A common scenario:
"I hate my job." This thought leads to...
"I want to work from home." Which becomes...
"I can start a home-based online web startup!" Then reality hits: it's not a secure or easy path. Must be some way to strike it rich without have to work hard...
"Day-trading!" (or to keep up with the times: FOREX!).
Then you spend minutes, hours, or even days voraciously consuming all available information on trading. If you're savvy you'll end up at Investopedia, Seeking Alpha, or The Big Picture. If you're not, you'll find yourself at The Motley Fool, or the Google Finance boards. Maybe you'll even pick up a Forex ebook or three. You'll read about optimal entry strategies, profit-taking exit strategies, earnings surprises, Fibonacci retracements, Elliot wave theory, overbought/oversold levels, MACD signals, the RSI, and eventually you'll develop your own strategy to test out. You drop 10K into a Scottrade or TradeKing account (please don't use Zecco) and two things can happen:
1. You start losing money immediately. You panic, you're down 8% over a two-week period you know this is where you set your mental stop but maybe the market will turn around tomorrow you could get it all back plus you need this money you need to prove you can strike it out on your own you don't need a real job. Your holdings then plummet to a 15% loss and you sell everything and never mess around with stocks again (until 6 months later when you've pushed that bad experience to the back of your mind).
2. You happened to be on the right side of the trend with the majority of your holdings. But you listened to traditional advice that you should diversify. In fact you bought some $GLD to hedge your stock positions. You're up 11% on your stocks over a two-week period but you didn't set an automatic stop to get out of $GLD and it plummeted 8% in one day and maybe -15% over the same period. You eke out a couple hundred dollar gain THAT IS NOT WORTH THE RISK YOU ARE TAKING.
3. You realize that market makers control prices virtually at will, and if you go against them you are fucked. You make astounding gains because you understand how market dynamic really work.
Please choose option #3. Now read this excerpt from Growing Wealth Mag:
"The specialists and market makers post their buy and sell prices. This information, along with retail investors’ orders, is transmitted through the Nasdaq system. The market makers have the added insight of seeing all the limit orders — a powerful advantage in determining the market buy and sell resistance levels. With Nasdaq Level III access, the market makers essentially know exactly when the investor will buy and sell.
They say knowledge is power, and market makers are no different. The market makers know exactly the low points that will cause a trader to sell, as well as at what prices traders will jump in to buy the stock.
Given their powerful knowledge of limit orders, market makers commonly employ techniques that arbitrarily raise or lower the price of the stock. They are known to shake the tree and get the loose leaves to fall, causing the shaky retail investors and day traders to sell or buy before bringing the stock back to its true value.
Market makers can manipulate a stock by artificially pushing the value down to where they see a bulk of limit orders to sell, resulting in retail investors and day traders selling to cut their losses. After the carnage is all that remains, the market makers will raise the price back up to its real value.
At the same time, market makers can artificially inflate a stock price, causing investors to jump in on the rise before the market makers correct it to the stock’s true value.
Most people trade on patterns and breakouts, and when market makers artificially inflate the price to where they see a bulk of limit orders to buy, it looks as though the stock is on a breakout pattern, because it has penetrated through traditional resistance levels. This signals day traders and pattern traders to purchase the stock, since all technical indicators suggest a breakout is about to occur. Once these buy limit orders have been filled, the market makers bring the price back down to true value, causing day traders and investors to lose tremendously."
If you keep the above in mind always, purchase Level II quotes to see what market makers are up to, set automatic stop-loss triggers, and always always go with the trend, then you should be okay. Don't let logic get in your way, just trade what you see. Don't read media reports about why the stock market is going in a certain direction; it's poison.StockTwits.com and The Big Picture are really very useful if you're just getting into this.
Free tip: If you're on margin and only have a couple grand, you could probably double that in the next few months just VERY carefully playing $FAS and $FAZ (but for god's sake don't hold them overnight ever).
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