If you're an active trader in the stock market, then it has, no doubt, happened to you. In fact, it's probably happened to you so many times, you're beginning to wonder if you've somehow angered the Market Gods, or missed that paragraph in the Trader's Rule Book that says any stock that you buy must immediately head south. It becomes particularly galling when you've done your homework, checked your charts, and every indicator says the price is headed skyward. Unfortunately, there are just two little things that you've forgotten.
The first is, you're not alone. The same news, charts and indicators that told you that the stock was going up also told lots and lots of other people the same thing, and some of those people are professionals with millions of dollars of investment capital at their disposal.
You're probably thinking, that's a good thing, right? After all, theoretically, the more potential buyers there are, the greater the probability that your stock will take off like a rocket and earn you some profits. And that would be true, if it weren't for Pesky Forgotten Thing Number Two.
Here it is in a nutshell: The big money investor doesn't like this price, whatever the current price is. He doesn't like it, because he knows that he can get it cheaper, sometimes a whole lot cheaper, later today. He knows this, because all he has to do is unload a sizable chunk of the stock all at once, and the price will drop significantly. It matters not if he doesn't own any of the stock, he can simply short it. Taking a small loss on it now will virtually guarantee a major gain later.
He knows that if he were to try executing a large buy of the stock right now, it would be handled in bite-sized lots of 100 shares, and the price would inevitably start rising immediately during the buy, pricing the shares above his limit order, making the full order difficult, if not impossible to execute. What he needs is an equal and opposite price action to mask his large purchase.
While you, and perhaps thousands of other small investors are buying into the stock, the institutional investor s watching the volume and price action carefully. Then, once he knows just how much it will take, he dumps or shorts just enough of the stock to send it southward. Across the country, a collective gasp of disbelief is heard, as thousands of small investors begin to conclude that they must have been wrong in their assessment of the stock, and bail. Again, the big-money investor watches the volume carefully, until he is convinced he has squeezed as much downside price action as he can out of the process. Then he starts buying, and buying big.
By driving the stock price down at the precise moment when every rational investor expected it to rise, the big-money investor is not only able to mask his large purchase with an equally large (in the aggregate) number of sell orders, but he has artfully arranged to get the stock at clearance sale prices, tacking a tidy 2-8% bonus onto his usual projected gains.
It's no wonder the average investor gets burned so routinely by the markets. It's painful enough to lose money on any trade or investment. Finding out that you lost money because you were manipulated into serving as camouflage for big-money traders as they snap up your stock at bargain basement prices is just rubbing salt in the wound. Perhaps the best solution for you, if you're an average investor, would be to mimic the actions of the institutional traders, and heed the old axiom, "If you can't beat'em, join 'em."