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How to Track the Smart Money in Forex
02/10/2015 9:00 am EST
Forex trader and Online Trading Academy instructor Sam Seiden reviews price action on the charts that can signal areas where banks and institutions are buying and selling.
Singapore is one of the forex trading hot spots on the planet. I live in Chicago, but also spend time in Singapore. When I am with Singapore traders, I notice some of them are trying to make so many different strategies work in the forex market, yet none are achieving the success they are in search of.
They don’t realize the key factor in trading is proper market timing: the ability to identify market turning points in advance, before they happen. It is also the ability to identify where market prices are going to go, before they go there.
The main reason you would want to know how to time the market’s turning points in advance is to attain the lowest-risk, highest-reward, and highest-probability entry into a position in the market. Think about it: by entering as close to the turn in price as possible, you enjoy three key benefits:
1) Low Risk: Entering at or close to the turn in price means you are entering a position in the market very close to your protective stop. This allows for maximum position size while not risking more than you are willing to lose. The further you enter the market away from the turn in price, the more you will have to reduce position size to keep risk in line.
2) High Reward (profit margin): Similar to number one above, the closer your entry is to the turn in price, the greater your profit margin. The further you enter into the market from the turn in price, the more you are reducing your profit.
3) High Probability: Proper market timing means knowing where banks and institutions are buying and selling in a market. When you are buying where the major buy orders are in a market, it means you are buying from someone who is selling where the major buy orders are in the market, and that is a very novice mistake. When you trade with a novice, the odds of success are stacked in your favor.
So how do we time the market’s turning points in advance? It all begins and ends with understanding how to properly quantify real bank and institution supply and demand in any and all markets. Once you can do that, you are able to identify where supply and demand is most out of balance, and this is where price turns.
Once price changes direction, where will it move to? Price moves to and from the significant buy (demand) and sell (supply) orders in a market. So, again, once you know how to quantify and identify real supply and demand in a market, you can time the market’s turning points in advance, and with a very high degree of accuracy.
See also: It All Starts with Supply and Demand
To better understand how to do this, let’s take a look at a recent trading opportunity that was identified in our online graduate trading program, the Extended Learning Track (XLT) on March 25.
During the session shown below, we identified an area of demand in the euro (EUR) (highlighted in red) at 1.31975 - 1.32065. You can also see that demand zone on the chart, the two lines creating a “buy zone,” allowing us to apply our simple rules for entering a position. This was an area of bank/institution demand for a few reasons.
First, notice the strong rally in price from the origin of that rally (the demand level). Also, notice that price rallies a significant distance before beginning to decline back to the demand level. These two factors tell us that demand greatly exceeds supply at this level. The fact that price rallies a significant distance from that level before returning back to the level clearly shows us what our initial profit margin (profit zone) is.
These are two of a few “odds enhancers” we teach in our graduate program. They help us quantify the bank and institution supply and demand in a market which is the key to knowing where the significant buy and sell orders are in a market.
The plan with this trade was to buy if and when price declined back to that area of demand. This trade was high probability, but how do we know that? Well, being very confident that there is significant demand at that level, this tells us that we will be buying from a seller who is selling at a price level where demand exceeds supply.
Selling after a decline in price and at a price level where demand exceeds supply is the most novice move a trader can take. These are “retail” sellers selling where banks and institutions are buying. The retail sellers are selling with the odds stacked against them, which means they are stacked in the buyer’s favor (our members) in this trade.
As you can see below, what happens next is price declines down to our predetermined demand level where banks and wealthy traders buy from sellers who are selling at extreme “wholesale” (demand) prices. They are selling after that big decline in price and into that price level where demand exceeds supply.
Notice that price declined (downtrend) to our demand level where we were willing buyers. Every trading book would say we are breaking the most important rules in trading by buying under those circumstances. Well, how many people do you know who read trading books that make a consistent, low-risk living year after year trading?
I would be surprised if you knew one, so be careful with what you read. The trading book version is conventional thinking, which has you buying high and selling low. Don’t take my word for it, however, read a trading book and ask yourself if how that book is teaching you to buy and sell in markets is the same as how you make money buying and selling anything in life?
If there is any difference, good luck trying to profit from the information. Like anything in life, there is the book version way of learning to do something and the real world way.
Shortly after reaching our demand level and offering wealthy traders a low-risk buying opportunity, price rallied and met the profit targets. This is market timing, and while it does not guarantee that each trade will be a profitable one, it does offer the lowest-risk entry, the highest reward with that entry, and the highest probability for success.
How high your winning percentage is with the strategy depends on your ability to identify key bank and institution supply and demand levels like we do at Online Trading Academy.
I sometimes hear people say “I don’t want to try to pick market tops and bottoms, I am only trying to catch the middle of the move.” They are trend followers and say that as if doing that is somehow easier.
If price is already moving higher, for example, and you want to buy, where do you enter, where is your protective stop, what is your risk/reward, and so on?
I would argue that catching the middle of a move and making a consistent, low-risk living is harder than proper market timing. I am not suggesting the trend is not important; I just want our students to be in the market well before the trend is underway. The longer we wait to enter, the greater the risk and lower the reward.
Another thing I hear people say so often is this: “I wish I knew where the banks and institutions were buying and selling.” Every time I hear this, I say, “You can see where they are buying and selling if you know what to look for on a price chart.”
It all comes down to supply and demand, just like buying and selling anything else in life.
By Sam Seiden, instructor, Online Trading Academy
Sam Seiden is a forex trading instructor for the Online Trading Academy Extended Learning Track (XLT).