Accepting the Obvious - Accepting the Obvious Brett N...

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Accepting the Obvious Brett N. Steenbarger, Ph.D. This past week, I received an email with an excellent question that has bedeviled me in my own work with traders: Why do traders fight breakout, trending moves when they are so obvious? Time and again, I will see traders refuse to enter a market that is breaking lower because “I don’t want to sell the lows”. Worse still, traders will hold onto positions against the trend because “It’s going to come back” or “The market is being manipulated.” Let’s get down to basics: Volume tells you where traders and investors are accepting value at a given point in time. If the market has been trading within a narrow range and then breaks above that range on high volume, it means that the market is accepting value at higher levels. If you were attending an auction for an artwork that you own and large numbers of bidders kept offering higher prices for the painting, you would conclude that the painting has not yet found its ultimate selling value. You surely wouldn’t sell your art piece as soon as the first group of bidders starts to aggressively bid! The market works on similar auction-based principles (see Mind Over Markets , the excellent book by Jim Dalton and coauthors for a discussion of auction theory in trading and the use of the Market Profile). Each day, we see an auction for such artworks as the S&P, NASDAQ, bonds, etc. The dynamic interplay between buyers and sellers determines value for those markets. It is when we see volume expanding on a directional price move that we realize that the market is out of balance. It will continue to move in its direction until it can attract sufficient buying or selling interest to create a new balance. Not infrequently, I will ask a trader who missed a breakout move what happened to volume during
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Accepting the Obvious - Accepting the Obvious Brett N...

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