How to Find Stocks with Good Institutional Demand

When I was learning swing and positional trading, I came to the realization that the only way I'm going to make money buying stocks is when other people buy after I buy a particular stock.

That is the most fundamental way to make money in the stock market.

I also realized that no amount of fundamental analysis or technical analysis is going to tell me exactly when people are going to start buying a stock in huge quantities.

This was a real challenge I faced.

To overcome this challenge, I figured out that I at least need to get involved only in those stocks where there is evidence of Institutional demand.

Price and volume are two independent variables of a stock in the market.

Price and volume provide evidence of institutional demand in a stock.

That's when I came across another challenge.

How do I use price and volume action information to figure out which stocks have institutional demand?

I realized that William O'Neill through his book, How to Make Money in Stocks, has already solved that problem by creating something called as the buyer demand rating or the accumulation distribution rating.

He divides the entire set of stocks in the stock market into five different buckets, A, B, C, D, and E.

Marketsmith does not show exactly what is the calculation they are using to categorize stocks in these five buckets based on their institutional demand.

I am pretty sure that information is coming from price and volume only.

Marketsmith does tell us that the leading stocks of the past multiple decades had an Accumulation Distribution rating of either A or B before they began their full-scale price advance.

This much information was enough for me to get through this challenge.

Now I have a fixed filter in my Marketsmith account.

I only focus on those stocks which have an Accumulation Distribution rating of either A or B.

A and B represent good institutional demand.

C represents fair amount of institutional demand.

D and E do not represent institutional demand, or falling institutional demand.

Is it possible that a stock with an institutional demand rating of C, D, or E can go up?

Absolutely, it is possible.

However, when I use the buyer demand rating of A or B, I am putting the odds of success in my favor.

Historically, those are the ratings that were already present in leading stocks of the past multiple decades.

As a swing and positional trader, my goal is to put the odds of success in my favor, and this rating keeps me on the right side of market price and volume action.

Regards,

Rohit Musale, CFA

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