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Why The Markets Move
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Why The Markets Move

  #1 (permalink)
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Why The Markets Move

All the books, CD's and training material out there do a fine job of preparing a trader to understand many market basics. But I've yet to read anything substantial describing definitive reasons for particular market moves.

Why does a market make 100 pip move overnight, then a retrace to one Fib level or another? Or, why does a market move up 20 pips, retrace 10, then continue up again?

If you read enough material you'll eventually find an explanation or two for each of these types of moves, but frankly that's just not good enough. Generalizations such as "Supply and Demand", or "they're taking out stops" are fine to give traders an overview of moves. But I want to know the nuts and bolts of minute by minute strategies used by the big players.

Surely some good sources exist that detail the "play by play" action of the market makers. I'd sure appreciate any pointers in the right direction. Seems like it would help to connect the dots as I watch the market action unfold.

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The question you have to ask your self is why the market moves at all. What is the mechanics that make it climb the ladder? In other words what make the price go from 987 to 988?

Baruch

p.s.
The problem with people on this forum and others that they don't like to put their brain to work.(to think)

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Some time ago, I read a book called something like "Confessions of a Floor Trader". Interesting reading, but you came away with the feeling it stopped just short of revealing the nuggets that tie it all together.

The book explained in detail the inner workings of bull flags, double bottoms, and on an on. So armed with this knowledge the trick seemed to me that a trader should first amass many millions of dollars and then just mimic the big boy's trades. Fine, it just doesn't work for me.

The traders I know fall into one of 3 categories:

1] SHORT: The mini scalper looking to grab 3-4 pips at a time, usually trading 10 or 20 contracts a pop. In and out.

2] MEDIUM: This trader looks to take what the market will give, trades 2-3 contracts and takes off the first few contracts +5 or +10. The last is left as a runner.

3] LONG: Using long-term charts, this type of trader plans to be in the market for many hours at a time. They just look for major turning points and ride the wave until another turning point appears.

Of the 3, the Long-Term trader most closely follows the moves of the big boys. There is the advantage of only trading a few times a session as well as snagging some nice long runs. Plus, long term charts filter out most of the "noise". On the down side, it typically requires very large stops and I'm not sure most of us are comfortable with that.

So that leaves the rest of us forced to deal with the gyrations that happen in between the tops and bottoms of long runs. Hence the zillions of indicators that try to predict what the big boys are up to. I've marked up a 5 minute chart with my best guess as to the workings of the smart money, but it's just a guess.

But assuming the chart is more or less correct, I'd really like to know the inner workings of the big money on a bar by bar basis. In other words, what is really happening behind the scenes in between the major moves?

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Let's say Al Gore decides to invent something out of nothing: carbon credits. And these credits are only available to retail traders, no hedgies or institutions. A person could then reasonably expect the market of these credits to dink around in the same narrow price range most of the time. Only some outside force like "news" would cause a major fluctuation in price. In other words it would trade much like the Swiss Frank.

Then one day Big Al decides he needs some new mansions and opens up the credits to everyone, institutions and all. All of a sudden the market for credits begins trading like the British Pound. Up 100 ticks and back down 100 ticks, all in a single day. It is essentially the same market as before, but the addition of "market manipulators" has caused a formerly quiet market to gyrate wildly.

Now some would say the credit market has evolved from an orderly, predictable market to one of chaos and randomness. I would argue there is nothing random about it at all. The manipulators have simply applied their lever (money) in such a way to further enrich themselves. After all, a market that rises 100 then falls 100 in a single session really hasn't moved at all. Those applying their levers know in advance the direction of the market and therefore profit from the moves they created artificially.

This continues on for several years until a group of enterprising traders band together to get a jump on market moves. Their plan is to tap the phone lines of the manipulators in order to learn in advance the scheduled moves of the day. So they hire a burglar to break into Al Gore's house to retrieve the infamous Clipper Chip from his safe. Once installed, they are set to go to work.

On the very first day they discover the schedule is to move the market up by quietly buying credits at 2:00 AM. After 5 minutes of buying they'll sit on the sidelines for 1/2 an hour then begin buying again. They will buy for another 5 minutes then sit on the sidelines for 1-1/2 hours. Right before lunch they'll buy another lot knowing that when they return they'll start selling off credits and rake in the profits. Armed with this insider information the enterprising traders can simply piggyback off the moves of the manipulators.

Which leads to the conclusion of the story: shouldn't we all be working towards some method to monitor the moves of the manipulators?

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hondo69 View Post
Let's say Al Gore decides to invent something out of nothing: carbon credits. And these credits are only available to retail traders, no hedgies or institutions. A person could then reasonably expect the market of these credits to dink around in the same narrow price range most of the time. Only some outside force like "news" would cause a major fluctuation in price. In other words it would trade much like the Swiss Frank.

Then one day Big Al decides he needs some new mansions and opens up the credits to everyone, institutions and all. All of a sudden the market for credits begins trading like the British Pound. Up 100 ticks and back down 100 ticks, all in a single day. It is essentially the same market as before, but the addition of "market manipulators" has caused a formerly quiet market to gyrate wildly.

Now some would say the credit market has evolved from an orderly, predictable market to one of chaos and randomness. I would argue there is nothing random about it at all. The manipulators have simply applied their lever (money) in such a way to further enrich themselves. After all, a market that rises 100 then falls 100 in a single session really hasn't moved at all. Those applying their levers know in advance the direction of the market and therefore profit from the moves they created artificially.

This continues on for several years until a group of enterprising traders band together to get a jump on market moves. Their plan is to tap the phone lines of the manipulators in order to learn in advance the scheduled moves of the day. So they hire a burglar to break into Al Gore's house to retrieve the infamous Clipper Chip from his safe. Once installed, they are set to go to work.

On the very first day they discover the schedule is to move the market up by quietly buying credits at 2:00 AM. After 5 minutes of buying they'll sit on the sidelines for 1/2 an hour then begin buying again. They will buy for another 5 minutes then sit on the sidelines for 1-1/2 hours. Right before lunch they'll buy another lot knowing that when they return they'll start selling off credits and rake in the profits. Armed with this insider information the enterprising traders can simply piggyback off the moves of the manipulators.

Which leads to the conclusion of the story: shouldn't we all be working towards some method to monitor the moves of the manipulators?

hondo,

So, when the manipulators start buying/selling, it is the momentum of the volume they pump into the market that give them the control. Right ? Will the method to "monitor" them not going to be volume-related ? If it is, then can't any of the GOMI projects or something similar to the GOMIs, be used to "monitor the moves of the manipulators" ? If it is another parameter-related, then can we first identify this other parameter ?

Lolu

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Personally, I think volume is very important and an excellent topic can be found here.

I spent a couple of weeks learning about volume using both the VolumeStop and BetterVolume indicators. It was both fascinating and confusing at the same time because the more you learn the more complex it becomes. So I'm looking for a good book that will help me reach the next step. It's just one of those things that takes an incredible amount of hard work to master and it's on my January To Do list.

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Market Moves because of the "Market" orders

Hi there all,

Well my opinion is that market will move because exactly there are traders willing to
enter it at a "Market" price and not a "limit" or "stop" price, and this is what fuells the market, basically if all traders where trading with limit orders the Market would simply not exist, so the market moves becauseof the people that put their money where their mouths and beliefs (and all the information) tey have do.

Sincerelly,

Charles

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I agree, if no one is willing to pay "market price" then no sales will occur.

Example: Let's say the market is stuck at a price of 1.000. There are sellers at 1.001 and higher and also buyers at 0.999 and below. But no one seems to be willing to take a trade at 1.000, so the market just sits there for the longest time.

At the hedge fund, Alex is watching the market just sit there too, but he has a major game plan for the day. He plans to push the market up 80 pips to yesterday's high and is waiting for the perfect time to make his play. Because the market is not moving at all right now he can be assured there are no other big players in the middle of a move of their own. So Alex figures this is the perfect time to kick his plan into gear and makes the first move.

Alex begins selling small numbers of contracts at the market price.

This move sets off a chain reaction among the retail traders that had earlier been sitting on their hands. The sellers have been expecting the price to go lower but were hoping to get in at a higher price and thereby making more profit as the market drops. Now they must decide if they should chase the market lower or the bus might leave without them. Their other option is to sit tight and wait for the price to retrace to their previous comfort level. Some of the sellers sit tight but others jump on board and sell at the market. This further fuels the drop in price that Alex had precipitated artificially.

Now those buyers willing to buy at 0.999 and lower are in the market as their price levels were hit on the way down. Those that bought at 0.999 have stops around 0.992 or so. When their stops get hit they sell to get out of their positions, further fueling the drop in price.

So a market that was stuck at 1.000 just a few short minutes ago has suddenly dropped 20 pips to 0.980. The buyers are all now nervous and thinking it's time to change their minds as the market must be surely headed down further. The sellers are happy as clams because they made the right decision by predicting the market would go lower. But both are wrong.

Remember that Alex created this temporary drop in price by breaking the stalemate. His plan is to drive the market up, way up, and this is the perfect time to switch to Phase 2 of his plan. When the price drops to 0.980 he begins buying. At this point there is no shortage of retail sellers because they think market is heading down. So Alex's plan is to snap up all the contracts he can within a certain range, say 0.980 to 0.990.

Now Alex doesn't want to set off any alarm bells at the other hedge funds so he disguises his move by trading 10 lots only. So he buys 10 at the price of 0.980 then waits a little bit. He's able to buy another 10 at the same price a short time later. As things stabilize in the market Alex keeps grabbing 10 here or there and pretty soon the price has inched back up to 0.990. Alex checks his numbers and see's he has roughly 200 contracts all purchased in the range he planned.

But he's not done yet. Not by a long shot. Alex has only established his "base position" that he plans to carry all the way to the top. It's time for a little rocket fuel to kick this thing into high gear. So Alex goes on a buying spree snapping up every contract he can which causes a spike in the market. Many retail traders jump on board further boosting the rocket higher.

So now it is time for Alex to unload some of his rocket fuel positions to pocket some quick profits, which also allows him to "reload" for the next spike up. After unloading the rocket fuel he checks his paper profits on the "base positions" which are obviously up nicely too. He'll keep his powder dry for 15 minutes or so and let the market retrace a bit before he fuels up the rocket ship for the next leg higher.

Let's see how Alex has done so far:

Phase 1] Alex invested about 40 contracts artificially moving the market lower when he broke the stalemate. He averages a 15 pip or so profit on each before he sells them.

Phase 2] To establish his "base position", Alex began buying 10 lots until he accumulated a total of 200. His plan is to make 80 pips or so on each.

Phase 3] To kick things into high gear, Alex began buying like a mad man. He "invested" a total of 300 contracts during the spike up.

Phase 4] Now he begins to slowly unload the 300 rocket fuel contracts, making a nice little profit on each. Once the 300 contracts are unloaded he'll sit tight while the market retraces a bit. While he's waiting he checks the numbers and sees that he's up about $50,000 in real profits from the combination of the initial move down and the rocket fuel contracts. He also sees roughly $75,000 in paper profits from the base position he still holds. So now it's just a matter of time before he sends the rocket higher once again.


Last edited by hondo69; December 27th, 2009 at 10:09 AM.
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Meanwhile, Dmitri has the opposite gig going and is doing the same thing in reverse to get the market down. He's been taking Alex's rocket longs to get the market higher so he can accumulate more shorts. And so it goes!

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Market Makers add liquididty ?


Hi all,

Reading these fine examples and remarks i am wondering if some one could explain the exact role of market makers in the liquidity or manipulation of the markets.

Thanks

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