Lecture Notes: How Prices Move and Who the Players Are

Introduction

• Understanding how traders make prices move is essential for consistent trading results.
• Prices change due to the dynamics between buyers and sellers.

How Prices Move

• The last reported price on the screen represents the current value (e.g., $10).
• To move to the next price (e.g., from $10 to $11), all offers at the current price must be taken out.
• Price movement is either an increase (price going up) or a decrease (price going down).

Making Money in Trading

• Two primary ways to make money: Buy low, sell high or sell high, buy low.
• No one trades with the intention of losing money.
• A shift in price requires conviction from traders.

Conviction and Market Movement

• Conviction drives prices up or down.
• Dynamic traders create price movement through their conviction and actions.
• Every trade has opposing beliefs from buyers and sellers.

Understanding Dynamic vs. Passive Traders

Dynamic Traders

• Traders who can move markets up or down intentionally.
• Includes hedge funds, money managers, etc.

Passive Traders

• Depend on dynamic traders to make them winners.
• Use technical indicators but do not intentionally move markets.

Historical Context and Futures Markets

• Futures markets evolved to manage risk for producers (e.g., farmers) and consumers.
• Speculators entered markets, formalizing futures contracts for hedging and speculation.
• Market movement often involves large directional trades by dynamic traders.

Technical Analysis

• Technical indicators find patterns in market data, which create trading edges.
• These patterns emerge consistently but don't predict individual trade outcomes reliably.
• Patterns make markets a consistent source of opportunities but not on a trade-by-trade basis.

Auctions and Reverse Auctions

• Dynamic traders might bid prices up or offer them lower to attract opposite side trades.
• Creates a “reverse auction” mechanism to induce market movements.

Psychological and Financial Resources in Trading

• Knowing other traders' intentions can change market outcomes dramatically.
• Retail traders often lack the resources and intent to move markets as dynamic traders do.

Impacts of Dynamic Traders

• Traders who move markets (e.g., hedge fund managers) can create significant price swings.

Market Manipulation Examples

• Dynamic traders might create false breakouts by driving prices up then down, profiting off the induced trades.
• Shaking out weak longs/shorts to position themselves advantageously.

Probabilistic Thinking in Trading

• Successful trading depends on thinking probabilistically rather than on single trade certainty.
• Traders need to train their minds to think in terms of probabilities and series of trades rather than individual outcomes.

Conclusion

• Understanding the dynamics of price movement and the role of dynamic traders helps traders set realistic expectations.
• Technical indicators can guide consistent income over a series of trades but can't predict individual trade outcomes.

Takeaways

• All price movements begin from an imbalance in conviction between buyers and sellers.
• Dynamic traders with both financial and psychological resources often dictate short-term market movements.
• Effective trading combines technical analysis, understanding market psychology, and thinking probabilistically.