To understand what makes the price reverse we first need to understand what makes the price move in any given direction.
Price moves up if aggressive buyers are continually clearing out all the passive sell offers at each price level. And in reverse price drops when aggressive sellers continually clear out the passive buy bids at each price level.
Hence price will reverse when there is a change in circumstances. If price has been rising price will change direction when all aggressive buyers are overpowered by the aggressive sellers and aggressive sellers being to push the price down. And of course the reverse is true that if price has been falling due to aggressive sellers it will reverse when aggressive buyers overpower sellers and push the price up.
These events happen regardless of what any technical indicator is trying to tell you.
So in conclusion the market is driven in either direction by aggressive buyers and aggressive sellers overpowering each other to push the price in either direction.
That’s right. Big money moves the market when big players make their trades. We, small traders, can only learn to see the tracks of these whales and trade in their direction.
Prices in the market change because of a battle between people wanting to buy and those wanting to sell. Think of it like a game of tug of war. When prices go up, it’s because there are more eager buyers than sellers, and these buyers keep buying everything the sellers are offering, which pushes the price higher. But when prices go down, it’s because there are more eager sellers who keep selling everything buyers want, making prices fall.
A price changes direction when the balance of power shifts. If prices have been going up because buyers were in charge, they start to go down when sellers take over and start pushing the price down. And if prices have been going down because of strong selling, they start to go up when buyers take control and push the price up.
True, we can’t see the change coming.
Depending on what financial instrument you are trading and what data you are using you may be able to see the change in order flow with central exchange traded instruments.
Otherwise, other options are to wait for reversal and enter after a swing high or swing low. Some alternative candle types can be of assistance to limit false reversal signals like Range Bars or Heiken Ashi.
The constant battle between buyers and sellers make the price get reversed.
The same is true with trends, because trend is such a thing which can be broken down easily: uptrend - when there are a lot of buyers of assets and sellers lose, downtrend - vice versa.
Also we should take into account news, because some events, key ones, like annual reports if we speak about shares, and CPI and unemployment rates if we speak about major currency pairs, are very impatcful. That is why it’s of utmost importance to keep an eye on major news, they can easily turn the picture you see upside down.
Totally agree!
But the winning side is not being able to see something the big money players can’t, but rather knowing when they are starting to run in the opposite direction and join them. So it is good enough to react to their initial move, join in a little later than them and get out with a carefully planned target.
Individual traders can make fast decisions without dealing with the slow, complicated rules that big companies have. This quickness lets them take advantage of short-term chances that large firms might miss or think are too minor to bother with.
The thing is, price can not reliably show which of 100 new potential reversals will become a full reversal and which are simply pull-backs before continuation of the original trend.
This makes trading with the new trend just after the “reversal” point so random - so random that it can be argued that all reversal strategies are coin-toss systems. This means the trader might just as successfully set both buy and sell orders a chunk above and a chunk below current price and ride whichever trade is triggered.
But if that’s true, why wait for a reversal point? Now we’re down the road which says that no matter what price is doing in a trend, you should have a buy and a sell set and wait for one to be triggered. Which means actively selecting reversal points is not a bona fide strategy - they all look great in textbooks and on Youtube video clips but they are all a conjuring trick - you only see what the magician’s right hand is doing, the left is always hidden.
Agree!
Always best to begin any market analysis by stepping back and looking at the big picture on a higher timeframe.
Up trend?
Down trend?
Range bound?
For trends, safest to trade with the overall longer term flow.
For range bound safest to trade from the edge (support or resistance) to middle. Sometimes range can bounce between edges but other times can decide to only go halfway approximately.
Then naturally a trend will eventually end and either totally reverse or find new value range region. And range bound times will also eventually end and turn into up or down trend.
So at the end of the day given the many possibilities the more information we have to make good trading decisions hopefully the better.
One quote I have heard is at any random price level there is a 50/50 chance of going up or down. So any information that can help us get better than a 50/50 chance is good information.
Actually, you are right the market analysis is crucial. But I was shocked when I saw some companies simply ignoring this step and saying, ‘We’ll see how it goes!’