MARKET DYNAMICS

  1. Price moves in a series of thrusts and corrections.

    • Prices don’t move straight up or down.

  2. Price discounts all information efficiently, but not perfectly.

    • Any information that  becomes known about a market gets factored into the price very quickly. That is why it’s a losing proposition to trade based on rumors, tips, analyst opinions, and otherwise. If it’s publicly available information, the price has already likely discounted it and there is no edge in trading based on it.

    • On the other hand, since price is not perfect at discounting all information (because the market participants are emotional human beings who are not perfectly rational), the market can often overreact to information and go too far in one direction or the other. These inefficiencies often end up being great trading opportunities. 

  3. Trends start from balance areas or after major climaxes.

    • The majority of the time, trends start from balance areas. They breakout to one side or the other of the balance area, as either the buyers or the sellers overpower the other side. The other side often gets caught on the wrong side of the market and is forced to exit their losing positions quickly, which adds to the initial momentum of the new trending move.

    • When trends start after major climaxes, one side (either the buyers or the sellers), gets too emotional and either buys out of hope and greed at prices that are too far above true value, or sells out of fear at prices that are too far below true value.

    • In both cases, the other side aggressively responds to the price being too far from value and the price snaps back quickly the other way. Here too, the late buyers or sellers who were acting on emotion get stuck in losing positions and are forced to exit quickly, further intensifying the price reversal and new trend.

  4. A trend in motion tends to stay in motion.

    • Crowd psychology ensures that once a trend is in motion, other participants will be attracted to it for no other reason than the need to conform and join the masses. Social proof is powerful, and it tends to keep trends in motion.

  5. Trends end in climax or balance. 

    • If trends start after a climax or a balance, then they must also end in a climax or a balance. So the trend will keep going until buyers and sellers reach a point of equilibrium and prices start balancing, or it will keep going until it attracts the laggards (the uninformed masses) who pile in emotionally and move prices too far in that direction- causing a climax when the other side responds aggressively to price being too far away from true value.

  6. High volume on the vertical scale signifies directional conviction and a rejection of value.

    • It’s the major institutions who start moves, because major moves need a large volume of orders as their fuel, and the large volume of orders comes from the institutions with millions and billions of dollars to spend. Once they commit to a certain direction with conviction, their orders create large volume in any given time-period, which shows up as large vertical volume.

    • This volume fuels a move away from currently established value, and often is the cause of new trends that go on to move price to a new value area. However, once a trending move is already established, it can keep going without large volume because of its momentum and crowd psychology.

    • Finally, high vertical volume coming after a sustained directional move often marks a climax, and the directional conviction it points to is that of the uninformed retail crowd, which is wrong the majority of the times.

  7. High volume on the horizontal scale signifies value.

    • When the market spends time in a certain price range, trade is transacted there. The more time and volume gets transacted in an area, the more that area becomes a place that signifies an agreement between buyers and sellers of what value is. The price range becomes accepted as a value area.  

  8. Previous market behavior influences current market behavior.

    • Since the market is made up of people, and these people are all looking at the same charts, important highs and lows will be seen by everyone, and many people will buy or sell at these areas simply in anticipation of others doing so. In that sense, we get a self-fulfilling prophecy.

    • In another important sense, previous market behavior (which can be referred to as market structure), influences current market behavior because of the very real reason that the previous behavior was simply showing which side was in control of the market and to what extent, and now as we revisit those areas the same participants may still have the same view and have more orders to fill there. Also, those that previously missed the move may now elect to get in there, and those that were caught on the wrong side of the move may elect to exit their position if given the chance.

    • All of this often causes the market to react at certain places where it had reacted before.

Source: OpenTrader Training