Have you ever sat down to trade for the day only to watch with confusion as the stock you are following seemingly has a mind of its own?
Whether you are using candlestick or OHLC (open-high-low-close) charts, MACDs, Oscillators or Moving Averages, it is important to take a moment to understand what is actually taking place on the stock exchange when you watch your charts and indictor patterns evolve during the day.
Largely what you will be seeing is the behaviour of the institutional dealers at work.
Institutional dealers take buy and sell orders from large institutions, such as banks and superannuation funds and then execute their orders on their behalf. The size of these orders can range from the tens of millions of dollars upwards and represent the majority of trades carried out on the Australian Stock Market.
Institutions issue buy or sell orders for a variety of reasons. It may arise from a strategic shift in weighting from one sector to another, increasing or decreasing exposure to the market generically, the impacts of currency shifts or oil and commodity prices on a company.
Large overseas funds move into and out of countries and in fact regions based on sophisticated computer analytics or chase currencies that react in certain ways. For example, they might be tracking the Australian dollar (AUD) to commodities prices and then invest in the underlying stocks with the required exposure. What is important to note is that these buy and sell decisions are often not connected with decisions made by the average retail trader or investor.
So these institutions, having decided a particular stock is no longer relevant to their current strategy will communicate that to ASX participants (stockbrokers) by dealers within these fund management organisations.
Inside the Stockbroking Organisation
Stockbrokers receive brokerage commissions only on what has been transacted, so of course it is in their own best interests to buy or sell an order in full. However clients will often set out parameters within which the order must be executed and they also have to do that within a market that may be reacting to external variables and influences.
Fund managers will judge the performance of a stockbroker against several criteria, including comparing the average market traded price against the Value Weighted Average Price (VWAP) of the share for that day.
When buying shares, an entry price lower than the average VWAP is desirable, and for selling, the stockbroker will be seeking a higher than average price. Scoring a better average traded price than the VWAP is a cause for celebrations and high fives all around. Conversely poor performance compared to the VWAP will go against the stockbroker’s rating, which could affect their ability to gain future business. So a large trade cannot just be lodged into the market to be sold as one bundle but must be managed.
It is important to note the brokers themselves are not trading on a prediction that a share price will go up or down, but market to market within a client’s instructions. The stockbroker has to break up their order into strategic parcels and monitor the market in order to achieve the highest (or lowest) average price possible.
So what does this mean, practically speaking?
The largest component parcel will be traded in the first ninety minutes of trade, and you can often see where the big money is going to push the market and the trading range for the day.
When you look at intraday volume and the price range you will see the interaction of volume buyers and sellers transacting.
Occasionally something will occur during the day to cause a sentiment shift, such as a news story or company announcement, and it is important to review what the volume traders are doing. Are they sidelined pending instructions? The tell tale sign here will be volumes tapering off until research analysts determine likely repercussions.
The traditional stockbroking lunchtime is from 12.30-2pm and over lunchtime, volumes will tend to dry up but the thinking stockbroker might leave some orders in the system to snag a good fill and instruct the Designated Trading Representative (DTR) at the firm to monitor activities.
“Call me if it breaks $43.60 – you know where I’ll be!”
Generally they would be aiming for 65 – 70% of the order to be transacted by 2pm, leaving the balance to try and finesse a great trade in the remaining two hours of trade. Drip feeding the market through the afternoon should avoid a last minute panic. Irrespective they would probably keep some firepower up their sleeve for the last few minutes of trade. Just in case.
Then you panic because the market is not going the right way for you, so you quit the balance hitting the market with the remaining stock. After all you do want the brokerage – right?
You see a higher volume of shares enter the market right before close as brokers try to fill the final parts of their orders, finalise their commissions and make their clients happy. Not an easy combination.
So with this scenario in mind, take a moment to look at an intraday chart on your trading software and magnify the time period so you are looking at just one or two days and overlay these thoughts onto the price interaction and volume your are viewing. You might now be seeing behind the chart for the first time.