Trading Price Movement
It may seem simplistic, but there are really only two major principles any market has that you need to know to create consistent profits from your trading or active investing. And these principles hold true for most liquid markets throughout the world.
- Price will rise if we see increasing buyer demand outweighing sellers and accepting the ask price.
- Price will fall if we see increasing seller demand outweighing buyers and accepting the bid price.
We can see evidence of this in so many markets around us. The Australian property boom of 2003 had buyers scrambling to get into real estate accepting higher ask prices, with massive price increases as a result. The record sell off on global stock markets with the global financial crisis caused a stampede of sellers accepting lower prices. Even something as simple as the price of prawns at Christmas – when there are more people prepared to step in and buy for their Christmas parties, the price goes up!
So the basic principle behind trading price movement is quite simple, but the ART of making money from trading is learning to read the market to determine if there is more buying or selling pressure, or the market is in equilibrium. A key skill in reading the market is also learning to assess when the market control is changing between these three states.
What to Consider when Trading Price Movement
There is only one way that I read the market and that is to look to the general movement in price. I am not so concerned with why a price has moved, only where the price is now and where it is most likely to move to next.
So when assessing the general movement in price, my primary considerations are:
- Where are the closest major support and resistance levels?
- Where is the current price in relation to these support and resistance levels?
When I have those answers, I then have a feel for where price is most likely to move to. For example, if current price is close to a prior resistance level, especially after a strong push up, then a move down off the resistance level is more likely. Likewise, if price is close to a support level after a strong push down, then a move up off the support level is most likely.
Remember, at this point, we are looking at general price movement. In the following article we’ll look at building on our market read and likely price movement by looking at more specific, short term price action.
A Note on Indicators
The number and use of indicators that are available to assist traders with their trading decisions is enormous, ever increasing and often overwhelming. However, all indicators are simply derivatives of price and/or volume and all of them require some subjective input and/or interpretation.
My preference is to use price as my primary analysis tool as it is current, factual and unquestionable. I only utilise a very small number of indicators as support for my trading decisions, never as the sole basis for my trading decisions.
Predicting vs What is Actually Happening
My aim in analysing the price action is to determine what is occurring in the market. I then make my trading decision based on this analysis and my assessment of what the next most likely movement in price will be.
I need to make an important distinction here. In my trading I am taking a position on the MOST LIKELY next movement in trading price movement based on the current market conditions. I am not trying to PREDICT future prices.
When my current price analysis indicates that market conditions have changed, then I review my position. Instead of thinking in terms of what price is ‘going to do’, think in terms of, ‘if price does this then I’ll do that’. This then covers you for price going either with your read or against it. It also helps to reduce the emotional attachment of each trade.
Trying to predict the future price is dangerous because it clouds your assessment of what is actually happening. Predicting causes many traders to ignore their stops and incur large losses as they are inherently saying that they are right and the market is wrong.
Be ready for price to go either way and stay away from thoughts of what you think price should be doing.