Sunday, December 21, 2008

Buyers vs Sellers

In the land of the squiggly line, it is becoming easier to find someone who thinks George Bush is intelligent than it is to find traders online who read price action for a living. I preface it with the online because I know there are still many professionals out there who trade with minimal or no indicators, but the are usually too busy making copious amounts of money to be hanging around the online world.

A recent article in Technical Analysis of Stocks & Commodities featured an interview with Jack Broz. Jack is a member of the Chicago Board of Trade (CBOT), and trades Bonds and Dow futures in the pits, and from the screen. In this interview he made some interesting observations of floor traders, but it was this paragraph that warmed my heart:

"… The bias of the floor. Are the floor traders trying to buy dips, or are they trying to sell rallies? Are they bullish or do they want to buy strength? What levels are they using? One thing I have noticed as I trade more is that nobody in the pit uses indicators."

Nobody uses indicators in the pit, which of course seems obvious in hindsight considering the chaos that is the pit of CBOT:

Not really a place for the squiggly line is it. The speed and frantic nature of the pits ensure that trading is done with the minimum of frosting.

What I think is forgotten at times is we are trading financial markets. It is called a market for a reason, it is no different than your local farmers market or super market, it is still a place for someone to either buy a product they need from someone who want to sell it to them, or vise versa. It doesn’t matter if you are buying an apple, shoes or gold, either way the process is the same, you buy from someone who wants to sell.

The most successful technical traders are those that know what this might look like on chart. If you have a long bias on an instrument, i.e. looking to buy, who are you buying from? Sellers, stating the obvious I know, however the amount of traders I have worked with that seem to forget this simple fact indicates that perhaps it is not as obvious as it seems.

If you are at a market, that market has fruit and vegetable stalls, arts and craft stalls and hardware stalls and you want an apple, chances are you are going to look for the physical characteristics of someone selling an apple. You might be looking for a Greek man with an apron, a fruit van or other similar products in the general genre of apples. If someone has a stall with pears, chances are their are apples there as well. Certainly a much better chance than if they were selling hammers.

Back to our buying idea, there are two things we need for price to go in our direction:
  1. Someone to buy from (sellers)
  2. Other buyers to support the purchase (momentum)
Knowing where new buyers are can be difficult to spot. In the majority of cases they are the silent minority, they have left little or no footprints as they are not in the market as yet. In fact, you, as a potential buyer, are one of those exact buyers.

Potential sellers however have left tracks, they are already in the market, and so spending your time looking for where they were could be a much more productive use of your charting time. The most desperate sellers are those that are feeling the pain of a losing position. We all know the feeling, when we are holding a losing position and are going through the “if it just comes back to break even” game.

This scenario is most commonly called reverse polarity. This is where support becomes resistance and resistance becomes support. Visually this usually looks like:

So if we are buying, looking for sellers at previous resistance (i.e. where sellers last came into the market), in this instance looks like a fantastically easy way to find who you are going to buy from. Naturally things aren’t always that clear cut, for example:

While there was one polarity change here, we had a couple of turns that seem to turn in mid air. Some might put it down to a mysterious ratio found in the ancient pyramids, sunflowers and the patterns in the hair on my left arm (you know who you are). While others might look for reasons in price itself.

The theory of sellers in a panic wanting to offload them to buyers can take a different visual form. To the left is a close-up of one scenario. Here we have six blue candles, which at first glance makes you think six bullish candles.

Candle three however is anything but a bullish candle. It’s long upper wick indicates this is very much a bearish candle, with heavy selling coming in at the top of the range. Another instance of reverse colour blindness.

The next three candles however returned to strong bullish candles. There must have been a strong reason to be going short in an uptrend. After the close of candle three, those sellers would be feeling rather chuffed at their intelligence, thinking they have picked the top. The next three candles reverse those feelings quickly, and that comfort now turns to panic, and they are now more than happy to offload their positions to anyone wanting to buy.

Let’s go back to the previous chart with this in mind and look at those mysterious turns again:

Not so mysterious .. certainly no ancient mathematics involved in these cases. You can see in the zoomed in versions that each case this time had sellers being reversed on quickly, providing some very eager sellers looking for others wanting to buy what they have (see the link to the farmers market … knew I would get there).

There are many variations on the theme, but breaking things down to the core of market behavior; buyers and sellers, can sometimes clear the brain enough for you to make some money. Have other visual representations of this scenario? Let us know.

Related Posts :
  1. Trading Support and Resistance

Sources :
  1. Buyers vs Sellers | Written by Akuma99, December 16th, 2008 at 10:05 pm.

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