Market Participant Groups and Market Orders
Professionals often speak of money flowing in and out of
a stock, but how can that be if there are an equal number of buyers and
sellers? It is because Money flow is the balance of the lot sizes, and at most
times there are four positions in any one stock which are Buy, Buy-to-Cover,
Sell, and Sell Short. Each of investor and trader in the stock has their own
separate agenda.
Each may come from a different Market Participant Group, and
there are now nine of these groups in the stock market including giant
Institutional Investors which are giant Mutual and Pension Funds, Wealthy
Individual Investors, Corporations, Professional Traders, High Frequency
Traders, Small Funds, Retail Traders, Small Lot Investors, and Odd Lot
Investors.
Buyers are anticipating that the stock is going to move up.
Their order types span the spectrum for example Market Orders, Limit
Orders, and Buy Stop Limit Orders. Buy-to-Cover orders are traders who are
panicking because they were selling short in the stock and are afraid that
stock is going to move up more than it recently has, or they sold short and
they are now taking profits. Most Buy-to-Cover are usually Market Orders or
Limit Orders.
Those who are selling the stock are anticipating the stock
is going to move down. On an uptrending stock this is profit taking near the
top of the run.
It can also be on a downtrending stock because the seller is
afraid that the stock is going to move down more, and they have been holding
through what they thought was a short Retracement. Most of these orders will be
Sell At Market SAM. Sell Short Traders are anticipating that the stock is going
to move down, and can place a variety of orders just like the buyers. Buyers
and Sell Short Traders are both entering the trade. Buy-to-Cover and Sellers
are exiting the trade. It is the mix of these kinds of buying and selling,
coupled with the kind of investor or trader and the size of their share lots
that causes money flowing in and out of a stock.
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If the buyers are mostly large lots and the sellers are
mostly small lots, then who is in control? The answer is the buyers purchasing
large lots. This is because at some point there will not be enough small lot
sellers and those who are selling short will turn and start Buying-to-Cover,
creating more of a shortage of sellers. Consequently this will put more
pressure on the buy side.
There are always late comers to a stock run, and they are
usually small lot buyers. As the stock moves up in price, more of the small lot
buyers will step in pushing the price up even further. Most small lot buyers
typically use a Buy-At-Market order which is the worst kind to use to control
the entry price. As the stock moves up in price the last of the Sell Short
Traders will panic and Buy-to-Cover, causing the stock to gap up or jump even
higher. This then triggers the large lot buyers, to start selling for profit.
As profit taking begins, the stock dips in price. This causes the odd lot buyer
to rush into the stock and buy because they have been told to “Buy-on-the-Dip."
The news media by now has been talking about this stock and its great run, so
consequently the odd lot uninformed investor finds the dip irresistible and
buys on pure emotion without any analysis of the stock. This causes the final
gap up and exhaustion pattern.
Now while all of those odd lot latecomers are buying, who is
selling to balance the equation? Market Makers are selling short, and smart
money giant Institutions who were the first to enter are selling to take
profits. Suddenly the large lots are now to the downside and what happens? The
control switches to the sellers who are moving larger lots. Now money is
flowing out of the stock, yet the price may go up a bit briefly.
Large lots are usually wiser investors and traders, who know
more than the other investors and traders. They are the Mutual and Pension
Funds that have access to information often not yet available to Independent
Investors and Retail Traders. It can be assumed that the smaller the lot size,
the less the investor and trader knows and understands about the market. When
the large lots dominate the buy side, money is flowing into the stock
and they are controlling the price action. As smaller lots move in a shift of
power occurs and the large lots move to the sell side, thus money is flowing
out of the stock. The price will probably continue to move up for a brief
period of time, but it is at risk of a sudden collapse when the odd lot buyers
dry up and no more buyers come into the stock.
As the stock collapses and reaches a price or equilibrium
near a base or bottom, those smaller lots who held through the collapse reach
an emotional point of extreme pain of loss and begin to sell in panic. In
response the large lots and Market Makers switch roles again, Buying-to-Cover
their profitable shorts and buying to hold as the stock moves up again.
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Summary
So money flowing in and out of a stock is constantly occurring and every time you take a position in a stock, there are three other positions at the same time in that same stock. You need to be aware of each of those, and make sure that you are with the right group. Most of the time, traders who are having problems with their trades are in the wrong group.
Smart money which are the large lot Mutual and Pension Funds
have their own agenda that has little to do with the small lot Independent
Investor and Retail Trader. They are not aware of you, so keep your trading in
perspective. This is a huge advantage that most Independent Investors do not
appreciate, because being invisible is a good thing. Trading as an individual
is a good thing too.
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Trade Wisely,
Martha Stokes CMT
Chartered Market Technician
Instructor and Developer of TechniTrader® Stock and Option Courses
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