You’ve opened an account. You’ve made some trades. You’ve watched the market bounce up and down and go round and round. You’ve had some winners. You’ve had some losers. Probably more losers than winners or you wouldn’t be reading this right now. You understand all of the fundamentals. You understand the risk. You know how quickly you can lose a month’s pay.
Now you want to know why the double bottom didn’t hold. Why did the breakout become a “false breakout”? Why did the breakout not become a “false breakout”? Why is it so choppy here? Why did this price hold as a support level last time but not this time and why does it always seem like it fails when I buy and it holds when I sell? The unemployment number was positive so why is the market going down? The outlook for the economy is dismal so why is the market going up? Who would buy at these prices? And how can they just keep bidding it up? And why didn’t they do that when I was long an hour ago? Why are they doing it now when I’m short?
What…in the world…is happening?
Let me give you a little insight.
What you see is blinking numbers or lines on a screen. What you’re not seeing is the people who are creating all of that madness. This is the key. When I was giving the first webinar, a guy pointed out to me that it seemed like I wasn’t really seeing numbers but instead, I was seeing people (and/or computers) executing trades. I agreed with him. Then he compared it to the movie The Matrix and said it was similar to the guy saying, “I don’t even see lines of code anymore. I just see blonde, brunette, red head…” I chuckled when he said it but it’s probably one of the best analogies there is for describing what’s happening when a scalper reads the orderbook. I wasn’t seeing 5000 contracts trade. I was seeing a guy who trades size dropping 5000 on the market in an effort to create a short-term move to the downside.
For example, let’s say the market has been moving down all day. It’s approaching a “support” level. Everyone knows it’s a support level. The average retail, inexperienced trader is thinking “buy support” or “sell after the break”. But that’s all he’s thinking.
The pro is thinking this,
“The longs are already getting crushed today. They know this is a major support level. They’re probably not going to wait to see if it holds. They’re probably going to start puking out part of their positions now and if it goes through the level, they’re going to quickly puke out everything they have left. Why? Because they know that major players at the major firms are probably going to crush the market just because they can. Those major players are going to continue shorting the market in an attempt to send it lower and it’s unlikely that anyone or anything is going to buy enough to stop it. So this isn’t just a place where the weak longs are going to puke. The weak longs and the strong longs are both going to puke which means they’re going to drive the market even further against themselves and they would prefer to not do this but they know that it doesn’t matter if they puke or not. The market is still going to go down because Mr. G. Money from Wall Street is going to hammer the market by selling 10,000 contracts and he doesn’t care if it doesn’t break because he made his firm thirty million last year so he’s selling and if you have the guts to buy 20,000 contracts and try to bid it up, then do it and we’ll see who wins.
So I think I’ll go short and wait for the break. Worst case, it doesn’t go and I’m out a tick or two.”
Of course, this all transpires in the pro’s mind in about 8/10ths of a second.
There is no chart or indicator in the world that can give you that information. That kind of thinking is the product of countless hours spent staring at the bids, offers, time and sales, and market profile. It’s also the product of simply knowing how traders think. You can learn to think that way but you have to get past any previous notions you may have about what works and what doesn’t.
Charts and indicators tell you what happened in the past. In order to make high probability entries and exits, you need to know what’s happening right now. It’s much more important. The movers and shakers may be looking to make some long-term trades based on technical analysis but if they see serious size step up and start to push the market against them, trust me when I tell you that they will adjust their positions accordingly. It matters not what the chart says at that point. Trend lines be damned.
You have to learn to think like that. This is where the edge lies. If you can learn to think like that and then learn how to sit on your hands and wait for just those spots, you will have the foundation for a possible career in trading. I use the word “career” in jest, of course…