why is market microstructure so useful?

Hi all!
I started this thread to answer one of my deepest doubts.
Reading many threads of newbie asking for some info about what they should study to become profitable traders i often see many Pros recommending getting into market microstructure, so: partecipants of the market, type of orders, order flow, type of markets etc..in one post of james16 thread (http://www.forexfactory.com/showthre...44#post4242344) i've read "most of what your going to find that is old is going to be worthless.. what you will find relating to the price action and volume will be priceless"..
thanks to post like this and other threads (in particular those ones about order flow) i started studying this kind of stuff: i started from "trading and exchanges market microstructure for practitioners" by larry harris, than i passed to darkstar posts and many papers of people like Osler,Berger,Rime and many others you know better than me. All i found at the moment, obviously helped me understanding the market, But i wanted to ask:

how can all this material improve my trading?

I mean: i understood why false breakout happen, why price that accelerates towards a support/resistence (or supply/demand zone) is likely to turn or what kind of action takes place at S/R at many other things.. in other words i understood the "why" of many things.. but many traders trade profitable without reading 400+ pages book and papers and without knowing the difference between Dealer Market and Auction Market.
In the last article i'm reading, "The market microstructure approach to foreign exchange: Looking back and looking forward" by Michael R. King, Carol Osler and Dagfinn Rime,much in line with this one by darkstar "why is market microstructure useful" i understood "Order flow can and does reveal the intentions of private information" but still remain the main question " Is determining order flow something this kind of lectures can help me with or i'd do better staring at charts and practice with price action?

moreover, my dream is to become a quant trader.. is market microstructure more important for this kind of traders? if yes, in which way?


anyway i have to say i haven't finished my market microstructure studies yet.. so my post doesn't want to say "market microstructure is usless.. don't waste your time" but i only hope to have some answer from more experienced traders that can confirm i'm on the right way or tell me if i'm missing something.

greetings
jc

How can understanding market microstructure improve your trading?

You can’t give someone off the streets a scalpel and expect them to perform surgery, or give someone who has never worked with coding a computer and expect them to start writing programs. They must gain the knowledge and experience to be able to perform those skills. But to gain knowledge for anything, you must begin at the foundation of that subject and build yourself up to learning the more advanced concepts. Well, market microstructure is that foundation to your trading. It fills up the gaping hole to your understanding of why price is moving the way it does and puts meaning behind trading tools such as technical analysis and price action.

I use to wonder why price would sometimes respect a support and resistance level, and why sometimes it would break it. Why price would sometimes reverse at a Fibonacci level and then sometimes shoot straight through it. Or why I could see the perfect chart pattern and enter a trade only to have it go against me. Well learning market microstructure gave the explanation of how price changes and why it is doing what it does. It explains what causes the 5-pip, 50-pip, and 100-pip movements. Studying market microstructure allows you to break down markets into their basic structure and understand how every transaction that occurs plays a role in determining the price a security will trade at.

When studying to become a surgeon, you must first study the beginning concepts that relate to surgery such as biology and anatomy, and then branch into what type of practice you want to get into and how to properly do it. Before becoming a programmer, you have to learn the basics such as what coding is and what it looks like, and then choose the type of language you want to learn. Market microstructure is the basis which allows you to gain a deeper understanding of how trading tools such as price action and fundamental analysis are properly used and how it all relates to price change. This understanding is what allows you to build a profitable strategy based on actual market dynamics rather than a simple lagging MACD cross or oversold RSI.

One major factor that improved in my trading after learning market microstructure is that I became much more selective in the trades I took. Each trade is filtered with actual reasons of why it should work other than because some chart pattern or indicator says it will. I gained a deeper meaning of what market cycles, trends, and chart patterns are actually telling me and I can rely much more on my intuition. So do you need to know market microstructure to be a profitable trader? I guess not, although I’ve never met anyone profitable who doesn’t. But I can for sure say that learning market microstructure will highly benefit your trading. Remember, trading is a probabilities game in which you are up against the best traders in the world. Any upper hand over your opponents will give you an edge, and learning market microstructure can definitely give you a better edge.

I recently started a thread on another site relating to this concept. I think it can really help you out and you're welcome to follow along - FXMasterSK - Market Microstructure and Order Flow Analysis

Hi J.C if you want to realy learn on how to make money in this market...enter to my thread
http://www.forexfactory.com/showthread.php?t=478693

Why was OP's thread moved to commercial? LOL

thanks for your answers guys!

hey FXMaster i like this quote in particular from your post!

i've gone through so many trading systems that seemed to be profitable but at the first loss on a trade that should have been an A+++ according to the respective system i used to wonder the same questions above. so i looked for another system and so on. untill a few months ago when i found this market microstructure stuff and i understood it could help me understanding why a trade could be an A+++ or not. as i wrote in the first post it already helped me a lot answering this type of question.

So what i understand is that market microstructure can give a more "professional" mindset to stay in the market that can support your style of trading, (based on price action, news events, fibonacci or whatever) BUT DOESN'T REPLACE IT.

please correct me if i'm wrong
greetings
JC.

PS: FXMaster I've seen your thread. very interesting! keep posting

Yes, market microstructure is not a trading style on its own although you can build plenty of strategies around it. Market microstructure provides an understanding of why technical analysis and fundamental analysis should or should not work, and how supply and demand forces interact to create a price the market will trade at. Market microstructure is at its basic level just learning how markets operate.

Learning market microstructure does not mean you will become rich once you master it. You still have to figure out how you can apply market microstructure concepts to your trading, but it does provide a deeper understanding of how people placing orders due to TA, FA, or any other analysis all play a crucial role in the price a currency will be trading at. It gives more meaning to price action and you will actually be able to understand what those candlesticks or bars being printed on the price chart actually mean on an institutional level. This will allow you to get a feel for the market and make a really good educated guess at which direction it wants to break out in.

You still have lots of work to do after you learn market microstructure, but learning about how markets operate can really improve your trading. Combining market microstructure with order flow and sentiment analysis can allow you to build a vast array of strategies and inefficiencies on any time frame of your choosing. You can drastically improve your win probability rates, and combining that good risk management and discipline will have you being a profitable trader in no time. Just don't give up!

Thank you! Hope you will find it useful!