Market Technical Analysis, The Futures or any market is an auction. Price is set through a process called “price discovery”. What is this, you may ask? Market Technical Analysis Define at futures-trading-how-to.com the Advanced Mechanisms of Futures Trading. The Auction Process is the Essence of the highly acclaimed “technical analysis” methods in the world of Trading (and any Market). “Markets move in trends” (Directional Moves).
“Price gathers all the information” Remember that the Basic Mechanism of Futures Markets, Supply and Demand, are the “basic” way to state the Auction Process. At the end, Supply and Demand and the Auction Process are the same. Buyers betting for a price (demanding) and sellers offering for a price (Supplying). What is an Auction Process: It is where Price is set through a process called “price discovery”. It is simply where the buyers or sellers will continue to move the market in one direction or another, UNTIL the opposite force is motivated enough to step in and stop the advance. The Market will auction as high as it needs to, in order to find sellers, or as low as it needs to find buyers. Or in other words in order to motivate buyers to see the Market as “relatively cheap”. (yes I can see your blank face!, Don’t worry I will clear it out for you). For Example, and Getting a little bit more specific, we can say that the market opens and begins It moves directionally up, trending up (number 1 in figure below), then after moving up, it advertises for an opposite response (looks for sellers) to shut off the directional move and change trend (number 2 in figure below). What does all this mean?. Again Lets say that the market moves directionally up after the opening and the up move brings in selling. The selling is an opposite response which: One stops the up move. In other words, shuts off the buying, And two causes the market to reverse and move down. The result: the up auction ends and a down auction begins. Keep something in mind: Price (The Market) determines the “Market Technical Analysis” through The Auction Process forming “patterns in price” or simply leaving “traces” of where Supply and Demand is, therefore the process is like a machine, price moves up and down, up and down, and vice versa. Take a look at the following chart representing directional moves and their shut off of those directional moves by opposite response Now let’s say The Market moves up and advertises for selling (same example as above) but doesn’t get any. Instead, it brings in more buying. Therefore, The Market has to move higher to bring in an opposite response. The result: The up auction continues, and The Market keeps it trends up. At the end you will have just two options in The Market: Look for Continuation (get into the trend) of the directional move Or look for a change of the directional move. (go with the reversal of the trend).
So what is your job as a Futures trader and as a market technical analysis Specialist?.Your job as a futures trader and a technical analysis specialist of the market is to identify when the Shut off of the directional move will occur, in other words, locate where is Supply and where is Demand. Now Let’s look at what happens when The Market keeps advertising price Up looking for sellers (change in trend) and doesn’t find those sellers. The Up Auction continues, an a continuation of the trend take place. Now Let’s look at what happens when The Market keeps advertising price down looking for buyers (change in trend) and doesn’t find those buyers.
The Down Auction continues, an a continuation of the trend takes place. Lets continue the journey here at market technical analysis!!! To facilitate trade which simply means distribute goods and services, anymarket moves from imbalance to balance, to imbalance and back again. In Futures Trading It uses this behavioral pattern in a single session, for example, in emini trading or Index futures it is from 9 30 am New York time to 4 15 Pm NY time. (a day’s session), and also in longer-term trends or auctions.(days or weeks). If the market is balanced, basically equal amounts of buying and selling are present . The Market has brought in an opposite response that shut off any directional move either up or down. The market has found a fair price around which it can facilitate trade without causing any “imbalance”, this mean that buyers and sellers agree that “this” fair price is were the value of The Market is. Simplifying, it means that The Market is in a Trading Range or consolidation when balancing. Supply and Demand are “equal” and no opportunity is present for us to enter a trade. If The Market is imbalanced, either buying or selling is predominant . At a price where The Market is Imbalance, Opportunity is present because either Supply or Demand is greater than the other (at that price), causing a disequilibrium. Simplifying it means that, when The Market has moved up or down and has found at a “determined price” a “force” that is greater than the other, That “force” will cause the price to be rejected because that “force” (either buyers or sellers) is greater than the other. Take something into account when doing market technical analysis, The Market is just a balance-looking machine, always moving higher or lower in order to find fair price (equilibrium or Balance area) around which it can distribute goods and make everybody happy (buyers and sellers). Now, summing all up here in market technical analysis we have that: If the price is “fair” (balance), The Market accepts that price and consolidates around it until “any force” either buyers or sellers step in to “move” the market out of balance again and look for a new are of balance or equilibrium. If the price is Unfair (Imbalance), The Market rejects that price OR travels through it looking for a new “fair price”. For example, Lets say we are in the oranges season, in season price is balance, we normally have a good supply and demand. Now when we stray away from the season of oranges, Suppliers lack inventory and if people demand the same, the price will be imbalance because there is less Supply, therefore price will move in order to find Demand and meet equilibrium (balance or fair price). In brief I could say that in market technical analysis, A balanced market has found a fair price. Price we all agree is the best. An imbalanced market where one force is greater than the other is seeking a fair price (equilibrium), where Supply meets demand or vice versa. This is Simply a way to State the familiar Law of Supply and Demand which rules futures trading, Buyers Demand, Sellers Supply, the market is in equilibrium (balanced) between buyers and sellers or it is working toward the equilibrium (imbalanced) Ok now, let’s stop talking and look at it in a chart.
The circles in the chart represent:
Imbalanced areas (shut off of directional moves) where an opposite response entered the directional move and shut it off. Price travels from red circleto the green circle and vice versa looking for value or a balancing area. Guess where the balancing are is building up?…Any idea? Nope yes? In the rectangle where the congestion is In the above chart I have added a tool called Volume Profiles. The rectangle represents the Most traded price or where ranges or balancing areas are developing. That area represents no opportunity, the circles represents opportunity OR imbalanced areas. I want to emphasize here, as a side note, that the Auction Process concept, is also used in stock market technical analysis, options technical analysis and in technical analysis in general, for those who are also interested in technical analysis of other instruments. You can apply it even for “shoes”. Supply and Demand concepts remain intact for any Market. This concludes our market technical analysis explanation, Now let’s identify those opportunity areas or where Supply and Demand is exceeding one another in Futures Trading Charts.
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