Basically there are 3 kinds of traders in a market:
-Those who are positioned LONG – they exspect rising prices
-Those who are positioned SHORT – they exspect falling prices
-Those wo stand on the sideline – they are FLAT and waiting for a good entry
These three groups are responsible for the fact that a price determines, because they provide the offer and demand. From this fact there originates the important knowledge, that not news or external events make the price, but the three mentioned tradertypes .
Origin of a trend
From the knowlegde about the order book there originates again the knowlegde about forming a trend. At the moment, while the demand exceeds the supply, more buyers than sellers exist – the price will increase by the traders who are LONG positioned. In the following example, a big institution is on the buyside, that makes the price rise.
When the price has increased, one can read mostly in the press or www. Uninformed traders /newbies now take attention of the stock and also wakes interest in the share, perhaps they also buy some shares.
But what happens with the ones who are already invested and have already taken part so in the first movement?
Because their positions tend to be profitable, some of them will normally decide to take their profit and sell their shares. At this point we have on the one hand some newbies who want to buy and and the other hand many “early birds” who want to sell. In such situation we have a supply surplus. This ist he point, a HIGH appears – Such a HIGH to which we give the number “2” in the market technology originates exactly from this change.
The whole activity is observed of course still by the group no three which became attentive by the movement to the stock or has observed the market anyway. These stand still @ the sideline and are still flat.
the demand is lower than the offer what leads to falling proices. The market tips and is traded down.
What happens which these traders who have bought the HIGH from those which have sold her shares up there?
As a result oft he decreased market their positions are in the deficit - the one or other will decide to close their positions. They offer their shares again and stand on the supply side in the orderbook. Now this drop other traders adopt again and buy this share to a more favorable price again after or also for the first time because they are for example orientated technically.
Now more traders are ready again to buy, that means that the market will rise above the last HIGH. The traders who stood @ the sideline (flat) to find a market-technically-entrance are in the end responsible for that move.
And thus the whole play continues on and on till the trend breakes.
The trend break occurs, when the market drops below the last LOW. Those market participants who prefer trend trading (swing) according to the market-technique place their stops under point “3” and will trail this stop accordingly. If the market drops below the last LOW, these stops lying there get triggered. With it the market drops even further and the play can begin again, only just then in the other direction.
Perhaps some of you (if u are a newbie) will recognize, why they made many bad trades in the history. The cause for it lies only in it reasonably that one makes a decision always on account of an available movement what is owed to the missing knowledge about trend construction. It would be better, one would position himself on account of a movement to be expected and not only during or even at the end of a movement.
Now you have already read several times the word or concept „movement“. One understands by it a neuralgic point in which the course gets drive. This mostly happens in a point “2” – the last HIGH (respectively a “LOW” in a downtrend)
But why is he point „2“ so important? This arises from it because this point is valid as a special place of matching orders. At this point entrance orders, stop orders and entrance orders by position rotating meet and thereby originate a mostly fast movement which again leads to a new HIGH / LOW (new “2”)
The first trader is positioned short and his stop order will be executed at point „2“. When triggered, his stop order turns into a market order. Somebody stands on the other side and buys there the share and thereby originates a long order (in downward trend vice versa). Because the trader has recognized his position was wrong, he switchs his position i.e. he buys again on which the second long order originates in the book. Therefore the same trader occurs twice in the orderbook.
The third trader was up to now FLAT, is market-technically orientated, recognizes the point “2” and also opens there a LONG position. All that proves taken together the so called domino-effect which signs for the market-technically movement responibly. Therefore it might be clear that the experienced market technical always searches himself a point “2” for his entry.
The duty of a market-technical trader is to proceed always on the search for intact trends and to lay his focus on a striking point "2". Nevertheless the freestyle of technical trading is to realize in which market phase the stock is trading at the moment. Much more important than the entry is the “WHERE”. Is the market just in a MOVEMENT or is he in a corrective mode. Or has the market just ended his correction and a new movement begins?
Anyway, every trade is only as good as the belonging to its market phase because with an accidental winning trade is not sustainable. At this point we come to the biggest challenge in stock trading: WAITING!
Who cannot wait for the right market phase will not earn money in the long term. The main thing of technical trading exists of two steps:
- If we have found a signal – a point „2“ in an intact trend – it is the duty to have a look at higher time frames. If the market phase is also in an intact trend (1-2-3) and there optimally from a correction to their last point “2”, the signal has a very good CRR. With all market-technical entries the higher market phase must be considered because the Big Players will give the direction.
1-2-3-Trading (Trading the Trend)
Trading the Move(ment)
Trading the Break-Out
For all these three opportunities, the “1-2-3 counting” is essential.
1-2-3-Trading (Trading the Trend)
As mentioned above Point „2“ is the pivot of Trend-Trading. At or near this point, you open your position. Your Stop Loss is based near the point “3”.
To minimize the risk of false-breakouts you can use the Retest of the Breakout as your entry-level to open a position. A buy stop is placed one tick above the highest high of the Ross Hook. Short trades: A sell stop is placed one tick below the lowest low of the Ross Hook
The theory of flags
Flags are my favorite technical formations. They have a trend confirmation character, are easy to recognize and grateful when you trade them correct
A bullish flag is a massive, strong volume move followed by several days of sideway trading sessions to lower price action on much weaker volume followed by a second, sharp rally to new highs on accelerating volume again.