What Is Money Flow In & Out of a Stock? - Candlestick Patterns Explained by TechniTrader®

It Is the Balance of the Lot Sizes

Professionals often speak of money flowing in or out of a stock, but how can that be if there is an equal number of buyers and sellers? It is because “Money Flow” is the balance of the lot sizes.

Below is the TechniTrader graph of the Stock Market Participant Groups’ buying levels.

At most times, there are four positions in any one stock, which are Buy, Buy to Cover, Sell, and Sell Short. Each investor and trader in the stock has their own separate agenda. Each may come from a different Stock Market Participant Group, and there are now 9 of these groups in the Stock Market, including giant Buy Side Institutions who invest Mutual and Pension Funds, Investment Groups and Small Funds, Corporations, Wealthy Individual Investors, High Frequency Traders (HFTs), Institutional Traders, Individual Small-Lot Investors, Individual Retail Traders, and Odd-Lot Investors.

Buyers are anticipating that the stock is going to move up. Their stock order types span the spectrum; for example, Market Orders, Limit Orders, and Buy Stop Limit Orders. Buy to Cover Orders are placed by traders who are panicking because they were Selling Short in the stock and are afraid that it is going to move up more than it recently has, or they sold short and are now taking profits. Most Buy to Cover Orders are usually Market Orders or Limit Orders.

Those who are selling the stock are anticipating that the stock is going to move down. In an uptrending stock, this is profit taking near the top of the run. It can also be similar in a downtrending stock because the seller is afraid that the stock is going to move down more, and they have been holding through what they thought was a short retracement.

Most of these stock order types will be “Sell at Market” (SAM). Sell Short Traders are anticipating that the stock is going to move down, and they can place a variety of orders just like the buyers. Both Buyers and Sell Shorters are entering the trade, while Buy to Cover Traders and Sellers are exiting the trade. It is the mix of these kinds of buying and selling coupled with the kind of investor or trader and the size of their share lots that causes money to flow in or out of a stock.

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Trade Wisely,

Martha Stokes CMT

Chartered Market Technician
Instructor & Developer of TechniTrader Stock & Option Courses