Conditions change fast
Price moves where it can conduct the most business. There are no guarantees where that area may be. It is dynamic and always changing based on market sentiment and trader positions. It used to be a slow change. Now information travels fast and HFTs can rapidly manage positions. With high speed internet connections, retail can engage the market now, more than ever. No more frantic calls to brokers to open and close trades at the prices we want. Non-professional traders can engage the market at any time, at any price, with the click of a button. This has dramatically increased the activity in markets. The net effect on financial markets is positive. The number of transactions have gone up while the fees per transaction have gone down.
Why do we execute trades
We execute trades because we want to make money. We want to buy a stock and it goes up. Then we sell it for a gain. We want to short a stock and it goes down. Then we buy it back for a gain. The profits are the difference of the price we bought and the price we sold. The old adage of “Buy Low, Sell High”. Traders often think together. If one trader thinks it's a buying opportunity, then there are likely many, many more who think the same. This means they will enter and buy in the same area. They will often set stops in the same area as well. These areas provide liquidity. Higher liquidity provides increased activity.
Buyers become Sellers, Sellers become Buyers
Trading is 2-sided, 2 transactions for every trade. A round trip trade consists of one transaction to open trade and the other transaction that closes it. We always need an offsetting transaction to close positions. A buyer needs a seller and a seller needs a buyer. Every transaction will have buyer and a seller. It won’t always be an opening transaction matched with a closing transaction. It can be a new long transacting with a new short. There are many variations to who is involved in the trade. Generally it comes down to wants vs needs. Who wants to open trades vs who needs to close trades. We buy to open long trades. We need to sell to close longs. We sell to open short trades. We need to buy to close shorts. Opening trades are wants. Closing trades are needs.
Wants vs Needs
We want to open trades, but it doesn't mean we will. We want to open positions, but we don’t want to close them at a loss. As a result, we will often hold losing trades longer than we hold winning trades. We will take profits fast. We won’t close losing trades unless we are forced to. They say “let winners run” but it’s easier said than done. Trader emotions play a large part in where we open trades. Some traders will enter early, some will enter late, based on varying degrees of confirmation. Traders will often enter at different areas. However, technical analysis will have traders setting stops in the same areas. As everyone wanted to buy the same price, everyone will want to sell the same price. Margin requirements and stop loss hits are the most common reasons why a trade will be forcefully closed. These stop losses are often located in the same price areas. As a result, large portions of high volume areas are because of traders closing positions rather than opening them.
Why move up and not down
We want to trade when price is in an area we want and when price trades near our stop loss. We are forced to trade if price hits our stop loss or we fail to meet margin requirements. Price moves to force one side out. Nobody willingly trades, unless we are forced to. We don’t willingly buy the high or sell the low unless we are forced to. We are forced to sell longs at the low. Price moves down because longs are selling at a loss. We are forced to buy shorts at the high. Price moves up because shorts are buying at a loss. Market makers will push to areas that increase activity and generate fees. Price will move up if that’s where it can conduct the most business. The most business at high prices are shorts buying to close shorts at a loss. Some of it will be longs that panic buy at high prices.
Margin
Trading on margin or in futures markets requires a minimum account balance. If the account balance falls below minimum, a trader will be not be allowed to open new positions. They will only be allowed to close existing positions, often at the discretion of the broker. Only institutions are forced to open and close trades where as retail is only forced to close trades. Institutions are forced to open and close trades to balance portfolios. Large institutions will have billions of dollars in assets to manage and it can be risky for them if they don’t open new positions. Retail traders are forced to close trades when account balances are low.
Markets force participation by forcing traders to close positions. This removes liquidity and when it's dried up, price will have to leave this area. It can continue on trend or reverse. There aren’t any guarantees which way it will move next. It depends on market sentiment and where the most stops are located. Price will always move to areas that encourage the most trading. It will always move to the areas that have the most stops. For every winner, there are many more losers.