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Thread: Does price reflect everything?

  1. #1
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    Does price reflect everything?

    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.

    Look at the chart below:

    Attachment 10298

    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

    What if we switch to 1-hour chart?

    Attachment 10299

    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:

    Attachment 10300

    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):

    Attachment 10301

    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:

    Attachment 10302

    To know more about analysis with market profile, you can attend my webinar on this topic tomorrow.

    Know more

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    Last edited by Value trader; 04-29-2014 at 10:08 PM.

  2. #1741
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    Quote Originally Posted by komalam View Post
    To understand the factors behind the price movement we need to understand the effect of news that are the main market drivers. It should be noted that not everyone should dare to trade news, first thing is we need lot of experience so that we get to know what can happen on a particular news. Hence with the news figures and beyond that fundamental analysis we know the market sentiments.
    effect of news is really important from my experience technical won't work on time of news, but when we do some news trading its best, so make sure you do trade and do on base of management, price is normal thing into trading it can up and down but the reasons are important, we need to understand reasons of that movement, and news will tell us about economy of country and we can take good decision on base of it

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  3. #1742
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    Different time frame, different price reflection and different understanding about price, that is what the forex market is all about. That is the way I see the market, because a different trader might get to see a buy trade on a pair like EURUSD and then another trader will see a sell trade opportunity, so therefore it differs what we see and then how we handle the market.

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  4. #1743
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    Quote Originally Posted by Striker$ View Post
    Different time frame, different price reflection and different understanding about price, that is what the forex market is all about. That is the way I see the market, because a different trader might get to see a buy trade on a pair like EURUSD and then another trader will see a sell trade opportunity, so therefore it differs what we see and then how we handle the market.
    What you have explained above is what made me know that the price does not reflect everything in the market. The price is just moving anyhow as it pleases, it can even cause traders to be making mistakes. What will not cause traders to be making mistakes is the pattern on the chart, when traders can analyse their technical patterns very well, this is the solution to the knowing of the right direction of the market.

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  5. #1744
    Trader ola4real's Avatar
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    Quote Originally Posted by naeem555 View Post
    effect of news is really important from my experience technical won't work on time of news, but when we do some news trading its best, so make sure you do trade and do on base of management, price is normal thing into trading it can up and down but the reasons are important, we need to understand reasons of that movement, and news will tell us about economy of country and we can take good decision on base of it
    News means a new event that has not happened before, that will surely distort the balance in forex field. I do not trade the news, but i respect it if it breaks out, so that forex field will move strongly and we can make income even if it is the technical chart we are only reading. What i do is that i only trade during the news if i could trade with the same direction if the both news and charts pattern are saying the same thing.

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  6. #1745
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    Quote Originally Posted by ola4real View Post
    News means a new event that has not happened before, that will surely distort the balance in forex field. I do not trade the news, but i respect it if it breaks out, so that forex field will move strongly and we can make income even if it is the technical chart we are only reading. What i do is that i only trade during the news if i could trade with the same direction if the both news and charts pattern are saying the same thing.
    news is a regular release of market major and minor currencies from all over the world which already happened for decades. it's not something new for traders to face news in market and most release has repeated or equal values to their previous releases few years ago. big traders are the people who directly or indirectly control market movements in news through their fast pace trading with big lot size. price suddenly reflects to such transactions and create big swing in market which always happening in news time.

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  7. #1746
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    It all depends on what you know and then what you can see, that will determine what the market price will be able to reflect to you, because when you know about the market and can make good decisions being that you have a good strategy, then you will be able to know what action to be taken, then you can actually get to see good signals, also it also has to do with the time frame of your choice.

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