I just started reading Master the Markets by Tom Williams. So far a great read. Below in an exert and if anyone is interested I have supplied a link where you can download it for free. You do have to register with trade guide in order to get the book free, but you don’t have to buy anything or watch. But if your funds are limited it’s a great read and like I said it’s free. One more thing to note. I am not endorsing anything to due with trade guide or any of there services. This is a free download if you register account with them and that’s as far as I went.
The stock market revolves around the simple principles of accumulation and distribution, which are processes that are not well known to most traders.
Perhaps you can now appreciate the unique position that the market-makers, syndicate traders, and other specialist traders are in – they can see both sides of the market at the same time, which represents a significant advantage over the ordinary trader.
It is now time to refine your understanding of the stock market, by introducing the concept of ‘Strong and Weak Holders.’
Strong Holders Strong holders are usually those traders who have not allowed themselves to be trapped into a poor trading situation. They are happy with their position, and they will not be shaken out on sudden down-moves, or sucked into the market at or near the top. Strong holders are strong because they are trading on the right side of the market. Their capital base is usually large, and they can normally read the market with a high degree of competence. Despite their proficiency, strong holders will still take losses frequently, but the losses will be minimal, because they have learnt to close out losing trades quickly. A succession of small losses is looked upon in the same way as a business expense. Strong holders may even have more losing trades than winning trades, but overall, the profitability of the winning trades will far outweigh the combined effect of the losing trades.
Weak Holders Most traders who are new to the markets will very easily become Weak Holders. These people are usually under-capitalised and cannot readily cope with losses, especially if most of their capital is rapidly disappearing, which will undoubtedly result in emotional decision-making. Weak holders are on a learning curve and tend to execute their trades on ‘instinct’. Weak holders are those traders who have allowed themselves to be ‘locked-in’ as the market moves against them, and are hoping and praying that the market will soon move back to their price level. These traders are liable to be ‘shaken out’ on any sudden moves or bad news. Generally, weak holders will find that they are trading on the wrong side of the market, and are therefore immediately under pressure if prices turn against them.
If we combine the concepts of strong holders accumulating stock from weak holders prior to a bull move, and distributing stock to potential weak holders prior to a bear move, then in this context:
• A Bull Market occurs when there has been a substantial transfer of stock from Weak Holders to Strong Holders, generally, at a loss to Weak Holders.
• A Bear Market occurs when there has been a substantial transfer of stock from Strong Holders to Weak Holders, generally at a profit to the Strong Holders.
Master the Markets 21
The following events will always occur when markets move from one major trending state to another:
The Buying Climax
Brief Definition: An imbalance of supply and demand causing a bull market to transform into a bear market.
Explanation: If the volume is seen to be exceptionally high, accompanied by narrow spreads into new high ground, you can be assured that this is a ‘buying climax’.
It is called a buying climax because to create this phenomenon there has to be a huge demand for buying from the public, fund managers, banks and so on. It is into this buying frenzy, that syndicate traders and market-makers will dump their holdings, to such an extent that higher prices are now impossible. In the last phase of the buying climax, the market will be seen to close in the middle or high of the bar.
The Selling Climax
Brief Definition: An imbalance of supply and demand causing a bear market to transform into a bull market.
Explanation: This is the exact opposite of a buying climax. The volume will be extremely high on down-moves, accompanied by narrow spreads, with the price entering fresh low ground. The only difference is that on the lows, just before the market begins to turn, the price will be seen to close in the middle or low of the bar.
To create this phenomenon requires a huge amount of selling, such as that witnessed following the tragic events of the terrorist attacks on the World Trade Centre in New York on September the 11th 2001.
Note that the above principles seem to go against your natural thinking (i.e. market strength actually appears on down-bars and weakness, in reality, appears on up-bars). Once you have learned to grasp this concept, you will be on your way to thinking much more like a professional trader.
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