There are two basic parameters when one is looking at any particular stock counter during a trading day, it's price and volume of transactions. These two parameters may change during each trading day. And, the price and volume over a period of trading days are almost always different (unless the stock counter is an illiquid one).
For every stock market participants, we are affected by the price and volume of transactions of any particular stock counter. Like it or not, the stock market is an open market for all to participate, so it is a supply and demand principle at work in the many transactions of any stock counter listed on the stock exchange.
Since we are looking at supply and demand in the stock market, we need to know how many outstanding shares of a company is traded on the stock market, also known as it's free float. One also need to know whether this free float is likely to increase or decrease in the future. If free float increases, more shares will be flooding into the market from the particular stock increasing it's supply of shares in the market. On the other hand, shares buy back by the company will ensure some shares are retreated from the market and decrease the supply of shares in the market.
By examining the daily volume of shares transacted for any stock counter, one can also see some insights into the supply and demand situation for any stock counter. When large volume of trasactions occur and the daily volumes of transactions over a period of time experience steady growth, coupled with a growing stock price, the stock is in demand. Just looking at growing price alone over a period of time may be misleading, unless it is supported by a growing volume of transactions over the same period of time too. This shows that "volume of transactions cannot lie" as these are actual recorded transactions of trades made for a particular stock counter over a period of time. However, the "stock price may lie" whereby it is increasing over low volumes of transactions showing the growing price may not be well supported and there may not be a good demand for it's shares just by looking at growing stock price alone.
On the other hand, a decreasing stock price coupled with increasing volumes of transactions over a period of time may mean the demand for the shares of a stock is decreasing. Market participants keep selling the shares by volumes upon volumes at lower and lower prices indicating the desire to get out of a stock. We see this phenomenon in the last bear market when the volume of transactions was large over the entire period of the bear for decreasing stock prices.
So, when one looks at the fluctuating stock price of any counter next time, remember that the "stock price can lie" and an increasing stock price or decreasing stock price may not mean anything. However, when one looks at the volume of transactions together with the changing stock price over a period of time, one sees the whole picture of the supply and demand for a stock as "volume of transactions does not lie" as it indicates how many shares are changing hands to cause the stock price to increase or decrease.
No matter whether one is a long term or short term market participant, it can be rewarding to estimate the demand for the shares of a stock to know whether one can invest into a stock by checking out if it has growing demand and stock price. Next time, when someone gets excited by an increasing stock price or decreasing stock price, be forewarned that changing stock price may not mean anything much when one does not look at the daily volumes of transactions over the same period of time. Be careful of getting trapped by the fluctuating stock prices when looking at it alone.
Wednesday, November 10, 2010
Monday, November 8, 2010
The big players.
In the stock market, there are small and big players. Small players are retail investors while big players may be instituitional investors or other high net worth investors. When a stock is chosen by big players to be invested in, the stock may follow certain behavioural dynamics in it's price. If small players like the common retail investors can pick up some simple behavioural dynamics of the big players in a certain stock, they can ride on the strength of the big players and derive profits by understanding the mechanics of how big players invest in certain stocks.
Usually big players invest in a sequence as follows:
1. Selection of a potential stock to invest in.
2. Period of accumulation.
3. Period of flushing out weak players.
4. Period of pushing up a stock price.
5. Period of unloading the stock at a suitable higher price.
Selection of a potential stock to invest in
Big players like to select stocks that can rise in stock price. What are stocks that can rise in stock price? Most often, these are stocks with a current or near future popular theme. Some ages back, we have stocks like the internet stocks which were chased like crazy having their stock prices pushed to sky high. It is not always the case that a stock must have a popular theme to be selected, just that it is very common to "fish at a river that have many fishes" (where there is a popular theme for the stock). Another consideration is that the stock price must be suitable to invest in so that there is some room for appreciation in the stock price (usually this may involve investing onto a bull run when the general market sentiment is bullish).
Period of accumulation
After a stock is selected, there is a period of accumulation by the big player. The period of accumulation can be long as the big player patiently buy up slowly and accumulate a large number of shares over a period of time. By accumulating slowly, the stock price is prevented from being pushed up too fast.
Period of flushing out weak players
Sometimes, if the big player cannot accumulate a substantial amount of shares at low prices, it can push up the stock price a little bit (e.g. by 10% price appreciation) and buy in from short-term investors who are willing to let go their shares after getting a 10% profit. During this period of flushing out weak players, big player can also create a resistance point whereby it suppresses the stock price from going higher by some amount of selling. Weak players once seeing the stock price appreciate a little followed by a little bit of falling in prices, quickly sell their shares to lock in some amount of profits and avoid loss. In doing so, the big player continues to accumulate some more shares to build up their position. The objective of the big player is to accumulate a major portion of the shares so that when the price appreciates later, it being the biggest player will have the most reward from the gain in stock price.
Period of pushing up the stock price
Once the big player is satisfied that it holds a large enough portion of the stock, it goes through a period of pushing up the stock price. This move will see the stock appreciate by a large magnitude. Some smaller players who have not leave the scene yet will get their rewards from riding on the wave of the stock price movement.
Period of unloading the stock at a suitable higher stock price
Once the big player has managed to push up the stock price, it has to unload it's shares to finish this whole cycle of investment. So, there is a period of unloading whereby the big player slowly sell off it's shares to other unwary investors. Usually unwary retail investors after seeing the stock price has appreciated by a large magnitude, may become filled with greed and buy from the big players hoping that the stock price can continue to appreciate further. Little do they know that the game has just ended, so these unwary retail investors become the final people to carry the shares at a "high price", shares that will not appreciate further but almost often depreciate after the big player has left the scene.
Conclusion
By understanding the mechanics of how big players work, a retail investor can be better informed and be wary of certain behavioural dynamics in the stock price movement over a period of time. The big players are a force not to be trifled with as these are players with extremely large capital to inject into a stock. So, it pays to understand how they work so as to ride on their success and get a pie of their gains.
Usually big players invest in a sequence as follows:
1. Selection of a potential stock to invest in.
2. Period of accumulation.
3. Period of flushing out weak players.
4. Period of pushing up a stock price.
5. Period of unloading the stock at a suitable higher price.
Selection of a potential stock to invest in
Big players like to select stocks that can rise in stock price. What are stocks that can rise in stock price? Most often, these are stocks with a current or near future popular theme. Some ages back, we have stocks like the internet stocks which were chased like crazy having their stock prices pushed to sky high. It is not always the case that a stock must have a popular theme to be selected, just that it is very common to "fish at a river that have many fishes" (where there is a popular theme for the stock). Another consideration is that the stock price must be suitable to invest in so that there is some room for appreciation in the stock price (usually this may involve investing onto a bull run when the general market sentiment is bullish).
Period of accumulation
After a stock is selected, there is a period of accumulation by the big player. The period of accumulation can be long as the big player patiently buy up slowly and accumulate a large number of shares over a period of time. By accumulating slowly, the stock price is prevented from being pushed up too fast.
Period of flushing out weak players
Sometimes, if the big player cannot accumulate a substantial amount of shares at low prices, it can push up the stock price a little bit (e.g. by 10% price appreciation) and buy in from short-term investors who are willing to let go their shares after getting a 10% profit. During this period of flushing out weak players, big player can also create a resistance point whereby it suppresses the stock price from going higher by some amount of selling. Weak players once seeing the stock price appreciate a little followed by a little bit of falling in prices, quickly sell their shares to lock in some amount of profits and avoid loss. In doing so, the big player continues to accumulate some more shares to build up their position. The objective of the big player is to accumulate a major portion of the shares so that when the price appreciates later, it being the biggest player will have the most reward from the gain in stock price.
Period of pushing up the stock price
Once the big player is satisfied that it holds a large enough portion of the stock, it goes through a period of pushing up the stock price. This move will see the stock appreciate by a large magnitude. Some smaller players who have not leave the scene yet will get their rewards from riding on the wave of the stock price movement.
Period of unloading the stock at a suitable higher stock price
Once the big player has managed to push up the stock price, it has to unload it's shares to finish this whole cycle of investment. So, there is a period of unloading whereby the big player slowly sell off it's shares to other unwary investors. Usually unwary retail investors after seeing the stock price has appreciated by a large magnitude, may become filled with greed and buy from the big players hoping that the stock price can continue to appreciate further. Little do they know that the game has just ended, so these unwary retail investors become the final people to carry the shares at a "high price", shares that will not appreciate further but almost often depreciate after the big player has left the scene.
Conclusion
By understanding the mechanics of how big players work, a retail investor can be better informed and be wary of certain behavioural dynamics in the stock price movement over a period of time. The big players are a force not to be trifled with as these are players with extremely large capital to inject into a stock. So, it pays to understand how they work so as to ride on their success and get a pie of their gains.
Wednesday, November 3, 2010
Going for the "big win"......It's occasional, but pays well........
Many investors are mediocre players in the market struggling to fulfil "bread and butter" rates of returns on their investments. Many lament that the stock market is full of many "dangers" and "pitfalls" making winning consistently in the stock market an imagination too far to be reached. This is because many market participants fail to go for the "big win", and instead thrive on the many small winnings. When one big loss comes their way, it swallows up whatever small winnings they had in the past, so they end up breaking even or at most making only a meagre net return on their investments.
Why do many market participants fall into this trap of making only multiple small winnings only to find themselves run into the risk of losing back all their small winnings or even suffer a net loss on their capital when a big loss comes their way? It all boils down to the habit of thinking in making investment decisions. The thrill of immediate winning is more enjoyable than suffering immediate loss.
There are two general types of participants in the market, the short-term players who trade actively and long-term players who invest with a longer time horizon. No matter who is participating, all short-term and long-term players both face this problem of falling into the trap of making multiple small winnings only to suffer a bigger loss that trims off the winnings eventually.
For short-term players, the emotional side of the trader tends to disrupt the objective system of trading. It is known to many traders that it is important to stop loss with a small tolerance level (e.g. stop-loss around 10% or even lesser) and let trailing-stops work their way for a winning stock so as to maximise the returns. If the trader does not stick to such strict rule of the game which works on the principle of making a "big win" by using trailing-stops and promptly stopping any losses by strict "stop-loss" measure, then the "big win" effect cannot be realised.
For such emotional traders, it becomes the other way round, making the occasional "big loss" because they let a small loss snowball into a big loss, and making multiple small winnings since they are not able to resist the thought of not realising their immediate gains if any from their winnings. Their consolation after every small win is that, "What can go wrong with taking immediate profits off the table since I have the money in my pocket?". There is nothing wrong with taking profits. However, there is something wrong when taking multiple small profits cannot cover up a big loss eventually. So, to ensure consistency in making "big wins", work on maiximising returns from each winning using trailing-stops and ensure one is covered on the downside by using strict "stop-loss" measure. A simple illustration: if a trader aims for at least 30% returns on each single trade before realising the profits, this returns from that single trade can cover up for 3 losing trades with a "stop-loss" at 10% each. If the stop-loss is more stringent (e.g. stop-loss at 5%), then the cover up on the losing trades is even better with each winning trade. So, the old adage for traders, "let your winnings run and losses stop promptly" is very applicable for making the "big win" when it comes to playing the stock market on a shorter time frame.
For longer term market participants, when does one sell? Aim to sell at a returns of at least 100% on invested capital. Since one is going for a longer haul, it does not make sense to sell at a lower rate of returns. To achieve such returns is not an easy feat. How many market participants can resist the temptation of sitting on unrealised returns for long? Again, their consolation being human is all the same, "What can go wrong with taking immediate profits off the table since I have the money in my pocket?". There you go again. Same excuse, no matter so called long-term players or short-term players, all being humans fall into the tendency of emotional judgment when it comes to investment decisions.
So, no matter long term or short term market participants, there is always this tendency of realising profits too early and stopping losses too late. In doing so, they seems to work along the line of making multiple small winnings and big occasional losses such that their overall investment performance is mediocre at best.
If one has the patience and fortitude to hold the ground after selecting the right stocks at a suitable attractive valuation, only going for the "big win", just a 100% realised returns each year on one single stock in one's portfolio (provided one does not diversify to many stocks: maximum 7 stocks) for a few consecutive years and reinvested, can compound one's portfolio at an alarming rate of return.
So, always be patient to wait for right price to buy (during a bear market or major correction) and right price to sell (at least 100% returns on a single stock) to maximise the gains. Afterall, what is the purpose in investing if one only aims for a meagre returns from the stock market after taking on a bigger risk than other safer investments such as bank deposits? If one is fearful and impatient to wait for a larger magnitude of returns before realising profits and/or is adverse to loss taking which is sometimes necessary, then the stock market may not be suitable for such a person who may be better off putting his hard-earned money into safer investments that he can sleep soundly every night without worries.
A word of caution for readers: there are other considerations such as holding period, fundamentals of a stock and general market sentiments, so please take my sharing with a good dose of caution when going for the "big win".
Why do many market participants fall into this trap of making only multiple small winnings only to find themselves run into the risk of losing back all their small winnings or even suffer a net loss on their capital when a big loss comes their way? It all boils down to the habit of thinking in making investment decisions. The thrill of immediate winning is more enjoyable than suffering immediate loss.
There are two general types of participants in the market, the short-term players who trade actively and long-term players who invest with a longer time horizon. No matter who is participating, all short-term and long-term players both face this problem of falling into the trap of making multiple small winnings only to suffer a bigger loss that trims off the winnings eventually.
For short-term players, the emotional side of the trader tends to disrupt the objective system of trading. It is known to many traders that it is important to stop loss with a small tolerance level (e.g. stop-loss around 10% or even lesser) and let trailing-stops work their way for a winning stock so as to maximise the returns. If the trader does not stick to such strict rule of the game which works on the principle of making a "big win" by using trailing-stops and promptly stopping any losses by strict "stop-loss" measure, then the "big win" effect cannot be realised.
For such emotional traders, it becomes the other way round, making the occasional "big loss" because they let a small loss snowball into a big loss, and making multiple small winnings since they are not able to resist the thought of not realising their immediate gains if any from their winnings. Their consolation after every small win is that, "What can go wrong with taking immediate profits off the table since I have the money in my pocket?". There is nothing wrong with taking profits. However, there is something wrong when taking multiple small profits cannot cover up a big loss eventually. So, to ensure consistency in making "big wins", work on maiximising returns from each winning using trailing-stops and ensure one is covered on the downside by using strict "stop-loss" measure. A simple illustration: if a trader aims for at least 30% returns on each single trade before realising the profits, this returns from that single trade can cover up for 3 losing trades with a "stop-loss" at 10% each. If the stop-loss is more stringent (e.g. stop-loss at 5%), then the cover up on the losing trades is even better with each winning trade. So, the old adage for traders, "let your winnings run and losses stop promptly" is very applicable for making the "big win" when it comes to playing the stock market on a shorter time frame.
For longer term market participants, when does one sell? Aim to sell at a returns of at least 100% on invested capital. Since one is going for a longer haul, it does not make sense to sell at a lower rate of returns. To achieve such returns is not an easy feat. How many market participants can resist the temptation of sitting on unrealised returns for long? Again, their consolation being human is all the same, "What can go wrong with taking immediate profits off the table since I have the money in my pocket?". There you go again. Same excuse, no matter so called long-term players or short-term players, all being humans fall into the tendency of emotional judgment when it comes to investment decisions.
So, no matter long term or short term market participants, there is always this tendency of realising profits too early and stopping losses too late. In doing so, they seems to work along the line of making multiple small winnings and big occasional losses such that their overall investment performance is mediocre at best.
If one has the patience and fortitude to hold the ground after selecting the right stocks at a suitable attractive valuation, only going for the "big win", just a 100% realised returns each year on one single stock in one's portfolio (provided one does not diversify to many stocks: maximum 7 stocks) for a few consecutive years and reinvested, can compound one's portfolio at an alarming rate of return.
So, always be patient to wait for right price to buy (during a bear market or major correction) and right price to sell (at least 100% returns on a single stock) to maximise the gains. Afterall, what is the purpose in investing if one only aims for a meagre returns from the stock market after taking on a bigger risk than other safer investments such as bank deposits? If one is fearful and impatient to wait for a larger magnitude of returns before realising profits and/or is adverse to loss taking which is sometimes necessary, then the stock market may not be suitable for such a person who may be better off putting his hard-earned money into safer investments that he can sleep soundly every night without worries.
A word of caution for readers: there are other considerations such as holding period, fundamentals of a stock and general market sentiments, so please take my sharing with a good dose of caution when going for the "big win".
Subscribe to:
Posts (Atom)
Posts
