A Simple List of General Do's & Dont's of Trading: Message Board

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Strategies & Market Trends : A Simple List of General Do's & Dont's of Trading:

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To: Arthur Tang who wrote (515)	2/2/1998 7:02:00 AM
From: Arthur Tang	Read Replies (1) of 769

Market making revisted for the pull back procedule, in addition to the nice move procedule mentioned previously in answer "515". Everything goes up must come down. When market makers sell borrowed stocks, they must buy back and return to the original owners. When the market makers buy back stock, they have already run up the price. But the average cost of the borrowed stock is generally about 20% below the peak. The highest ask price has less buyers and possibly more sellers. So it takes pulling back 30% for the market makers to make some money. In a good economy, nobody will sell back to the market makers. Investor might average down and create more borrowed stocks at lower average. Then the market makers are forced to pull back 70%. IOMEGA is a good example of what went wrong. Too many buyers pay too high a price. Too few investors sell back to market makers. Short interest just goes higher and higher. When economy is bad, market makers survived; when market making is based on this overbought strategy. The proper market making is to pull back before excess enthusiasm cause too much money to come into the stock. Then start a base building to accumulate again. Which may take a few month. After the base building, the stock can move up again, if the earnings warrants it. Many market makers tempted by the excess investment money succumb to the evils of borrowing too much stock, that they can not buy back. Daily volume has to be folded back 5 times to be realistic. And the economy is still moving ahead. Greed works, but fear for losing money, which you do not need for maintaining a living, is not there anymore. When economy is good, market makers survived; when market making is based on this "matching buyers and sellers" base building strategy. T/A can show you how the market makers have been doing their jobs, a lot of volitility or even keeled nice moves. Before you invest; know your market makers.

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