Collective Market Sentiment
In this article we are going to explore how the dual auction changes the supply and demand which is due to Collective Market Sentiment.
Note that price within these swings is not moving in a straight line – it fluctuates constantly. The
market is comprised of buyers and sellers all competing through different analysis styles, on
different timeframes, with different reasons for wanting to enter or exit.
We don’t know their individual reasons. It’s the collective sentiment that matters. And price moves with whichever crowd most desperately needs to act.
It comes down to sentiment of the market participants.
As individual traders become increasingly bullish, they add to the bullish sentiment of the collective group of buyers. If enough of them do this, the overall sentiment of the whole market becomes bullish, demand overcomes supply, and price rises.
As individual traders become increasingly bearish, they add to the bearish sentiment of the collective group of sellers. If enough of them do this, the overall sentiment of the whole market becomes bearish, supply overcomes demand, and price falls.
- Price moves with changes in the forces of supply and demand.
- Supply and demand change as the sentiment of the crowd changes.
- And the sentiment of the crowd changes with changes in the bullish or bearish sentiment of the market participants.
So, here are the key points below:
- Just as we discovered that price is two individuals making buy and sell decision, we have now established that price moves also as a result of the net effect of all market participants making individual trade decisions.
- Some people use fundamentals to make trading or investing decisions. Others use Technicals. Others may even use lunar cycles. It doesn’t matter. At the core level, it’s all just people making decisions.
- Price doesn’t move up or down because of fundamentals or Technicals. Individuals form an opinion about market direction. Some of them will act on their opinion – they’ll make a decision to buy or sell.
- The sum of all the buy or sell decisions forms the collective sentiment of the crowd, which may be bullish or bearish. And this collective sentiment of all market participants, leads to a net bullish or bearish order flow, which moves price.
- The most “fundamentally” bullish stock will still fall if the sentiment of the crowd is bearish, and they don’t want to own it.
- The most technically perfect breaking of a neckline of a head and shoulder pattern (which is supposedly bearish) will fail to reach its projected target, if the sentiment of the crowd at this point changes to bullish, and they all want to buy this stock.
- It’s not about the fundamentals or Technicals. It’s about people… and the decisions they make about market direction.
- Price changes as supply and demand change… supply and demand change based on the beliefs of market participants, or more correctly on the decisions of market participants to act on their beliefs.
Key takeaways from this Volume 1 : INTRODUCTION
- Price movement results from a supply/demand imbalance.
- Changes in supply and demand occur as sentiment changes within the market participants.
- Price therefore depends on the bullish or bearish sentiment of market participants.
- The net sum of all individual trader decisions and actions, form the Net Order Flow.
- When Net Order Flow is bullish (demand greater than supply), price will rise.
- Price continues to rise until we run out of buyers at higher prices, or until the higher prices attract sellers in sufficient quantity to overcome demand.
- When Net Order Flow is bearish (supply greater than demand), price will fall.
- Price continues to fall until we run out of sellers at lower prices, or until the lower prices attract buyers in sufficient quantity to overcome supply.
Or more simply:
- Price moves as a collective result of all traders’ bullish or bearish sentiment and their decisions to act in the market (buy or sell).
See you in next Volume 2 : PRICE ACTION & S/R articles.
