The future increase or decrease in the price of security is based upon what? Buying or selling pressure. This pressure comes from human's believing the price has his a threshold and is either too low or too high (either by directing clicking a mouse or creating an automated system). It seems like sometimes we as traders forget this. If we believe in a setup and KNOW if will go in our favor, the only way it will in fact do so is for other traders to have the same views. Other traders have to bid the price up, the stock will not simply increase because of the setup. This idea makes me question trading systems and ideologies. Why try to fight human behavior by creating an assortment of technical indicators that somehow "predict" price direction? If other traders never find that same correlation, how will the price go anywhere? I feel like price and volume are the only pure ways to gauge human behavior. Instead of attempting to find or create a secret or edge, maybe the simplest approach is the best. The two goals are to find out the bias of the market (long or short), as well as the strength of that bias. We as traders attempt to "ride" or maybe even anticipate the actions of crowds. The crowds (whether it be individuals or institutions) move the market, move the price. If we are able to go long before the last trader goes long, and exit before the exiting traders outweigh the entering traders, we make a profit. Obviously this is an oversimplified view of the market, but its a reminder on price action. Having the perfect setup can be a complete failure if it is not seen by other traders.
In my opinion and that of quite a few other folks, the rationale for price movement is called "Auction Market Theory". Its all about perception of value. When participants believe that an item is priced lower than what they see as reasonable "value", they are motivated to step in and buy. Conversely when participants believe that an item is price higher than what they see as reasonable value, they are motivated to "sell" or to put it another way, there is a "lack of interest" in buying and without interest (also known as "demand") the price of an item generally moves lower. The rest of the scenario is all about the strategies that market participants employ in the process of "trading" on various time frames....If you think about it for a moment, the concept of value is different for various time frames. The representation of "Value" is best seen in a couple of ways. You can use a Market Profile chart, or you can use a Volume Profile chart, or you can simply put a standard chart on your screen and put in your standard Support/Resistance lines. For those who are interested in a closer look, Market Delta also works pretty well. If you learn how to use them, these kinds of tools can show you the price at which traders step up to buy or sell based on their perception of value. Since I am not here to put on an Auction Market Theory seminar I suggest that if you are interested you do some research. Good luck
You may or may not know this, but when you say "other traders" you are basically talking about smart money.. The rest of the traders don't really count.. They can't move the market (not enough buying power).. The smart money actually is the setup, believe or not... What I mean is, the smart money pushes the price up and down which create patterns that traders can detect.. These patterns actually makes the setups that we create.. I agree It's nothing wrong with going along with the crowd.. Remember, the object here is to make money.. It doesn't matter how we make it, as long as we stay consistent.. Going long before another trader goes long sounds good, but in real life it's not that easy.. Unless you have the ability to see the true buy and sell orders (which retail traders don't have access to) is going to be difficult to go long before others.. You can always buy the middle of the up move and still profit.. Again, the rest of the traders (retail traders) doesn't count.. So it doesn't matter if we see the setup or not.. Perfect example is when we made the head n shoulders on the s&p not to long ago.. Did we traders (retail traders) see that setup? Hell yeah we did.. But what happen? It failed and wiped out a lot of people that was short.. If you can detect the behavior of the smart money, then you are on your way to riches..
Here's a link to smart money. Since late 2006 at least 117 major funds at 71 outfits have "imploded*" - Atticus Funds - Austin Capital Management - Safe Harbor Fund - Satellite Asset Management - Parkcentral Global Hub - Weavering Capital - Macro Fixed Income Fund For the rest - Go to the list http://hf-implode.com/
Warren Buffett is smart money.. people thought he was nuts when he bought financials a while ago, he's up a couple of Billions on that bet.. so far...
Let's call smart money big money. The ability to understand their relative valuations of stocks, bonds, etc. is the key. What changes this is major government intervention/economic indicators that no one (other than GS) can forsee. The rest is psychological/technical. Know your market. For the record I too believe Market Profile is the only useful study as it gives you the ability to organize data for interpretation.
There is underlying math to markets that smart money can't evade very much for very long too. MP might help to organize it but there is more going on than that. I'd say floor traders needed something to make a framework but a screen trader needs to dig into the underlying math, there are volume patterns, volatility patterns, and momentum patterns that I don't think floor traders could ever deal with to much of an extent, they had the pit noise and they could see what the other traders were doing and they like MP probably because it gives them a structure... they knew how to exhaust the other side of their market and let things run the other way and then trample all over them with size when they had a large order to move.. you see a lot of that on a day with an extended trend... Big [assumed to be smart] money moves the markets but there is more going on in the aggregate market than even the individual smart money knows about... and they may only be smart because they are big, big orders move markets, they could be dumb and moving markets really... it appears to be the case sometimes, often not though...
Humans work according to geometric and numerologic rules. I know academics are to indoctrinated to believe. Spx low 666..66 trading days later June high. 666 days later from the high in 07 we had a high. Slightly higher now but time is more important than price.