This post was contributed by a guest author, and does not necessarily reflect the views of Richard or MovetheMarkets.com

This weekend I saw my Dad, and the first thing out of his mouth was regarding the new highs on the Dow.

Then last night a friend of mine who has been reading trading books for quite awhile now (without actually ever making a single trade) let me know that he is putting a rather large sum in the market — specifically the Dow. Since he has been a TA proponent for so long, I asked him what was his reason for entry. He got very defensive. Basically, his reason is that he has been missing out, and this money could have gained much better interest than a money market account.

When I asked about the possibility of actually losing money in the short term, he gave me a long term forecast based upon a book he read regarding the aging of the population, and what that may mean.

I could make the obvious point about fading the crowd, but instead I want to bring up another point that plagues many of us.

We have two people here. One (my Dad) has no interest in the market, and no desire to trade. The other person owns at least seven or eight books on trading. They both reached the same conclusion. I’m not disputing that conclusion. Plenty of tops have been called as the market powered higher. By my previous post, I believe the market will continue to rise over the long term. However, I am not betting either way. When the correction finally comes, it will be painful for those who bought the most recent top. As they are shaken out, the market will resume its trend.

Even after reading all the trading books, and even a few blogs, my friend’s main focus is a fear of missing out. Personally, that same feeling has caused me to take many a bad entry. A fast moving market doesn’t always allow a safe entry with a defined risk. Some times that works. More often than not you will lose money jumping in without any regard for risk. He did say that he would put a stop in place. When asked where, he answered 5%. Remember, he has read quite a few trading books. I asked him if it was possible for the market to have a 5%, or even 10% correction while still being in an uptrend. He agreed that it could, but was unwilling to wait until he had a plan. He wasn’t goint to look at the first chart. When pressed, he said he had a feeling it was going up. Eight trading books later, he had a feeling.

There are a few questions that each of us need to answer before putting our money at risk. Where will I get out if the trade moves against me? What is my target? Is it defined by price, or the way market is acting? All of these factors have much more to do with our profitability than identifying a trend. Without ever making a trade, he has no idea how hard it is to hold onto a winner. Likewise, he doesn’t really understand how hard it is to get in the habit of cutting losses quickly. As his irritation grew, I backed off. I changed the subject to an Escalade I saw on Unique Whips — specifically the sound system. The conversation went back to trading. We were talking about the probability of success. My belief is that my success or failure at trading has absolutely no impact on his ability to be successful or otherwise. His thought was that within about three years he should be a millionaire. I’m not making fun of him. I used to think the same thing. When I asked him why, his answer was that most traders don’t understand the psychology of trading. After all, he read Trading in the Zone. I laughed. Almost everyone has. In fact I recommend Mark Douglas other book, The Disciplined Trader, even more.

This was a long way to get to my main point. We all read the same books on TA, psychology, business plans, strategy, or whatever. However, we also are all plagued with the same emotions that are at the core of our being. I think perserverance is probably the one essential trait for an aspiring trader to be successful. Along the way, you will be beat down, lose money, kick yourself for not sticking to your plan, and maybe even make some money. You have to retain enough trading and mental capital to make it long enough to find a system that fits you. There are a ton of strategies that make money, but a successful strategy won’t work for everyone. Its my belief that if you continue to violate your own rules, you probably are trading a system that’s not right for you.

Btw, he went to a free seminar where they showed drawdowns for different trading systems. He wanted the system that doubled your money every year with only a 5% drawdown. Where do I sign up?

This post was contributed by a guest author, and does not necessarily reflect the views of Richard or MovetheMarkets.com

I see a lot of references out on the web about how seeing block trades–especially at the ask–is a good sign for going long. But, without a vigorous trade rate to back it up, it’s not so!

Today, I was stalking FIS to go long above 48, and I saw a 140,000 share print go by. At the time, that doubled the total volume for the day. So, I should hop right in, right? Especially if the trade is at the ask, right? In this case, not at all! Trades were not going off fast and furious in the wake of the big print.

It’s a Matter of Market Mechanics

Note: This is just my conjecture about what is happening, but it makes sense to me. Regardless, it’s the end result that matters, and I’ve seen it plenty of times. Of course, the markets rarely act 100% like you think they logically should. That can make things difficult, but I still love women all the same. Markets, I mean. Love the markets all the same. :-)

So, what happens when a very large buy order comes in (a size much larger than the typical ask for a given stock)? The market wouldn’t be very orderly if the Specialist let it just eat through ask levels. Instead, they supply the needed liquidity by selling their own reserve shares to the buyer. What’s important here is that now our market maker effectively has a large short position on. Which direction do you think he wants the stock to go, then? Down, that’s where! I imagine the market maker will do whatever is in his power to keep the stock down until he can buy back the majority of that position at a lower price. The hybrid market must make that harder for the NYSE specialists to do, but they still have influence.

In today’s FIS case, I noted the volume at the block print (the one just before 10am). I decided that the next unhindered push at 48 would only happen after 150k to 200k more shares had traded. In fact, that’s exactly what happened… when the stock pushed to 48 again around noon. Of course, that push failed, too, and I lost interest in the stock and went to sleep.

What If Demand Is Too Great?

Now, consider the case where the Specialist fills the block order, and there is so much demand that he can’t easily keep the stock down. Many small and medium size buyers are piling on left and right, and prints are going off quickly. Now, the specialist will eventually have to give in and buy back the shares he had provided at a loss. Not only does this alleviate the downward pressure he would otherwise apply, but it actually helps fuel the run up!

That’s why I say you need to have energetic small-timers buying at the time of the big block trades, for them to do you any good. If the other buyers are standing aside, whoever just made the market for that block buyer will certainly push the stock down to make some easy money.

The Logic Works in Reverse, Too

If a big block goes by at the bid, then there must have been a large seller. Bearish sign, right? Just reverse the logic, to see that we may now have a greedy market maker with a large long position. They will try to prop the stock up long enough to sell those shares at a higher price.

Here are a few prevalent misconceptions that didn’t deserve full articles:

Trading Is Complicated

Trading is simple. You are complicated.

I Have to Trade Every Day to Make a Living

No, you don’t.

I Have a Right To Know How Much Money Other Traders Make

No, you don’t.

DayTraders Will Appreciate Hearing My View That They Are Reckless Gamblers

No, they won’t.

I Don’t Want To Donate To “Move the Markets”

Yes, you do:

There are two flavors of this misconception:

• Pessimistic: I tried it once, and it didn’t work, so it never works
• Optimistic: I saw it work once, so it always works

Let’s look at them in a little more detail…

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Many tales of woe on beginning trader blogs start like this:

The markets were tanking, so I looked for short plays, and …

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I’m thinking about doing a series of posts where I address what I feel are the most common misconceptions among new (and even established) traders. I see these again and again when reading books and blogs. I feel kinda funny using that angle, since I’m not a wise (or filthy rich) trading guru.

But, I do have strong opinions, and a website… so… here’s the first article :-)

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