Price action basics. Part 1
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  1. #1

    Price action basics. Part 1

    Hi, traders.

    In series of posts, I will try to uncover underlying reasons that drive the market.

    Trading the market, you want to see something beyond candlestick charts, and you want to see - guess what? You want to see people, traders with their interests, fears and desires. Like one wise man said, "discover what makes people tick, and you will know what makes market tick"



    1. Where are you trading?



    First of all, there is a significant difference between stock market and markets that trade with leverage. Forex is one on those markets (but not the only one - there are futures, options, OTC derivatives and so on).

    Nature of retail Forex market is that real currency rarely trades here. We trade obligations (for example, we take responsibility to buy some currency after the trade, and deposite some money fot that. If we are mistaken, we give some money to the market, if we are right - we take some money from the market).

    Numerous obligations (traders from retail traders) meet together and form a huge whole position, that liquidity provider must cover using other liquidity provider. That's how it works.


    ! The process of exchanging obligations is somewhat different from exchanging real goods.


    Imagine you're trading a stock. Quantity of stocks is limited, and to go short you must borrow some stocks from its' owner. If you want to close your long position, you expect somebody to sell it (real stock). And that's why we have "short interest" on the stock market, it usually doesn't exceed 5% of the whole volume.

    stock_market.jpg

    Things are different on Forex and futures. You can sell almost unlimited number of contracts, so you don't need to borrow something from somebody. That circumstance makes analysis of supply and demand on Forex pretty different than on stock market.

    We can see big supply, but suddenly market reverses and all those short sellers start covering. Why? Because they need to do it - they have small pockets and should exit quickly otherwise they can blow up their accounts.

    The same is with long positions - there are lots of weak holders, that have very close "pain point" - they go long, place very close stop and if they have no defense from "strong holders", market will probaly go after their stops, because there is always strong counterparty that can hold the level and prevent price from further rising (remember - they can place as many "sell limit" orders as they want)

    forex_market.jpg



    ! Trading on Forex market is really the Art of analysing underlying inventory.



    To start successfully find good trades, we should answer these questions from small check-list:



    1. Who is responsible for price action? Strong holders or weak holders? (price will go in the favor of strong holder)

    2. Is market oversold or overbought on the way up? (in the first case we have weak short sellers, in the second - weak long bueyrs)

    3. Is market oversold or overbought on the way down? (in the first case we have weak short sellers, in the second - weak long buyers)



    Remember, there are not only situations when we have "win-lose" situation and "strong-weak" market configuration, we can also have "strong-strong" market configuration, when market is careless about retail traders and their positions (this is when we have elongated trends).

    As a trader, you should know how to read inventory and to play on the strong side.


    to be continued....
    Attached Images Attached Images
    Last edited by Value trader; 08-10-2013 at 11:12 AM.

  2. #2
    When we are talking about trading, there are some popular ideas that you may have heard.

    One of them:


    Behavior of market participants is irrational. Market is driven by greed and fear and trader can benefit from that.


    Let’s analyse this message. How do you think – when trader sets stop-loss, is it because he is blind and driven by fear? I don’t think so. More often than not, he has calculated his stop-loss lever before and knows his «pain point».

    By «pain point» I mean price, that, being achieved generates loss for a trader that he’s not able to hold. He starts searching for counterparty to liquidate his position. This is sort of normal behavior, yet position size that trader has accepted is not rational.

    So, when we are talking about retail traders with close «pain point», we can call them «weak holders».
    Guess, who plays the other side of their positions? Of course, other weak holders can do it, but more often than not all weak holders usually tend to act similarly, and some stronger player absorbs their positions.
    More often than not, positions of weak holders create exceeding inventory on the market, that should be corrected first before market is ready to act upon its dominating trend.


    Weak holders


    We need to spot weak holders activity first to avoid rapid price movement against us, then to place our stop-losses correctly, and finally – to know where strong money is headed.
    We can use several ways to spot weak holders – using «reference points», urgency in price action and «informational risk» concept

    Let’s go through each idea:


    Reference points:


    To spot «weak holders» activity, let’s think – what levels will be not interesting for big money buyers/sellers?
    They are – sessional highs/lows, previous days highs/lows.

    Look at this chart:

    weak.jpg

    We see some participation from level above and price freezes near level below. If it reverses from this point, probably it will be a sign of daytraders purchasing there. Big money players are not interested in that levels – they don’t attract enough volume for them. Big money buyer will rather act inside of consolidation, because he needs volume to execute his position.

    Now if you have two attempts from daytraders to play long and to play short, you may want to see – what group is going to earn money. If sellers will have good prices to exit (prices will breakout to the downside quicky), then probably market is driven more by strong (professional) supply there, if daytrading buyers will win, then some strong (professional) demand is there and helps them.

    to be continued...

  3. #3
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    about weak holder,

    We can use several ways to spot weak holders – using «reference points», urgency in price action and «informational risk» concept, what is the most useful from both of them, and about the concept, how to build it ? i see this is very important for trader to keep trading with safely,
    thank you very much

  4. #4
    Quote Originally Posted by newentry View Post
    about weak holder,

    We can use several ways to spot weak holders – using «reference points», urgency in price action and «informational risk» concept, what is the most useful from both of them, and about the concept, how to build it ? i see this is very important for trader to keep trading with safely,
    thank you very much
    Can you ask more specific questions? All topics that you have mentioned are very broad.

    In a nutshell - we can see behavior of weak holders (reference points), anticipate it (informational risk) or both.
    If market goes exactly to previous day's high and reverses - this market is probably driven by short-term sellers, they are weak holders by their nature. Also, if you see rally when market is already overbought, probably weak holders are responsible for this rally.

    So it's about finding overcrowded markets and trading against the crowd

  5. #5
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    this is a good system for us to understand, it will give us the understanding for some reason why we enter the market and what is the goal from it, and also how good the options to protect our balance, then we can reduce the risk, traders need to know the market price and where will it good,

  6. #6
    Quote Originally Posted by Value trader View Post
    We need to spot weak holders activity first to avoid rapid price movement against us,
    There are some movement which is caused by weak holders but but ultimately the movement goes on behalf of strong holders. Weak holders tend to go against market, so for making successful trading we should beware of weak holders and their positions and avoid trading in line with them.

  7. #7
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    Quote Originally Posted by ahsanullah View Post
    There are some movement which is caused by weak holders but but ultimately the movement goes on behalf of strong holders. Weak holders tend to go against market, so for making successful trading we should beware of weak holders and their positions and avoid trading in line with them.
    The movement of the market actually the war between the holder. Who the hold the market stronger than any other holder will win the war, and the strong holder will move the market directly to their position. The weak holder get loss because againts the market, the stronger holder will end the war with smile and get profit.

  8. #8
    Quote Originally Posted by aris90 View Post
    The movement of the market actually the war between the holder. Who the hold the market stronger than any other holder will win the war, and the strong holder will move the market directly to their position. The weak holder get loss because againts the market, the stronger holder will end the war with smile and get profit.
    yeah, that is why retail forex traders must always trade with proper money management because they may be going against the trend of the strong big traders. Any trader who wants to use price action method must be prepared to learn how to recognize trend.

  9. #9
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    Quote Originally Posted by Value trader View Post
    When we are talking about trading, there are some popular ideas that you may have heard.

    One of them:


    Behavior of market participants is irrational. Market is driven by greed and fear and trader can benefit from that.


    Let’s analyse this message. How do you think – when trader sets stop-loss, is it because he is blind and driven by fear? I don’t think so. More often than not, he has calculated his stop-loss lever before and knows his «pain point».

    By «pain point» I mean price, that, being achieved generates loss for a trader that he’s not able to hold. He starts searching for counterparty to liquidate his position. This is sort of normal behavior, yet position size that trader has accepted is not rational.

    So, when we are talking about retail traders with close «pain point», we can call them «weak holders».
    Guess, who plays the other side of their positions? Of course, other weak holders can do it, but more often than not all weak holders usually tend to act similarly, and some stronger player absorbs their positions.
    More often than not, positions of weak holders create exceeding inventory on the market, that should be corrected first before market is ready to act upon its dominating trend.


    Weak holders


    We need to spot weak holders activity first to avoid rapid price movement against us, then to place our stop-losses correctly, and finally – to know where strong money is headed.
    We can use several ways to spot weak holders – using «reference points», urgency in price action and «informational risk» concept

    Let’s go through each idea:


    Reference points:


    To spot «weak holders» activity, let’s think – what levels will be not interesting for big money buyers/sellers?
    They are – sessional highs/lows, previous days highs/lows.

    Look at this chart:

    weak.jpg

    We see some participation from level above and price freezes near level below. If it reverses from this point, probably it will be a sign of daytraders purchasing there. Big money players are not interested in that levels – they don’t attract enough volume for them. Big money buyer will rather act inside of consolidation, because he needs volume to execute his position.

    Now if you have two attempts from daytraders to play long and to play short, you may want to see – what group is going to earn money. If sellers will have good prices to exit (prices will breakout to the downside quicky), then probably market is driven more by strong (professional) supply there, if daytrading buyers will win, then some strong (professional) demand is there and helps them.

    to be continued...
    I have nothing to put my comments on it rather than gathering experience and knowledge on it. Through this thread I came to learn elaborately about price actions basics and trying to realize the reality and importance of this topics. I want to become a good trader and thus I am spending huge time to get lesson from this forum.

  10. #10
    Trader nsawork's Avatar
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    Quote Originally Posted by Jamuna View Post
    I have nothing to put my comments on it rather than gathering experience and knowledge on it. Through this thread I came to learn elaborately about price actions basics and trying to realize the reality and importance of this topics. I want to become a good trader and thus I am spending huge time to get lesson from this forum.
    Trading experience is very important in the life of a Forex trader. If he holds good trading knowledge and experience and is doing his trades in such a manner that his income is getting big he would surely become more successful in his life.Being able to understand the Price Action basics means that we already know about a trade and also we are willing to take more risks in the market.

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