Unfortunately I don't know how to implement a picture into a text instead of at the end.
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| The fox and the market https://www.stevehopwoodforex.com/phpBB3/viewtopic.php?t=2010 |
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| Author: | Forexfux [ Sat Apr 27, 2013 3:48 pm ] |
| Post subject: | Re: The fox and the market |
Here is another example of a trader who generates scenarios in his mind: Look at the chart. Ive put this on a 5m. I don't usually do this but it's for illustrative purposes. Price rallies hard into 41. Longs exit into the level. Some traders get short into the resistance. Some other traders were long and were "hoping" it would go through 41 and now feeling a little bit nervous as price catapaults off there back down (the sharp reaction is news based - what a coincidence it happens right on the level) So we come off hard back to 15. As we trade into that level, the limit buys start getting hit as the traders that have seen the move up all morning decide they want in "with the trend" and charge in on the pullback. Up we go to 41 again. It's resistance. Some traders that bought ahead of 15 will cover here if we don't get through. The other traders that didn't get out at 41 the first time are now unlikely to make the same mistake twice. In we come to 41's and off we come back again towards 15. It's all just traders jostling for positions. Some people say K.I.S.S. Trade the bars. Forget about who is doing what. I find it helped me enormously to think about this stuff though. And I hope it helps you too. |
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| Author: | Forexfux [ Sat Apr 27, 2013 4:05 pm ] |
| Post subject: | Re: The fox and the market |
I hope the mindset topic was not too esoteric for you. Good news it's getting better now. Pls read the next passage by Dali. That's knowledge every trader should have. Type of Orders and How Price Changes In this article, I will cover the three main type of orders used in trading and how price changes. We will take a look what really happens and what is moving price. First of all, there is the term liquidity. If you want to buy an asset, you need someone to sell it to you. You are therefore looking for liquidity. The same things applies if you are a seller, you are looking for a buyer to take the asset you wish to sell. A bid is a limit order to buy an asset at a specific price (better than the current market rate) and an offer is a limit order to sell an asset at the determined price (better than the current market rate). Bids and offers make liquidity in a market, they provide it to participants which trade via market orders. Liquidity is a very imporant factor in trading, especially for large traders. The more liquid a market is, the more it will attract other traders. Large traders cannot simply think about how much price will move, but also how they will get out of their trade when the time has come. This is not a problem for us retail trader, but definitely a key factor for those trading big amounts of money. Type of Orders Market orders Market orders consume liquidity provided by limit orders. They are orders issued to buy/sell a specific asset at the current market price. A buy market order will be filled against the best offer and a sell market order will be filled versus the best bid availaible. Market orders take away liquidity from the market as the participant that issues them wants to trade immediately and eats availaible liquidity via limit orders. Limit orders Limit orders provide liquidity because they give other traders the option to trade against them. If I issue a 1 million bid (buy limit order) at 1.31000 for EUR/USD, I provide liquidity to other participants looking to sell at the market at this price. They are called limit orders because they cannot be filled at a price worse than specified. This means my bid at 1.31000 can be filled AT or BELOW (positive slippage) the rate, but not above. Order books or DOMs (Depth of Market) are mostly used in Futures trading, as the FX market has no aggregated volume data. Example: In this asset, we have no orders at 44 and 45, which means you can currently buy at 46 (the best availaible offer) and sell at 43 (the best availaible bid). If I decide 45 is a good price to sell at and issue an offer at that rate, the spread will narrow and buyers will be able to buy from me at 45 the amount I offer to sell. Let’s say there is an impatient buyer that moves his bids to 44. He will again reduce the spread and now sellers are able to sell at a better price than before. The order book looks now like this: How Price Changes Scenario 1: Trader „A“ buys 20 contracts of the asset at the market. The order book above shows the availaible liquidity and it is visible that he will not be filled at 45 as there is insufficient liquidity. He will get filled as follows: 10 at 45, 8 at 46 and 2 at 47. As he consumed ALL liquidity at 45 and 46, the order book will now look like this: The order book will stay this way until there are new bids created below 47 OR there is even more buying at the market price (at the best offer) which drives price higher and further consumes offers. DOMs are not used in FX (or at least, shouldn’t be used, as there is no aggregated volume data for FX), but the mechanism of price change is the same in all markets. Limit orders are providing liquidity, while market orders are consuming them. Stop Orders Stop orders are orders to buy above the current market price/sell below the current market price. The term „stop order“ is used because the order is „stopped“ from being executed until it hits the determined price. It is being stopped because otherwise, if you create a bid at the price where offers already exist or above, it would become marketable order and would be executed immediately. Most of the time, a buy stop order will be executed when it’s price has hit the market „offer price“ and a sell stop order will be triggered when it’s price has hit the market „bid“ price. They will be converted into market orders and will consume liquidity. But there is something unique about stop orders. They can also provide liquidity. Let’s say I’m a large trader looking to sell an asset (please forget about the above order book for this example). Market price is currently 44/46 (I can buy at 46 and sell at 44). I don’t want to sell at 44 because liquidity is not good enough for the amount of contracts I intend to sell. I’m aware that there are a lot of buy stops above the price of 50 from participants that are already short. Other participants are also aware of this and price will be attracted to those levels. I will therefore set my offers above 50 (let’s say 51 and 52) and gain advantage from the stops. How? Chances are good there are not many buyers at those levels, as price will be perceived as high and liquidity is a bit thin. But there are forced buyers above 50 and they will have to take my liquidity. My shorts will be filled and price is likely to move quickly in my favor as most buying came from shorts that were stopped out. Price is not attractive for buyers and will likely drop quickly. Stop hunting is a common activity in ALL markets, not just the FX market. Retail traders are aware of this, but mostly in the wrong way. I’m not talking about your retail broker widening spreads to take some few more stops out, but stop hunting on a larger scale. Large traders need it for liquidity as above described and bank dealers will also use it also to control their book better. |
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| Author: | Forexfux [ Sat Apr 27, 2013 4:07 pm ] |
| Post subject: | Re: The fox and the market |
Unfortunately I don't know how to implement a picture into a text instead of at the end. |
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| Author: | Forexfux [ Sat Apr 27, 2013 4:08 pm ] |
| Post subject: | Re: The fox and the market |
More later |
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| Author: | forextrader-radioman [ Sat Apr 27, 2013 5:47 pm ] |
| Post subject: | Re: The fox and the market |
I love your thread! ... very nice  for "inline" pictures see attachment ... All the best to you and yours, Dietmar (Forextrader-Radioman) |
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| Author: | Jemook [ Sun Apr 28, 2013 1:42 am ] |
| Post subject: | Re: The fox and the market |
Fixed the inline pictures. Thanks Dietmar for the step by step guide |
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| Author: | Forexfux [ Sun Apr 28, 2013 1:36 pm ] |
| Post subject: | Re: The fox and the market |
Thank you for your help guys and the kind words. During my "trading career" I stumbled twice or more across different trading subjects. Back in the days when I was an indicator trader I have read the first time about order flow trading and I thought what the f... has this to do with trading. It was boring and it seemed not really related with chart trading. During my progress of improvement I found that topic again and now I realised what a treasure this informations are. Therefore I'm happy when other traders find the lessons helpful too. |
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| Author: | Forexfux [ Sun Apr 28, 2013 1:51 pm ] |
| Post subject: | Re: The fox and the market |
I often read that the forex market is too big to be manipulated. I think CJ proofed the opposite. Yes the forex market is super liquid but like Darkstar stated in reality anyone with a 6 figure account can move price because at least 50% of the $3t is multiple hedges of the same transaction. Disperse that 50% over a dozen or so common crosses and divide that by 24 hours and the net result is a hell of a lot more stop hunting activity then is commonly assumed. Obviously the more capital someone has, the farther they can move price and subsequently the more they will NEED to hunt stops in order to facilitate their trading strategy. I'm not sure about the 6 figure argument but forex can be manipulated. |
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| Author: | Forexfux [ Sun Apr 28, 2013 2:23 pm ] |
| Post subject: | Re: The fox and the market |
A little bit about pin bars: Pin bars is a acronym for pinocchio bars or candles. They are called that way because they lie and like when Pinocchio lies he gets a long nose. They work best at special locations (I'll write about locations later). Pin bars are the visual footprints of the fox that he is hunting stops. The key is that a larger cluster of stop loss orders will have the attention of other traders, especially when they are near. The bigger or wider the stop clusters are distributed the longer the nose will be. The stop loss buying or selling above or under an important location, will accelerate upside or downside momentum for a short period and get limit orders of informed traders triggered. However, as they were forced buyers/sellers and there are little "real buyers/sellers" there, price will quickly drop or rise. |
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| Author: | Forexfux [ Sun Apr 28, 2013 2:28 pm ] |
| Post subject: | Re: The fox and the market |
Stop hunt example by Dali: GBP bias is clearly negative and we saw a sharp drop down to 150.80 on the Sunday opening. As price declined, there were traders who lowered their stops to protect their gains and in general, more buy stops were building above. It is a common practice of retail traders (but not only them) to put their stops slightly above the big figure (big figure = every 100 pip price level - i.e. 1.50, 1.51, 1.52) when they are short. As GBP/USD recovered, first stops above 1.5150 got the attention of stop hunters and then those above 1.52. Take a look at the chart below and you will see what I described happened twice! First stops above 1.5150 were taken out and the pair traded up to 1.5160. However, up momentum disappeared and price quickly dropped below. The 1.5090 support level held and as price marched towards 1.52, stops above were in focus. Do you see what happened? Stops above 1.52 were triggered, offers were filled, little buyers left after the forced one's were done and price dropped! |
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