The biggest misconception I’ve seen in many beginner day traders is that they are always
on the quest to find the best penny stock trading strategies, penny stock patterns,
and indicators etc.
What most fail to realize is that those things only work, if people use them.
In order to profit we must think for the other buyers and sellers and understand who are
the players and who is in pain.
The most common players in the penny stock market are, break out traders, momentum traders,
dip buyers, short sellers, and swing traders.
I will be breaking down the basics of these traders’ psychology in the market.
So you will be able to analyze and profit from day trading beyond just memorizing patterns
and strategies.
I’ve spent a lot of time preparing for this video all by myself to make sure there is
100% value and 0 hype.
So if this sounds like something that can benefit your trading, make sure to watch till
the end, nd drop me a like so others can benefit from my videos in the future
The first one we will go over are the breakout traders.
These are the traders who buy into a penny stock when it’s at the point of breaking
a previous high.
Let’s look at the $ABIO intraday chart here on May 1, 2019.
On this day the stock got pumped up by PR and traded as high as $9 from $5 in the morning
session.
It sold off a little bit mid day and retested the previous high at around 1:20pm in the
afternoon.
At this retest price.
Breakout traders see that, hey the stock is about to make a new high nad think to themselves.
i can see the price break $9 and possibly go up to $10 or even more.
I must get on this.
Break out traders are the most predictable traders because it is the most common “strategy”
taught in penny stock day trading courses, dvd’s, and chat rooms.
They term this strategy “break out pattern”, “U shape pattern” etc.
This is very important.
We’ll come back to talk about this in detail a little bit later so hold on tight.
You can see the increase in volume in the stock around previous price level of $9 as
more break out traders hop on to this stock.
In this case, there is more breakout traders than the sellers.
So this break out becomes successful.
The stock breaks the previous high in the morning at $8.95 and run higher to $11.50
and then almost $13 dollars at 2pm.
Once all the traders watching $ABIO see that the stock has just made a new high breaking
above the previous resistance of $8.95 for them, this is where the momentum traders get
interested.
this is what those players are thinking.
“Oh that break out on $ABIO was successful, and when stocks break previous day highs successfully,
it’s really likely that more volume are going to pile in.
so i should hop into strength as well!”
So these momentum traders hop on in along with the breakout traders.
And that's why many times when penny stocks break a previous resistance with strong volume,
the price will squeeze even higher.
Remember this, Momentum traders join strength.
And when strength weakens, this where momentum traders sell their position and get out.
You can see right here on this 10 min candle.
The breakout traders who got in to break the previous high of 12.69 failed.
The stock only went twenty cents higher at 12.88 and quickly slammed back down to $11.
This is a sign of weakness and extension.
And when the stock no longer has strength, this is when the momentum traders who got
in earlier start selling and there were not enough fresh break out buyers coming in.
so the increase of selling and decrease of buying causes this sell off for the stock
from $12.80 back down to $10 and below.
This is where the third kind of players come in, the short sellers.
Short seller love to lurk at the top of each stock.
These are the traders who can spot increase of selling and decrease of buying in the volume
and level 2.
Short sellers love overly extended stocks on the day like $ABIO.
So they saw $abio and these shorts thought “ummm okay, this stock ran from $5 to almost
$13 today.
This is over extended.
I think the buying has slowed down and selling is going to increase now.
I want to short this stock down”
So in this case, if the short seller entered at the top around 12.80.
He or she was correct their thesis and they made profit from the stock selling off all
the way down below $10.
However, there are always those impatient short sellers.
Those are the shorts who got in too early from earlier.
Some traders love to short everything that’s up.
So they short here at $7, $8 and and remember, previous high was $9.
So i bet you there were many shorts taking entries around that price at 1:20pm.
Well, those short sellers got in too early.
There were more breakout traders and momentum traders buying than the overall selling.
And the stock was breaking highs.
When that happens, these early short sellers are thinking to themselves.
“Holy ***, I didn't think this stock could possibly break $9 and now its breaking above
$10.
I am down a lot now i thought this breakout will fail but im wrong.
What if it goes to $20 or $30.
Oh my god I better get out before i blow up my account”.
So the short sellers who are in pain decide to get out.
And they need to buy to cover to get out.
That causes a short squeeze.
the shorts buying along with the break out traders and momentum traders buying, causes
this stock $ABIO to squeeze even higher right here.
So let’s get back to the successful short sellers here.
If i was a short seller who shorted at $12.80 and now the stock is back down at $9.
I would start to cover a piece around this level at $9.
Why?
Because i know that dip buyers are going to start coming in.
Dip buyers are the fourth kind of players you need to keep in mind of.
These are traders who buy into a stock when they see that a stock has made a high and
retraced back to previous support level.
Dip buyers love to get into the stock on pull backs after it shows impressive strength to
the upside
For example, dip buyers would be looking at the $9 level here and think “mmm , the stock
was just trading around 12 dollars and now its pulled back.
I can buy into this at a cheaper price.
Previous resistance level was $9.
And previous resistance once broken becomes support.
Ok $9 is a support price i think it’s reasonable to buy in here”.
And at the same time, short sellers also look at the previous support levels at $9 and think.
“Ok, i need to beware of dip buyers.
They may look into getting into this stock at this level.
So i better start covering up.”
And its this exact balance between all players in the market that create these support and
resistance levels.
Dip buyers buy at $9 and short sellers buy to cover, that makes the stock price to bounce
from $9 again to $11.70.
And this bounce pattern only happened because dip buyers and shorts came in to buy.
This is why i’ve stressed in many of my previous videos, don’t focus on memorizing
patterns, focus on understanding the players involved in the stock and what they are doing
to form the pattern and price action you are seeing right now.
Think for the other traders.
And there’s more, I’m not done yet.
So at the end of the day on this day one run up $ABIO closed around $9.
The next day on day two we can see the stock gapped up to $19 pre market.
This is where the fifth major player comes in.
the swing traders.
Swing traders are the people who love to buy a strong stock holding gains overnight.
Which is an important criteria i’ve mentioned in my penny stock swing overnight video.
Swing traders would be thinking here on May 1, “ok this is only day one of this move
on $ABIO.
This penny stock is holding up it’s gains really well and not sold off.
I think the news release could potentially drive more buyers to come in overnight.
Then i can sell my position at tomorrow’s gap up or into a morning spike.”
So the next morning.
Guess what, these swing traders are laughing to the bank.
The stock is trading at $19.
And the swing traders are thinking, “wow this is amazing, i just made $9 a share in
less than 12 hours.
I better lock in some gains in case this stock sells off back down to $10.”
At the same time, let’s think for the break out traders who are trading by following chat
room alerts.
Remember I mentioned earlier that we’ll come back to those people?
The most common day trading chat room strategies are buying breakouts of previous day highs,
premarket highs etc etc.
Now let’s put short sellers into consideration as well.
As i mentioned there were shorts piling in around $12.80 the day prior and probably held
overnight because they think the stock could sell off even more back down to $5.
So let’s now put these swing traders, break out traders, and short seller puzzles together.
Swing traders, after profiting $9 a share overnight.
What do you think they are more likely to do at the market open.
They would probably sell and take their 90% ROI and run.
Short sellers who were holding short overnight from $12.70 woke up to see that they are down
$7 a share.
They’d probably panic and want to buy to cover immediately at market open.
Break out traders in all these penny stock chat rooms.
They would probably get an alert by their moderators to buy at the break of premarket
high $19.50 and sell at the next whole number $20.
So at the market open, break out traders pile on to buy at the premarket high of $19, short
sellers buy to cover, those two players together drove the stock shares up from $18.30 to a
little bit above $20.45.
Swing traders who got in previous day, they want to cash out on overnight gap up or spike
at the open.
So they start selling their overnight positions at the same time and taking home their profit.
The amount of selling outweighs the fresh buyers and short sellers covering.
So the price did not go higher.
This is when chat room followers and break out traders panic “oh ***, i thought the
stock was going higher to $25 or $30 after i bought at $19.
But now it’s breaking down below premarket highs at $17 now.
I better cut my losses before the stock tanks back down to $5.”
so all these break out traders who are stuck at $19 or $20 at the open start selling as
well.
Now the smart short sellers who didn't get squeezed from their overnight positions, they
would be lurking around this premarket high.
They would be thinking “ ok the stock just gapped up $9 overnight.
If i was long and up so much i would totally sell and take profit.
I think this stock might spike a little bit at the open with people chasing and immature
shorts covering, but i think ultimately there would be more sellers than fresh buyers, i
want to take this short”.
Basically this is the foundation of the gap up strategy I mentioned in my prior video.
This is the cause and effect relationship that i think is so crucial to understand.
Chart patterns are byproducts of psychological decisions by buyers and sellers in the stock.
This is why no patterns or strategies are 100% guaranteed.
If dip buyers didn’t come in today to $ABIO at $9 here on day 1.
Do you think the stock would have bounced?
If there weren’t enough break out traders buying than selling, do you think this break
out would have been successful?
Most people think to make money in day trading penny stocks you need to understand the market
and analyze the patterns.
Sure that could help, certainly.
But really it's not you against the market, it’s you against the other people in the
market.
This is why I believe day trading psychology is so important.
You have to think for the other players involved.
This is the kind of psychological analysis that will separate you from the sheep that
follow alerts and study just patterns.
Don’t trade chart patterns.
Understand the traders in the stock.
And trade those traders.
If you’ve found this video helpful please do comment below and let me know.
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enjoy videos like these.
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This is the humbled trader.
Thank you guys for watching and i will see you next time