As a technical analyst/trader, my job is to forecast a direction in price based on market conditions, historical data, a little statistics and trade balance. Aside from being properly positioned to benefit from this directional move in price, the most fascinating thing about technical analysis and trading is that you get to see the changes before they occur on the news and the effects in the real world.
This fascination keeps us ahead of potential corrections and reversals because of one simple concept; ORDER FLOW.
What is Order Flow?
One of the beautiful things about the financial markets is that behind all the chaotic charts and volatility, lies some of the most reliable sources of information than any public information website can give you. How does order flow come into play?
It allows you to see where institutional orders are taking place. Tracking order flow is a way of knowing exactly where the liquidity is in the markets and what prices big money institutions are looking to get in and out at.
If that’s a complicated explanation let me break it down a little more for you;
Big institutional capital has to trade in high volume, because the higher the volume, the more orders can be absorbed. However they do not have the luxury of trading like retail traders for more than a few reasons but here’s a few;
- They lose money from spreads and commissions just like you and me
- They can offset trade balance just by pumping capital into a particular position and alert the markets on their idea
- The losses they take on spreads and commission are huge
With all this in mind, how do they trade the markets you ask? Well, they have to accumulate positions at the best prices possible in order to absorb opposing volumes. When this absorption happens the orders get filled, then there’s a big move in price.
These moves in price leave digital footprints on the charts, these “footprints” are considered order flow. Because these are areas where the bigger capital look accumulate unfilled orders.
Technical analysts are able to observe when the price of an asset changed hands from buyers and sellers and I can tell you right now that Bitcoin sentiment switched hands a long time ago when it hit 60K. Since late March to Mid April. I was one of this crazy people telling his friends on social media to expect a correction before the SNL episode.
One thing you must know…
The markets are pro-asset, which means the majority of interest (of any asset)is primarily a buying one. The problem however is, when the price of an asset keeps going up that is a sign of high demand, the follow up challenge becomes this; if everyone is buying who’s selling?
The news is not so new
By the time something starts trending on the news it’s often too late to benefit from it because let’s face it; human greed tries to keep it a secret for as long as possible. However if you take the wealth of nation’s concept of the invisible man; then you’ll understand the power of incentives.
Therefore you have to ask yourself when the news is indirectly encouraging you to invest in something;
Who stands to benefit from this?
Your Answer; the entities most invested in the asset you’re trying to purchase.
For every buyer in the market is a seller, therefore when an asset is trading at a high price, the biggest benefactors are the earliest investors. Early investors have to pocket profits as well from time to time, taking advantage of the dips and spikes to accumulate their positions in the best possible prices, as mentioned earlier.
So with all that said what happened to crypto this week?
It’s simple, liquidation. You have to understand this is an asset that’s been rising for a year and showed no signs of slowing down.
This is because there was a lot of panic during the pandemic and cryptocurrency suddenly became a safe haven for the masses. In that time a lot of big money was able to accumulate positions in the $15–17k range. At that time BTC wasn’t the talk of the town as it is today or for the past 3 months.
Between billionaire interviews, IPOs, ICOs, songs and news outlets and mass enthusiasm, there was a force of influence for people to hop on this trend when it was pretty late. Which circles back to my question; “if everyone is buying who’s selling?”…
“Be greedy when others are fearful and fearful when others are greedy”
Wise words from the Oracle of Omaha that lead to answers for my favorite rhetorical question.
Golden Ratio Club
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