Chapter 5-1 Types of Buyers and Sellers

There are two main categories in which you can clump most buyers and sellers into.  These two types of buyers and sellers are known as aggressive and passive.  Each type when identified correctly can greatly aide in the forecasting of future stock moves.  If successfully identified, you can more accurately predict the distance and speed of an impending stock move.  Recognizing and understanding the tendencies of an aggressive buyer and seller versus that of a passive one can ultimately save you from entering into poor trades and prevent you from exiting prematurely from profitable ones.  Here are some of the key tendencies of aggressive and passive buyers and sellers.

Aggressive Buyers

  • Step up significant size (typically 5,000 to 10,000 shares at a time) trying to purchase stock.
  • Buyer reloads when sold into or after very slight pull backs.
  • Buying pressure does not necessarily coincide with chart.  Stock doesn’t pull back to test moving averages or support levels.
  • Multiple buyers of all different sizes continuously improving bids on the limit book.
  • After a significant move which draws the stock far away from its moving average, use caution as severe pull backs can occur.
  • Typically occurs with stocks that are news driven and with stocks that have large amounts of short interest that are forced to frantically cover, also known as short squeezes.

Passive Buyers

  • Large stagnant buy limit orders waiting to get filled at prices that correlate with averages or levels on the stock chart.  These large stagnant buy orders are not as reliable in faster moving markets.
  • Buyer tends to cause the stock to trade in a channel.  As a result, there are often opportunities to scalp the range.
  • Use caution as it is possible the buyer is there simply to hold up the stock for a moment in order to actually sell or short more.
  • Buyer can also hug a moving average.  Purchasing large amounts of stock close to the average, and as the stock begins to rise and separate from the average the buyer ceases.  Thus, dropping the stock price back to the average before starting the cycle all over again.
  • Typically crowd buyers act in this manner.  Strategically entering into or holding up a stock.

Aggressive Sellers

  • Exactly like Aggressive Buyers but inverted.  Just note that Aggressive Sellers are more likely to cause dramatic gaps, because stocks typically fall faster than they rise.
  • Steps down significant size (typically 5,000 to 10,000 shares at a time) trying to short or cover stock.
  • Seller reloads when bought into or after slight retracements.
  • Selling pressure does not necessarily coincide with chart.  Stock doesn’t pull back to test moving averages or resistance levels.
  • Multiple sellers of all different sizes continuously lowering offers on the limit book.
  • After a significant move which draws the stock far away from its moving average, use caution as severe retracements can occur.
  • Typically occurs with stocks that are news driven.

Passive Sellers

  • Exactly like Passive Buyers but inverted.
  • Large stagnant sell limit orders waiting to get filled at prices that correlate with averages or levels on the stock chart.  These large stagnant sell orders are not as reliable in faster moving markets.
  • Seller tends to cause the stock to trade in a channel.  As a result, there are often opportunities to scalp the range.
  • Use caution as it is possible the seller is there simply to hold down the stock for a moment in order to purchase more stock.
  • Seller can also hug a moving average.  Shorting or selling large amounts of stock close to the average, and as the stock begins to drop and separate from the average the seller ceases.  Thus, raising the stock price back to the average before starting the cycle all over again.
  • Typically crowd sellers act in this manner.  Strategically selling/shorting or keeping a stock down.

It is very important to note that key buyers and sellers also lie on ECN’s along with the limit book.  These aggressive and passive buyers or sellers on ECN’s also have much of the same tendencies.  Thus, you must spend time looking at the Level 2 as well.

 

Aggressive Seller

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Passive Buyer

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Aggressive Seller

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Passive Seller

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Questions