Understanding the Dynamics of the Automated Multi-Venue Stock Market
Since a lot of you
are very serious about trading, I am going to talk frankly here as I would to
my students. I believe this will help you do better in your trading. Of course
some of you won’t like it much, but my reason for spending my retirement
teaching is to have traders succeed.
Technical Traders
tend to focus on the simpler and basic aspects of stock chart analysis, thus
missing the larger picture which would allow them to make higher profits from
their trading.
What is most
problematic is how the retail news media talks about “investors doing this or
that.” To most Technical Traders, it is presented as if everyone in the Stock
Market knows and does the same thing at the same time. This is a total
misperception based upon misinformation.
There are 9 Market
Participant Groups, and hopefully soon a 10th which would be the
Semi-Professional Technical Trader. This new group of Technical Traders would
be a step up from the Retail Trader, and way above what I call the “Hobby
Trader.”
The Securities and
Exchange Commission SEC is paying attention. They are seeing that some of the
“retail crowd” are indeed working toward becoming highly educated, are
beginning to behave as professionals do, and are capable of trading
profitably. It probably would surprise you to learn the success rate of
the individual Retail Trader is well, dismal. Professionals would never
make it at such a low level of profitability.
The SEC is
considering allowing those few Technical Traders more latitude than the retail
crowd currently is permitted. The SEC strives to protect the uninformed and
less informed, from their tendency to chase hypes and scams. It is a tall
order.
When looking at any
chart as a Techncial Trader, the first question that should come into your mind
is “Who is controlling Price?”
In the chart example
below who moved price up? Which of the 9 Market Participant Groups made this
happen? Who makes this kind of run? Who buys at new All Time Highs? What is
going to happen next?
You may think this
has nothing to do with being at a 6 figure income as a profitable trader
but it does.
The current Market
Participant Groups are the following:
1. Giant Buy Side and
Sell Side Institutions
2. Wealthy Individuals,
Family Trusts, Sovereign Funds
3. Professional Traders as Independent,
Floor, and Proprietary
4. International
Corporations, and Fortune 1000 Corporations
5. High Frequency Trading
Firms
HFTs
6. Mid-sized and Smaller
Funds, Small
Sovereirgn, Small Foreign Funds, Non-Profit Funds
7. Retail
Traders/Technical Traders
8. Individual Small Lot
Retail Investors
9. Odd Lot Investors
TechniTrader Students
who are reading this, you already know the answer. For Readers who are
not Students, there are many webinars on the TechniTrader.com site that will
provide the answer.
What I am trying to
do here is give you more than just something to read. I am trying to teach you
what is going to turn the Stock Market from being a rather complicted, or
confusing, or volatile seeming place into a logical and more obvious pattern of
trend and action.
If you do not know
who you are trading with and who is on the opposite side of the trade, then you
are at huge risk of losing money no matter what strategy, indicator, or system
you use.
Each Market
Participant Group uses the following in their cycle of buying and selling:
1. Different venues. You are in the Retail
Trader Group and are basically tied to the Exchanges even though tour broker
fills your orders 99% of the time out of their inventories. Dark Pools in
Alternative Trading Systems ATS do not even show the orders until after the
market closes.
2. Different order
types. Retail
Traders usually use Limit Orders, which the Professionals abandoned a long time
ago. Some other groups use Time Weighted Average Price TWAP with numerous legs,
or Volume Weighted Average Price VWAP orders. The Institutions have so many
order types which they can combine to get the desired result, you would be
astounded.
3. Different intent. You want to make a
short term profit. The other Market Participant Groups have many reasons to buy
or sell, and those reasons are important to understanding how price is behaving
and what it will do next. This is NOT predicting, this is understanding the
market behavior.
4. Different speeds of
order execution, which
is a BIG deal. HFTs trade 60,000 times per minute. Your trade order takes a
minute or slightly longer. The Dark Pools wait an average of 10 minutes for
their orders to fill and execute.
5. When and how each
group obtains information relevant to the stock price value. Those using Dark
Pools are way ahead of everyone else in terms of knowing what is going on with
a corporation in which they hold stock. Retail Traders are the last to know so
while retail buys, they are selling.
Summary
There are many more
variables in the Market Participant Groups cycle, but these are some of the
most important ones. I will tell you and show you, who was in control of
price in the next lesson.
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Trade Wisely,
Martha Stokes CMT
TechniTrader technical analysis using a StockCharts chart, courtesy of StockCharts.com
Chartered Market Technician
Instructor & Developer of TechniTrader Stock and Option Courses
TechniTrader DVDs with every course.
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