Thinking ahead of the crowd


When reading Price Action, one of the important concepts is to trade according to your bias before it is already obvious to everyone. You need to look for such price setups where you can already see some hints that the price is likely to move in the direction of your bias. At the same time, there is still no obvious entry setup. At this point we ask ourselves how other traders are likely to interpret the current situation.

How do you know that these early signs of reversal are not obvious to everyone else? Simple – the Market is not reacting to that setup just yet – the price is not breaking through support or resistance levels with enough conviction to show that the majority of market participants are trading in this direction.

If these signs are not obvious to everyone else, how do you know that these are correct signs? You don’t. That’s the main trick in trading – to act under uncertain circumstances. You want other traders to push the price in your direction, BUT after you are already in the market. We are seeking such a situation where not only there are enough traders who will see similar opportunity and start trading with us, but also there are enough traders who are holding the opposite position at this moment and who are ready to take a loss if the price goes against them.

If expecting a bearish move, start trading on a correction, on a bullish failure, on double top, on a bounce, etc. If you wait for the price to break a significant level, you are already too late.

The problem with waiting for too many confirmations is that we really can never be sure enough. Looking for confirmations only strengthens your desire to be right, to find a perfect opportunity. There is no perfect opportunity on the market, there is no situation when you can take a trade with absolute confidence that it is going to be a winner. But, there can be confidence that the Market is already providing a great selling/buying price and refusing it is foolish.

You see, there is nothing we can do on the market without our fellow traders. On the one hand, you need them to create liquidity and take the other side of your bias. On the other, you need them to move the price to your target after the entry – you want enough volume that will agree with your analysis as well. Whether this volume is generated through new entries aiming for profit, or taking old losses, is irrelevant.


Following the Market

One of the most important concepts in trading is following the market. I was always looking at the market trying to predict its future: what is it going to do the next candle? What trade can I place right now? Often I would go back in history and watch some trading pair bar by bar and still make the same predictions. Not only that, but I would actually feel frustration when the market was not doing what I expected it to do.

A very good exercise is to watch the market unfold, mentally (or in writing) noting what it is doing right this moment (this candle), and go to the next candle with open mind. I call this market meditation, because it takes all our presence, all our ability to control the thought process in order to just watch what the market is doing instead of trying to tell it what to do.

When doing this exercise, I often catch myself surprised after the next candle is revealed. I am surprised because I did not expect the candle to be that way, and yet the whole purpose of the exercise is to stop all my expectations. Why is it so difficult to just let the market be?

This exercise also proves yet again that the market can do absolutely anything. It can go in any direction by any amount at any given moment. When we catch ourselves surprised, not expecting the current move that has just been revealed, it is very important to listen inside – to the thoughts that float in our brain and the emotions that we feel. Is there anger, frustration, disappointment? Is our brain trying to judge us because we were not able to “predict” this move? Try to stop this incessant thinking – if there is anything to judge, it is our inability to let the market go, and follow the flow.

And yet, there is another side to this. Sometimes we see the market close just as we wanted, and we feel a rush of adrenaline, a pleasurable sensation that tells us we were “right”. In this exercise the excitement is no better than the frustration we’ve just experienced when the marked defied our expectations. Any emotion about the market implies a conscious or subconscious judgement on our part.

Remember, the purpose is to watch what the market is doing – without trying to predict, understand or judge. The market is supplying us with an endless flow of information. I believe that we can never deal with this flow constructively, unless we first learn to let it be just the way it is.

So give it a try:

  1. Open any trading pair on any timeframe
  2. Go back in history a couple thousand candles and start revealing one candle after another, pausing at least for a couple seconds on each
  3. Make a mental note how the current candle has closed
  4. Note any emotions, feelings or thoughts that you might have, accept them and let them go
  5. Go to the next candle whenever you feel like it

You can also add any indicators you usually watch – but avoid any indicators that give you a signal to buy or sell. For example, you can add a moving average and then note its position relative to the price chart on each candle. At the same time, do not say that it is a sell signal because the price has crossed the moving average. Remember that any trading signals are not generated by the market, but by our brain – one way or another, for better or worse, our brain has learned to recognize a particular pattern as a buy or sell signal. In this exercise we want to avoid such patterns, because they are nothing more than our subjective judgement. An indicator simply gives us another variable, another source of information for us to note. This is the real purpose of any indicator – to help up clarify what the market is doing right now, not what it is going to do in the future.