Topic 3: All About the Price (The Introduction)

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In this topic we are going to talk about the "price". The price is perhaps one of the most important information in trading. The price makes people want to buy or sell something. And the change in price is the determining factor between profit and loss for many traders. Because our goal as traders is of course to buy when the price is low and sell when the price is high. That's only logical, right? But why are so many traders still losing money? When the price starts to move there needs to be a big enough force behind it to overcome its opposing force. So there must be more buyers than sellers to move the price up and more sellers than buyers to move the price down. And the people who trade in the market make the market move with their buying or selling activities. How price moves out of an area can determine if the impending move will be strong or weak.

Above we see a normal candle chart with price action. We can all look at this chart and say "Oh look at that big bearish candle everyone is short here!". Shall I sell too? The market definitely has room to fall further I see it all the time. But…… We also often see that such a large bearish candle can be followed by an equally large bullish candle. Haven't we all seen it before? But until you look at the next component, volume, you can't judge how strong the move is and more importantly who is behind the move.

Here we have a down candle followed by a large up candle followed by another down candle. If we look at that first down candle we can say that the sellers were in control which was not entirely wrong but why did the market immediately turn the other way? It just did a complete 180 degree turn and even took out the high of the red down bar. Market rotations like this happen quite regularly and we will certainly see more often.

We know that the market moves because of changes in Supply and Demand, of course we all know that. And when there is more buying than selling, prices go up. And when there are more sellers than buyers, prices go down. This all sounds very simple of course, but it is a lot more complex than that in reality of course. Markets move up because there are no big sellers taking profits.

The major buying should have already occurred early in the move by institutions. So until institutions start selling their positions out, the market keeps going higher. If institutional players are still expecting higher prices they will absorb selling that comes into the market. They don't just buy to support the market but they buy to make sure all the supply at these lower levels is gone.

They don't just buy to support the market but they buy to make sure all the supply at these lower levels is gone. The price can go down not only because there are more sellers than buyers, but also, for example, because too little is bought to support the market on its way down. In a bearish market there is very little to hold up the market in terms of bids, as a result prices drop.

Prices go up until:

1. Buyers become unwilling to buy.
2. Buyers run out of buying power.
3. Buyers are overwhelmed by sellers.

Prices go down until:

1. Sellers become unwilling to sell.
2. Sellers run out of inventory.
3. Sellers are overwhelmed by buyers.

We as traders include what activity sets the price in the movable market. I mean if sellers are busy with bids and clearing them your position can be run over very quickly. Especially since we don't know who else is selling there. You therefore have to make the choice whether you want to be a buyer in a market that is falling? Or better a seller? Do you see what I'm saying with this? Only an order flow chart can give a trader the insight into why the market turned around.