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Deconstructing Trading

  • #1
  • First Post: Jan 11, 2011 7:27am Jan 11, 2011 7:27am
Hi Guys,

I am creating this thread to invoke a process of reducing or de-constructing our assumption and ideas about trading and the markets in general. I want to peel back perceptions and tear down wrong thinking.

I include myself in this process as I am by no means a expert or guru, I am probably like many here, I have been researching trading for 3 years. In those years I have absorbed a huge amount of information and knowledge probably 90% of it either useless or repeated.

If we start by forgetting everything we know or perceive to be true and start at the basics of how price moves via orders, classify some broad groups of participant who place orders and their motives. Then look at pattern that may develop on price that will show footprints of the behaviours of these groups.

I would like this thread to be discussion based and no one preaching or talking about systems or methods. We should build up from scratch

I will try and steer the thread in the right direction (if it actually goes anywhere).
Kind Regards Chris
  • #2
  • Jan 11, 2011 7:44am Jan 11, 2011 7:44am
Price moves due to orders being filled at a certain price point or orders being pulled that are closest to the market. If the order volume at 99.00 is filled or cancelled the new ask price becomes 99.01.

E.g.
..
..
99.01 100,000
99.00 200,000

89.98 100,000
89.97 50,000
..
..

This is of course simplified and there are orders being places almost continuously.

I will ask at this point for others to comment, correct or add to this.
Kind Regards Chris
  • #3
  • Jan 11, 2011 8:35am Jan 11, 2011 8:35am
To think of price moving the way described above is very simplistic and I have always tried to come up with a visualisation of the flow of orders coming in, being cancelled or being filled. I think it would be useful to think of an analogy, however the market is unlike the natural world and I would imagine any attempt would fall short somehow.

If we think about why price moves in one direction for a time over the other then it isn't that there are more buyers than sellers but more buyer or seller pressure. This pressure is something that must come from the participants.
Kind Regards Chris
  • #4
  • Jan 11, 2011 8:52am Jan 11, 2011 8:52am
Quoting chriskins
it isn't that there are more buyers than sellers but more buyer or seller pressure.
Yes; I cannot stand the rediculously facile statements thrown about regarding there being "more buyers than sellers" or "sellers coming into the market".

edit: I suppose the latter is OK
  • #5
  • Jan 11, 2011 9:01am Jan 11, 2011 9:01am
Quoting Ted1983
Yes; I cannot stand the rediculously facile statements thrown about regarding there being "more buyers than sellers" or "sellers coming into the market".

edit: I suppose the latter is OK
Yeah Ted, this is one of things this thread might help, to reboot peoples understanding of how price moves and use that as a foundation to build a solid understanding of how to trade.
Kind Regards Chris
  • #6
  • Jan 11, 2011 9:21am Jan 11, 2011 9:21am
Quoting chriskins
If we think about why price moves in one direction for a time over the other then it isn't that there are more buyers than sellers but more buyer or seller pressure. This pressure is something that must come from the participants.
To me they are one and the same. More buyers than sellers causes pressure. Obviously I don't mean *actual* buyers/sellers just net liquidity consumption.
  • #7
  • Jan 11, 2011 9:23am Jan 11, 2011 9:23am
Hi Chriskins

Following your line of thought so far, I propose the next question is, who are the groups that exert the majority of the buying/selling pressures?

If there is a basis we need to understand before this, then I'm open to it, I'm just throwing that up as a possible next point to discuss.

Joe
  • #8
  • Jan 11, 2011 9:28am Jan 11, 2011 9:28am
Quoting randomuser
To me they are one and the same. More buyers than sellers causes pressure. Obviously I don't mean *actual* buyers/sellers just net liquidity consumption.
The net consumption is always equal, its just in a bull run for example buyers are more eager to trade and will pay higher prices and vice-versa.
Kind Regards Chris
  • #9
  • Jan 11, 2011 9:35am Jan 11, 2011 9:35am
Quoting chriskins
The net consumption is always equal, its just in a bull run for example buyers are more eager to trade and will pay higher prices and vice-versa.
By consumption I mean market orders consuming limits (bids/offers). If a bunch of market buy orders come in and consume the liquidity at the best offer, boom price moves. Then if there is buying interest to continue consuming offer liquidity, and offer liquidity is also being pulled, price moves up more easily.

Also net consumption = difference between market buys and market sells - if the difference is positive then price *should* move up, depending of course on how the offer side looks like.
  • #10
  • Jan 11, 2011 9:36am Jan 11, 2011 9:36am
Quoting joekurr
Hi Chriskins

Following your line of thought so far, I propose the next question is, who are the groups that exert the majority of the buying/selling pressures?

If there is a basis we need to understand before this, then I'm open to it, I'm just throwing that up as a possible next point to discuss.

Joe

Hi Joe,

Yeah I think you are right, to me there are a number of broad groups which include Major players such as Funds, Big Businesses, Central Banks , Big Private Traders etc. then the lowly retail traders which collectively could be rather big.

You could also divide them by style, Fundie, Techie, Quant, Order Flow etc..

We can see that it a large order can cause a spike or rapid move in price by clearing orders, and im sure test orders are placed to feel for demand or supply or to trigger stop runs, by parts that have the means.
Kind Regards Chris
  • #11
  • Jan 11, 2011 9:52am Jan 11, 2011 9:52am
I think I may have jumped ahead with my earlier post.

The last few posts suggest that price moves up because of buying pressure.

But if everything remained the same - then buyers and sellers would probably be willing to transact at the same price forever.

So then it seems reasonable that the buying/selling pressure is a result of some type of catalyst.

The catalyst causes market participants to anticipate higher or lower prices. In the case of the market having buying pressure a catalyst would have occurred causing buyers to be willing to pay more, and sellers to be unwilling to offer for less.

So then maybe what's of interest are:

The types of catalysts that cause pressure.

How participants become aware of catalysts.

How partcipants process and react to pressure.
  • #12
  • Jan 11, 2011 9:58am Jan 11, 2011 9:58am
Quoting joekurr
I think I may have jumped ahead with my earlier post.

The last few posts suggest that price moves up because of buying pressure....
Good questions, I also think price going up can be a further catalyst, i.e. herds of technical traders during a breakout.

Also lack of selling pressure can also make prices rise even when buying pressure stays the same i.e. sellers don't want to sell at the current price.

News is one of the catalysts, usually government announcements or such.

Intervention decisions being made by central banks are another.
Kind Regards Chris
  • #13
  • Jan 11, 2011 10:11am Jan 11, 2011 10:11am
Quote
Also lack of selling pressure can also make prices rise even when buying pressure stays the same i.e. sellers don't want to sell at the current price.

If sellers don't want to sell at the current price and raise their offers, would price go up if nobody hits the offer?

And I would propose that sellers wouldn't raise their offer unless there was some reason for them to believe selling at the current price was not in their interest. So they must have some piece of information that brings them to the conclusion that they are currently selling too cheap. Whether buyers come to the same conclusion and hit the offer is another question.
  • #14
  • Jan 11, 2011 10:14am Jan 11, 2011 10:14am
Quoting joekurr
If sellers don't want to sell at the current price and raise their offers, would price go up if nobody hits the offer?

And I would propose that sellers wouldn't raise their offer unless there was some reason for them to believe selling at the current price was not in their interest. So they must have some piece of information that brings them to the conclusion that they are currently selling too cheap. Whether buyers come to the same conclusion and hit the offer is another question.
If we are talking about last traded price then you are right, but the bid ask would widen, however the sell side would be there to keep the spread small so that needs to be factored in.
Kind Regards Chris
  • #15
  • Jan 11, 2011 10:26am Jan 11, 2011 10:26am
Quoting joekurr
And I would propose that sellers wouldn't raise their offer unless there was some reason for them to believe selling at the current price was not in their interest. So they must have some piece of information that brings them to the conclusion that they are currently selling too cheap. Whether buyers come to the same conclusion and hit the offer is another question.
See Osler's paper Price Discovery in Currency Markets
http://people.brandeis.edu/~cosler/p...ne-10-2010.pdf
  • #16
  • Jan 11, 2011 10:54am Jan 11, 2011 10:54am
Quoting randomuser
See Osler's paper Price Discovery in Currency Markets
http://people.brandeis.edu/~cosler/pdf/OMM-June-10-2010.pdf

Her papers are really good, would suggest everyone reads them.
Kind Regards Chris
  • #17
  • Jan 11, 2011 12:43pm Jan 11, 2011 12:43pm
While there are indeed instances where the spot rate is manipulated to suit the interests of participants involved in forex-based derivatives, the majority of the activity engaged is of a speculative nature. I'm a bit tired as to cite a credilbe source, but I have seen figures ranging from 70% - 85% in some material.

If we can conclude that the majority of activity is speculative in nature, then it means that at some point after initiating a position and hopefully realizing gains, participants would need to liquidate their position, for whatever reason it may be; fear of holding positions overnight/over weekend; the need to keep assets liquid; investor commitments; whatever. But they must all do so in an efficient manner; allowing their covering orders to get filled as completely as possible, without adversely moving price against them in the process, as this would decrease profits. If you were fortunate enough to command an institution of such size, how would you go about doing this?

On the flip-side, your institution while sizeable, is certainly not unlimited in capital, or well-endowed to match that of larger financial organizations such as commercial banks. Your objective is to make a profit, while not putting the firm in financial jeapordy. You understand that being on the wrong side of the market in a prolonged move against your position, may result in dire financial consequences for your firm, and as such you need to place a covering order (stop-loss) to safeguard from unfavorable price movements.

Can you see the connection I am trying to create?

I've noticed that discussions breaking down trading to a microstructure perspective have been popping up more often, and I eagerly anticipate sharing ideas to hopefully learn something I was unaware of, or look at things from a different point of view.

Good initiative

Regards,
xXTrizzleXx
  • #18
  • Last Post: Jan 11, 2011 1:58pm Jan 11, 2011 1:58pm
Quoting xXTrizzleXx
While there are indeed instances where the spot rate is manipulated to suit the interests of participants involved in forex-based derivatives, the majority of the activity engaged is of a speculative nature. I'm a bit tired as to cite a credilbe source, but I have seen figures ranging from 70% - 85% in some material.

If we can conclude that the majority of activity is speculative in nature, then it means that at some point after initiating a position and hopefully realizing gains, participants would [color=SeaGreen][i][u][b]need to liquidate...
Thanks Trizzle,

If I had to liquidate a large position would do it piece meal into areas of high liquidity such as stops as you connected in you post.

Knowing where the stops or general liquidity to exit a position could be done by selling (for eg) a some of the position and watching how price reacts, if it spikes then liquidity is a bit thin, so would need to somehow attract orderflow to that price?
Kind Regards Chris
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