DislikedI know this question wasn't directed to me, so I'll butt out if requested, but I want to see if I can add some clarity here. Keep in mind also that I'm kind of thinking this through as I type it...
The fact that price "quickly rebounds" from the demand area doesn't tell us anything about the orders that were waiting there. Here's why. There can only be two types of orders that were waiting down below the market; buy limits and sell stops.
The demand down at that level comes from the buy limit orders. (These may have originated from a bank...Ignored
No butting out needed, all intelligent discussion is welcome.
Your assumption that “the only thing that could have made price bounce sharply is newly entered market orders to buy” is only half true, because in reality, we need buyers, but more importantly, a lack of sellers for these buyers to buy from.
What pushed price down to this level in the first place? Conventional answer is selling, right? A more correct answer would be a lack of buyers, as I have posted seemingly numerous times now. Price is looking to match buyers and sellers constantly, so if we have both, price consolidates until an imbalance is realized and price reacts, if we have no buyers price drops, if we have no sellers price increases…I know this may seem obvious, but most people don’t have this market view.
Due to the innate human quality of herd behavior, the more selling that occurs the more one wants to sell. But if you think about it logically, each successive seller is less knowledgeable than the previous. The smartest money gets in first, followed by the less and less informed. So the last seller to get in is usually the least informed as well…this seller doesn’t think about Who he is selling to nor Why they are buying from him at this time, he is simply following the herd. Knowing this also gives us insight to the size of orders on each side of the book at certain prices. Who’s moving all the money? The most informed or the least? So the last seller is also the smallest, which also makes his order the easiest for buyers to absorb…
You said that the fact that price quickly rebounds from the demand area doesn’t tell us anything about the orders that were waiting there. But when you realize that it is not necessarily buying that moves prices up, it is a lack of selling, then you realize why this quick rebound tells us a lot. Small orders could not soak up the ignorant supply left in the market after a large drop as quickly and efficiently as large orders (or even able to soak up the supply at all); and who places large orders? That’s right, banks. And who do we want to time our entries with, that’s right, banks.
We know that these buy orders/buyers were large enough to soak up the selling that made price reach this level in the first place, so we do know something about these orders from the way price reacted once this level was reached. We also know something about the sell orders going through at these levels…they must be smaller then the buy orders to be absorbed so quickly, right? So again, who is selling here?
Thus, the large orders did cause the stop, but also caused the bounce by absorbing the last seller and giving price no choice but to increase to entice sellers back into the market…b/c no smart money wants to sell here…they already sold, of course, at a better price…
In reality, the buyers we are referring to were the original sellers that got this downward movement started in the first place…if smart money is selling, we have a lack of buying, which is ultimately why price moved down (we have to entice buyers with a cheaper price, just as anything in the 'real economy'). Once it did, these original sellers are now buyers, where they take profit and position themselves for the next movement with buy orders…
And just to clear up some confusion I probably helped cause, demand doesn’t necessarily have to be limit orders waiting; demand is simply a price buyers find attractive. So maybe there were no limit orders waiting, which of course is probably not true, but either way, enough buyers have entered the market (with limit orders on the books for weeks, or newly booked limit orders, or market orders) to absorb the selling…when all the sellers are in, no one is left to sell to these new buyers that find this price level attractive. The resulting price movement goes back to simple supply and demand dynamics.
I know someone will chime in, “well how do I know where buyers find price attractive and where sellers find price attractive?” Well, look at the chart…Who can place large enough orders to move price quickly up? So after seeing this on a chart, who has open interest in the market? Where are they positioned? Where did they unload their position? So where is selling attractive?
You won’t know exactly, you can’t unless you have access to an order book, but you can have a pretty good idea and you can use this to your advantage…
I feel like this post is sort of jumbled, if its hard to follow I apologize, ask for clarity if need be…but like Scotty said, its somewhat difficult to do much more than open the door over a medium like this…
Don’t ever think you have past through the last door, there will always be another…as I have found out the hard way time after time…
"If we knew everything, what would be the point of tomorrow?"
Capitalist, I'm sure you know a lot of this, don't take this post as directed only at you, although I did try to answer your response....and the breakout theory you mentioned (I think it was you), spot on my friend.
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