我寫本章的目的在於打破和分析價格運動的動力學和心理學，首先，在最基本的層面，是個別的交易者；然後，我會將此解釋擴大到檢視交易體集體的群眾的行為。I want to demonstrate that, if you understand the psychological forces inherent within traders' actions, you can easily determine what they believe about the future by just observing what they do. Once you know what traders believe about the future, it's not that difficult to anticipate what they are likely to do next, under certain circumstances and conditions.
What is really important about this insight is that it will help you to understand the distinctions between wishful thinking and the actual potential that exists for the market to move in any given direction. You will be learning to let the market tell you what to do by understanding the forces behind its behavior and then learning to differentiate between pure, uncontaminated market information and how that information is distorted once it starts doing something to you.
巿場的最基本組成就是交易員。請謹記在心，交易員是能對價格有所行動因而造成價格變的唯一的力量。所有其他的因素都是次要的。是什麼形成巿場的呢? 兩個想要交易的交易員，一個要買而另一個要賣，他們同意一個價格，然後進行交易。
最後成交價 (last posted price) 代表什麼呢? 最後成交價是兩方的交易者在同意交易的當下，其中一方願意付出的而另一方願意賣出的價格。 It reflects an agreement in present value between those traders acting at that price.
什麼是 bid? 某個交易員喊出他要買進的價格。什麼是 offer? 某個交易員喊出他要賣出的價格。交易員要怎麼賺錢呢? 要在這種遊戲賺到錢只有兩種方式。你相信以現在的價格買進，能夠在以後用較高的價格賣出。或者，你相信以現在的價格賣出，能夠在以後用較低的價格買進。
Now, let's take a look inside the pit to see what has to happen for prices
to move off equilibrium and how this will tell us what traders believe.
98-18 The offer, sellers attempting to sell high.
98-17 Equilibrium, the last price.
98-16 The bid, buyers attempting to buy low.
因為交易的唯一目的是要賺錢，我們可以假設一個交易員不會相信他將會虧損而故意要進行一個交易。而且一個交易要存在必需要有兩個交易員同意一個價格。然而，在兩個交易員同意交易的當下，他們都已讓自己置身於巿場的風險中。也就是說，在下一個 tick，將會使其中一個成為贏家，而另一個成為輸家。因為我們知道兩個交易員都想要贏，都不想輸，我們可以假設兩個交易員對該合約的未來價值的信念是完全相反的。所以對於同意一個價格而進行交易的兩個交易員，對於未來有完全抵觸的相反的信念。買進者相信他買進後，未來能夠用較高的價格再賣出去，而賣出者則相信他賣出後，未來能用較低的價格再買回來。
假如下一個 tick，將會使其中一個成為贏家，而另一個成為輸家，我們可以假設兩個交易員都不認為自己會成為輸家。假如賣出者認為下一個 tick 價格會變高，他怎麼不會等一下以更高的價格賣出呢? 對於賣進者來說也是如此。這是這個遊戲的目的，也是賺錢的唯一方式。Basically what we have is a situation where two opposing forces are clashing; both believe they are right about the future, and only one side can profit at the direct expense of the other.
If the last price of a bond future was 99-14, what has to happen for the
price to move to 99-15? Very simply, some trader has to be willing to bid
and pay higher than the last price. This means that relative to the last
posted price, he has to be willing to do the opposite of buying low. Any
trader or group of traders willing to buy high or sell low relative to the last
posted price is very significant for several reasons.
First, a trader willing to buy high or sell low instead of buy low or sell
high has to have a stronger conviction in his belief in the future value, even
if his conviction is out of panic. Second, he is making the last price a bottom.
Third, he is aggressively taking the initiative and is making losers out of
everyone who sold at the last price and deepened the losses of those who
sold lower. Fourth, he is creating price movement that can possibly gather
momentum if other traders perceive the new price as low relative to the
future. This will also be true for the trader who is paying up to liquidate a
position. On the other hand, the seller on the other side of his trade is
being lured into the market by the attractiveness of the high price at which
he can sell. He believes he is getting the edge. He is in fact selling high, but
he is not creating movement or much of a possibility for momentum in his
direction. He is picking a top and waiting for something to happen, hoping
it won't go any higher.
Now, what do the actions of the two traders represent about the market
in its collective form? First, this trade tells us that nobody had a strong
enough belief in the future value to risk selling it to him at the last price or
lower. Second, nobody was aggressive enough to want to enter the market
short or liquidate an existing long position by offering to sell it at the last
price or lower. A consummated trade at the next higher level creates a new
equilibrium. This new equilibrium makes winners out of all the buyers at
the last level and losers of all the sellers at the last level.
All of the losers at the last price level or lower would have to maintain a
belief in the future value to stay in their position or demonstrate a
conviction in this future value by adding on to their positions. This is
because each new level the price is bid up makes it that much more
attractive to them. If they believed it was high at lower levels, at each higher
level, it's even a better trade. However, at the same time, each move the
market makes against their position invalidates the sellers' expectation of
future value. Each move clearly demonstrates that the sellers are passive,
that the buyers are the aggressors, and that the buyers have a greater
potential to move the market in their direction.
The fact that buyers are aggressively bidding up the price and paying
more and more again tells the observer something. It tells him there aren't
enough sellers to meet the buyers' demand for a trade at each new price
level. If there is a limited supply of sellers, those traders wanting to buy
will have to compete among one another for the limited number of sellers
available willing to take the other side of the trade.
Just observing this price action tells you that at the present moment, the
momentum is in favor of the buyers. Prices would not be bid up unless
there were fewer sellers in relation to the buyers. If traders continue to pay
more and more, the price gets further away from old sellers. Eventually
their belief in future value will erode, and one by one the sellers will join
the existing pool of buyers competing against one another for the fewer and
fewer traders willing to sell. As long as the ratio between buyers and sellers
remains as I have just described, there is very little potential for downward
price momentum to be established.
Now what will start to tip the balance to cause the market to fall back?
For one thing, old buyers will eventually take profits. When they do, they
will be joining the existing pool of sellers, thereby increasing the number of
traders available to sell. If a move gathers enough steam, it can become
similar to a frenzied shark feeding. Eventually, prices will be driven way out
of line with some economic factors other traders perceive as relevant
compelling them to enter the market in the opposite direction. If these new
traders enter with enough force, it will likely cause old buyers to panic
adding to the downward momentum.
Maybe you can visualize this back and forth action. When there are more
sellers than there are buyers to take the other side of the trade, the balance
will be tipped. Sellers will then aggressively offer to sell lower than the last
price, responding to what they perceive as a limited number of buyers to
take the other side of the trade.
All price movement is a function of group behavior. The market prices
flow back and forth like a tug of war between those who believe and
expect the market to go up—and consequently buy— and those that
believe the market will go lower—and consequently sell.
If there is no balance between the two forces, one side will gain
dominance over the other. As prices move farther and farther away from
the weak group, the emotional pain of admitting they are wrong will be in
direct conflict with their need to avoid losses. Eventually, one by one they
will lose faith in their position and liquidate their trade, adding to the
momentum of the dominant force.
The prevailing force will continue to dominate until there is a general
perception that prices have gone too far and are out of line with other
related factors. The members of the dominant force will have to switch
sides to liquidate their positions, creating momentum in the opposite
direction.
As individuals, if we do not have the strength actually to move prices in
the direction we would most benefit from, then the next best thing is to
learn to identify and align ourselves with the side that has established
dominance until the balance shifts and again align ourselves with the side
establishing the strength.
As prices move back and forth in this tug of war, it creates an ebb and
flow that is easily identifiable in price charts or point and figure charts.
These charts will show us in graphic terms how the forces interact and
counteract. They are a visual representation of traders' beliefs in the future
and the intensity in which they have been willing to act on those beliefs.
If, for example, a market has been making consistently higher highs and
higher lows, to determine what is likely to happen next, ask yourself the
following questions:
1. What kind of price action will sustain the buyers' beliefs that they can
make more money?
2. When are sellers likely to come into the market in force?
3. Where are old buyers likely to take profits? Where are old sellers likely to
lose faith in their positions and bail out?
4. What would have to happen for buyers to lose faith? What would have to
happen to draw new buyers into the market?
You can answer all these questions by identifying certain significant reference
points where buyers' and or sellers' expectations are likely to be raised and where
they are likely to be disappointed if they don't get their way.
Actually, all this works quite nicely in the typical market behavior patterns and
price formations with which we are all familiar. So, we are going to look at the
psychological makeup of some of these typical patterns. However, before we do,
I want to cover a few more definitions.
The market's behavior can be defined as the collective action of individuals
acting in their own self-interest to profit from future price movement while
simultaneously creating that movement as an expression of their beliefs about the
future.
Behavior patterns result from the collective actions of individual traders doing
one of three things: initiating positions, holding positions, and liquidating
positions.
是什麼因素讓交易者進入巿場呢? 因為他相信可以賺錢，而且巿場目前的狀態提供進入交易的機會，其價格的將會高於或低於結算的價格。
是什麼因素讓交易者保持一個部位呢? 他仍然相信這個交易還有獲利的潛力。
是什麼因素讓交易者結束一筆交易呢? 他相信巿場已經不再提供賺錢的機會了。這意味著在一個獲利的交易中，巿場可能的移動方向將不再讓交易者獲得更大的利潤，或者相對於可能增加的獲利，覺得繼續留在交易中的風險太高了。或者，在一個虧損的交易中，交易者相信巿場的移動方向不太可能讓他打平虧損，或是這筆交易是一個預計的風險，其為事先設定的預定虧損水準。
If you look at any price chart, you notice that over a period of time,
prices will form patterns in a very symmetrical fashion. These kinds of
symmetrical-looking price patterns are not an accident. They are a visual
representation of the struggle between two opposing forces—traders
squaring off, so to speak, taking sides and then having to switch sides to
liquidate their trades.
Significant Reference Points
Now, what you would be looking for in these charts are significant market
reference points. These are defined as anything that causes traders'
expectations to be raised about the possibility of something happening.
They are points where a large numbers of traders have taken opposing
positions. Based on those expectations, they will continue to hold a
position in the belief that the expectation will be fulfilled, and most
important, they will likely liquidate a position as a result of the expectation
being unfulfilled
Significant reference points are places where the opposing forces (traders
with opposite beliefs about the future) have taken a stand, where they have,
in their minds, prescribed for the market very limited ways for it to
behave, an either/or situation.
The more significant the reference point, the greater the effect traders
will have on prices, as the balance of power will shift dramatically between
the two opposing forces at these points.
These expectations about what the market will do, projected into price
levels, are especially significant because both sides, buyers and sellers, have
decided in advance their degree of importance, where one trader is taking
one position, betting the market can't or won't do something, and the trader
taking the opposite side of the trade is betting that it will.
So, reference points are price levels where many traders on one side of
the market are very likely to give up their beliefs about the future, whereas
the other side will have their beliefs about the future reinforced. It is where
each side expects the market to confirm what they believe to be true. You
could say it is a place where the traders' expectations about the future and
the future actually meet.
This means for one side, in their minds, that "the market" will make
them winners; their beliefs will be validated. All the traders on the other
side, however, will be made losers; they will feel the market took
something away from them and will naturally be disappointed. I want to
point out here that the "objective observer" doesn't care one way or the
other; she would just be looking for signs and opportunities.
The greater the expectation traders have about something happening,
the less tolerance they have for disappointment. On a collective basis, if
you have a whole group of traders who expect something to happen and it
doesn't, they will have to trade from the opposite direction of their
original trade to get out of their position.
On the other hand, the winners had their beliefs validated, consequently
leaving fewer and fewer traders available to let the losers out of their trades.
The losers will have to compete among one another for the limited supply
of traders willing to take the other side of the trade, the side they originally
believed would be successful. For example, if buyers are the losers, they
will need other traders to buy from them to get out of their positions. All this
activity will result in a great deal of movement in one direction.
Balance Areas
J. Peter Steidlmayer and Kevin Koy in their book Markets and Market Logic
(Chicago: Porcupine Press, 1987) refer to a "value area," where they
discovered that the majority of trading activity on any given day takes
place in a normal bell curve distribution pattern. This is very easy to see
day after day when you organize trading activity so that you can see how
price corresponds with time.
I don't want to get into a lengthy discussion of their methods of
organizing market data, which I recommend you learn, other than to
distinguish between what they call a "value area" and what I call a "balance
area." Steidlmayer and Koy say that most of the trading volume takes place
within a specific price range because that range is what the market has
established as a fair price representing the value of whatever is being traded.
The distinction I want to make is that the majority of traders don't
specifically relate to a fair price or value; they relate to comfort. What gives
them comfort is doing what everyone else is doing. In a balance area, traders
are basically absorbing each other's orders or energy (their beliefs about the
future expressed in the form of energy). When I say that traders relate to
comfort, I mean some degree less of the fear they normally feel. Most of
the trades take place in a value or balance area because it is where most of
the traders feel the least fear, somewhere in the middle of the trading
range between an established high or low. This is precisely why there are
fewer trades outside the value or balance area and why, as Steidlmayer and
Koy say, these trades represent the best opportunities to make money, "to
buy or sell away from value." And that is why these are the scariest trades
to make because the trader who can make them is all alone; there is no
safety in numbers.
There are traders who relate to value by making comparisons between
various interrelated contracts and the cash markets. There are the
professional commercial or institutional arbitrage traders who will put on
or take off positions based on sophisticated mathematical formulas that
determine the present value of something as it relates to something else.
Otherwise, the majority of traders don't have the slightest concept of
value. The more time the market spends at a certain price or in a price
range, the more balance, agreement, or comfort there is in the market.
Traders are absorbing each other's orders, and nobody is willing to bid the
price higher or offer the price lower.
Eventually someone will enter the market who doesn't agree with
everyone else and believes there is a possibility for the prices to move
much higher or lower. This person or group of traders will basically upset
the balance with their buying or selling activity. If their activity is forceful
enough, it will set off a series of chain reactions as it causes other traders,
who are either holding positions or watching the market for opportunities,
to confront these new conditions.
If the balance is tipped in favor of the buyers, for example, it may attract
new buyers into the market, creating more buying force and, hence, more
disequilibrium. This may cause the traders who are holding short positions
to liquidate. To do that they will need to be buyers, leaving fewer and fewer
sellers willing to take the other side of the trades the buyers want to get into
and the old sellers want to get out of. These traders will compete among one
another for the dwindling supply of sellers, bidding the price higher and
higher to make it more attractive for someone to sell.
While these traders are in their own little bidding war, they usually lose
sight of the fact that the rest of the world is watching what is going on.
There could be a trader who is looking to put on a massive hedge to protect
the value of an investment portfolio or crop. He is observing this price
action from a completely different perspective than the traders on the floor.
The floor traders are just concerned with getting their share and not
missing out on the opportunity these rapidly rising or falling prices
represent. The hedger, on the other hand, is looking at the price rise as an
unexpected gift. The rally could have provided much higher prices than he
anticipated for locking in the value of something he already owns.
So the commercial trader decides to put on a hedge. And you can assume
if one commercial thinks the price is good, others will too. Anyway, if the
hedger has an order he perceives to be big enough to stop the rally, he will
give instructions to the floor brokers handling his order to do scale in
selling, the purpose being to get as much of the order sold as possible
without ruining the rally.
However, it won't take long for the other floor traders to figure out what
is going on. They are very aware of which floor brokers fill orders for big
commercial and institutional customers. Once they find out someone "big"
is in the market selling into the rally, few if any of the floor traders will go
against them by continuing to buy. No one wants to get caught at the top.
So as each group of traders finds out who is selling, they will all try to
reverse their positions by selling, and the cycle starts all over again.
Watching this happen from the outside of the pit, it would seem that the
reversal is instantaneous, but it isn't. It occurs in waves, as the information
about who is selling spreads from the source outward, very much like the
waves that result from throwing a stone in a pond.
This leads me to the observation that few traders have any concept of
value. They know that price movement creates an opportunity to make
money, and it can just as easily take the money away if they don't know
what they are doing. If the price trades within a certain range for a period of
time, traders will become comfortable with that balance area, making it easier
for the trader to trade. As prices move out of the balance area, fewer traders will
participate because of what they perceive as more risk than they are comfortable
with.
Highs and Lows
Probably the most prominent of these significant reference points are previous
highs and lows. If prices are moving steadily higher, buyers will begin to
anticipate whether or not prices can penetrate the last high, and sellers will be
looking for another top.
In the mind of the seller, that last top, or other tops in the distant past, was a
place where the market met enough resistance to stop the rally. In other words,
enough traders thought the price was expensive the last time it was there, and
they will begin to anticipate whether the same will happen again.
Both buyers and sellers will have raised expectations about the likelihood of
the market doing one of two possible things—making new highs or failing to
make new highs. As the market approaches this high, if some of them are willing
to bid the price past it to some significant level, it could make believers out of
other traders who were on the sidelines. If these new traders come into the
market as buyers, it will add to the upward momentum, possibly causing old
sellers to bail out of their positions. This will also add to the upward momentum
of price movement.
Support and Resistance
In a falling market, support is a price level where buyers entered the market or
old sellers liquidated their shorts with enough force to keep prices from going
any lower. In a rising market, resistance is a price level where sellers entered the
market or old buyers liquidated their longs with enough force to keep prices
from going any higher.
Support and resistance levels are significant reference points because many
traders recognize support and resistance on charts and believe in their
significance.
That statement may seem redundant to some people, but it really illustrates a
very important point about the nature of the markets (traders acting on their
belief in future value). All beliefs eventually become self-fulfilling prophecies.
If enough traders believe in the significance of support and resistance, and
demonstrate their belief by making trades at those levels, they are in effect
fulfilling their own beliefs about the future.
As observers, if we know that each side (in the perpetual tug of war
between buyers and sellers) expects one thing to happen, then we will
know who will be the winner, who will be the loser, what they will likely
do in each case, and how it will affect the balance between the two forces.
For example, if buyers are bidding up a market, causing prices to rise, and
all of a sudden many traders are willing to sell for less than the last price (or
one trader comes into the market with a big order to sell), causing an
immediate price reversal, the price level at which the market stopped is
resistance.
Now, it really doesn't matter why the balance of forces shifted from
buyers to sellers. Everybody will have his own reasons for what caused
prices to reverse. All of them will usually be way beyond the simplest and
most obvious reason—that enough traders were displaying a strong enough
conviction in their belief in future value to stop the upward price
momentum and create downward price momentum.
What is really important about this, however, is that many traders will
remember the market reversed at that price level. As a result, that price will
then have a degree of significance in the minds of those traders who
experienced the reversal.
This first reversal is a top. What we don't know is whether it will remain
a top, how long it will take before it is challenged again, or whether it will
ever be challenged again.
If the buyers are dominant enough to bid the market back up to the
previous high, they will consider this second attempt a test and begin to
anticipate whether or not prices can exceed the previous high. The only
way that can happen is if these higher prices actually attract additional
traders into the market on the buy side because they believe it is an
opportunity to buy low relative to the future. Floor traders are especially
aware of whether or not new traders are being attracted into the market
from off the floor and act on this information.
For the sake of this example, if the market reversed very strongly the last
time prices approached this level, there will be many traders who will think
it will probably reverse again. As a result, they may act on their belief about
the low probability of prices trading beyond the last high and thereby
prevent it from happening. If more traders are willing to act on the belief
that it won't in relation to those who act on the belief that it will, then prices
will stop again.
Technically, once the market tests a previous high or low and fails to
penetrate, you then have a defined support and resistance area. Support and
resistance are most easily identified in point-and-figure charts because they
graphically represent price movement in reversals. Once support and
resistance are established and identified, it can be very easy to trade by
putting your orders on either side of the support or resistance line.
For example, if over the last two weeks, every time the bonds rallied to
95-25, then fell back significantly to some support level, like 94-10, what I
have just described is a support and resistance zone, commonly referred to
as a trading range. The significance of either end of the zone would be
determined by how many times prices rallied to 95-25 and failed to
penetrate, and how many times prices fell to 94-10 and failed to
penetrate. Obviously, the more attempts and failures, the more weight
these points will have in the minds of the traders who experience these
tests and subsequent failures.
For an objective observer with no bias toward any particular direction,
trading ranges can be very easy ways to make money. As the market
approaches 95-25, put in an order to sell somewhere around 95-21. Since
we know the markets are not precise, you don't want to put your order
exactly at the upper end of the range, because each time the market makes
an attempt to penetrate there will be many traders who will be anticipating
a failure. As a result, they will start selling early and the price may never
get to 95-25 for you to get filled, if you had placed your order there.
Also, put an order in the market to stop and reverse (buy two) possibly
around 95-31. Each circumstance will be different. In this example, the 6
ticks that I have given the market to define itself may not be enough. The
object would be to put your orders in a place where the highest probability
is that it will continue in the direction of your trade. If the market trades to
95-31, it still may not be enough for old sellers to become disappointed
and bail out of their positions en masse, causing prices to rise even further.
This trade will work if the resistance level has a high degree of
significance in the minds of enough traders for them to act and sell against
it in relation to those who are willing buy. Each time the market
approaches this area, traders will expect either one of two possible things
to happen. The market will penetrate, or it will fail again. In any case the
price move that results will be significant because one side of the market
will be disappointed. And if we know what will validate and disappoint each
group, then we can determine how they will likely behave and thereby affect
the balance of the market.
Since the market can display billions of combinations of behaviors from
one point to the next, significant reference points like support and
resistance narrow those behaviors down to two likely possibilities. By
putting your order on both sides, you can take advantage of the situation,
regardless of what happens.
Support Becomes Resistance and
Resistance Becomes Support
Many traders have read or heard that old support becomes resistance and
old resistance becomes support. This bit of market insight is valid for some
very sound psychological reasons.
If resistance has been established at 95-25, it is because there were enough
traders who sold at that price to make it resistance. In fact, it would probably
be the same group of traders who sold at 95-25 each time the market
approached that price. So, every time the market rallied up to 95-25 and
sold off, it made winners out of all those traders who chose to sell at or near
that price. As a result, 95-25 will take on a great deal of significance in the
minds of the traders who were successful. Each subsequent time they are
successful will only strengthen their belief and faith in that price level.
Now, the prices rally up to 95-25 again, maybe for the fourth or fifth
time, and like the last time, you will have a group of traders who believe in
that resistance level and will sell against it. Only this time the buyers are
very strong on the way up and continue to buy right on through the
resistance level.
All the traders who choose to sell at 95-25 are now faced with having to
deal with a losing trade. Some will get out with a small loss, others will hang
on hoping the market will come back. In any case, the market invalidated
their beliefs about the future, and they are suffering considerably. They had
faith in 95-25, and in their minds the market betrayed them.
If the market happens to come back to 95-25 after rallying for several
days, how do you think the group of traders who sold at 95-25 the last time—
the ones who believe they were betrayed—are going to behave? First, the
traders who were hanging on in hopes of the market coming back will bail
out as soon as they are close to being made whole. They are so grateful for
getting their money back, there is no way they will stay in that trade
regardless of what the possibilities are for additional profits. They will have
to be buyers to liquidate their shorts and will be all too happy to end their
suffering.
The traders who originally cut their losses when the market blew through
95-25 won't consider selling at that price again because of the emotional
pain of being wrong the last time they sold at that price. I am not saying
they will in turn be buyers at that level, but they are very likely not to sell.
The overall effect this will have on the balance of the market is to take
away from the existing pool of available sellers at 95-25 (old resistance),
thereby causing the balance to be tipped in favor of the buyers. Hence, old
resistance becomes support, and old support becomes resistance for the
same reasons.
Trends and Trendlines
Trends, a series of higher highs and higher lows, or lower highs and lower
lows over a period of time, work because there aren't enough sellers to
absorb the number of buyers competing with each other to get into the
market during that period of time. Adding to this buying force will be old
sellers at lower levels who finally lose faith and bail out of their positions.
They will do this in significant numbers when the prices penetrate what
they believe to be significant reference points.
Keep in mind that trends are a function of time. The next tick up could
be defined as a one-tick trend. How long will the imbalance between buyers
and sellers last?
In an upward-trending market, prices will retrace because buyers are
taking profits. This will create some counteracting pressure, but if the trend
continues after a normal retracement, it just tells you there still aren't
enough sellers around to absorb all the buyers, with enough left over to
create downward momentum. You will know when that has happened
when the trending market breaks its normal ebb and flow pattern. That is
why markets that break trendlines have a tendency to keep on going in the
direction of the break, because it signals a significant shift in the balance of
forces.
After a certain period of time, you can notice how trending markets will
develop a certain rhythm and flow, making the price movement look very
symmetrical on a bar chart. You really don't have to know why this is so,
you just have to notice that it exists. When this flow is broken (the market
trading above or below a significant trend line), it is a good indication the
balance of the market forces has shifted. Then ask yourself, what is the
likelihood the shift will gain hold and continue trending in the direction of
the break?
You don't even have to know the answer to that question. Put in an order
at a spot that would confirm the highest probability of a change in the
balance. Then wait for the market to define itself. If your order is filled,
put a stop where the market shouldn't be to confirm that your trade is still
valid. "What is a valid trade?" you ask. One where the highest probabilities
for price movement are in the direction of the prevailing force.
High . Retrace . Rally to a Lower High
I will give you an example. No matter how simple a trade this is, it has very
sound psychological reasons for working. In this example, the market made
new highs and sold off. The sell-off could be the result of new sellers
corning into the market in force, or old buyers selling to take their profits,
or a combination of both. Prices will continue to drop until enough traders
believe the price is cheap and are willing to take the initiative and bid the
price back up. As the price approaches the last previous high, buyers will
begin to anticipate whether or not prices can penetrate, and sellers will be
looking for another top.
In either case expectations by both will be raised. If some buyers are willing
to bid the price past the previous highs to some significant level, it will make
believers out of others who were on the sidelines. If they do come in, it will
add to the momentum.
Some old sellers will admit to being wrong and will have to buy to get out
of their trades, thus adding to the upward momentum.
However, what if the market approaches the highs the second time, and
sellers come back into the market again with enough force to keep the price
from exceeding or equaling the previous high? Buyers will start to become
disappointed. Where will they really be disappointed?—if enough buyers
don't come into the market to support the price at the previous low. If prices
penetrate that low, watch for buyers to bail out en masse. For them to get out
of their position, who is going to buy it from them? If everybody is trying to
sell and no one is available to buy, what are prices going to do? Fall like a
rock.
The reason why a bull market is ready to turn into a bear market when the
general public gets involved is because the general public has the least
tolerance for risk and consequently needs the most reassurance and
confirmation that what they are doing is a sure thing. As a result, they will
be the last to be convinced that the rising market represents an opportunity.
If a bull market has lasted for any length of time, the general public will feel
compelled to jump on the bandwagon so to speak, because of their
perception that everyone else is doing it and making money. They will pick
up on any reason that sounds the most rational to justify their participation,
when in reality, they will know very little about what they are doing, but
since everyone else is doing it, how can they go wrong.
A continuing bull market requires the continual infusion of new traders
who are willing to pay higher and higher prices. The longer a bull market
lasts, the greater the number of people who are already participating as
buyers, leaving fewer and fewer traders who haven't already bought and
fewer and fewer traders who are willing to bid the price up. These older
buyers obviously want to see the market keep on going up, but they also
don't want to get caught holding the bag, if the market stops going up. As
their profits accumulate from the higher prices, they start to get nervous
about taking their profits.
By the time the general public starts buying en masse, the professional
traders knows the end is near. How does the professional know this?
Because the professional knows that there is a practical limit to the number
of people who will participate to bid the price up. There will come a point
where everyone who is likely to be a buyer will have already bought, quite
literally leaving no one else to buy. The professional trader would like the
market to continue to go up indefinitely just like all the other buyers.
However, he also understands the impracticality of that happening, so he
starts taking his profits while there are still some buyers available to sell to.
When the last buyer has bought, the market has no place to go but down.
The public gets stuck because they weren't willing to take the risk when
there was still potential for the market to move. For the market to sustain
itself, it needs to attract more and more people. As big as this country is or
the world for that matter, there are only so many people who will buy.
Eventually the supply of buyers runs out, and when it does the market falls
like a rock.
The professionals have been selling out their positions before this
happens, but once the supply of buyers runs out, the professionals start to
compete among one another for the available supply of buyers which is
dwindling fast, so they offer lower and lower prices to attract someone into
the market so they can get out. At some point, instead of the lower prices
being attractive to people, it panics them. The public didn't anticipate
losing. Their expectations are very high with very little toleration for
disappointment. The only reason they got in was because it was a sure
thing. When the public starts to sell, it starts a stampede.
Again, people will ascribe their actions to some rational reason because
nobody wants to be thought of as irrational and panic-stricken. The real
reason why people panicked and the prices fell is simply because prices
didn't keep on going up.