Mark Douglas Trading Psychology 2/7 Order Flow

Summary

The speaker discusses the unpredictable nature of market movements, emphasizing that no one can accurately predict what will happen next. They explain that market fluctuations are due to the imbalance between buy and sell orders, and that even professional traders cannot know the reasons behind every market move. The speaker shares personal experiences with trading, highlighting the dangers of assuming one can eliminate risk and the psychological challenges traders face, such as 'Mind Freeze'. They advocate for understanding market dynamics and the role of order flow to navigate trading more effectively.

Takeaways

• 🤔 The unpredictability of market movements is a fundamental aspect of trading, as no one can accurately predict what will happen next.
• 🧠 The belief that one can eliminate or reduce risk by understanding market movements is a misconception; risk is always present in trading.
• 📉 The lack of a direct correlation between a trader's analysis and market outcomes means that success does not necessarily indicate correct reasoning behind a trade.
• 💡 Understanding the true nature of trading involves accepting the inherent uncertainty and not overestimating one's ability to predict market behavior.
• 🥶 Fear of being wrong is a primary concern for traders, but the lack of certainty means that being right or wrong is often out of one's control.
• 💸 The concept of 'Mind Freeze' occurs when traders overcommit based on confidence from previous wins, leading to significant losses when the market moves against them.
• 🔄 Price movement is fundamentally driven by the imbalance between buy and sell orders entering the market, not by individual predictions or analyses.
• 🌾 Hedgers and speculators have different objectives in the market; hedgers aim to mitigate risk through locking in prices, while speculators seek to profit from price movements.
• 🏭 Commercial entities and large traders can influence market prices with their orders, which may not be related to the reasons behind typical speculators' trades.
• 📊 The lack of transparency in order flow means that the reasons behind price movements are often unknown or speculative, challenging the ability to analyze market behavior accurately.
• 📈 Despite the limitations, traders must develop strategies that account for the unpredictable nature of the market and manage risk effectively.

Q & A

What is the main theme of the transcript?

The main theme of the transcript is the unpredictability of market movements and the importance of understanding that no one can accurately predict what will happen next in trading.

Why does the speaker emphasize that there's no way to know what will happen next in the market?

The speaker emphasizes this point to highlight the inherent uncertainty in trading and to challenge the belief that analysis or experience can eliminate or significantly reduce risk in market predictions.

What does the term 'Mind Freeze' refer to in the context of the transcript?

In the context of the transcript, 'Mind Freeze' refers to a state where a trader, after a series of winning trades, becomes overconfident and makes larger trades than their account size would prudently allow, leading to a significant loss when the market moves against them.

How does the speaker describe the relationship between a trader's analysis and the market's movement?

The speaker describes the relationship as largely non-existent or unpredictable. Even if a trader's analysis leads to a correct prediction, there's no way to know if the reasons behind the analysis were correct or if it was just a coincidence.

What is the significance of understanding the nature of trading for a trader?

Understanding the nature of trading helps a trader shift their perspective from fearing being wrong to accepting the inherent uncertainty and risk. This acceptance can lead to better decision-making and potentially more resilient trading strategies.

How does the speaker describe the process of price movement in the market?

The speaker describes the process of price movement as a function of the imbalance between buy and sell orders flowing into the exchange. Prices move when there is an imbalance, with the direction of the movement depending on whether there are more buy orders or sell orders.

What is the role of hedgers in the market according to the speaker?

Hedgers, according to the speaker, are market participants who don't want the price to move. They use the market to lock in prices for their commercial purposes, thereby eliminating their risk exposure to price fluctuations.

What is the speaker's view on the effectiveness of analysis in trading?

The speaker suggests that while analysis is a part of trading, it is not always effective in predicting market movements. Over-analysis can lead to analysis paralysis, where traders become so overwhelmed by the number of variables that they are unable to make trades.

How does the speaker describe the experience of trading without knowledge of the reasons behind market movements?

The speaker describes it as a challenging experience where traders must operate with the understanding that their reasons for entering a trade may not be the actual cause of market movements. This requires a level of trust in oneself and an acceptance of the inherent risk and unpredictability.

What advice does the speaker give to traders regarding their mindset and approach to trading?

The speaker advises traders to let go of the fear of being wrong and to accept that they will never have complete knowledge or control over market movements. Instead, they should focus on managing their risk and developing strategies that can withstand the unpredictability of the market.

Outlines

00:00

🤔 Embracing Uncertainty in Trading

The speaker begins by discussing the fundamental uncertainty in trading and the futility of trying to predict market movements with certainty. They emphasize that even with thorough analysis, one can never truly know why the market moves in a particular direction. The speaker shares their realization that understanding this uncertainty is key to shifting one's perspective on trading and managing the fear of being wrong.

05:00

💡 The Psychology of Loss and Mind Freeze

The speaker delves into the psychological aspects of trading, particularly the fear of being wrong and the emotional pain associated with losses. They describe the phenomenon of 'Mind Freeze,' where traders, after a series of winning trades, overconfidently increase their positions, leading to significant losses when the market moves against them. The speaker highlights the importance of recognizing and overcoming this psychological trap to avoid catastrophic trading errors.

10:00

🌱 The Evolution of Trading Understanding

The speaker shares their personal journey of understanding the nature of trading, moving from the belief that one could predict and control market outcomes to accepting the inherent uncertainty and risk. They discuss the concept of order flow and how price movements are simply a result of imbalances between buy and sell orders, not necessarily related to any individual trader's analysis or actions.

15:02

🔄 The Dynamics of Speculators and Hedgers

The speaker explains the difference between speculators and hedgers in the market. While speculators aim to profit from price movements, hedgers seek to mitigate risk by locking in prices. The speaker uses the example of a farmer and an electric motor manufacturer to illustrate how hedgers use futures contracts to secure their profit margins, contrasting this with the speculative trading approach.

20:03

📈 The Imbalance of Buy and Sell Orders

The speaker further elaborates on the concept of order flow, emphasizing that price movement is driven by the imbalance between buy and sell orders. They explain that for a price to move, there must be more buy orders than sell orders, or vice versa. The speaker also shares personal experiences from the early days of their trading career, highlighting the challenges and inefficiencies of trading before the advent of electronic exchanges and real-time market data.

25:03

🚫 The Myth of Knowing Market Movements

The speaker debunks the myth that market movements can be accurately predicted or explained. They argue that the reasons behind price changes are unknowable to the average trader, as they are the result of the collective actions of all market participants, whose individual motivations remain private. The speaker advises skepticism towards any claims of knowing the 'real' reasons behind market movements, as these are often unfounded.

Keywords

💡Market Imbalance

Market Imbalance refers to a situation where the number of buy orders does not equal the number of sell orders in the market, leading to price movement. In the video, it is emphasized that price moves occur due to this imbalance between buy and sell orders, and understanding this concept is crucial for traders as it highlights the unpredictable nature of market movements.

💡Risk Management

Risk management is the process of identifying, assessing, and prioritizing the risks faced by individuals or organizations, and then implementing coordinated and economical application of resources to minimize, monitor, and control the probability or impact of unfortunate events. In the context of the video, the speaker discusses the importance of understanding that risk cannot be eliminated in trading and that overconfidence, such as believing one has eliminated risk, can lead to significant financial mistakes.

💡Mind Freeze

Mind Freeze is a condition described in the video where a trader, after a series of winning trades, becomes overly confident and increases their trading size, leading to a situation where a small market movement against their position can cause significant losses. This overconfidence prevents them from reacting appropriately to market changes, causing a mental shutdown or 'freeze'.

💡Order Flow

Order flow refers to the movement of buy and sell orders in the market. It is a key concept in understanding how prices change, as it represents the supply and demand dynamics in trading. In the video, the speaker explains that prices move as a function of the imbalance between buy and sell orders flowing into the exchange, and that understanding order flow is essential for traders to grasp the unpredictable nature of the market.

💡Speculation

Speculation in trading involves taking a position based on the belief that the price of an asset will move in a certain direction, with the aim of making a profit from this anticipated price movement. The video emphasizes that speculators are essentially gambling on price movements, despite often not viewing themselves in this light. It also highlights the difference between speculators and hedgers, with the latter using the market to manage risk associated with their commercial activities.

💡Hedging

Hedging is a risk management strategy used to offset potential losses in one area by taking an opposite position in a related asset. In the context of the video, the speaker discusses how commercial entities like farmers or manufacturers might use futures markets to lock in prices and protect against adverse price movements, thereby hedging their risk.

💡Technical Analysis

Technical analysis is a trading discipline employed to evaluate investments and identify trading opportunities by analyzing historical price activity, primarily through the use of charts and technical indicators. In the video, the speaker mentions technical analysis in the context of traders using chart patterns and moving averages to predict market movements, but also cautions that even with technical analysis, one cannot truly know the reasons behind market movements.

💡Emotional Trading

Emotional trading refers to making decisions in the financial markets based on emotions rather than rational analysis. The video discusses how fears of being wrong and the pain of losing can lead traders to hold onto losing trades, hoping the market will turn in their favor, which is an example of emotional trading.

💡Price Movement

Price movement in trading refers to the change in the price of a security or commodity over time. It is caused by the interaction of supply and demand in the market, represented by the imbalance between buy and sell orders. The video emphasizes that understanding price movement is fundamental to trading, as it is the primary way traders make profits.

💡Overconfidence

Overconfidence in trading is a cognitive bias where a trader believes they have more knowledge, control, or ability to predict market outcomes than they actually do. The video warns against overconfidence, stating that it can lead to dangerous trading behaviors, such as increasing trade size beyond what is prudent, based on a false sense of security.

💡Market Efficiency

Market efficiency is the idea that at any given time, the price of a security or commodity reflects all available information. The video challenges this concept by arguing that since the reasons behind individual trades are not disclosed, it is impossible for the market to fully reflect all information, making it inherently unpredictable.

Highlights

The foundation for understanding the unpredictability of market movements is emphasized, highlighting the lack of certainty in the industry.

The impossibility of knowing market outcomes is stressed, as there is no way to predict or reduce risk based on analysis alone.

Traders often mistakenly believe there is a logical connection between their analysis and market movements, which can lead to overconfidence.

The concept of 'Mind Freeze' is introduced, describing a state where traders overcommit due to a false sense of certainty about market outcomes.

The danger of assuming one can eliminate risk in trading is discussed, as it can lead to significant financial errors.

Price movement in markets is explained as a function of the imbalance between buy and sell orders.

The distinction between speculators and hedgers is clarified, with the latter using the market to lock in prices for commercial purposes.

The impact of large orders from commercial and institutional entities on market prices is highlighted.

The concept of 'positive synchronicity' is introduced, referring to beneficial coincidences in trading unrelated to one's analysis.

The importance of understanding order flow and its impact on price movement is emphasized for traders.

The process of price discovery and how it relates to the imbalance of buy and sell orders is detailed.

The historical context of trading before the advent of electronic exchanges and the challenges faced by traders is discussed.

The inefficiency and high costs of trading in the past, including the lack of real-time price information, are highlighted.

The personal journey of the speaker from a stable career to trading commodities, and the losses experienced, is shared.

The concept of order flow imbalance as the sole reason for market price movement is reiterated, dismissing other explanations as speculative.

The lack of transparency in the reasons behind individual trades and the implications for market analysis are discussed.

Transcripts

[Music]

thank you

okay uh okay what I want to get what I

want to kind of want to get into now is

uh uh is to start building a foundation

for understanding that uh

uh not only do we not know what's going

to happen next

there's no way to know

literally there's no way to know it

doesn't seem the industry isn't set up

that way the industry is not set up that

way to allow you to think that there's

no way to know but I'm going to prove to

you that there isn't there isn't a way

to know and the problem and the thing is

when you when you really grasp why you

can't know

then you won't think that there's some

way to

eliminate or reduce the risk because if

if I go into a trade if I for example if

my if I do my analysis I've gone I

stepped into this an analytical process

and I come to a conclusion my analysis

makes a prediction I put on a trade the

trade works is it not going to be

natural for me to think

that the market is moving in my favor

for the same reasons I put on the trade

for the for the basic screen based

Trader like we are okay just not that's

all professionals I'm not top one

managers or whatever with a typical

screen based Trader that is almost never

the case there's almost never a

relationship between the reason why you

put on the train and when the market

went in your favor

and even if there was a relationship or

correlation there isn't any way for you

to find out approvement

zero

that means that you don't never know if

your analysis is ever right

it'll be right in terms of you'll know

if it's right if it made the right

prediction you won't know if you had the

right reasons for making the predictions

and if you don't know that you have the

right reasons

then there's really nothing to be right

or wrong about

he's one of the primary fears of trading

as I'm afraid of being wrong

hello there's nothing to be wrong about

because you don't ever know if you're

ever right

let's see when you start understanding

the nature

way really works

you'll start shifting your perspective

and say you know what there's nothing to

be afraid of here

[Music]

I can't prove if the reason why

I'm on the trade

and see the problem is as soon as I

think that as soon as I think that I

know the reasons why the market moved in

my favor I will just naturally assume I

can duplicate the process it'll seem as

if I'm in this winning trade I know why

I put the trade on I'm assuming that the

Market's moving in my favor for that

same reason allowing me to think that I

knew what was going to happen and if I

knew what was going to happen then guess

what I've eliminated the risk

[Music]

that is the most dangerous thought you

can think as a traitor

is thinking you've eliminated the risk

eliminated the risk here's a condition

called Mind Freeze

does everybody know what I mean by Mind

Freeze

you think you know what's going to

happen you know you've got three or four

winning trades in a row you know and

it's like hey I get a I get the next

signal I've got this you know I got the

market by the balls okay I'm you know

I'm gonna load up on this one

so instead of being you know uh you know

100 share Trader you move to a thousand

shares or five thousand shares or ten

thousand shares or whatever so so as as

you make this money management error in

other words you are now stepping into

the realm of trading far more than what

your account size would say is prudent

all the market has to do is go against

you just a little bit just a little bit

and because we're so in other words our

level of commitment based on our trade

size

would be would be corresponding or

correlated to how convinced we are that

the Market's going to go in our favor

so that just that little bit against us

and we go into a State of Mind Freeze

in other words our expectations of

what's going to happen are so far away

from the reality of the situation that

our minds cannot process the experience

appropriately it shuts down

and as a result we sit there and watch

the money the market take our money away

as the market moves against our position

until like an innate sense of

self-preservation kicks in and for that

level is different for everybody that

level of self-preservation where are

where our minds check in that

self-preservation mode where kickstand

is going to be different for everybody

and we just like snap out of it and get

out of the train or like to say we're

losing one more dollar

losing one more dollar is one degree

more painful than admitting that we're

wrong

okay in other words in other words

everyone has life experiences memories

that fall into a general category of

what it means to be wrong like this is

like uh like uh these would be

negatively charged beliefs all the all

the ways that we could be wrong in our

lives that if we have experiences that

tap us into this pain we will experience

it

[Music]

all the beliefs and all the experiences

that we have that go into our memories

just in a general category of what it

means to lose this is all negatively

charged painful emotional energy

we're in the market when the market is

when the market takes away when it's

more in other words it is more painful

to lose one more dollar

than it is to admit that we're wrong is

when we'll get out of that trade

this is not a good way to trade

people again like I said a little

earlier we have to we have to trust

ourselves we cannot be most people never

recover the Traders I've worked with I

would say that for the most part most

people never recover from it they can if

they really want to work at it I'm not

saying they can't recover from it I'm

saying that they don't want to do the

work they don't want to process they

don't want to go step into the process

of what it requires to do the work to

recover from a Mind Freeze experience

that other things they don't keep on

trading but they're so damaged that you

know because because mostly when people

experience a Mind Freeze experience

understanding the underlying dynamics of

what caused it and what caused that pain

what do you think what do you think they

think their way out of it is what do you

think how do you think they're going to

compensate for it

more analysis and of course the more

analysis the more possibility of

analysis paralysis and the next thing

you know people spend years you know

learning how to reach the market they

become absolutely excellent analysts

they really do

they can't put on trade

because there's just too many variables

to consider and one of those variables

that I might not have might have

overlooked or the one that's gonna cause

me to be loose cause me to lose and so

therefore I can't I can't I can't get

past the fear but I'm sorry

so uh uh okay so so what we're going to

do is I want to do is basically give you

give you some this is sort of a a little

bit of a of evolution of how I came to

the point where I recognized that you

know we don't know what's going to

happen next and the risk always exists

and these are some of the things like

you know these experiences that that

initially happen in my life that I

really kind of just you know that I took

for granted that you know I don't you

know that you really don't need to know

not only that there's no way to know

when you understand order flow there's

no way to know

well maybe I should give you order flow

first we'll see let's just try this okay

how do prices move

prices move is function assembly of an

imbalance between the buy and sell

owners flowing into the pit or flowing

into the exchange it's that simple

when there's an imbalance between the

number of buy orders flowing into the

exchange and the number of sellovers

that flow into exchange to do the

exchange so for example if uh we have a

10 11 12

9.07 and the last price is nine what we

have is we have people we have traders

who are bidding at eight and offering a

ten now now you you have to you really

have to you have there's a couple of

things taken consideration one there is

a as speculators

and interesting how we we know that

we're speculating on price movement and

do not think of ourselves as gambling

and yet we will Define ourselves as

speculators but we're speculators who

don't gamble okay we're speculating but

we don't gave them okay anyway yeah what

we have is a situation where we need

price movement to make money

the price has to move for us to make

money it's that simple whereas for

example there are there are several

Market participants who don't want the

price to move

these are people who use the markets for

legitimate commercial purposes

these are your headdress

these are people who are naturally long

or naturally short whatever it is that

they do for a living so for example if

I'm a farmer

and I'm planting my corn in the spring

anticipating harvesting it in the fall

I am the moment to think about this the

moment that I decide the moment I decide

to plant my corn and how many acres I'm

going to plant and what my and what I

anticipate my my yield to be for those

Acres I am long corn I am along the corn

Market

all I did was decide to plant the corn I

become long the corn Market why because

what are the price fluctuation occurs

between the moment I decided and the

moment I harvest my crop is going to

determine how much money I get

so like if I get a million bushels or

100 000 bushels whatever the whatever

the price of corn is when I harvest it

is is what my is what my income is going

to be

so as a farmer I'm thinking okay uh my

cost of production is X number of

dollars per bushel the price of corn

let's say the price of corn is at seven

dollars a bushel right now in April I

don't know what it's going to be in

October or November I have a slightest

idea what it's going to be I'd like it

to be ten dollars a bushel or nine

dollars a bushel but I don't know

you know what and my cost of production

is uh let's say five dollars a bushel

would I be satisfied with a three dollar

bushel profit

yeah I think I would so what am I doing

what am I going to do I'm gonna go into

the Futures market and sell the

equivalent amount of Futures contracts

I'm selling my crop in advance

so if I'm anticipating let's say a

hundred thousand bushels and one Futures

Contract is 5 000 bushels what am I

going to do I'm gonna sell 20 contracts

if I think I'm going to get a million

bushels what am I going to do I'm going

to sell 200 contracts

and what I have done is I've locked in

my price at eight dollars a bushel if my

price was eight dollars a bushel and

locked it in at eight bucks my cost of

production is three or my cost of

production is five that means I've

locked in my profit at three dollars a

bushel no matter what the price is in

October

but in essence it doesn't matter what

the price is in October because

I've got my price already so the price

can change as much as it wants

but what a lot of people a lot of

speculators people who don't understand

the markets don't realize is that when

hedgers enter a locket notice what I'm

going to show you is that it's an

imbalance between the number of buy

orders and sellers that flow into the

pit to determine whether the price moves

up or down

and because because we might only be

trading you know five or ten Mini S PS

or even as big Traders we might get into

you know in terms of shares of stock

might get it's pretty significant amount

pretty significant amount of shares

people don't realize is that there are

commercial and institutional entities

that can that can put on orders massive

orders that can affect the price check

the imbalance between the buys and the

number of cells coming into the pit and

think that they're taking risks that

they can't nobody would do that because

it's too risky to do it wrong it's not

risky they're eliminating the risk now

putting in orders that can have a huge

impact on the price and they're

eliminating the risk because they're

already naturally long or short

you guys you sorted with me on this so

for example if I got a if I got a an

electric motor manufacturer and my sales

manager comes back with a with a huge

order that you know he sold these huge

generators that are you know you know

500 000 a piece or whatever and he went

over something country and sold 10 of

them or something the moment he signed

the contract the moment he got the

purchase order uh whatever the amount

the amount of pounds that it takes to

make these gen of copper that it takes

to make these orders they are short

copper unless they already have it in

their inventory chances are they don't

have it in their inventory because let's

say they're running at high capacity and

what they have in their inventory is

just enough to make the orders that they

already have and because they're not

even going to start making the motors

for six months from now or whatever it's

like they don't want to acquire the

actual physical inventory of all that

copper what are they going to do they're

going to go into the Futures market and

buy the equivalent number of proper

contracts that they need to lock in the

price of copper when they need it to use

it so that they can so that they can

guarantee their profit margin that might

be a huge order

now if I just happen to be training off

a moving average my technical indicator

off a moving average on you know in

Copper at the time that that order hits

the pit or hits the exchange you know if

I'm on if if uh um if I'm on the long

side if my moving average just shows me

you know about two or three minutes

before their order huge order hits the

exchange I'm going to find myself in a

winning trade

did my reason for putting on that trade

have anything to do with why the market

went up

nothing absolutely nothing

this is what I call like a positive

synchronicity a planned synchronicity

with the order flow let's get into the

order flow okay so for example what does

it take if the last fight so so here I

just wanted to make this distinction

between speculators and hedgers headers

when they put an order in the market

they don't want to make the price move

in other words if I'm this this this

generator this manufacturer of

generators and I'm and I need to lock in

the price of copper to lock in my profit

margin when I put my hundreds of capital

orders in the market I don't want to

force I don't want them to create such

an imbalance in in the in the order flow

to cause the price of copper to go up

because because I'm increasing my

average price what I want to do is do it

in a way that doesn't create price

movement so that I maintain you know I

maintain my average price I maintain a

good average price because what happens

is this is that what you have is that

for us as speculators to make money

there's only one there's only two ways

to make money that's it everyone's

trying to do the same thing everyone has

to buy low and sell high or sell high

and Buy Low there's no other way to do

it there's absolutely no other way to do

it

and as speculators screen-based typical

screen-based speculators we don't have

the uh let's say in many cases or in any

case really not many uh where we don't

have the financial or the Psychological

Resources to actually move the price

ourselves whereas you have to understand

that there are plenty of Traders out

there who do

there are a lot of hedge fund managers

and big traders who can under under a

lot of different circumstances actually

create price movement purposefully they

purposefully look for situations with

what I call like the herd Masters okay

where they're looking for they're

looking for patterns they're looking for

chart patterns where they know that a

lot of uh what they call week week Longs

you've heard these words week Longs and

weak shorts have gone into the market

and what they want to do is they want to

force the week Longs out so they can

they can they can buy they can buy they

can get into their position at a lower

price or they want to Performance the

week week shorts out so they can they

can sell at a higher price and they will

look at chart patterns where they know

that did the typical Speculator has gone

into the market they'll hit the hit the

market with huge orders Force the price

lower or higher cause the typical

Speculator to panic because uh the cause

of the panic which which creates further

movement in the direction against the

Speculator but what they need is

inventory I'll explain how this works

okay so for example Buy Low sell high

sell High Buy Low if the last price was

nine how does it get to ten

yeah in other words in other words look

at it this way if you look at it from

The Exchange perspective before the

electronic change electronic exchanges

exchanges

you you have executable orders and for

every buy order there has to be a

sellover or if you can't execute a trade

on electronic exchange it's the same way

there has to be somebody on the other

side of your trade whether it's a

computer program that was you know that

was designed by a major brokerage firm

like Goldman Sachs or whatever or an

actual individual it doesn't make any

difference there is somebody on the

other side of your trade

in every circumstance in every single

circumstance

which means that if if you you buy at

nine and the price goes to ten or eleven

whoever on the other side of your trade

is losing money the money that you're

gaining is the money that's coming

directly out of their account through

the clearing firm into your account

and when the market goes against us the

money that's flowing out of our account

going into the clearing firm and going

directly into the account is on the

other side as is on the other side of

the trade

so what this means is that if the last

price was nine how it gets to ten is

that there were no executable in other

words I have a certain number of buy

orders flowing into the pit at 10. there

has to be a there has to be an

executable sell order to match up with

every buy order

if you're not getting this let me know

there has to be an executable sell order

to match up with every buy order for the

price to go anywhere if there is an even

amount of buys falling into the exchange

at this at any particular moment with

with the number of cells as there are

buys the price will go nowhere

are you with me on this if there's an

even number of buys and an even number

of cells executable by the cells at this

price the price goes nowhere it doesn't

go up to 10 until there aren't enough

sell orders at nine

to fill the number of buy orders for the

people who want to buy for the number of

number of contracts or shares or

whatever available on the buy side and

then the electronic exchange what it'll

do is it'll move the price up to 10 to

find its sell orders

you'll find executable sell owners and

if there aren't enough executable sell

orders then that's the buy inventory

flowing into the pit then it'll move it

up to 11. when we're dealing with

physical exchanges people actually did

this in other words what you have are

actual traders in The Exchange in the

pits or whatever who would actually bid

the price up in other words if they

couldn't find any other traders in the

pit who who they could execute a trade

at nine at they've bid it up to 10 or

bid it up to 11 to find someone who

would someone who would sell because the

whole idea is sell High Buy Low Buy Low

sell high so the higher the price goes

the theory would be the more attractive

it would be for someone to come into the

pit and take the outside of my trade

are you guys with me on this yes so what

it all boils down to is that price

movement is simply an imbalance between

the number of buys and number of cells

flowing into the exchange that's it that

is it but it has major implications

for example when I uh you know I started

trading I said 1978 and I was working in

the commercial casualty of business uh

as a matter of fact of managing a

commercial accounts in the agency just

before I moved I mean this will pretty

much just before I moved to Chicago I

signed a three-year contract with this

Agency for 360 000 100 000 in the first

year in 120 in the second 100 and 140 in

the third so I mean that was kind of

financially I was I was you know I was

doing good especially in my early 30s

and uh uh but shortly thereafter and

something happened I was also I also

didn't like managing I didn't really

like being in the insurance business and

I certainly didn't I thought I'd like

management I did not like management at

all I was a horrible manager yeah yeah

anyway just it's not something just not

something my brain was into but in any

case um something happened to me where

where I felt compelled to move to

Chicago because I was I got I called

from like a shearsome broker in the

building we were in and uh I opened up a

Commodities account and started trading

gold and silver right off the bat

and uh lost you know my first couple of

steaks you know whatever I think I

started out with a ten thousand dollar

account lost that you know did another

five or six thousand dollars lost that

changed my broke I went to a different

brokerage here so I'm thinking you know

he would do a better job had no idea

this is in 1978 1979 what we understand

about the markets and what's available

to us or virtually today we're

non-existent back then we didn't even

have computers okay we didn't even have

personal computers the

I didn't even know what was going on was

to call your broker 10 times a day or

whatever and also we did have instant

execution you know what you had in the

situation where you want to execute a

trade you've got to call your broker you

got to dial the phone he has to answer

the phone if he's on the other line with

another customer you have to wait and

then once and once and you answer the

phone of course he had to uh you write

out a ticket the ticket had to be wired

down to the exchange once it got to the

exchange it got to the phone clerk at

the exchange the phone clerk rolled out

another ticket and gave it to a runner

the runner then review it to the

appropriate uh broker executing trades

for that particular firm in the pit and

then and then the broker would do based

on supposedly open outcry actually you

know say hey I've got I've got five to

buy or five to sell at this price and

then if someone else whatever another

maybe another brokerage firm or just a

local some guy trading for his own

account standing in the pit hit the

order hit the bid or the offer whatever

the price was and then the uh then the

floor broker would would uh you know

record the trade uh get it give it back

to the runner the runner would then go

back to the phone clerk the phone clerk

would go and call up uh or wire it back

to the back to the broker else and then

the broker had to get back to you with

the film

okay

and all this cost on average with the

big firms like Merrill Lynch and Hutton

and cheerson like 100 between 130 and

140 a round turn one contract one

contract trade between 130 140 bucks

now I can't tell you how many times I

I've been on I mean it doesn't but just

to give an example if I put in an order

you know to buy silver at uh you know

nine bucks an ounce or whatever okay

that you know I'm buying at nine dollars

an ounce and and the market comes down

and hits my price but I'm not guaranteed

a fill unless it goes one tick through

my price

so if it hits my price and goes back up

I don't even know if I'm in a trade my

broker doesn't even open a trade if the

floor broker hasn't gotten back to them

yet if the floor broker is busy it might

take 20 minutes half an hour if it's

what the exchange classified as a fast

Market he wasn't even obligated to get

back to me until maybe an hour I don't

remember what it was

so I could be in a winning trade and not

know it I could be wanting to take my

profits and not even know if I'm in a

winning trade if I go ahead and just

assume that I got billed

and you know and and so I could end up

being that short you know the Market's

going up and not even know it is you

know I mean I get into being that short

not know it

the old-timers with the Tony you know

what I'm talking about right

yeah

this was a rough way to trade because

not only that do you even check out we

didn't have we didn't have price

available we didn't have any prices

available we had to call our broker you

know 20 times a day where's it now

where's it now where's it now basically

what you did was trade out a daily bar

charts from The Wall Street Journal

now when you get the Wall Street Journal

morning and you do your go ahead Tony

yeah so commodity perspective right

right yes

yes

so yeah it was it's like you you know

there's things that you learned that you

know you sort of paid for granted about

about the way you developed as a result

of that but anyway this is this is

really a tough way to trade and so so

what happened what happened with me so

you do understand the concept that is

simply an imbalance in order flow right

everybody with me on this if there's

more bio or stuff so why did the market

why did the market go up today

more bio doesn't sell orders why did the

market go down today more sell orders

and buy orders now the reason why there

are more bioters and sell orders oh how

do we know why in other words every one

of us in our room in the room has a

reason everybody contributes to everyone

contributes to the order flow which

means that everyone contributes to the

up and the down takes

everyone every order contributes to the

up and the downticks

so why did the market tick up well

you're basically the reasons exist in

the minds of everyone who put on a trade

that contributed to the imbalance

between the buys and the sells in that

moment and since the exchange says one

when we put out a buyer or sell order in

since you are not required to attach

your reason for putting you are not

required to attach your reason for doing

it

foreign

s

and neither is anybody else

that we don't know why other people are

doing it

and what's interesting is that as

typical screen-based Traders we are

strictly dependent

and the Traders do have to a trade

since we are not we don't have the

financial or emotional resources to be

able to move the market ourselves I'll

talk more about that a little bit since

we do not have these resources then we

are strictly dependent on what other

Traders decide to do after we get into a

trade and the reality is we don't have

the slightest idea why what they're

going to do or why they're going to do

it in other words orders are going to

flow into the exchange after we get into

a position we don't know what the what

the volume between we don't know what

the imbalance is going to be in other

words there could be a huge order that

hits the market in our favor but there

happens to be enough a huge buy order we

just got in there's a huge buy order

that hits the market a few minutes after

we get into a trade but there's enough

cellular inventory in that moment in

that moment to absorb all that all that

buy volume price goes nowhere

five minutes later that buy order could

create a panic

and the market could shoot right up like

this

why did it happen

because for whatever reason whoever put

the mortar in however many Traders did

it and for whatever reason they do it

we'll never know unless we have a way

unless the exchange the reality is the

exchange if the exchange gave us uh uh

uh gave us the uh the names and you know

the accounts and the names of all the

people who contributed to the order flow

in any given moment so that we could go

ask these people why they put their

orders in the market then we would know

why the price went up or why the price

went down

then we would know

the real reasons

everything else that you hear or read is

basically that people are making up

and I'm not kidding

and I'm really serious about that it's

people's stuff that people are making up

because they don't know

people don't get on TV or write articles

and do it in a way where they don't

sound like they know what they're doing

or not gonna or not gonna do it in a way

where they don't sound intelligent or

that that they know what they're talking

about

so even if they don't come right out and

say directly this is why or that's why

they're implying that they know

which gives us the idea that somehow

another it can be known

and there are there are exceptions

because if you do know large fund

managers and and Traders who can move

the market and put in and they do put in

huge orders and you happen to know that

these huge orders hit the exchange and

there wasn't enough inventory on the

other side to uh to absorb those orders

and that's the reason why the market

went up if you know that correctly then

you know why it happened and certainly

the guys that or the people that put

those orders in they know why it

happened because they're the ones who

did it

so the typical spring-based Trader this

information is off all intents and

purposes unknowable

so the implications are that regardless

of how sophisticated your analysis is

regardless of how good you think it is

it isn't telling you the reasons why

even if for example let's say we're

trading a support resistance pattern

okay or we're trading you know uh we're

training a retracement okay so what we

have here and I put and I put a buy

order in right here

and the market shoots up

is it possible that the reason why other

Traders came into the market and created

an imbalance in the order flow is

because they happen to put orders right

in there too yeah

it's very possible

it may even be likely is there any way

that I know that

no I don't know do I

it's unknowable to me

and if you think that what I'm saying

isn't correct all you've got to do is

challenge somebody every time you hear

somebody say the life price went up

because of this other than an imbalance

in buy and sell orders every time you

hear somebody give you a reason say poop

it

prove how you know that where's the

information that you have access to that

tells you that that's the actual reason

why

tweet the people on CNBC don't approve

it

I guarantee you those