Successful stock market trading requires experience, discipline and technical knowledge. Traders must learn how stock prices behave and how they are influenced by key market participants. Knowledge and insight into the behavior of the key market players will greatly enhance the traders' ability to anticipate and recognize their operations, forecast the direction of prices and position themselves accordingly. While no trader is successful 100% of the time, the successful trader should strive to be right most of the time. Being right often means making money.

Types of Institutional Market Participants
Today's influential market participants are mainly institutional investors. These include asset management and equity market-making firms. Most institutional players manage, control and/or trade large amounts of investment capital daily. Their impact on share prices can be significant.

A large percentage of institutional investors are asset managers involved in managing long-only portfolios of equity securities held in pension funds, retirement plans, mutual funds, charitable foundations, endowments, etc. Other asset managers, like hedge fund managers, deploy alternative investment strategies utilizing the equity and other markets to accomplish their goals. Hedge funds control vast amounts of investment capital, and assets under their management have a serious impact on the direction of equity markets.

Equity market makers also affect share prices. These firms stand ready to buy and sell shares from retail and institutional traders looking to open or unwind positions to pursue their goals. They provide liquidity and help maintain efficient and orderly markets - especially in times of financial market turmoil.

How Institutions Influence Stock Prices
Asset managers influence prices when they carry out their investment decisions. Prudent managers accumulate and liquidate positions systematically through well-conceived campaigns.

A manager's goal is to acquire shares methodically, without driving prices up too rapidly. The trading desk charged with executing the manager's instructions will acquire a portion of the total position and may even offer some back for sale, attempting to hold prices within an acceptable range. This back-and-forth price action appears as a horizontal trading range, or "congestion area," on a stock chart. The manager's ultimate goal is to acquire shares at an acceptable average price. Once the entire position is accumulated, the manager, through his traders, wraps up the operation. Eventually, prices begin to rise as the available supply is absorbed and the public gets involved. The balance between supply and demand has shifted from one of equilibrium to one where demand for shares exceeds available supply.

As the price rises and approaches the manager's price target, the distribution process commences. Institutional investors begin distributing, or systematically selling, their shares to other bullish investors. Once again, the institutional investor will liquidate a portion and possibly bid up or support the price, protecting the operation's overall return. The distribution process appears as a congestion area on a price chart.

Once the entire process of systematically buying and selling concludes in one stock or group, asset managers repeat the process in other stock market areas. This rotation across the various industry groups, macroeconomic sectors and market capitalizations affects prices significantly as investment capital flows in and out.

As new opportunities arise, skilled asset managers take positions in leading stocks within the groups that are poised to move. The leaders are usually the widely-held large cap names that many investors are familiar with. When the institutional investor's campaign runs its course, the manager will liquidate the leaders and rotate into second- and third-tier names within the same group, knowing that they will eventually attract a following within the retail investment community. Once the crowd begins acquiring shares, the institutional investor will once again begin distributing holdings to the crowd. Institutional investors also rotate in and out of different groups and sectors as opportunities arise throughout the course of the market cycle.

Market-making firms affect prices in several ways. By standing ready to buy and sell stock from the retail and institutional trading community, market makers take the other side of the trade, exposing themselves to fluctuating prices and the market risk that goes with it. They are partially compensated by being able to buy at the bid and sell at the offer. To fully mitigate their exposure, market makers will accumulate or liquidate inventory in anticipation of the market's consensus outlook. Often, this will entail buying or selling in contrast to most public participants in a particular stock or group.

In other situations, market makers will buy in one market and sell the same or a similar security in another (arbitrage) to flatten their positions, reduce their exposure and possibly earn a riskless profit once they unwind their position. The overall impact of these activities is beneficial to the majority of market participants, as markets operate more efficiently.

What the Individual Trader Can Do
Focus on supply and demand
Wall Street may well be the greatest marketing mechanism in the history of civilization. Traders are constantly bombarded by waves of fundamentals, statistics, economic reports, news stories, rumors and more. For example, it is not uncommon to see a key earnings release exceed analysts' expectations, but see the underlying share prices go down. It is also not uncommon to see a key economic report, such as non-farm payrolls, fail to meet expectations, only to see the stock market rally.

Traders would be well-served to consider only supply and demand. Fundamentals, statistics, etc. only matter to the extent that they induce the big-money investors into taking a particular course of action in the market. Intentions of the majority of investors involved in a particular stock are revealed by the direction of prices. The overall outlook is illustrated on the charts, which are merely graphical representations of their actions. Many argue that there is no need to get bogged down with statistics if you can graphically interpret their actions.

Use volume to identify accumulation and distribution
Traders must learn to recognize areas of accumulation and distribution. These horizontal trading ranges provide ideal opportunities to take positions once a stock breaks out and the future trend begins to unfold. Determining whether a stock is being accumulated or distributed is one of the greatest challenges facing individual traders. A volume analysis provides valuable insight.

When a stock levels off after a downtrend, a burst of volume usually coincides with the actual bottom, often during or just before the actual low of the move. The surge can take place over one or several trading sessions. No bottom is exactly the same. Congestion areas not accompanied by volume increases are suspect, and traders should be extremely cautious. One important clue in recognizing a significant bottom is when a huge spike in trading volume occurs on a day when the stock opens lower, sells off during the day, rallies during the session and then closes at or near the intraday high. Chances are good that a bullish reversal that will partially or entirely correct the previous move is in the offing.

When stock prices begin rising, volume tends to be brisk on positive days and contracts as prices pull back. No stock rises in linear fashion. All stocks undergo periods of profit-taking. If favorable conditions within your stock, the related industry and the broader stock market persist, these inevitable pauses offer experienced individual traders the opportunity to buy more shares, or pyramid their position.

The key is to watch for exhaustion, when the shares churn on heavy volume but experience little or no price movement. As volume spikes and the shares churn and close at or near the intraday low, traders must be on the lookout for further downward pressure on the share price. Short-term traders would be well served to unload their holdings until the selling subsides and bullish conditions signal another attractive entry point. It makes no sense to hold shares unless they are poised to move. Let someone else hold them.

Limit losses with stop orders
Traders should learn to place stop orders properly. The use of stop orders is a source of fierce debate among many traders. If used properly, stops force traders to close losing positions before losses get out of hand. Sell stop orders should be placed just below well-defined areas of accumulation, or key support levels. Buy stop orders must be placed directly above the horizontal trade range where shares met resistance and were distributed to less-savvy traders late in the game.

Traders must learn to exit losing positions early. Mastering this skill requires discipline and a short memory. Until a trader is supremely confident in his mental discipline, well-placed stop orders provide the trading discipline necessary to exit losing positions before losses become catastrophic. Setting arbitrary exit points, such as a 5% or 10% loss, are another way to control losses. Losing trades are an inevitable part of stock market trading. Keeping them under control will allow you to get out and trade another day.

Unfortunately, most individual traders lose money and eventually quit. Others lose but never quit. As an individual trader, you are not necessarily doomed to failure. You are doomed if you do not learn the rules of the road. Part of your skill set as a trader must include knowledge of the key players, their behavior patterns and the clues that reveal those patterns. This knowledge will help you anticipate the direction of prices and increase your odds of trading success.