Bill Baruch, president and founder of Blue Line Futures, reviews and previews the euro, Japanese yen...
How to Find the Best Entries and Exits in Forex
05/28/2013 9:00 am EST
If you know what to look for on a price chart, you can see where the “smart money” is buying and selling forex, which can help you stack the odds in your favor, says Sam Seiden of Online Trading Academy.
London is one of the forex trading hot spots on the planet. I live in Chicago but also spend time in London. When I am with London traders, I notice they are trying to make so many different strategies work in the forex market, yet I don’t meet anyone who is achieving the success they are in search of. They don’t realize the key factor in trading is proper market timing. Market timing, the ability to identify market turning points and market moves in advance, before they happen, with a very high degree of accuracy. 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 factors:
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, that 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 institutional 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 price levels with 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 markets turning points in advance, with a very high degree of accuracy.
To better understand how to do this, let’s take a look at a recent trading opportunity where we identified an area of demand in the euro (highlighted in yellow). The two lines creating a “buy zone,” allowing us to apply our simple rules for entering a position.
This was an area of bank/institutional demand for a few reasons. First, notice the strong rally in price from 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) potential is. These are two of a few “odds enhancers” we teach. They help us quantify the bank and institutional supply and demand in a market, which is the key to knowing where the significant buy and sell orders are.
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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 buyers’ favor, at the demand level.
As you can see, what happens next is price declines down to our pre-determined demand level where banks and we were able to buy from sellers who are selling at “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” (down trend) to our demand level where we were willing buyers. Every trading book would say we are breaking the most important rule 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 most often has you buying high and selling low, so be careful. Don’t take my word for it however, read a trading book and ask yourself how that book is teaching you to enter positions in markets. Is the book’s entry and exit into a market 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. All we are doing at Online Trading Academy is simply sharing real world trading and investing with you. We are not trying to reinvent the wheel. How you make money buying and selling anything in life is exactly how you make money buying and selling in markets. I learned reality-based trading during my time on the trading floor of the Chicago Mercantile Exchange.
Shortly after reaching our demand level, offering a low-risk buying opportunity, price rallied and met the profit target for a short term income trade. This is market timing and while it does not guarantee that each trade will be a profitable trade, it does offer the lowest-risk entry, highest reward with that entry, and highest probability of success. How well your winning percentage is with the strategy depends on your ability to identify key bank and institution supply and demand levels.
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 want our students to be in the trend, as well. I just want them entering at the beginning of the trend, well before the trend is evident to everyone else. 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 the smart money is 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, Vice President of Education, Products, and Services, Online Trading Academy
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