How to read a Chart - Part V: Perspectives on MarketConstruction
Part V - Perspectives on Market Constructions
Introduction
To enable ourselves to see the markets in a deep and holistic view, we need to know how a market is moving and why. As this is basic economic knowledge,
some things differ slightly, especially in smaller time frames. So, to understand trends and ranges, we need to understand how price is built within a chart.
A. The smallest price indication?
First, the smallest visible indication is built from single trades, from one buyer selling to another. A buyer selling? I will explain this in the next section, don’t worry.
But overall, the smallest transaction, independent of the size of the transaction, is building the “line”, only added with a timestamp.
At this point some already know, others suspect and some wonder: What is this dude talking about?
Evidently I’m talking about the tick chart, as every transaction is recorded as a tick, a single print of conducted business.
And for those who have never seen a tick chart (and as I do not own a pro membership of @TradingView at this very moment),
I’ll show you something that looks like the tick chart.
Even though the picture above is the 1-minute-chart of GRT/BUSD, the tick chart is a non-aggregated line chart connected through single transactions.
Especially in day trading it deploys a very valuable indication of the speed of movement, as well as the ability to see the raw unfiltered and non-aggregated data of transactions.
The downside is you won’t be able to see gaps, fails, strength or weakness.
But wait! Is there anything smaller than a tick chart? And the answer is: YES!
B. Supply and demand
As some already might have suspected, the only thing smaller than the tick chart is the single transaction, the tick itself.
But before we dive deeper into reading the smallest fragment of a chart, we need to understand what drives a market.
Let's have a look at a picture first.
Being the basics of any economic market, the picture above shows the general supply and demand curve.
As this is applying to all timeframes, ranges or scales, there always needs to be someone to push prices higher and lower, some bigger players than the usual traders are,
except you are trading a crypto with low market cap or markets with low liquidity, where you might be able to push prices in a certain direction.
At this point I want to drop an advice for you: don’t try it, but if you want to have this experience and you are driven by an extreme risk-on mode,
there is no holding back ;) .
On the left side you’re seeing a simplified sketch, on the right side a more realistic sketch of a supply-and-demand graph, but I think you’ll get the idea.
In general the graph shows you the basic idea of ANY trade, any type of conducting business, if the flea market, a supermercado, Amazon,
or anything else - not just stock / forex / crypto trading.
If there is value attributed to an object, price will rise; if not, price will fall. This means that only if someone is eager to get a product, prices will rise or if he or she is heavily selling the product, prices will fall.
Let’s have an example: on one hand, think of it like a new and thus rare product that is introduced by only one seller.
If you want to have it, you have to pay the price as nowhere else the product is to be bought, or, on the other hand,
think of it like a product from a discounter which is “in the offer”: as there is a price war or heavy supply the product is therefore very cheap to buy.
If the selling and buying is finding its fair value, price will be stable as the market has found its equilibrium.
If it is a one-timer and interest is lost, the market is oversaturated and prices will stall again.
This is mainly the case for non-consumable goods, as they are not consumed, spent or wasted on a regular basis which would naturally stabilze supply.
Let’s have a look at a picture to explain this from a different perspective.
On the left I’ve visualized the ongoing trading activities. In this case this might also be the day's opening (f.e. in the stock market),
where people are buying and selling at the corresponding prices. After business and deals have been conducted, the market is going into a period of saturation
and is building the actual balance around a bilateral fair value after this session, which results in the middle picture.
The middle picture is displaying the DOM - the depth of market, also known as orderbook, where only the limit orders are displayed. If there are only limit orders,
no trading is possible, because all buyers are below (the bid) and all sellers are above (the ask) the actual price. The span in between is called “the spread”.
In the picture to the right we’re seeing new trading activity as buyers and sellers are moving their orders or recently entered the market with limit orders (orange),
as well as “aggressive” buyers and sellers entering the market using market orders (black).
As shown in the next picture, the trading activity continues, pushing the prices higher, until a point of exhaustion is reached. The market might also go sideways,
but as supply dries out, the prices cannot go higher if there are no sellers left. At this point, you should have realized that every buyer needs a seller and
every seller needs a buyer. Coining it further this means that every buyer in the NOW is a seller in the FUTURE and vice versa. What would you do, if you have,
f.e. bought at 8 and the price is stopping and you are seeing (in the orderbook) that most buyers are gone?
Selling limit or even market to the buyer at 11 seems reasonable, which will get you a profit of 3.
And so prices are turning around, as the future buyers and futures sellers deal their deals forth and back.
As you might know, this is also the case for falling prices and you might play it through by yourself.
C. Times and Sales
In short, the “Times and Sales” is a continuous list plotting all transactions of one or more exchanges - depending on your product and broker.
It is tremendously vital in reading actions happening in the moment such as absorptions, reversals, exhaustions and others.
As of now, @TradingView has no implementation of it, but I’m sure it is planned in the future.
Another possibility to visualize conducted business on a specific price level is a volume profile plotting the volume in horizontal lines, as shown in the picture below.
I will explain volume profiling in the future, but as you can see: the strong plotted area in the middle is the price range,
where most of the trading business has been conducted thus where the most interest in business was and where the fair value of the asset is estimated by the traders.
Key Takeaways
From the moment you have bought, you are a future seller.
You are not dealing with NPC’s (at least if your broker is reliable), but with other people.
Watch out for rotations!
Don't be the last to sell nor the last to buy!
Because remember:
The devil takes the hindmost.
___
Note:
As I’m writing a book about reading a chart,
I am going to post a couple of short articles on this topic and others related to it, e.g. trend, volume , Dow theory, auction theory and behaviorism.
If you are spotting some errors or if you like to add something, feel free to comment or pm.
Cheers,
Constantine -
p.s.: This article is not intended as any kind of trading advice. If anything concerning this topic remains unclear, drop a message or a comment.
Thanks to all for reading and I hope it will help you in your analysis and your trading career.
Introduction
To enable ourselves to see the markets in a deep and holistic view, we need to know how a market is moving and why. As this is basic economic knowledge,
some things differ slightly, especially in smaller time frames. So, to understand trends and ranges, we need to understand how price is built within a chart.
A. The smallest price indication?
First, the smallest visible indication is built from single trades, from one buyer selling to another. A buyer selling? I will explain this in the next section, don’t worry.
But overall, the smallest transaction, independent of the size of the transaction, is building the “line”, only added with a timestamp.
At this point some already know, others suspect and some wonder: What is this dude talking about?
Evidently I’m talking about the tick chart, as every transaction is recorded as a tick, a single print of conducted business.
And for those who have never seen a tick chart (and as I do not own a pro membership of @TradingView at this very moment),
I’ll show you something that looks like the tick chart.
Even though the picture above is the 1-minute-chart of GRT/BUSD, the tick chart is a non-aggregated line chart connected through single transactions.
Especially in day trading it deploys a very valuable indication of the speed of movement, as well as the ability to see the raw unfiltered and non-aggregated data of transactions.
The downside is you won’t be able to see gaps, fails, strength or weakness.
But wait! Is there anything smaller than a tick chart? And the answer is: YES!
B. Supply and demand
As some already might have suspected, the only thing smaller than the tick chart is the single transaction, the tick itself.
But before we dive deeper into reading the smallest fragment of a chart, we need to understand what drives a market.
Let's have a look at a picture first.
Being the basics of any economic market, the picture above shows the general supply and demand curve.
As this is applying to all timeframes, ranges or scales, there always needs to be someone to push prices higher and lower, some bigger players than the usual traders are,
except you are trading a crypto with low market cap or markets with low liquidity, where you might be able to push prices in a certain direction.
At this point I want to drop an advice for you: don’t try it, but if you want to have this experience and you are driven by an extreme risk-on mode,
there is no holding back ;) .
On the left side you’re seeing a simplified sketch, on the right side a more realistic sketch of a supply-and-demand graph, but I think you’ll get the idea.
In general the graph shows you the basic idea of ANY trade, any type of conducting business, if the flea market, a supermercado, Amazon,
or anything else - not just stock / forex / crypto trading.
If there is value attributed to an object, price will rise; if not, price will fall. This means that only if someone is eager to get a product, prices will rise or if he or she is heavily selling the product, prices will fall.
Let’s have an example: on one hand, think of it like a new and thus rare product that is introduced by only one seller.
If you want to have it, you have to pay the price as nowhere else the product is to be bought, or, on the other hand,
think of it like a product from a discounter which is “in the offer”: as there is a price war or heavy supply the product is therefore very cheap to buy.
If the selling and buying is finding its fair value, price will be stable as the market has found its equilibrium.
If it is a one-timer and interest is lost, the market is oversaturated and prices will stall again.
This is mainly the case for non-consumable goods, as they are not consumed, spent or wasted on a regular basis which would naturally stabilze supply.
Let’s have a look at a picture to explain this from a different perspective.
On the left I’ve visualized the ongoing trading activities. In this case this might also be the day's opening (f.e. in the stock market),
where people are buying and selling at the corresponding prices. After business and deals have been conducted, the market is going into a period of saturation
and is building the actual balance around a bilateral fair value after this session, which results in the middle picture.
The middle picture is displaying the DOM - the depth of market, also known as orderbook, where only the limit orders are displayed. If there are only limit orders,
no trading is possible, because all buyers are below (the bid) and all sellers are above (the ask) the actual price. The span in between is called “the spread”.
In the picture to the right we’re seeing new trading activity as buyers and sellers are moving their orders or recently entered the market with limit orders (orange),
as well as “aggressive” buyers and sellers entering the market using market orders (black).
As shown in the next picture, the trading activity continues, pushing the prices higher, until a point of exhaustion is reached. The market might also go sideways,
but as supply dries out, the prices cannot go higher if there are no sellers left. At this point, you should have realized that every buyer needs a seller and
every seller needs a buyer. Coining it further this means that every buyer in the NOW is a seller in the FUTURE and vice versa. What would you do, if you have,
f.e. bought at 8 and the price is stopping and you are seeing (in the orderbook) that most buyers are gone?
Selling limit or even market to the buyer at 11 seems reasonable, which will get you a profit of 3.
And so prices are turning around, as the future buyers and futures sellers deal their deals forth and back.
As you might know, this is also the case for falling prices and you might play it through by yourself.
C. Times and Sales
In short, the “Times and Sales” is a continuous list plotting all transactions of one or more exchanges - depending on your product and broker.
It is tremendously vital in reading actions happening in the moment such as absorptions, reversals, exhaustions and others.
As of now, @TradingView has no implementation of it, but I’m sure it is planned in the future.
Another possibility to visualize conducted business on a specific price level is a volume profile plotting the volume in horizontal lines, as shown in the picture below.
I will explain volume profiling in the future, but as you can see: the strong plotted area in the middle is the price range,
where most of the trading business has been conducted thus where the most interest in business was and where the fair value of the asset is estimated by the traders.
Key Takeaways
From the moment you have bought, you are a future seller.
You are not dealing with NPC’s (at least if your broker is reliable), but with other people.
Watch out for rotations!
Don't be the last to sell nor the last to buy!
Because remember:
The devil takes the hindmost.
___
Note:
As I’m writing a book about reading a chart,
I am going to post a couple of short articles on this topic and others related to it, e.g. trend, volume , Dow theory, auction theory and behaviorism.
If you are spotting some errors or if you like to add something, feel free to comment or pm.
Cheers,
Constantine -
p.s.: This article is not intended as any kind of trading advice. If anything concerning this topic remains unclear, drop a message or a comment.
Thanks to all for reading and I hope it will help you in your analysis and your trading career.
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