Markets aren't abstract entities—they're networks of interconnected flows, liquidity pools, and price-discovery mechanisms. Understanding these mechanics reveals why prices move and where opportunities emerge.
Capital doesn't just sit still. It rotates between asset classes, geographies, and risk levels based on changing conditions, expectations, and constraints. Tracking these flows helps anticipate where prices might head next.
Smart money quietly builds positions while sentiment remains subdued
Prices rise as broader participation validates the initial thesis
Early accumulators begin offloading to late arrivals
Prices decline as sellers overwhelm remaining buyers
Volume patterns often reveal flow dynamics before price does. Increasing volume on up days suggests accumulation; increasing volume on down days suggests distribution. But context matters—the same volume pattern means different things at different market phases.
Fund flow data provides another lens. When money floods into a particular sector or geography, it creates buying pressure that can persist for weeks. Conversely, redemption waves force selling regardless of fundamentals, creating temporary dislocations.
When capital exits one area, it typically moves somewhere else rather than vanishing. Understanding these displacement patterns helps identify where opportunities might emerge as a result of selling pressure elsewhere.
Consider what happens during emerging market stress. Capital flees perceived risk, flowing into developed market government bonds and defensive equity sectors. This creates simultaneous overvaluation in "safe" assets and undervaluation in affected markets—a setup that often reverses over subsequent quarters.
South African investors face this dynamic regularly. Global risk-off episodes push the rand weaker and local assets lower, while rand hedges and offshore allocations appreciate. The reverse happens during risk-on phases. Positioning for both scenarios—rather than betting on one—tends to produce more consistent results.
Liquidity—the ability to buy or sell without moving the price significantly—varies enormously across markets, assets, and time periods. Understanding this scaffolding helps avoid situations where you can enter positions easily but struggle to exit.
Large-cap stocks in major markets offer deep liquidity most of the time. But even these can become illiquid during stress events, as 2020's volatility demonstrated. Mid and small-cap stocks, emerging market securities, and alternative investments operate with thinner liquidity buffers under normal conditions and can become nearly untradeable during disruptions.
For South African investors, the JSE's relatively concentrated market structure adds another dimension. A few large stocks dominate trading volumes, while the tail of smaller companies trades sporadically. Position sizing should account for exit liquidity, not just entry availability.
The gap between what buyers offer and sellers want reveals immediate liquidity conditions. Widening spreads signal stress; tightening spreads suggest improving conditions.
How much can you trade at current prices before moving them? Shallow depth means larger orders create impact costs that erode returns.
Some positions take days or weeks to build or unwind without affecting prices. Factor this into your strategy's time horizon and risk management.
Prices emerge from the interaction of buyers and sellers with different information, time horizons, and constraints. Understanding these structures helps interpret why prices reach particular levels.
At any moment, the order book contains visible bids and offers at various price levels. Large orders at specific prices create "support" or "resistance"—not because those levels have mystical significance, but because substantial capital has committed there.
When price approaches a level with concentrated orders, it either absorbs that liquidity (breaking through) or bounces off (orders repel the move). Tracking where large orders accumulate helps anticipate these reactions.
Not everyone knows the same things or interprets information identically. Some participants have genuine informational edges (industry expertise, better research, faster data feeds). Others trade on noise, mistaking randomness for signal.
Price discovery happens as informed traders gradually reveal their views through order flow. The market aggregates these dispersed insights into prices that reflect collective judgment—imperfectly, but persistently.
Large institutions—pension funds, sovereign wealth funds, insurance companies—operate under constraints that shape their trading patterns. Quarterly rebalancing, benchmark tracking, and regulatory requirements create predictable flows.
These flows can temporarily push prices away from fundamental value. Month-end and quarter-end often see price distortions as institutions adjust positions. Index rebalancing events create known demand shifts that sophisticated traders anticipate.
Algorithms now execute a majority of trades in developed markets. Some provide liquidity through market-making; others pursue statistical arbitrage or momentum strategies. Their interaction creates patterns that didn't exist in human-dominated markets.
Flash crashes and sudden volatility spikes often stem from algorithmic feedback loops. Understanding that these exist—and that they typically reverse—helps maintain composure during seemingly irrational price moves.
Understanding how capital moves is one thing; building frameworks to act on that understanding is another. Explore our analytical frameworks section for practical tools.