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A contract for difference (CFD) allows you to trade a stock, index, crypto, or commodity without owning it. When you trade a CFD, you simply make (or lose) the difference between the price you bought it at and the price you sell it at.

Why have CFDs quickly become one of the preferred ways for investors in the financial markets to trade?

Because they: 

For the savvy trader, CFDs can be used as outside-the-box solutions for several common trading problems. They can also be used to implement more advanced strategies. 

 Top 5 surprisingly useful facts about CFDs

1. Trading smaller  

One of the less appreciated benefits of using CFDs is that they allow you to trade at a smaller size.  

Why is this so helpful? 

On top of the ability to trade on a smaller account in general, it also allows you to be much more accurate in your position sizing. This benefits you no matter what size you are trading. 

For example, if you trade the S&P500 e-mini futures contract, the contract trades in $50 increments. In contrast, the CFD trades in $1 increments. The smaller contract size provides you with much more risk control than its larger cousin. 

2. Scaling out of your trades  

The smaller position size also has the great benefit of allowing you to scale out of your positions. The small minimum position size allows you to split your trade into several positions. Optimally, you would split the trade into three positions rather than one and close them at separate points. 

This method allows you to take some profit when the market makes it available. You can take some profit the moment you can, take more at your target, and leave some skin in the game for a big win. 

3. Hedging your stock portfolio and earning interest  

Think the market is going to head down, but do not want to sell your stocks? Going “short” on a CFD index might be just the thing for you. 

By shorting a CFD, you benefit as the price of the index goes down. Of course, you lose when the index goes up. The profits in the CFD can thus offset some or all of the associated losses in your stock holdings. 

4. Trading in the evening 

CFDs provide you with access to global markets that trade 24 hours a day, excepting weekends. The beauty of this is that you can fit your trading into your schedule. Have a day job? No sweat. You can choose a market that is active during your evening. 

For example, if you are Australian-based, you could look to trade the UK market index (FTSE100), which is active after you finish work for the day. 

Making sure your trading fits nicely into your schedule is very important. If you do not balance your lifestyle with your trading, you will find it difficult to trade consistently. 

5. Tax benefits 

Depending on your location, CFDs can be tax efficient. If you lose when trading with CFDs, they are generally tax-deductible. This means you can offset your losses against your income to reduce your tax obligation. You can even receive a refund under certain circumstances. 

Of course, you do not want to trade to lose in order to gain the tax benefits. However, even the best traders do not win all the time. Saving some money in taxes when things are not going so well is a nice little perk.   

Trade CFDs with BlackBull Markets today

 Trading is risky. T&Cs apply.

Experienced stock market traders often attempt to apply their battle-tested systems to forex trading. They often suffer the same setbacks as aspiring forex traders when they do so. Why is this? What makes the forex market so different from stocks, bonds, or indices?

One key difference is that the forex market trades continuously, 24 hours a day, five days a week. This continuous action (but fluctuating in intensity) means new participants must adjust their trading style. Strategies that worked in other markets need to be tweaked to tackle FX successfully.

Everything is relative to the time of the day in which you are trading in FX markets. Trades made when Tokyo traders are active can be quite different from trades made when London or New York traders are active. So, how can traders break down the 24-hour cycle without exchange-mandated hours?

Enter session maps.

Trading Different Money Centres

A clever way to manage the 24-hour action in forex is to break down each day into the three major "sessions" that occur in each trading day.

1. The Asia/Pacific session: 

Most turnover in this time zone is done in Sydney, Tokyo, Hong Kong, and Singapore. Typically, there will be exporters and regional central banks active during this session. However, the liquidity is nowhere near as deep as it is during the London or New York sessions. As such, the price action is not usually as interesting as it is during the other sessions. 

The Asia session does have its moments: when there is regional data (AUD or NZ unemployment, JPN Tankan, Central Bank meetings), you can rely on strong directional moves. But most of the time, this session is range-bound or follows whatever happened in the New York session.

2. The London session: 

This is perhaps the most important session of the day, for geographical reasons above all else. Along with London, other European financial centres like Frankfurt, Geneva, and Paris are active. That's why sizeable corporate activity takes place during this session and contributes to the deep liquidity of the session. This deep liquidity means that the price action seen during the London session is quite important. It gives a good insight into market sentiment and positioning.

3. The New York session: 

The forex market experiences its peak in turnover as London passes the baton onto New York. However, whereas the London session tends to be trendy, New York can have much more volatility and chop. During the afternoon in New York, liquidity starts to dry up quickly.

How do you trade forex with a session map?

EURUSD 1H with Session NY, London, Asian indicator

Evidently, the best trading strategies to deploy can change significantly depending on the time in which you are trading.

The primary goal of a session map is to help traders visualise which session is currently operational.

The session map allows traders to spot strengths and weaknesses during a session more efficiently. They also help you notice patterns which can be helpful in identifying market sentiment.

The session map can help you establish these factors with greater ease. Indicators for session maps are plentiful and can be found on all major trading platforms. The session map visualised above is one of the most popular indicators used by traders on TradingView. In this indicator, each colour represents a different session (Asian = purple, London = green, New York = red). Overlap between the London and New York session creates a brown band.

APAC should be hogging most traders’ attention in the first half of the coming week. China and New Zealand take the spotlight up to Wednesday. A sprinkling of US and European data helps to round out the offerings.

*Please note; Author is working from UTC +13 when determining the timeline of data releases.

What Will Traders Be Watching This Week?

22 Nov – 26 Nov, 2021

Monday, November 22:

China opens the week and reveals its 1Y Loan Prime Rate. The People’s Bank of China (PBoC) has kept the 1Y Loan Prime Rate at 3.85% for the past 18 months. No change in the rate is expected on Monday. However, looking to a long-term change, China’s Premier Li Keqiang noted on Friday that China is facing “many challenges” in managing the downward pressure on its economic growth and rising commodity prices.

Tuesday, November 23:

New Zealand releases data on Retails Sales (Q3) in the lead up to the country’s Central Bank Interest Rate decision on Wednesday. Retail Sales in the last two quarters rose 3.3% and 2.8% respectively. A projected -0.5% is expected in Q3 as the country’s largest city has been in lockdown for the entire Q3 period.

European and Great Britain Markit PMI Composite data (NOV) is also released on Tuesday. Aggregating the data from the economies’ Manufacturing and Service sectors, the PMI is a broad indicator of economic expansion or retraction. Although still firmly within an expansionary range, a slight pullback in the PMI values is expected for both economies.

Traders

 

Wednesday, November 24:

US Markit PMI Composite data (NOV) is up next. Unlike Tuesday’s PMI data, US PMI is expected to lift ever so slightly from 58.4 to 58.8.

As mentioned above, the Reserve Bank of New Zealand (RBNZ) will be updating the market as to its Interest Rate decision. A 25 basis point hike to 0.75% is all but guaranteed at this point. Speculation of a 50 basis point hike has emerged in reaction to Inflation Expectation in the country, reaching 2.96% in two years. Although, such a significant hike is unlikely and deviates from RBNZ precedence.

 

Thursday, November 25:

Thursday is all about the United States. For October, durable Goods Orders, New Home Sales, and Personal Spending data are released in quick succession. Any beat or miss in the slightly optimistic forecasts for these data points should be pounced upon by traders.

The FOMC minutes are then released later in the morning. Fed representatives have been vocal about their stance on inflation, employment, and the need to keep a loose monetary policy for the short term, all last week. These notes should be reflected in the FOMC minutes.

Traders

Friday, November 26:

A quiet Friday closes the week. South Korea’s Interest Rate decision should be watched closely. A 25 basis point increase is possible, which would bump the Interest Rate to 1% from 0.75%. Analysts are split as to its likelihood as the South Korean Government has other tricks up its sleeve to curb rising prices (such as removing fuel taxes).

As a trader, it's a general rule of thumb that we should always be looking to maximise potential returns (per unit of risk) with each transaction. We should always be looking to squeeze as much out of the market as we can.

There are times when this can occur by simply letting the trade run its course. However, sometimes market conditions align perfectly for savvy traders to "press the trade" or  Pyramiding into the trade.

Don't press your luck; press the trade instead!

Attempting multiple entries in the direction of a trend is one strategy savvy traders use in an attempt to maximise return (otherwise known as Pyramiding). The problem with this tactic is that while it may increase the potential reward, having a larger position in the market also opens you up to more risk. As a trader, you need to find the perfect balance of pressing the trade while not pressing your luck.

There are a few ways to achieve this:

 

Pick your battles carefully when Pyramiding

You may find that as time wears on, you're left with a large portion (>2% of total equity) in a single trade. The tactic of adding exposure will generally make for a "short" pyramid, which typically won't grow over 2.5% of overall equity. This Pyramiding tactic ensures you're exposed to additional upside while minimising downside to a level with which you're comfortable.

Here are a few things to be wary of:

Final Thoughts on Pyramiding

Remember always to start small and slowly. There's no need to rush in. Experiment with pyramiding until you're comfortable with your approach. Always remember the two key elements to consider:

  1. Resist the temptation to take profit early when the opportunity arises. Sometimes it's best to sit on an existing trade.
  2. Be wary of adding to your trade at "worse" levels. Trends will always end at a certain point, so you don't want to be pyramiding into an extended, ongoing trend. Look for new trends to pyramid in, which will reduce your overall risk.

The FX market is immense. There are seven major FX pairs and over 70 crosses! How can one person possibly keep track of everything and identify the best pairs to trade at any given time? That's where the correlation matrix can come in handy.

Most traders, when exposed to the word “correlation”, automatically think of intermarket analysis.

For example:

Setting Up Your FX Correlation Matrix

It is very easy to manually determine a correlation matrix in MT4 and MT5.

  1. Select your currency pairs to compare.
  2. Select the time frame based on your trading style:

Of course, these are only suggestions. The key is to select a time frame and a lookback period that compliments your trading style and commit to it.

  1. Highlight the strong correlations that are visible. Identify which pairs are either moving strongly in lockstep or strongly opposite one another.
  2. Determine what market event is enacting a similar influence over the different currency pairs.
correlation matrix

Alternatively, custom indicators can be added to your account to do some of the heavy lifting for you.

Tracking Common FX Themes

When all the crosses of a currency pair are moving in the same direction, there is usually a fundamental reason. Even if you don't know the fundamental cause, you can still identify the overwhelming dynamic and keep that currency pair on your watch list.

Using Correlations To Allocate Risk

When correlations are high, you can spread your risk capital amongst two or three different FX pairs. This way, you reduce the risk of identifying the market drivers correctly but on the wrong instrument. We will never know ahead of time which pair will be “the winning horse”. Consequently, when there is a strong correlation amongst crosses, splitting our risk allocation amongst two or three candidates makes more sense. We can then ride the winning horse and reduce risk on the slower performers.

It's already difficult enough to identify clear drivers and strong themes in the currency markets. If we think we're good enough to pick the best currency every time, we fall into yet another mental bias that will harm us more than help us. So, instead of risking, say 2%, on one single currency pair, try risking 0.5% on three pairs. As a result, one of them might develop into the multi-day trend trade we all aspire to catch.

What’s Next?

The correlation matrix is a very neat tool that allows us to spot strong FX correlations amongst the major pairs quickly and amongst the crosses of a given regional currency.

You should attempt to:

  1. Identify the situations that show high correlation amongst pairs.
  2. Track them back to the fundamental influences that are driving the correlation.

If you take these simple steps, you will be in an ideal situation. You will understand why the currencies are behaving the way they behave, and you will be able to make sense of the technical behaviour on your charts.

It's like boxing with both arms (technical and fundamental) instead of just one (technical).

GBPJPY W1

1 GBP is currently trading at ~155 JPY, which is an important touchstone for the pair. The GBPJPY last touched (and notably rejected) this level in December of 2017. Before this, a period of consolidation occurred just above this price level in early 2016, before dramatically breaking down to its lowest point in the twenty-tens.

An important question to ask is: Where is the pair headed in the second half of 2021?

Will the pair bounce off this important touchstone and head back down to a sub 155 price level? Or, will the GBP penetrate past this point and head for a price level circa above 160?

GBPJPY H4

An early indication of whether the pair bounces off this touchstone or penetrates it can be found in the smaller time frame charts. At the H4, the bulls show early promise, with some intense upwards pressure at the end of May. The intense upwards pressure occurred after a prolonged period of ranging. A slight drawdown has predictably occurred after this push. However, the pair appears to be moving to the upside again after shaking off the early profit takers.

However, it is far too early to make a call either way.

Let’s look at some events are may affect the trajectory of the pair in the near future. Two important events that I am keeping an eye on are the Tokyo Olympics and the health of the manufacturing sector in Great Britain.

Tokyo Olympics: Will they, won’t they?

Tokyo Olympics yen

The Japanese Government are marching staunchly toward an Olympics opening date of 23 July. But what happens if the Olympics are postponed again? I’m of two minds in this regard. The Yen might strengthen because investors will recognise that the country will be at less risk for another Covid outbreak without thousands of athletes flying into the country to compete. Or, the Yen might weaken, with ‘bad news’ begetting ‘bad news’.

Great Britain Manufacturing PMI (May)

The report hinting at the health of GB’s manufacturing sector is released in half a day. A solid value of 66.1 is expected, the same as last month, signaling that the sector is continuing to expand at a pace.

A spike in demand from China and the US was recorded in April, resulting in a record level of 61.1. I anticipate a slight tapering off in demand moving forward as the cost of inputs rise, and these costs filter into the sticker prices of goods. But this is might now appear until June or July PMI figures.

The First Rule of Trading Forex

Have you ever found that your trading system works great one day but fails miserably the next? If so, your problem is likely market-type identification.

Too many forex traders will trade the same way no matter how the market is behaving. Instead, you should identify the market type first. Then, you can devise a strategy appropriate to that market type. Sounds simple, right?

With the proper technique and a little practice, you will be able to quickly tell what market type you’re in and how to trade it. There are six primary market types in forex that you need to be able to identify:

- Bull Normal
- Bull Volatile
- Bear Normal
- Bear Volatile
- Sideways Quiet
- Sideways Normal

If the market type is quiet, wait for a breakout or range trade. If the market type is bullish, look to buy dips. If it’s bearish, look to sell rallies.

When Market Types Change

Like the weather, market types shift and change. The good news is they do so in a predictable manner. Volatile market types settle into normal then quiet markets. Bull markets turn sideways before they turn bear, and quiet markets expand into trending bull or bear markets. As a trader, you want to be aware of what market typically comes next and plan accordingly.

How to Identify Market Types

While there are numerous ways to identify market types, here is an intuitive model you can follow.

For this, we use two sets of indicators:

- Bollinger bands
- A 7-period and a 3-period Exponential Moving Average (EMA)

These can be applied across any timeframe on any chart. They provide you with an easy-to-use method of identifying the current market type.

Bull Normal Market Types

A bull normal market type can be identified by the price trading above the Bollinger band, while the 3-period moving average is trading above the 7-period.

The Strategy

In a bull normal market type, there are generally two strategies that will be effective:

  1. Buying dips. You set limit orders at key levels or wait for a pull-back. This is an indication that the trend is going to continue.
  2. Buying breakouts. You wait for periods of consolidation and then buy breakouts in the direction of the trend.

Bull Volatile Market Types

bull market volatile

Bull volatile market types can be identified by large candles trading above the Bollinger bands. These candles will often have long wicks.

The Strategy 

In volatile bull market types, it can be tempting to rush in and buy. However, this may not always be the best course of action. Keep in mind that prices can quickly reverse. If you are lucky enough to be in a position that turns into a volatile bull, then keep your stops tight.

Bear Normal Market Types

Bear normal market types can be identified by the price trading below or along with the lower Bollinger band and the 3-period moving average remaining below the 7-period.

bear market normal

The strategy 

For a bull normal market type, sell on rallies or breakouts after a period of consolidation.

Bear Volatile Market Types

Bear volatile market types can be identified by the large candles trading outside of the Bollinger band.

The strategy

Similar to the bull volatile market type, the bear volatile market type is a difficult one for entries. However, if you find yourself in one, as you often will, keep your stops tight to guard against the reversal. This will allow you to capture profit if the move continues. It will also allow you to keep hold of most of your profits if it quickly reverses.

Sideways Quiet Market Types

You can identify a sideways quiet market type by the Bollinger Bands tightly coiling around the price.

sideways quiet market

The Strategy

Breakouts from sideways quiet market types can provide excellent risk/ reward trading opportunities. Be patient and stalk the breakout like a hunter stalking their prey.

Sideways Volatile Market Types

Sideways volatile market types can be identified by expanded Bollinger bands moving sideways and the price contained within the range.

The strategy

There are some excellent trading opportunities for range trades during sideways volatile market types. Wait for the edge of the range to be penetrated and the price to reverse back inside before you place the trade.

What’s next?

Learning to identify the market type and apply the right strategy will significantly impact your trading.

Now, take out your trading plan and note:

  1. How you will identify the market type
  2. How you will trade it

Once you turn these notes into regular habits, you should start seeing better results.

USD index range possibly narrowing in near term

The USD index is currently ranging in between 90.0 and 93.0 and has been for the past six months. Moving forward, the adequate economic data coming from the US should help the weak Dollar regain some of its status, but not a ton. I expect the range to narrow, with the 91.5 level serving as a new support level.

Read the full analysis at fxstreet.com

USD Index 1W

The 5 Types of Forex Traders

There are 5 types of Forex Traders. These traders are separated by their trading style, risk profile, and trading objectives.

The Day Trader

Marty Schwartz's trading was at one time accounting for 10% of the daily volume on the S&P 500 futures contract. He is the author of "Pit-bull, Lessons from Wall St's Champion Trader".

To the uninitiated, the day trader may seem like a person of action. But they are just as comfortable stalking their trade as they are decisive when it comes time to execute. Typically surrounded by multiple screens, the day trader monitors dozens of inputs while waiting for a trade with an edge to appear.

Some trade rapidly, moving in and out of the market in a heartbeat, taking 5 pips here, 10 pips there. Others may be more serene, placing only one or two trades per session, carefully waiting for the optimal time to catch the day's move. The day trader may be boisterous and rowdy, but they have learned to separate their ego from the trade.

What if the market doesn't go for them? They either out or going back the other way. To the day trader, it's all the same. What matters is whether they cut their losses short or let their profits run. Whether they are right or wrong is irrelevant. They may only win with half of their trades. But through superior risk management, they end each day well in the black.

The Technical Analysis Trader

William Delbert Gann was famous for his ability to forecast market moves using technical analysis.

The charts weave a compelling story to the technician. They know that technical patterns provide a window into the market's soul and a snapshot of its psychology. It is through technical analysis that they surf the waves of market participants' fear and greed. Be it Fibonacci, Elliot Wave, or Gann theory; the technical analyst has the tools to help them predict the market's near-future. The skills to implement a winning trade are based on their ideas.

The technician can analyse both short and long-term moves. Some will combine their technical analysis with fundamentals, trading primarily when both are in alignment. Others trust the price. They trade first and seek reasons later.

The technician's charts are brightly adorned with trend lines, moving averages, stochastics and MACD. But underneath it, all is a beautiful simplicity that guides them to trade with accuracy and aplomb.

The System Trader

Ed Seykota is a system trader beyond compare. He understands that trading is about psychology first and the system second.

The system trader is the god of the trading machines. Through a rigorous process of development and testing, the system trader has automated their trading strategies. Their computer essentially does the trading for them. A picture of discipline, the system trader, sits calmly through rough periods. They know that when the trends appear, their profits will be significant.

System traders are in a research war. Markets change, and as they do, systems need to adapt. System traders spend more time researching than trading. That is unless they are roaming the world, as the master system trader is prone to do. His machines afford him the luxury of free time.

The Macro Trader

Famous for predicting the Black Monday crash in 1987, the billionaire Paul Tudor Jones is now the head of the philanthropic Robin Hood Foundation. The Global Macro Whizz Kid is known for trading big market moves with skill and tenacity.

The best global Forex traders know that it's hard work and discipline that has led to their success. They search tirelessly for opportunities in currencies, indexes, and commodities. Then, they work even harder to ensure the best risk/reward profile for their trade. They understand that ideas are only going to get them so far and that implementation is the key.

The best global macro traders (the true whizz kids) never have a losing year, profiting in all market types.

The Hedge Fund Trader

Ray Dalio is the founder of the world's largest hedge fund, Bridgewater Associates. In 2012, Dalio appeared on the annual Time 100 list of the 100 most influential people in the world and is currently worth over $15.2 billion.

It takes a leader to build a successful hedge fund, but it takes true leadership to build a business based on its people. Hedge funds are experts in selecting traders who fit their criteria, be they mechanical, macro or quant.

First and foremost, they are risk managers, with each trader having their place in a greater risk management plan. Traders that are performing exceptionally well are allocated more funds, while allocations are cut to those that are not.

The hedge funds trader knows that their team can produce returns far greater than their individual parts' sums.

Trade Tactically With Liquidity Pools & Stop Orders

Have you ever been stopped out, just to see the price reverse from that very same level? Don’t worry, you’re not alone.

Many traders tend to place their stops in the same types of places, without sufficiently weighing the fact that they are incredibly easy and worthwhile to hit. In the grand scheme of things, these stops end up becoming little more than useful liquidity pools for larger players with the firepower to influence the market’s direction.

What Is Liquidity & Why Is It Important?

If you want to buy EURUSD at 1:1000, you need someone to sell it to you at 1:1000. The same applies in reverse: if you are selling, you need a buyer. This is just the nature of the market.

To keep things simple, saying an asset is “liquid” means it’s easy to find a counterpart. The opposite is “illiquid,” meaning it’s difficult to find a counterpart. Here’s Bill Lipschutz, discussing what liquidity means to him:

"I'm short the dollar and I've misjudged my liquidity in the market, I've tried to hold the market down, but it's not going to work. And I can't buy them back." “All I wanted to do was to make it through to the Tokyo opening at 7 P.M. for the liquidity. If you really have to buy $3 billion, you can do it in Tokyo; you can't do it in the afternoon market in New York - you can't even do it on a normal day, let alone on a day when major news is out.”

– Bill Lipschutz, New Market Wizards.

"Liquidity pools" are levels at which price frequently "makes a decision" as many orders hit the market. They are, so to speak, intersections of orders. This helps with managing open trades, initiating new trades, and adjusting stop losses.

While it’s impossible to avoid losses in the market, it is important to understand the where and why of the market’s reaction.

How To Avoid Dumb Mistakes

The first order of business when talking about stops is to make sure we aren’t placing them too close to the market. Otherwise, we risk getting stopped out too frequently on volatility alone. Here are some reasons why traders get stopped out:

We want to avoid getting stopped out for the last two reasons. If we can eliminate obvious mistakes and understand why we are losing, then at least we’re losing intelligently.

This is already a big step ahead of many traders: especially those who don't know why they are losing in the first place. There are a few things you can do to avoid those unnecessary losses:

  1. Do not place your stop loss 1 pip below the most recent swing low, despite trading with the trend.

The market does not work off precise levels and exact prices. Levels can often be better thought of as “zones,” extending 10-20 pips around a given price point. Depending on the pair in question, and your broker, you’re already looking at a few pips of variance just in terms of spread.

Furthermore, it’s quite common for professional and retail traders alike to use swing highs/lows as logical places to place stops and/or reversal orders.

So, depending on the liquidity available in a given “zone”, the price can dip into the zone, find orders, and get rejected. In the case above, we would get stopped out of our trade, right where we should be looking for clues on continuation or rejection.

  1. Do not place your stop too close to the market

Liquidity is often found on either side of the Asian Range. As such, any trade taken in a range-bound situation should have a stop 15-20 pips outside the range barriers. This helps prevent being stopped out as a natural by-product of the market’s search for liquidity, or just pure volatility.

  1. Do not trade unless you have a logical and tested plan

This is possibly the worst mistake in the book. Attempting to trade without a sturdy plan in place will make you vulnerable. There are too many things the markets can throw at you. If you fail to prepare, prepare to fail.

Order Flow Intersections

We previously talked about liquidity pools as intersections of orders. Let’s now return to the point with some more context under our belt.

Common retail traders don’t usually have to think about liquidity. The market can easily absorb orders of up to $10m. This is far above the sizes they will trade, often even with high leverage.

Traders who trade above this size find liquidity to be a very real issue. They cannot think about the markets like common retail traders. Instead, they need to factor in where and how they are going to deploy their strategy. They need liquidity to deploy their bets without moving the market and without being detected. They also need to have a clear idea of where they will be able to exit, regardless of whether the trade ends up being successful or not.

Large traders (think big funds and Central Banks) cannot simply accumulate or distribute a large position whenever and wherever they wish. Instead, they must look for those places where liquidity is aggregating and stops are helping them in an indirect way.

Anybody looking to place a big order has a much safer opportunity to do so quietly. They don’t need to show their hands or influence the market too heavily. They don’t have to look or hope for liquidity if it’s already there.

Wherever stop-loss orders aggregate, there is a 2-way pool of liquidity being created. The traders that get “stopped out” are forced to issue opposite-side orders. They must thus give large traders the possibility to “fade” the stops that accumulate at those levels.

Since people are creatures of habit, they will usually use the same methods for deciding where to place their stops. For example, just below a recent low, or x pips away from market price. As we’ve discussed, those stop orders create liquidity because they issue a market order when they are triggered.

Major swing points on a major chart are the first place to look for liquidity. And they’re also the first places to keep an eye on what happens. Because, following the same logic, if large traders are active at these levels, then at these levels we have the first clues as to what the aggregate market knows and thinks.

  1. If an evident stop level gets broken (hurdled) and price continues in the same direction, that means the flow has become indigestible to the diverse participants and the price structure changes. This is usually driven by a significant event or strong fundamental reason.
  2. If an evident stop level gets faded, (a break, followed by a quick reversal) that means the flow is still in balance and it demonstrates that the fundamentals are still not strong enough to push forward.

 

 

Stop Being Exploited & Start Exploiting The Stops

Don’t get caught with the crowd. Understanding the dynamics of liquidity will help you protect your entries. It’ll also help you understand where on the price map the market is likely to make important decisions.

So, how do you do this?

The key, as with many things in the market, is to keep it simple and subtle.