Beware the Phantom!

There was a time when I heavily relied on the bid and ask table for putting a trade. It was a time when I'm still blaming the market or the system when everything goes wrong. So, I decided to experiment. I read about volume analysis and it made sense to me. I started my experiment on that topic and so, after a few weeks, I came about this methodology. The process is simple, there were only two conditions to look out for: (1) whenever the ask side is overwhelmed by the bid side, I would buy.

And (2) whenever the bid side is overwhelmed by the ask side, I would sell.

I used to look at the end of day bid and ask table to spot potential trades for the next trading day. The win rate wasn't bad. In fact, I experienced some winning streaks using it (sorry don't have data to prove my claim, I wasn't very organized at that time). I had zero knowledge about risk management, no proper allocation, didn't even have a journal. I was a gorgeous innocent little newbie at that time.

  
"If you had experienced winning streaks with that methodology, then why'd you stop using it?" you ask. Yes, there were winning streaks but there were also losing streaks, just like every trading system. But having no risk management, my losses outnumbered my gains. So, even with a high win rate but having a low risk/reward ratio, it's still not profitable. If I applied risk management with that methodology, maybe it would turn out profitable. Maybe.

The reason why I posted this is because I was bothered by traders who heavily relied on this methodology. It is highly likely that they believe that there are only two variables present: (1) the buyers who posted their bids and (2) the sellers who posted their asks. But there is also one important variable that must be considered and that is: traders who are just observing the price action. I call them the phantoms. For me, they are a force to be reckoned with. They are like predators silently stalking a prey.

 "Who are they?" you ask. Well, I don't know, that's why I call them phantoms. Maybe some of them are seasoned traders who wants to lock in profits, or institutional investors who wants to liquidate their shares as soon as possible, or maybe an insider who knows something bad is going on in the company.  

I've seen it a lot of times, when the ask side is overwhelmed by the volume of the bid side (there is still a part of me that wants to enter a trade when witnessing such a sight) and then after a few seconds the stock plummeted and didn't recover. The lesson here is, anything can happen in the stock market and that you should always be ready when the phantom strikes.