Horses Chasing Carrots, Day Trading, And Communication
Look beyond the system to the humans who make it work
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In This Edition - Stock Trading As A Form Of Communication
Even something as impersonal as the stock market eventually boils down to transactions between humans and involves communication at some level. Always take a moment to consider the human side of your interactions to ensure you don’t forget about the person on the other side.
Stock market investing is one of my personal interests (a passion actually) and I have recently decided to experiment with day-trading. Day-trading is where an investor may buy/sell a security several times during a single day instead of buying and holding it for days, weeks or even years. My rationale for this shift was that a stock will move up and down a lot throughout the day and if I can take advantage of a few of those cycles I can make money throughout the day and have more control over my investments.
This approach may not be right for everyone so please do not take anything in this article as investment recommendations.
Image created by Ed Paulson using Dall-E. The horse will make sense in a few paragraphs. EP
The stock market is a massive, dynamic marketplace where millions of folks are buying and selling stuff (shares of stock) every instant. It is common for a single stock to trade tens of millions of shares in a day. Multiply that by thousands of stocks and you can get an idea of the scale and complexity of the market. It’s impressive!
We hear things on the news like “Apple shares moved up 2% on the announcement of their new iPhone.” This means that over the course of a day more people wanted to buy Apple stock than sell it, which moved the price higher. The news statement represented the aggregate result of a full day’s trading activity. That aggregate was formed by thousands of individual trades between a buyer and a seller. Each of these trades resulted from negotiations that haggled over pennies until the price was right and the shares were sold.
Buyers and sellers express their interest levels by entering quotes into computers where other traders can in turn see the various prices and quantities at which people are willing to buy or sell. It is sort of like an eBay auction.
Years ago, a professional trader told me that each stock has its own personality and if I wanted to understand its personality I should take the time to watch it and get to know it. I never really understood what he was talking about until I started day-trading. In retrospect, his comment related to something another stock trader told me, which was “The trading screen is where all the action is.”
Their words came back to me this week as I spent hours in front of my computer screen watching stock prices move up and down by the second. I noticed that Tesla (TSLA) stock traded differently from Ford (F) stock. The more I watched the price movement, the more the idea of a personality made me wonder how something inanimate like a stock price could have a personality.
Then it hit me: There are people behind each of these trades. What if the stock’s personality represents the composite personalities of the people behind the trades, and that they are communicating through the trades?
We have all heard “Buy low and sell high” which makes sense. Buyers want to buy at a lower price. Sellers want to sell at a higher price. The more effectively you can buy at a bargain and sell at a premium, the more money you will make. This is true in business and in the stock market. But no transaction happens without both a buyer and a seller, which means that they must agree on a price before the transaction will occur. This is where communication comes into the picture.
To explain how communication comes into play with all of this we need to cover a little background information. Please bear with me as we wade through some key concepts. It’s just a couple of paragraphs.
As I watched the prices and number of shares fluctuate over the course of the day, I started to develop a sense for whether the buyers wanted to buy the stock more than the sellers wanted to sell. If you have ever heard of the law of supply and demand1, you can watch it play out on a real-time basis with this trading process. Supply and demand basically says that if there is less of something (short supply) that buyers want (high demand), the price of the item will increase. Conversely, if there is too much of something (oversupply) then sellers will decrease the price to entice hesitant buyers (limited demand) to purchase the item.
Question
Would you like me to do an issue covering supply and demand in more detail? I’d appreciate your letting me know by clicking the “Leave A Comment” button at the end of this post. Thanks. EP
Remember that a sale only happens if sellers agree to part with their stock which only happens when buyers offer a price that is in the sellers best interest. If buying demand is high, then the stock price will move up because buyers need to offer a higher purchase price to entice sellers to sell (sellers want to sell high). When buyers are active the stock price will go up. Conversely, if the buyers decide that the stock price has increased to a stopping point (called resistance) then they will stop buying. They might even become sellers to take their profits which means that they may need to reduce their asking prices to entice buyers (buyers want to buy low). When sellers were active the stock price will drop. Existing buy and sell offers are displayed with something called Level II Quotes which I get access to through Charles Schwab2.
OK. School is over. Back to communication.
Here are a few things I noticed during my trading sessions last week. If a lot of sell offers were listed at a higher price than the most recent trade, indicating that the sellers were in no hurry to sell, then buyers who wanted to own the stock needed to increase their offer price if they wanted to own the stock. Often the stock price would increase.
Conversely, if many buy offers were concentrated at a price lower than the last trade price, indicating that the buyers thought that the current price was too high, then sellers who wanted to part with their stock would need to drop their asking price to entice buyers. Often the stock price would decrease.
The quantities and prices adapted continuously, almost like a game, which was where my communication realization happened. Quite often, as a stock started to move up, the sell orders that previously were much higher than the current trade price started to decrease to within a few pennies of the current trade price. Almost like the sellers hung a carrot in front of buyers as is done with a horse to entice it to start walking.
If the buyers purchased at the price that was one penny above the prior price, more shares would instantly appear at a price 2 and 3 pennies above the current trade price. This additional temptation often worked and increased the price until it eventually stalled. The buyers had reached their limit. This made sense to me as I realized that buyers had bought a lot of shares as the stock moved from where it was up to its current higher price. Buyers were basically saying, “I’m full!”
Image created by Ed Paulson using Dall-E.
The negotiations between buyers and sellers at the individual trade level is a form of communication that I had never considered up until now which is a little embarrassing to admit given that I have been investing in the stock market for years. Sigh …
A key takeaway from this week
Never forget that whenever you have people involved some form of communication must be happening. Even something as impersonal as the stock market only functions when a buyer and seller agree on a price for a single transaction which involves communication. For years I have looked at the market as shares of stock coldly transferring through the cloud. This was only partially true. We often talk about working with a “company” when in reality we are interacting with a human being inside of that company who, in turn, is working with us. Train yourself to slow down enough to think about the human influence on whatever is happening and you will be glad you did!
#stockmarket, #trading, #communication, #buyers, #sellers
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Check out this link for a overview of supply and demand concepts. https://www.investopedia.com/terms/l/law-of-supply-demand.asp
Here is a great overview of Level II quotes for those who are interested. https://stockstotrade.com/understanding-level-2-quotes-infographic/
Very creative interpretation Dr.Biz