One of the reasons traders find it so hard to achieve consistent results in their trading is due to them not understanding what the true nature of the markets is.
If you believe a chart, some patterns and indicators, some signals and some price movements are what the market is, then you might be missing the forest for the trees.
Prices, patterns, indicators, signals… all of those are the effect of something and if you are trying to understand markets, you need to understand what cause those to happen.
In fact, focusing only on price is something which will not allow one to see things for what they really are.
In simple terms, the price move correlates to the effect of something.
And once traders start focusing on identifying, understanding, and trading the cause (or causes) of those price movements, their results are bound to improve.
The way this works is simple: once you understand the causes of price actions you will also be able to identify potential price moves way ahead of others, regardless of if it’s before or as they occur.
Since you understand why the price is moving you will also be able to assess properly when said move is likely to end.
Ultimately, if you look at the effect, you will be trading reactively to whatever has already occurred, whereas if you look into the causes, you will be trading proactively.
Back to basics
Price happens as two traders try to make a buy and sell decision, much like a dual auction in which the most dominant force at the time auctions it up and down.
Its movement is a function of supply and demand, or, to put it more accurately, a result of a supply/demand imbalance, which in turn means that markets work from that perspective.
As such, prices will rise when demand outgrows supply and buyers are ready and willing to pay those higher prices.
The price will continue upwards until either there aren’t enough buyers willing to take that trade or there is an increase in supply which absorbs all demand.
The price falls while supply outweighs demand and while there are enough sellers willing to sell their assets at those price points. The price will continue on a downward route until sellers are no longer willing to sell or there is added demand up to the point in which supply is fully absorbed.
And what fuels the supply/demand imbalance, you might wonder?
To put it simple: aggregated individual trader sentiment.
It is the net effect of each individual trader’s sentiment which correlate to the general market sentiment (bullish, bearish, or neutral).
This effect is pushed even further depending on the sense of urgency in their trades.
It is important to understand that every single trader out there will have its own motivations, its own methods of analysis, its own timeframes, its own individual reasons to behave the way he or she does in the market and in their trading sessions.
Regardless of which, it will be the collective sentiment which matter as it prevails in terms of price.
As we all know, a bullish sentiment will help raising the price, a bearish one will help it fall, and, lastly, a neutral sentiment will result in sideways price action.
This is trading at its core: people making decisions.
As such, the next time you look at a graph, try looking at it not for its patterns, price movements, and squiggles, but for what it really is: traders making decisions on whether they commit to a trade by buying or selling, or even sitting this one out.
And with that one’s your mind, it will be easier to view price movements from other traders’ perspective, bears and bulls alike, and how that price movement casts its influence and/or correlates with their decisions, those being due to fear, greed, a bias, and so forth.
You may think that this shift in perspective might be irrelevant but trust us: give it time and you will see just how important it is.
And remember that this is actually all about people and not about price.