What Moves Price
Price Moves result from Supply/Demand Imbalance
Changes in Supply and demand occur as sentiment changes with market participants
Price therefore depends on the Bullish or bearish sentiment of the market participants
The Net sum of all the individual traders decisions forms the Net Order Flow
When net order flow is bullish price will rise and will continue to rise until we run out of buyers or until Sellers absorb the Buyers demand
When Net order flow is bearish price will fall and will continue to fall until we run out of sellers or until the buyers absorb the sellers supply.
Traders Making trading Decisions – Which leads to a Net Order Flow – which leads to the effect – Price Movement.
Markets are traders making trading decisions. We need to see when they are in pain and when they are feeling good. Learn to see all price movement from the perspective of other traders and how that price movement influences their trading decisions.
The Reality of Trading and How we profit and Why Lance’s strategy Works
Profit requires Buying lower and selling higher or selling higher and buying lower. More importantly profit requires this to happen AFTER you enter your position.
So buy at areas where you know others will buy after you and sell at areas where you know others will Sell after you. These are areas of trader decisions.
Identify areas where others will be making Buying decisions and you can profit. Identify areas where others will be making selling decisions and you can profit. We analyse areas of trader decisions.
Price Movement is a result of crowd sentiment which is based on flawed analysis and irrational decisions. Price movement is therefore based on Psychology and is emotional not mathematical and cannot be predicted by such.
The Real trading game
Aim to determine where large numbers of traders are going to be wrong in their decision making. The theory being that at the point where they know they are wrong will contain an increase in their order flow as their stops are executed. I aim to profit from this order flow by entering exactly at this point, or earlier.
To put it simply I try to find the Losers on the chart. I look for areas where traders are trapped and in Pain. its a mercenary game.
An effective trading strategy is based upon the forces of Supply and Demand acting in the market and assessment of how that will affect other traders decision making.
On Bar A price broke below Support at B. Breakout traders will likely enter on the move down. However it broke into an area of Support from the Vol node at C and effective analysis identifies that this also occurs in a longer term uptrend. The Lower Prices into Support are Likely to bring bullish Order flow opposing the breakout. We assess that should this breakout fail those breakout traders will be forced to exit creating a bullish Surge of order flow.
Our Entry triggers at A with a stop below and an initial target at E where we expect to encounter resistance with longs taking initial profit and therefore slow or halt the rate of climb. Next Target would be F.
When price is moving higher and stops it is because of one of three things
Traders were not interested in buying at higher prices. Demand had dried up and there was no longer any urgency to get long in the market.
The Higher prices attracted sellers. longs took profits on their positions and new shorts entered the market. This increase in Supply absorbed the remaining demand.
The result of these two causes is that Bullish pressure which caused the move is no longer able to overcome bearish pressure. price will fall creating a new swing high at resistance. The converse is true for a move lower forming support.
But what causes old resistance to be respected? Its a function of how we are wired as human beings and asses value. Those Longs who didn’t take profit at the high will wish they did and place stops to get out should price get back there. new Shorts will also see this as an area of previous resistance and place short Limits. Longs who got in on the Pullback will see the High as an area of previous resistance and will take profit here. this creates an influx of sell orders that may well overcome demand.
Stops
Where are Stops placed?
Prior to the breakdown at point A. Longs would have been confident having had three tests of the Low. Those smart longs would have placed a sell stop below price to exit should the low fail. Breakout traders will also go short on a break of the low. So should price push through this area there will be an influx of new Supply based on these causes alone. Now after such a move down, those longs who are still holding will be in pain and will resolve to get out should price move back and place Sell Limit orders. Smart Longs who got in at the bottom after the Short profit taking will see the break point as resistance and an area to take profits. Those who got short in this area and covered at the bottom will see this as a second opportunity to get in and therefore will also sell on a move back. Who would be Buying here? Well those shorts who didn’t take profit at the low and any would be breakout traders. The odds favour more supply than Demand.
Decisions to buy or sell are made through referencing current price action against previous areas which caused significant emotional response in particular those which led to regret around missed opportunity or those areas that trapped traders in losing positions.
