The market exists because of conflict. For every transaction, there must be a buyer and a seller; hence, it is necessarily adversarial, and in each individual transaction there can only be one winner; the other must lose. It is impossible for both sides to be right and the order flow goes in only two directions, up or down. Even in a sideways market, when you look closely, you'll notice that the tick or pip goes up, then down, which only means that there are equal numbers of buyers and sellers at each price point. So, the importance of knowing the order flow cannot be overstated. At some juncture, both winner and loser must close their positions. They must at some point exit to turn a debit/credit into a case settlement. Actually, a large percentage of price action is characterized by stops being hit, or in other words, the loser is liquidating. Only the loser must get out, the winner can wait. When the loser and winner leave the market, the market is vulnerable to a reversal – only winners are left. All price action is determined by an imbalance of orders over time. How and when those orders are filled creates price action.
Your order must be ahead of the next wave of order flow in the direction of the price action. One hundred percent of your market study must be designed to find where the eventual loser will be placing his orders; as you analyze this, nothing else matters. Where is the loser now and to when will he be moving?Price action is about pain or pleasure. Price action begins in the mind of every trader just as she decides to make a play. She has enough conviction in making that trade to put herself at risk. She believes (if she is trading) and hopes (if she is gambling) that she will make a profit; otherwise, she would not make the trade. The question is, "What creates that belief, and what happens when, due to the failure of her decision, she must change that belief?" If you are wrong and price moves against you, for the novice trader, there is pain. When the pain is strong enough, you will get out. Pain takes place as soon as there is a realization that the conflict between the desire to make money and the fact that the trade is in the wrong place has been made. Pain is directly proportional to the momentum of price action and the degree of real estate or space from the entry. As it moves away from your losing entry, the pain grows until you liquidate and leave the market. If the winner has done the same, there are less people in the market, but only one thing is certain: Only the winner can afford to wait to liquidate as time goes on. Even if prices stop moving against the loser, his pain grows, because he thinks to himself, "The trade is not working. I can't wait anymore." The conflict of price action is also driven by pressure, buying and selling.
The order flow comes in natural imbalance, and this imbalance becomes the price action. Knowing where the loser is in the order flow is all that you need to concern yourself with when you trade: "Where is the loser and when will he quit?" What does this mean? Well, you start the process of understanding where the loser is and when he will quit by first understanding what prevents you from seeing where the loser is.
This is difficult for many traders because they fail to realize that as a novice, they are the loser at this point. In many ways, your thinking is the same as every other loser out there. Knowing how you think gives you clues to how they think. You can then learn to separate yourself from the herd. Of course, to know how you think, you must first become aware of your biases as it relates to the charts and the news.
Extended rallies or sell-offs hold an inordinate amount of bias as the novice becomes excited by the real estate being covered in the price action. He becomes seduced by the belief that prices are going to continue and often, impulsively executes in the direction of the rally or sell-off. Actually, the seasoned, successful trader is looking to take the opposite side of that novice trade when markets are extended and there is a distinct imbalance between supply and demand. You not only need to become aware of your beliefs about the price movement, you also must learn how to look at the charts to identify areas where the imbalance is greatest because that's where the lure of false buy or sell signals are.
The market is only a neutral organic representation of the price action; the pain is not created by, nor is it in, the market. It is only in the head of the trader. Therefore, you are the market. There are those who would like to think that the market is "against them," and that it is somehow a fight, but the fight is really with yourself. And, the fight with yourself is caused by another conflict, the conflict inside the trader in the form of limiting beliefs that drive unconscious conversations regarding internal bias about price action. These biases and limiting beliefs are about "good" news versus "bad" news, the need to conform to the masses and the belief that indicators have real time data. These biases and limiting beliefs distort your judgement and distract your thinking.
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