Professional traders are exceptional at deciding which stocks are worth buying and which ones are worth selling. Retail traders approach the markets in a haphazard way, but professional traders do not do this. They plan their approach with military precision, a co-ordinated campaign to acquire stock. Buying a stock is known as accumulation and selling the stock is known as distribution.
What is Accumulation & how it performed by Professional Traders?
To accumulate is to purchase as much stock as possible, without raising the price against their own buying. Professional traders will accumalate until there are a few, or no more shares at the price you have been purchasing at. Accumulation normally occurs at after a bear move has taken place.
The first sign of accumulation is when you have ultra-high volume on a wide spread down bar. The lower prices are now attractive to professional traders. Not all the issued stock can be accumulated straight away, as most of the stock is tied up. It’s the floating supply that professional traders are after.
Once most of the stock has been removed from the weak holders, the retail investor, there will be little to no stock left to sell in the mark-up in price. This will normally cause the price of the stock to drop. The resistance to higher prices have been removed. Now if accumulation has taken place in lots of other stocks by many other professional traders, at a similar time, then we have a makings of a bull market.
Once a bullish move starts, it will continue without resistance as supply has been removed from the market.
What is Distribution?
Distribution occurs at the top of a market as many traders will look to sell their stock holdings which they bought at lower prices. They will look to place large sell orders at a specified price range. Market makers have to absorb the selling to create the market. Retail investors are enticed to buy around major news announcements which forces the price to rise.
The market makers selling have will be accomplished without puting the price down against their own, or other traders selling. The process of distribution will normally take some time to complete.
In the early stages of distribution, if the selling pressure is so great, prices will be forced down, and when the selling stops, prices will be supported. This will give the market makers the chance to sell more stock on the next wave up. Once the processional traders have sold most of their stock, the bear market begins because the market will fall without professional support.