The
first thing you need to truly understand is that algorithms control the
stock market; not the large institutional players,
not the massive hedge funds, but price auction algorithms. Algorithms are there to create volatility and liquidity; they have no mind, they are programmed to go to technical areas, certain levels, to take out buy and sell orders. The market operates on a
day-to-day basis with both premium and discount levels. When the market
moves toward a premium level, the algorithms target that area to create liquidity. Conversely, when the market moves lower, the algorithms aim
for the discount area to generate liquidity.
Equilibrium Level and Premium -Discount Zones.
Algorithms dictate the direction of the market, especially in the near term. The mathematical equations used in these algorithms are designed by humans, based on historical data. When the market is
trending lower and algorithms reach a significant technical level (support/resistance, supply/demand zones, previous highs and lows of sessions, days, weeks, months, imbalances, order blocks, 50%-levels, round numbers, option strike prices) and the market is
trending lower, algorithms will activate and target that technical area. They recognize that the area is a support level. They also
understand that they can manipulate investor emotions to make them
believe that the market is bottoming out.
Premium-Discount Zones for Short and Long Setups.
As a result, when the
algorithm hits that technical area, it aims to trigger emotions that
lead investors to sell or short in response to what appears to be a
breakdown. These breakdowns are often referred to as "failed breakout
trades," and they tend not to succeed. In fact, they fail in more than
80% of cases.
» Some of the best trade setups are failed breakouts. «
Why? Because it’s a contrived effort by the mathematical logic of the algorithms, designed to make investors do exactly what the algorithms want. The goal is to get people to go short at the bottom and encourage long investors to sell their positions at the lowest point, clearing the way for an upward movement. First, shorts need to be covered. Then, longs who sold at the bottom will be motivated to buy back shares, creating another emotional impulse. Typically, this leads to a poor trade for those who sold too early.
» The goal is to get people to go long at the top. «
The same principle applies in both directions—whether the market is moving up or down. For instance, in a false breakdown, algorithms may manipulate the market to sell. In a false breakout, they may prompt buying. In both cases, the effect is similar: short covering and long investors buying at the wrong time. To sum it up, the algorithms exploit emotional responses. There is no support for short positions when the market is trending down, and the longs who are caught at the top are forced to sell. This creates the momentum for the market to move in the opposite direction.
» 80% of Breakouts fail. «
This is why some of the best trades are failed breakdowns—buying against technical levels that are collapsing. This is when and where you should buy, while everyone else is being pushed out of the market. You don’t want to short a failed breakdown in a technical area, nor should you buy a breakout in such an area. Instead, you should do the opposite in these situations. » Algos do what they are programmed to do. They take no prisoners. «
My most successful trades, without question, occur when stop orders are triggered. People use stop orders to protect themselves from losses. This is where you should enter the market—against stop orders. If stop orders are triggered and the market has to sell down, you should buy. Conversely, if stop orders are triggered on the way up, you should sell. The key is to position yourself on the other side of stop orders.
To sum it up, algorithms are written by programmers, and have to be designed to go somewhere. Where do they go? To technical areas. Those algorithms are heading there, without a doubt. They aim to shake out longs and get people to go short or vice versa. So, what do the smart players do who are at the bottom of these algorithms, scooping up all this action? They feed into these people. That's the purpose of algorithms. We take advantage of what they give us. Printing money. That’s what we do. And we do it every day.
You need to know the technicals, the levels, and pay attention to them. Technical areas are borders, and price history is how you identify and track them. Do multi-time frame analysis; understand what failed breakdowns and failed breakouts look like; double bottoms, double tops, pin bars, three-push-patterns, three-bar reversals, and M and W patterns, all the way down to the 1-minute chart. Find out what else VWAP, EMA (9), and Keltner can do for you. Wait for price to get to technical areas, and for reversal setups to form. Price to price, level to level, zone to zone. Don't chase trades; scale into them, as single-entry trades will kill you. Understand position management; know your stop-loss level, take-profit targets, and your R, and take what the market gives you. Consider taking partial profits and holding positions through a session close or daily close. Journal your trades; some of your best trades will be losing trades that help you learn valuable lessons. Keeping things simple is the key to success as a trader. See also:
