So, you are now asking - what can I actually take away from this?
How can I use these principles?
Why is it actually important to know?
Well, you now know that the price is being moved by aggressive traders using market orders,
and these aggressive traders must clear the barrier of limit orders in order for the price
to move.
This is very important because now, you can start asking the following questions.
What happens, when the market makes low and then reverses?
And what happens, when it makes high and then reverses?
And I am not talking about indicator signals or moving average cross-overs - I am talking
about the interaction between aggressive and passive traders.
I am talking about the supply and demand.
You can also ask the following - at what price levels, we can expect the powers of buyers
and sellers to change?
In other words - where we can expect massive limit orders to be placed, which will stop
aggressive traders and make the market to stop and reverse?
I analyse this by looking at the volume profile in combination with price action and also
the wider context of the market.
So my strategy is like a puzzle, where I put the small pieces of information together to
build a bigger picture of the market.
And you can also ask the following: who is likely to use limit order to enter a trade
and who is likely to use market order to enter a trade?
For example - do you think that big traders such as investment banks or hedge funds use
market orders to open their positions?
I don't think so - they are likely to use limit orders because they trade such massive
quantities that they have be in the control of their entry price.
Therefore, they can't afford to use market order.
So, at what logical price levels they are likely to have their limit orders placed?
And who uses a market order?
Small retail traders.
In other words - amateurs.
Now, who do you think is making money in the markets?
Small, retail trader who trades with a capital of $5000, or professional, institutional trader
with 10 years of experience who trades a capital of hundreds of thousands $? Yes, the second
option is correct - so you want to trade the same direction as these professional big traders,
right?!
You see, just by knowing these basics of market auction, we came up with these questions and
answers to them.
Let's look at an example.
In this example, I will focus on explaining the answer to the first question - what happens
when the market makes low and then reverses.
What happens in this situation from a supply and demand point of view?
You see a chart - the price is going down.
You should now be able to say what needs to happen in order for the market to stop and
then reverse.
What needs to happen between aggressive and passive traders?
Let's firstly analyse this chart a bit.
The price is going down - the market has created a double top pattern.
This move down is now very visible everybody.
Now, many aggressive sellers will be selling because they see that the price is going down
very quickly and they believe it will remain going lower, and the market will start trending
down.
At the moment, the aggressive sellers seem to be in the control of the market, making
the price to go down.
Let's continue, by displaying a simple moving average.
If we display this moving average with a period of 30 days, we see that the market has just
broken below this average.
What does it mean to me?
For me, this confirm that there will likely be more aggressive sellers who will sell.
These sellers believe it is safe to sell at the moment, just because there are many confirmations
that are visible for them that the market is definitely going down.
But.. are these aggressive sellers right?
In my opinion, they're not.
Why?
Because these aggressive sellers are most likely to be small, retail traders.
In other words - amateurs.
And these amateurs are wrong almost all the time.
They mainly use market orders to get into the market, and they get into the market very
late, usually just before the market move actually ends.
Big professionals who control the markets do not trade like this.
They open their big positions at price levels that they perceive as a good value - a good
price.
You need to think about what price levels may be interesting for them.
According to my analysis, I displayed a potential price level that may be interesting for them.
This support comes from my analysis of volume profile, price action and wider context of
the market.
It also comes from, let's say, a psychological analysis of market participants.
Now, if this area is likely to be interesting for big players, then they are going to have
their limit orders somewhere in this area.
Therefore I can say that in this area, there are likely to be massive buy limit orders.
Because big players trade such massive positions, these orders will be strong enough to stop
small aggressive sellers.
In other words, we can expect the barrier of buy limit orders to be stronger that aggressive
sellers.
For example, let’s say there is barrier of 1000 buy limits in this area.
The aggressive sellers who will start selling because for example, they see that the market
has just broken below the moving average, will sell 700 contracts.
So they clear 700 buy limits, but 300 more buy limits are yet to be cleared.
But, there are no more aggressive sellers who want to open new positions.
That means they are not strong enough to break through the barrier of buy limit orders.
So the price stops - aggressive sellers are exhausted.
There are no more aggressive sellers opening their positions, simply because everybody
who saw the market going down has already opened his position.
In the meantime, aggressive buyers start to come into the market.
They move the price up a little bit and when it goes up, more aggressive buyers start buying
- because they see that the price is going up.
Buyers will take over the market, making the price to go up.
And it looks like this - the market has moved down, made low and then reversed.
To sum it up - the price went down, attracting aggressive sellers.
Aggressive sellers were in control of the market, moving the price down.
Then, they were stopped by a barrier of buy limits - they got exhausted, not being able
to break through it.
Then, aggressive buyers came in, making the price to reverse and go up.
So let's find these particular parts of this process on this chart.
Aggressive sellers in control - point 1.
Aggressive sellers exhausted, not being able to break through buy limits - point 2.
First aggressive buyers come in - this is quite clear - point 3.
And finally, more aggressive buyers come in and move the price - point 4.
So these are the basics of how supply and demand works in financial markets.
This is why the markets move.
You know, markets don't move because indicators or moving averages are saying so.
And markets don't move because of price action patterns.
Markets move because supply and demand changes.
You can find many people trying to analyse markets.
They will open a chart, apply some indicators to it or draw wide range of magic price action
patterns on it and say - you see, the market has reversed up because the 5-day moving average
has crossed above the 25-day moving average.
And that's why the price went up.
Indicators, moving averages and price action patterns are only trying to interpret what
has already happened in the market.
Markets don't move because of these signals and set-ups, but because supply and demand.
Such examples can be seen on this chart.
We can see a wide range of mechanical, price action patterns.
We can see a bull flag pattern, 1-2-3 and double top patterns and false breakouts.
All of these patterns come with a set of rules on how to trade them.
These rules say where to enter the market, where to place your stoploss and so on.
Now, again, there are many people who are trying to analyse markets and they will say
that for example, the market has created a 1-2-3 top pattern and that's why it went down.
So these people are trying to justify why the market moves by drawing these patterns
on the charts.
Once again, because this is very important - markets don’t move because of these patterns,
markets don't care about them.
It is the supply and demand that moves the markets.
Of the major problems of these mechanical patterns is that they only describe what has
already happened.
Therefore, they will get you to enter the market too late.
This is by the way one of the reasons why most people lose money in the markets.
They simply enter too late, when the move has already taken place.
Let's look at these examples.
Bull flag - this set-up would get you to enter the market shortly before the move up actually
ends.
1-2-3 top pattern - the rule says that you should sell when the market breaks below the
point 2.
In this example, the move after you would have entered the market is so small that there
is basically no room for a profit.
The actual move down has already happened, before you entered the market.
False breakout - usually, most traders would buy after they have seen some confirmation
that the market has reversed after the false breakout.
That means that most people would buy at this bullish bar following the false breakout.
That's simply too late and for too bad price.
As you can see, the market has reversed straight away after this bar and your stop-loss would
be most likely somewhere in the middle of this bar.
As you can see, the market takes your stop-loss and then reverses up.
1-2-3 bottom - the rule says to buy when the market breaks the point 2.
This has happened on the close of this big bullish bar.
Again, this price and its location is very bad.
If your stop-loss would be too small, somewhere in the middle of the bar on which you have
bought, then it’s taken - you have a loss and after that, the market has reversed.
Double top - most beginners would sell this double top at this very visible bearish bar.
Again, they wait for the confirmation - they sell after they have seen that the market
is reversing and starting to go down.
The usual stop-loss of these people is just above these two tops.
They place it just above this yellow horizontal line.
So what happens?
The market takes their stops and then reverses.
This is by the way how false breakouts work from the supply and demand point of view.
So, the key take away from this is that if you will trade these mechanical patterns in
any market condition, without thinking about the logic of these patterns, then I can almost
guarantee you that you will lose money and give it up.
Congratulations.
You now know how the market auction works.
In this example, you have actually seen a part of my trading strategy.
This is how I analyse markets - I trade short changes in supply and demand, while analysing
the wider context of the market.
I analyse whether the market is in trend or in range and I adjust my strategy to it.
Therefore, I do not blindly trade a mechanical pattern, but I tailor my plan to the actual
context of the market - which is yet another very important thing you must do in order
to be successful in trading.
I also analyse the behaviour of particular market participants - and of course, I want
to trade in the same direction as big professional traders who make money.
And very importantly - a crucial part of my trading style is critical, alternative thinking.
What do I mean by this?
By thinking critically, I mean that I do not believe in all the general knowledge about
markets that is widely available to everybody.
I always ask myself questions.
For example - why I should believe indicators which can be used by everyone else?
Will they really give me an edge in my trading?
Will they give me an advantage over others?
Every time I analyse market, I ask myself why I should NOT trade the same as these people
who follow indicators and mechanical patterns.
And why do I do this?
Because the majority, which follows these general truths, are losers.
So if you want to survive in markets, then you have to think critically and alternatively.
So, if you are serious about your trading and you don't believe people who want to sell
you a magic, secret strategy that makes millions (because it doesn't exist), then stay tuned
for more courses that can really boost your progress in trading.
It was my pleasure to spend this time with you, thank you for watching this free course
and I am looking forward to see you next time.