Liquidity Distribution for Day Trading...
You might be thinking by now that there is a rhyme and reason today trading after suffering one loss after another which makes no sense to you. After all you looked at your executed order flow, your ticker tape and your volume profile and you saw a clear cut trade with no reason at all to move against you, yet that is precisely what price did.
The tools that are given to you to decipher action in the market are nowhere near enough to compete with the liquidity providers and market makers who have all the information they need to run price whichever way they want. Clearly in the short run that is what they do.
You see they can add or subtract orders in the blink of an eye. They make money by executing derivative orders which are not made of real money. It doesn't mattter if they leave these order floating in the open market because they can always hedge them. The bigger the number of orders in the market the greater the chance that price is going to move against you. It is that simple.
You see traders often think that they see something in the market. Something that makes sense to them based on whatever rules that they follow. Most times those rules are not powerful enough to keep them out of trouble. Their emotions are the other enemy that keeps them losing too. A machine or algorithm doesn't think or feel. It just does.
The way you have to look at the market is to think like a liquidity provider. This is the side of the market that you want to be on. It is not easy because you have to know in advance where most traders are likely to take positions and in what direction they are trading. The small fellows get eaten by the big fellows. That is the one constant in the market that hasn't changed in a long time. It is still as applicable today as it was one hundred years ago.
Thinking like a liquidity provider is not an easy thing to do. You don't have the information that they have but yet you have to execute as if you did. Let's use an example. Say you are looking at a triangle break out pattern. It is at the bottom of a move and you suspect there is further downside to the move. You wait and sure enough price breaks to the downside only to quickly reverse and head back up in the opposite direction. The reason for this is the number of inexperienced traders that saw exactly what you did. Except they took trades on the break. So what happened?
You have a large position of retail sells in one direction against the liquidity providers. Who is going to win that one? Right the liquidity providers or the commercial traders.
This is the way you have to think. You trade against the obvious or easy to spot trades. You won't always win but they will often be a lot bigger moves than if you went with the herd.
This is how I have always tried to teach my classes and how I have always tried to explain the markets to those who would listen. The markets quite simply are a trap for fools. That is what they have always been and that is what they will likely always be. Cheers!
The tools that are given to you to decipher action in the market are nowhere near enough to compete with the liquidity providers and market makers who have all the information they need to run price whichever way they want. Clearly in the short run that is what they do.
You see they can add or subtract orders in the blink of an eye. They make money by executing derivative orders which are not made of real money. It doesn't mattter if they leave these order floating in the open market because they can always hedge them. The bigger the number of orders in the market the greater the chance that price is going to move against you. It is that simple.
You see traders often think that they see something in the market. Something that makes sense to them based on whatever rules that they follow. Most times those rules are not powerful enough to keep them out of trouble. Their emotions are the other enemy that keeps them losing too. A machine or algorithm doesn't think or feel. It just does.
The way you have to look at the market is to think like a liquidity provider. This is the side of the market that you want to be on. It is not easy because you have to know in advance where most traders are likely to take positions and in what direction they are trading. The small fellows get eaten by the big fellows. That is the one constant in the market that hasn't changed in a long time. It is still as applicable today as it was one hundred years ago.
Thinking like a liquidity provider is not an easy thing to do. You don't have the information that they have but yet you have to execute as if you did. Let's use an example. Say you are looking at a triangle break out pattern. It is at the bottom of a move and you suspect there is further downside to the move. You wait and sure enough price breaks to the downside only to quickly reverse and head back up in the opposite direction. The reason for this is the number of inexperienced traders that saw exactly what you did. Except they took trades on the break. So what happened?
You have a large position of retail sells in one direction against the liquidity providers. Who is going to win that one? Right the liquidity providers or the commercial traders.
This is the way you have to think. You trade against the obvious or easy to spot trades. You won't always win but they will often be a lot bigger moves than if you went with the herd.
This is how I have always tried to teach my classes and how I have always tried to explain the markets to those who would listen. The markets quite simply are a trap for fools. That is what they have always been and that is what they will likely always be. Cheers!
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