Our Rolls Royce trade last week was particularly annoying. We fell for – or rather, didn’t allow enough for, one of then oldest tricks in the market makers’ armoury.
When it is pretty obvious to all that a stock (in this case Rolls Royce), that has suffered a minor price pullback on some ‘bad’ news, is about to make a recovery the market makers’ trick can be to push the price hard down at the open before they then start buying like fury to lift the price dramatically upwards.
What that does is not only to take out those, like ourselves, who had just opened a Long trade in anticipation of the upmove but also to dissuade others who were about to do the same. This then leaves the market makers with an open ‘Long trade’ goalmouth.
Click on the chart to enlarge it.
Why did we not pay more heed to our instincts and experience that this might happen? The only answer that we can provide is that we were put off entering a lower stop-loss price by the size of the gap when we suggested opening the trade at the 618p price ( on the 9th Nov.).
Our initial instinct was to set the stop at 558p – i.e. under the previous day’s wide-spread low. But to have done that meant a gap below the opening price of some 9.7% and we thought this too large a gap and so settled for the slightly higher stop at 574p. Mistake! Wrong! We should have used our initial analysis or we should have eschewed taking the trade. As it was a 9.7% risk would not have been too out of bounds given that the potential for profit was put at + 22.3%.
We made a mistake and re-learned an old lesson.
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