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past accurately predicts the future and that we can project these past patterns to predict the future. While this is more true in certain aspects of life, it just isn't true when it comes to the stock market. While the past patterns may be quite useful in making educated guesses about the future, there is no direct cause-and-effect relationship, much to the dismay of business school professors, economists, market historians, chart technicians, and analysts. |
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It is far easier to predict the individual behavior of people playing the market than it is to predict the short-term or long-term moves of the entire market itself. You know the stale qualifier that all brokerage companies include when they give the yearly return on investment of funds: "Past performance is no guarantee of future results." And, of course, sometimes past performance is a contraindicator of future results! |
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The Psychology of Market Maker "Head Fakes" |
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Active traders know that market makers for NASDAQ stocks like to play mental electronic games. Longer-term investors can save some emotional wear and tear by being aware of the head fake, so when they see it they will not react quite so instinctively and end up feeling duped. |
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The purpose of the head fake, as in basketball or football, is to make it look like the play is going one way when it is really going the other way. The fact that this goes on electronically is one argument for more casual investors not to being glued to the monitor all day, thus not having to negotiate and sustain the short-term abrupt movements that speed hearts up and clench stomachs into knots. And yet it is considered simply part of the game for traders, and can be exciting when the reversal move is in the direction that they're looking for, as I will indicate later in this chapter. |
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Sometimes, market makers will scare the hell out of traders and spook investors by taking a fast-moving Internet stock down 10 points or less in a matter of literally two minutes. The idea in doing this is to force what are thought of as the "weaker hands" (or the "scared money") into selling their shares, out of fear that they will lose whatever profit they may have accumulated. Or, to scare those who are watching a loss mount up tick by tick to bail out so as not to lose even more. |
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When a serious head fake is taking place, it can come out of nowhere. Things are looking nice and calm and then the stock jumps |
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