How Prices Move and Who the Players Are

in this section we're going to discuss how prices move and who the players are behind it when you understand how traders make prices move then how you need to think to generate consistent results will start to become clear to you okay where we're going now is that is that i think what i said when we you know just before the break is that when you guys understand the nature of price movement and how any technical methodology that's based on a mathematical formula or a price pattern interacts with that movement when you understand that relationship how you need to think will become self-evident do you remember me saying that okay this is the part that we're going into right now okay in other words where you understand just exactly how prices move because what i found in doing these workshops over the years that here i'm i'm i'm addressing a group of people who trade and who in many cases have traded for years and if you ask somebody exactly how do prices get from one price to the next they can't tell you they don't know they don't know how it happens and maybe you guys are i'm sure you guys aren't that group but we'll you know we'll do we'll we'll go over it just as a refresher okay we'll we'll do it as a kind of refresher so no actually i haven't i haven't addressed a group yet that that there were very few people or if anybody could tell you exactly how prices move from one price level to the next so for an example um okay if the last reported price that you see on your screen of something is 10. how does it get to 11. what they asked 12. who's they uh market maker the market maker and market maker asked 12. okay well no well okay it's at 10 how does it get to 11 how does the price actually move to 11. well mo buyers but that okay that's true but then again when you when you with that demand demand okay but when you look at 10 what you have is you have offers at 11 and you have bids at nine right everybody understands that okay now there's only two ways that anybody can make money in this business there's only two possible ways no matter what strategies you're employing no matter how elaborate they are no matter how simple they are you have to be able to buy something at a low price and sell it back at a higher price or sell something at a high price and buy it back at a lower price are we in agreeance on that and would you also agree that everyone that trades is trading to make money in other words i'm gonna say that there isn't anybody who puts on a trade that does so knowingly and consciously thinking it's going to be a loser in other words when they go into the market and say i my purpose is to lose money okay you guys with me on this now if the only way that you can make money is to buy low and sell high or sell high and buy low and the last price posted price is 10 which represents the value at that moment then what's low nine is low and what's high 11. what's the only way that it can get to 11. somebody somebody thinks 11 is a good price meaning that they have to buy high relative to the last price right so for an exam so so basically what this also means is that that all the offers have to be taken out at 10 do they not anybody who had an offer in at 10 that wanted to sell at 10 will get filled and all those offers have to be taken out for the price to go to 11. correct and of course and for the price to go to 12 all the offers that exist at 11 have to be taken out so that someone could actually bid the price up to 12. for prices to move somebody literally has to bid the market up or for prices to go lower it means that someone has to offer it lower now if the only way that anyone can make money is to buy low and sell high and sell high and buy low why in the world would anybody bid the market past the last posted price conviction exactly conviction in other words what you have is a situation where on every trade every trade that exists there are both there are two people on both sides of the trade even in stocks there are there's even someone who's selling a stock not like a commodity where where in a futures contract or an options contract there's two people on both sides of the trade there's a buyer and there's a seller and the next tick is going to make one of them a winner and one of them a loser right off the bat if you and i you and i enter into a trade at 10 okay we enter into a trade at 10. it means that you in essence if you're the seller will say you you sold them at 10 and i bought them at 10. the next tick is going to make one of us a winner and one of us a loser if the next tick is nine the amount of money that flows into your account is coming directly out of mine are you guys with me on this the next tick is 11 the amount of money flowing into my account is coming directly out of your account okay so basically what you have is you have two diametrically opposing beliefs entering into every single trade every trade that is made there are diametrically opposing beliefs about what the future is going to be so again i'm going to say what would cause anybody to buy high or sell low just conviction in other words what you have is a situation where if someone's willing to bid a market up to the next highest price basically what that person is doing is that person is stepping out saying that my conviction that the price is going to go to 12 or beyond is so great that i am willing to do the opposite of what i need to do to make money think about what i just said i am willing to do the opposite of what i need to do to make money because my conviction is so strong that the next price will be 12 or 13. otherwise this person would wait if this person thought the next price was going to be nine then they'd buy lower well they thought it was going to be eight they'd buy low they'd wait and buy lower where so what happens is that the person who's willing to bid a market up and take out these offers at 10 take out all the offers at 10 and bid it up to 11. has to have a stronger conviction in the future than the person who sold it to him at 11. because this person is creating price movement is actually creating movement and the person on the other side of the trade is being passive because they're doing exactly what they think they need to do and that's sell high relative to the last price are you guys with me on this okay everybody understand it now i want to ask you is there anybody in this room who has purposefully bid up a market there are there are some people who've actually been a market up in other words the people who've actually taken taken the offers all the offers out at the next highest price and bid it up do people like that exist yes that so another we are aware of the fact that there are traders who have both who both have the financial and the psychological resources to actually purposefully bid markets up or offer them lower are we we're together on this right okay so basically what you have is that all price movement has to be a result of an imbalance in the degree of conviction between the traders who believe that prices are going up and those who believe that it's going down that is the only way that prices move it doesn't matter what the reasons are that people tell you about why they did what they did or it doesn't matter what the reasons that you hear on cnbc or whatever about where the market is and why it went the way that it went ultimately it all boils down to an imbalance in conviction that's the only way prices can move because the only way they can move is for someone to actually purposefully bid it up or offer it lower and for them to do it there has to be you know like like a sense of of strength in terms of energy and their belief that the next tick is going to make them a winner okay so we basically does everybody understand everyone's with me on this all price movement is a result of an imbalance in conviction between the buyers and the sellers every trade every trade that's made there's somebody on both sides of the trade that have diametrically opposing beliefs you're always having with every single trade there's always a clash there's always a clash in wills and a clash in belief in terms of what the next tick is going to be or what the future holds we've got two people coming entering into in a sense an agreement by making a trade but both of those people have diametrically opposing expectations of the future and one of them is willing to say hey you know what my expectation is so great is so strong that i am actually willing to do the opposite of what i need to do to make money and bid a market up now there are traders who will do that i call them dynamic traders they are the people that have like i said both the financial and the psychological resources to actually bid markets up what the typical and what i'm going to call everyone else passive technical traders okay they've got dynamic traders and passive technical traders what the typical passive technical trader doesn't really i'd say really not aware or think about is the fact that the only way that they will find themselves in a winning trade is by the actions of the people who are willing to bid a market up and off law for it lower that's the only way that it happens in other words when you and i get into a trade i am a passive technical trader by the way i'm not one of these dynamic guys i don't bid markets up and off from lower okay that when you and i get into a trade at this price right here let's say we got into we bought at seven we're buyers at seven what are we really saying when we get into that trade bottom line what are we saying based on the dynamics of what i just explained we're saying that i think that someone is going to come into the market after me and buy at a worse price than what i did that so that has such a strong conviction that this market is going to go up that that person is actually willing to buy at a worse price than me to buy at eight to buy at nine to buy it ten because if there isn't anybody else that comes into the market to take out all the offers at eight take all the offers at nine take out all the offers at ten that market ain't going up and i'm not going to be in a winning trade you see the implications are every single trade that we put on as packed as passive technical traders we are in fact obliged and dependent on other people who are willing to do something at a worse price than what we've done it we did it at or we won't be a winner are you guys following me on this is it starting to put the idea of trading into a different context that in essence what you're really trading is other people's perception of what is high and what is low that any technical indicator any price pattern that you might trade any trade that you put on you are basically trading other people's perceptions of what is high and what is low now when you think about how well you might know other people's perceptions you think about in that context it might not make a lot of sense to get so fixated on staying in a trade that isn't working it might be a little easier to put in a stop and to say hey you know what if they if these if people aren't coming in to buy at a higher price than me i'm going to give them this much room from here to here and if they don't come in i'm out of this trade i just go to the next one because that's basically what you're doing as a trader you are completely dependent on other on other traders to make you a winner now who are these dynamic traders who are the people that are going to do this and why what hedge funds okay money managers uh in the commodities arena do you guys really know how like the futures markets even started in the first place or why they even exist i know people probably exist because they're on the screen and it's part of the platform but you know there's actually a legitimate economic purpose for these things and when you when you get to the underlying when you understand the underlying reason for these markets you'll you'll understand why they trade the way that they do and why prices move the way that they do you know for an example what you know what it really what what happened in the past is that for example if you had a farmer who uh uh you know who planted their their their corn in the spring and harvested the corn in the fall what they were dependent on of course was a lot of different factors that they had no control of one of them being the weather and one of them being how much other how much other corn was planted out throughout the country and how much that corn would end up end up in in the market in the fall in relationship to what the demand was so if there was a lot of corn and and and let's say um the demand remain relatively constant the price of the corn would go down and the farmer would lose money if there wasn't a lot of corn and demand would remain constant the price would go up if there wasn't a lot of corn and for some reason demand was really high and the price would go up even further so what you had is a situation where there was a great deal of economic risk in in being a farmer or being anybody that manufactured anything or or dug stuff out of the ground like gold or silver or manufactured electric motors that needed copper or whatever goes into all the products that we use so what what evolved was a situation where the the farmer and the and the manufacturer let's say a bread that needed the flour they would enter into what was called a forward agreement meaning that they both wanted the economic risks taken out of their business they both wanted to be able to make a profit they both wanted you know to be able to to have some sense of certainty as to what prices might be at some point in the future so for example if if i'm a farmer and it cost me four dollars a bushel to plant my corn and bring it to harvest or bring it to market then for me to force me to make some money i want at least five dollars a bushel right and if i'm the guy on the other end of that trade or the other end of that transaction that wants to buy that corn in the fall or wheat or whatever and i want to know exactly how much i'm going to have to pay for it so what ends up happening is that if let's say it's it's april or it's it's march and the price of corn is four dollars a bushel you enter into a forward agreement with with the with the end user and they say hey you know what i will deliver a million dollars of a million bushels of corn or a hundred thousand bushels of corn at say 450 a bushel or whatever price they agree on five dollars a bushel regardless of what the price of corn is in the fall so if the price of corn in the fall happens to be uh three dollars a bushel because there's so much demand because because there's so much corn and very little demand then the farmer actually still got his price at let's say five dollars a bushel but the but the manufacturer ended up having to pay two dollars a bushel more than what he would have if he had waited and just bought his corn on the open market in the fall so in that sense he seemed to lose on that transaction but then the next year what ends up happening is that there's very little corn or there's more demand than what there is corn and the price of corn ends up being seven dollars a bushel and the farmer would have made the seven dollars had he not entered into a ford agreement but what ends up happening is he still made his dollar bushel profit and the and the end user ended up saving himself two dollars a bushel so over the years all this evens out well so then what happened then is that exchanges in other words instead of these these people individually entering into these transactions exchanges uh were developed so in other words they had a central place to come to and make these transactions like the chicago board of trade and chicago mercantile exchange well what ended up happening is that when with the advent of exchanges what you had as a situation where there were people that were willing to take the other sides of these trades that had nothing to do with the actual process of making bread or growing weed or corn they were called speculators and then that's when futures futures contracts you know came into being so what would happen is that is that if i'm if i'm a farmer instead of me having to make the transaction directly with a uh um with someone who who manufactures bread i could go to the chicago board of trade and sell my corn or wheat with a futures contract and so if i'm selling it at four dollars a bushel and so that means i'm long corn this is where the log and the short comes from i am long cash i'm long corn and because i've got a crop and crop in the ground and so if um if i sell it at four dollars a bushel on a futures contract i take the equivalent number of futures contracts and so if the price of corn goes down or let's say the price of corn goes up i've already locked in well i'm gonna sell it five dollars but i've locked in my dollar bushel profit so if the price of corn goes up what i've done is i'm short futures i'm short the actual futures contract i'm long the corn so i'm going to lose money on my futures contract because as the price goes up i'm losing money but i'm making money on my cash so i'm making the equivalent amount of money on my cash as what i'm losing on my futures so in any case it doesn't matter what the market does the market could go up the market can go down i've locked in my dollar profit bushel a dollar per bushel profit and the person on the other side of that trade the speculator if of course the market goes up then the speculator is the one that makes that two dollars a bushel profit if it goes up to seven dollars a bushel okay you guys with me on all this if the price of course go the price of of of it goes down then i'm losing money i'm losing money on my cash crop but i'm making money on my futures contract and the speculator on the other side of the contract is losing money because the market's going down in other words the speculators just one-sided this the farmer's two-sided he's hedged that's what's that's what's called a hedge now what's interesting about all this is that is that as these markets evolved you will find that that the farmers don't trade against each other or the grain elevators or the people who the commercials who actually are involved with the production and manufacture of anything they don't take the other side of each other's trades what they do is they want speculators to take the other sides of their trades in other words if i'm a if i'm a commercial grain elevator i'm i'm not going to be that i'm another commercial grain elevator is not going to be taking the other side of my trade because we're both going to be doing the same thing okay if i'm a farmer and i'm going to sell sell my wheat or sell my corn the guy the farmer down the street who also trades isn't going to be taking the other side of my trains what commercials and hedgers and fund managers and all the people who are really let's say professionals they have become very very sophisticated at finding ways of drawing the general public into taking the other sides of their trades meaning and the point that i'm making here is that they will purposefully do things that will draw the typical general public let's say the general public into the other side of their trades when in fact what they want to do is the exact opposite for example let's uh if i'm if i'm a hedge fund if i'm a hedge fund manager and i wanna and i'm long stocks or or it doesn't really matter what it is i could be long bonds i could be long gold i could be whatever it is and i wanna and i wanna liquidate my position now i've got a huge position meaning i've got a cash position and i want to sell it if i go into the market right now and sell my entire position what do you think is going to happen to the price chances are it's going to go down i'm going to i am actually going to because of the volume of my trades i am actually going to drive the price down making my average cost lower and lower i don't want to do that i don't want to so for example if i come into the market and i say hey you know what i've got 10 million shares of this and that to sell what's going to end up happening is that those 10 million shares are going to end up taking out all the bids all the all the prices down take out all the bids until you find a spot where it can't take out where the size of the trade cannot take out any more bids and the price stabilizes okay so i'm thinking to myself now what you get is you you got these what i'm going to call like these these hot shot hot shot kind of uh uh hardcore traders where you know to make a name for themselves because they're in a they're in a big trading room and they they compete amongst one another and their bonuses depend on how well they do what they're going to be what if what if they did something like this i'm looking at a price chart let's just say they could be daily bars or whatever okay and this is like a swing high swing low okay now interestingly enough as we're talking about this i want to make a point about what does this what does this price represent right here and what does this price represent right here what yeah we're going to call it resistance but but but more from a practical matter what does it represent what's that nobody believes it's going to go hard ah yeah in other words there wasn't no you're right he said he said that nobody believes it's going to go higher it represents there wasn't one person in the whole world in the whole world that was willing to bid it bid the price one tick higher not one up to this point there could be any number of people who are willing to bid it higher but it got to a certain price level and there wasn't one person left in the whole world that would bid it higher this by the way is one of the reasons why technical analysis works is because the market has a memory this is why technical analysis works the market has a memory because when the market came back down he formed a swing low came back up to this high there were people there were people who made money by selling this high there's a good chance those same traders are going to come back into the market and do it again as well as there are people who lost money by buying that high because for every trade that was made up to this last price there was a buyer and a seller there was a trader on the other end of the trade that sold that bought that high now when the market comes back again to this to the same price level chances are there will be an imbalance between the buyers and the sellers just by the mere fact that the people who made money are going to be willing to trade it again and come into the market maybe with a with a lot of ferocity and the traders who lost money by buying that high are probably not going to be willing to do it again and so what you have is even more of an imbalance that existed the last time are you guys with me on this i'm waiting for it to break through okay well that's fine you can do that however what they're thinking no i'm not going to really get i'm just the most i'm going to do is get into what we're just doing right now because this is not you know this is not a course in technical analysis i mean and it doesn't really matter anyway because you guys are trading off of mathematical formulas and and not doing subjective trading so and this would fall into the category of subjective trading subjective trading also is is the equivalent to uh like like who who watches uh texas holding tournaments like on tv anybody come on give me more of a show of so so you've got so you've got categories of development where where initially people when when they play texas hold them you play your cards and then you get well enough you get good enough for playing your cards what you start doing is playing the people and you get good enough you get so good that you don't even have to play your card you don't have to look at your cards just play the person that's the equivalent to subjective trading okay what you're doing is you're using a process of deductive reasoning to determine who's thinking what and what they're likely to do okay and all the only reason i'm i'm giving you all this information and making this point is so that you understand with with no uncertain terms that there are as a whole category of traders out there people out there traders people who have both the financial and the psychological resources the bid markets up and off roam lower and what's the point that i'm making the point that i'm making is that any particular technical methodology that you use to determine a pattern is present that gives you a higher probability of one thing happening over another until you get into the minds of the people who actually move prices you will never know for sure what's going to happen next the only people that know for sure the people who are willing to do it and that's what you've got to get you got to burn that in your brain you will never know for sure what's going to happen next unless you can read the minds of the people who are going to do it and there are people who will do it and they do it all the time that's the only way you end up in a winning trade most of the time when you end up in a winning trade is because of what these other dynamic traders are doing so to convince you that there are people who are willing to do this if i'm a hedge fund manager and i've got to unload if i've got to unload a huge position and the market happens to be sitting right here in relative to this chart pattern how might i maximize my profits what might i do now remember i've got to sell i'm going to be a seller but what might i do to make sure that i get the best price what drive it up yeah drive it up in other words i will do the opposite of what i want to do to get a better price and i will drive it up but how much risk am i taking by doing that well yeah i mean if i drive the price up by taking out these offers and then bidding up taking out it off taking other words i can look with with depending on the kind of software i have i can find out what depth uh the depth of the market meaning that that you know and i'm not saying these are hard hard offers because people pull their offers all the time but i can look at this i can look at this high and say you know what what if how much money might it take for me to drive the market from here to just past these highs right here how many offers do i have to take out to do it just tally it up and see if you want to spend the money because in essence how much risk you actually taking see by by by driving it up what you're doing is you're you're increasing the asset value of your portfolio so in that sense you're not taking any risk you're actually making money if i if i continue to drive the price up i am actually making the trades that i made down here winners every tick that i drive the price up i'm making myself a winner on the trades that i made at lower prices to actually drive a price up because you are making yourself a winner at the prices that you know what you bought at lower prices if for an example by me driving this price up it draws other people into the market that will help will it not because it creates more of an imbalance now that's the real thing what i want to do is i want to get more buyers into the market the reason why i want to get more buyers into the market is so somebody is there to take the other side of my sell orders because that's ultimately what i'm doing here what i'm doing is i want to sell so what i'm doing is creating a bigger pool of of of of orders to come into the market so i could sell into so that my my sell orders don't drive the price down down and so i will purposefully do the opposite of what i want to do ultimately with respect to my position now what the reason why i'm selling has nothing to do with this chart pattern absolutely nothing to do with the chart pattern itself i'm just using the chart pattern as a means to maximize my profits now what if i managed to drive it up to resistance chances are there's going to be a lot of sell orders coming in that i'm going to have to compete with that's that's a risk that i that's a risk that i that i'm that i'm taking here but what if i can drive it a little past that resistance what i'm going to have is a situation where all the people the other traders who sold at this level right here that came into the market because it was approaching this previous high they're going to put their stops a little bit above the market now what kind of stops are they going to be they're going to be buy stops if they sold to get out at a loss they have to be buyers if i can drive the market to those buy stops i have given myself an instant pool an instant pool of orders to take the other side of my trades and and get me out at maximum profits this is typically what you see in a chart pattern as a false breakout because what'll end up happening is that as soon as my order hits the market it's so large and and then because there really weren't that many other traders that were willing to continue to bid the market up what it'll do is it'll take out all the bids and then drive the price right down that's called a false breakout it's it's being done at different different time frames all of the time to do this you have to have a large enough position so that when you drive up your cost basis it's incrementally small compared to where you really are today and then as you said you get up to either you do it below that resistance hope you break above and then you just dump your shares right right thank you now like i said this is did anybody ever wonder why like uh like you you have a really strong bull market or a really strong bear market and the market seems to open up in the morning like in bull markets it opens lower and bear market opens higher like why does that happen what's the deal with that what do you think is going on you ever heard the term shaking out the week longs and the weak shorts that's that's what that's what dynamic traders are doing they're shaking out the week longs in the week shorts in other words they're taking their spot because what you have in a bull market is you have you know people that you know the market's going up because this is this is a daily bar but if we made it an intraday bar or whatever as the market is going up they're buying people are buying but they're not they're not like really confident about what it is that they're doing now in the morning before the market opens there might not be that many bids in other words if the after the market opens there'll be more bids that come into the market but before the market opens there might not be that many bids so what so if there aren't what these dynamic traders will do to take advantage of this is they'll hit those bids in other words they'll sell they'll sell into those bids drive the market down and then when the market opens up all of the week longs meaning people who aren't that confident will will start to start to get a little frightened and to get out of their position what do they have to do they have to sell and these other dynamic traders will take the other side of their sell orders to buy and increase their position and the market goes right straight back up all they did was shake these guys out take their spot at lower prices by by by forcing the market lower on the open go ahead isn't this an argument to have to either not use let's talk no no no it is not no i don't want to get i don't want to get into the use or not absolutely use stops i'm not going to we're not going to get into that we're yes you as mechanical passive technical traders in the mechanical mode this is not in any way saying that you should not use stops absolutely it's a disastrous thing to do not use stops okay because i'm not saying that regardless of any of this you can't make money you i'm giving all i'm doing is giving you examples that there are people out there who will drive prices up and offer them lower that they have the psychological and financial resources to do it and the reason why i'm spending you know making so much emphasis is that the passive typical the passive typical passive technical trader would never conceive of of actually bidding a market up and so as a result it's very difficult for you to think that anyone else can do it either when the reality is that's the only way in many cases you're going to make money and so the point that i'm making is that what you you're trading off of a mathematical formula literally you're trading you're in this mathematical formula what technical analysis does is it gets into the collective mind of the market in other words every tick every uptick and every downtick is information that information is accumulated and mathematical principles are applied to it there are there are actual patterns that that that emerge that repeat themselves over and over and over again that you can identify with mathematical formulas or with these visual price patterns but the problem is that there's no mathematical formula that can get into the mind of the individual traders who actually are driving prices up or offering them lower but if you don't know that you somehow or another if you happen to if you're trading on a smaller time frame you're trading on a smaller time frame and you get a little uh a little pullback right here okay and based on that pullback your methodology says okay it's time to buy and you do and but and you do it just before this hedge fund manager comes in and starts driving the price up see you're going to think that the reason why you won is because that your mathematical formula told you what was happening next and that was the reason why it happened what i'm saying to you now is that there almost isn't any reason that you could come up with whether you won or lost that would correspond to what really happened in the market you hear what i just said there's almost no reason that you will come up with to put on a trade that will ever correspond with the actual reason why the market went up or the market went down other than the fact that there was an imbalance in conviction between buyers and sellers because the people who do this will not tell you unless it's in their best interest to do so and the reason the people who report it in the news agencies they don't know either they're making it up they make up the reasons because they sound reasonable they are paid to sound reasonable and there's no way to verify what it is that they say that's right there's no there's no way the only people who can do it are the people who actually made the trades the only people who know for sure what's going to happen next are the ones who are willing to make it happen you see we'll put on a trade and find ourselves in a nice monster little winner here and think oh man my methodology it is just fantastic and then the next time you get the same signal and then you don't get anything not only that it's a loser you think oh now you feel betrayed you think your your methodology let you down your methodology wasn't designed to tell you what's going to happen next on a trade by trade basis no technical methodology is that's where your expectations are not in line with the reality of the situation that's why it's so easy to make mistakes is because you're expecting something from your methodology that just doesn't exist it just doesn't it never did on a trade by trade basis they will tell you what will happen let's say i don't want to use to happen next they'll tell you what will happen over a series of trades on a percentage basis this particular pattern will emerge x number of times and when it does there's a higher probability of this happening than that if i limit my risk when i take the trade and my profits uh my profit potential is at least you know one or two or three times greater than what i need the risk then over a series of trades i will be a consistent winner that's what trading is all about guys as a passive technical trader unless you're doing this other stuff i just said it right then and there i said it all right then and there there was a guy that i the guy that i a guy that came to me for for consultations uh uh several years ago he was a he wasn't really anything he was he was a guy that [Laughter] he was a guy that lost a lot of people's money he was basically what he was he he uh uh he was actually he was a really good analyst i should say really he was he was an excellent aspect as far as as far as market analysis was concerned he's probably one of the best analysts i'd ever worked with but the problem is that he had some really as far as executing his trades and and let's put it this way he he was let's say on the arrogant side that's and that's and that's that's being that's being nice and so when he put on a trade he just thought that that was it you know the market was going to do what he thought it was going to do period so he was the kind of guy who you know he went through all of his re his relatives money with trading accounts and his friends and that sort of thing and he was getting the point was really exasperated so he he came to me for consultations and basically after listening to him i said hey you know what why don't you do something get paid for something that you're good at and you know and stop trying to you know stop losing other people's money and go get a job as an analyst just get paid to be an analyst not as a trader and so he did he got a job with a with one of the major clearing firms at the chicago board of trade as one of their analysts for their brokers and that sort of thing and uh the president or actually the chairman of the board he was his son was actually the president he chairman of retired he was an old-time grain trader soybean trader and uh you know made his money in the 40s and the 50s and that sort of thing and and traded pit style trading in other words something that i talked about earlier this morning i'm not going to get into but in any case he didn't make direction related trades and so so he was really mystified with this with the idea of technical analysis i mean he really was he was literally mystified with the idea that you could basically predict prices based on chart patterns and that sort of thing so he thought well you know what i'm going to sit down with this guy and you know this this star analyst here that we have in the firm now and find out what this with what this crap is all about basically the way he thought about it and um so he's sitting down with him for a few days and uh it got to a point where one day um the the soybean market was uh the soybean market was was basically you know trading in a range about the middle of a range between what the analysts projected as the high of the day not just the high the high of the day and the low of the day okay and so the market drifted around you know like you know maybe did a little bit of a close to a test of the high it's coming down to the coming down to the low and they're both sitting there and they're both watching it right now and the the chairman of the board the soybean trader old site subbie trader says okay so this is going to be the low of the day right here right the guy said yep that's it gets that price that's the low of the day low of the day and the guy looked at him and said that's bull and he picked up the phone which he had a direct line to the soybean pit he said sell 10 million beans at the market now 10 million beans is 2 000 contracts because they trade in 5 000 5000 bushel increments so he hit the market at that moment with 2 000 sell orders okay which drove immediately drove the price down 10 cents which basically is a million dollar trade by the way driving the price of course of course if he got if he had sold all of them at this price and brought them all back at this price but they were he was there there was an average price down but from here to here is 10 million is a million bucks on 2000 contracts and then after the price dropped he you know he he looked at him said hey if i can do that anybody can do that if i can do that anybody can do it now think about the implications of what i just said if you remember back in that survey that we just took a little while ago and i said it only takes one traitor somewhere in the world to negate the positive outcome of your edge oh gee what if you were one of the people that bought right here how many people did it take to mess up your trade just one just one person that's all it's usually more than one but that's all it takes is one you guys starting to get the idea this kind of stuff is going on all of the time as a matter of fact when prices move this is usually the reason why when i was at merrill lynch i mean this i mean you know and for many years even when i was teaching teaching you know material in the psychology of training i didn't really include a lot of this stuff because i just sort of took it for granted that people understood it and knew it you know and the reason why i took it for granted because i guess i learned it so early in my trading career that it just you know it was self-evident to me but it was self-evident because here i was at merrill lynch and and i had i had access to a squawk box now our squawk boxes were open phone lines to the various pits in both chicago and new york meaning we had merrill lynch representatives in each of those pits that as as buy and sell orders would come in they would tell us who was buying and who was selling what houses what manufacturers what big accounts what big traders if they could in other words if they had if they had access to the information they would tell us who was buying you know and and and maybe who was even taking the other side of their orders if they could determine it so it's like you had a very intimate it was like a you know you had this sort of intimate um connection with what was really going on now at the same time i when i was doing my own technical analysis i would do i would do my equations because we didn't have computers back then of course you could do the huawei packard the handheld thing but i didn't do that i did all my equations on all my analysis on a spreadsheet and i actually did all the all the calculations by hand and i did it on purpose that way so that i could get an intimate sense of how the actual mathematics of my signals in other words the actual calculations the multiplications the divisions the subtractions you know and what th what the final product was in terms of a signal how it related to the actual market movement and i found that there was no relationship other than the fact that it would identify patterns where the signals would work sometimes and you know sometimes they wouldn't but the point is is that there wasn't any relationship between this fixed mathematical formula and the people who were buying and selling at that moment and the reasons why they were doing it there's none at all but not only that here's what really shocked me is we had a tv monitors going all the time and we had it on uh in chicago there was a local investment channel channel 26 and it was very much like cnbc now but it was a lot less sophisticated and you know so we'd watch as as people would come on the show and uh and with various you know have various interviews and that sort of thing and i'm watching watch it one morning and there's this vice president from heinhold which is now doesn't exist anymore but they're one of the biggest hog and meat producers in the midwest back in the 80s and uh this this vice president from heinhold is being interviewed by you know the guy on channel 26 and he's talking about how you know how people got people got to get into live hogs and pork bellies because prices are going up and you know he's just going on and on about what a great investment it is and and really and here and this would happen quite frequently by the way but this was just an example and then all the phones started lighting up these are all the people in the chicago area the typical you know the traders in the chicago area they're listening to this guy because i want to say that because the phones are lighting up and all the brokers are starting to take orders to to uh uh to buy bellies and buy hogs and i think well you know that was pretty pretty impactful right oh gee then on squawk box guess who's taking the other side of those orders heinhold they needed somebody to come in and take the other side of their orders what does a mathematical formula have to do with that now as it just so happens if my math is working in a way where i happen to get in at that moment i end up in a winning trade well that's great but that doesn't mean i can rely on rely on it to do the same thing the next time uh okay explain hedging reverse auction in a normal auction this i'll talk about dynamic traders right now in a in a normal auction what do people do in a normal auction in other words if you're in in a situation where where things are items are up for bid when you bid when you're out bidding somebody what are you doing you're eliminating the competition right in other words by bidding higher you're hopefully eliminating anybody else who'll bid higher than you hedgers and commercials and dynamic traders create what i call a reverse auction they'll bid a market up or offer it lower to try to attract the public into the market to take the other side of their trades you guys with me on this they will bid a market up or offer it lower as a reverse auction that doesn't mean that they want the they you know they could the market can go higher but their their immediate objective is to if they're bidding it up it means that they want to sell they just want someone to take the other side of their trades so they're actually creating a reverse auction attracting people into the market because as the market goes up the people are thinking okay i'm going to be missing out and and i've got the assurance that i need that it's going to keep on going and so they get sucked into this move and then and then they slam them with a huge order now see i had intimate contact with all that merrill lynch i really you know not only that i mean because because i knew the floor traders i knew many of the floor traders who actually created the movement that particular day and there were a number of times where the movement was significant and they were fast markets and you know enough to track the media to the exchange and you know they put a microphone in front of their front of their mouth and you know and i definitely they definitely would say something that was palatable to the public in other words what was reasonable i can guarantee you that the reason why they did what they did during the day had nothing to do with what they said nothing there was no relationship whatsoever go ahead i fully understand your concept of the the movement that's taking place because of dynamic players and i can understand how that would relate to the commodity stock and stock options market but can you have the same effect in say the foreign currency market where it's a much bigger market that's traded worldwide it just depends on the player absolutely you get a central bank that starts that starts doing that starts unloading something and then they're going to it's going to have a major impact on the market yes but you yeah you've got basically what you have is a situation where where this market's so large it's so liquid that it it would be very difficult for individuals to have any impact on it is that what you're saying to me is that what you're well i wasn't necessarily limiting it to individuals i mean even a central bank um it just on the world market could they have that kind of an impact well it's what i call the pebble and the pond effect okay they might not have enough they might not have enough impact initially okay initially to to do something okay to have to have that meaningful make to create that meaningful of a price move but you've got a pebble in a pond which is the way a lot of prices move anyway because it's like what you got is you drop a pebble in a pond well if it's you know it creates waves does it not okay and what i found is that especially with floor traders and and and really the kind of same the kind of same the same kind of dynamics work even uh uh even with off the floor traders in the general market itself i found that what you had is that most floor traders did not know what they were doing in the sense that they didn't have a real good reason for buying or selling at any given moment other than the fact that they were following the lead of other people who thought they thought did have an idea of what they're doing so what ends up happening is that is that what you've got is you've got the guy the trader who's competent knows exactly what he's doing why he wants to do it and does it and then you've got oh you got all the other guys who are let's say in the pit okay who are closest to this particular this guy might be on this step right here who are closest to this guy that will that will mimic what he does and then what it does is it starts spreading out and that and that as as word gets out okay the guys at the farthest end end up getting prices that are that are greatly diminished in relationship to this particular individual but the point is it's kind of like the pebble in a pond a central bank could create the same thing in other words initially a central bank hitting the market with a huge order might be absorbed but the fact that the central bank is doing it will cause other people to want to do it too and therefore as a result of all the other traders who pile on it creates a huge move does that make sense okay we're moving right along here okay dynamic traders okay players they know and understand the mindset and behavior patterns of the crowd or her they they basically refer to the general public as the herd and they are the herd masters okay they are the herd masters whenever possible they will use that knowledge to move prices in a way that will extract the most amount of money from the largest number of traders that is their mission that is what they do characteristics of passive technical traders they're usually mystified by price movement would that be a fair characterization okay they wouldn't think about trying to cause price movement as a result they typically can't conceive of anyone else doing it either they are typically drawn into trades based on an opinion about the attractiveness of the price or stampeded out because of fear the passive technical trader's objectives to find himself in a winning trade without any intent to move prices now think about what you're doing you are trading in a way where you want to find yourself in a winning trade but absolutely wouldn't even think about moving prices to do it you're completely dependent on someone else doing it for you to find himself in a winning trade he's dependent on the traders to be willing to either buy or sell at a worse price than himself to create movement in his direction the typical passive technical trader is expecting other dynamic traders to make him a winner when they usually have little or no knowledge insight or understanding about how dynamic traders operate would that be fair the typical passive trader does not realize it only takes one dynamic trader somewhere in the world to negate the positive outcome of his edge is that a fair statement now does anybody want to argue with the statement anymore or not i'd say anybody did in the first place but there were some people who raised their hand and said that that wasn't the case is there anybody that that's not convinced about this seriously i want to know and i'm not we're not going to get into a fight or anything but you know okay the characteristics of technical analysis now what we're going to do is we're going to take what we now understand about the nature of price movement and look at the nature of technical analysis to see just see what we got here okay see how well it you know it meshes okay technical indicators define identify and organize market data the up and down ticks into understandable patterns are you guys with me on this the patterns are observable observable quantifiable meaning they can be measured and repeat themselves with statistical reliability and and really while i'm doing this and while we're going through this i want you guys to really keep in mind that that just because i explained the the underlying characteristics of dynamic traders and people who can actually move the market and do it and do it all the time in fact when the market's moving they're the ones who are doing it it's not you or i the only time you or i move the market is when there's an over abundance of market orders coming into the market from passive technical traders because the market order does what okay if the last again the last price is 10 we've got nine we've got 11. okay what's the market the last price is 10. if i want to buy the market's actually 11 isn't it that's the market because that's where the offers are the offers are at 11 so that's where i'm going to get filled i'm going to get filled at 11. well if there's so many buy orders come market buy orders coming into the market and all the all the offers are taken out at 11 then that means the next price up where there's offers are 12 and that's where i'm going to get filled and if there's so many more that got in before me and this is real i mean it's really an overabundance of buy orders in relationship to the number of offers that are that that exist then i might get filled at 13 because that's the market so that's the difference you've got you've got an overabundance of passive technical mar orders coming into the market that will drive it up or you've got dynamic traders who are doing it purposefully and when they're doing it purposefully i guarantee you they got they got a good reason for it they know what they're doing i'm not saying it always works but they know what they're doing and it doesn't mean that you can't take advantage of it it doesn't mean that you can't make a consistent income even i mean a really a really good consistent income with your technical methodologies you don't you don't even have to you don't have to understand all these these subtle dynamics or of market or price movement to be able to take advantage of of it all you've got to do is be able to trade your edge and follow your plan i just want you to understand that when you understand what's going on you will be able to trade your plan because you won't be putting so much emphasis on things that don't have any relevance like expecting this next trade to work just because you got a signal is this what drives the price up typically early in the morning like when the market opens some popular stock all the market all the orders come in or it goes down and is that what creates this gap or well i can't tell you the act i mean when you say what that's what happens i mean all you can look at is it a log jam you can you can always break it down to one fundamental reason the only fun the only reason that really there is there's an imbalance between between buyers and sellers price movement is always the result of an imbalance because when there's balance there's no movement it's that simple right if there's balance there's no movement prices do not move when there's balance there has to be an imbalance for people to bid it up or offer it lower and if people aren't actually bidding it up in this example we don't see what the reason why i can't answer you exactly is because i don't know if it's actually being bid up purposefully by somebody or or it's because there's an overabundance of buy orders in relationship to the amount of offers that's what i don't know okay the pay the patterns basically measure the collective mind of the market in other words here and i should have and i should have really emphasized this word collective collective mind of the market not the individual minds the collective mind meaning all of the actions all of the beliefs all of the agendas all of the objectives are built into that next incremental price change from 11 to 12 or from 12 to 13. it's all there and the only thing that mathematical formulas can do is actually measure that you know measure the patterns that result from that information it isn't getting the information of the guy who actually bid the market up by taking out all the offers because he's got some specific agenda about what he wants to do with where he wants to see the prices go because he's he's doing something has nothing to do with any of this meaning your technical methodology or anybody else's he might be putting on a huge hedge position based on some contract that he has to deliver something three months from now so collective mind to the market indicating when there is a higher probability of one thing happening over another represented as an edge so because the patterns show up in every time frame technical analysis turns the market into an unending stream of opportunities to enrich ourselves these patterns that the mathematical formulas identify show up in every time frame from the smallest to the largest and as a result if we learn how to think about these patterns or edges appropriately it will actually turn the market into an unending stream to enrich ourselves but not on a trade by trade basis but not on a trade by trade basis but rather as a percentage over a series of trades this is big guys this is it right here this is the holy grail of technical analysis right here right now your technical indicators will turn the market into an unending stream of opportunity to enrich yourself but not on a trade by trade basis but rather as a percentage over a series of trades that means you have to learn how to think of probabilities you may understand the concept of probabilities it doesn't mean that you can think that way i've worked with traders in fact one guy came to one of my workshops many years ago a hedge fund manager reasonably successful you know let's say reasonably because he made you know i don't know 10 to 18 percent a year but his indicators if you'd followed them the way you know the way they were planned to be followed he could have made anywhere from 60 to 70 a year a little frustrated came to a workshop and then you know some some consultations afterwards in one particular situation where he said you know he put in a trade a trade he'd been watching for months finally got to his price level you know he put the trade on then put a stop in the market you know and the market started approaching a stop and you know he he got out he got out of the trade early and mark didn't even hit a stop he got out of the trade early and then it just went just just fell to pieces because he was short and you know in his direction he wasn't in the trade and he would have been someone who would have said that he understood the nature of probabilities because he majored in it in college but he hasn't he did not do the sufficient amount of work to train his mind to think in probabilities at a functional level there's a huge difference you can't take it for granted that because you understand the nature of percentages that you can think that way at a functional level it would be you know like you could you can do i'll do the analogy to technical analysis to uh flipping a coin okay that if you if you take an evenly weighted coin and flip it a thousand times you've got a large sample size there right the pattern that will emerge with each thousand flip sample size is a relatively even distribution between heads and tails maybe not quite 50 50 but let's say 49.2 and you know uh 49.8 or something or whatever there might be a little bit of variance more variance there but in any case that will be a pattern see that's a pattern because it'll happen every single time you flip the coin a thousand times but within that thousand flip sample size is there any way since you're going to get an even distribution between heads and tails is there any way that you can know for sure which individual flip is going to be heads and which individual flip is going to be tails no you could get 10 flips of heads in a row and be absolutely positive the next one is going to be tails and it could come up heads again and even though you can have all these streaks of heads and tails in the end they're still going to come up 50 50. this is exactly the way technical analysis works exactly when you consider the diversity the diversity of the market with all the different players and all the different agendas from people all over the world trying to predict what will happen next would be almost equivalent to sitting in front of a slot machine and coming up with some rational reason why you think that the the pattern that you're looking for is going to come up on the next push of the button it wouldn't make a lot of sense would it but the reason why it's if we get fooled as traders and we think of it in in in not this in not this probabilistic way is because when we put on a trade we put on a trade for a reason see reasons are important in our lives reasons are important we put on a trade for a reason and see the problem is is that when the trade works we think our re we just naturally think our reason was right what i'm trying to do here is help you disconnect is disconnect any reason that you put on a trade with the reason why it actually moved because like i said before there's almost never a relationship there's almost never a correlation and so the next time that reason seems to appear in the market we're gonna we're gonna do the same thing thinking we'll get the same result and then when we don't we feel betrayed and then the next time the reason comes up we're going to be a little hesitant we might not put it on at all we'll try to find additional reasons why this trade will work when the reality is there isn't any reason you're going to be able to come up with that's going to assure you of anything unless the reason you're coming up with is you know the people who are actually going to bid the market up or offer a lower and they tell you what they're going to do and why ultimately there's only one reason why markets my prices move and what would that reason be come on yeah and imbalance and conviction that's the only and what technical analysis does is it finds patterns in that imbalance okay technical analysis finds in patterns in the imbalance where there's momentum in a direction it's still not going to tell you what's going to happen next technical analysis doesn't nor can it get into the minds of any particular individual trader who has both the financial and psychological resources to either move prices or defend certain price levels and traders will defend price levels by the way there are dynamic traders who will actually defend the price is it reasonable to expect the fixed criteria that make up a mathematical formula to say to stay consistent with a dynamic event that's in perpetual motion on a trade by trade basis what's the answer to that what is the answer come on no no it is not reasonable no it is not especially where that motion is being caused by traders all around the world with differing beliefs objectives and agendas there is no way of determining the intentions of all these traders yet the typical passive trader trades their methodology as if they are being told what those intentions are the professionals do not you guys get that the typical passive technical trader trades their methodology as if they are being told what their intentions are whereas the professional does not and why doesn't the professional because the professional understands the underlying dynamics of price movement and that anybody could come into the market at any time to do anything there was another floor trader that i worked with who executed uh traded his own account in the soybean market but also also executed the orders for one at the time one of the biggest soybean uh producers in the world there was an italian firm that actually tried the corn of the soybean market got thrown off the board of trade but before that happened you know there was many days where you know they he would call you know be in touch with the the head traders at the home office and they're plotting out their strategy you know like you know he told me one day you know it's like like the whole strategy for that day from the home office traders the whole strategy was to spank the locals at the chicago board of trade that was their only purpose that day they were going to suck the locals into a trade and they were going to try to wipe them out she said we're going to spank the locals today now your mathematical pattern okay you happen to get a buy signal ends up to be a big winning trade you think it's because because a couple of lines crossed you know no matter what it is you know whether stochastics or wise trade or whatever doesn't really matter it had absolutely nothing to do with the reality of why the prices moved nothing this is the primary characteristic that separates the professional from everyone else what i just said right here you

in this section we&#39;re going to discuss how prices move and who the players are behind it when you understand how traders make prices move then how you need to think to generate consistent results will start to become clear to you okay where we&#39;re going now is that is that i think what i said when we you know just before the break is that when you guys understand the nature of price movement and how any technical methodology that&#39;s based on a mathematical formula or a price pattern interacts with that movement when you understand that relationship how you need to think will become self-evident do you remember me saying that okay this is the part that we&#39;re going into right now okay in other words where you understand just exactly how prices move because what i found in doing these workshops over the years that here i&#39;m i&#39;m i&#39;m addressing a group of people who trade and who in many cases have traded for years and if you ask somebody exactly how do prices get from one price to the next they can&#39;t tell you they don&#39;t know they don&#39;t know how it happens and maybe you guys are i&#39;m sure you guys aren&#39;t that group but we&#39;ll you know we&#39;ll do we&#39;ll we&#39;ll go over it just as a refresher okay we&#39;ll we&#39;ll do it as a kind of refresher so no actually i haven&#39;t i haven&#39;t addressed a group yet that that there were very few people or if anybody could tell you exactly how prices move from one price level to the next so for an example um okay if the last reported price that you see on your screen of something is 10. how does it get to 11. what they asked 12. who&#39;s they uh market maker the market maker and market maker asked 12. okay well no well okay it&#39;s at 10 how does it get to 11 how does the price actually move to 11. well mo buyers but that okay that&#39;s true but then again when you when you with that demand demand okay but when you look at 10 what you have is you have offers at 11 and you have bids at nine right everybody understands that okay now there&#39;s only two ways that anybody can make money in this business there&#39;s only two possible ways no matter what strategies you&#39;re employing no matter how elaborate they are no matter how simple they are you have to be able to buy something at a low price and sell it back at a higher price or sell something at a high price and buy it back at a lower price are we in agreeance on that and would you also agree that everyone that trades is trading to make money in other words i&#39;m gonna say that there isn&#39;t anybody who puts on a trade that does so knowingly and consciously thinking it&#39;s going to be a loser in other words when they go into the market and say i my purpose is to lose money okay you guys with me on this now if the only way that you can make money is to buy low and sell high or sell high and buy low and the last price posted price is 10 which represents the value at that moment then what&#39;s low nine is low and what&#39;s high 11. what&#39;s the only way that it can get to 11. somebody somebody thinks 11 is a good price meaning that they have to buy high relative to the last price right so for an exam so so basically what this also means is that that all the offers have to be taken out at 10 do they not anybody who had an offer in at 10 that wanted to sell at 10 will get filled and all those offers have to be taken out for the price to go to 11. correct and of course and for the price to go to 12 all the offers that exist at 11 have to be taken out so that someone could actually bid the price up to 12. for prices to move somebody literally has to bid the market up or for prices to go lower it means that someone has to offer it lower now if the only way that anyone can make money is to buy low and sell high and sell high and buy low why in the world would anybody bid the market past the last posted price conviction exactly conviction in other words what you have is a situation where on every trade every trade that exists there are both there are two people on both sides of the trade even in stocks there are there&#39;s even someone who&#39;s selling a stock not like a commodity where where in a futures contract or an options contract there&#39;s two people on both sides of the trade there&#39;s a buyer and there&#39;s a seller and the next tick is going to make one of them a winner and one of them a loser right off the bat if you and i you and i enter into a trade at 10 okay we enter into a trade at 10. it means that you in essence if you&#39;re the seller will say you you sold them at 10 and i bought them at 10. the next tick is going to make one of us a winner and one of us a loser if the next tick is nine the amount of money that flows into your account is coming directly out of mine are you guys with me on this the next tick is 11 the amount of money flowing into my account is coming directly out of your account okay so basically what you have is you have two diametrically opposing beliefs entering into every single trade every trade that is made there are diametrically opposing beliefs about what the future is going to be so again i&#39;m going to say what would cause anybody to buy high or sell low just conviction in other words what you have is a situation where if someone&#39;s willing to bid a market up to the next highest price basically what that person is doing is that person is stepping out saying that my conviction that the price is going to go to 12 or beyond is so great that i am willing to do the opposite of what i need to do to make money think about what i just said i am willing to do the opposite of what i need to do to make money because my conviction is so strong that the next price will be 12 or 13. otherwise this person would wait if this person thought the next price was going to be nine then they&#39;d buy lower well they thought it was going to be eight they&#39;d buy low they&#39;d wait and buy lower where so what happens is that the person who&#39;s willing to bid a market up and take out these offers at 10 take out all the offers at 10 and bid it up to 11. has to have a stronger conviction in the future than the person who sold it to him at 11. because this person is creating price movement is actually creating movement and the person on the other side of the trade is being passive because they&#39;re doing exactly what they think they need to do and that&#39;s sell high relative to the last price are you guys with me on this okay everybody understand it now i want to ask you is there anybody in this room who has purposefully bid up a market there are there are some people who&#39;ve actually been a market up in other words the people who&#39;ve actually taken taken the offers all the offers out at the next highest price and bid it up do people like that exist yes that so another we are aware of the fact that there are traders who have both who both have the financial and the psychological resources to actually purposefully bid markets up or offer them lower are we we&#39;re together on this right okay so basically what you have is that all price movement has to be a result of an imbalance in the degree of conviction between the traders who believe that prices are going up and those who believe that it&#39;s going down that is the only way that prices move it doesn&#39;t matter what the reasons are that people tell you about why they did what they did or it doesn&#39;t matter what the reasons that you hear on cnbc or whatever about where the market is and why it went the way that it went ultimately it all boils down to an imbalance in conviction that&#39;s the only way prices can move because the only way they can move is for someone to actually purposefully bid it up or offer it lower and for them to do it there has to be you know like like a sense of of strength in terms of energy and their belief that the next tick is going to make them a winner okay so we basically does everybody understand everyone&#39;s with me on this all price movement is a result of an imbalance in conviction between the buyers and the sellers every trade every trade that&#39;s made there&#39;s somebody on both sides of the trade that have diametrically opposing beliefs you&#39;re always having with every single trade there&#39;s always a clash there&#39;s always a clash in wills and a clash in belief in terms of what the next tick is going to be or what the future holds we&#39;ve got two people coming entering into in a sense an agreement by making a trade but both of those people have diametrically opposing expectations of the future and one of them is willing to say hey you know what my expectation is so great is so strong that i am actually willing to do the opposite of what i need to do to make money and bid a market up now there are traders who will do that i call them dynamic traders they are the people that have like i said both the financial and the psychological resources to actually bid markets up what the typical and what i&#39;m going to call everyone else passive technical traders okay they&#39;ve got dynamic traders and passive technical traders what the typical passive technical trader doesn&#39;t really i&#39;d say really not aware or think about is the fact that the only way that they will find themselves in a winning trade is by the actions of the people who are willing to bid a market up and off law for it lower that&#39;s the only way that it happens in other words when you and i get into a trade i am a passive technical trader by the way i&#39;m not one of these dynamic guys i don&#39;t bid markets up and off from lower okay that when you and i get into a trade at this price right here let&#39;s say we got into we bought at seven we&#39;re buyers at seven what are we really saying when we get into that trade bottom line what are we saying based on the dynamics of what i just explained we&#39;re saying that i think that someone is going to come into the market after me and buy at a worse price than what i did that so that has such a strong conviction that this market is going to go up that that person is actually willing to buy at a worse price than me to buy at eight to buy at nine to buy it ten because if there isn&#39;t anybody else that comes into the market to take out all the offers at eight take all the offers at nine take out all the offers at ten that market ain&#39;t going up and i&#39;m not going to be in a winning trade you see the implications are every single trade that we put on as packed as passive technical traders we are in fact obliged and dependent on other people who are willing to do something at a worse price than what we&#39;ve done it we did it at or we won&#39;t be a winner are you guys following me on this is it starting to put the idea of trading into a different context that in essence what you&#39;re really trading is other people&#39;s perception of what is high and what is low that any technical indicator any price pattern that you might trade any trade that you put on you are basically trading other people&#39;s perceptions of what is high and what is low now when you think about how well you might know other people&#39;s perceptions you think about in that context it might not make a lot of sense to get so fixated on staying in a trade that isn&#39;t working it might be a little easier to put in a stop and to say hey you know what if they if these if people aren&#39;t coming in to buy at a higher price than me i&#39;m going to give them this much room from here to here and if they don&#39;t come in i&#39;m out of this trade i just go to the next one because that&#39;s basically what you&#39;re doing as a trader you are completely dependent on other on other traders to make you a winner now who are these dynamic traders who are the people that are going to do this and why what hedge funds okay money managers uh in the commodities arena do you guys really know how like the futures markets even started in the first place or why they even exist i know people probably exist because they&#39;re on the screen and it&#39;s part of the platform but you know there&#39;s actually a legitimate economic purpose for these things and when you when you get to the underlying when you understand the underlying reason for these markets you&#39;ll you&#39;ll understand why they trade the way that they do and why prices move the way that they do you know for an example what you know what it really what what happened in the past is that for example if you had a farmer who uh uh you know who planted their their their corn in the spring and harvested the corn in the fall what they were dependent on of course was a lot of different factors that they had no control of one of them being the weather and one of them being how much other how much other corn was planted out throughout the country and how much that corn would end up end up in in the market in the fall in relationship to what the demand was so if there was a lot of corn and and and let&#39;s say um the demand remain relatively constant the price of the corn would go down and the farmer would lose money if there wasn&#39;t a lot of corn and demand would remain constant the price would go up if there wasn&#39;t a lot of corn and for some reason demand was really high and the price would go up even further so what you had is a situation where there was a great deal of economic risk in in being a farmer or being anybody that manufactured anything or or dug stuff out of the ground like gold or silver or manufactured electric motors that needed copper or whatever goes into all the products that we use so what what evolved was a situation where the the farmer and the and the manufacturer let&#39;s say a bread that needed the flour they would enter into what was called a forward agreement meaning that they both wanted the economic risks taken out of their business they both wanted to be able to make a profit they both wanted you know to be able to to have some sense of certainty as to what prices might be at some point in the future so for example if if i&#39;m a farmer and it cost me four dollars a bushel to plant my corn and bring it to harvest or bring it to market then for me to force me to make some money i want at least five dollars a bushel right and if i&#39;m the guy on the other end of that trade or the other end of that transaction that wants to buy that corn in the fall or wheat or whatever and i want to know exactly how much i&#39;m going to have to pay for it so what ends up happening is that if let&#39;s say it&#39;s it&#39;s april or it&#39;s it&#39;s march and the price of corn is four dollars a bushel you enter into a forward agreement with with the with the end user and they say hey you know what i will deliver a million dollars of a million bushels of corn or a hundred thousand bushels of corn at say 450 a bushel or whatever price they agree on five dollars a bushel regardless of what the price of corn is in the fall so if the price of corn in the fall happens to be uh three dollars a bushel because there&#39;s so much demand because because there&#39;s so much corn and very little demand then the farmer actually still got his price at let&#39;s say five dollars a bushel but the but the manufacturer ended up having to pay two dollars a bushel more than what he would have if he had waited and just bought his corn on the open market in the fall so in that sense he seemed to lose on that transaction but then the next year what ends up happening is that there&#39;s very little corn or there&#39;s more demand than what there is corn and the price of corn ends up being seven dollars a bushel and the farmer would have made the seven dollars had he not entered into a ford agreement but what ends up happening is he still made his dollar bushel profit and the and the end user ended up saving himself two dollars a bushel so over the years all this evens out well so then what happened then is that exchanges in other words instead of these these people individually entering into these transactions exchanges uh were developed so in other words they had a central place to come to and make these transactions like the chicago board of trade and chicago mercantile exchange well what ended up happening is that when with the advent of exchanges what you had as a situation where there were people that were willing to take the other sides of these trades that had nothing to do with the actual process of making bread or growing weed or corn they were called speculators and then that&#39;s when futures futures contracts you know came into being so what would happen is that is that if i&#39;m if i&#39;m a farmer instead of me having to make the transaction directly with a uh um with someone who who manufactures bread i could go to the chicago board of trade and sell my corn or wheat with a futures contract and so if i&#39;m selling it at four dollars a bushel and so that means i&#39;m long corn this is where the log and the short comes from i am long cash i&#39;m long corn and because i&#39;ve got a crop and crop in the ground and so if um if i sell it at four dollars a bushel on a futures contract i take the equivalent number of futures contracts and so if the price of corn goes down or let&#39;s say the price of corn goes up i&#39;ve already locked in well i&#39;m gonna sell it five dollars but i&#39;ve locked in my dollar bushel profit so if the price of corn goes up what i&#39;ve done is i&#39;m short futures i&#39;m short the actual futures contract i&#39;m long the corn so i&#39;m going to lose money on my futures contract because as the price goes up i&#39;m losing money but i&#39;m making money on my cash so i&#39;m making the equivalent amount of money on my cash as what i&#39;m losing on my futures so in any case it doesn&#39;t matter what the market does the market could go up the market can go down i&#39;ve locked in my dollar profit bushel a dollar per bushel profit and the person on the other side of that trade the speculator if of course the market goes up then the speculator is the one that makes that two dollars a bushel profit if it goes up to seven dollars a bushel okay you guys with me on all this if the price of course go the price of of of it goes down then i&#39;m losing money i&#39;m losing money on my cash crop but i&#39;m making money on my futures contract and the speculator on the other side of the contract is losing money because the market&#39;s going down in other words the speculators just one-sided this the farmer&#39;s two-sided he&#39;s hedged that&#39;s what&#39;s that&#39;s what&#39;s called a hedge now what&#39;s interesting about all this is that is that as these markets evolved you will find that that the farmers don&#39;t trade against each other or the grain elevators or the people who the commercials who actually are involved with the production and manufacture of anything they don&#39;t take the other side of each other&#39;s trades what they do is they want speculators to take the other sides of their trades in other words if i&#39;m a if i&#39;m a commercial grain elevator i&#39;m i&#39;m not going to be that i&#39;m another commercial grain elevator is not going to be taking the other side of my trade because we&#39;re both going to be doing the same thing okay if i&#39;m a farmer and i&#39;m going to sell sell my wheat or sell my corn the guy the farmer down the street who also trades isn&#39;t going to be taking the other side of my trains what commercials and hedgers and fund managers and all the people who are really let&#39;s say professionals they have become very very sophisticated at finding ways of drawing the general public into taking the other sides of their trades meaning and the point that i&#39;m making here is that they will purposefully do things that will draw the typical general public let&#39;s say the general public into the other side of their trades when in fact what they want to do is the exact opposite for example let&#39;s uh if i&#39;m if i&#39;m a hedge fund if i&#39;m a hedge fund manager and i wanna and i&#39;m long stocks or or it doesn&#39;t really matter what it is i could be long bonds i could be long gold i could be whatever it is and i wanna and i wanna liquidate my position now i&#39;ve got a huge position meaning i&#39;ve got a cash position and i want to sell it if i go into the market right now and sell my entire position what do you think is going to happen to the price chances are it&#39;s going to go down i&#39;m going to i am actually going to because of the volume of my trades i am actually going to drive the price down making my average cost lower and lower i don&#39;t want to do that i don&#39;t want to so for example if i come into the market and i say hey you know what i&#39;ve got 10 million shares of this and that to sell what&#39;s going to end up happening is that those 10 million shares are going to end up taking out all the bids all the all the prices down take out all the bids until you find a spot where it can&#39;t take out where the size of the trade cannot take out any more bids and the price stabilizes okay so i&#39;m thinking to myself now what you get is you you got these what i&#39;m going to call like these these hot shot hot shot kind of uh uh hardcore traders where you know to make a name for themselves because they&#39;re in a they&#39;re in a big trading room and they they compete amongst one another and their bonuses depend on how well they do what they&#39;re going to be what if what if they did something like this i&#39;m looking at a price chart let&#39;s just say they could be daily bars or whatever okay and this is like a swing high swing low okay now interestingly enough as we&#39;re talking about this i want to make a point about what does this what does this price represent right here and what does this price represent right here what yeah we&#39;re going to call it resistance but but but more from a practical matter what does it represent what&#39;s that nobody believes it&#39;s going to go hard ah yeah in other words there wasn&#39;t no you&#39;re right he said he said that nobody believes it&#39;s going to go higher it represents there wasn&#39;t one person in the whole world in the whole world that was willing to bid it bid the price one tick higher not one up to this point there could be any number of people who are willing to bid it higher but it got to a certain price level and there wasn&#39;t one person left in the whole world that would bid it higher this by the way is one of the reasons why technical analysis works is because the market has a memory this is why technical analysis works the market has a memory because when the market came back down he formed a swing low came back up to this high there were people there were people who made money by selling this high there&#39;s a good chance those same traders are going to come back into the market and do it again as well as there are people who lost money by buying that high because for every trade that was made up to this last price there was a buyer and a seller there was a trader on the other end of the trade that sold that bought that high now when the market comes back again to this to the same price level chances are there will be an imbalance between the buyers and the sellers just by the mere fact that the people who made money are going to be willing to trade it again and come into the market maybe with a with a lot of ferocity and the traders who lost money by buying that high are probably not going to be willing to do it again and so what you have is even more of an imbalance that existed the last time are you guys with me on this i&#39;m waiting for it to break through okay well that&#39;s fine you can do that however what they&#39;re thinking no i&#39;m not going to really get i&#39;m just the most i&#39;m going to do is get into what we&#39;re just doing right now because this is not you know this is not a course in technical analysis i mean and it doesn&#39;t really matter anyway because you guys are trading off of mathematical formulas and and not doing subjective trading so and this would fall into the category of subjective trading subjective trading also is is the equivalent to uh like like who who watches uh texas holding tournaments like on tv anybody come on give me more of a show of so so you&#39;ve got so you&#39;ve got categories of development where where initially people when when they play texas hold them you play your cards and then you get well enough you get good enough for playing your cards what you start doing is playing the people and you get good enough you get so good that you don&#39;t even have to play your card you don&#39;t have to look at your cards just play the person that&#39;s the equivalent to subjective trading okay what you&#39;re doing is you&#39;re using a process of deductive reasoning to determine who&#39;s thinking what and what they&#39;re likely to do okay and all the only reason i&#39;m i&#39;m giving you all this information and making this point is so that you understand with with no uncertain terms that there are as a whole category of traders out there people out there traders people who have both the financial and the psychological resources the bid markets up and off roam lower and what&#39;s the point that i&#39;m making the point that i&#39;m making is that any particular technical methodology that you use to determine a pattern is present that gives you a higher probability of one thing happening over another until you get into the minds of the people who actually move prices you will never know for sure what&#39;s going to happen next the only people that know for sure the people who are willing to do it and that&#39;s what you&#39;ve got to get you got to burn that in your brain you will never know for sure what&#39;s going to happen next unless you can read the minds of the people who are going to do it and there are people who will do it and they do it all the time that&#39;s the only way you end up in a winning trade most of the time when you end up in a winning trade is because of what these other dynamic traders are doing so to convince you that there are people who are willing to do this if i&#39;m a hedge fund manager and i&#39;ve got to unload if i&#39;ve got to unload a huge position and the market happens to be sitting right here in relative to this chart pattern how might i maximize my profits what might i do now remember i&#39;ve got to sell i&#39;m going to be a seller but what might i do to make sure that i get the best price what drive it up yeah drive it up in other words i will do the opposite of what i want to do to get a better price and i will drive it up but how much risk am i taking by doing that well yeah i mean if i drive the price up by taking out these offers and then bidding up taking out it off taking other words i can look with with depending on the kind of software i have i can find out what depth uh the depth of the market meaning that that you know and i&#39;m not saying these are hard hard offers because people pull their offers all the time but i can look at this i can look at this high and say you know what what if how much money might it take for me to drive the market from here to just past these highs right here how many offers do i have to take out to do it just tally it up and see if you want to spend the money because in essence how much risk you actually taking see by by by driving it up what you&#39;re doing is you&#39;re you&#39;re increasing the asset value of your portfolio so in that sense you&#39;re not taking any risk you&#39;re actually making money if i if i continue to drive the price up i am actually making the trades that i made down here winners every tick that i drive the price up i&#39;m making myself a winner on the trades that i made at lower prices to actually drive a price up because you are making yourself a winner at the prices that you know what you bought at lower prices if for an example by me driving this price up it draws other people into the market that will help will it not because it creates more of an imbalance now that&#39;s the real thing what i want to do is i want to get more buyers into the market the reason why i want to get more buyers into the market is so somebody is there to take the other side of my sell orders because that&#39;s ultimately what i&#39;m doing here what i&#39;m doing is i want to sell so what i&#39;m doing is creating a bigger pool of of of of orders to come into the market so i could sell into so that my my sell orders don&#39;t drive the price down down and so i will purposefully do the opposite of what i want to do ultimately with respect to my position now what the reason why i&#39;m selling has nothing to do with this chart pattern absolutely nothing to do with the chart pattern itself i&#39;m just using the chart pattern as a means to maximize my profits now what if i managed to drive it up to resistance chances are there&#39;s going to be a lot of sell orders coming in that i&#39;m going to have to compete with that&#39;s that&#39;s a risk that i that&#39;s a risk that i that i&#39;m that i&#39;m taking here but what if i can drive it a little past that resistance what i&#39;m going to have is a situation where all the people the other traders who sold at this level right here that came into the market because it was approaching this previous high they&#39;re going to put their stops a little bit above the market now what kind of stops are they going to be they&#39;re going to be buy stops if they sold to get out at a loss they have to be buyers if i can drive the market to those buy stops i have given myself an instant pool an instant pool of orders to take the other side of my trades and and get me out at maximum profits this is typically what you see in a chart pattern as a false breakout because what&#39;ll end up happening is that as soon as my order hits the market it&#39;s so large and and then because there really weren&#39;t that many other traders that were willing to continue to bid the market up what it&#39;ll do is it&#39;ll take out all the bids and then drive the price right down that&#39;s called a false breakout it&#39;s it&#39;s being done at different different time frames all of the time to do this you have to have a large enough position so that when you drive up your cost basis it&#39;s incrementally small compared to where you really are today and then as you said you get up to either you do it below that resistance hope you break above and then you just dump your shares right right thank you now like i said this is did anybody ever wonder why like uh like you you have a really strong bull market or a really strong bear market and the market seems to open up in the morning like in bull markets it opens lower and bear market opens higher like why does that happen what&#39;s the deal with that what do you think is going on you ever heard the term shaking out the week longs and the weak shorts that&#39;s that&#39;s what that&#39;s what dynamic traders are doing they&#39;re shaking out the week longs in the week shorts in other words they&#39;re taking their spot because what you have in a bull market is you have you know people that you know the market&#39;s going up because this is this is a daily bar but if we made it an intraday bar or whatever as the market is going up they&#39;re buying people are buying but they&#39;re not they&#39;re not like really confident about what it is that they&#39;re doing now in the morning before the market opens there might not be that many bids in other words if the after the market opens there&#39;ll be more bids that come into the market but before the market opens there might not be that many bids so what so if there aren&#39;t what these dynamic traders will do to take advantage of this is they&#39;ll hit those bids in other words they&#39;ll sell they&#39;ll sell into those bids drive the market down and then when the market opens up all of the week longs meaning people who aren&#39;t that confident will will start to start to get a little frightened and to get out of their position what do they have to do they have to sell and these other dynamic traders will take the other side of their sell orders to buy and increase their position and the market goes right straight back up all they did was shake these guys out take their spot at lower prices by by by forcing the market lower on the open go ahead isn&#39;t this an argument to have to either not use let&#39;s talk no no no it is not no i don&#39;t want to get i don&#39;t want to get into the use or not absolutely use stops i&#39;m not going to we&#39;re not going to get into that we&#39;re yes you as mechanical passive technical traders in the mechanical mode this is not in any way saying that you should not use stops absolutely it&#39;s a disastrous thing to do not use stops okay because i&#39;m not saying that regardless of any of this you can&#39;t make money you i&#39;m giving all i&#39;m doing is giving you examples that there are people out there who will drive prices up and offer them lower that they have the psychological and financial resources to do it and the reason why i&#39;m spending you know making so much emphasis is that the passive typical the passive typical passive technical trader would never conceive of of actually bidding a market up and so as a result it&#39;s very difficult for you to think that anyone else can do it either when the reality is that&#39;s the only way in many cases you&#39;re going to make money and so the point that i&#39;m making is that what you you&#39;re trading off of a mathematical formula literally you&#39;re trading you&#39;re in this mathematical formula what technical analysis does is it gets into the collective mind of the market in other words every tick every uptick and every downtick is information that information is accumulated and mathematical principles are applied to it there are there are actual patterns that that that emerge that repeat themselves over and over and over again that you can identify with mathematical formulas or with these visual price patterns but the problem is that there&#39;s no mathematical formula that can get into the mind of the individual traders who actually are driving prices up or offering them lower but if you don&#39;t know that you somehow or another if you happen to if you&#39;re trading on a smaller time frame you&#39;re trading on a smaller time frame and you get a little uh a little pullback right here okay and based on that pullback your methodology says okay it&#39;s time to buy and you do and but and you do it just before this hedge fund manager comes in and starts driving the price up see you&#39;re going to think that the reason why you won is because that your mathematical formula told you what was happening next and that was the reason why it happened what i&#39;m saying to you now is that there almost isn&#39;t any reason that you could come up with whether you won or lost that would correspond to what really happened in the market you hear what i just said there&#39;s almost no reason that you will come up with to put on a trade that will ever correspond with the actual reason why the market went up or the market went down other than the fact that there was an imbalance in conviction between buyers and sellers because the people who do this will not tell you unless it&#39;s in their best interest to do so and the reason the people who report it in the news agencies they don&#39;t know either they&#39;re making it up they make up the reasons because they sound reasonable they are paid to sound reasonable and there&#39;s no way to verify what it is that they say that&#39;s right there&#39;s no there&#39;s no way the only people who can do it are the people who actually made the trades the only people who know for sure what&#39;s going to happen next are the ones who are willing to make it happen you see we&#39;ll put on a trade and find ourselves in a nice monster little winner here and think oh man my methodology it is just fantastic and then the next time you get the same signal and then you don&#39;t get anything not only that it&#39;s a loser you think oh now you feel betrayed you think your your methodology let you down your methodology wasn&#39;t designed to tell you what&#39;s going to happen next on a trade by trade basis no technical methodology is that&#39;s where your expectations are not in line with the reality of the situation that&#39;s why it&#39;s so easy to make mistakes is because you&#39;re expecting something from your methodology that just doesn&#39;t exist it just doesn&#39;t it never did on a trade by trade basis they will tell you what will happen let&#39;s say i don&#39;t want to use to happen next they&#39;ll tell you what will happen over a series of trades on a percentage basis this particular pattern will emerge x number of times and when it does there&#39;s a higher probability of this happening than that if i limit my risk when i take the trade and my profits uh my profit potential is at least you know one or two or three times greater than what i need the risk then over a series of trades i will be a consistent winner that&#39;s what trading is all about guys as a passive technical trader unless you&#39;re doing this other stuff i just said it right then and there i said it all right then and there there was a guy that i the guy that i a guy that came to me for for consultations uh uh several years ago he was a he wasn&#39;t really anything he was he was a guy that [Laughter] he was a guy that lost a lot of people&#39;s money he was basically what he was he he uh uh he was actually he was a really good analyst i should say really he was he was an excellent aspect as far as as far as market analysis was concerned he&#39;s probably one of the best analysts i&#39;d ever worked with but the problem is that he had some really as far as executing his trades and and let&#39;s put it this way he he was let&#39;s say on the arrogant side that&#39;s and that&#39;s and that&#39;s that&#39;s being that&#39;s being nice and so when he put on a trade he just thought that that was it you know the market was going to do what he thought it was going to do period so he was the kind of guy who you know he went through all of his re his relatives money with trading accounts and his friends and that sort of thing and he was getting the point was really exasperated so he he came to me for consultations and basically after listening to him i said hey you know what why don&#39;t you do something get paid for something that you&#39;re good at and you know and stop trying to you know stop losing other people&#39;s money and go get a job as an analyst just get paid to be an analyst not as a trader and so he did he got a job with a with one of the major clearing firms at the chicago board of trade as one of their analysts for their brokers and that sort of thing and uh the president or actually the chairman of the board he was his son was actually the president he chairman of retired he was an old-time grain trader soybean trader and uh you know made his money in the 40s and the 50s and that sort of thing and and traded pit style trading in other words something that i talked about earlier this morning i&#39;m not going to get into but in any case he didn&#39;t make direction related trades and so so he was really mystified with this with the idea of technical analysis i mean he really was he was literally mystified with the idea that you could basically predict prices based on chart patterns and that sort of thing so he thought well you know what i&#39;m going to sit down with this guy and you know this this star analyst here that we have in the firm now and find out what this with what this crap is all about basically the way he thought about it and um so he&#39;s sitting down with him for a few days and uh it got to a point where one day um the the soybean market was uh the soybean market was was basically you know trading in a range about the middle of a range between what the analysts projected as the high of the day not just the high the high of the day and the low of the day okay and so the market drifted around you know like you know maybe did a little bit of a close to a test of the high it&#39;s coming down to the coming down to the low and they&#39;re both sitting there and they&#39;re both watching it right now and the the chairman of the board the soybean trader old site subbie trader says okay so this is going to be the low of the day right here right the guy said yep that&#39;s it gets that price that&#39;s the low of the day low of the day and the guy looked at him and said that&#39;s bull and he picked up the phone which he had a direct line to the soybean pit he said sell 10 million beans at the market now 10 million beans is 2 000 contracts because they trade in 5 000 5000 bushel increments so he hit the market at that moment with 2 000 sell orders okay which drove immediately drove the price down 10 cents which basically is a million dollar trade by the way driving the price of course of course if he got if he had sold all of them at this price and brought them all back at this price but they were he was there there was an average price down but from here to here is 10 million is a million bucks on 2000 contracts and then after the price dropped he you know he he looked at him said hey if i can do that anybody can do that if i can do that anybody can do it now think about the implications of what i just said if you remember back in that survey that we just took a little while ago and i said it only takes one traitor somewhere in the world to negate the positive outcome of your edge oh gee what if you were one of the people that bought right here how many people did it take to mess up your trade just one just one person that&#39;s all it&#39;s usually more than one but that&#39;s all it takes is one you guys starting to get the idea this kind of stuff is going on all of the time as a matter of fact when prices move this is usually the reason why when i was at merrill lynch i mean this i mean you know and for many years even when i was teaching teaching you know material in the psychology of training i didn&#39;t really include a lot of this stuff because i just sort of took it for granted that people understood it and knew it you know and the reason why i took it for granted because i guess i learned it so early in my trading career that it just you know it was self-evident to me but it was self-evident because here i was at merrill lynch and and i had i had access to a squawk box now our squawk boxes were open phone lines to the various pits in both chicago and new york meaning we had merrill lynch representatives in each of those pits that as as buy and sell orders would come in they would tell us who was buying and who was selling what houses what manufacturers what big accounts what big traders if they could in other words if they had if they had access to the information they would tell us who was buying you know and and and maybe who was even taking the other side of their orders if they could determine it so it&#39;s like you had a very intimate it was like a you know you had this sort of intimate um connection with what was really going on now at the same time i when i was doing my own technical analysis i would do i would do my equations because we didn&#39;t have computers back then of course you could do the huawei packard the handheld thing but i didn&#39;t do that i did all my equations on all my analysis on a spreadsheet and i actually did all the all the calculations by hand and i did it on purpose that way so that i could get an intimate sense of how the actual mathematics of my signals in other words the actual calculations the multiplications the divisions the subtractions you know and what th what the final product was in terms of a signal how it related to the actual market movement and i found that there was no relationship other than the fact that it would identify patterns where the signals would work sometimes and you know sometimes they wouldn&#39;t but the point is is that there wasn&#39;t any relationship between this fixed mathematical formula and the people who were buying and selling at that moment and the reasons why they were doing it there&#39;s none at all but not only that here&#39;s what really shocked me is we had a tv monitors going all the time and we had it on uh in chicago there was a local investment channel channel 26 and it was very much like cnbc now but it was a lot less sophisticated and you know so we&#39;d watch as as people would come on the show and uh and with various you know have various interviews and that sort of thing and i&#39;m watching watch it one morning and there&#39;s this vice president from heinhold which is now doesn&#39;t exist anymore but they&#39;re one of the biggest hog and meat producers in the midwest back in the 80s and uh this this vice president from heinhold is being interviewed by you know the guy on channel 26 and he&#39;s talking about how you know how people got people got to get into live hogs and pork bellies because prices are going up and you know he&#39;s just going on and on about what a great investment it is and and really and here and this would happen quite frequently by the way but this was just an example and then all the phones started lighting up these are all the people in the chicago area the typical you know the traders in the chicago area they&#39;re listening to this guy because i want to say that because the phones are lighting up and all the brokers are starting to take orders to to uh uh to buy bellies and buy hogs and i think well you know that was pretty pretty impactful right oh gee then on squawk box guess who&#39;s taking the other side of those orders heinhold they needed somebody to come in and take the other side of their orders what does a mathematical formula have to do with that now as it just so happens if my math is working in a way where i happen to get in at that moment i end up in a winning trade well that&#39;s great but that doesn&#39;t mean i can rely on rely on it to do the same thing the next time uh okay explain hedging reverse auction in a normal auction this i&#39;ll talk about dynamic traders right now in a in a normal auction what do people do in a normal auction in other words if you&#39;re in in a situation where where things are items are up for bid when you bid when you&#39;re out bidding somebody what are you doing you&#39;re eliminating the competition right in other words by bidding higher you&#39;re hopefully eliminating anybody else who&#39;ll bid higher than you hedgers and commercials and dynamic traders create what i call a reverse auction they&#39;ll bid a market up or offer it lower to try to attract the public into the market to take the other side of their trades you guys with me on this they will bid a market up or offer it lower as a reverse auction that doesn&#39;t mean that they want the they you know they could the market can go higher but their their immediate objective is to if they&#39;re bidding it up it means that they want to sell they just want someone to take the other side of their trades so they&#39;re actually creating a reverse auction attracting people into the market because as the market goes up the people are thinking okay i&#39;m going to be missing out and and i&#39;ve got the assurance that i need that it&#39;s going to keep on going and so they get sucked into this move and then and then they slam them with a huge order now see i had intimate contact with all that merrill lynch i really you know not only that i mean because because i knew the floor traders i knew many of the floor traders who actually created the movement that particular day and there were a number of times where the movement was significant and they were fast markets and you know enough to track the media to the exchange and you know they put a microphone in front of their front of their mouth and you know and i definitely they definitely would say something that was palatable to the public in other words what was reasonable i can guarantee you that the reason why they did what they did during the day had nothing to do with what they said nothing there was no relationship whatsoever go ahead i fully understand your concept of the the movement that&#39;s taking place because of dynamic players and i can understand how that would relate to the commodity stock and stock options market but can you have the same effect in say the foreign currency market where it&#39;s a much bigger market that&#39;s traded worldwide it just depends on the player absolutely you get a central bank that starts that starts doing that starts unloading something and then they&#39;re going to it&#39;s going to have a major impact on the market yes but you yeah you&#39;ve got basically what you have is a situation where where this market&#39;s so large it&#39;s so liquid that it it would be very difficult for individuals to have any impact on it is that what you&#39;re saying to me is that what you&#39;re well i wasn&#39;t necessarily limiting it to individuals i mean even a central bank um it just on the world market could they have that kind of an impact well it&#39;s what i call the pebble and the pond effect okay they might not have enough they might not have enough impact initially okay initially to to do something okay to have to have that meaningful make to create that meaningful of a price move but you&#39;ve got a pebble in a pond which is the way a lot of prices move anyway because it&#39;s like what you got is you drop a pebble in a pond well if it&#39;s you know it creates waves does it not okay and what i found is that especially with floor traders and and and really the kind of same the kind of same the same kind of dynamics work even uh uh even with off the floor traders in the general market itself i found that what you had is that most floor traders did not know what they were doing in the sense that they didn&#39;t have a real good reason for buying or selling at any given moment other than the fact that they were following the lead of other people who thought they thought did have an idea of what they&#39;re doing so what ends up happening is that is that what you&#39;ve got is you&#39;ve got the guy the trader who&#39;s competent knows exactly what he&#39;s doing why he wants to do it and does it and then you&#39;ve got oh you got all the other guys who are let&#39;s say in the pit okay who are closest to this particular this guy might be on this step right here who are closest to this guy that will that will mimic what he does and then what it does is it starts spreading out and that and that as as word gets out okay the guys at the farthest end end up getting prices that are that are greatly diminished in relationship to this particular individual but the point is it&#39;s kind of like the pebble in a pond a central bank could create the same thing in other words initially a central bank hitting the market with a huge order might be absorbed but the fact that the central bank is doing it will cause other people to want to do it too and therefore as a result of all the other traders who pile on it creates a huge move does that make sense okay we&#39;re moving right along here okay dynamic traders okay players they know and understand the mindset and behavior patterns of the crowd or her they they basically refer to the general public as the herd and they are the herd masters okay they are the herd masters whenever possible they will use that knowledge to move prices in a way that will extract the most amount of money from the largest number of traders that is their mission that is what they do characteristics of passive technical traders they&#39;re usually mystified by price movement would that be a fair characterization okay they wouldn&#39;t think about trying to cause price movement as a result they typically can&#39;t conceive of anyone else doing it either they are typically drawn into trades based on an opinion about the attractiveness of the price or stampeded out because of fear the passive technical trader&#39;s objectives to find himself in a winning trade without any intent to move prices now think about what you&#39;re doing you are trading in a way where you want to find yourself in a winning trade but absolutely wouldn&#39;t even think about moving prices to do it you&#39;re completely dependent on someone else doing it for you to find himself in a winning trade he&#39;s dependent on the traders to be willing to either buy or sell at a worse price than himself to create movement in his direction the typical passive technical trader is expecting other dynamic traders to make him a winner when they usually have little or no knowledge insight or understanding about how dynamic traders operate would that be fair the typical passive trader does not realize it only takes one dynamic trader somewhere in the world to negate the positive outcome of his edge is that a fair statement now does anybody want to argue with the statement anymore or not i&#39;d say anybody did in the first place but there were some people who raised their hand and said that that wasn&#39;t the case is there anybody that that&#39;s not convinced about this seriously i want to know and i&#39;m not we&#39;re not going to get into a fight or anything but you know okay the characteristics of technical analysis now what we&#39;re going to do is we&#39;re going to take what we now understand about the nature of price movement and look at the nature of technical analysis to see just see what we got here okay see how well it you know it meshes okay technical indicators define identify and organize market data the up and down ticks into understandable patterns are you guys with me on this the patterns are observable observable quantifiable meaning they can be measured and repeat themselves with statistical reliability and and really while i&#39;m doing this and while we&#39;re going through this i want you guys to really keep in mind that that just because i explained the the underlying characteristics of dynamic traders and people who can actually move the market and do it and do it all the time in fact when the market&#39;s moving they&#39;re the ones who are doing it it&#39;s not you or i the only time you or i move the market is when there&#39;s an over abundance of market orders coming into the market from passive technical traders because the market order does what okay if the last again the last price is 10 we&#39;ve got nine we&#39;ve got 11. okay what&#39;s the market the last price is 10. if i want to buy the market&#39;s actually 11 isn&#39;t it that&#39;s the market because that&#39;s where the offers are the offers are at 11 so that&#39;s where i&#39;m going to get filled i&#39;m going to get filled at 11. well if there&#39;s so many buy orders come market buy orders coming into the market and all the all the offers are taken out at 11 then that means the next price up where there&#39;s offers are 12 and that&#39;s where i&#39;m going to get filled and if there&#39;s so many more that got in before me and this is real i mean it&#39;s really an overabundance of buy orders in relationship to the number of offers that are that that exist then i might get filled at 13 because that&#39;s the market so that&#39;s the difference you&#39;ve got you&#39;ve got an overabundance of passive technical mar orders coming into the market that will drive it up or you&#39;ve got dynamic traders who are doing it purposefully and when they&#39;re doing it purposefully i guarantee you they got they got a good reason for it they know what they&#39;re doing i&#39;m not saying it always works but they know what they&#39;re doing and it doesn&#39;t mean that you can&#39;t take advantage of it it doesn&#39;t mean that you can&#39;t make a consistent income even i mean a really a really good consistent income with your technical methodologies you don&#39;t you don&#39;t even have to you don&#39;t have to understand all these these subtle dynamics or of market or price movement to be able to take advantage of of it all you&#39;ve got to do is be able to trade your edge and follow your plan i just want you to understand that when you understand what&#39;s going on you will be able to trade your plan because you won&#39;t be putting so much emphasis on things that don&#39;t have any relevance like expecting this next trade to work just because you got a signal is this what drives the price up typically early in the morning like when the market opens some popular stock all the market all the orders come in or it goes down and is that what creates this gap or well i can&#39;t tell you the act i mean when you say what that&#39;s what happens i mean all you can look at is it a log jam you can you can always break it down to one fundamental reason the only fun the only reason that really there is there&#39;s an imbalance between between buyers and sellers price movement is always the result of an imbalance because when there&#39;s balance there&#39;s no movement it&#39;s that simple right if there&#39;s balance there&#39;s no movement prices do not move when there&#39;s balance there has to be an imbalance for people to bid it up or offer it lower and if people aren&#39;t actually bidding it up in this example we don&#39;t see what the reason why i can&#39;t answer you exactly is because i don&#39;t know if it&#39;s actually being bid up purposefully by somebody or or it&#39;s because there&#39;s an overabundance of buy orders in relationship to the amount of offers that&#39;s what i don&#39;t know okay the pay the patterns basically measure the collective mind of the market in other words here and i should have and i should have really emphasized this word collective collective mind of the market not the individual minds the collective mind meaning all of the actions all of the beliefs all of the agendas all of the objectives are built into that next incremental price change from 11 to 12 or from 12 to 13. it&#39;s all there and the only thing that mathematical formulas can do is actually measure that you know measure the patterns that result from that information it isn&#39;t getting the information of the guy who actually bid the market up by taking out all the offers because he&#39;s got some specific agenda about what he wants to do with where he wants to see the prices go because he&#39;s he&#39;s doing something has nothing to do with any of this meaning your technical methodology or anybody else&#39;s he might be putting on a huge hedge position based on some contract that he has to deliver something three months from now so collective mind to the market indicating when there is a higher probability of one thing happening over another represented as an edge so because the patterns show up in every time frame technical analysis turns the market into an unending stream of opportunities to enrich ourselves these patterns that the mathematical formulas identify show up in every time frame from the smallest to the largest and as a result if we learn how to think about these patterns or edges appropriately it will actually turn the market into an unending stream to enrich ourselves but not on a trade by trade basis but not on a trade by trade basis but rather as a percentage over a series of trades this is big guys this is it right here this is the holy grail of technical analysis right here right now your technical indicators will turn the market into an unending stream of opportunity to enrich yourself but not on a trade by trade basis but rather as a percentage over a series of trades that means you have to learn how to think of probabilities you may understand the concept of probabilities it doesn&#39;t mean that you can think that way i&#39;ve worked with traders in fact one guy came to one of my workshops many years ago a hedge fund manager reasonably successful you know let&#39;s say reasonably because he made you know i don&#39;t know 10 to 18 percent a year but his indicators if you&#39;d followed them the way you know the way they were planned to be followed he could have made anywhere from 60 to 70 a year a little frustrated came to a workshop and then you know some some consultations afterwards in one particular situation where he said you know he put in a trade a trade he&#39;d been watching for months finally got to his price level you know he put the trade on then put a stop in the market you know and the market started approaching a stop and you know he he got out he got out of the trade early and mark didn&#39;t even hit a stop he got out of the trade early and then it just went just just fell to pieces because he was short and you know in his direction he wasn&#39;t in the trade and he would have been someone who would have said that he understood the nature of probabilities because he majored in it in college but he hasn&#39;t he did not do the sufficient amount of work to train his mind to think in probabilities at a functional level there&#39;s a huge difference you can&#39;t take it for granted that because you understand the nature of percentages that you can think that way at a functional level it would be you know like you could you can do i&#39;ll do the analogy to technical analysis to uh flipping a coin okay that if you if you take an evenly weighted coin and flip it a thousand times you&#39;ve got a large sample size there right the pattern that will emerge with each thousand flip sample size is a relatively even distribution between heads and tails maybe not quite 50 50 but let&#39;s say 49.2 and you know uh 49.8 or something or whatever there might be a little bit of variance more variance there but in any case that will be a pattern see that&#39;s a pattern because it&#39;ll happen every single time you flip the coin a thousand times but within that thousand flip sample size is there any way since you&#39;re going to get an even distribution between heads and tails is there any way that you can know for sure which individual flip is going to be heads and which individual flip is going to be tails no you could get 10 flips of heads in a row and be absolutely positive the next one is going to be tails and it could come up heads again and even though you can have all these streaks of heads and tails in the end they&#39;re still going to come up 50 50. this is exactly the way technical analysis works exactly when you consider the diversity the diversity of the market with all the different players and all the different agendas from people all over the world trying to predict what will happen next would be almost equivalent to sitting in front of a slot machine and coming up with some rational reason why you think that the the pattern that you&#39;re looking for is going to come up on the next push of the button it wouldn&#39;t make a lot of sense would it but the reason why it&#39;s if we get fooled as traders and we think of it in in in not this in not this probabilistic way is because when we put on a trade we put on a trade for a reason see reasons are important in our lives reasons are important we put on a trade for a reason and see the problem is is that when the trade works we think our re we just naturally think our reason was right what i&#39;m trying to do here is help you disconnect is disconnect any reason that you put on a trade with the reason why it actually moved because like i said before there&#39;s almost never a relationship there&#39;s almost never a correlation and so the next time that reason seems to appear in the market we&#39;re gonna we&#39;re gonna do the same thing thinking we&#39;ll get the same result and then when we don&#39;t we feel betrayed and then the next time the reason comes up we&#39;re going to be a little hesitant we might not put it on at all we&#39;ll try to find additional reasons why this trade will work when the reality is there isn&#39;t any reason you&#39;re going to be able to come up with that&#39;s going to assure you of anything unless the reason you&#39;re coming up with is you know the people who are actually going to bid the market up or offer a lower and they tell you what they&#39;re going to do and why ultimately there&#39;s only one reason why markets my prices move and what would that reason be come on yeah and imbalance and conviction that&#39;s the only and what technical analysis does is it finds patterns in that imbalance okay technical analysis finds in patterns in the imbalance where there&#39;s momentum in a direction it&#39;s still not going to tell you what&#39;s going to happen next technical analysis doesn&#39;t nor can it get into the minds of any particular individual trader who has both the financial and psychological resources to either move prices or defend certain price levels and traders will defend price levels by the way there are dynamic traders who will actually defend the price is it reasonable to expect the fixed criteria that make up a mathematical formula to say to stay consistent with a dynamic event that&#39;s in perpetual motion on a trade by trade basis what&#39;s the answer to that what is the answer come on no no it is not reasonable no it is not especially where that motion is being caused by traders all around the world with differing beliefs objectives and agendas there is no way of determining the intentions of all these traders yet the typical passive trader trades their methodology as if they are being told what those intentions are the professionals do not you guys get that the typical passive technical trader trades their methodology as if they are being told what their intentions are whereas the professional does not and why doesn&#39;t the professional because the professional understands the underlying dynamics of price movement and that anybody could come into the market at any time to do anything there was another floor trader that i worked with who executed uh traded his own account in the soybean market but also also executed the orders for one at the time one of the biggest soybean uh producers in the world there was an italian firm that actually tried the corn of the soybean market got thrown off the board of trade but before that happened you know there was many days where you know they he would call you know be in touch with the the head traders at the home office and they&#39;re plotting out their strategy you know like you know he told me one day you know it&#39;s like like the whole strategy for that day from the home office traders the whole strategy was to spank the locals at the chicago board of trade that was their only purpose that day they were going to suck the locals into a trade and they were going to try to wipe them out she said we&#39;re going to spank the locals today now your mathematical pattern okay you happen to get a buy signal ends up to be a big winning trade you think it&#39;s because because a couple of lines crossed you know no matter what it is you know whether stochastics or wise trade or whatever doesn&#39;t really matter it had absolutely nothing to do with the reality of why the prices moved nothing this is the primary characteristic that separates the professional from everyone else what i just said right here you

Transcript for:How Prices Move and Who the Players Are

Transcript for:
How Prices Move and Who the Players Are