What professional traders track that never appears on retail charts
We’ve always tried to give a balanced view when things are not set on stone since at the end of the day, everything is an opinion rather than a fact and if the opinion serves its purpose (educated decisions for the opinionated), then why not?
A discussion between a broker dealer and a client this morning regarding technical vs fundamental analysis piqued our interest and these discussions usually miss a critical part. That is the underlying reasons that drive the prices we see on charts, rather than the analysis itself. That’s because those reasons are liquid, yet the analysis process is always the same.
Most price charts available to the retail investor, show price, time, and volume. Indicators are layered on top or oscillate below. And although technical view is extremely important, there are structural elements of how markets function that influence price behaviour long before it becomes visible on a chart.
Price is the final output, not the input
A popular grounding approach to trading, is that no one can predict consistently and with 100% accuracy what the markets will do. Multiple reasons to outline here, but we’ll only mention the human element which in our view, is a catalyst when it comes to unpredictability. People operate via emotions and tend to act on those, even if the decision is what should be.
Evidently, a chart shows the result of trading, not the process. Before any candle forms, limit orders are placed or removed, liquidity gets deep or shallow, or limitations force certain participants to act (some when they should, some when they shouldn’t, more on this below).
By the time price behaviour actually updates and materializes on charts, these processes have already occurred.
So professional focus tends to search for the conditions that must exist for price to move the way it does.
Inventory and positioning (not sentiment)
Retail story telling often relies on “bullish” or “bearish” sentiments. Professionals, focus instead on who is already positioned.
Positioning refers to net exposure held by participants, a concentration of similar bets. When it gets concentrated, it gets crowded and we’ve heard a great statement by a chief dealer on this who said “moves often happen on position adjustments, not when they were initiated in the first place”.
Who is forced to trade (and who isn’t)
As mentioned above, limitations force certain participants to act. These limitations depending on the asset class (if asset-specific), can be margin requirements, redemptions, rebalancing schedules, compliance constraints, expiring contracts and so on.
What this means is that price is again irrelevant. Action will take place nonetheless, and it would be very challenging for a chart to predict and show these in real time, for retail traders to base their decisions on. Other than taking actions regardless of price, these participants create pressure without expressing directional opinion.
Therefore again, charts will show the result of the forced act, not the educated decision to position.
Liquidity conditions, maybe not volume
Another important point professionals look for is liquidity conditions. The order book depth is a good starting point, with the size available at each price level. Crowded or thin liquidity can speak wonders, much more than volume could potentially do. Any volatility spikes without reason (new information or other), fast moves on small flows, or sudden price gaps are a good indicator of thin liquidity.
Time based constraints
Another important point candles don’t explain, is time constraints related to time-in-force orders (TIF), expiration dates, settlement cycles, roll periods, reporting deadlines, funding resets etc.
The price shown on a chart (e.g., a 1-minute candlestick) is an aggregation of all trades that occurred during that minute. Individual trade prices, which might have varied due to latency or TIF constraints, are averaged or represented by the high/low/open/close of that candle, masking the micro-level price movements that occur in milliseconds.
When thinking TIF orders, you think day order, good-til-cancelled (GTC), fill-or-kill (FOK), immediate-or-cancel (IOC): Any portion of the order that can be filled immediately is, and the remainder is cancelled.
The effects of these constraints are primarily related to the difference between the intended price and the actual executed price (known as slippage). These factors influence the actual transaction price before it is ultimately recorded and displayed on a chart.
Funding rates, carry, and holding pressure
Funding, carry, and holding pressure create temporary price distortions and influence the spot and futures price relationship, through real-time supply and demand dynamics and financing costs. These pressures are a factor in the actual execution price, which is the data point that eventually forms the chart we analyze.
Funding rates are periodic payments between long and short position holders. The price adjustments happen within the market’s live order flow. When arbitrageurs (as an example) act on price discrepancies, they cause moves to help prices converge before they even appear on the chart.
The cost of carry includes interest costs for financing the positions, storage/insurance costs for physical commodities, subtracting any income generated by dividends or the convenience yield. Same with funding, traders act on discrepancies, adjusting the prices before appearing on a chart.
When a large volume of an asset is held by a few participants it creates potential for significant price fluctuations when those holders decide to trade. Buying or selling pressure drives prices up or down respectively. Think of a large, sudden order from a major holder clearing multiple price levels in the order book almost instantly. Maybe high-speed algorithms can react to such an event, but general market participants will only act after charts record it.
Using volatility as a behaviour alternator, and not how it “plots”.
It’s true that volatility is “plotted” through technical indicators, but this only reflects what has already happened. Volatility is often described as the “fear index”, it directly triggers psychological biases, drives impulsive decisions and overreactions to “noise”.
Technical indicators that “plot” volatility are primarily historical tools that summarize past behaviour. They tell you the market was volatile and lag in nature.
How to act on this? As an example, professionals in volatile times reduce position sizes and readjust to stay “in” the market. They also exploit irrational discounts, and purchase high quality assets when others dump them.
So think volatility plots as the “what”, and volatility behaviour as the “why”. Indicators Vs sentiment analysis, lagging Vs anticipatory data reactions.
Look at asset correlations under stress, not in smooth sailing
Asset correlations are very important, some might say the cornerstone of diversification. But unless the correlations are structural, something is bound to break during volatile conditions. Where historically asset relationships spoke the same language, under stress one speaks English and the other Finnish.
Temporary asset correlations behave differently, while structural ones reassert themselves (especially if they disconnected for a minute). Charts average these events and speak after the fact.
Who is providing liquidity right now
Are market makers active or defensive? Any changes in quoting behaviour? What about the spreads?
When liquidity providers become defensive, price becomes sensitive, there is an acceleration in fluctuations, and technical levels might lose relevance.
The difference between trading an instrument and trading a system
An instrument exists inside a clearing system, a margin system, a regulatory system and a funding system. Prices on charts might reflect changes and shifts, but don’t necessarily explain them. As rules change, as capital requirements change, these changes affect behaviour.
A lot of this information stays away from retail charts because it is contextual, qualitative and requires interpretation. Charts are great in providing a visual representation of what happened. But they are limited at showing everything else.
Final thoughts
Paying attention to structure and behaviour defines professional traders. Answering questions like who is acting, who is waiting, what limits the behaviour and where pressure accumulates, these are all forces that shape markets long before they appear in the candles of a chart.
*this article is provided for educational purposes only. It is not to be construed as investment advice and all visitors are encouraged to keep learning while understanding that trading is exciting but also carries unlimited risk. Lets all be responsible investors to make the most out of the experience.