Welcome back everybody to the second episode of the free price action trading course. This video will focus on how the market price moves or how the prices are made to move in a particular way by some big players. You might have heard people saying things like history repeats itself, price memory and stuff like that.
What they really mean is how the market price moves in a specific pattern time and time again. Now the question is, why does the price of a stock go up or down? There can be different answers to this particular question.
Like it could be the news or government passing some bill, a new monetary policy by the RBI, some legal issues etc. But at the center of it all, the one thing that makes the market movements are the earnings of a company. Even if a piece of very bad news related to a particular stock has come out. but it has no direct impact on the earnings of the company, then there might be a temporary noise in the stock for a short period, but eventually the stock will recover.
But on the other hand, stocks like Vodafone Idea, Yes Bank, etc. are victims of the news that directly affects the earnings of the stock and thus resulting in their crash. In the stock market, there are mainly two players in general. Number one are the retailers. and number two are the institutions 90 or more of all the trading in the markets is done by institutions which means that the market is simply a collection of institutions the institutions includes mutual fund houses banks, brokerage houses, insurance companies, pension funds, hedge funds etc. These companies account for most of the trade volume and they mostly trade on the fundamentals of the stock but now they are eventually shifting to the algorithmic side of trading.
What I mean to say is that the trading done by these institutions controls the direction of the market on daily and weekly charts and a lot of the big intraday moves or swings are also controlled by the big institutions. It is not very surprising to know that almost all these institutions are profitable over time. So the institutions are generally considered to be the smart money. Meaning they are smart enough to make a living by trading and they trade a very large volume every day. No trade can take place without one institution willing to take one side of the trade and the other willing to take the other side.
The small volume trades made by the retailers can only take place if an institution is willing to take the same trade. Let me explain this. If you want to buy at a certain price, the market will not get to that price unless one or more institutions also want to buy at that price. Similarly, you cannot sell at any price unless one or more institutions are willing to sell there.
Because the market will only go to a price where the institutions are willing to buy and others are willing to sell. I hope the point is clear. Most individual traders or retailers have no ability to move the market.
The market will only test a particular price if one or more institution believes that it is financially sound to sell at that price. On the other hand, there are other institutions which believes that it is profitable to buy there so to be very precise at every tick in the stock market institutions are buying and other institutions are selling and all of them have proven systems that will make money by placing those trades so the main point to be noted or the main point that i want to convey is this you should always be trading in the direction of majority of the institution or like The professionals say follow the footprints of these institutions because they control where the market is heading or simply they move the market. Now let us look at a new scenario. You have found out a new trading strategy that makes money and it works perfectly but at some point it stops working after a while.
Many of us might have gone through this situation. The reason for this is simple. The markets are changing.
It is never fixed. But it is always in transition from one stage or one phase to the other. This simply means that if you are using a trend trading strategy today and you continue to do that then at some point you will lose money in range markets and Similarly, if you are using a range trading strategy and continue using it for a while, at some point you will end up losing the money in the trending markets. The thing to understand is that the profitability of trading system moves in cycles.
There are periods during which the trend following systems are highly successful and profitable. Then the market shifts from the trending to range price action. That is when all the trend trading systems become unprofitable.
and the inexperienced traders start making losses. This is the reason why you see a lot of newbie traders boasting up their P&L during the trending markets while all of a sudden they disappear when the range market arrives. To sum it all up market moves in three phases or three stages.
Number one is the uptrend or the advancing stage. Number two is the downtrend or the declining stage and number three is consolidation. So the consolidation stage can be further subdivided into accumulation phase and distribution phase. So let us look at how the market transition from one phase to the other. Let us start with the accumulation phase.
The accumulation phase is when the big institutions start buying a particular stock. This institution deals in huge bulks of money. Therefore, their order sizes are expected to be huge. So think what happens if they buy such huge quantities in a single order. The prices would react suddenly and the prices would just shoot up.
They will be able to purchase the stock at a specific price only if there is enough liquidity in the stock. Else the orders will be matched at higher prices. which will in turn reduce the profitability of the institution but they will not allow this to happen so instead of placing a bulk order the institution places small orders secretly and this is called as position building in short we can conclude that during the accumulation phase the institutions are building up the position slowly and silently and during the accumulation phase the market tends to be in a range or it is range bound and the trend traders would face losses if they don't adapt suddenly so how will you identify the accumulation phase generally the accumulation phase occurs after the price has fallen down or simply it happens after a downtrend The accumulation phase can also be viewed as an area of low volatility or an area where there is a lack of interest between the bulls and the bears.
Moving on to uptrend or the advancing phase. This stage occurs usually after the price breaks out of the accumulation phase. Here's what happens in the uptrend or the advancing phase. After building up the positions, the institutions take the market higher.
So there is a bullish sentiment in the market all along. The institutions will not book profits anytime soon. So the uptrend can last anywhere from months to even years. It is during this phase that the trend traders make a lot of profit.
We will discuss on how to identify an uptrend and how to approach your trades during an uptrend in our upcoming videos. But now let's move on to the third phase which is the distribution phase. The distribution usually occurs after the prices have raised to a good extent and the distribution phase looks similar to an accumulation phase where the market remains in a range.
Here's what happens in the distribution phase. The institutions begins to distribute or sell or square off their positions after they have made a good chunk of profit on their initial investments. Similar to the accumulation phase, the institutions sell the shares secretly and slowly so that the market doesn't fall immediately creating a panic situation.
So they will sell at a range of target prices and that is why the distribution phase is also range bound and the trend traders don't stand a chance if they don't adapt suddenly. In the distribution phase, the volatility tends to be high due to the panic of an imminent crash or fall in the prices. The last and the final phase is the downtrend or the declining phase. The declining phase happens when the price breaks down of the distribution phase.
During this phase, the selling pressure is high and the market outlook is bearish. Most traders try to cut their losses and those who don't, well... they remain as long-term investors. In the hope that the price will come back up, the volatility tends to be very high due to panic and fear in the market. So this is a good time for trend traders who can short the market and get hold of good profits.
This is how the phases look like in a chart and it is interesting to note that these stages continue to appear time and time again as cycles. and if you could spot them early then you have an edge over the market and eventually you can use a suitable strategy that works in the situation. We will talk about different trend trading and range trading strategies in detail in the upcoming videos and we will also understand how to design your trading strategy according to changing market conditions. I would like to wind up this video by saying that Being flexible at times is always a good thing because the market is always flexible.
I will catch you guys in the next video. Till then it's goodbye from my end.