Random Thoughts: Trading and Dealers, $Study $$

Foundations 101, Trading 101 Off 1

So its hit me as I’m laying in bed thinking of this whole support and resistance thing, what hits me you ask?  Its hit me that you have understand support and resistance,  (watch the way  price reacts to my lines in this video), as well as a fundamental understanding of basics like fibs and ma’s.  The hard part for many is the entry, with the ever common newbie mistake of cutting winning trades too soon or losing patience, as well as the reverse letting bad positions go to far.

Traders need to control their emotions prior to and during a trade.  How can you do that? Reverse your thinking.  If you have knowledge of the markets and price action but you’re losing money, you have to do something different.  One possibility is to scale into a trade rather than scale out.  Price moves due to supply and demand right?  More buyers, the price goes up, more sellers it goes down.  If you scale in light (starting small) your emotions more under control.  This way if the trade goes against you its a lot easier to overcome, as opposed to putting on full risk at the start of your position.

 

Scale in, and then if you are on the right side of the trade then as it hits and breaks further entry criteria then you can add momentum to the trade regardless of how small a position you hold.  (Yes, I am aware that the forex market trades multi trillions per day, and that any individual’s trades have virtually no impact on the market).  However, think of physics, an object at rest stays at rest, but an object in motion in the absence of gravity stays in motion.  Well there are outside forces on price, buyers and sellers, but if price is moving, if it is in motion then by the law of physics, even small amounts of added force have an exponentially greater effect on the object in play, price.

Think about dealers, big money, they get paid and make bonuses based on their performance.  They also have the capital in the markets to effect price movements.  They get the ball moving and they want to keep the ball moving until they reach their goal, they may also take off huge chunks to cause an adverse price reaction and that creates liquidity in the market by bringing in new money. They get that money back into the market after price moves in the opposite way, takes out stops in that direction then the dealer is able to add to a position and move price back in the initial direction creating even bigger profits.  How often do you see a huge, non fundamental move in price only to hit a level and reverse with nearly as much force as the move itself.  Over and over again.
This happens because of big money (dealers) that have kept price moving and is exiting positions at predefined levels. This causes a massive vacuum at that price so it has to jump back to find liquidity, as that is the only way they can exit.  However because they have been adding on the way, not only does it keep price moving, it also incrementally or exponentially increases the profit on their positions.

In summary, it is vital to understand support and resistance levels in this market.  These are areas where price is likely to change direction.  Once you have that understanding under control you have to start thinking like the big players.  They are the ones that have an impact on the market and they are able to a degree to manipulate price by way of the huge positions that they command.  They know where small traders and scared traders are keeping stops and those stops add market liquidity.  Gain this understanding and you are well on your way to trading profitably.

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Doug Craigmile

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