Mastering Fear

[bassclef]

Cheers guys. Right on.

The one thing that I can't figure out, as a hodler, is what to do during the euphoric buying phase. It seems like a good time to sell, on the one hand, and yet Bitcoin is still so far from its full potential on the other.

Successfully calling tops and bottoms is probably the most difficult thing to do in trading. The second most difficult thing to do is actually make a trade at these levels. During selling climaxes, people are panicking, committing suicide, calling for Bitcoin's head on a platter, and more FUD than you've ever seen is flooding the forums. Average Joe has no interest in buying at these levels because of all the negative news. At the other end, during buying climaxes, prices have gone parabolic and even the most stubborn bear has turned bull. Good news is everyone. Now, Average Joes are tripping over each other to buy. Bitcoin will go to $1 million each! Everyone is going to retire young!! Naysayers are shouted down. The mood is so euphoric that many people miss the crash, and are even in denial when it inevitably happens.

The key is to look for market weakness in uptrends, and strength in downtrends. During an uptrend, watch the spread of the candlesticks on the chart. Watch the length of these candles in relation to volume. At some point, the spread of these candles will increase as the buying climax nears, then shorten near the top. Also, look for long wicks shooting up from the top of the candle. This indicates that significant selling has entered the market, and that the market may be weak. This type of candle denotes heavy distribution to willing buyers at higher prices while closing much lower. You will usually see a few of these near market tops on narrowing spread. These are signals to go short.

It is the opposite for finding strength in downtrends: Look for candles with heavy stopping volume (wicks that protrude deeply from the bottom of the candle) and shortening of the candle spread on increased volume as the downtrend runs out of steam. This denotes heavy accumulation by traders, and is an indication of a strong market. This is a signal to go long.

Pull up the 3d Bitstamp chart and look at the candlesticks during the November rally. There are a few candles that denote heavy distribution and thus a weak market. One is near the very top (it's red), and a big one is a few back, at the $750 level accompanying very high volume. See those wicks shooting upwards? These are big red flags that a selling climax is about to occur (or is occurring). There is also a candle with extremely narrow spread near the top, but the volume, while lower, is still significant. This indicates the market is nearing the top as significant buying couldn't push the price higher. Right before the bottom falls out there is a narrower spread candle on lower volume. This is like when Wile E. Coyote runs off a cliff. There is a few seconds before he realizes the bottom has disappeared. Watch out below!

Now fast forward to October of this year for the opposite. See that candle with the super long wick down to $275? That was a selling climax. The volume was high but not high enough: The market rebounded but ultimately $300 did not hold. Now look at the most recent candle down to $153. Look familiar? Huge, huge stopping volume amid pure panic. It is an indication to go long.

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[r3t4rD4life]

Thanks. I'm new to this whole thing, been reading, looking at charts, speculating etc but this thread has been just about the only thing that has given me a tiny bit of understanding. Kudos for the unfiltered wisdom 

[FreeBit]

Fear is the path to the dark side. Fear leads to anger. Anger leads to hate. Hate leads to suffering.

 

I am from the dark side and I hate miners. I would love to see them taken out of business by a bitcoin price of 10$. I love this crash ....

[Hyena]

Good post! Makes me remind this post:
http://www.washingtonpost.com/blogs/wonkblog/wp/2015/01/14/bitcoin-is-revealed-a-ponzi-scheme-for-redistributing-wealth-from-one-libertarian-to-another/

the bottom must be near one more giant drop to perhaps sub 100$ and UP we go.

[fearlesscat10]

Cheers guys. Right on.

The one thing that I can't figure out, as a hodler, is what to do during the euphoric buying phase. It seems like a good time to sell, on the one hand, and yet Bitcoin is still so far from its full potential on the other.

Successfully calling tops and bottoms is probably the most difficult thing to do in trading. The second most difficult thing to do is actually make a trade at these levels. During selling climaxes, people are panicking, committing suicide, calling for Bitcoin's head on a platter, and more FUD than you've ever seen is flooding the forums. Average Joe has no interest in buying at these levels because of all the negative news. At the other end, during buying climaxes, prices have gone parabolic and even the most stubborn bear has turned bull. Good news is everyone. Now, Average Joes are tripping over each other to buy. Bitcoin will go to $1 million each! Everyone is going to retire young!! Naysayers are shouted down. The mood is so euphoric that many people miss the crash, and are even in denial when it inevitably happens.

The key is to look for market weakness in uptrends, and strength in downtrends. During an uptrend, watch the spread of the candlesticks on the chart. Watch the length of these candles in relation to volume. At some point, the spread of these candles will increase as the buying climax nears, then shorten near the top. Also, look for long wicks shooting up from the top of the candle. This indicates that significant selling has entered the market, and that the market may be weak. This type of candle denotes heavy distribution to willing buyers at higher prices while closing much lower. You will usually see a few of these near market tops on narrowing spread. These are signals to go short.

It is the opposite for finding strength in downtrends: Look for candles with heavy stopping volume (wicks that protrude deeply from the bottom of the candle) and shortening of the candle spread on increased volume as the downtrend runs out of steam. This denotes heavy accumulation by traders, and is an indication of a strong market. This is a signal to go long.

Pull up the 3d Bitstamp chart and look at the candlesticks during the November rally. There are a few candles that denote heavy distribution and thus a weak market. One is near the very top (it's red), and a big one is a few back, at the $750 level accompanying very high volume. See those wicks shooting upwards? These are big red flags that a selling climax is about to occur (or is occurring). There is also a candle with extremely narrow spread near the top, but the volume, while lower, is still significant. This indicates the market is nearing the top as significant buying couldn't push the price higher. Right before the bottom falls out there is a narrower spread candle on lower volume. This is like when Wile E. Coyote runs off a cliff. There is a few seconds before he realizes the bottom has disappeared. Watch out below!

Now fast forward to October of this year for the opposite. See that candle with the super long wick down to $275? That was a selling climax. The volume was high but not high enough: The market rebounded but ultimately $300 did not hold. Now look at the most recent candle down to $153. Look familiar? Huge, huge stopping volume amid pure panic. It is an indication to go long.

Thank you for this. And to OP too. Hopefully with this I'm going to get in and out of Bitcoin with a profit.

[bassclef]

My take on recent market conditions

It is always important to keep a short, medium, and long term view of the markets when analyzing them in order to put the puzzle together of what market participants are doing. The information is there in the volume, candles and ticker if you know how to read it. With this information, you can build a picture of supply and demand based on facts, not speculation on what "might" be happening or what you heard on Twitter. The price action and volume does not lie. You must also understand that the market action today directly affects market action in the future. It is the same in markets as it is in physics: An action causes an equal and opposite reaction. If it doesn't, we must figure out the reason why which gives us additional clues as to what might happen in the coming hours, days, weeks and months.

Unless you were living under a rock, I don't need to tell you that we had a massive crash on record volume to $150, a price many thought we would never reach. With this in the recent background, it colors the interpretation of today's market. Over a three-day period, over 500,000 coins exchanged hands on Finex, and nearly 250,000 on Bitstamp. This is extremely significant. Keep in mind that no crash of this magnitude has ever taken place without at least a multi-day bounce in the other direction, because of this very fact--it greatly alters supply and demand in favor of demand.

Volume is relatively low now, but I attribute that to market indecision and the fact that so many coins (having changed hands during capitulation) are simply being held. Some are probably taking a break from the market, deciding what to do. Today we had a small increase in demand on the NYSE news, but not significant. I think it will take a few days for this news to settle in.

On the bear side
Bears are fighting heavy demand. The few large dump attempts made by the likely suspects have gotten us nowhere except for three retests of ~$200 on low volume that were rejected on higher volume. Fighting the market is a great way to lose money, so I think we will see this behavior get weaker and weaker as they run out of ammo selling against the increased demand at these prices.

On the bull side
Bulls are hungry, but can't go up because of the heavy supply area near $220. However when we do get a spike upwards and the path is clear, volume expands and eager buyers pile in. The longer we stay here and hug the top resistance line, taking bites out of the supply, the more traders will turn from bear to bull. Eventually, the orderbook will be thin enough to push up through.

Conclusion
Advantage to the bulls. The bears, knowing that they are outnumbered, are holding on by a thread with their large walls and bulging coin stashes they've accumulated from a year's worth of shorting. Once those are cleared out, the bulls will make a run for it. If we move past $220-$230 volume will expand greatly and we will finally leave this trading range behind.

[Torque]

the bottom must be near one more giant drop to perhaps sub 100$ and UP we go.

If you really think that market confidence won't be completely destroyed for years if we go sub $100, then you really are delusional.  Seriously, I mean it'll take like 5-7 years to recover from sub 100.  If that happens, you might as well sell everything now and put your money elsewhere for years.

[Hyena]

the bottom must be near one more giant drop to perhaps sub 100$ and UP we go.

If you really think that market confidence won't be completely destroyed for years if we go sub $100, then you really are delusional.  Seriously, I mean it'll take like 5-7 years to recover from sub 100.  If that happens, you might as well sell everything now and put your money elsewhere for years.

You registered in November 2013 and you're telling ME about sub 100 prices, market confidence and what not. Bitch please I was here when the price was 4$

[bassclef]

During these uncertain times I'd like to share a couple chapters from a very good book by Tom Williams, called Undeclared Secrets That Drive the Stock Market. For years, Tom was a member of a professional trading syndicate that accumulated, held and distributed stocks at higher prices. No doubt he made a great fortune doing this. Most of his ideas and knowledge can be applied to digital currency markets as well. After all, they are traded by people with the same intentions--to make money.


Random Walks and Other Misconceptions

To most people, the sudden moves seen in the stock market are a mystery. Movements seem to be heavily influenced by news and appear when least expected; the market usually does the exact opposite to what it looks like it should be doing, or what your gut feeling tells you it ought to be doing. Sudden moves take place that appear to have little to do with logic: We sometimes observe bear markets in times of financial success, and strong bull markets in the depths of recession.

It seems a place for gamblers, or for those people that work in the City, or on Wall St – who must surely know exactly what is going on! This is a fallacy. If you can take a little time to understand the contents of this book, the heavy burden of confusion will be removed from you forever. The stock market is not difficult to follow if you can read charts correctly, as a top professional would. You’ll understand exactly how to recognise the definitive moments of market action, and the sorts of pre- emptive signs to look out for, just before a market rises or falls. You’ll know how a bull market is created, and also the cause of a bear market. Most of all you will begin to understand how to make money from your new-found knowledge.

The markets are certainly complex – so complex, in fact, that it has been seriously suggested that they move at random. Certainly, there is a suggestion of randomness in the appearance of the charts, irrespective of whether you are looking at stocks or commodities. I suspect however, that those who describe market activity as ‘random’ are simply using the term loosely, and what they really mean is that movements are chaotic. Chaos is not quite the same thing as randomness. In a chaotic system there may be hundreds, or even thousands of variables, each having a bearing on the other. Chaotic systems may appear unpredictable, but as computing technology advances, we will start to find order, where before we saw randomness. Without doubt, it is possible to predict the movements of the financial markets, and as technology advances, we will become better at it. There is an enormous gulf between unpredictability and randomness.

Unless you have some idea of the various causes and effects in the markets, you will undoubtedly, and frequently, be frustrated in your trading. Why did your favourite technical tool, which worked for months, not work "this time" when it really counted? How come your very accurate and detailed fundamental analysis of the performance of XYZ Industries failed to predict the big slide in price two days after you bought 2,000 shares in it?

The stock market appears confusing and complicated, but it is most definitely based on logic. Like any other free market place, prices in the financial markets are controlled by supply and demand – this is no great secret. However, the laws of supply and demand, as observed in the markets, do not behave as one would expect. To be an effective trader, there is a great need to understand how supply and demand can be interpreted under different market conditions, and how you can take advantage of this knowledge. This book will help you to do this – read on...


The Market Professionals

In any business where there is money involved and profits to make, there are professionals. We see professional diamond merchants, professional antique and fine art dealers, professional car dealers and professional wine merchants, among many others. All these people have one thing in mind; they need to make a profit from a price difference to stay in business.

The financial markets are no different and professional traders are also very active in the stock and commodity markets – these people are no less professional than their counterparts in other areas. Doctors are collectively known as professionals, but in practice they split themselves up into specialist groups, focusing on a particular field of medicine – professional market traders do the same and also specialise in various areas.

It’s important to realise at this stage, that when we refer to the definition of a professional, we are not talking about the ‘professionals’ who run your investment fund or pension. At the time of writing this section (June 2003), the vast majority of investment funds have been making huge losses for the last 4 years! Furthermore, some of these investment fund companies (including insurance firms) have even closed down, owing to their inability to invest wisely in the markets. People nearing retirement are extremely worried, as the value of their pension plummets further into the doldrums – some pension companies have even been reported to be teetering on the brink of financial crisis. In the UK, the vast majority (if not all) of the endowment funds are in trouble, even failing to make meagre returns of 6%, which means that most homeowners are now at serious risk of not being able to raise funds to pay for their homes.

The ‘professionals’ in the previous examples do not live by their trading talents, instead they receive a salary from the respective investment or pension fund company – which is just as well, since these people would otherwise be homeless! I make no apology for these scathing comments, since millions of people have been adversely affected on a global scale, and billions of dollars have been lost to the witless idiots who have been given the responsibility of investing your hard-earned money. The truth of the matter is that most fund managers find it difficult to make profits unless there is a raging bull market.

So what do I mean by a professional trader? Well, one example is the private syndicate traders that work in co-ordinated groups to accumulate (buy), or distribute (sell), huge blocks of stock to make similarly huge profits. You can be absolutely certain that these traders have made more money from distributing stock in the last four years, than they did during the bull market in the 1980s. Why? Because we have just witnessed one of the best moneymaking periods in your lifetime – the largest fall in stock prices for decades...


Accumulation and Distribution

Syndicate traders are very good at deciding which of the listed shares are worth buying, and which are best left alone. If they decide to buy into a stock, they are not going to go about it in a haphazard or half-hearted fashion. They will first plan and then launch, with military precision, a co-ordinated campaign to acquire the stock – this is referred to as accumulation. Similarly, a co-ordinated approach to selling stock is referred to as distribution.

Accumulation

To accumulate means to buy as much of the stock as possible, without significantly putting the price up against your own buying, until there are few, or no more shares available at the price level you have been buying at. This buying usually happens after a bear move has taken place in the stock market (which will be reflected by looking at the Index).

To the syndicate trader, the lower prices now look attractive. Not all of the issued stock can be accumulated straight away, since most of the stock is tied up. For example, banks retain stock to cover loans, and directors retain stock to keep control in their company. It is the floating supply that the syndicate traders are after.
Once most of the stock has been removed from the hands of other traders (ordinary private individuals), there will be little, or no stock left to sell into a mark-up in price (which would normally cause the price to drop). At this point of ‘critical mass’, the resistance to higher prices has been removed from the market. If accumulation has taken place in lots of other stocks, by many other professionals, at a similar time (because market conditions are right), we have the makings of a bull market. Once a bullish move starts, it will continue without resistance, as the supply has now been removed from the market.

Distribution

At the potential top of a bull market, many professional traders will be looking to sell stock bought at lower levels to take profits. Most of these traders will place large orders to sell, not at the current price available, but at a specified price range. Any selling has to be absorbed by the market-makers, who have to create a 'market’. Some sell orders will be filled immediately, some go, figuratively, 'onto the books‘. The market- makers in turn have to resell, which has to be accomplished without putting the price down against their own, or other traders’ selling. This process is known as distribution, and it will normally take some time for the process to complete.

In the early stages of distribution, if the selling is so great that prices are forced down, the selling will stop and the price will be supported, which gives the market-maker, and other traders, the chance to sell more stock on the next wave up. Once the professionals have sold most of their holdings, a bear market starts, because markets tend to fall without professional support.


Strong and Weak Holders

The stock market revolves around the simple principles of accumulation and distribution, which are processes that are not well known to most traders. Perhaps you can now appreciate the unique position that the market-makers, syndicate traders, and other specialist traders are in – they can see both sides of the market at the same time, which represents a significant advantage over the ordinary trader.

It is now time to refine your understanding of the stock market, by introducing the concept of ‘Strong and Weak Holders.’

Strong Holders

Strong holders are usually those traders who have not allowed themselves to be trapped into a poor trading situation. They are happy with their position, and they will not be shaken out on sudden down-moves, or sucked into the market at or near the top. Strong holders are strong because they are trading on the right side of the market. Their capital base is usually large, and they can normally read the market with a high degree of competence. Despite their proficiency, strong holders will still take losses frequently, but the losses will be minimal, because they have learnt to close out losing trades quickly. A succession of small losses is looked upon in the same way as a business expense. Strong holders may even have more losing trades than winning trades, but overall, the profitability of the winning trades will far outweigh the combined effect of the losing trades.

Weak Holders

Most traders who are new to the markets will very easily become Weak Holders. These people are usually under-capitalised and cannot readily cope with losses, especially if most of their capital is rapidly disappearing, which will undoubtedly result in emotional decision-making. Weak holders are on a learning curve and tend to execute their trades on ‘instinct’. Weak holders are those traders who have allowed themselves to be 'locked-in' as the market moves against them, and are hoping and praying that the market will soon move back to their price level. These traders are liable to be 'shaken out' on any sudden moves or bad news. Generally, weak holders will find that they are trading on the wrong side of the market, and are therefore immediately under pressure if prices turn against them.

If we combine the concepts of strong holders accumulating stock from weak holders prior to a bull move, and distributing stock to potential weak holders prior to a bear move, then in this context:

• A Bull Market occurs when there has been a substantial transfer of stock from Weak Holders to Strong Holders, generally, at a loss to Weak Holders.
• A Bear Market occurs when there has been a substantial transfer of stock from Strong Holders to Weak Holders, generally at a profit to the Strong Holders.

The following events will always occur when markets move from one major trending state to another:

The Buying Climax

Brief Definition: An imbalance of supply and demand causing a bull market to transform into a bear
market.

Explanation: If the volume is seen to be exceptionally high, accompanied by narrow spreads into new
high ground, you can be assured that this is a ‘buying climax’. It is called a buying climax because to create this phenomenon there has to be a huge demand for buying from the public, fund managers, banks and so on. It is into this buying frenzy, that syndicate traders and market-makers will dump their holdings, to such an extent that higher prices are now impossible. In the last phase of the buying climax, the market will be seen to close in the middle or high of the bar.

The Selling Climax

Brief Definition: An imbalance of supply and demand causing a bear market to transform into a bull
market.

Explanation: This is the exact opposite of a buying climax. The volume will be extremely high on down-moves, accompanied by narrow spreads, with the price entering fresh low ground. The only difference is that on the lows, just before the market begins to turn, the price will be seen to close in the middle or low of the bar.
To create this phenomenon requires a huge amount of selling, such as that witnessed following the tragic events of the terrorist attacks on the World Trade Centre in New York on September the 11th 2001.
Note that the above principles seem to go against your natural thinking (i.e. market strength actually appears on down-bars and weakness, in reality, appears on up-bars). Once you have learned to grasp this concept, you will be on your way to thinking much more like a professional trader.


Resistance and Crowd Behaviour

We have all heard of the term ‘resistance’, but what exactly is meant by this loosely used term? Well, in the context of market mechanics, resistance to any up-move is caused by somebody selling the stock as soon as a rally starts. In this case, the floating supply has not yet been removed. The act of selling into a rally is bad news for higher prices. This is why the supply (resistance) has to be removed before a stock can rally (rise in price).

Once an up-move does take place, then like sheep, all other traders will be inclined to follow. This concept is normally referred to as ‘herd instinct’ (or crowd behaviour). As human beings, we are free to act however we see fit, but when presented with danger or opportunity, most people act with surprising predictability. It is this knowledge of crowd behaviour that helps the professional syndicate traders to choose their moment to make a large profit. Make no mistake – professional traders are predatory beasts and uninformed traders represent the symbolic ‘lamb to the slaughter’.

We shall return to the concept of ‘herd instinct’ again, but for now, consider the importance of this phenomenon, and what it means to you as a trader. Unless the laws of human behaviour change, this process will always be present in the financial markets. You must always try to be aware of ‘Herd Instinct’.

There are only two main principles at work in the stock market, which will cause a market to turn. Both of these principles will arrive in varying intensities producing larger or smaller moves:

1. The ‘herd’ will panic after observing substantial falls in a market (usually on bad news) and will usually follow its instinct to sell. As a trader who is aware of crowd psychology, you must ask yourself, “Are the trading syndicates and market-makers prepared to absorb the panic selling at these price levels?” If they are, then this is a good sign that indicates market strength.

2. After substantial rises, the ‘herd’ will become annoyed at missing the up-move, and will rush in and buy, usually on good news. This includes traders who already have long positions, and want more. At this stage, you need to ask yourself, “Are the trading syndicates selling into the buying?” If so, then this is a severe sign of weakness.

Does this mean that the dice is always loaded against you when you enter the market? Are you destined always to be manipulated? Well, yes and no.

A professional trader isolates himself from the ‘herd’ and becomes a predator rather than a victim. He understands and recognises the principles that drive the markets and refuses to be misled by good or bad news, tips, advice, brokers, or well-meaning friends. When the market is being shaken-out on bad news, he is in there buying. When the ‘herd’ is buying and the news is good, he is looking to sell.

You are entering a business that has attracted some of the sharpest minds around. All you have to do is to join them. Trading with the ‘strong holders’ requires a means to determine the balance of supply and demand for an instrument, in terms of professional interest, or lack of interest, in it. If you can buy when the professionals are buying (accumulating or re-accumulating) and sell when the professionals are selling (distributing or re-distributing) and you do not try to buck the system you are following, you can be as successful as anybody else can in the market. Indeed, you stand the chance of being considerably more successful than most!

[bassclef]

Effort Versus Result

Effort to go up is usually seen as a wide spread up-bar, closing on the highs, with increased volume – this is bullish. The volume should not be excessive, as this will show that there is also supply involved in the move (markets do not like very high volume on up-bars).

Conversely, a wide spread down-bar, closing on the lows, on increased volume is bearish, and represents effort to go down. However, to read these bars on your chart, common sense must also be applied, because if there has been an effort to move, then there should be a result. The result of effort can be a positive one or a negative one. For example, on Chart 7 (pushing up through supply), we saw an effort to go up and through resistance to the left. The result of this effort was positive, because the effort to rise was successful – this demonstrates that professional money is not selling.

If the additional effort implied in the higher volume and wide spreads upwards had not resulted in higher prices, we can draw only one conclusion: The high volume seen must have contained more selling than buying. Supply on the opposite side of the market has been swamped by demand from new buyers and slowed or stopped the move. This has now turned into a sign of weakness. Moreover, this sign of weakness does not just simply disappear; it will affect the market for some time.

Markets will frequently have to rest and go sideways after any high volume up-days, because the selling has to disappear before any further up-moves can take place. Remember, selling is resistance to higher prices! The best way for professional traders to find out if the selling has disappeared is to ‘test’ the market – that is, to drive the market down during the day (or other timeframe) to flush out any sellers. If the activity and the volume are low on any drive down in price, the professional traders will immediately know that the selling has dried-up. This now becomes a very strong buy signal for them.

Frequently, you will see effort with no result. For instance, you may observe a bullish rally in progress with sudden high volume appearing – news at this time will almost certainly be ‘good’. However, the next day is down, or has only gone up on a narrow spread, closing in the middle or even the lows. This is an indication of weakness – the market must be weak because if the high activity (high volume) had been bullish, why is the market now reluctant to go up? When reading the market, try to see things in context. If you base your analysis on an effort versus results basis, you will be taking a very sensible and logical approach that detaches you from outside influences, such as ‘news’ items, which are often unwittingly inaccurate with regards to the true reasons for a move. Remember, markets move because of the effects of professional accumulation or distribution. If a market is not supported by professional activity, it will not go very far. It is true that the news will often act as a catalyst for a move (often short-lived), but always keep in mind that it is the underlying activity of ‘smart money’ that provides the effort and the result for any sustained price movement.


The Path of Least Resistance

The following points represent the path of least resistance:

• If selling has decreased on any down-move, the market will then want to go up (no selling pressure).
• If buying has decreased on any up-move, the market will want to fall (no demand), Both these points represent the path of least resistance.
• It takes an increase of buying, on up-days (or bars), to force the market up.
• It takes an increase of selling, on down-days (or bars), to force the market down.
• No selling pressure (no supply) indicates that there is not an increase in selling on any down-move.
• No demand (no buying), shows that there is little buying on any up-move.

Bull moves run longer than bear moves because traders like to take profits. This creates a resistance to up- moves. However, you cannot have a bear market develop from a bull market until the stock bought on the lows has been sold (distributed). Resistance in a bull move represents selling. The professional does not like to have to keep buying into resistance, even if he is bullish. He also wants to take the path of least resistance. To create the path of least resistance he may have to gap-up, shake-out, test, and so on, or he may do nothing at that moment, allowing the market to just drift.

Bear markets run faster than bull markets because a bear market has no support from the major players. Most traders do not like losses and refuse to sell, hoping for a recovery. They may not sell until forced out on the lows. Refusing to sell and accepting small losses, the trader becomes locked-in and then becomes a weak holder, waiting to be shaken out on the lows.


Markets can be Marked Up (or Down)

You cannot help notice how major moves from one price level to another usually happen quickly. This rapid movement from one price level to another is not by chance – it is designed for you to lose money. You can be suddenly locked-into a poor trading position, or locked out of a potentially good trade by one or two days (or bars) of rapid price movement: The Index or stock usually then rests and starts to go sideways. If you have been locked-into a poor trade, you may regain hope, and so will not cover a potentially dangerous position. The next sudden move against you does exactly the same thing, so the process continues.

Conversely, if you are not in the market and have been hesitating or waiting to trade, sudden up- moves will catch you unawares; you are then reluctant to buy into a market where, yesterday, you could have bought cheaper. Eventually a price is reached where you cannot stand the increases in prices any more and you buy, usually at the top!

Market-makers, specialists and other professional traders, are not controlling the market, but simply taking full advantage of market conditions to improve their trading positions. However, they can and will, if market conditions are right, mark the market up or down, if only temporarily, to catch stops and generally put many traders on the wrong side of the market. The volume will usually tell you if this is going on, as it will be low in any mark-up that is not genuine. Yes, they are marking the market either up or down, but if the volume is low, it is telling you that there is reduced trading. If there is no trading going on in one direction, the path of least resistance is generally in the opposite direction!


Manipulation of the Markets

A large percentage of people are surprised to learn that the markets can be manipulated in the ways that we have described. Almost all traders are labouring under various misconceptions.

There are all sorts of professional interests in the world's financial markets: brokers, dealers, banks, trading syndicates, market-makers, and traders with personal interests. Some traders have a strong capital base, some are trading on behalf of others as investment fund managers, pension fund managers, insurance companies and trade union funds, to name but a few.

As in all professions, these professionals operate with varying degrees of competence. We do not have to be concerned by all these activities, or what the news happens to be, because all the trading movements from around the world are funnelled down to a limited number of major players known as market-makers, pit traders or specialist (collectively know as the ‘smart money’ or ‘professional money’). These traders, by law, have to create a market. They are able to see all the sell orders as they arrive, and they can also see all the buy orders as they come in. They may also be filling large blocks of buy or sell orders (with special trading techniques to prevent putting the price up against themselves or their clients). These traders have the significant advantage of being able to see all the stop-loss orders on their screens. They are also aware of ‘inside information’, which they use to trade their own accounts! Despite ‘insider dealing’ being illegal, privileged information is used all the time in direct and indirect means to make huge sums of money.
To put it simply, a professional trader can see the balance of supply and demand far better than anyone else can. This information is dominating their trading activity. Their trading will then create an ongoing price auction.

Floor traders usually complain bitterly if they are asked to modernise, which usually means leaving the floor to trade on computer screens. They will have lost the feel and help of the floor! "I am all in favour of progress, as long as I do not have to change the way I do things", was a passing comment from one London floor trader as he was forced off the trading floor.

Professionals trade in many different ways, ranging from scalping (that is buying the bid and selling the offer) to the long-term accumulation and distribution of stock. You need not be concerned too much with the activity of individuals, or groups of professional traders, because the result of all their trading is shown in the volume and the price spread. Firstly, the volume is telling you how much trading activity there has been. Secondly, the spread or price action is telling you the position the specialists are happy with on this activity (which is why the price spread is so important). All the buying and selling activity from around the world has been averaged down into a 'view' taken by the specialists or market-makers – a view from those traders who have to create a market, can see both sides of the order book, and who trade their own accounts.

However, you do need to recognise that professional traders can do a number of things to better their trading positions: Gapping up or gapping down, shake-outs, testing, and up-thrusts are all moneymaking manoeuvres helping the market-makers to trade successfully, at your expense – it matters not to them, as they do not even know you.

This brings us to the "smoke-filled room syndrome”. Some people may think that when we talk about a moneymaking manoeuvre, some sort of cartel gathers in a smoke-filled room.

"OK chaps, we are going to have a test of supply today. Let's drive the prices down on a few strategic stocks and see if any bears come out of the closet”.

In practice, it does not usually work like that. This sort of thing was much more common many decades ago, before the exchanges were built, and the volume of trading was such, that markets were much easier to manipulate. Now, no single trader, or group of traders, has sufficient financial power to control a market for any significant length of time. True, a large trader buying 200 contracts in a futures market would cause prices to rise for a short time, but unless other buyers joined in, creating a following, the move could not be sustained. If you are trading futures related to the stock market, any move has to have the backing of the underlying stocks; otherwise, your contracts are quickly arbitraged, bringing the price back in line with the cash market.

If we take the example of the 'test of supply', what actually happens is something like this:
Groups of syndicate dealers have been accumulating stock, anticipating higher prices in the future. They may have launched their accumulation campaigns independently. Other traders and specialists note the accumulation and also start buying. Before any substantial up-move can take place they have to be sure that the potential supply (resistance) is out of the market. To do this they can use the ‘test‘. Usually they need a window of opportunity in which to act. They do not collude in the test action directly; they simply have the same aims and objectives and are presented with the same opportunity at the same time.

Market-makers can see windows of opportunity better than most other traders. Good or bad news is an opportunity, so is a lull in trading activity. Late in the trading day, just before a holiday, is often used and so on. As they take these opportunities, reduced effort is required to mark the prices down (this is now cost effective), the market automatically tells them a story. If most of the floating supply has been removed, then the volume will be low (little or no selling). If the floating supply has not been removed, then the volume will be high (somebody is trading actively on the mark-down which means supply is present). If most of the floating supply had been removed from the market, how can you have active trading or high volume? (This point refers specifically to cash markets).

Professional interests frequently band together. Lloyds of London, for example, have trading syndicates, or trading rings, to trade insurance contracts, making their group effort more powerful while spreading the risk. You accept this without question – you know about them because they are well known and have much publicity; you read about them, they are on television, they want the publicity and they want the business.
Similar things go on in the stock market. However, you hear little of these activities, because these traders shun publicity. The last thing they want is for you or anybody else to know that a stock is under accumulation or distribution. They have to keep their activities as secret as possible. They have been known to go to the extremes, producing false rumours (which is far more common than you would perhaps believe), as well as actively selling the stock in the open, but secretly buying it all back, and more, via other routes.

From a practical point of view, professional money consists of a mass of trades, which if large enough, will change the trend of the market. However, this takes time. Their lack of participation is always as important as their active participation. When these traders are not interested in any up-move, you will see low volume, which is known as ‘no demand‘. This is a sure sign that the rally will not last long. It is the activity of the professional traders that causes noticeable changes in volume – not the trading activity of individuals such as you or me.

Top professional traders understand how to read the interrelationship between volume and price action. They also understand human psychology. They know most traders are controlled in varying degrees by the TWO FEARS: The fear of missing out and the fear of losses.

Frequently, they will use good or bad news to better their trading position and to capitalise on known human weaknesses. If the news is bad and if, at that moment, it is to their advantage, the market can be marked down rapidly by the specialist, or market-makers. Weak holders are liable to be shaken out at lower prices (this is very effective if the news appears to be really bad). Stop-loss orders can be triggered, allowing stock to be bought at lower prices. Many traders, who short the market on the bad news, can be locked-in by a rapid recovery. They then have to cover their position, forcing them to buy, helping the professional money, which has been long all the time. In other words, many traders are liable to fall for 'the sting’.

Market-makers in England are allowed to withhold information on large deals for ninety minutes. Even this lengthy period is likely to be extended. Each stock has an average deal size traded and, on any deal, which is three times the average, they can withhold information for ninety minutes. If for example, trading in ICI, the average is 100,000 shares and 300,000 are traded, they can withhold this information for ninety minutes. Their popular explanation for this incredible advantage is that they have to have an edge over all other traders to make a profit large enough to warrant their huge exposure. As these late trades are reported, this not only corrupts the data on one bar, but two bars. To add insult to injury, you are expected to pay exchange fees for deliberate incorrect data.

So professional traders can withhold the price at which they are trading at for ninety minutes or longer, if it suits them. However, the main thing they want to hide from you is not the price, but the VOLUME. Seeing the price will give you either fear or hope, but knowing the volume will give you the facts. In trading other markets around the world, you may not have the same rules, but if the volume is so important in London, it will be just as important in any other market. Markets may differ in some details but all free markets around the world work the same way.

As these market-makers trade their own accounts, what is stopping them trading the futures markets or option markets just before they buy or sell huge blocks of stocks in the cash markets? Is this why the future always appears to move first? Similar things happen in other markets – however, the more liquid or heavily traded a market is, the more difficult it will be to manipulate.

You will frequently see market manipulation and you must expect it. Be on your guard looking for manipulation and be ready to act. Market-makers cannot just mark the price up or down at will, as this is only possible in a thinly traded market – most of the time, this will be too costly a manoeuvre. As we have already pointed out, windows of opportunity are needed; a temporary thinning out of trading orders on their books, or taking full advantage of news items (good or bad).

It is no coincidence that market probes are often seen early in the mornings or very late in the day's trading. There are fewer traders around at these times. Fund managers and traders working for large institutions (we shall refer to these people as ‘non-professional’ to distinguish them from market-makers et al) like to work so called 'normal hours' – they like to settle down, have a cup of coffee, or hold meetings before concentrating on market action. Many traders who are trading other people's money, or who are on salaries, do not have the dedication to be alert very early in the morning. Similarly, by late afternoon, many are tired of trading and want to get home to their families.

[trade2winnn]

Fear is a powerful emotion. It is an evolutionary holdover from thousands of years ago when it was a necessary trait to survive. Have to run from a large cat? Yeah, that fear is going to get the adrenaline pumping and make you run faster and farther. Although technology has changed society, it hasn't changed humans very much. The same fears remain, sometimes brushed aside or ignored, but always there, waiting. Professional traders are well aware of this fact and through years of mastering and manipulating fear in others (and because of fierce competition within their own industry) have gained an edge over the non-educated investor. To understand how they do this will give you a greater understanding of how the markets generally work.

Fear of loss

During bear markets, there comes a point where investors can't stand the thought of further loss. This is fear. Fear of loss. Fear of being wrong. Fear of having to explain to your friends and family why the investment you made lost so much money. It results in a selling climax that accelerates and gains momentum. Soon panic selling ensues (usually near the bottom) then rebounds like a basketball. If the volume is great enough it can even change the trend from bear to bull. This happens every time, in every market throughout history. Why is that? Why doesn't the price continue to fall? The answer is that investors, having waited on the sidelines for attractive prices, stop the selling. If they didn't, the price would fall forever. The buyers of these climactic selloffs are obviously bullish on the price or they wouldn't be buying. They plan to sell back at higher prices.

Fear of missing out

The second fear is the cause of greed and jealousy. It is fear of missing out. Say your neighbor or friend got rich with a certain stock. Certainly this gives you a strong temptation to buy the same stock and profit for yourself as you are jealous and seek to improve your financial position. It's no different with Bitcoin. Having accumulated coins (or stock, it works the same way), the same investors who bought all the extra supply at wholesale prices are now holding. The selling is slowly stopped as those who are tempted to sell eventually give in and leveraged positions are covered. Once this happens, the price will have a fairly easy time going up (with a little help of course). Suddenly sentiment changes, prices soar upwards and good news abounds. Fortunes are being made. As the price shoots up, suddenly those on the sidelines begin to feel fear again: Fear of missing out. They buy back in. At some point, the fear of missing out on profit becomes too great and "the herd" panic buys, usually near the top at the point of greatest euphoria. This gives the investors a perfect opportunity to sell to "the herd" at higher prices. As the stock is distributed to the new buyers, supply floods the market in greater quantities and the price tanks. This is called a buying climax and works in opposite to a selling climax.

Having identified both fears, it's fairly easy to see how they are manipulated for profit. Bad news often accompanies bear markets for the same reason good news accompanies bull markets. They are often timed this way to maximize profits for investors. During bull markets, investors can call their friends at CNBC and unwittingly the anchors and news outlets become stock pumpers. They don't know any better, but the smart money does. Why did good news about the dollar come out recently? Because it's at the top of a bull run and those who accumulated months ago need plenty of buy orders to sell into. Good news almost always accompanies market tops to tempt "the herd" into buying through fear. Now do you understand, on this forum and others, why there are so many negative trolls during bear markets and positive trolls during bull markets? They are not there to be your friend, that's for sure!

To test this theory, look at stocks that are being "pumped" on mainstream news outlets. Note the price and return a few months later--likely it will be lower. A good example is the dollar which has been in a steady uptrend for quite some time. Check out recent news, like this gem: http://www.wsj.com/articles/dont-buck-the-dollar-trend-heard-on-the-street-1421189831. There is a chart with the words "Fly Like an Eagle." Are large investors stockpiling dollars at this price? Probably not, but they need someone to sell to, and they know the dumb-dumb public will fall for this. Understanding how this process works, again and again, and how the herd falls for it again and again, is key to understanding how markets operate.
 

Good post, thanks.

-trade2winnn

[Q7]

Fear of missing out

The second fear is the cause of greed and jealousy. It is fear of missing out. Say your neighbor or friend got rich with a certain stock. Certainly this gives you a strong temptation to buy the same stock and profit for yourself as you are jealous and seek to improve your financial position. It's no different with Bitcoin. Having accumulated coins (or stock, it works the same way), the same investors who bought all the extra supply at wholesale prices are now holding. The selling is slowly stopped as those who are tempted to sell eventually give in and leveraged positions are covered. Once this happens, the price will have a fairly easy time going up (with a little help of course). Suddenly sentiment changes, prices soar upwards and good news abounds. Fortunes are being made. As the price shoots up, suddenly those on the sidelines begin to feel fear again: Fear of missing out. They buy back in. At some point, the fear of missing out on profit becomes too great and "the herd" panic buys, usually near the top at the point of greatest euphoria. This gives the investors a perfect opportunity to sell to "the herd" at higher prices. As the stock is distributed to the new buyers, supply floods the market in greater quantities and the price tanks. This is called a buying climax and works in opposite to a selling climax.

Nice post. I think for me, my utmost concern is basically fear of missing out. I used to face that problem during my time trading fx currency. Nowadays, I try to control myself not to buy when seeing a quick bull run and so far, been quite okay.

[pereira4]

I have big control over feelings when investing, I never feel fear and stick to my plan.

[knight22]

Bump this valuable tread 

[Bit_Happy]

I haven't "mastered fear", but I love bargains.
Show me a "falling knife" and I'll be ready to grab it now! 

I have big control over feelings when investing, I never feel fear and stick to my plan.

"Plans" do not cover all situations, sometimes it pays big to be flexible if market conditions change radically.

[oblivi]

"again and again" really sums it up, how come the herd never learns to buy when prices are down 80 to 90%?
Oops, shhhhh... don't tell the noobs.

Some people fall into the trap of waiting for that special perfect price, till the point you realize you just missed the boat, which by then is too late. The best strategy is to start buying in small amounts as soon as you think its going low enough. Of course, some people just can't be helped and are too scared to pull the trigger, so they don't have a "low enough" threshold. These people weep and hate at the investments they were considering entering at when they take off out of frustration.

[afbitcoins]

Thanks for this thread. Should be sticky !