"In a longer time frame, I believe that the markets are more controlled by a future anticipation of something, such as a company's earnings or the future economic health of a country or global economy, and so on." But this still comes back to the basic prinicple of fear and greed. Those going long are greedy because they do not want to miss out on the future money they will make if the stock goes up. Those selling are selling because they fear that the stock will fall in the future and they will lose money.
A single institution will absorb panic liquidation by a 100 retail traders like a sponge on a drop of water. The trader that slips in during the panic profits off the subsequent vaccuum/whipsaw that follows.
illiquid, perhaps you miss understood me. The 100 to 1 ratio was used to keep it simple, but what I was trying to show is if sellers out number buyers 100 to 1, then the simple way to make money would be joining the herd as a short seller, therefore you would be a seller just like the herd that is selling. If the sell off was on a news related event, I would really doubt institutions would jump in buying as some would be selling as well.
This is from another board and I thought it relates to the original post. It's long but very worth the read. --- Hi everyone - copied this from HS : Psychological Aspects of Trading : I have recently been reading a study by Terrance Odean, an assistant professor at the University of California. : Odean received the trading history of over 60,000 accounts that where active been 1991 and 1996 from a discount broker and used the data to study the trading behaviors of online investors. Not surprisingly, most of them underperformed the stock market and only a small minority beat the market. In fact only half of active traders managed to just break even. Most simply made little or lost a little. Only a small minority produced outstanding returns(the top 5% had an average return over 2.41% a month and only 1% had a return over 4.86% a month. Professional investors do not fare all that much better as half of all mutual funds fail to beat the S&P 500 index every year. : The failure rate of investors and traders is a different picture than that which is portrayed by online and traditional brokers through their advertisements. In fact if most people actually lose money in the stock market, then the market is more like a pyramid scheme in which wealth is simply transferred from the mass and given to the brokers, stock manipulators, market makers, and a small super trading elite at the top than the get rich fantasy that is so often presented. A view that some might find romantic would picture it as a pure Darwinian survival of the fittest and leave out the part about the manipulators. One would need more data to confirm if either of these views are true. A study on how many trading accounts are opened and closed would prove or disprove this. If brokers must continually recruit new accounts to replace ones closed due to losses than these two pictures of the market are correct. Money earned outside of the market is brought into it and given to professionals and manipulators. Just like a ponzi scheme, more money has to be recruited to keep the engine running. For a pyramid to continue new blocks must be placed on it. No matter how the market is structured, what is more interesting is trying to figure out why it is that many people lose money and a few make a lot of money in the stock market. What can we learn from that to increase our own returns? : How do most people lose money? Odeanâs trading data shows that almost all individual investors generate poor returns by selling winning stocks too soon and holding on to losers. He argues that they do this because they are "overconfident." They consistently believe that their losers will come back and the market ends up proving them wrong. When they have a winner they sell them too soon, fearing that it will become another loser. : Odeanâs study provides a great resource about the behaviors of active investors. However, any conclusions about motivations that can be drawn from the data are merely theoretical and cannot be proven. This isnât his fault, its simply the nature of proof and evidence. There is no way one can extrapolate the motivations of thousands of individuals by studying number data and one doesnât have the resources to ask all of these people about their motivations. One can only manufacture logical explanations from the data. : This isnât a bad thing. You can learn a lot by thinking in that manner. My guess is that people do not lose money in the markets because they are stupid or because they arenât pros. Remember that most mutual funds also underperform the stock market. I believe the primary difference between winners and losers is psychological. Winners and losers are presented with the same set of information, however the winners take different actions. What guides their actions? From my own history of losing and then making a lot of money in the stock market and study of general and trading psychology Iâll try to come up with some explanations. I believe that the actions of losing traders are guided by fantasy and a fear of losing while winning traders are guided by confidence. Without the proper mindset and attitude you cannot make money in the stock market. Itâs not a guarantee to being successful, but itâs a prerequisite. However, the stock market is an environment that makes it difficult for most people to obtain this proper mindset, let alone maintain it. : environment -> senses -> beliefs -> identification -> motivation -> actions : The human mind gathers information about the outside world through the uses of itâs senses. It recognizes the information and then processes it. It then identifies it and responds to it with a whole host of beliefs, unconscious and subconscious. Based upon a personâs motivations and interpretations of what is taking place he carries out an action. The key is that actions that people take are based upon their own set of associations with what is going on in the world outside of them. These associations are based upon past experiences and a personâs beliefs about himself and the task at hand. The world consists of inputs that make people feel and they respond. : To relate this to trading, winning traders and losing traders experience the trading environment differently. It makes them feel different and as a result their actions consistently vary. In pyschological terms, they interpret the market differently because they have a separate belief system in the way that they see themselves relative to the stock market. : Letâs list these beliefs and actions below: : Belief statements that different traders can make: : Winning Traders : The markets provide an opportunity : The markets exist to give me profits : If I get stopped out then I have to reevaluate the trade : If the market doesnât do what I expect then I must reconsider : Iâll take one trade at a time. : I donât have to be perfect, I just have to do my best. : Money is not that important : Losing is part of the process of making money : Trading is a game, I know I can win : Every setback provides me with new market information : I can wait for an opportunity to come : Losing Traders : I must be in the market now : If I lose on this trade I am a loser : If I wait for my trading rules Iâll miss out : If I get stopped out I have bad luck : I canât lose money : The market makers got me again : Iâm an idiot, how could I lose money : What will they think when I tell them I lost money on this one? : The stock market is rigged : Itâs impossible to get a good fill : I cannot take a loss : If I take my profit then I am right
: These different beliefs create different characteristics of winning and losing traders: : Winners: : Get pleasure from trading the market as an end in itself : Not motivated primarily by money : Confident that they can make money in the market : Not afraid to take a loss : Patient - waits for opportunities : Uses a highly planned strategy : Is well prepared, done his homework : Measures the risk/reward ratio of every trade : Losing Traders: : Never define a loss : Locked into a narrow belief system : Hesitate to make a trade : Do not stick to a system : Trade by whim : Trade by emotion : Have no consistent strategy : Do not practice risk management : more interested in proving themselves right then being a success : Financial markets are structured in such a way that make it very difficult for someone to approach them with a confident psyche; and that is why it is so difficult for most people to make money trading them. Almost all environments - the workplace, family, friends - provide external forces that limit a personâs behavior. They provide a set of rules of what is right and wrong and what actions are to be rewarded or punished. This is not true for the stock market. : The stock market does not care if you make or lose money. The market has no control over you. Since the market does not exert any external control over your actions you have to fashion your own system of rules and have the discipline to obey them in order to be successful. No one else will do it for you. You have to have the confidence to take this responsibility yourself. It takes enormous self control and discipline. : Most people cannot take this approach. Instead they construct a fantasy in which the market provides them with future riches. They transplant these fantasies on to the individual stocks that they purchase and have difficulty confronting the reality of being wrong. When events donât match their illusions they simply ignore them. If a stock they bought drops below their purchase price they refuse to reject the fantasy that their decision to purchase the stock will make them money and instead convince themselves that it is a winner that merely isnât in favor yet. : However, stocks do not make successful traders money. They do it themselves. Instead of believing in the power of stocks, they believe in the viability of their own trading strategy. They have faith that their own disciplined interaction with the stock market will make them money and not the other way around. The decision making freedom the stock market gives ruins most active investors, but handsomely rewards the few prudent traders. : As I said earlier it takes extreme confidence to execute a well planned trading strategy and most people cannot find it. Instead, they often experience intense anxiety in the market. They may come to believe that the markets are rigged against them. The market doesnât cause this. Itâs their lack of strategy that twists them into emotional knots. : What one has to do to move from a fear stricken psyche to one capable of building enough confidence to make money in the market is to first believe in oneself and develop a strategy that consists of strict money management techniques. Iâll discuss how I have done this later. But, once you have a strategy in place you have to have the fortitude to continue to believe in it when you suffer losing trades. Losses are a part of the game. The way to make money is to accept them and to use money management techniques to keep your winners larger than your losers. : You have to move away from a mindset that stocks will make you rich and believe that your trading method will make you money. Then you must come to realize and hold the belief that being right or wrong on each individual trade does not matter. You have to be able to move through the adversity of losing trades and hold the faith that you will make money in the long run. This is why people find it so difficult. People focus too much on the individual trades and hold unrealistic fantasies about them, while they cannot take responsibility for the decisions that go wrong. The worst ones take it personally. Most never understand what is required to succeed. : The bad news in all of this is that if you are trying to generate large percentage returns on your account the odds are stacked against you. The odds of someone starting small and making a lot of money in the stock market are probably the equivalent of a rookie league baseball player making it into the big leagues. The good news is that most people trade recklessly, on pure emotions, and with little or no strategy so the competition isnât so hot. Dedication and following a sound strategy can go a long way. I try to demonstrate that and encourage you in that direction with this newsletter and website. : To read the Odean study yourself click this link. Take a look at page 19. : http://www.gsm.ucdavis.edu/~odean/p...ns/returns.html
That's exactly what they do, those buying in size need to be buying when the selling is strongest. Only the difference is, buyers are using falling price momentum to their advantage and letting sellers come to them.
I believe the markets are in a constant state of trend. The time frame used is the question. What you do between the highs and lows and the distance between them that you use is discretionary. My belief is this is what makes the markets work and move. As technicians your analysis may vary. As a MM or a Specialist you are on the other side of this...and reverse supply and demand plays a bigger factor in your life... As a Fundamental trader, you longer term views can be effected by News and Politics... The markets can appear to move randomly, but it is really a varying degree of all of the above. If the markets were random, then that would render supply and demand useless and there would be no trending at all... Michael B.
Nicely said. In fact, they do more than that. They actually use their activity to provide the more popular visual cues in smaller timeframes (LL & LH or a cross of MA's on 2 min chart) to wrong-foot the suckers. This provides them not only with enhanced liquidity for their positions but also with a significantly improved entry price.
To make money in this field you need a system and then you have to be able to execute it. As you can easily guess those who are easily impacted by the emotions of greed and fear are not very likely to execute their systems properly.
Interesting IF....THEN statement. I wonder where it came from? Not just the thought that you chose to type it down to begin a thread. Statistics and data on markets were invented to help important participants have knowledge and understanding of what was going on with respect to the components of the market they used to make money and build wealth. Money makers, I find, generally consider most how effectively and efficiently they are performing. This is very far away from considerations of even the possibilities of losing money. The formal education that the participants go through in all aspects of the financial industry keys off the idea that a person is standing still (not building wealth nor losing wealth) when they equal the performance of the market. That is the standard for whether wealth is gained or lost. The market is an accurate reflection of what is going on with respect to the size and performance of another thing. That is, the state of the economy. A debate will continue on how effective and efficient the measure is and how much it leads or lags the actual real state at any given time. To build wealth there is but one requirement. A person has to participate. The obvious key to partiticipation is also a singular consideration. The lone consideration is timing. Now you know where the term "herd" came from. Herds are the massive neutral element of application of capital in markets. "Ownership" comes closest to describing the character and strategy of the herd. The herd bets on the economy by judging the quality of investments from an economic point of view. Those who beat the indexes are better "owners" than those who fail to beat the indexes. The total herd averages are necessarily less than the averagse for obvious "cost of doing business" reasons. ET is a place where another group than the herd congregates. This is where people focus on the matter of timing since they recognize that timing is the singular item that can build wealth more effectively and more efficiently in any market. The serial process of reasoning goes another step beyond step 1, participation and step 2, timing. The third key is change in price. Thus the GOAL to build wealth is to participate and time market change in price most effectively and efficiently. This is an activity thatis peripheral to the main activities of markets. It does happen to be the place where there is a lot of concern about Fear (two reasons) and Greed (two reasons). But these four concerns are not part of the herd mentality it turns out. You have just typed an IF...THEN ...which is a myth of the marketplace. you are concerned with something that is not there vis a vis the herd. Fear comes from not "knowing" about timing and not "knowing" about price change. Greed is a strange thing. Almost all "greedy" types have no idea of the potential of the market to delivery increased wealth nor the rate at which that is possible (efficiently and effectively). To state how to reach an optimum extraction of capital, it is not difficult to type out the basic sentence from which all efforts and considerations stem. You will not find the words herd, fear and greed in the statement. You will not find the words, edge, anomoly, or gambling there either. The words buy and sell also drop out of the picture. So does "risk".