Price Discovery Cycle

By Lawrence

Plan do check act circlePart of Art of Chart Reading

Price discovery is the process of buyers and sellers interacting at the marketplace to determine the price of an asset. If this sounds like ancient Greek or Latin to you, don’t worry it is absolutely normal because it is obscure. My preferred definition for price discovery is that it is a struggle among the market participants to outsmart each other in order to squeeze money out of each other.

It is necessary to use this alternative definition to highlight the most important theme of the process – a struggle to make money. These struggles are not structured. These struggles are not orderly. They are chaotic processes.

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Comments
  • mel December 9, 2013 at 10:58 pm

    LC great article ! but it came late (better late than never) I experienced the cycle inversion many times but just not too sure how to react to it, in particular the low volume breakout (criteria) without strong reaction. LC can you please elaborate more on 1-2-3 breaking back into the previous range? Thanks !

    • Lawrence Chan December 10, 2013 at 10:12 am

      1-2-3 buy / sell setup in the opposite direction

      • mel December 10, 2013 at 6:50 pm

        Ok thanks !

  • mel December 9, 2013 at 11:03 pm

    N225 on 9 dec gapped up altering H1 and D1 this I suppose will constitute cycle inversion

    • Lawrence Chan December 10, 2013 at 10:15 am

      It is not the gap that matters.

      What trend is hourly in? what about daily?

      Which one is your main timeframe?

      Look at 15-min too and let me know.

      • mel December 10, 2013 at 7:07 pm

        D1 is uptrend (just did a retracement) H1 from Dec4-6 made swing lows (also lower lows) gapped up and now in ranging mode (consolidation).

        M15 has recently brokeout its downtrend line its also in ranging mode

        I am looking at M5 as main (also H1) hence H1 and D1 as Dominants

  • mel December 10, 2013 at 7:27 pm

    Is there a prescribed number of bars to view in each timeframe for determining the trend?

    • Lawrence Chan December 11, 2013 at 9:11 am

      you need at least 2 bars to each side of a bar to confirm a swing high / low.

      more is better at 3 to 5 bars depending on how fast the market is.

      • mel December 11, 2013 at 9:21 am

        Roger that!

  • mel December 11, 2013 at 3:45 am

    mel

    D1 is uptrend (just did a retracement) H1 from Dec4-6 made swing lows (also lower lows) gapped up and now in ranging mode (consolidation).

    M15 has recently brokeout its downtrend line its also in ranging mode

    I am looking at M5 as main (also H1) hence H1 and D1 as Dominants

    Trying to refine by using M15 as main and M5 as trigger if possible.

    • Lawrence Chan December 11, 2013 at 9:15 am

      time to disclose the answer:

      back then,

      – daily up trend just put in place
      – 4 hour 1 single up swing testing resistance on daily
      – thus hourly ready for a pullback (the reaction move)

      it just tagged the daily and 4 hour support last night.

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