Tuesday, November 18, 2008
Who Move Markets Q: Hedge Funds, Mutual Funds, Individuals?
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This is an education post. Read it completely. It contains some insight that can help you become a better trader, understand the market, and know why other traders lose in the market, and the nature of the market participant who make it (called smart money). The post contains a test question. Please answer it in the comments section. I will provide the answer once readers have had a chance to think the answer.
On a forum I visit often a thread was started on the topic of who moves markets. Excepts from the original post in his thread read:
" ...quite often we see the big movements of market without any big news...
I just wonder who moves the market. Are they hedge funds ? mutual funds or the collective of individduals....
...
Since hedge funds, mutual funds and individuals have different behavior patterns, if we know who determine the market, we can choose different strategies to play against them ...
"
The main question is worthwhile, but the person asking the question made some assumptions that seem to be rooted in the way he views the market, which may cause difficulties in understanding the market and become profitable.
The devil is in the details. The person seems to want to pinpoint the type of players who move the market most or are cause for the big recent moves. This may be wrong in the first place, as what he is searching for (same type of players) may not exist in the first place, and also even if this were to be the case how would one go about finding the player or type of player.
Therefore, the poster is off track. But let us go back to the question of why markets are making large moves recently.
The answer is routed in the nature of markets. I was surprised by the answers that followed in that thread, and thought to give my explanation.
One should distinquish two phases: the "birth" of higher volatility, and the phase that following it in which volatility decrease but take times to go back to previous levels of volatility. In other words volatility rises a short span, and dies in a relatively much longer span.
As for the birth of a high volatility, no one really knows the whys, be it is associated with periods of fear in which supply of stock is much higher than demand, and with uncertainty this causes the market to move lower at a faster pace.
Now the period after the initial shock is interesting. It needs to be understood better as it will help you know where to be and/or to sell.
Below are the comments In which I address the latter question:
1. Smart buyers, and smart sellers are farther apart of each other.
2. Same length of moves for the same period of time between sellers and buyers, for different volumes, give an estimate of the total number of losers in the stock market.
3. Point 2 invalides a remark in which a poster stated that price moves ONLY because there are less trades. As a matter of fact you will note that large moves in October were accompanied with higher trading volumen. Therefore, large moves can be with less trades or with more trades.
4. Once can think of price as a ball that goes from the side of smart buyers to the side of smart sellers (or vice versa). The medium on which the ball moves are the other traders (the one we did not classify as smart traders), a large number of them (80% of them) are losers and only small number (10 %) are winners.
5. Smart money wins no matter what. So you have 80% losers and 20% winners.
Note: 10% and 20% in above discussion are not exact but meant to illustrate that they are small, and may even be much smaller number.
To be make money in the markets, you need to be a smart buyer, a smart seller both, or a winner in the 10% (or less) who move prices.
That is a non-expert has a better chance to be a sellers after a rally in a bear market, be a buyer on retreats in a bull market, and have the ability to be to know whether we are in a bear or bull market.
I leave with this question that you should be able to answer based on the above post: are we now in a bear market (or a bull market), and what do you think a non-expert trader should do as of today November 18, 2008? Also if the person should be a seller (buyer), where are the smart sellers (buyers) located. If you can articulate an answer to this question, you will be part of half the smart money in the world--- not a small feat!
In a post I plan to post tomorrow, I will provide another educational post. This time, it will be on the root cause of making or losing money in markets. If you understand the next post you will be able to know which markets to trade and why, when to take profits and why, and why traders lose and are stopped out of their trades 66% if the time. (Think about that again, only ON AVERAGE 33% of the trades are stopped with a loss--- this is a mathematical fact, do not let anyone tell you it is not the case. We will provide the proof).
On a forum I visit often a thread was started on the topic of who moves markets. Excepts from the original post in his thread read:
" ...quite often we see the big movements of market without any big news...
I just wonder who moves the market. Are they hedge funds ? mutual funds or the collective of individduals....
...
Since hedge funds, mutual funds and individuals have different behavior patterns, if we know who determine the market, we can choose different strategies to play against them ...
"
The main question is worthwhile, but the person asking the question made some assumptions that seem to be rooted in the way he views the market, which may cause difficulties in understanding the market and become profitable.
The devil is in the details. The person seems to want to pinpoint the type of players who move the market most or are cause for the big recent moves. This may be wrong in the first place, as what he is searching for (same type of players) may not exist in the first place, and also even if this were to be the case how would one go about finding the player or type of player.
Therefore, the poster is off track. But let us go back to the question of why markets are making large moves recently.
The answer is routed in the nature of markets. I was surprised by the answers that followed in that thread, and thought to give my explanation.
One should distinquish two phases: the "birth" of higher volatility, and the phase that following it in which volatility decrease but take times to go back to previous levels of volatility. In other words volatility rises a short span, and dies in a relatively much longer span.
As for the birth of a high volatility, no one really knows the whys, be it is associated with periods of fear in which supply of stock is much higher than demand, and with uncertainty this causes the market to move lower at a faster pace.
Now the period after the initial shock is interesting. It needs to be understood better as it will help you know where to be and/or to sell.
Below are the comments In which I address the latter question:
1. Smart buyers, and smart sellers are farther apart of each other.
2. Same length of moves for the same period of time between sellers and buyers, for different volumes, give an estimate of the total number of losers in the stock market.
3. Point 2 invalides a remark in which a poster stated that price moves ONLY because there are less trades. As a matter of fact you will note that large moves in October were accompanied with higher trading volumen. Therefore, large moves can be with less trades or with more trades.
4. Once can think of price as a ball that goes from the side of smart buyers to the side of smart sellers (or vice versa). The medium on which the ball moves are the other traders (the one we did not classify as smart traders), a large number of them (80% of them) are losers and only small number (10 %) are winners.
5. Smart money wins no matter what. So you have 80% losers and 20% winners.
Note: 10% and 20% in above discussion are not exact but meant to illustrate that they are small, and may even be much smaller number.
To be make money in the markets, you need to be a smart buyer, a smart seller both, or a winner in the 10% (or less) who move prices.
That is a non-expert has a better chance to be a sellers after a rally in a bear market, be a buyer on retreats in a bull market, and have the ability to be to know whether we are in a bear or bull market.
I leave with this question that you should be able to answer based on the above post: are we now in a bear market (or a bull market), and what do you think a non-expert trader should do as of today November 18, 2008? Also if the person should be a seller (buyer), where are the smart sellers (buyers) located. If you can articulate an answer to this question, you will be part of half the smart money in the world--- not a small feat!
In a post I plan to post tomorrow, I will provide another educational post. This time, it will be on the root cause of making or losing money in markets. If you understand the next post you will be able to know which markets to trade and why, when to take profits and why, and why traders lose and are stopped out of their trades 66% if the time. (Think about that again, only ON AVERAGE 33% of the trades are stopped with a loss--- this is a mathematical fact, do not let anyone tell you it is not the case. We will provide the proof).
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