False Breakouts – The Trap Set by Institutional Investors

If you’ve ever playing sports, one of the things coaches are supposed to tell you is to separate your emotions from the game.  “Have an even keel,” athletes are told.  Don’t get too high, don’t get too low.  If you make an error or cost the team the game, shake it off.  Don’t dwell on it. 

Because ultimately, those who succeed don’t harp on tiny mistakes – they emotionally separate themselves from the task at hand.

Of course, every day we see athletes who wear their emotions on their sleeve, but the main point still resonates: keep your emotions in check.

This lesson, one would think, would be embraced by traders, but the exact opposite is true: the entire stock market is predicated on emotion.  If a trader sees a stock price inching back towards his cost basis, emotion takes over, and he’ll sell.  This action is replicated countless times and in the process, forms resistance lines that kills a rally.

When the market rises above resistance and lures buyers in, we get a false upside breakout.  When prices fall below support, attracting bears, we get a false downside breakout.  Institutional traders rarely avoid false breakouts; in fact, they can actually cause them to occur.  The victim in all this is the average trader – you and me.