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A theory of trading

  • #1
  • First Post: Edited Aug 30, 2014 4:41am Aug 27, 2014 11:00am | Edited Aug 30, 2014 4:41am
I'm learning english. There will be a lot of mistakes, so if you don't understand sth, please feel free to ask any questions.



1. Who do control transactions? Buyers or sellers?

It's a fundamental question and the answer is very valuable.

There are 3 possibilities :

1) control of buyers

2) control of sellers

3) Neutralized market:

- a) neutralized market with buyers influence
- b) neutralized market with sellers influence
- c) Very neutralized market (neither buyers nor sellers control transactions.)

Some examples:

1) Buyers control the auction process: why? Because you can observe prices is moving up in a fast way.

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2) Auction process controlley by sellers

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3) Neutralized market

a) buyers influence::

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b) sellers influence:

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c) Very neutralized market:

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Do you understand why am I talking about very neutralized market? Because the Bullish auction process isn't effective anymore. Indeed, Buyers control the auction process in periode 1. Then in period 2, you observe that Buyers wait TOO MUCH TIME to show that they're still in control. You can say that they are not able to push up price anymore and that's why I use the term of"very neutralized market"


2. Let's talk about the concept of value

What's the purpose of a market?

A market does exist in order to facilitate transactions between buyers and sellers. That's all. I assume that you're familiar with the concept of supply and demand and price of equilibrium as called "Value".

In fact (in normal market conditions), price is lateralizing when markets participants have found the Value. Why?

1) Trends appear when there is a disequilibrium between supply and demand. Why? Because the purpose of a market is to facilitate transactions.

So, when there is too much buyers, we need to move up IN ORDER TO FIND SELLERS.

2) And then you can see a sideways market/trading range/balanced market/neutral market, whatever, it means that BUYERS and SELLERS are making business.

Buyers do agree to buy at that price and sellers do agree to sell at the same (zone of) price.

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Also we don't need prices moves because the both side are satisfied. Do you understand? We don't care what is the real value of sth. We just need to consider what is the value according to markets participants. It's sth quite ironic becauser sellers consider that price is too high compared to their perception of value and buyers think price is too low in relation to their value's perception. Therefore, their trading flow neutralizes price because supply is equal to demand and vice-versa.

Typically, these balanced area are highest volume zone and price tends to spend a lot of time around it. I think you can understand why? Because if we, buyers and sellers make huge transactions then market-makers make a lot of money thanks to fees. That's why we are always looking for a Value trading area and don't be suprised if trading ranges just occur the majority of time. That's why you may even say that volume made is a synonym for value. I want to be sure that you understand me well.

Trading range means that buyers and sellers are making a lot of business (volume). So, if there are making a lot of volume, you can say market participants have found the Value because there is an equilibrium with supply and demand.

Market makers may push down/up the price if there is a huge historical volume zone at proximity.


3. Do I understand value?

http://www.forexfactory.com/showthre...52#post7703752

4. Importance of Time (part one)

http://www.forexfactory.com/showthre...24#post7704424

5. Importance of Time (part two)

http://www.forexfactory.com/showthre...04#post7707104
  • #2
  • Aug 27, 2014 11:44am Aug 27, 2014 11:44am
Nice interpretation of reading order flow on a chart.

The next question aspiring traders should ask is, "How can I develop a strategy around this to make money?"


ps - by interpretation I mean other traders may use different terms, but its all the same concept.
  • #3
  • Edited 4:38pm Aug 28, 2014 10:04am | Edited 4:38pm
3. Do I understand value?


Traders want to be systematic. It's not really a bad thing but you can't simplify markets because you want to. Let's talk about trending market for exemple. What is a trend? Higher high, higher low? No, it's not true from a market point of view.

trend occurs when price diverges from the value. Why? Because perception of the value has changed. Why do smart-money decide to go long or short? It's not the point. Quantitative analysis, fundamental analysis, technical analysis, whatever. Price diverges from value in order to fine a NEW value zone.

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In fact, a bullish trend is a trend where value moves up and bearish trend shows a value which is moving down,

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Also reversal trend appears when perception of value has changed. That's why it's really important to look for Value on your charts. Who cares if the previous high/low is triggered? It doesn't matter. What is important is the fact that market participants decide that price is actually too expansive or too cheap.

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  • #4
  • Aug 28, 2014 10:26am Aug 28, 2014 10:26am
Some examples of Value-based trading :

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  • #5
  • Edited 8:07pm Aug 28, 2014 4:31pm | Edited 8:07pm
4. Importance of Time

“Here we are, trapped in the amber of the moment. There is no why.”


Well, Time is a fundamental concept too. I define two different concepts about time. I'd like to have a better lvl in english in order to make me understand because it's a really interesting topic. I'm going to keep it simple but I could write more about the importance of time.

So as I wrote, there are 2 differents ways to consider time imo:

a) Time as a proxy for volume

b) Time as a human structural element.


A. Time as a volume's proxy


Back then, there was no way to know about volume. You know, in the 1980s, it was quite impossible for a retail trader to know how much volume has been traded on a specific price or price are. Peter Steidlmayer had a great idea: Using time like a proxy for volume.

Why? Because when a trading range occurs, it means that buyers and sellers are making business. You can say that because price doesn't move, therefore there is an equilibrium in supply and demand. So price stays a lot of time in this trading range. That's why you can say that huge volume has been made during a balanced market phase, right?

Well the thing is as a trader you want to work with effective tools and TPO methodology is quite useful. TPO allows traders to know at which level price spends time: and a lot of time is equal to a lot of volume traded (however, there is an exception on fx because of overnight).

Retails traders often say that volume on FX Spot is irrelevant. They're wrong. You can know at which price lvl there has been the most trading activity during a specific period by using TPO methodology. How? Well, TPO measures how much time markets spend at a particular price lvl. So If a price spends a lot of time, I know there is huge volume also.

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B. Time as structural element

(I'll write tommorow)
  • #6
  • Aug 28, 2014 6:38pm Aug 28, 2014 6:38pm
Markets and Market Logic , pretty much ?


btw. price + time = value

and its easy to tell were most transactions take place.. ie. within a range .. actually in the middle of a range is where most transactions take place..
due to value or fair price.. wereas .. on a resistance or support price gets rejected.. mostlikely due to no interrest of two partys in taking trades on those levels.. ie.

unfair high or unfair low...

the market is alwas on the lookout ie. price is advertizing itselff all the time in order to fasciliate a trade between two partys
and where most trades take place there is value.. but to make money one should trade , the extremes .. ie rejections.. ie unfair values...

balance > imbalance>balance >imabalance >> etc...

so one should either trade a shift in supply and demand.. and or.. a rejection of either side..

keep on.. looking forward to your posts


btw. there is no chance to follow Volume on Spot FX .. as its a non centralized market.. but one could use futures to get a grip.. but actually volume isnt that neccessary to make sound decisions .. if one knows how to read price
  • #7
  • Aug 28, 2014 6:56pm Aug 28, 2014 6:56pm
btw , i took a the chart u posted above and drew in a trend channel (red) which basically is nothing more then a diagonal trading range...
on an uptrend with increasing value.. ie. demand.. like in this case (vice versa on a down channel)


whereas the upper and lower limit represent unfair highs or lows.. and the middlepoint a fair in this case rising value...

one could now anticiapte a change in behaviour due to to the fact that we broke the MP but after nearing the lower limit (aug25/26) the reaction didnt took us back above the MP.. ie. we rejected a former fair "value"(twice) ... so one could anticipate a downward channel.. (orange) and a change in the force of supply and demand. in the favour of supply.. but a true change most likely will concur if we break the lower limit of the red channel for good..

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as always trades can be found on the extremes.. (eitherway)

remember anything can happen..
  • #8
  • Aug 28, 2014 7:37pm Aug 28, 2014 7:37pm
Quote
btw. price + time = value

price + time = value but only with time as volume's proxy, as a TPO. Price*Volume=Value is the statement. Then you can use TPO or even tick as proxy in order to find the value distribution.

Quote
within a range .. actually in the middle of a range is where most transactions take place..

Yes, most of the time, but not always.


Quote
​btw. there is no chance to follow Volume on Spot FX .. as its a non centralized market.. but one could use futures to get a grip.. but actually volume isnt that neccessary to make sound decisions .. if one knows how to read price

As I said above "Retails traders often say that volume on FX Spot is irrelevant. They're wrong. You can know at which price there has been the most of activity during a specific period by using TPO methodology."

Actually, you can use volume on spot fx by using TPO which is volume's proxy. You can even use tick instead of TPO, it's pretty accurate too.

TPO is used as a) volume proxy and b) opportunity's regulator, if you think that volume is irrelevant on FX spot, it means
you consider tpo-metho isn't effective...which isnt the case from my experience.
  • #9
  • Edited 8:06pm Aug 28, 2014 7:52pm | Edited 8:06pm
Quote
one could now anticiapte a change in behaviour due to to the fact that we broke the MP but after nearing the lower limit (aug25/26) the reaction didnt took us back above the MP..

It's not as simple.

When price breaks a previous low or a previous high, it doesn't always mean a change in perception of value. (a range is just a value area which contains 100% of market activity).

When prices is sideways just above a previous swing High/low, it's not a good sign at all. Then you can observe a previous Value zone with a strong supply level.

I'm not saying that is was an amazing short level but you can't say that a bullish sentiment may be expected just because price broke the previous high.


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  • #10
  • Aug 29, 2014 11:55am Aug 29, 2014 11:55am
Keep on good post bro, i subscribe to this thread.
  • #11
  • Aug 29, 2014 4:54pm Aug 29, 2014 4:54pm
for me also very interesting point of view. deeply reasonable. I am with You and waiting for next words. regards
Mind is like a parachute - it is useful only if open
  • #12
  • Aug 29, 2014 5:35pm Aug 29, 2014 5:35pm
I think it's great that threads of this nature are finally appearing on ForexFactory. The concept of value is one thing every aspiring trader should know and understand. It is (at least in my perspective), the only objective way to define a "trend" - which is a term thrown around very loosely. Having said that, I would not rely entirely on value for any sort of trading decision. It should be treated as a playing field, rather than an entry factor. You've identified where good opportunities exist to take longs and shorts, which is great. As long as the playing field makes sense, I would now suggest taking it to the next level - using microstructure analysis to manage your positions. Again, as long as you can objectively define criteria with a microstructure approach, you're on your way to consistent results. Keep up the good work!
  • #13
  • Aug 30, 2014 3:25am Aug 30, 2014 3:25am
Quoting Benevolent
I think it's great that threads of this nature are finally appearing on ForexFactory. The concept of value is one thing every aspiring trader should know and understand. It is (at least in my perspective), the only objective way to define a "trend" - which is a term thrown around very loosely. Having said that, I would not rely entirely on value for any sort of trading decision. It should be treated as a playing field, rather than an entry factor. You've identified where good opportunities exist to take longs and shorts, which is great. As long...
yes, I completely agree with You that the true value of such a place like ForexFactory is seen through threads like this one. And people who aspire other traders to really take a journey of understanding the market which in my opinion is the only way to succeed in long term.
Having said that, I also think that if You can continue the thought or You can contribute/add - You should do it. If You do not want to share - which of course is Your right - just be silent reader. It is up to You. Could You explain what do You mean writing 'microstructure approach', could You give some examples? Thank You. regards
Mind is like a parachute - it is useful only if open
  • #14
  • Aug 30, 2014 4:36am Aug 30, 2014 4:36am
5. Time structurizes the auction process


What I gonna do tommorow?
What did you do yesterday?
I'll met my mother the next week.
I'd like to travel to England the next year.
I was in Portugal the last month.


Well, "Time" has an other great influence on markets. It acts like an element of structurization. As a human traders we take time into consideration.

"I'm not a great fan of intraday". "I'm gonna keep this trade overweek". "I think daytrading is the best trading style"

A fund manager (who can uses rpbots-algo trading) would like to close some trades because it's the end of the first semester and he has to show results to his clients for example. Time influences us in a very deep way. So, it's really important to keep it mind. Let's say you have an important support level. The fact is that your support is stronger if it's a previous yesterday/week/month low. Why? Because it does mean sth for us.

What's the state of mind of the day? Bullish, bearish, neutral? I'd like to buy eurodollar for an intraday trade but is it a bullish week?

1. Draw on your charts previous daily and weekly high-low.

2. Always ask yourself if the day and/or week and/or month is/are bearish or bullish.
  • #15
  • Aug 30, 2014 4:46am Aug 30, 2014 4:46am
Quoting Benevolent
I think it's great that threads of this nature are finally appearing on ForexFactory. The concept of value is one thing every aspiring trader should know and understand. It is (at least in my perspective), the only objective way to define a "trend" - which is a term thrown around very loosely. Having said that, I would not rely entirely on value for any sort of trading decision. It should be treated as a playing field, rather than an entry factor. You've identified where good opportunities exist to take longs and shorts, which is great. As long...

Yes, you're right. I plan to study microstructure one day. It's the final step imo.


+

Thank you all for yours comments guys.
  • #16
  • Aug 31, 2014 3:02pm Aug 31, 2014 3:02pm
I have seen many explanations on this matter, many of them simply wrong,
one would be the ( if the market go down there is more sellers than buyers)
or if the market go up, there is more buyers than sellers, this is simply wrong!
if anyone is saying this to you, then you know he don't know what he is talking about.

there can never! be more sellers than buyers or vice versa,
that is totally impossible! why?

here is a small explanation why,

if you buy 1 car then there needs to be a guy selling 1 car to you otherwice you couldn't buy it right? then NO TRADE
if you buy 2 cars then you need 2 sellers or NO TRADE,
if you want to buy 500 cars, you need 500 sellers, or NO TRADE,

there is only actual TRADES that are registering in the price, not seller or buyers standing by waiting to buy or sell.
this is a miss concept, I just want you to get that out because I keep hearing this over and over and over,,,,
if there is 2 million buyers on EURUSD and there is no one want to sell, there can be no trade at all, price will stand absolutely still,
if there is 2 million buyers on EURUSD and there is only 1 want to sell, price will go up 1 tick providing that he buy at a higher price then before

so why then would price go up or down?

it's because the buyer are prepared to buy the product at a higher price than it is right now, and he do so,
the result is that price will print at the higher vaue of that particular product and trade, whatever it might be,
on the chart you se that as 1 tick higher, and turn all this around if price go the other way
Bulls are stupid Animals!especially when Im short!
  • #17
  • Aug 31, 2014 4:02pm Aug 31, 2014 4:02pm
Quoting roughtrader
I have seen many explanations on this matter, many of them simply wrong, one would be the ( if the market go down there is more sellers than buyers) or if the market go up, there is more buyers than sellers, this is simply wrong! if anyone is saying this to you, then you know he don't know what he is talking about. there can never! be more sellers than buyers or vice versa, that is totally impossible! why? here is a small explanation why, if you buy 1 car then there needs to be a guy selling 1 car to you otherwice you couldn't buy it right? then...
One simpler way of say it would be:If price go up, it mean that traders are buying. If it go down, is because traders are selling. That's all
  • #18
  • Aug 31, 2014 5:21pm Aug 31, 2014 5:21pm
I must say this is akind of mistery for me, sorry if my next words sound stupid for You guys but I still can't get used to FX
My example is taken from the other market - stock exchange. To make it simply suppose the hole market are just 2 traders.
Lets say trader A has 5 shares and trader B wants to buy. The price is at $10
The price is not good enough for trader A - he doesn't want to sell -> so there is no trade
BUT trader A sends the order to his broker that he will sell at $15 - and here is what will happen:
1. no trades at $10
2. trader B must decide to rise his proposal OR trader A must lower his offer - at both cases the result is that THE PRICE WILL CHANGE to find the trade

if the buyer sends the proposal at $15 - the order of seller is already waiting - here we have the trade and the price at the chart is $15 - so we would have the gap - the price jumps from $10 to $15

now my question is: what happens when on such liquid market like for example EURUSD we have suddenly several huge orders, what happens with the price?
there must be a kind of a limit where the market must react and what would be the reaction. and if so - is it true that bigger players can try to manipulate this way the market? and the conclusion for us - if we can 'find' such a prices where the huge orders are placed - only thing we should do is to join

sorry for my English...
regards
Mind is like a parachute - it is useful only if open
  • #19
  • Aug 31, 2014 7:08pm Aug 31, 2014 7:08pm
Quoting roughtrader
...this is simply wrong! if anyone is saying this to you, then you know he don't know what he is talking about. there can never! be more sellers than buyers or vice versa, that is totally impossible! why?....
Well , how does your logic affect your trading when you want to place order either to buy or sell?
The Market pays you to be disciplined
  • #20
  • Aug 31, 2014 7:19pm Aug 31, 2014 7:19pm
Where did you get this chart? I've been looking for that DOM indicator on the right side. Thanks..

http://www.forexfactory.com/attachme...2&d=1409273560
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