Interpreting price movements

As indicated earlier, in this book we are interested in short term trading. At that scale, a lot of predictable human behavior is at play. Think of it as a game with two teams: The Longers and the Shorters.

They want different things:

Longers, people that buy and want the stock to go up.

Shorters, people that sells the stock and want the stock to go down.

They fight a never ending war with many battles.

At times, you see the longers wining by seeing the price increase, but energy may run low, and the shorters may attack, causing a reversal in price.

By affecting the demand and supply of shares, the balance of forces between the longers and the shorters determines the price of the stock.

Figure 1.5: Shorters, longers and stock price

As a day trading plays out, the transactions by longers and shorters will make the price to go up or down, until a point in which one side sees no gain, and the other wins, causing a breakthrough in the stock price.

When you read into stock charts, you need to think on the motivation behind the people driving the patterns.

At times, you can see patterns with no return, or very winnable patterns, you can win in.