Why Study Price Action?

Why study price action?To understand this problem, we still have to go back to the chain behind the price trend.

Let’s think about the stock market as an example.

Many people in the stock market will do fundamental research, study the industry, and study the company's operating conditions. Through fundamental research, they can find companies with future growth potential and intrinsic value, and then buy and hold them. To put it simply, you need to find a good industry, a good company, a good price, and hold it for a long time. This is a better trading method for people who do stock trading.

In the long run, the growth of a company's market value is relatively deterministically related to its own fundamentals, just like the relationship between productivity and economic growth. In the long run, improvements in productivity will definitely bring about economic growth. Behind the constantly fluctuating prices, there is such a relatively certain correlation. Find good industries, good companies, good prices, and hold them for the long term. This is a method suitable for long-term trading. As mentioned in the previous video about trading and investment, the purpose of making money is also divided into long-term trading and short-term and medium-term trading. The long-term trading mentioned above earns incremental money for the company.

But if we look at it in the short to medium term, will the price of a high-quality company only rise rather than fall? Whether a company's long-term value is realized in days, weeks or months. Obviously not, so why do stock prices fluctuate all the time? Price fluctuations are due to orders, and behind these orders are funds for gaming to earn short-term price differences. Therefore, before talking about trading methods, you must first consider clearly what kind of money you want to make.

If it is a long-term transaction, then you should study the fundamentals, because in the long term, companies that can gain competitive advantages in growing industries will definitely increase their stock value. It just takes time and there will be fluctuations in the process.

But if what you are doing is short- to medium-term trading, there are several issues that you need to consider clearly.

First, regarding fundamental analysis

The development of a company must go through a certain process. Whether it is the implementation of policies or the execution of strategic decisions, it is a long process until the final results are achieved.

These values ​​will not appear in the short term, and short-term price increases and decreases are actually only caused by the fluctuations caused by speculative funds attracted by this information.

Therefore, short-term fluctuations caused by hot news and favorable policies are essentially a game of funds. Therefore, in the short and medium term, the value of fundamentals cannot be reflected in a short period of time, and there is no deterministic relationship between fundamental information and short-term price trends.

Second, technical analysis

The recent videos have explained many familiar technical indicators to everyone, from the principle of indicators to the final application. After we have a clear study of technical indicators, we can understand that technical indicators have a deterministic relationship with price trends, because indicators have fixed formulas. What kind of price trend can be obtained after calculating the fixed formula, what kind of technical indicator form can be obtained.

But the basis for including the indicator is the first price. At the same time, from the perspective of obtaining market information, using technical indicators to obtain market information will lag behind on the one hand, and a lot of information will be lost on the other. Fundamental information has no deterministic relationship with price trends in the short and medium term, while technical indicators have a deterministic relationship with price trends, but information will be lost later. Therefore, many traders gradually put their trading energy into the study of price behavior. The market is made up of funds, and the only way for funds to participate in the market is through orders. The market is filled with all kinds of information all the time, and this information is constantly changing.

There are countless participants in the market. On the one hand, everyone has different ways of obtaining information and the information they pay attention to, so there is a natural information gap in the market.

On the other hand, even if the same information is exposed to different people, they will be artificially filtered and processed based on their own cognition. In the end, even if they see the same information, they will output different results.

The result is that the market is filled with different opinions all the time. So in the whole chain. Before the action of funds generating orders, we have no way to find a deterministic correlation as to what information had such an impact that caused funds to generate orders. But one thing is certain, that is, the funds in the market all have a common purpose of making money.

When a long order enters the market, we don't know what caused it to take a long order action, but one thing is certain. With the purpose of making money, and then there is a long order action, it must be because this part of the funds has the expectation that the price will rise next. Because it is expected that the price will rise next, and it is possible to make money by going long now, you will place a long order. So what’s behind the order? It is the expectation of funds. Behind long orders is the expectation that prices will rise, and behind short orders is the expectation that prices will fall. I believe everyone must have heard of this sentence. When we judge a person's will, we should not listen to what a person says, but see what he does. We need to look at a person's true wishes through his behavior. Orders are the behavior of funds, and orders are the truest expression of funds' expectations for price rises and falls. Then what? When an order enters the market, it will be executed according to fixed rules. The execution of the order will cause the price to rise or fall. By understanding this process, you can see that there are certain rules in the process from the order to the price. Therefore, there is a deterministic relationship between price and orders. The funds are all for the purpose of making money, and they trade their own expectations for price rises and falls through orders. Orders are a true expression of capital expectations, and there is a deterministic relationship between capital expectations and order actions.

So when we understand how orders affect price fluctuations, we can understand the movements of funds in the market and the true expectations of funds in the changes in price rise and fall. This is why we study price behavior in short- and medium-term transactions.

Finally, to briefly summarize, behind the price trend is a chain from fundamental information to technical indicators.

Where in the chain you obtain information and make decisions defines your trading style. Price behavior is an analysis method that directly obtains market information through prices.

For short- and medium-term transactions, fundamentals affect the long-term and have no deterministic relationship with short- and medium-term prices. Technical aspects have a deterministic relationship with price trends, but information will be lost later, making it difficult to gain an advantage in short- and medium-term games. And we understand that there are fixed rules and a deterministic relationship between orders and prices, and orders are the true expression of price expectations of funds with the purpose of making money.

Therefore, we obtain information directly through prices to observe the movements of funds in the market and the true expectations of funds. This type of analysis is also price behavior analysis.