Does price reflects everything and if every area is equally important for market.

Hi traders! Everbody knows one of basic principles of technical analysis – price reflects everything. Let’s think about it for a while. Many traders are caught in the price action and ask – «what in the world does it (price) reflect?».

If fact, market needs some time to reflect demand and supply in the price action.

This is a weekly chart and you see that price action here really reflects activity of all major players who are interested in this market. This is big timeframe and takes 1 week to complete this figure. Strong side of the market (smart money, market movers) is automatically visible after bar (candlestick) is closed. If buyers were dominating the market, we see rising bar (candlestick), if sellers were dominating – we see declining bar (candlestick) e t.c. In this particular situation, we see that buyers were in control.

We immediately register much more ambiguity, volatility and uncertainty. Price goes back and forth. No one would say with confidence who is in control here.

So, we come to conclusion that, yes, price reflects everything but it needs some time to do that. On small timeframes price becomes advertising mechanism that fluctuates from high to low prices to attract buyers and sellers for whatever reasons. What does it mean that price is an “advertising mechanism»? It simply means that goal of the marketplace – to bring together buyers and sellers, to facilitate trading.

Market works as an auctioneer. Imagine some auctioneer that tries to sell something to the public. What will he do? He will claim starting price and if no one is interested, he will claim lower price until any buyer is interested. That’s how market operates, nothing new about this.

If you want to purchase something, will you blindly buy something just for the reason that it is advertised? No, you will not do that. You want to know fair price, in other words, you want to know not only price but also value. You don’t want to buy something overpriced. That’s a main difficulty of technical analysis. It’s been said that price reflects everything, but we see it only in retrospective. In real time we see semi-stochastic process of price action going back and forth.

Find where the value is To avoid being trapped by the price, traders needs to know where the value is. In a nutshell, value is a area of acceptance, area where all timeframes are comfortably trading with each other. To find value, you should pay some attention to parameter of time. The more time price spends near certain price level, the more accepted this level is. For example, on a sample below we see that market was holding certain high prices within some period of time, and when price tries to get away from this level, market rejects is:

However, time also is a double-edged sword. Too much time time spent near price level means that market is preparing for big move (thus, is not going to stay near this level):

Sometimes it’s hard to identify value. It’s not easy process and sometimes market will rotate waiting for more information.

Market profile

The most convenient tool that allows us to see how value migrates, is market profile. It is a tool that organizes data using distribution as a core principle. It shows – how much time price was touching every level within a trading day and builds «value area». Value area is an area that combines 70% of data within one blue rectangle. This is an area of acceptance. When price emerges from this area, it will most likely revisit this area again. But there are times when market builds new value higher of lower without revisiting former value areas. We call it a trend

price action basic and swing trading

«Thing that hasn’t happened is sometimes more important in the market than thing that has happened»

I want to start this thread with this strange sentence. We will talk about trading logic. How do you make decisions? Do you look for signs of buyer and seller and act accordingly?

Price action basics.

Think about simple thing –price action itself (trend, movement) will not allow you to benefit from that. Some movements are continued, some are reversed.

It depends on current market conditions, but probability of success will be close to 50/50 if you simply follow price action (substract spreads and rapid volatility spikes and you will get perfect strategy for failure).

So, what works?

If you dig deeper than simply following price action, you will understand that supply and demand will drive the market. But supply can be short-term, then transform into demand and vice versa. So, you have to rely on professional supply and professional demand and be able to distinguish it between other fluctuations.

all that we learn here is designed for that. Professional demand (or supply) in most cases is ongoing demand. But are we naive enough to think, that professional buyer will uncover his actions for you in easy identifiable and straightforward way? No, they don’t do that!

There are numerous attempts to capture signs of professional activity using volumes. Some traders think that if they have volumes, they have real information. Poor guys!

Volumes are also misleading. So, one can not be successful in trying to capture big buyer from the market… if he thinks in conventional way.

Market tells you a story and you should understand this story, combining nuances and clues (even number of volumes if you like) in the whole picture.

< 1. Market breaks out from a level and keeps level above. You see strange passive behavior of sellers –market shows you levels with very low volatility and holds there twice! If sellers were interested in this market, they would probably responded immediately. But you see no participation –something wrong with the supply is going on here. Therefore you can anticipate that big guys are buyers! They’ve collected all supply below and no one wants to go against them at least for a while.

Not surprisingly price breaks out to the upside again.

2. There’s neutral day after the breakout. If there were short-term traders who have made this breakout, they would liquidate pretty soon. But nothing happens –nothing at all! All day price goes back and forth with very low tempo. It means that probably those buyers were big (institutional) buyers.

Every time you analyze the market, you make narrative. Be sure that your narrative is reasonable and relies on solid market logic.

There are some important principles:

1. Institutional buyers will sell on the upside breakout (not downside)

2. Low volatility after high volatility (directional breakout) shows lack of participation. The less liquidity (participation) we have near current levels, the more odds that market will auction higher.

Is it complex?

Yes, it is. But this is mindset that requires from you some disbelief, some critical view, some commitment to dig deeper and see what is hidden. That what trading is about.

Example of how Imbalance creates trends and balance creates ranges

Market fundamentals

Let's talk a bit about market fundamentals. If you want to survive and obtain ongoing success in trading, you'd better rely on fundamental principles that don't change not setups. There are bunch of setups over there, candlestick configurations and other stuff.

But if you know principles, you will be more flexible and your success will be more solid

What you can rely on trading markets?

1. Imbalance creates trends, balance creates trading ranges

Yes, exactly this sequence. Not "trend is your friend", but imbalance is your friend, because trend is an outcome, imbalance is a market condition that creates this outcome.

"Trend-oriented" mindset often pushes traders seek for bad trade locations, when opportunity no longer exists. Imbalance is what you really need.

Though trading is not a science, it has some unwritten laws beyond price action:

First - big market participants create trends and rely on fundamental analysis. Biggest players don't rely on charts in decision making process.

They have charts for just one thing - to know how crowd thinks and where majority will step in the markets. Big players need "hot spots" on the market (when many traders are in) to have liquidity. Their positions require liquidity and without liquidity they will be unable to accumulate enough volume for their positions.

Imagine player with pip size equal to 100.000 USD or higher. Of course, he will need liquidity and will build his position long enough.

That's why they monitor charts to know when traders will step in. But the reason they need to build a position is not techical analysis. Reason is fundamental analysis and analysis of real supply and demand.

It's hard to spot "big playesr"

One thing will help you. Address yourself a question - who loses on the market? Who is caught in short or long positions? If you understand that long players are losing, you automatically know that bigger timeframe short player opposes them. Smart money players create imbalance and absorb volumes.

Who provides liquidity, who consumes it? Like Warren Buffet said - if you find yourself near the poker table and don't know who loses money - it's you who loses it.

2. Keep an eye on hot spots in the market

What is a hot spot? They are: important extremums, round numbers, option barriers, in a nutshell - spots that traders are watching. If you know that volumes are there, big guys are also there.

Every trend can be divided into several parts - young trend, mature trend and culmination.

Young trend and culminational phase represent great imbalance but with one nuance - big players are building positions in young trend, and covering their positions during culmination.

If you see "obvious" trend and see very hot market, be aware - avoid being a laggard.

Price Action Basics

Hi everybody! Let’s continue our study in price action and market logic.

How do you think, what is the main goal of the marketplace? Some would say – market brings together supply and demand, and that would be right answer, but it would be too abstract.

Liquidity – what trader needs to know?

The goal of the marketplace is not just to gather buyers and sellers and give them opportunity to trade, but to facilitate trading. What does it mean – to facilitate? It means that big market participants that mostly benefit from liquidity, will be interested in active trading from all types of traders.

The more traders are involved, the better execution large speculator or commercial trader will have.

Exchanges, for example, hire special companies, that are called «market makers» and pay them salary for keeping two-sided quotes – therefore every investor will be sure that he will be able to get a fill for his position.

But even though, two-sided liquidity providers are unable to keep market in a balanced state when there is some aggressiveness in the market and liquidity is not very high.

Trends often occur when there are not enough traders involved and market has to advertise more and more to attract liquidity. So, big market participants are often not interested in trends, they would rather prefer balanced state of market to have opportunity to slowly accumulate their positions. It’s tough job – to accumulate position on the rising market.

But we as traders are interested in trends, aren’t we? Of course, idea of a trend is different for day-trader and for position trader. Let’s now talk about short-term perspective.

See the picture below – how do you think, where liquidity can come to the market, in point A, B or C?

Obviously, points A and B are extremes of the bracket, and there are always traders that will try to fade extremes, as well as traders that will try to play breakouts.

In point «C» there are not too many traders involved – they don’t know how to calculate the risk and where to place their stops, that’s why I can call this area «no mans’ land» and areas at the extremes «hot spots of liquidity»

If market is trading without significant support from other timeframes, it will tend to go from one extreme to another, yet it’s tough to calculate risk at the extremes, because you don’t know who will win in short-term time perspective – buyers and sellers, buyers can create a breakout, collect stops of sellers, then market will go lower, or sellers can drive the market down and buyers will liquidate.

So, when the crowd is there, don’t expect that price action will be predictable and smooth.

In my own trading, if I see that market conditions are balanced, I rather try to work near «no man’s lands» in the direction to «hot spots» where I cover my positions.

Key here is aggressiveness – if market is aggressive and volatile and liquidity is not enough, it will tend to reach extremes – market needs liquidity, after all it is an auction which goal is to facilitate trading. Liquidity is located near hot spots – I exit there, I don’t know who will win and I even don’t want to predict it.

Price Action Basics and Its behavior

We would like to continue our studies on price action and Here I would like to tell you how apple trade went well although, there was strong selling after upside breakout, I was confident that buyers will step and move the price way beyond.

I want to start this post with this strange sentence. We will talk about trading logic. How do you make decisions? Do you look for signs of buyer and seller and act accordingly?

Keep you trading simpler !

Think about simple thing – price action itself (trend, movement) will not allow you to benefit from that. Some movements are continued, some are reversed. It depends on current market conditions, but probability of success will be close to 50/50 if you simply follow price action (subtract spreads and rapid volatility spikes and you will get perfect strategy for failure).

So, what works?

If you dig deeper than simply following price action, you will understand that supply and demand will drive the market. But supply can be short-term, then transform into demand and vice-a- versa. So, you have to rely on professional supply and professional demand and be able to distinguish it between other fluctuations.

All that we learn here is designed for that. Professional demand (or supply) in most cases is ongoing demand. But are we naive enough to think, that professional buyer will uncover his actions for you in easy identifiable and straight forward way?

No, they don’t do that! There are numerous attempts to capture signs of professional activity using volumes. Some traders think that if they have volumes, they have real information. Poor guys!

Volumes are also misleading. So, one can not be successful in trying to capture big buyer from the market… if he thinks in conventional way.

Market tells you a story and you should understand this story

Combining nuances and clues (even number of volumes if you like) in the whole picture. Here are several examples:

1. Market breaks out from a level and keeps level above. You see strange passive behavior of sellers – market shows you levels with very low volatility and holds there twice! If sellers were interested in this market, they would probably responded immediately. But you see no participation – something wrong with the supply is going on here.

Therefore you can anticipate that big guys are buyers! They’ve collected all supply below and no one wants to go against them at least for a while.

Not surprisingly price breaks out to the upside again.

2. There’s neutral day after the breakout. If there were short-term traders who have made this breakout, they would liquidate pretty soon. But nothing happens – nothing at all! All day price goes back and forth with very low tempo. It means that probably those buyers were big (institutional) buyers. Every time you analyze the market, you make narrative. Be sure that your narrative is reasonable and relies on solid market logics There are some important principles:

1. Insitutional buyers will sell on the upside breakout (not downside)

2. Low volatility after high volatility (directional breakout) shows lack of participation. The less liquidity (participation) we have near current levels, the more odds that market will auction higher.

Is it complex?

Yes, it is. But this is mindset that requires from you some disbelief, some critical view, some commitment to dig deeper and see what is hidden. That what trading is about.