The Three Dimensional Market: Who, What, Why?


By Martha Stokes, C.M.T. © copyright 2007 all rights reserved.

Most traders have a one dimensional view of the market.  They are simply searching for stocks to buy or sell using the latest strategy or indicator that they have learned.  Excitement is high about the latest trend and they are oblivious to many aspects of the market that can and do impact their trades. They have no idea who else is trading that same stock and why.  Their trading reflects a flat view of the market.  Their success rate is inconsistent and their net results disappoint them because the market is not flat, it is complex and dimensional. The market moves and changes and successful traders must move with it.

To be consistently successful with steady, growing gains rather than the typical “make some money”- “lose some money” trading profits pattern that is all too common among traders, you must learn to see the market and trade the market three dimensionally.  Technical Analysis of the market participants is essential to understanding this concept but most traders use it improperly or simply don’t know how to use it at all.

The study and analysis of Market Participants is an understanding of who is trading a stock, the capital available to them to trade, their intent for that trade, and their entry and exit strategy.  There are six primary market participant groups in today’s market and each leaves their own unique “footprint” on a chart.

By understanding which market participants are trading a stock at any given point in time, you will be able to make more prudent decisions about when to enter, how long to hold, and when to exit based on your trading style and strategies..  In other words, knowing what the major players are doing helps you to know how to trade today’s market.

Market Participants can be broken down into six primary levels and are listed here in order of the capital they have available to invest or trade.

1. The giant Pension Funds, ETF’s, Mutual Funds, and Investment Banks.  These funds are the behemoths of the market and have many billions of dollars at their disposal.  The managers of these funds are brilliant, highly skilled, and have extensive market experience.  These are the Smart Money.  The most knowledgeable managers are usually the ones with the largest quantity of money to invest.  They are called ‘smart money’ because they lead all other market participants. They are able to do this because they have access to information most investors only get much later on or not at all. These managers are wise and savvy market participants who have exceptional skills at long term investing.  Their primary purpose is to find stocks to invest in for the long term.  However, they do occasionally trade short term or hedge to offset losses during brief market corrections.  They are the first buyers into a bottoming stock and the first ones out of a topping stock. They are careful participants and their buying occurs before price moves up out of a bottom and seldom causes price to move much if at all.  For purposes of this lesson, we are going to call them “Level One Market Participants.” During a level one market participant buying period, the stock will be in a consolidation pattern with small price action and surges of volume.  This occurs because these managers set a specific price range for buying the stock incrementally over a longer period of time.

The Chart below exposes Level One Market Participant systematic accumulation as a stock forms an intermediate term bottom.  Price moves slowly over a 6 month period.  Volume surges show large lot institutional investors as well as some Level Two Market Participant activity during this phase.

2.  The Large Lot Fund Trader is a new market participant category.  They are the Level Two Market Participant and have billions at their disposal to short term trade.  They move the price and the market as they move into and out of stocks.  Since the elimination of the ‘Rule of 3’ in the late 1990’s, which had placed certain restrictions on funds trading short term, large lot short term trading has increased dramatically.  The Level Two Large Lot trader lacked experience during the late 1990’s and caused tremendous volatility in the market at that time. Since then, the Large Lot Trader has been slowly developing skills and learning to trade short term successfully.  If you owned a mutual fund from the late 1990’s through the early years of this century, and you had a large tax liability even though the fund lost money that year, your fund was traded short term by inexperienced Large Lot Fund Trader attempting to shift from long term to short term trading. This group trades the market short term, either day trading, swing trading, or selling short. Their goal is to increase the fund profit percentages trading on a short term basis.  The Large Lot Fund Trader’s skills have improved in recent years. But they have a lower success rate overall when compared to Level One Smart Money. Their buying does create surges of price and big runs as they buy and sell large lots on a short term basis. Often the spectacular price gains on speculative moves are caused by the short term large lot trader.

3. The next level of Market Participants is large to mid-sized pension funds, mid-sized mutual funds, large to mid-sized corporations, large non-profit organizations, and wealthy individuals. This group has millions to billions to invest and have experienced managers who often move up to Level One pension and mutual fund management positions as they gain a reputation for excellence in managing and investing in the market. This group has a tendency to follow the lead of the first level and primarily invests for the long term.  Their buying patterns can cause some surges of price gains but seldom create the speculative runs seen by Level Two trader action.

4. Smaller funds, small mutual funds, mid-cap to small-cap corporations, non-profit organizations, small pension funds such as a local teachers retirement fund, and small retail investment clubs make up the next tier of participants. This group has mostly inexperienced managers with less market knowledge.  They move hundreds of thousands to millions of dollars in and out of the market.  Their choices are often predicated on price action already underway, news, or rumors.  They typically lack technical analysis skills and are known for often chasing the Large Lot Trader activity without being aware of what they are doing.  Their results are poorer returns than the other higher levels of funds.  Their buying can create wide swings in price and often cause gap ups or gap downs as they use market orders to buy and often sell emotionally in a state of panic.

5. Low capital base retail traders, options players, individual long term investors, and very small funds, are the fifth tier. These traders and investors lack market experience, are prone to emotional trading, and do not have basic market knowledge and skills.  They have anywhere from a few thousand to one hundred thousand dollars to invest or trade.  They often make poor choices but can impact price at the end of the run during speculative moves.  They buy or sell based on news events, rumors, gossip, peer pressure, and greed.  Their results seesaw between profits and losses. They usually enter a stock late—chasing the run up and exit late—losing profits that should have been protected. Their buying often occurs as the large lot trader is selling for profits.  Price continues up but on significantly lower volume with large lot indicators showing heavy selling pressure even though price moves up briefly. Their buying also can create wide swings in price and often cause gap ups or gap downs as they use market orders to buy and often sell emotionally in a state of panic. Low capital base retail traders can also create small gaps as stocks whipsaw against them, taking out stop losses placed incorrectly.

The chart below shows buying of smaller lots as price falls due to heavy profit taking by large lot traders.

6.  The odd lot investor is the sixth level of market participant and has the least experience and the lowest capital base.  The odd lot investor is also the investor who takes the highest risk.  They are the last group to buy stocks in a speculative, overbought Bull market and the last one out at the bottom of a Bear market.  The odd lot investor knows nothing about investing and buys and sells purely on emotion. The odd lot investor typically buys at the top of a run as large lot traders are selling for profits.  The odd lot investor price action can be gaps or runs at the top just before stock prices collapse.

Each of these groups of market participants buys and sells at a different time with a different agenda and with different kinds of facts and information about companies and stocks.  Their buying and selling of stocks is based upon what they know about a stock and when they learn or hear about this information.  The buying and selling patterns of these 6 different groups of market participants cause the price action we see on charts today.

It is important to note that the market didn’t always have 6 levels of market participants.  Before the 1990’s the large lot trader did not exist as they do today.  Before the 1980’s there were no pension funds in the stock market.  In the 1950’s to 70’s the market participants were mostly smaller investors and mutual funds.  Today the market is dominated by the institutional investor and the institutional trader.  The small retail investor has a much smaller role in the market.  As the market changes, so do the market participants and their roles in how prices move.

Below is a weekly chart of the Dow 30 Industrial Average.  Remember that an Average is an index that gives each component equal weight.  With just volume with a moving average we can study the activity of various market participants for the Dow in the past couple of years.  Recently the Dow has had a strong upward move out of a sideways pattern. However, if you study the chart carefully, this price action was not on strong volume but on volume that is decidedly weaker as the Dow moves up.  Lower volume as price moves up is indicative of smaller lot investing and trading.  Higher volume is indicative of larger lots.  The larger lots typically buy during bottoms and sideways or consolidation periods.  The smaller lot investors and traders typically buy after a stock is running with lower volume.  This recent Dow rally was predominantly smaller investors or the lower tier of market participants rushing into buy the Dow stocks.  The risk now is that volume is so weak and the trendline is too vertical to sustain.  Without volume, up-trends can collapse without much warning.

An uptrend requires constant buying pressure with increasing volume to sustain.  The lower volume indicates that buyers are scarce and buying pressure is weak.  Unless volume increases, the uptrend is at risk.

In contrast, the NASDAQ 100 Composite Index shows a rise in volume from August through November.  Larger Lots were more active in the NASDAQ stocks than in the Dow. Both the Dow 30 and the NASDAQ 100 moved up in the fall of 2006 but different market participants were buying Dow stocks than those buying NASDAQ stocks.

The chart below shows an example of Level One Smart Money investing in an accumulation or systematic buying mode.  Volume is high as price reaches the bottom.  The large lot buying commences but price doesn’t move much.  Once their buying ceases, the stock shifts to a consolidation with lower volume.  As the stock climbs, volume is actually declining as smaller lot investors and traders rush to buy this stock with market orders and random buying patterns.  Large Lot Traders move in for quick short term trades causing the stock to move up further.  Surges of volume quickly fade as these short term large lot traders take profits and move on.  Volume drops dramatically as price moves up after that profit taking near the middle of November.  And the price starts to collapse back as buying is exhausted.


Being able to identify who is buying a stock at any given time in the price action will help guide you in understanding the intent of the trade.  Institutional investors are buying systematically for the longer term hold while institutional large lot traders are buying for short term gains, and will take profits quickly.

Small lots can cause price to move up. However, the run will be unreliable and is a higher risk trade because there is a lack of continued buying pressure to keep the price moving up and there is a risk of profit taking by large lot traders who entered earlier.  With fewer traders and smaller lots, the stock is more likely to whipsaw or collapse with the heavy selling pressure of profit taking.

Large lot investors prefer to buy stocks that are forming bases or bottoms and enter stocks without causing price surges.  They buy into a stock incrementally over many weeks or many months, with a pre-determined buy price.  Their goal is to not disturb price and to buy all the shares before other traders discover their quiet accumulation.  They generally know news in advance of every other market participant, long before that news is public knowledge.  They prefer to buy quietly without anyone really knowing they are buying.  Once they have their allotment of shares, the news leaks out and other market participants rush to follow their lead, causing the price to rise out of a base or bottom rapidly.

Large lot traders take advantage of speculative moves by anticipating price action.  They also usually know news before the general public and are watching the large lot investor’s activity.

When the news is released to the general public, the smaller investor, small capital base trader, and odd lot investor rush to buy based solely on that news. The stock rises briefly on very low volume before collapsing.

These days, these patterns are most common with earnings release dates.  During the quarter, the stock will rest in a consolidation or sideways pattern with intermittent surges of volume on up days.  This “footprint” chart pattern is the large institutional investor buying without disturbing price prior to the earnings release date.  As the earnings date nears, price rises as institutional traders move in on a speculative mode with the intent of taking quick profits.  They know that most small investors and small lot traders buy on the day that earnings are released.  The large lot trader intends to hold and sell just before or on the day of the earnings report.

On the day of the announcement of earnings, the stock rises briefly after the report is released.  Small traders and investors create this momentary price rise as they rush to buy the stock based on the news of a “great report.”  Their buying triggers the profit taking mode for the institutional trader and the imbalance of large lots selling over small lots buying cause the stock to fall in price.

Many small investors and traders are baffled as to why a stock with a great earnings report drops in price the day of the report release.  It is simply a matter of how the market participants trade that stock at that time.

If you learn to identify which market participant(s) are buying or selling at any point in time, you will be better able to anticipate price action and have more reliable profitable trades.

Martha Stokes, C.M.T. is the Senior Technical Analyst and co-instructor for TechniTrader, the educational division of Decisions Unlimited.  Stokes’ courses teach swing, position, options, intermediate, and long term trading and investing.  In her 25 years of teaching and trading, Stokes has developed all of the material featured in this series and writes for various paper and internet publications.  She also authors daily and weekly newsletters for all of her students on market condition and in-depth analysis of stocks, trading techniques, and strategies.  For more information on TechniTrader’s courses, go to or call 888-846-5577.