The Foundations of Profitability for Traders (Part 2)

03/11/2008 12:00 am EST

Focus:

Bo Yoder

Publisher and Writer, 5MinuteInvestor.com

When a market has been in an established uptrend, then forms a lower high a trader initiating a short position is hoping that the Bulls will be taking defensive action to protect their open profits.  This chart shows a short position we gave in the Active Trader Newsletter in the stock of GOOGLE (Nasdaq:GOOG). After a long boom period, GOOG had exhausted itself to the upside, and a lower high formed.  We took short exposure in the hopes that this topping pattern would:

1: Bring aggressive shorts into the market. Their order flow would overwhelm the liquidity on the bid, and this imbalance would tip the stock over and provoke a selloff.

2:  Once the shorts helped turn the line of least resistance to the bear side, the bulls would begin to react in fear to this weakness.  This selling would further depress prices as the bulls took profits from long exposure taken during the uptrend.

As you can see, this is precisely what occurred, and the trade was closed out after quite a collapse to the downside.

Part 1  |  Part 3  |  Part 4

By Bo Yoder, of BoYoder.com

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