Teaching You to Trade Stocks 87: Some Miscellaneous History of Playing with Market Makers 4

2007/10/30 22:05:40

Everything below is sleep-talking. Don't believe any of it.

I have a business trip tomorrow and no mood to write anything complex, so let me just tell stories — continuing with some old history.

Previously I talked about engineering tops to distribute shares. Today let's talk about engineering bottoms to accumulate shares. Strictly speaking, if you're accumulating, there's no such thing as a fixed bottom. As long as you have enough shares, money, and sufficient time, any cost basis can eventually be averaged down. Especially for those forces with enough influence on the trend — the tops ahead belong to them, the bottoms belong to them too, all the spreads are theirs. What cost can't be brought down?

Why do many market makers eventually blow up? It's because they have no concept of cost. Honestly, many — in fact, the vast majority of market makers still have retail investor mentalities. They see their portfolio's market value rise and get dizzy, forgetting that stocks are merely certificates — certificates for extracting blood. The real skill is actually getting the blood out.

Most stupid market makers want to play the collect-and-distribute game, but this game often puts themselves on the fire. In reality, the key is cost reduction. Generally speaking, if the cost hasn't reached zero, there's no need for aggressive price pumping. The right approach is to keep going back and forth, washing the chip cost down to zero, and only then is there a need to push higher. True pumping shouldn't cost money. If pumping requires spending money, it means the price is already too high, capital inflow can't keep up, and you should have reversed and dumped already.

Often, the difference between dumping one day earlier versus one day later means two entirely different worlds. What's needed here is experience, insight, and intuition. The basic zero-cost chips, then repeated pumping all turns into pure negative cost, and after ultimately creating N^N-fold returns, when you finally don't feel like playing anymore, with hands full of negative-cost chips, you have a big clearance sale — whoever buys is dead. This is truly the safest method. Of course, a clearance sale doesn't have to be a fire sale — it can also be a markup sale, or even wholesale. Techniques abound; they're just different stories.

Therefore, to play this game, the key is having a base of chips. These chips can of course be fought for — as mentioned before, I once fought someone over something, running all the way from 8 yuan to over 20 yuan in one go, then a big platform, and finally one more surge, after which it was time to do what needed to be done. This is one method, but it's too tedious, and generally isn't how it's done.

Of course, the most direct approach is to grab everything at the lowest possible price. This tests one's skill the most. Let me share a classic example from the past.

In this example, before any moves were even made, the insider positions had already started buying. Therefore, the subsequent task was extremely daunting. First, enough shares had to be grabbed. Second, the cost couldn't be too high. Third, the insider positions had to be shaken out. Fourth, the time frame couldn't be too long. No matter how you looked at it, this was a mission impossible.

First, a large resistance level was held by absorbing all the shares from those looking to break even. Insider positions wouldn't absorb break-even selling, and smaller players even less so. Then at that level, repeated false breakouts were staged. Generally at a strong resistance level, people won't throw themselves into charging the barrier, and the repeated false breakouts made all the technical traders hand over their shares. But the shares bought at this point were at the highest cost — except for the historically trapped positions at even higher levels, everyone else had a lower cost basis.

At this point, basically all the cash in the account was spent, with only a portion remaining. At that time, there was a type of margin facility that required same-day closing. Using the remaining cash, this type of margin was borrowed. Then that day, buying was frenzied — by morning, all the cash plus margin was spent buying. Because of the previous N false breakouts, when a real breakout happened, nobody cared anymore — this was exactly the desired effect.

In the afternoon, positions needed to be closed. Repeated negotiations over whether closing could be avoided — the answer was no. With a painful expression, the closing operation began. Like a waterfall, prices crashed. Everything bought in the morning was dumped at a loss, ending the day's tragic trading. The price also crashed through the platform that had been defended all along. After the close, rumors about someone being trapped and hounded by creditors immediately spread everywhere.

The next day, all insider positions and everyone who'd heard the news fled en masse, and then the same on the third day.

Meanwhile, in N distant, remote locations, all the sold shares were being absorbed into a nameless pocket. All who fled were celebrating, because the fourth day still opened with a massive gap down.

Suddenly, powerful buying surged like molten rock erupting from underground, sweeping up every share offered for sale. Before anyone could react, they had already lost any opportunity to buy. The next day, it was the same — the moment the market opened, the price immediately moved beyond anyone's ability to buy in. Meanwhile, those who hadn't escaped in time continued to sell.

On the third day, the price was nearly back to the original platform. There, buying suddenly disappeared, as if no buying had ever existed. Nobody knew what to do. If it was a V-shaped reversal, the massive overhead resistance from the original platform level was something nobody dared to push through. If it was an oversold bounce, all the space had already been used up. After a period of market silence, selling surged again — multi-directional killing began. Nobody dared to step in, but the price would never return to where it was on the second day of the rebound. In a narrow range, those who'd sold had no room to buy back. Those who wanted to buy feared the not-too-distant massive overhead resistance zone and the possibility of a fake oversold bounce. But the price stopped falling. All the shares fell into one enormous pocket.

Finally, at a moment nobody expected, the price rapidly broke through the overhead resistance zone. That so-called technically massive resistance zone — when it was actually broken through, it took less than 15 minutes.

As for the fate of the insider positions — at a price N times higher from where they'd been cut, they finally bought back in again. But that's another story.