What moves the stock market

As much as i hate to say this, no one can predict the next price movement of the stock market. Even technical analysis will not be able to assist you with a 100% accuracy in prediction. The real factors that move the stock market are money flow, greed and fear. There are lots of big players in the market such as hedge funds, institution traders, the rich and affluent and syndicate. We as retail traders are consider as 'small fish' since we do not have sufficient money to move the stock market. In order to profit from our trading, we need to leverage on the movement of these 'big fish'.

When money flows into the stock market, it will inflate the price of the stock. Thereby creating a paper demand for that stock. As retail investors and traders begin to be attracted by the price appreciation of the stock, they will enter into the market. This will in turn further aid the appreciation on the stock price. On first sight, this is an idea situation whereby everyone is a clear winner as long as they buy the stock. However, problem will set in when greed comes into play. Stock price on theory should not be worth more than its earning potential. In order to justify the price appreciation, there must be growing anticipation on the potential of earnings. More often than not, stock price appreciate much more than it's potential earning power. This is what i would describe as overbought condition. As a result, 'big fish' will begin to take profit and exit the market which in turn causes the stock price to fall.

The irony with stock market is that it has very serious mood swing problem. Always swinging between extreme greed and extreme fear. When the 'big fish' starts to sell their stocks holding, it create massive market fear which results in retail investors and traders to dump their stock. This action creates panic selling pressure and causes stock price to fall sharply.

As a trader, we need to understand the basic mechanism on why stock price moves. This is important because it help us to understand the stage that we are in. If market is fearful, study the long term trend of the chart (usually the daily chart) using moving average and determine whether is this a temporary drop in share price. However, when market has been rising too much, make use of the moving average to identify potential reversal in uptrend as stock prices might start to plunge. There is a saying for traders, when the public are fearful, we long the stocks (buy the stock and hope price will rise). When the public is greedy, it is time to sell your stock and get out. If you notice, i use the word public and not 'big fish'. The reason is because 'big fish' are the trend starter whereas the public will always follow after them. The irony is that the public are usually the 'lamb' waiting to be slaughter as they enter the stock market last...

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