It is nothing new in the stock markets but new tactics have evolved with technology enabling the use of algorithms. First of all let us try to understand how manipulation works and it brings profits within a short term for those who set-up the game. Remember it is traders who are hurt the most and the long term investors the least in these plays.
Every trader has an expectation in the direction of his stock will take in a given period of time. It could be bullish, bearish or sideways. They have a plan too. Enter at some price, book profit at some price or stop loss at a point when their trade goes wrong. And there are a given number of traders in a particular stock. So in one particular stock, when there are more bullish players, let us say 80% of the bets are on the one side and if it is possible to manipulate the stock (for example, by buying puts, selling calls and heavy selling in cash market simultaneously), all those traders playing bulls will be forced to get out of the market as their stop losses hit. Here the manipulator used tens of crores on just one stock to take it below technical support level of the traders (as identified by the algorithms). Once he gets out of that counter, sanity check comes back and the stock price comes to normal levels. This is just one simple example but the algorithms can be set for multiple strategies to make money for those who employ them.
How do you know which stock is manipulated?
Look for very high OI on the option chain and Futures. As it reaches 100% of the limit, stock goes into F&O ban.In the intra-day, you will see high price variations with low volume. And the reversal happens pretty quickly. This process repeats multiple times as a bait to attract and then put the short term traders into a trap.Look for divergence from non-manipulative counters. Indices (like Nifty) and bigger stocks with a wide investor base (like Larsen, HDFC Bank) are not easy to manipulate as they need huge sums of money to manipulate and even if attempted there would be counter forces coming into play soon to restore the normalcy.
How do I survive now?
For human traders, it is not an easy thing to compete with algorithms. Psychological pressures will be very high to handle as the technical indicators seem to go wrong (as they are manipulated). So it best to avoid the counters once you identify the manipulations in them and stick to your trades in indices or with large cap stocks. But if you are an experienced trader and have the ability to look at markets dispassionately, you would be able to understand what these algorithms are at since they are also devised by human beings. The key here is to be not emotional, wait patiently by not getting into devised traps and when the market seems to be not expecting a move in a particular counter, then you have a chance to go for a swing trade as the algorithms go out of action and you have a chance to profit from it. This opportunity does not come every day so wait until overselling or buying reaches an irrational stage and after that nothing seems to be happening and it leads to volatility drops as the one sided trades go awry. When the interest seems to be dead, the reversal happens. So why waste time waiting so long for such trades in mid-cap and small-cap stocks? Better focus on large cap stocks and indices. If you still want to trade in manipulated counters, keep your exposure very limited.
Note: I do not mean all of algorithm trading is manipulative but I am of the opinion that it makes the manipulation easier.Original link
Every trader has an expectation in the direction of his stock will take in a given period of time. It could be bullish, bearish or sideways. They have a plan too. Enter at some price, book profit at some price or stop loss at a point when their trade goes wrong. And there are a given number of traders in a particular stock. So in one particular stock, when there are more bullish players, let us say 80% of the bets are on the one side and if it is possible to manipulate the stock (for example, by buying puts, selling calls and heavy selling in cash market simultaneously), all those traders playing bulls will be forced to get out of the market as their stop losses hit. Here the manipulator used tens of crores on just one stock to take it below technical support level of the traders (as identified by the algorithms). Once he gets out of that counter, sanity check comes back and the stock price comes to normal levels. This is just one simple example but the algorithms can be set for multiple strategies to make money for those who employ them.
How do you know which stock is manipulated?
Look for very high OI on the option chain and Futures. As it reaches 100% of the limit, stock goes into F&O ban.In the intra-day, you will see high price variations with low volume. And the reversal happens pretty quickly. This process repeats multiple times as a bait to attract and then put the short term traders into a trap.Look for divergence from non-manipulative counters. Indices (like Nifty) and bigger stocks with a wide investor base (like Larsen, HDFC Bank) are not easy to manipulate as they need huge sums of money to manipulate and even if attempted there would be counter forces coming into play soon to restore the normalcy.
How do I survive now?
For human traders, it is not an easy thing to compete with algorithms. Psychological pressures will be very high to handle as the technical indicators seem to go wrong (as they are manipulated). So it best to avoid the counters once you identify the manipulations in them and stick to your trades in indices or with large cap stocks. But if you are an experienced trader and have the ability to look at markets dispassionately, you would be able to understand what these algorithms are at since they are also devised by human beings. The key here is to be not emotional, wait patiently by not getting into devised traps and when the market seems to be not expecting a move in a particular counter, then you have a chance to go for a swing trade as the algorithms go out of action and you have a chance to profit from it. This opportunity does not come every day so wait until overselling or buying reaches an irrational stage and after that nothing seems to be happening and it leads to volatility drops as the one sided trades go awry. When the interest seems to be dead, the reversal happens. So why waste time waiting so long for such trades in mid-cap and small-cap stocks? Better focus on large cap stocks and indices. If you still want to trade in manipulated counters, keep your exposure very limited.
Note: I do not mean all of algorithm trading is manipulative but I am of the opinion that it makes the manipulation easier.Original link
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