Stock market Basics - part 2

In this chapter, let us look at how to make terms and concepts such as "price

action" and other new-age technical terms relatable and understandable to retail

investors and traders. Even though they may come across as rocket science, they

are simple. Lets me break it down.

As we saw in the previous article, I gave an example of a traditional old-age auction market.

Now imagine the scenario described below.

1. A seller checks the previous day’s close price and the total volumes of the previous day. let’s take the same example a t-shirt, the closing price yesterday was 150.00.

Now, let us say, today, in the course of the day, the demand for the T-shirt reduced.

In other words, the demand for the shirt at the end of the day was lesser than the demand at the start of the day. And same with the price, the price of the shirt also declined during the day as the traders wanted to offload their stock as quickly as possible. So when the market opens, the seller starts the auction with a price of 145, there was some initial demand and then thedemand began to drop. Buyers only accepted to buy only at a lower price. Like 143, 142, 141. As you can see the bid price of the buyers was going down… so sellers sell at 143 and keep reducing as the day goes by.

At the end of the day, the price reduces to 140 and the last sell before the market, close was 141

Here, the opening price of the day is 145.00 and the highest price of the day is also 145. The low of the day was 140 and the day closed at 141. So this is what you see in the computerized recent day market price

Open =high = 145

Low = 140

Close = 141

This is how an open = high is formed in a day.

The vice versa is open = low when the demand is high and the price of the t-shirt that was sold at market open was the lowest, after which only increased and was higher by the close of the day.

Read the first article, twice or even thrice if required try to visualize it. You can find it here - stock market Basis

Now let’s move on to market participants

There are different types of market participants. We can broadly classify them into 3 main categories.

1. Floor traders – They run the market.

This is how we should take it so that we understand them clearly. You would

have seen a lot of stocks, inside the top NIFTY 50, and outside, which gets

traded in high volumes but the price movement is very less say 5 to 10 paisa in

smaller price counters and Rs.1 to 2 in higher value counters. Typical examples

I can give you in current day’s market are stocks like ITC, IOC, COALINDIA,

NTPC etc. The floor traders are the ones responsible for this, they buy/sell

within themselves and keep the markets moving with a good volume. Their

requirement is just a 5 paisa profit and they do unimaginably large quantities.

They are traditional people who have been

doing this together for generations with the sole purpose to carry on the family's old legacy. Most of them are direct brokers of NSE. They don’t do any stock

broking business; they use their license to trade only for themselves.

2. Retail traders – Either you are an investor/trader who has 10000 rupees or you are a full-time large trader with crores of rupees as your capital, everyone short or long-term investors, a day trader, or a positional trader, a derivatives trader, options trader, intraday player come under this category. Let's keep things simple and not get into sub-categories right now.

3. The 3rd category is the institutions, domestic and

foreign both. Institutions are financial companies, mutual funds, pension funds,

banks and other such organisations. They are the people responsible for high volume

price movements. These institutions are what are called “big fishes”.

The fundamental concept is an organisation and or any

individual comes into the market only

to either buy or sell. When an institution has come to buy, the demand for that

particular stock goes up, and the supply is unable to match the demand, hence

the price also goes up.

And when an institution has come in to sell and liquidate

it's holding, then the supply is more than the demand, and this leads to

unimaginable fall in the stock price.

You may have watched this rollercoaster of prices, live if

you have traded on the market. If you haven’t, I would

suggest you do so for a day. Or Observe the stock market through any medium.

In technical terms we say it as demand and supply or to be more precise traders use terms such as

resistance and support.

When there is an institutional buy, the price breaks out,

breaks the resistance and moves upward and when there is a sell, the price falls and breaks the support falling further down.

It is important to understand and identify institutional participation in the market.

When do they get in?

Which counter?

How to identify that?

How can I participate in that move??

Once you have learnt and understood this, you should go along with the institutions, in their same direction, in the same counter, and exit when they do or even before they do. This is what I do and make a fortune.

Understanding this is the "mantra" Maybe your capital is small, maybe you are a small-time retail investor or trader, but always "Think Big", think you are one of the "Big fishes"

That's the mantra you need to follow always.

But how do I identify this institutional activity?

I will help you do that with a lot of examples and live demonstrations in the forthcoming articles. Stay tuned…

Thank you