The stock market can make people filthy rich. For day traders, it's very possible to consistently make money each day. Why is that? It's because the stock market is inefficient.
What does stock market inefficiency mean? It means that it takes time for stocks to accurately price to where they should be trading at. Some stocks get overbought and some get oversold -- in other words "mispriced" in relation to their true intrinsic value.
One example of a market inefficiency is when I trade an extremely low volume (one that trades 500,000 shares or less) $20 $XYZ stock and a fund just instantly dumps 100,000 shares of the stock at market just to liquidate a position. Since that equates to around 20% of the stock's normal trading volume, this order will move the stock violently. The fund doesn't care what prices he will be executed at and just needs to liquidate the $XYZ position. What usually happens is the stock will "flash crash" down a buck or two on this market order because no buyers are alerted of this huge block of stock being sold instantly. It's called a flash crash because in just a matter of seconds, a stock goes down 5 to 10% in price. Nothing has changed fundamentally about the company but a seller has just come in and has artificially oversold the stock. This is a prime example of a market inefficiency that can be easily profited from. Daytraders can take advantage of this and quickly buy the stock after it has flash crashed and ride the stock back up to possibly where $XYZ was at before the fund dumped its shares.
Take a look at an actual flash crash in $PG stock before:
It dropped almost $10 points in a matter of a minute because sellers piled over one another and just dumped stock at market. But the recovery was just as rapid making it an easy money trade if you were able to get long the stock during the crash. Not every flash crash is as violent as this one but you can get the jist of the concept.
Time is on a day trader's side. It creates an opportunity for fast acting traders to take advantage of the markets to consistently pull wads of greenbacks out each day. But first you need to know and learn how to spot these examples. Watch me and other veteran day traders trade live in the MookTrader chat room and you will learn what you can do to have an edge in the markets by recognizing and exploiting these market inefficiencies.
- Hubert Tsai