June Trade Setup Follow up…..

Jul 2, 2015Blog

In this post we go through a setup which produced a 700 pip move from a previously identified buying zone. What’s interesting is the way in which this developed as most retail traders would have been trading in the opposite direction to this move. It emphasises the difference between retail trading and institutional trading and breaks down how smart money was playing this market…

In the last article we saw the importance of the dominant trend and why using a higher timeframe is important to stop you over relying on just one time frame. Too many people jump into a trade without looking at the bigger picture. They only see what price is doing on the main timeframe they are using and consider nothing else. This is trading blind to be honest and it’s much better to trade in the direction of the overall market rather than in the direction of the short term movement of price.

We saw that price on the 60 min chart was heading down but then reversed sharply off an identified zone. What is interesting to note is that price came back to that same level a few days later and turned from it again. This time it went up by over 700 pips! Check the chart below:

GBPUSD 60 Min Chart:

Coincidence?

Is it a coincidence that price came to the same place where it turned form before and reversed sharply? It isn’t once you understand how the markets work. You see we identified this as a price reversal zone by looking at multiple factors such as support and resistance, Fibonacci levels, Elliot wave analysis and looking at higher timeframe momentum. On top of that the higher timeframe which was the daily chart told us the trend was up hence we could confidently look for buying opportunities to get into the uptrend. What we saw in the blue circled area was price simply retesting that buying zone a second time before making the big move up.

Why Retest?

Why should price retest an area? It because of what we call a shake out. Basically when Smart Money (the banks and institutions) initiate a move (which normally is against the direction of most traders as in the case above) they will wait to see if other traders get on board the move. If too many traders start taking the same trade and following what smart money is doing then this causes a problem for smart money. What they will then do is drive the price down again like what we saw to try and get rid of as many other traders as possible before pushing price up once more. In other words they will fool other traders into thinking price is moving down again which gets rid of many buyers and leaves smart money alone to execute their game plan. The reason they have to do this is because Smart Money buy in massive quantities and need deep liquidity pools to execute the amount of orders they need to, this level of liquidity can only be supplied by tricking other traders into taking the opposite side of the trade which smart money wish to execute. If too many other traders are doing the exact same thing then it limits the amount of orders that smart money can fill which reduces their profits.

GBPUSD 60 Min Chart in More Detail:

We can see in the first half of the chart that price went up quite nicely allowing traders on board to make decent profits. In the second half of the chart we can see that price moved down aggressively shaking out a lot of traders who were in the trade long. This would have also enticed many traders to go short thinking the trend is down but guess what happens? As soon as price hits the buy zone highlighted in gold it reverses. What this means is that smart money manipulated the market and price movement in order to get rid of copy cat traders and entice fresh sellers who would provide additional liquidity for the big move up. Even though the initial move produced 270 pips of profit, the second move produce over 700 pips which tells us that was smart money’s initial objective:

Setup Outcome in Detail:

Conclusion:

The above scenario is one that unfolds many times in Forex – smart money decides which way they are going to push the market and then trick other traders before revealing their hand. How do you avoid becoming a victim of such manipulation? To begin with you can adopt the following safeguards:

1, Always go with the direction of the bigger picture as that will yield the strongest and longest move – avoid the intra day noise as much as possible. This is particularly true if you’re a swing trader. If you’re a day trader then use the higher timeframes for your direction such as the 60min and 4hr charts. This will help you see what the real picture is which in turn helps you to stay on board a major move without being shaken up.

2, Accept that there will be a shake out and be determined to stay in the move regardless. Once price hits a reversal zone it will often move out of that zone aggressively which is what we call the impulse move. Sooner or later though it will return which is the retracement to the price reversal zone. As long as it doesn’t go below the original zone then you will still be safe to stay in the trade.

3, Always use a stop loss that is a safe distance away from the price reversal zone – in the above example you would want your stop loss to be a safe distance below the lowest point in the zone.

4, Learn to identify the price reversal zones like the ones above and ensure that they have a high probability of holding because not all zones are the same. Make sure you only use the ones which have a high degree of confluence as a result of several technical factors coming together such as Fibonacci levels, Support and resistance, price action, momentum and indicators.

5, Stay in it for the long run – remember that these types of trades are ones which will yield a very high reward to risk ratio so for every 1% you risk, you should be looking at 5% or more return due to the magnitude of the move we expect off these zones. You could just set and forget your trades so that once you enter them then you just leave them to run and glance at them only occasionally. This will stop you from panicking each time price retraces against you.

This should give you some good tips on how to stay in the direction of smart money and not get caught out like the vast majority of retail traders. For more information on how to identify smart money movements and to track what the banks do then we urge you to check out our Forex Pro programme which focuses on bank manipulation and smart money trading to give you an edge in the markets.

0 Comments