We all must have heard about the 95:5 ratio in trading. In the trading industry, there is a trend that, 95% of the traders fail in the industry while only 5% find success in this industry. The rich (5%) are getting richer, while the rest do not see any growth, financially. Therefore, it is essential to understand the market in the right logic and sense to achieve fruitful results.
The concept one must completely understand in trading is the concept of Buyers and Sellers. The whole idea of trading is based on buyers and sellers. It is also important to understand that trading is a business just like any other real-life business. The better a trader can follow this business; the higher are the trading results. So, let’s get right into the concept of buyers and sellers.
Buyers and Sellers
Well, what is this concept of buyers and sellers? As simple as this topic sounds, it is quite complicated. If asked to an average trader, they would most probably come with answers like buyers indicate an uptrend or a bullish market, while sellers indicate down trending or a bearish market. All they know is the terminology. However, the vocabulary is least important when it comes to trading. The most critical aspect is the logic behind the buyers and sellers.
So, first things first, who is moving the markets? It’s the larger players with an enormous amount of capital, who move the market. They include investment banks, Hedge funds, mutual fund companies, etc. These are the ones with tons of money who are doing the business. Moving forward, ever wondered what do the charts (candlesticks) represent? They represent the transactions that are performed by the larger players. Charts do not represent patterns that give you buy or sell signal, rather, are transaction receipts of the larger players. Analyzing what the larger players have done in the past, we try to understand what could they do in the future. Hence, they are the buyers and sellers.
Understanding Buyers and Sellers
In the figure, we see that the market is in an uptrend. The market goes up, holds at support and resistance, and keeps making higher highs. And, what do we usually do in an uptrend? When the price comes to our support and resistance line, we hit the buys. This is the normal logic. And, this is completely technical. Let us understand it in a different fashion.
Let us say the given chart is EUR/USD and the larger players want to buy it. They think that the price is quite less; hence, they start to buy it. Once they start to buy, the market begins to go up. At some point, for whatsoever reasons, they stop buying. Perhaps, they find the price to be high. Since there is no large player interested in buying at that price, the market starts to drop down and starts giving discounts to the larger players. Once the larger players get the required discount, they resume buying, which makes the market go up higher. The same process continues again and again until they fully complete buying. So, this is the real deal happening in the market. We see a green candle for a reason. It is not some pattern, but, is a transaction made by a large player. Also, the concept remains the same if the big player is a seller as well. Hence, understanding the market in this manner gives you an edge over traders.
Putting the concept into action
Before getting into the charts, let us understand one more concept. One of the best ways to analyze a chart is by connecting it with a real-life example. For example, instead of saying the buyer is buying EUR/USD, we can assume that the buyer is buying a real-life object, for example, a phone. Let us say the buyer wants to buy about 100,000 phones. As he has such a large quantity, he would buy it only at lesser prices. If the prices are high, he won’t buy it. So, the buyer starts to buy when the prices are low and stops buying when the price becomes very expensive. Now, the public sees the demand on the phones and hence, they start to buy it at a very expensive hoping that it will go higher. While the big buyer has already finished purchasing his 100,000 phones. Now, there will not be any big buyer to buy the phone as it is very expensive and the prices will not go up as well. The only ones buying right now is the public, and they fall into this trap.
Let us do an example by flipping it up. We understood how the market works when the big player is a buyer. Now, in the following example, we’ll understand working when the big player is a seller.
Let us assume the big seller has 500,000 phones to sell. The price of the phone is $1000 initially. The seller sells some of his phones. The price drops lower and comes to $800. The seller sells his phones at a price again. The price drops even lower and comes to $500. This time the seller sells the rest of his phones, and he is done with his business. The public sees that the price of the phone is falling drastically, so they start to sell their phones at these at very low prices. As they are getting very less amount for their phones, they are now in a loss.
As time goes by, the prices start to go up. The public is now in shock. And, as the price moves up drastically, the public starts to buy, assuming that the price will go higher. While some other big seller sees this discount coming, he steps into selling his phones. This results in the price to fall again. And, the public who were buyers is wrong-footed yet again. Hence, maintaining a ratio of 95:5.