I can say i've spent a few most exciting days thinking about this topic and i'm sure i will spend at least next month.
[ First of all i must say that i don't consider myself a trader but rather a pupil. I came to the phase where i can hold my head above the water (sometimes better sometimes not) but can't call myself a trader in any sense. Just to make that clear. ]
I found this topic very related to the work of Richard Wyckoff. His point is the same: thinking about the market and what actually drives it.
In order to think about it, we need to think about market micro structure. In other words, how exchange actually occurs and what is it that moves the price. In particular, what human motives are behind different market moves. And that's something i never thought in a way this topic pointed me to.
Now when i think about it i come to the conclusions that there are:
greedy,
fearful and
rational orders (meaning, people with that characteristics place them).
Personally, i find:
* greedy and
fearful pretty predictable (or should i say - predictable enough).
*
rational ones very hardly predictable (practically - mission impossible but i'd say mission useless)
Rational ones take advantage of greedy and fearful ones and that's pretty much all we have to know. also, from what i know so far, that is the only thing we can rely on in fx spot market. that is
the level 2 data, so to speak
Next thing should be finding situations that we can rationally judge as those when greedy and fearful positions are being exploited by measurable. that is measurable. or at least -
judgeable. And that brings us to stohastics: it's completely different thing to make a judgement in stohastic world or to make on in discrete world. Meaning, whenever there really are greedy&fearful orders at places we thought they will be there - we're probably in a winner trade (it's execution then). When they are not there - we're probably in a loser. But the fact that we had losers doesn't mean that greedy&fearful orders aren't still something we can rely on.
And, since there hasn't been much said about execution itself....the best tool i'm aware of so far is Wyckoffs analysis. There is plenty of material available on the Internet about it. There certainly are situations where we can be sure (in a stohastic sense) that we're looking at rational orders exploit greedy&fearful ones. And all we need for that is raw chart.
To make sure i'm not misinterpreted, this is thinking-out-loud....far from any statement or conclusions. Actually, i've just setup a demo account so i can start testing my thoughts.
Of course, if anyone wants to give his thoughs then by all means, please - i'll be very thankful.
PS.
More i think about things more i'm convinced that trading ranges is the key, not trading trends as almost every 'school' teaches. And then, at the end of the day, of course it's gonna turn out that every range is the accumulation, distribution, reaccumulation or redistribution within the trend. But that's something completely different than fibbing the pullback.
PS2.
The next thing i'm almost completely convinced (from this thread and Wyckoffs work) is that capitulation moves price - not victory.