Trading Made Simple – Prices Move in Only Three Directions: Up, Down and Sideways

Meir Barak |

Escher.jpgThe Stock Market: A Constantly Changing Body

The stock market is the outcome of the sum of all persons operating within it. Each has an individual opinion and thoughts, and individually, each pushes the market in the direction he or she is able –whether as a buyer or seller. Thus, the stock market is changing its appearance. Every trading day is different from the preceding one, and every trading hour is different from the hour before. As the ancient Greek philosopher Heraclitus once said, “You cannot step in the same river twice.” 

Can we nonetheless know what the sum total of persons operating in the market is thinking? Of course we can! The answer can be found by taking a quick glance at one important piece of information: stock price.

A dynamic market that constantly changes is inherently challenging. However, our human thinking processes are very standardized. Most people wish to demarcate concepts within boundaries, sorting and cataloguing different factors. However, the market is highly dynamic. To cope with this challenge, you will need to become closely familiar with the market, the principles of stock trading, and how markets behave. This will enable you to establish your own work program, your own rules and limitations, and apply them when you join the market.

The Price (and Market) is Always Right

The stock market’s conduct as described has given rise to two similar statements: “the market is always right” and “the price is always right.” At any given moment, the market and the price consistently embody all relevant information. Don’t try to argue with the market – many before you have tried and failed. Any attempt to force your opinion or hopes on the market is predestined to fail. Even large players in the stock market who truly have the ability to slightly shift the market are aware of the its forces and consider their moves with due gravity. 

Over time, I also learned the uselessness of disputing the market. For example, one of my rules is that on any day that I make three consecutive losses, I stop trading. My experience has taught me that if I continue, I just keep losing, since the psychological impact of three losses at a time makes me try to force my will on the market. In that battle, I can assure you, the market will always come out on top.

Market Forces: Bidders and Askers

Understanding the market means first understanding the forces that control it. In other words, gaining a deeper understanding of the interests of buyers (bidders) and sellers (askers) and the impact of their interests. It is customary to say that if bidders control the market, the price of a stock rises, and if sellers are controlling, the stock price will drop. This is generally true, but too simplified and appropriate to a novice trader or amateur investor. 

We know that bidders want to buy cheaply, and sellers want to sell for the highest price they can get. For investment banks, who buy and sell for institutional clients and are remunerated according to the bid and ask prices they procure for the clients, buying cheaply and selling at higher prices gets translated into action. Small traders like us can do nothing but follow in their footsteps.

Let’s take a look at the following: one fine morning, a trader in a large investment house on Wall Street is instructed to buy 500,000 shares of Company X. In anyone’s view, that’s a lot of stocks. Will Company X’s stocks open on that same day with a rise or a drop in rate? The answer depends on multiple factors, but because the bidder wants to buy a huge amount of stocks at the cheapest price possible, the bidder will first try to make the stock price drop. The bidder may start the day by selling a large quantity of stocks as soon as trading opens, igniting a wave of sales.

When the stock drops to a price that is sufficiently low in the bidder’s view, the bidder will then start buying. Simply put, the buyer’s control over the stock caused it to drop instead of rise. A trader following the stock’s movement may accidentally think the stock is facing a day of downward-spiraling prices, when in actuality, that was only at the start, followed by rising prices for the remainder of the day.


To learn more about the stock market and to begin your own journey toward financial independence, visit Meir Barak's site Tradenet and check out his book "The Market Whisperer."  

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: