Now what I’m about to suggest might sound completely logical to you or it may sound crazy, but the fact of the matter is that the reason up to 90% of retail traders lose money is because the professional “smart money” players understand “herd mentality” and how the retail traders work, and so they use this understanding to put retail traders on the losing side of the trade over and over again, in a game that’s gone on for well over a century.

Traders attempting to trade the news more often than not end up as part of a blood bath, incredulous as to how they could’ve possibly gotten wiped out.  Black box “buy on green, sell on red”  indicators are nothing more than a high-priced version of roulette – as they say, even a broken clock is right twice a day.

Instead, if you really want to trade successfully, you need to understand how the professional interests operate and how to read the footprints they leave on the charts, because if you know how to look, you can certainly find it.

But first, if you still doubt that professional interests are deliberately taking the opposite side of the trade of retail traders, consider this point: Because of the capital these interests control, they simply cannot just come in and buy the market.  To do so would tip the supply/demand scale and put prices up against themselves.

So in order to buy, these players need an equivalent (or heavier) amount of size on the sell side.  And when they wish to sell, they would simply mark the prices against themselves to just sell the market.  They need to sell into an equivalent (or heavier) amount of buying.

As simple as it seems, that is the real key to beginning to understand how the smart money trades, and why you’ve probably so often found yourself in bad positions shortly after entering a trade.

Now for a real-life example of this, and how to begin to spot these signs of professional activity, look at the chart below:

(Click image above for larger view)

Point A represents the worse than expected consumer sentiment news released on August 27, 2010.  To the average trader, they see the market selling off into the news release and then once the news hits, surprise, it’s bad news!

The market begins to flush down, the volume starts flooding in, and the retail trader says, “Wow, I’ve got to get short so I don’t miss out on this trade!”  And yet only minutes later, the trader’s now under considerable pressure, if not stopped out (and if he/she isn’t, they will be soon).

So what happened here?  Now let’s look at it from the professional side of the market …

Now while a trader may be correct in correlating volume with professional activity (although most traders don’t have a clue how to use volume and even ignore it because “it doesn’t matter”), this excessive volume is generally indicative of an upcoming move in the opposite direction.

What appeared to be a market flushing down was actually the professional side of the market using a news event as an opportunity to accumulate (buy), pulling supply out of the market to rally prices higher.

Take a look at the bar at point A, and notice how far it closed off of its highs.  In fact, it’s fairly close to closing at the mid-point of the bar.  How on earth could that be all selling in that bar if it closed this high?  And if it’s all selling in that bar, then how could the following bar close even higher??

This is the tell-tell sign of professional accumulation, and it’s everywhere (just go look at August 24th’s existing home sales announcement, where it missed by almost 800k homes and yet this announcement still marked the lows for the day!).

From here the market rallies until point B, which is actually my preferred entry point.  By this time, the accumulation at point A has been confirmed, the retail shorts have been wiped out, and professionals throw some sell orders in the market to try to draw out any bears.

As we can see at point B, we have a pretty narrow range bar that closes in the middle on very low volume (also lower than the 2 bars previous).  This is called a test, and it is confirmed by the next bar rallying higher.

With a buy stop above the high of point B, the trader can be taken into the trade as the test is confirmed on the following bar, making for a very low-risk entry point in this example.

To learn more about professional trading, click here.  Rob Hoffman is a veteran trader with over 20 years of experience, specializing in day trading index and currency futures (e-mini S&P, euro, yen, and more).

Rob trades his real account in a daily live educational format, teaching his unique methods of support and resistance and trade setups.  With over 7 months since his last losing trade (as of the time of this article – 9/2/10), his trading methodology is truly exceptional.

Click here to learn more about Rob Hoffman’s Power Charting.