Four distinctions about participants in financial markets

Four distinctions about participants in financial markets

I would like to focus attention on the participants that make up the financial markets from two points of view:

  1. On the one hand if they are active or not.
  2. On the other if they are strong or weak.

Both groupings are interrelated and can help to understand the movements that the markets make.

Let’s look at the first group:

  • we will say that they are assets those participants who are involved on a daily, or weekly, or even monthly basis, in making investment decisions. They actively enter and exit the market. For example, traders who operate intraday will be very active since they will enter the market and exit several times during a day. Those traders who buy and sell positions once a week or every few weeks will be active, although less so.
  • we will say that they are Passives those participants who are not interested in actively managing their accounts. They may have a portfolio, but the management is passive. Generally, their knowledge of the markets is poor, and their interest in trading is zero. They may hold certain financial assets as part of a long-term strategy, but monitoring their positions will be minimal.

It is important to understand this classification. If you are a person who trades the markets, who is consistent or on the way to being so, and who sees trading as a way to revalue their positions, you are an active trader.. In this case we have to take into account that they tend to seek a high revaluation of their positions, but also that, in many cases, they are easily influenced and that they can quickly change their perception of the market in response to news, rumors, suggestions from newsletters or brokers. , or wild swings in price action. This group plays the role of contributing liquidity to the market.

On the other hand, a passive trader, usually knows very little about the market and may not know how to buy or how to sell. But it plays a very important role because, with its long-term positions, it gives stability to the underlying in which it is positioned.

Let’s look at the second group:

  • An investor will be strong if you don’t feel the need to drop your position in case the price moves against you. It is not about the amount of capital you invest with, nor the amount you have available to invest. In this group there are also small investors who do not feel the pressure to release their positions because they are inactive investors. Paco Lopez accepted the recommendation of the director of his office and invested in the shares of a certain company. Now these shares are worth 60% less than they were when he came in, but he doesn’t actively manage his positions, going long and keeping his portfolio unsold.
  • An investor will be weak if you feel the need to exit your position when the price moves against you. In this group we see that small individual traders are usually found who are also in the group of active traders that we have seen before. Juliana Ramirez operates intraday with a modest account. When she opens a long position she does so with the expectation that the price will move higher, and when the price starts to move lower she feels the pressure to unwind her positions. It may take her more or less to do so depending on the type of investment strategy she uses, the underlying in which she invests and her technical knowledge, but if the price continues to fall, there will come a time when she will not bear the risk. loss and it will come out.

With these four distinctions we can understand many of the maneuvers What do the pros do in the markets? What they want, in general, is to take buy or sell positions (buy if they expect higher prices, sell if they expect lower prices). These positions can only be taken by acquiring what is available in the market. Passive participants hold positions, but are often not available for either buying or selling because these participants do not manage their portfolios. On the other hand, these participants are usually strong investors, in the sense that they do not let go of their positions even if the price goes against them. Then what the pros will do to position themselves in the market is to take the positions that are available (called “floating” positions), or that are easily available. What positions are readily available? Those of active traders who have modest accounts (yours and mine).

The pros know that if they move the price against our positions there will come a time when we cannot take the pressure and we will exit the market. If we have bought and the price moves against us (ie the price decreases) to the point where we have the stop loss, the order will be executed and we will be out of the market. Executing a stop loss on a long position is a sell. And when your position is being sold, who will be buying it? The pros just took your wallet.

If we have sold (that is, that we have entered short), and the price moves against us (that is, that the price increases), until our stop is triggered, what will be executed is a purchase (the stop loss of a position sale is a purchase order). Who will be selling that position for you to buy? The pros… that they will be short when you are out of the market.

If you have had the experience of taking a position because you thought that the price was going to move, say upwards, and you have seen how, just after you entered, the price has moved against you, that is, it has decreased, and you it has triggered the stop, and, just after you were out of the market, the movement has resumed in the original direction that you had estimated, possibly, you have experienced a manipulation maneuver by the pros.

I hope that these four distinctions help you to understand how and in what way the market moves. When you have the pieces in place you will see that it is completely logical.

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