Why Does a Retail Trader Keep Buying High and Selling Low

Hello traders! This week’s article will focus a bit of attention on how we can use retail traders’ reasons for taking trades to help with our own trades.

Have you ever met, or have you ever been, one of those really inquisitive kids, the kind who keeps asking the question “why” after every answer? A recent brokerage firm commercial immediately springs to mind, where the child basically asks his dad why he didn’t know how much he paid his broker, and why he still paid the broker if he was unhappy with their market performance. A common theme in our newsletters and obviously in our Online Trading Academy classes is the fact that we want to buy in demand and sell in supply, but why does that simple technique work so well?

Since I know you have been reading our newsletters going back many months or years, the basic answer to the previous question is, “Because that is where the institutional orders are located.” That is still true. But what about all of the retail trader orders and emotions that are showing up on the charts? Should we ignore them? For actual trading purposes I say yes, but for the inquisitive among you, their why is as follows:

In this chart I’ve colored a demand zone in green and a supply zone in yellow. At the blue arrow marked “One”, there were probably a few retail traders who purchased in those few basing candles. Congratulations, whatever strategy you were employing made money! Hopefully they managed that trade properly and made a few pips. Now, what happens when the trading price of the GBPUSD gets back to that same level? What does the retail trader do? More than likely, because they had a fond memory of making money by buying at that price point, they will do it again. Whenever you have a good experience doing something, do you attempt to do the same thing over and over again? Of course you do! Most retail traders are the same way. When price gets back to the demand zone at blue arrow marked “Two” those happy traders bought again. This merely adds to the demand at that zone.

What about the traders who SOLD at the blue arrow marked “One”? If they are smart, they will take the few pip loss and move on to the next trade. What about the traders who refuse to take the small loss? You know, the stubborn, ego driven traders who think that they must make money on every trade to make a living? (We call them short-timers, or hobbyists, because they don’t last long in the world of trading!) What were they feeling as the price action went up when they were short? Anxious, angry, upset, frustrated, whatever it was. Many new traders even try to make deals with God, the universe, Gaia, Zeus, or even Batman to get them out of their trade, “Please God, just get me out at break even, and I will never let a trade go against me like this again…” Sound familiar? So, if a trader went SHORT at blue arrow One, meaning they sold first, how would they exit that trade when price action gets back to their entry? They would have to buy, which again is some additional demand.

So now we have both groups of retail traders buying in the same area that is obviously a nice level of institutional demand. All they are doing is adding a bit of fuel to the fire for us at that level. The next time price achieved the same level at blue arrow marked “Three”, the level was broken. Do we keep trading at the same level forever and ever? That would be a “no.”

If these traders behave a certain way on the long side, does it work the same on the short side? That would be a “yes.” At red arrow marked “Four” some traders sold and some bought. The traders who sold were happy, and probably sold again at arrow marked “Five.” The traders who bought and held as the trade went against them, were probably praying all the way until finally they were able to sell at Five. Did the original traders sell again at red arrow “Six”? I hope not, as several of our odds enhancers were warning about the continued strength of the level.

As many of the instructors at Online Trading Academy, including myself like to say, the charts are all you need. Knowing what the emotions are that other traders are feeling certainly doesn’t hurt you when trading, but it isn’t necessary. Most have enough trouble managing their own emotions without trying to think about their competition!

Learn to Trade Now