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Friday, May 22, 2009

Market Effects of Large-Scale Trading

According to researches and studies, a major percentage of stock market activities are done by large-cap traders including institutional traders, scalpers and money managers who create a ‘smart money group’. According to CNBC this group of only 4,000 members is responsible for more than 80 percent of total daily stock trading volume. They conduct 50 trades as an average per session. Below are the effects of this type of large-scale trading.
  1. They tremendously contribute to the liquidity of stock market.
  2. They can start or end price trends (particularly on individual stocks), or can strengthen or weaken existing price trends.
  3. They are mainly responsible for creating the support and resistance levels with so much trading volume.
  4. They are mainly responsible for long-term steady price movements.
  5. Many times they serve as market makers for less-active groups and individual traders.
  6. The number and buying/selling activities of these smart money members is a very good indication of the health of the economy and market. Presence of more foreign funds and institutional traders is a very good indication.
  7. With large position sizes, they can easily mark their presence on intraday and other charts.
Many traders make use of charts together with specific indicators to find out this smart money activities and try to follow them. Most institutional traders trade on facts and news rather than on rumors and thus following them can often offer better results. More over this smart money group is usually the first to get inside-company news which can affect stock prices.

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posted by Daniel Pipitone at 5:52 AM

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