Home Technical Analysis Price action Logical Outlook Of The ‘Buyers’ & ‘Sellers’ In Price Action

Logical Outlook Of The ‘Buyers’ & ‘Sellers’ In Price Action

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Buyers and Sellers

In all levels, every trade is nothing but a buy and a sell. Every transaction is an agreement or an exchange between a buyer and a seller. Only buyers and sellers create every price on the chart. When price moves higher, the reason commonly to be is “there are more buyers and sellers”. But this might not be the reality. There might be one buyer and many sellers. For example, there might be one big buyer such as hedge fund manager with billions of dollars. He will be carrying with himself a high degree of research that will empower numerous sellers. That means one buyer might possess more money and information than other sellers.

The number of buyers and sellers is less significant than the amount of capital with the buyer or seller. A more prominent statement would be “buyers are more powerful than sellers”. Technical analysis should mainly focus on price. Price is going to ultimately determine whether the trade is going to be successful or not.

Gaps

Buyers and sellers create gaps as a result of excitement. When a gap is formed, the price jumps higher or lower than the previous price, leaving an empty space or gap between two prices. Gaps are mostly observed in illiquid trading instruments. This happens due to a lack of buyers or sellers and sometimes considered not very significant. Whereas gaps are considered significant when they occur in liquid stocks.

Gaps are not very common in the forex market. You will not observe them in currencies like the Euro or the U.S. dollar. This is because buyers and sellers are very high, and it is difficult to overcome their orders. However, under extreme circumstances, currency gaps do occur.

The real hanging man

While many traders consider hanging man as bearish, there are traders who also look at it differently. A hanging man can be formed in a bull or a bear market. During the formation of a hanging man, a significant amount of sellers push the prices down, and buyers come back immediately, leaving a wick. The bears were gaining the upper hand. However, the bear’s victory was short-lived, as it was followed by a sharp reversal.

Any bearish trader who sold during the formation of the wick found their gains wiped off. This means the sellers are in a discouraged state. The hanging man did reveal the existence of sellers and the fact that they were willing to take action. However, the patterns that formed later would seem to be in favour of the buyers, according to some traders. This is the actual interaction that takes between buyers and sellers in the hanging man pattern.

Short-covering in the market

When there is a strong downtrend, sellers are in a high emotional and fearful state. Generally, the emotion of greed is associated with buying, and the emotion of fear is associated with selling. Because fear is stronger emotion, panic selling causes the market to collapse.

However, traders have also been known to engage in panic buying. A “short-covering rally” occurs when sellers panic and run for exits. Fearful of a further move to the upside, traders are motivated to buy this rally. This buying forces the rallying of currency to move even higher, also considered a form of capitulation. Some buyers predict short-covering rallies before they occur. As the currency rises, sellers may begin to panic as their profits are being wiped out. By decoding the intentions of buyers and sellers, it is possible to make profits from these moves also.

Reversal patterns

A technical chart consists of a combination of lines, arcs and indicators. They give an indication of whether the chart is bullish or bearish. Chart patterns occur in all forms of trading. All the patterns fall into two categories.

  • Reversal chart pattern indicates the price is about to change direction.
  • Continuation chart pattern indicates that the price should continue in its direction.

Reversal chart pattern occurs in all chart types and time frames. You can see them on a five-minute chart as well as on the monthly chart. Since they are observed on all time frames, they are “fractal” in nature. Reversal patterns are more dramatic and impactful than continuous patterns. The reversal of a trend provides a jolt to many traders, shocking them into action and creating an opportunity for those looking to take the other side of the trade. In a reversal pattern opposite side of traders come in with strong commitment. The most important thing is that the reversal pattern should be preceded by a trend or a significant directional move. Otherwise, there is no meaning to it. It gives a high likelihood that the current trend is about to change. This makes reversal patterns useful in creating trade entries and exits. All chart patterns should be viewed in the context of buyers and sellers.

Patterns are imperfect

A novice trader might expect that every occurrence will lead to the anticipated result on every occasion. Every experienced trader has witnessed the failure of a chart pattern. The longer you trade, the more failure you will see.

If any aspect of technical and fundamental analysis worked consistently and flawlessly, trading would be an easy game. From the perspective of a trader, any situation that offers better than 50-50 odds of a positive outcome should be of great value to you. Chart patterns aren’t the key to an undefeatable system. It cannot profit you all the time. Understanding from buyers and sellers point of view is an attempt to gain an edge.

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