The Best Use of TA The best use of TA is not to find a trade for yourself but to use it to uncover how the other participants are thinking. It is this thinking you want to uncover as best you can because when the largest number of participants decides it is time to do something, order flow will change; and that is what creates the price change you are attempting to exploit. If you are on the wrong side of this order-flow change, you lose. Nothing can be done at that point except you must cash out and accept the loss. If you want to be the winner (which someone will become), you must get on the right side of that order-flow change. TA cannot help you do this unless you understand it in context—which is always how the loser is using it. Traders often want to enter a market (from either side) once the market has made a “significant move.” For the sake of illustration, let’s assume the market has made a down move in price and has made that move quickly and in a wide range. What I mean by that is the market has dropped a long way in a short amount of time. When we discuss multiple time frames, I will define “a long way” and “short amount of time.” For now, I want you to think about how you personally perceive a “long way” and “short amount of time.” Your perception of these terms is what stimulates your sense of opportunity. Think about it this way: If something happens that was “unexpected,” how do people you are competing with see that from their point of view? How do you see that unexpected event for your trading? Once the market has made this drop in price, we know that there must have been an order-flow imbalance to the sell side; otherwise, the market couldn’t have dropped in price. We want to know who the group of traders were that entered those sell orders, and we want to know why the buyers were not there. TA cannot tell us that information. TA can only tell us that the price drop happened and what it means (from that particular TA assumption). As winning traders, our goal is to uncover who lost money and who made money on that price decline, nothing more. Once the price decline has happened, there can be only two results: The shorts from somewhere above the market have a gain. The larger this gain becomes, the greater the conflict becomes to find a liquidation point (use a buy order to cash out a profit). The longs from somewhere above the market have a loss. The larger the loss, the greater the conflict becomes to find a liquidation point (use a sell order to cash out the loss). In both cases, the only thing that is certain is that the shorts are making money and the longs are losing money. When the conflict reaches a climax, someone decides to do something and the order flow changes again. From a standpoint of underlying market structure, the move has created an urge to action, and at this point people decide to do something. They may not decide to do something immediately, but they have decided to do something. This is when the order flow changes. If we stop to consider that a potential buyer now sees an opportunity to “buy low,” we have TA and time compression working together. If at this moment, the shorts from above the market decide it is time to press their advantage and add to a winner, the order flow changes. When this happens, the TA cannot predict a bottom nor can it account for the change in the order flow. This is when time compression becomes significant: At this moment, both sides are squaring off at a new price point.
(Continued from previous post) Suppose this price point is a place where the market has broken out to the downside, and TA says it is time to sell. But the price doesn’t decline. That can mean only that buyers are willing to execute at that low price, and their orders are enough to match the incoming sell orders. Therefore, only one side can win moving forward because at that exact moment, sellers were willing and so were buyers. When the price stops, that means order-flow balances; that means enough orders are present from both sides. But that also means enough of the participants will at some point suffer the growing conflict to liquidate, no matter if they win or lose. If at this moment the market has begun to recover in price, then we know the shorts are losing, which means the order flow at that low price is attracting more buyers than sellers. It doesn’t matter if that is shorts from above the market liquidating, new longs coming in, or old longs adding to a loser—at that moment, the buy orders on that drop in price are overwhelming the sell orders, and the market is rising. Some TA will now say that the market has suffered a false breakout and recommend that those who were short liquidate; those orders now add to the change in the order flow from offer to bid, increasing the price recovery. What would you have done if you could see this order-flow imbalance developing as I described it on a price drop? Obviously, you would have bought that drop in price. You would be long from a new low price point. Your risk was the lowest it could have been, and your profit potential would have been the highest possible. Every time you see a low price point followed by a higher price point, someone bought that low price point. Otherwise the price couldn’t have printed there. At that low price point, a buy order and a sell order were executed against each other. It doesn’t matter if the buyer was covering a short from above the market or if the order was a brand-new long position—someone was on the right side of the order flow at the absolute best price to buy (relative to where the market went next). Also, someone sold it into the hole (i.e., their sell order was executed at the lowest possible level). It doesn’t matter if that was a long from above the market liquidating a loss or a new short coming into the market; that was the absolute worst point for a sell order to be executed (relative to where the market went next). As this scenario plays out, we have the problem of TA and time compression working together. TA would not have suggested a buy at that point except by accident; time compression, however, would have been screaming, “It is time to buy.” Time compression attempts to understand where the order-flow imbalance is developing, whereas TA attempts to analyze price to predict another price. In the long run, TA will not help you find the turns in the market as effectively as an understanding of time compression will. Your goal as a winning trader is not to analyze price in order to predict another price but rather to gain an understanding of what the participants will be willing to do as price moves. Every time the price moves to a new significant area (a price level that attracts a lot of activity) it will change the perception of all the participants to some degree. If this change in price is enough to cause an urge to action, sooner or later the participants will enter an order, creating the order-flow imbalance you are trying to profit from. Analyzing price won’t tell you where this eventuality will occur except by accident. Understanding time compression will tell you when it is likely to occur—whatever price that it happens from may be. Or about what time it is likely to occur.
In the forex market, a large bank who wants to trade in US dollars can do so in a multitude of ways. First, the bank could simply sell Euros to buy US dollars, a straightforward sell on the EUR/USD. But, if the trade size were significant, the bank may decide to sell against another currency, the EUR/GBP for example, and then to sell the GBP against the USD. This achieves the same result, but hides the true nature of the buying and selling from view. This is what makes the forex market both unique and complex, and why trading using one chart and one time frame can be dangerous. "The market is designed to fool most of the people most of the time." — Jesse Livermore The old trading methodologies and approaches no longer work. For example, the currency markets are no longer driven simply by interest rate differentials. They are now highly politicized and manipulated as individual countries attempt to protect their own export markets by competitive devaluation. Moreover, quantitative easing has now entered the trading lexicon, with central banks happily printing money, further distorting the financial markets. To succeed as a trader now requires a much deeper understanding of market behavior, of market sentiment, of money flow, and risk appetite, which can be achieved using a trilateral approach: relational (intermarket analysis) fundamental technical These are the three strands of market analysis which when combined, provide the three dimensional view of the market, which so few forex traders use. Without it, failure awaits. With it, trading becomes stress free, as each trading opportunity is based on a complete view of the market, the money flow, and consequent risk. Markets move on risk and sentiment, which is then reflected in the consequent flow of money. No market trades in isolation, and all markets are inter connected via a variety of linkages. These linkages exist in all timeframes and can be seen on every price chart, and can be used by all types of traders, whether as an intraday scalper, or a longer term swing or trend trader. Bonds Bonds are generally considered to be a safe haven asset, and are the basic ingredient of the world's debt capital markets, which in turn are the cornerstone of the world's economy. Bonds are very simple to understand. They are simply a loan. Nothing more, nothing less. We all borrow money in a variety of different ways, and the bond market is structured in such a way as to allow all sorts of bodies, including countries, governments, municipal authorities and private companies, to borrow money for a variety of reasons. This then leads to the next question, which is why do companies and governments buy and sell bonds, and what do they tell us about the money flow, and this is where we return to the word risk. Bonds are generally perceived as a low risk investment. Therefore, if the money flow is into bonds, and away from other markets, then clearly investors and speculators are nervous, and looking for a safer haven for their money. So, in general terms, bonds are a low risk asset class which will normally see inflows of money when markets are nervous. In addition, they are also the ultimate barometer of interest rates, inflation, public sector debt and economic growth, all key measures of the flow of money and currency exchange rates as a result. But how do we analyse this huge market to help us in our trading? The answer is yield. This simple measure gives us all the clues and signals of market sentiment, risk appetite and consequent money flow. Yield tells us whether the market is buying or selling bonds and whether the yield is therefore rising or falling. Put this on a chart and you have all your analysis for bond markets, in exactly the same way as for any other instrument. Commodities The relationship between bonds and commodities is one of the pivotal relationships in the financial markets. If bonds are purely about money and the cost of money, the commodities markets are where real money is exchanged for real goods bought by real people to make real goods. In other words, the commodity markets play the central role of converting money into raw materials and in doing so, gives us a clear insight into the fundamentals of world economics. This relationship is the bridge between the speculative world of paper based assets and the tangible world of real goods. It is the commodity markets that provide the pivotal insights into central bank policies, global economic growth and decline, currency flows and investor sentiment. A real world view where prices are largely dictated by supply and demand across continents. While commodity markets provide the real world bridge between money and goods, those same commodities, then in turn provide a bridge between commodities and individual currencies. A commodity based economy will sell its raw assets overseas in return for hard currency, which in turn is likely to be reflected in the currency itself. Conversely, of course, an economy lacking in base commodities will need to import to maintain economic growth. A country such as Japan for example, has to import virtually all the base commodities such as oil, gas, and metals, a fact which is often seen in the CAD/JPY pair, which correlates relatively closely to crude oil. Equities Just like bonds and commodities, equities tell us a great deal, not least about risk appetite and market sentiment and, as you would expect, there is a strong relationship between equities and bonds. After all, equities are viewed as high risk, offering higher returns, whilst bonds are considered to be low risk with conservative returns. As a result, there is a continuos flow of money between these two markets, with a consequent and related flow, both in and out of particular currencies and currency pairs. Equity markets therefore provide us with a barometer of market sentiment, which in turn is reflected in the broader economy, and associated markets such as commodities. A further facet to the relationship between currencies and equities is from an investing perspective. The best example of this is the relative strength of the Japanese yen and consequent flow into and out of the Nikkei 225. A weak yen usually results in inflows into Japanese shares from overseas investors, looking for better returns. This is a classic example of the linkages and relationships which exist at all levels and across the four capital markets, but which are rarely considered by most traders, or even investors. Currencies Currencies is the axis around which all the other markets revolve. Why? Because it is purely concerned with money and, as such, is the most liquid of all the markets. Currencies can be converted instantly—the flow is instant and immediate, allowing market participants to change direction in a flash, as risk sentiment changes on market news or economic data. Every decision in every market, whether as an investor, speculator, government, bank or institution is about money, risk and return, which is why the forex market is the hub around which all the others rotate. Second, the forex market is more complex than all the above mentioned markets. Why? Because it is the market in which the central banks, governments and politicians all manipulate their home currency in one way or another, either for economic or political reasons. This is the market where global politics meets money in one glorious melting pot. It is also the primary market which offers central banks a small degree of control over the economic landscape as the international powers battle for supremacy. Ever since 2008, with the start of the financial meltdown, the rules have changed dramatically. No longer do currencies trade on simple interest rate differentials driven by inflation, growth and economic data. Now protectionist policies, market manipulation and artificial stimulus are all part of the mix. Third, it is the only market where buying or selling of an instrument can take place against several other instruments. As mentioned at the outset, a bank or large hedge fund wishing to sell the US dollar can do so against a raft of other currencies using a variety of mechanisms to achieve this end. Indeed, they will often do this, in order to mask their activities by constructing complex trading and hedging strategies.
Ok saw phil's and now your reply as to "who". But I don't get what you mean above... Copyleft, obviously?