Originally posted at forexfactory on Jan 13, 2011:
Hey Scotty, glad you could join the discussion.Yes I also thought about the sideways market being liquid because there are buyers AND sellers there, instead of in a trending market where there are either only sellers or buyers (now obviously not ONLY, but I think you get what I mean..). I have been thinking about “quantifying” my ideas, i.e. testing them but I don’t really have any idea where to start. First of, what is a balanced market? Or even better, what is an UNbalanced market? How do I define this? How do I predict future orders?…
Buyers and Sellers always exist. Even in trending markets there are always the same amount of buyers and sellers. The question is which side is more aggressive and is going to start bidding up the market or dumping the market. What is going to cause one side to get up off rear end and start executing market orders? What is going to light a fire underneath certain market participants that would cause them to gladly cancel their limit orders and pay market prices instead?
Take today for example. I am sure there were certain market participants that would of liked to buy EUR/USD at 1.3050. Maybe some of them put in limit orders to buy around some dips. What would cause them to say, hey my limit orders are probably not going to get filled and I need to instead start executing market orders, like right now! What would cause other market players to say hey I am currently short, but I probably need to start covering really soon, like maybe right now?
Predicting future orders is all about knowing what will generate order flow. Get into the minds of the market participants that are generating order flow and moving prices and figure out what will cause them to start executing billion of dollars in aggressive orders.
You don’t need candlesticks or any other chart for that matter to execute trades based off of order flow. Now a chart may be helpful, it could also be deceiving. If the reason for the market moving and order flow being generated has nothing to do with a chart, then you don’t need one. Chances are when market moves 100 pips, 200 pips, the market players that generated billions of dollars worth of aggressive order flow didn’t look at a candlestick chart and say, Ohh my god a bullish engulfing pattern, I need to buy 1 yard of EUR/USD right now! Chances are they did not look at a stochastic and say wow, there is divergence, I need to buy 2 yards of EUR/USD within the next hour! Chances are they are not going to execute billions of dollars based off of the charts showing a certain combination of moving averages have just crossed. Now I have seen a few market moves based off breakouts and things like that, but usually there are other things going on underneath, things that do not show up on a chart.
Stops are great and all, and I use them every day, but they are not the only order flow generator.
My 2 cents.
You are off to a really good start Carnegie, just know that there are still a lot of barriers in your way that you need to demolish. And that it will still require immense discipline and staying power to get you into the 5% of successful traders and then into the fraction of those that have an order flow mentality.
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