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The Basics

Price Movement Causality – Not What You Might Think

I saw the following statement made on the BabyPips site:

Forex charts are nothing but a chart of human emotions, most notably fear and greed. People don’t buy and sell because the price moves, it’s actually the other way around. Price moves because people buy and sell. All you need to do is predict where a lot of people will buy or sell and you can be a profitable forex trader…

Prices and Emotion
While the movement of prices (which of course is what charts display) are influenced by human emotion, they aren’t the only driver. Straight forward supply and demand also plays a meaningful part of it. Point blank, if there’s more demand for something than supply prices are going to rise. Emotions may slow that down or accelerate that, but eventually it’s going to happen.

And supply/demand isn’t just a long-term “fundamental” thing. It can factor in the short-term as well. For example, if GE needs to hedge a EUR 2bn transaction, that’s a big chunk of supply that will come in to the market which is at least going to make rising EUR rates very unlikely in the short-term.

People Don’t Buy/Sell Because of Price Movement
Secondly, people most definitely buy and sell because of price movement. Think about what gets you into a trade. If you’re system based then you’re entries and exits are almost certainly based on price moving to a point or through a point. Not that all trading decisions are made based on price movement, but many are.

Prices Move Because of Buying and Selling
Price actually move through the lack of buyers or the lack of sellers. The way most people think about it is that prices rise (for example) because of an increase in buying. That’s not the way it works, though. It’s only part of the equation.

Prices rise because there is insufficient selling interest at a given price to offset the buying interest. The market thus must move higher to find the selling interest to match the buying interest. This can happen if there is and influx of new buying which overwhelms the selling interest (meaning all the willing sellers have sold and none are left at current prices). It can also happen if there’s a drop in selling interest. It’s a relative relationship. Prices will only move when there’s an imbalance. It doesn’t have to mean that one side rises. An imbalance could just as easily come in when on side falls more rapidly than the other – for example selling interest falls more rapidly than buying interest.

All of this is why volume analysis is so useful (and open interest in futures/options). It can tell you whether prices are moving on the basis of more interest coming in or just because selling interest has faded more quickly than buying interest.

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Reader Questions Answered

A Trader’s Educational Path

I received the following in an email from a member of my mailing list. Because I think it tracks pretty well how many people work their way through different tools and resources and methods I decided to include it here essentially unedited. My comments and responses to the questions presented are at the end.


Like I said before I’m new to trading at what I consider a professional capacity. I’m more focused than I’ve ever been and couldn’t be more excited about trading, and yes of course I have a million questions for a seasoned professional such as yourself.

My trading education lead me first to Lance Biggs and I have now watched all his videos multiple times and read all the articles on his website which is in fact where I came upon your article.  Lance had mentioned that the single person who had influenced his trading the most was Mike Reed (www.tradestalker.com) who trades mostly off of support/resistance . Although I trust Lance Biggs recommendation highly I would like very much to know if you have reviewed this system and your opinion if so.

Along with Lance Bigg’s trading basics money management was my key focus. Now that I have the basics down I’m looking for what I term as high probability entry’s.

I seem to have stumbled onto volume as the best leading indicator as it points to where the big money is going. Your article on value areas etc. was very helpful.  From this I have started looking at various sites who seem to have the best Volume indicators such as www.linnsoft.com, who has a value area indicator (www.linnsoft.com/tour/techind/va.htm), and others such as www.ninjatrader-support.com/HelpGuideV6/helpguide.html?PowerVolumeIndicators .

There is also Trade Maven who has seemingly come up with some volume based system that I’m still not sure about. They are by far the more expensive of the two.

Finally there is a group which seems to me to be the most impressive (due to their many videos). They use what is called Price-Volume-Spread-Analysis or PVSA.  I called them and spoke with someone at length about their program and was even more impressed afterwards having learned that along with PVSA (which sounds great but is still rather mysterious) they use a form of Price Analysis/Price Action where they analyze the last ten candlesticks.  This all sounds most fascinating but their program costs a small fortune.

I would me VERY grateful if you had any ideas/comments on their system or if you perhaps know anyone who has taken or heard about their program. This is their website. www.nextbartrading.com  Be sure to watch their live trading videos.

Finally, my instinct is telling me that there is a very simple and obvious way to trade using a combination of support/resistance, volume, and by analyzing price action.

What does your trading system look like?  What indicators do you use? and really, do you believe I’m on the right track?


The first question posed above was whether I had any experience with Mike Reed’s analysis. I personally have not read much of Mike’s actual day-to-day market analysis and trading ideas. I have some idea of where it’s focused (support and resistance as noted), but I’ve not made a study of what he does. This has nothing to do with the quality of Mike’s work. Based on the feedback I’ve received over the last few years, that quality is very high. For my part, though, I steer clear of reading other people’s market analysis as it tends to muddle my own.

My next comment is that I have not used any of the other resources listed above, so I can make not comment on them personally. I encourage anyone who has, to offer their thoughts via comment below, though.

Now, getting to the last part of things, my first comment is that combining support/resistance, volume, and price action analysis generally (but not necessarily always) falls into the category of discretionary trading. As such, “simple” probably isn’t the best word to use here. Good discretionary trading comes about from experience. That means lots of looking at charts, and lots of developing expectations about future price movement from what you see. It’s not a quick thing.

I personally trade in a couple of different ways. When position trading stocks I incorporate basic fundamentals with price action analysis. When short-term trading indices or forex, I use price/volume distribution analysis. In those same markets, when I’m looking longer-term I generally go with price action and volatility.

But that’s just me.