Market dynamics

Before an aspiring trader can learn to earn money in the game of trading, He or she must first obtain a proper understanding of the participants, market structure,  risk of the instruments he is dealing in. The ability to understand why the market is behaving the way it is allows one to accurately anticipate market behavior.

Participants

Role of market is to facilitate the trade between buyers and sellers. However, Buyers and sellers are not the same. The ability to distinguish between these categories will allow you to anticipate upcoming price movement and behavior.

Responsive buyer- He enters the market when price is below value. In essence when one waits for the price of the iPhone to drop before the release of its new version he or she is a responsive buyer.

Responsive seller-  He waits until price is above value before entering the market.

Responsive buying and selling typically drive the price back toward the mean.

Initiative buyer- An initiative buyer enters the market when price is at or above value. Taking example of Covid situation - People started buying  groceries current market rates as they perceived its shortage in future which eventually pushed its price to a higher value.  This type of buyers would cause others buyers to enter the market causing prices to explode.

Initiative seller-An initiative seller operates the reverse of Initiative buyer and take prices to lower area of value.

Initiative participants have greater conviction behind their behavior, which has a greater influence on price.

Types of Market days

“Every market day is unique, but it is a clone of prior day in history”. This very statement is a basis and an assumption of technical analysis. Technical analysis works because trader psychology, and human psychology, never changes. Trading is a game of repetitions.

 Any day can be broadly categorized into six type of market days. Ability to recognize the pattern of the day gives trader an edge.

 

Trend Day- This is the most aggressive day. It could be bullish or bearish. On a bullish day open price marks the day’s low price and for bearish trend day the open price is the highest. Initiative buying or selling is the culprit on this type of day. The further the price moves more participants join creating sustained price movement. Initiative buying or selling is the culprit on this type of day. Price conviction is strongest during the day. It is usually followed by a quiet day of market activity. We will discuss how to identify this day even before the market opens in the later part of the series.   

Double- Distribution Trend day- It does not have the confidence or conviction of the trend day. It is characterized by market indecisive nature at the start of the session. Initial Balance is very low at the start of the session. Initial balance is the price range of the first hour of the session from low to high. Narrow price range indicates that prices will break free from the range and start oscillating in a different value area.

Typical Day- It is characterized by wide initial balance that is established at the outset of the day. Price rallies or drops to attract responsive parties to enter the market. The responsive players push prices in the opposite direction establishing day’s extreme. wide initial balance  at the start of the day  will likely mean that the day's extreme will remain intact and violation of the extremes is unlikely.  The market then trades quietly for the remainder of the session.   

Expanded Typical Day- It is characterized by strong directional price movement but not as strong as that of typical day, It has moderately wide initial balance but not as wide as that of typical day which leaves it  vulnerable to violation of initial balance extremes by initiative sellers/buyers.

Trading range Day- Initial balance is as wide as that of typical day. On this day buyers and sellers are actively participating. Imagine it as a game of volleyball where players are active. Responsive buyers/sellers are standing at extreme ends and volleying the ball back and forth. This type of market offers easy facilitation of trades.

Sideways Day- There is no actual being played on this day,  Trading activity is very low. This kind of day is expected before holidays or any news event. Prices are stagnant as both buyers and sellers refrain from activity. The image below depicts SBI stock price before its quarterly result release. 

All images have been taken from Zerodha app