The only reason a market exists is to facilitate a trade between two partys , thats its main
purpose. In order to facilitate a transaction between two partys both need to agree on the same price ,
therefore price is “advertizing” itself all the time in order to fulfill its main purpose. The process of price “advertizing” itself
in order to facilitate a trade where two partys agree on the same price.
Price fluctuates in order to find the most attractive price on any given TF till sellers and buyers agree to make business on a certain
for them “fair” price, ie. the market found “value” and is in balance , that balance only goes on for so long till either supply or demand
exceeds or absorbed the one or the other, this creates imbalance and price is again on the lookout to balance itself and the process
of finding “value” starts again.
There must be a buyer and there must be a seller and they must agree on a price before a transaction takes place.
Otherwise, there is no transaction and no guide to value, this happens in the process of an auction market.
An auction market's structure is continuously evolving, being revalued; future price levels are not predictable.
An auction market is in one of two conditions: balancing or trending.Traders seek value; value is price over time;
price is arrived at by negotiation between buyers and sellers.
Change in demand drives change in price.
One can expect to find support where the most substantial buying has occurred in the past and resistance where
the most substantial selling has occurred.
This, balance > imbalance cycle goes on forever and ever.
What Drives Price ?
Short and Simple answer The Law Of Supply and Demand
The Law of Supply and Demand operates in all markets in every part of the world.When demand exceeds supply ,
price rise, and when supply is greater than demand, prices declines.
Starting from the simple ground that the logical action of an Instrument was to decline when offerings exceeded
the number of shares/contracts bid for, and to advance when the amount bid for was greater than the amount offered.
Anyone who ever watched at a chart could see and judge with their own eyes the momentary state of the buyers and sellers like,
their eagerness or anxiety to buy and sell at certain levels , as well as to judge the force behind the buying or selling power on any given level.
wheter it was to buy without advancing the market or to force up, or to mark it down, or to discourage buying or selling by others ,
each transaction carried with it a certain evidence, altough it is not always possible to interpret that evidence.
That evidence so to speak , was in fact only the trigger to start an orderflow which results in a certain form of price action.
The reason behind any trade ever taken is therefore the reason how orders enter and therefore are executed in the markets..
which results in a certain price action based on the response of the market on the influx of the orders.
Traders who take action do this because of a certain “cause” which leads us to The Law of Cause and Effect which also
holds true in the markets. This cause can be anything for example
one thinks an instrument is over or under valued so he takes action based on that or if one is in a open position he might exit
the position because the profit target is hit or his stop loss is hit etc.. so it basically depends on fullfilled and/or unfulfilled expectations
in order to take action in one or the other way.
Which leads us to another ingredient in the markets which is the markets/traders psychology.
In order to see an influx of orders into the markets ie. the orderflow the market psychology is cruel to how and when orders
enter the markets , but there is a difference if one is all ready in a position and needs to get out or sits on the sidelines and
waits for a favorable situation in order to get in etc.
basically we can say ,
- there is a trigger which leads one to enter or exit the market for [insert anything here] (psychology) (cause)
- if one enters or exits the markets he sends orders into the market using Stop/Market/Limit (orderflow) (effect) >CAUSE<
- based on demand and supply entering the market, price fluctuates (the law of supply and demand) (cause)
- there is a reaction or market response to the incoming executed orders which results in price action (effect) >EFFECT<
>Market Psychology > OrderFlow > Supply/Demand > Price Action
An illustrative example:
let’s say the market has been moving down all day. It’s approaching a “support” level. Everyone knows it’s a support level.
The average retail, inexperienced trader is thinking “buy support” or “sell after the break”.
So we have some people going long at this level cause it is support, it looks , feels, good to buy here or what ever PA or Pattern ,
Formation , indicator signal service etc.. says so. then all of a sudden price breaks support heavily , because we have some
people selling the break of support , which probably triggered some stop loss orders as aneffect of the earlier buyers at the level
sending price down .
So we have fresh new money (bears) and scared money (bulls) all running in the same direction at the same time! (liquidity providers)
This creates a cascade of orders coming into the market in the form of stop and market orders (orderflow) which send price down.
but only so long till there is a change in the favour of demand , like if the selling pressure cools down as most sellers allready
left the building ie. got absorbed by strong hands or simply more money (limit orders) and we have now demand in charge, (the law of demand and supply)
price will likely trade back above support (false break/fakeout) (Price Action) which allready get the bears nervous and if they
start to puke , they will propell price even further up , as their scared buying also adds to demand.. etc..
so thats basically all there is to the markets…
Pro traders trade at the extremes and let others (herd) drive price in either direction…