It is all too easy to forget the underlying mechanics of price movement. Price chops around in a small range (remember when it did that) when very few buyers/sellers (PEOPLE) have any real conviction (FEELING) or need (MOTIVATED = feeling) to buy or sell.

On the other hand, price moves directionally when many buyers or sellers (PEOPLE AGAIN) have a strong belief (FEELING) or desire (FEELING) or need (MOTIVATED? = feeling) that the price will keep going and either

1. they are afraid (feeling) they will miss out

2. they are afraid (feeling) they will lose money.

Another reason that prices move directionally (and fast) is that the majority of people either are or want to be (out of desire or need) to be on the same side of the trade. By definition, this leaves few people to be on the other side and a relative lack of liquidity.

This may all seem elementary but it is very germane to what we have been seeing lately – from either the global macro credit crisis viewpoint or the 1 minute average true range viewpoint. How can that be you say?

Well for starters, one of the pillars of the story of where we are in the big picture is the lack of liquidity in the complex structured debt contracts dreamdt up by trading desks around the world. Once Bear Stearns admitted to trouble in those privately traded contracts, all the other players went “no bid” and the cards started tumbling – because there was no one else to take the other side of the trade. This link speaks tangentially to the resolution of this problem – i.e. hedge funds declining to trade these “OTC” (read potentially very illiquid) contracts.

The other side of the trade

On the other side of the spectrum, the ranges we are seeing both intra-day and even in very short time-frames are the result of more market-players (people) wanting or needing (which makes them want) to be on the same side of the trade.

The point of all of this? Traders make money when they correctly ascertain where other players in their time-frame are and where they are likely to WANT to be in the near future (again according to their time-frame).

In other words, it isn’t just lines or bars or even a back-tested set of probabilities. It is the probability of what other people (even if they use computers to execute) are going to want or need to do in your time-frame.

Is it possible to think of the markets this way? It is a good idea?