Prior to joining the Online Trading Academy team, I had a brief stint as a trader for a regional brokerage in California. As a trader, I was charged with executing the brokers’ orders from their customers. I was to work the orders and try to gain some advantage for the brokerage in the spread that would not be passed on to the customer. All of this while the customer was paying a commission too! That is why, as a trader for myself, I would never think of trading without a direct access platform.
The brokers used small pieces of paper called a chit. A blue chit was a buy order and a pink chit was a sell order. As the trader for the brokerage I would be met every morning in the office by a big pile of chit on my desk (don’t worry, you’ll get the joke if you read it again). I had the task to execute these orders so the brokerage would make commissions and, as I mentioned, some of the spread too.
This daily process was repeated throughout brokerage offices all over the nation. All of these retail orders would flood in every morning fueled by investors who heard about the next biggest thing on the news or a recommendation from the broker the night before. As my duty required, I would execute the orders at the open of the market; feverishly working to fill all of those investors’ dreams of retiring from one great trade!
Knowing what we do about supply and demand, what do you think would happen as soon as those orders were filled? The markets would immediately reverse as all of the emotion that was driving price strongly in one particular direction was suddenly over. Think about it, if everyone who wanted to buy a particular stock just did, then how can the price continue to rise? The stock becomes saturated with nervous sellers and collapses under its own weight. I do not use the term nervous seller lightly. Anyone who buys a stock becomes a nervous seller as they can only profit by selling the same stock they just bought. The nervousness enters as they decide when to sell to maximize profits and minimize losses.
Brokerages do not only have to fill the customer orders in the open market, but can also transfer shares from their inventory, or even sell short as a market maker as long as they give the customer the best price as indicated by the exchange at the time of processing the order. A smart trader who has seen the pattern repeat time after time would take the opportunity to short into this strength in anticipation of the reversal that occurs from profit taking or stop losses being triggered once the buying pressure has been exhausted. This is exactly what many market makers and specialists do every day.
The same reversal action occurs when there is bad news and panic in the markets. For every share that is sold by a scared investor, someone had to buy it to either close a short or initiate a new long position. Once the selling flood has subsided the prices will typically rise as there is nothing to hold down price and some bottom pickers try to profit from a bounce. The professionals who traded counter to the masses are now profiting as supply is gone and prices move higher.
Be careful not to think that this new trend will last as those who profited from the reversal will look to book profits as those who did not participate in the initial thrust of the market try on the second test. Yes, there will usually be a second reversal that sends the stock into its trend for the rest of the day.
Knowing how to anticipate trend reversals and timing them correctly is something that we work on all the time in the Extended Learning Track (XLT) program. If you are not aware of how to identify or trade these key reversals of the morning, then you should learn before venturing into trading that time frame. Fortunately, we teach that in our Professional Trader courses at Online Trading Academy and trade it live in the XLT online. I welcome you to join us and learn how to trade like the professionals. Until next time, trade safe and trade well!
Neither Freedom Management Partners nor any of its personnel are registered broker-dealers or investment advisers. I will mention that I consider certain securities or positions to be good candidates for the types of strategies we are discussing or illustrating. Because I consider the securities or positions appropriate to the discussion or for illustration purposes does not mean that I am telling you to trade the strategies or securities. Keep in mind that we are not providing you with recommendations or personalized advice about your trading activities. The information we are providing is not tailored to any individual. Any mention of a particular security is not a recommendation to buy, sell, or hold that or any other security or a suggestion that it is suitable for any specific person. Keep in mind that all trading involves a risk of loss, and this will always be the situation, regardless of whether we are discussing strategies that are intended to limit risk. Also, Freedom Management Partners’ personnel are not subject to trading restrictions. I and others at Freedom Management Partners could have a position in a security or initiate a position in a security at any time.
Editors’ Picks
USD/JPY holds near 155.50 after Tokyo CPI inflation eases more than expected
USD/JPY is trading tightly just below the 156.00 handle, hugging multi-year highs as the Yen continues to deflate. The pair is trading into 30-plus year highs, and bullish momentum is targeting all-time record bids beyond 160.00, a price level the pair hasn’t reached since 1990.
AUD/USD stands firm above 0.6500 with markets bracing for Aussie PPI, US inflation
The Aussie Dollar begins Friday’s Asian session on the right foot against the Greenback after posting gains of 0.33% on Thursday. The AUD/USD advance was sponsored by a United States report showing the economy is growing below estimates while inflation picked up.
Gold soars as US economic woes and inflation fears grip investors
Gold prices advanced modestly during Thursday’s North American session, gaining more than 0.5% following the release of crucial economic data from the United States. GDP figures for the first quarter of 2024 missed estimates, increasing speculation that the US Fed could lower borrowing costs.
Ethereum could remain inside key range as Consensys sues SEC over ETH security status
Ethereum appears to have returned to its consolidating move on Thursday, canceling rally expectations. This comes after Consensys filed a lawsuit against the US SEC and insider sources informing Reuters of the unlikelihood of a spot ETH ETF approval in May.
Bank of Japan expected to keep interest rates on hold after landmark hike
The Bank of Japan is set to leave its short-term rate target unchanged in the range between 0% and 0.1% on Friday, following the conclusion of its two-day monetary policy review meeting for April. The BoJ will announce its decision on Friday at around 3:00 GMT.
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