"Tricks of the Trade" Seminar
"The Market Test. Part I"

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This next section of the talk discusses a way of analysing market action in order to determine how strong or weak the market is. There is nothing particularly new about the concept and I freely admit that the ideas are not originally my own. Nevertheless putting it into practice can lead to successful and profitable futures trading.

The Market Participants

In the market there are basically four categories of participant:

  • Longs
  • Shorts
  • Uncommitted Longs
  • Uncommitted Shorts
    What happens to the market price basically depends on the net balance between these four parties. If, for example, the uncommitted longs are very keen to get long, the uncommitted shorts are not very keen on going short, the longs are quite happy as they are and the shorts are not very happy to remain short then the net effect will be a surfeit of buying and the price will rise.

    • Next consider what happens after the price has gone done to a certain level and then turned around and gone up, making a pivot low. Then the market starts to move back done towards this pivot low:

    The result of this is that our four categories of market participants will now modify their behavior in the light of what has happened:

  • The Longs Although the longs probably are not very happy at the moment since the market has been falling, they will probably feel that at least the market has found support and since buyers were sufficiently keen to buy at the low point last time they may well do so again. So the longs will probably hold on, waiting to see what happens when the price moves back down to the pivot low. If that low fails to hold then they may well liquidate.

  • The Shorts Although the shorts are probably quite happy since the market is moving in their favour, they may be a bit worried since the market found support at the pivot low. The more cautious of the shorts may decide to take profits at the pivot low since that was were the market held up last time. Otherwise, the shorts will be watching the pivot low point closely and if it holds up again they may well decide to liquidate.

  • The Uncommitted Longs These participants are looking for a place to go long. Since the market turned around at the pivot low last time that seems as good a price as any for it to turn around again this time so there may well be buying at the pivot low price. At the very least the uncommitted longs will be watching the pivot low point closely, ready to jump on if neccessary.

  • The Uncommitted Shorts The uncommitted shorts are a bit wary of going short since the market turned around at the pivot low level last time. They will probably wait to see if the low is going to hold again and only commit themselves to going short if it should fail to hold.

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