In Price Action Trading Strategy

The foreign exchange market is as complex as it is large and the presentation below provides a very concise overview of playing participants, dynamics and transaction methods across the business.

It never seems to shock us how few people have even a deep simple understanding of the market in which they are trading. When it comes to the Forex market, retail investors are at the bottom of the barrel in terms of information and tools, proven over and over again through return statistics.

Below you will find a concise summary of everything from market depth to the manner in which dealers interact, as well as definitions for commonly overlooked terms. A while back, one of our good friends introduced me to the work of Carol Osler, a professor of finance at the Brandeis International Business School. I have read a wide range of academic papers over the years discussing order flow, microstructure, etc., but I have never found one this concise in terms of discussing the foreign exchange market as a whole.

I respect the straightforward and nonsensical manner in which this paper was written, which essentially draws an outline of the market from a bird's eye view. Last week I was ready to post a quick link to this article, when I thought it would make better sense if I just created a brief presentation that outlines key sections and points. The presentation is essentially a verbatim translation of what is posted in the research paper, just simply broken down into a more visual manner with key points exposed. I have never blatantly asked this before but if you find this in any way useful, please share it. It is one of those things that simply deserves more attention.

You can alternatively download a copy of this in .pdf format (with active links to sources and much better quality) by clicking here.

 

Sources:

http://www.brandeis.edu/global/faculty/facultyguide/publication.html?pubnum=12&emplid=7468b146c250413e629fb09f8ac0fb5a692c37ff

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Showing 14 comments
  • Rumiguru
    Reply

    Great education for FX traders..for FREE

  • Pete
    Reply

    Steve, you are very generous purveyor of quality material. Thanks very much for sharing your expertise, enthusiasm and time with us.

  • Shirleyty
    Reply

    Valuable

  • RedCabbage
    Reply

    Great work compiling this for us Steve. Very useful

  • Bruce
    Reply

    Thanks Steve. Great stuff. Just what I needed at this point in time.

  • Steve W
    Reply

    As a ratio I’m not sure. You jogged my brain though and I’m doubtful about ever seeing any side by side comparisons there.

  • Christian Kerner
    Reply

    Big thanks, Steve. I am seeing some light in the end of the tunnel because of great people like you. 🙂

    “Consistent with this hypothetical dealer behavior, Osler et al. (2011) provide evidence that, after customer trades, dealers are more likely to trade aggressively and in the same direction as the customer if the customer is informed.”

    So this means if price reverses or moves off of a level rapidly, that most likely this was caused by informed traders (and a good reason for an entry like a 3/4 pullback if other factors are in line too)?

    “The price shift can be sustained because other dealers move their own quotes in parallel when they observe the interdealer trade.”

    Not sure if I have understood this right (maybe its just my English). The reaction may be somewhat delayed because other dealers haven’t realized yet that there are informed customers buying/selling? Are we talking here about seconds or minutes?

    • Steve W
      Reply

      Whatever the situation might be, essentially, yes that’s it. I know through experience that they have filters to see who’s basically right all the time, who’s wrong, or who’s considered ‘predatory’, and they’ll work in that context to remain profitable (try to stay in line with flows). Don’t forget the algo situation involved here. That’s really one of the hidden eye openers of this entire piece. People really tend to underestimate the amount of computer generated input actually goes into this market.

      • Chris
        Reply

        Yes, that’s indeed very interesting. But what are consquences of this increase in algo and HFT based trades for the manual retail trader?

  • Chris
    Reply

    Big thanks, Steve. I am seeing some light in the end of the tunnel because of great people like you. 🙂

    “Consistent with this hypothetical dealer behavior, Osler et al. (2011) provide evidence that, after customer trades, dealers are more likely to trade aggressively and in the same direction as the customer if the customer is informed.”

    So this means if price reverses or moves off of a level rapidly, that most likely this was caused by informed traders (and a good reason for an entry like a 3/4 pullback if other factors are in line too)?

    “The price shift can be sustained because other dealers move their own quotes in parallel when they observe the interdealer trade.”

    Not sure if I have understood this right (maybe its just my English). The reaction may be somewhat delayed because other dealers haven’t realized yet that there are informed customers buying/selling? Are we talking here about seconds or minutes?

  • L. C. Chong
    Reply

    Thanks for your great efforts in putting the information into a simplified and easy to understand document.

  • MilesT
    Reply

    Great info Steve!

    What is meant by “left hand side ECB fix”?

    I saw that comment on Talking Forex….

    • Steve W
      Reply

      Hi Miles – missed this comment somehow – LHS is basically sell interest RHS buy

  • 19wak49
    Reply

    Splendid Information….

    Thank you

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