The Insider Edge by Guy Cohen

Author:Guy Cohen [Cohen, Guy]
Language: eng
Format: epub
ISBN: 9781118282557
Publisher: John Wiley & Sons, Ltd.
Published: 2012-07-19T14:00:00+00:00

In Chapter 4 I'll show you exactly how we take our profits on a move like this. We take a conservative partial profit and let the rest ride as the stock price continues to fall.

A move of 10 points on a $35 stock is significant. Proportionately it's the same as a $100 move on a $350 stock . . . and that would certainly have you purring!

Avoiding Market Manipulation with Bear Flags

The same concepts apply with bull and bear flags when it comes to managing your orders with your broker.

In the SFLY chart the low point of the bear flag is $35.38. We need this point to be broken to the downside.

Indeed our order here is to short only when the stock falls slightly below this low (in fact, below $35 in this case—say $34.88). This is a psychological thing with a stock that clearly isn't as liquid as say AAPL.

We want to ensure that the flag is decisively resolved to the downside, so I want the comfort of having both the flag low and the round number of $35 taken out.

Our short here is a sell stop limit to open at $34.88, or a conditional order to open a short at that level. If the stock trades through this level, our order is triggered. If it gaps through it, your order will not be triggered. This type of order protects us from gaps that may put us into a trade that's not at our ideal price. The concern is that gaps are often filled, and we don't want to be gapped in, only for the price to reverse on us and fill its gap.

Remember: We set our orders at deliberately unrounded numbers away from others that are likely to be placed by amateur traders. While our order is relatively small and likely to be recognized as a private trade, it's typically only when lots of small orders are clumped together where a market maker will deem it worth gobbling them all up at the same place, only to then reverse the price.

Markets are manipulated, but if you play the game intelligently you'll be fine. Remember: Only a small number of private traders bother to get any form of proper education—and even then they're often seduced by poorly devised strategies that are simply very well marketed.

In the case of lots of different small sell orders accumulated in the same vicinity, in the event of a low-volume period, the market maker can walk the price down and match the sell orders with buy orders. Once that's done, with no more authentic sell orders at that price or below, the price will start to rise again, causing a problem for those who sold short.

With your order placed intelligently away from the amateur noise, you are far less likely to be taken to the cleaners by this sort of activity.

Volume with Bear Flags

Bear flags work in the same way as bull flags. In an ideal world, volume will be rising during the flagpole part of the pattern, subsiding during the consolidation phase, and rising again during the breakout.

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