In Price Action Trading Strategy

Market movers come in all different shapes and sizes. The interbank market is run by a plethora of institutional money managers, smaller-sized fund managers and the retail crowd. Of these three categories, the institutional money managers hold the most weight, and are responsible for the largest percentage of orders placed on a daily basis. This crew typically consists of banks and very large hedge funds looking to make money trading in the same manner as you or I.

Working for a couple of Investment Banks and a large hedge fund myself, I gained a lot of insight into what gets looked at on a daily basis and the basic premises of portfolio management. In my time I have seen many different portfolio managers implement a variety of techniques, some of which are much better than others. I have seen arbitrage strategies fail miserably, quantitative systems break apart and steady-headed portfolio managers run into disaster after failing to close a losing position, or stacking the chips on too big on something which fails.

Big or small, the potential for losing money always exists when it comes to various trading techniques. The most profitable traders I followed were the ones using the RIGHT information, day after day. These were speculators looking at the overall mentality of the market and following suit with the majority of investors. Using the WRONG information runs us into disaster. I firmly believe that the majority of new traders are memorized by the hype of trading systems and overflow of information out there to the point where the wrong information becomes embedded in their brains, and using them is second nature.

There are 3 major factors which control currency price movement: foreign supply and demand driven by a number of different variables, travelers pumping money into the local economy and speculators/investors. The speculators/investors portion of these factors is the one which we focus the most on, as our day-to-day trading regimen and price movement is for the greater part controlled by them. Volume in the FX market has exploded in recent years due to accessibility of the market, and as a result, the birth of many related ETF’s and funds speculating on the spot currency. Aside from government intervention, fundamental factors will drive the market to the extent that investors pay attention to these factors and buy or sell accordingly. The major traders and investors are looking at these fundamental and technical factors and using them when deciding to pull the trigger.

The institutional players control the cash. Period. The smaller players do not move the market like three $150mm positions placed simultaneously can. They key for a smaller daytrader or money manager is to take a look at what the three traders placing these positions are looking at, and follow suit. Assuming we are daytraders as opposed to long-term position players, fundamental analysis will generally consume a smaller portion of our day. So for a technical perspective, the trader needs to be consistent with what the biggest players in the market are looking at, plain and simple. And these are not indicators of any type – these are support and resistance levels.

Support and resistance levels work so well because EVERYONE can see them. A trader in Tokyo will see the same support/resistance level as a trader in New York, or a trader in London. The FX market is worldwide, so we need to look at what the rest of the world CAN see.

Support and resistance levels are heavily overlooked by new and even some experienced traders due to the wide range of materials out there available to the public. They sound completely boring, but they work better than everything else we see. To us, money isn’t boring. Also, people have a hard time believing that such a simple way of trading also happens to be one of the most profitable. If you are a newer trader and looking for an easy way out, I can wholeheartedly tell you that this is one of the easiest and most reliable ways of doing so. You want to be on the same page as the biggest movers out there, and this is how you do it. Support and resistance levels are what the biggest players are looking at day after day; hence, any good trader should be looking at them as well.

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Showing 4 comments
  • Interceptor
    Reply

    Very well written.
    Again!

  • Eric
    Reply

    brilliant! couldnt have said it any better

  • Eric
    Reply

    couldnt have said it any better!

  • TD
    Reply

    Hi Steve,

    It seems as there is quite often a local extreme that coincides with a S/R level around (+- 2 hours) the London opening 8:00 GMT. What do you think? And very often they’ve mad their first 100 pips before noon. I looked back until beginning of November. It seems, that this scheme works better in non trending markets.

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