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The Downtrend and Uptrend are Not Created Equal

Contributed by Martha Stokes, C.M.T.

There are many myths perpetuated in the trading world. One such myth is that if you know how to trade the uptrend or the buy side of the market, then you can easily switch and trade the downtrend or sell side of the market. All too often, Retail Traders assume the two are mirror images of each other. Unfortunately, this often leads to problems for traders who want to sell short.

The downtrend is significantly different in price action than the uptrending market. Here are some aspects of downtrending price action every trader needs to understand and recognize to improve their sell side trading:

The Market Participants who trade the downtrending market are a different mix than those who trade the uptrending market and do so for very different reasons. Since the late 1990’s, the levels of Market Participants have expanded and we now have 8 groups of Market Participants each with their own agenda for investing or trading stocks. On the uptrend, the Institutional Investor dominates price action. During a downtrend, the Institutional Trader controls the action. Since each of these groups has entirely different buying and selling agendas, price action is impacted often in dramatic ways. Understanding this phenomenon helps the Retail Trader know what kinds of entry signals to look for, the patterns to watch for in institutional indicators, and what kinds of exit signals and strategies to use for both stock and option trading.

Stocks require strong volume patterns to move up, so a continued increase in volume is necessary for the uptrend to sustain. On the downtrend, stocks can and do fall even on low volume patterns. This is especially true during the secondary and final phases of the downtrend. Retail Traders need to adjust their volume indicator settings to accommodate the variances between the uptrend and the downtrend. Volume bars should be used with a sub-indicator, either a moving average or rate of change and the settings need to be significantly tighter on the downside to achieve an accurate of volume to the downside.

To the downside, the angle of descent is far more vertical and occurs more frequently than the angle of ascent. The angle of descent can maintain a vertical drop longer than the angle of ascent. When a trader understands this phenomenon and is expecting it, then they are able to make adjustments to their exit strategies and indicator to keep them in the trade for higher point gains. Since the angle of descent is steeper, the sell side tends to move faster with far more momentum, even on lower volume. This creates different Trendline Patterns to the downside. Traders should expect to see tighter consolidations with dramatic stairstep patterns that are longer than upside stairstep patterns. The runaway trendline pattern will also occur more often to the downside than to the upside.

Traditional textbook theory on bear market trends identifies 3 phases of a bear market; however, today’s bear markets tend to have more than 3 phases. Bottoming patterns are more complex and gaps are more common. Retail Traders also need to watch out for more frequent bounces. During the first phase of a bear market or major correction, price action will be at its steepest. In recent years, the final move down of major corrections tends to fizzle out rather than the huge dramatic drops that occurred in prior decades.

The initial downtrend phase is an important area for retail traders to recognize to enter just as the topping action completes. Often Retail Traders are not aware of the topping action and miss the highest point potential of the downtrend. Conversely, during the early stages of a market bottom, Retail Traders are often attempting to sell short while institutional investors are quietly accumulating.

Here are a few tips to help you with your selling short trading:

Whenever any financial market, whether it is stocks, bonds, options, or forex go vertical and sentiment has gone over 90% to the upside, start watching for one of the 5 topping patterns and shift your mindset in preparation for selling short. Choose 1-3 sell short entry signals, adjust your indicators, and start setting up for selling short. Wait for the drop in volume on the final move up.
The Institutional Investors tend to exit the stock, index, or other instrument prior to the final move up. The small investor and late comers create that vertical extreme peak pattern on falling volume. If the stock, index, or other instrument doesn’t make a higher high and higher low on rising volume, then you have an initial topping pattern developing. Be aware that the late buyers coming in will “buy on the dip” with ‘market orders’ rather than controlled orders and this can cause a big bounce. Watch for this pattern.
Do not keep your stop loss too tight, allow for normal overlapping that forms in downtrend price action. Falling price action tends to overlap far more than upside price. If you keep a very tight stop, you will get whipsawed out of the sell short or option put prior to the major move down. Overlapping on downtrending stocks occurs because even as the Institutional Traders move in to control the downside action, late uninformed small lot buyers are rushing to buy with ‘at market’ orders. This creates a surge of pre-market orders allowing market makers to gap price up at market open, then as the large lot sellers move in, price drops quickly. The more popular the stock, the more overlapping of price action there will be when small lot late buyers meet Institutional Traders selling short.
When a stock drops below $15.00, it has less profit potential for selling short. Retail Traders need to be vigilant during the final phases of a downtrend to monitor the activity of the Institutional Investors who will move in quietly without disturbing price much. Once their counterparts, the Institutional Trader, finds out about the quiet accumulation, speculative bottoming action will occur. Often times Retail Traders have delayed selling short during a downtrend and jump in just as the stock is about to begin a bottom. If a stock has fallen 40%-50% or more, then it is usually not an ideal candidate for selling short.
Keep a 3/1 Profit Point to Risk ratio when selling short. The sell side offers a much higher profit potential per trade than the buy side, however, the risk is also greater as bounces can wipe out profits quickly. By choosing only optimal picks with a higher profit to risk ratio, you lower your overall risk and raise your profit potential.
Do not choose weaker picks with lower profit to risk ratios simply to have something to trade. If you can’t find ideal picks, then stop and accept the fact that the market is telling you something important. Often when you aren’t able to find picks with good profit to risk ratios the market is right on the cusp of a major upside shift.
Summary: The sell side is different than the buy side of the market. It has a much faster moving price action in the early stages of the downtrend, but it also has overlapping patterns not seen as frequently when stocks are trending up. The matrix of Market Participants—who is buying, who is selling, who is buying to cover, and who is selling short differs on the sell side to the buy side and impacts price action. When a trader understands these often subtle differences and can see the patterns on the price chart, they are on their way to mastering the sell side and becoming an expert trader.


About the Author:

Martha Stokes, C.M.T. is the co-founder and CEO of TechniTrader®, an educational firm dedicated to helping small investors and retail traders. Since 1998, TechniTrader® has taught thousands of beginners to professional level traders how to be consistently successful in the stock and option markets.

Martha’s fascination with the markets and business started at the age of nine. She made her first investment while still a teen. Her theory on Cycle Evolution is a landmark work on financial cycles. She has been involved in several startups and has sat on both sides of the Venture Capital negotiating table, worked on an IPO, managed a small fund, taught at community colleges, and has been a guest speaker at numerous seminars and investment groups including the Boeing Employees Investment Group. She has been a guest on the CFRA radio Ottawa Canada.

Her long list of educational work includes: 15 stock, investing, and option courses, 16 semester length Lab Classes, her Annual New Technology Reports, Sector and Industry, and Special Edition Reports, hundreds of articles, resource papers, and white papers. Martha writes 6 newsletters each week and still finds time to answer student questions.

www.technitrader.com

www.marthastokes.com

www.technitraderblog.com

TechniTrader Twitter Page

TechniTrader Facebook Page



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Support Tip
Updating Your Symbol Utility - Symbol Database

Contributed by Equis Support

The stock market is dynamic and symbols are constantly being changed, removed, or created. In order to keep up with the symbol changes, Equis updates the symbol file found within its symbol database. The Symbol Utility reflects those changes. It allows customers to automatically update the symbols in their “Local Data” view in the Open dialog on a monthly basis without having to manually change each symbol within each folder on their hard drive.

How to update the Symbol Database built into MetaStock.

Open MetaStock.
Select Tools – “Update Symbol Database”.
When you get the message “patch successful” select Close.
Close and restart MetaStock.
How to install the Symbol Utility for Reuters DataLink.

Go to: http://www.equis.com/customer/suppor...olutility.aspx
Read the warnings and agree to the terms and select “Download RDL file”.
When prompted select “Save”, this will open the “Save As” window. Using the drop down menu select the “Desktop” for the “Save In” then select “Save”.
When the download is complete close out of the Symbol Utility web page.
On your desktop you will have a new icon named “RDL_Symbol_Utility.exe” double click onto the file and select “Run”.
The extractor window will appear showing the unzip folder path as C:\MetaStock Data, next select “Unzip” to begin the extraction process.
Follow the steps below to download historical data from Reuters DataLink.

Open the DownLoader.
From the Tools menu in The DownLoader select “Download Prices”.
This will open the Select Securities window. On the left hand side of the folder tree, expand the C drive and highlight the MetaStock Data folder and select “Add all Subfolders” and select OK. This will add the folders and symbols created by the Reuters DataLink Symbol Utility for a data download.
Select “OK” on the Select Securities window and the Vendor Selection window opens. Make sure the Reuters DataLink tab is forward in front and select OK to begin a data download.
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MetaStock Features
The ETS Trading System

Contributed by Greg Allred

In today’s marketplace, there is a lot of confusion and bad trades being executed. The common systems and methods used in past years do not seem to work as well in today’s market conditions. ETS Trading System can create clarity in today’s uncertain market conditions and help shift the odds in your favor.

ETS Trading System does an excellent job of providing very clear and easy to read buy and sell signals. The system will display protective stops, trailing stops, and profit targets. Many systems only work on an end-of-day or intraday basis but this system works well for both time frames. ETS Trading System has two experts: ETS Basic and ETS Complex. The complex expert includes profit targets and protective stops for long or short trades. This system works with stocks, options, indices, futures, and FOREX. ETS Basic gives you clear and precise buy and sell signals.

The powerful tools ETS offers helps you eliminate the stress and emotion most people experience while trading. Whether you are a new or experienced trader, ETS can help avoid costly decisions and mistakes. The program comes ready to use out of the box and is easy to use. Help put your trading on the right side of the markets by adding these valuable tools to your collection.