思绪不断

Friday, June 27, 2008

About Volume, Accumulation and Distrubition

About Volume

Yes, you may be buying today and somebody may be willing to sell to you. However, you might be buying only a small part of large blocks of sell orders that may have been on the market-makers' books, sitting there, well before you arrived on the scene. These sell orders are stock waiting to be distributed at certain price levels and not lower. The market will be supported until these sell orders are exercised, which once sold will weaken the market, or even turn it into a bear market.

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You frequently hear of large blocks of stock being traded between professionals, bypassing what appears to be the usual routes. My broker, who is supposedly "in the know", once told me to ignore the very high volume seen in the market that day, because most of the volume was only market-makers trading amongst themselves. These professionals trade to make money and while there may be many reasons for these transactions, whatever is going on, you can be assured one thing: It is not designed for your benefit. You should certainly never ignore any abnormal volume in the market. In fact, you should also watch closely for volume surges in other markets that are related to that which you are trading. For example, there may be sudden high volume in the options market, or the futures market.
Volume is activity! You have to ask yourself, why is the ‘smart money’ active right now?

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For example, once a market has finished distributing, the ‘smart money’ will want to trap you into thinking that the market is going up. So, near the end of a distribution phase you may, but not always, see either an up-thrust (see later) or low volume up-bars. Both of these observations mean little on their own. However, because there is weakness in the background, these signs now become very significant signs of weakness, and the perfect place to take a short position.

(My note: If they finished distributing, why do they want to trap you? Just for fun?)

Accumulation

To accumulate means to buy as much of the stock as possible, without significantly putting the price up against your own buying, until there are few, or no more shares available at the price level you have been buying at. This buying usually happens after a bear move has taken place in the stock market. To the syndicate trader, the lower prices now look attractive. Not all of the issued stock can be accumulated straight away, since most of the stock is tied up. For example, banks retain stock to cover
loans, and directors retain stock to keep control in their company. It is the floating supply that the syndicate traders are after. Once most of the stock has been removed from the hands of other traders (ordinary private individuals), there will be little, or no stock left to sell into a mark-up in price (which would normally cause the price to drop). At this point of ‘critical mass’, the resistance to higher prices has been removed from the market. If accumulation has taken place in lots of other stocks, by many other professionals, at a similar time (because market conditions are right), we have the makings of a bull market. Once a bullish move starts, it will continue without resistance, as the supply has now been
removed from the market.

Distribution

At the potential top of a bull market, many professional traders will be looking to sell stock bought at lower levels to take profits. Most of these traders will place large orders to sell, not at the current price available, but at a specified price range. Any selling has to be absorbed by the market-makers, who have to create a 'market’. Some sell orders will be filled immediately, some go, figuratively, 'onto the books‘. The market makers in turn have to resell, which has to be accomplished without putting the price down against their own, or other traders’ selling. This process is known as distribution, and it will normally take some time for the process to complete.

In the early stages of distribution, if the selling is so great that prices are forced down, the selling will stop and the price will be supported, which gives the market-maker, and other traders, the chance to sell more stock on the next wave up. Once the professionals have sold most of their holdings, a bear market starts, because markets tend to fall without professional support.


About Market Maker

It is important to understand that the market-makers do not control the market. They are responding to market conditions and taking advantage of opportunities presented to them. Where there is a window of opportunity provided by market conditions – panic selling or thin trading – they may see the potential to increase profits through price manipulation, but they can only do so if the market allows them to. You must not therefore assume that market-makers control the markets. No individual trader or organisation can control any but the most thinly traded of markets for any substantial period of time.

Market-makers are fully aware of the activities of trading syndicates and other professional operators that place substantial orders. It therefore makes sense that they will take whatever opportunity is available to better their own accounts accordingly.

Why Index Keeps Rising

Have you ever wondered why the FTSE100 Index (or any other index) has generally shown a more or less continuous rise since it was first instigated? There are many contributory factors: inflation, constant expansion of the larger corporations and long-term investment by large players; but the most important single cause is the simplest and most often overlooked – the creators of the Index want it to show the strongest possible performance and the greatest growth. To this end, every so often they will weed out the poor performers and replace them with up-and-coming strong performers.

Sunday, June 01, 2008

A Way of Executing Big Orders

A practice mentioned in this video. Suppose a big institution want to
sell 2 million shares XYZ from its holdings. The daily volume of XYZ is
about 1 million shares. The institution will give the order to its
broker. The broker will try to sell 100k or 200k per day without
upsetting the market. A week or so later, they quitely sold 990k or
980k. And then the broker will use the last 10k or 20k to drive the
stock as low as possible, so that the average price of the 2 million
shares is much higher than the market price at the end. The broker is
rewarded by the institution for the "good" execution.



Same practice may happen on the buy side too.