What I've never understood about trading

I used to think what caused market moves were an imbalance of buyers and sellers, but then I read something that said that the idea of "more buyers than sellers and vice versa doesn't make sense, because for every share, or currency bought or sold, there has to be someone on the other side of the trade".


If I'm buying 100 shares, there has to be a seller of 100 shares.

If I'm buying 100,000 shares, there has to be a market maker, or a number of sellers that can sell me the # of shares I want.

So how does price ever move if for every buyer there is a seller?... how do you fill up a bucket of water if every gallon of water you put in, it leaks out a hole in the bottom?

People have often used the "auction house" analogy, of an auctioneer and a room full of buyers bidding the price up, but the problem with this analogy is that an auction only goes up in price, and you can't retract your bid once it's made, nor can the auctioneer manipulate the price.

There's a book of orders where people post what they want to buy and sell at. Buying removes offer, or someone who posted the offer removes their offer at a price. It creates appearance that market moved up. Bottom line here is, that if eur/usd is now 1.125, if you have account with couple million you can make eur/usd 2.0 or whatever. In theory. There's rules about how much the price can be moved in certain time but not all markets have to obey these rules. Eg. I have X eur in my account. Lets do a direct trade. I'm selling at 2 while last trade was 1.125.. I'm buying at 1.9 .. assuming I know you have no euros to sell. It's a bluff, I'm trying to con you into thinking the eurusd is now 1.95 (mid point between 1.9 and 2.0). If you take this trade, then I can post it to OTC records and maybe somewhere it will say eur/usd is worth 2.0 if that's what you paid.. nice almost 100% jump ... Then people with stupid brokers have their accounts blown up as the brokers liquidate people thinking the price was that much now due to some news that nobody heard of yet. Of course maybe I put out some twitter rumor that eur/usd is now really worth 2.0 as i'm some "insider" (bs) etc.. Then I sell to all the buyers (and shorts who got margin calls) at 2.0 while moving my bid and offer up slowly ("trend").. Then the rumor is found out to be bs and price is back to 1.125.

This is what goes on in penny stock pump and dump. There's one key difference to popular instruments. They have options market and hedging between the options and the underlying market creates all sort of mathematical patterns because of eg. Garman–Kohlhagen and people using algos and money management schemes to trade at certain levels.

Further there's market makers who are offering to buy and sell at every price - their price moves are largely tied to what is in the books, their inventory and the options market. As far as retail FX trading goes, you want to buy at a time when the market makers are less likely to be able to slam the price around to stop you out or cause a margin call. I think there's some 10% limit maybe. So if you buy, expect market to move up/down 10% due to some extreme gaming. This can be avoided by trading only when the market is liquid and there's plenty trading. (The volumes you may see create illusion of a lot of trading going on but it's really just market makers moving money from one pocket to another. You know the reality only by price action reading and testing the market with live account - another is if there's been some news then that's likely a cause for either liquidity or illiquidity depending on the news)


I would add that those 10% moves and such flash crashes etc don't happen that much as they have problems:
1. It can scare people out of the markets and thus the industry does not like it.
2. Trades can get busted, so results are uncertain
3. The dude doing the game to move eur/usd 100% is going to have to clear some offers. If they don't manage to create a story to sell people at higher prices then they'll end up having bought high and when "market" realizes this, smart money will squeeze the gamer by moving down until the gamer blows up, so the market can they buy at the lows the squeeze created. It will look like dump and pump on charts.
4. the penny stock pump and dumpers can get outgamed by smarter gamers. I've seen very conclusive research showing some of them lost millions (after they conned people for those millions, easy come easy go)

Yes bro, good question.

A lot of retail traders don't have any idea about that and what a mistake.

Price is going up when market orders take limit orders and vice-versa

For example,

there is 20 contracts limit order @1.2000.
If you send a 50 contracts market order, you're going to get only 20 contracts @1.2000. Then the price is going to up-tick in order to fill the rest of your order.
(for example 30 contracts limit order @1.2001)

Market orders mean agressivity because the trader is willing to buy/sell no matter what. Market orders consume liquidity and limit orders offer it.

When Market Makers think there is a directionnal risk they tend to reduce liquidity (by cancelling limit orders at prices). Therefore price can move easily because there is almost no liquidity available and when price has reached an interesting lvl the Market-maker start offering liquidity again and you can see an equilibrium taking place. You and I lose money. Hedge funds too. Market makers don't.


When market is balanced, market makers can handle easily because the flow is balanced: buyers buy and sellers sell. It's not the case when the market is imbalanced so the counterparty risk is huge and that's why by reducing liquidity market makers make the price moving fast more than ever.

Fair point. my understanding is that people are only happy to close out positions at certain levels creating supply at certain prices. Equally people are only happy to buy at certain levels creating demand at those levels. If that supply is exhausted the supply moves to the next level. Basically supply and demand. level 2, depth of market or whatever you wanna call it.

A lot of well meaning people often make a huge mistake when trying to explain why the market did what it did at any given time. They say things like, " the market went up today because there were more buyers than sellers". Or they say," the market went down due to a 'seller's' strike". These are completely wrong. The market's sole purpose is to bring a buyer and a seller together. Every price where a transaction takes place MUST have a buyer and a seller.

WHAT MOVES THE MARKETS, IS THE RELATIVE ENTHUSIASM OR AGGRESSION OF EITHER THE BUYER(S) OR THE SELLER(S).

Let's take a simplified example.

Suppose you want to buy a car. The price you are willing to pay is 50,000. The seller of the car is asking for 100,000. Now let's suppose we can't just split the difference and make a transaction at 75,000.

The car will sit there and no transaction will happen unless one of you is willing to move. Suppose you as a buyer see three more potential buyers coming. You may now have incentive to raise your price to 100,000. You are now willing to hit the ASK. This willingness is enthusiasm or aggression. The opposite could be true as well. Suppose the Seller becomes aware that another sellers of the same car is coming and is willing to take 45,000. The first seller would have incentive to quickly lower his price to 50,000. That is, the seller needs to hit the BID and make a transaction happen before the buyers gets word of the other car on the market.

This is what actually moves the market. Buyers willingly hitting the ASK will raise price and Sellers willingly hitting the BID will cause price to fall.

So while every transaction has a buyer and a seller, one side is AGGRESSIVE and the other side is PASSIVE. Price moves because of the aggressor.

Very good explaination.

Lot of traders bullshitting about more buyers than sellers when they just see a bullish candle which doesn't lay any logic at all.

Buyers were apparently very enthusiastic/aggressive at eur/usd 1.39-1.4 and now it's trading at 1.1x. Sellers apparently got excited at 1.04.

Market makers can have zero losing days because they don't speculate about direction. All enthusiasm/aggression vanes as the excitement of buying or selling ends or they run out of money/margin. Then starts the squeeze. Eur/usd is having a lot of squeeze this year. The time to sell was at 1.35-1.4, not 1.04.

Thanks guys, particularly HiddenGap. That explains things much better. When I see big volume, I shouldn't think " there's a high number of buyers/sellers", but rather which side is more aggressive at that price.

Hidden, can you also give an explanation to why market makers try to hunt for stops?

If the smart money's real intention is to push price higher, why do they want to hunt other people's stop loss orders?

Orders that create a loss or increase exposure are pretty much free money for market makers. So of course the market makers try to grab all they can. More volume and volatility helps to bring more traders and thus more losers and profits to market makers.

When trend is down and people all want to sell, technically the price can go to 0.01 or some such if there was no limits in place. If 0.01 is where the only buyer is and someone wants to sell at any price, then that's where it will go. Because stop orders exist in the price vacuum between current price and the 0.01, they all get executed in a quick "flush down the toilet". As stop orders are market orders, even just executing a single such order ensures price goes to 0.01 if that's where the only buy order remaining is. (note that there's limits to the max move per few mins in some markets but not all)

I'm not sure what happens if there is zero buy orders in the book and you try to sell at market - maybe it's not possible to do - for most retail traders, all orders are intercepted by retail "brokers" (bucket shops) and the broker trades against the speculator and passes part of the trade to market makers who then proceed to "find the counterparty".. atleast that's what the official story is. The reality is more sinister and goes directly into why most speculators lose even if after taking their loss they find the price always goes the way they thought it would - if only they held a bit longer... except that if they do that the price is either not going anywhere or going to their loss. If price stays still, you pay swap and/or interest for margin. So free money for market makers and brokers and near 100% probability of speculators losing. Probably if speculators accounts are surveyed over 10 years, 100% will have lost money. It's still possible to make money for retail trader but it's pretty much about becoming the guy who people complain about. ie. profitable traders are called market makers and brokers and bucket shops. The bucket shop is probably the most profitable out of those, that's why there's so many.

The exception to above is if you have some sort of insight (like Soros, or ability to predict QE etc) or command respect of the markets such that you can move them by talking them up or down. I actually tested buying few minutes after QE during the big move up that never returned. The move slowed down a lot and then looked like it would reverse so I had to back off the leverage (was maxed out to find out what happens), only to find it went up a lot more. I was already in before the move but wanted to add more (which caused the problem, shouldn't have done anything), so I also saw it go up at very fast pace (market makers were losing and I was winning).

Back in my school days we were told the aggressor is the trader hitting the bid or the ask of the market and the passive trader is the one waiting for the bid and ask to his price he is willing to buy or sell at.

So while technically you are right price moves because of an 'aggressor' taking a decision to trade, when price moves higher and lower in the market it is due to more willing demand or supply. (aggregate buyers and sellers). Price move because of an imbalance between willing demand and willing supply.

When trend is down and people all want to sell, technically the price can go to 0.01 or some such if there was no limits in place. If 0.01 is where the only buyer is and someone wants to sell at any price, then that's where it will go. Because stop orders exist in the price vacuum between current price and the 0.01, they all get executed in a quick "flush down the toilet". As stop orders are market orders, even just executing a single such order ensures price goes to 0.01 if that's where the only buy order remaining is. (note that there's limits to the max move per few mins in some markets but not all)

"When trend is down and people all want to sell, technically the price can go to 0.01" no that is not right, don't forget there is always a buyer on the other side. The trend is down because there are more sellers than buyers, not because 'all people want to sell'

The price is always the 1/2 point between the closet bid order and closest ask order.

It is not market makers hunting for stops. complete fallacy. MM create the market by offering bid and ask. MM make money collecting the spreads.

Institutional traders hunt for stops because they can create a quick price momentum in their favor, as stops are actually market order executed on bid/ask hitting them. So they hunt in times of low liquidity. Stops are effectively 'sell to close' orders below current price and 'buy to close' order above current price.

IT can easily locate stops because all they have to do is find where technical traders place their stops (at turning points, at round numbers, at S/R, Fibos, trend lines) Not kidding, but you could easily create an order book by just understanding where technical traders are 'trained' to put their stops.