Hey everybody,
I haven't been posting in a while because I was busy with exams, but I am back now--so back to the factory
John Murpy's and Alexander Elder's talk about price action and psychology really got me thinking and I THINK that I have experienced the aha! moment!
Here is my spin on the story:
Every market is a zero sum gain market. For one winner, there HAS to be one loser. In forex, currencies move in pairs - as one currency goes up another HAS to come down. Thus, when two people are trading EUR/USD for example, as person who is long on EUR is winning, a person who is long on USD is losing.
There are 3 types of people who participate in any financial market at any given price level:
1. People who went LONG at that price
2. People who went SHORT at that price
3. And people who decided not to trade at that price.
Here is what happens when those 3 people encounter a currency (or a stock or future) penetrating an important Resistance level (R1).
As we all know, penetrated resistance (R1) automatically becomes support (S1). When that resistance is penetrated (few points above the actual resistance level), 3 things happen:
1. The bulls go LONG, thinking that a breakout is happening.
2. The bears go SHORT, thinking that the currency will retrace back under the resistance R1 (or below support S1)
3. Some traders do not know what to do, so they simply stay out.
The next day, our currency rises 20 more pips.
1. The bulls are biting their elbows because they did not buy more lots, and are hoping for a retracement abck to support to buy more
2. The bears are biting their elbows because they are obviously are on the other side of the market and are waiting for a retracement back to support S1 to close out their SHORT positions and B/E.
3. The bystanders are biting their elbows because they missed out a rally, and are waiting for retracement back to support S1 to go LONG.
Because of that, all 3 groups of the market (the WHOLE market) are going to go LONG if the price retraces back to S1. This tests the importance of that new support S1. At support, everyone goes long, driving the price up. The longer the currency stays at support, the more valid or important that support is. The high spike in volume will tell us that a breakout is imminent.
Same story goes for broke support levels. Just change the word LONG to SHORT and the word SHORT to LONG.
Double tops and double bottoms also operate on the same principle.
Any comments and thoughts are appreciated!
Good trading,
Roman
I haven't been posting in a while because I was busy with exams, but I am back now--so back to the factory
John Murpy's and Alexander Elder's talk about price action and psychology really got me thinking and I THINK that I have experienced the aha! moment!
Here is my spin on the story:
Every market is a zero sum gain market. For one winner, there HAS to be one loser. In forex, currencies move in pairs - as one currency goes up another HAS to come down. Thus, when two people are trading EUR/USD for example, as person who is long on EUR is winning, a person who is long on USD is losing.
There are 3 types of people who participate in any financial market at any given price level:
1. People who went LONG at that price
2. People who went SHORT at that price
3. And people who decided not to trade at that price.
Here is what happens when those 3 people encounter a currency (or a stock or future) penetrating an important Resistance level (R1).
As we all know, penetrated resistance (R1) automatically becomes support (S1). When that resistance is penetrated (few points above the actual resistance level), 3 things happen:
1. The bulls go LONG, thinking that a breakout is happening.
2. The bears go SHORT, thinking that the currency will retrace back under the resistance R1 (or below support S1)
3. Some traders do not know what to do, so they simply stay out.
The next day, our currency rises 20 more pips.
1. The bulls are biting their elbows because they did not buy more lots, and are hoping for a retracement abck to support to buy more
2. The bears are biting their elbows because they are obviously are on the other side of the market and are waiting for a retracement back to support S1 to close out their SHORT positions and B/E.
3. The bystanders are biting their elbows because they missed out a rally, and are waiting for retracement back to support S1 to go LONG.
Because of that, all 3 groups of the market (the WHOLE market) are going to go LONG if the price retraces back to S1. This tests the importance of that new support S1. At support, everyone goes long, driving the price up. The longer the currency stays at support, the more valid or important that support is. The high spike in volume will tell us that a breakout is imminent.
Same story goes for broke support levels. Just change the word LONG to SHORT and the word SHORT to LONG.
Double tops and double bottoms also operate on the same principle.
Any comments and thoughts are appreciated!
Good trading,
Roman
~If you fail to plan, you plan to fail~