Who’s on third?
It is all too easy to forget the underlying mechanics of price movement. Price chops around in a small range (remember when it did that) when very few buyers/sellers (PEOPLE) have any real conviction (FEELING) or need (MOTIVATED = feeling) to buy or sell.
On the other hand, price moves directionally when many buyers or sellers (PEOPLE AGAIN) have a strong belief (FEELING) or desire (FEELING) or need (MOTIVATED? = feeling) that the price will keep going and either
1. they are afraid (feeling) they will miss out
2. they are afraid (feeling) they will lose money.
Another reason that prices move directionally (and fast) is that the majority of people either are or want to be (out of desire or need) to be on the same side of the trade. By definition, this leaves few people to be on the other side and a relative lack of liquidity.
This may all seem elementary but it is very germane to what we have been seeing lately – from either the global macro credit crisis viewpoint or the 1 minute average true range viewpoint. How can that be you say?
Well for starters, one of the pillars of the story of where we are in the big picture is the lack of liquidity in the complex structured debt contracts dreamdt up by trading desks around the world. Once Bear Stearns admitted to trouble in those privately traded contracts, all the other players went “no bid” and the cards started tumbling – because there was no one else to take the other side of the trade. This link speaks tangentially to the resolution of this problem – i.e. hedge funds declining to trade these “OTC” (read potentially very illiquid) contracts.
On the other side of the spectrum, the ranges we are seeing both intra-day and even in very short time-frames are the result of more market-players (people) wanting or needing (which makes them want) to be on the same side of the trade.
The point of all of this? Traders make money when they correctly ascertain where other players in their time-frame are and where they are likely to WANT to be in the near future (again according to their time-frame).
In other words, it isn’t just lines or bars or even a back-tested set of probabilities. It is the probability of what other people (even if they use computers to execute) are going to want or need to do in your time-frame.
Is it possible to think of the markets this way? It is a good idea?
Tags: fear, global macro
Denise, more like since the 70’s, give or take…but Mises & the Austrians were on it long before that…..
Tom, the hardest trades to manage are the winners – “do I let this run or do I get out”…. either way you either give up the additional profits or give back some… and this reality can easily become a debit to your account for psychological capital…
which then needs managed before the mental/emotional reaction to missing out or giving back compels an unplanned, flagrant (as my first trading teacher called them) trade.
… “We Love Vol”
Without volatility, there is no change in price, and no profit to be made. Craziness (volatility) tests our systems and our ability to understand why our heart is pounding or we want to walk away from the markets. This is training ground for less volatile days. It’s also a great opportunity to make or lose a lot of money. Is it a bull or bear on third? Can you let your profits run and cut your losses short? If not, what’s going on in you head that’s getting in the way?
Mark, haven’t you been predicting this since as least 2004?
…and it seems to me that auction market theory and the MP graphic represent the collective human emotion very well… in fact I tend to think of it as the most practical application of applied behavioral finance.
Angelo – Agreed! (funny that word is ” a greed” …. )
speaking of which… Martin, geez I can’t believe I wrote “whose”…. brain on too little caffeine I guess.
Neal – YEP!
Ben, soon there will be a study published in The Journal of Finance that will show that people using the “circuits” in the brain having to do with reading the language of the other are better at reading market data than those who think of market data only as numbers. Will be sure to post link here when it is released – done by an EE PhD at a very techy school. So… yes I agree there is a language.
sure it’s possible to think of markets in this way…just as it is possible to think of markets in terms of massive jupiter retrograde conjunct uranus (ouch?), or something…lol.
the point of market profile, as I’m familiar with it, is to divine ‘the other time frame player’s’ intention & be standing there with your thumb out when he comes along. his destination is your destination…so the song selection might be “Me & Bobby McGee” or “Highway Song”, or “Train, Train”….
as for ‘lack of liquidity in the complex structured debt contracts’, since its genesis was in the oceans of liquidity pumped out by certain nefarious manufacturers – hellbent on making ‘blue planet’ a reference to mood rather than water (or possibly to the squeezing of the collective smaller orbs, as in “blue balls”…), let me know when there is a futures contract on the fed…100% of my capital for that short….
I think the article is spot on in at least one important respect: the description of “fear of losing money” vs. “fear of missing out”.
People talk about markets being driven alternately by fear and greed; but in my experience, at least, the times when I’ve behaved in what might appear to be a greedy fashion (hello, tech stocks!) have in fact been driven more by fear of missing out on something on which everyone else is making heaps of money.
(Oh, and “whose” means “belonging to whom”. The word you’re looking for is “who’s”, which is a contraction for “who is”. Just sayin’…)
no doubt the markets move based on emotions!
but those emotions, per se, can’t make us money.
the chart reflect all those emotions, knowledge and whatever it is that make the markets move.
and the chart have no emotions…
if i was in the right side of the trade (even for the wrong reasons), i just had to watch the chart and do what it tells me to do.
the same applies if i was on the wrong side of the trade.
keep to the chart end keep to the plan!!!
want to screem, cry, hit somebody? do it somewere else, not in your trading room!!!
The mini S&P has been a volatility ‘heaven’ these last few weeks.
The moves are strong, the volume is high and the point ranges are to die for.
I could stand these conditions for at least another year. And then I would retire to some other country where they don’t have nauseating Republicans and Democrats, who can’t earn a living for themselves and only know how to steal from the subjects.
I loathe the days of market stability returning anytime soon.
Thursday Oct 16 was a record day for me. I took 600 points per contract out of the S&P. Unbelievable! I couldn’t have done it without the guys at the Department For “Global Crisis”. I guess that’s how the folks at Haliburton feel about the Department of “War For Terror”.
So, the intensity of human emotion (fear) directly translates to the intensity of price movement?
Based on that paradigm, a trader’s job is to identify (probable) sufficient fear for a directional price movement significant enough to profit from, then be able to measure the intensity of the ongoing fear (trend) to either extend the current profit opportunity or set up the next profit opportunity.
If so, the practical pursuit is measuring fear.
Isn’t there a song by the Rolling Stones that speaks to this issue? (I cant get no satisfaction . . . but if you try sometime, you get what you need)
We are always looking for something in our environment (the mkt, the candlesticks, our teenage kids, our significant other) to PLEEEZE give us something we want . . . .
And when we dont get it (read: expectations are “dashed”) we “react”, most likely in an emotional way to this “crisis” and storm off . . .maybe we get into a shouting match with significant other, we cover our “stupid” short in the mkt, or we tell our teenage kids to “go to their room” . . .
Hence my true belief on how the mkt moves is this . . .
Price patterns and candlesticks have a “language” and they speak to us . .but more importantly they convey a message about what the emotional expectations of the mkt participants are, and when those hopes are “dashed” (failure pattern occurs) then you get an emotional reaction to that event and, boom. . price moves, until the next patten sets up and unfolds.. . over and over again.