Author: sguth

What to expect as a new Trader

In this blog I want to explore the topic of actually trading. Imagining the glamour of what it means to do is definitely the easy part; the freedom and money. Strategies aside; what are you actually doing while sitting there watching the charts?

When you sit down to start your trading session, it usually involves quite a bit of mental preparation along with some self-talk. A positive ritual to get into the right frame of mind is essential for profitable trading. For me personally, I usually review my own personal reasons for trading (which is just a simple list of why I need to the best job I can). This is then followed by a purposely quick look (around 30 seconds) at what price has been doing over the last 48 hours. If I am unable to form a coherent understanding of what this means for future price action then I step away for 30 minutes or so and then reevaluate. Wash, rinse, repeat.

Next comes the real analysis of price. This usually includes a lot of measuring and in depth looks at past movement in relationship to current price. By far the most important piece of this is being truly subjective and not convincing yourself of some outlandish trading plan. You have got to devise a trading plan that has got a reasonable entry, stop, and limit, and you have to stick with that. It can be very easy to convince yourself that you’re at a turn, but 9 out of 10 times this simply is not the case. If you’re able to fight off the urge to immediately jump into a trade, then the real test of a trader comes into play… Waiting.

Waiting is what you are going to spend the majority of your time doing as a trader. Nobody told me it could be so boring when I started. Your income is directly tied to your ability to wait so that your timing is good as a result. For those that have not traded before this may not seem like much, but waiting while being intently focused on a moving target can be pretty tricky business. Your mind will constantly be fabricating a less than optimal reason to just jump into the market. At some point of the endless waiting there comes a moment, that given the understanding and screen time, you are presented with an actual entry.

Depending on a few different variables (news, volume, overall movement, etc.), this entry opportunity can last anywhere from 10 seconds to around 20 minutes. It’s typically on the lower side though. This is a fork in the road. Sometimes despite all that patience, you still can’t make yourself get in only to be upset with yourself for the rest of the session. In the event that you do take the trade, you’ll most likely find that for the next while you are going to be hyper sensitive to any movement in the market. This is called “anchoring”, and something you really want to avoid while trading.

After the initial tension of clicking into a trade is over, it is surprisingly followed by a numbness to the price action (especially if you are drastically positive in the trade). Yet again this is a thought process that you will want to avoid. When a trade is working out well, a trader’s risk tolerance is prone to also go up. This is usually how a seemingly competent trader may see a massive profit only to ride through and turn right into a meager profit. That money is not yours until the position is closed and it is sitting in your account.

Now that you have closed your position out for better or worse, you are faced with another challenge; avoiding overtrading. Overtrading is one of the top account killers in Forex. If you have ever had an experience in a casino that ended in a personal resolution to never go back, you might have experienced something similar to overtrading. As much as many (myself included) wish it wasn’t the case, there is usually only 1 good opportunity per session with about 2 far less optimal variations on that same trade. Taking more than 1-2 well thought out trades in a session is a surefire way to dramatically increase the risk you take on. Needless to say it usually doesn’t end well for anyone but the Broker and Bank.

While this all may seem very daunting for someone that has never traded before, rest assured, pulling off a great trading session is one of the most rewarding feelings that you can experience. The wins (and losses) are yours and yours alone. Getting to the other side of learning to trade is an eye opening experience that forces you to look at yourself and become the best that you can be.

Thanks for reading and be sure to subscribe for more emotional and technical analysis of Forex Trading.

Shane Guth

 

 

Hey Traders

This week we are going to be focusing on the Market Maker Manipulation and content behind the scenes that played out on November 18th during the release of the FED’s Minutes, which had quite an effect on the EUR/USD. The entire move, from it’s initial setup to the profit release to the short side, was truly a spectacle to behold.

Should you have any issue understanding some of the terminology in this post, please refer HERE.

As you can see from the image above, all of the normal components of the Market Maker Business Model were present.

  1. Accumulation of retail orders.
  2. A belief created in the retail public that their trade is going to be profitable.
  3. A stop-out of their positions to clear retail orders off the books, and generate the liquidity required by Investment Banks to take a position of their own.
  4. A Release of Profits in the direction mostly everyone thought it was going to go in the first place.

 

This is all well and good in hindsight but what we are going to be focusing on is how to read the signs leading up to, and taking advantage of the entry.

We will start small with some of the clues on the 5 minute chart, and work out to the larger time frames. As you can see in the image above, some pretty standard things played out. When news was released price whipped down to a past 8HR Average Price. This was the exact entry to test, that ended up being worth quite a hefty sum of pips. Taking that in the midst of High news snapping around can be a bit unrealistic though. There was also some play around a past Daily Average Price line, but that becomes much more pronounced on some of the higher time frames.

After taking out a past accumulation Dot (which was the best entry into the short earlier in the morning), price stalled out and started pulling back.

The real entry into this trade took place around 25 minutes post news when price completed it’s 32 pip pullback. For those unaware, the Market Maker’s Business model functions off of a 30 & 45 Pip system. Landing this entry had a risk of around 4 to 6 Pips, with a massive upside.

Of course, this is all on the 5 minute chart. Let’s take a look at how some higher time frames might have lent themselves to a long move playing out.The 15 minute chart is where things really got exciting. As stated on the picture, accumulation in the form of a 15 minute Dot took place on a past Daily Average Price line (represented by the tan line). These past levels have shown time and time again that they are some of the prices of choice for Market Maker’s to place trades of their own.

When the Market Maker’s accumulate orders at a price level, they allow the retail trader to also get in at that price. It is how they generate liquidity for their own massive trades. The retail trader’s stop levels was represented by the yellow liquidity line left near the low.

When news came out, it broke right through this level (stopping out any retail trader’s in a long position). After this stop out had taken place, price rose back up, and ended up being a rotation off of that original Market Maker entry point. This effectively took out retail traders, while protecting Market Maker interest in the pending long move.

The 1 hour chart was actually surprisingly similar to it’s 15 minute counter part. There was an accumulation Dot dead on that past Daily Average Price line, followed by a stop out of retail orders. Following the stop out, price rotated back up through the Dot, showing Market Maker’s protecting their own interests in a long position.

At this point there was a great deal of information point to the probability of a long trade, with virtually no risk. As a student of the FX365 Institute, this is an ideal setup.

With the current layout of Smart Money Profile Software, we do not track Accumulation Dots on the 4 Hour chart, however it is plain to see what took place. It was further rotation off of that past daily average price line. At this point, a trade to the long side is inevitable.

Once the long trade played out (which was worth about 120+ pips), I’m sure you can see that the market ended up backing off and going into an even larger run to the short side. Let’s take a look at that to see if there were any signs to get into this trade.

When I’m explaining the Market Maker’s Business Model to a new student, I like to use the gear analogy: The 5 minute gear spins the 15, which in turn spins the hour, that then spins the 4 hour, so on and so forth.

What was an Accumulation, Manipulation & Profit Release on its own ended up being a manipulation to the long side. This Manipulation was intended to knock out a serious number of retail traders from the on going short of the EUR/USD.

As you can see in the picture above, price traveled up and ended up bouncing off of a daily Average Price line. These price lines represent Market Maker Entries into their own trades. A Bounce off of one (especially on the daily chart) is a serious sign of a coming profit release in the opposite direction.

And since it has been mentioned so many times, here is the Daily Average Price line brought up throughout this post. It was formed May 15th, 2015, and all these months later has proven to be an invaluable price level to keep track of.

If you have ever been in a trade, only to get stopped out moments before the move takes off, I would encourage you to look into the Market Maker’s Business Model. If you ever get the feeling Forex is rigged against you, it’s because it is. Luckily for us though, the Market Maker’s system plays out time and time again on every time frame in every currency pair. Learning how to read the 3 stages of the Market allows you to get in when they do, and take your profit when they do. While it can still be hard to master, it certainly levels the playing field in Forex Markets.

Thanks for the read, and be sure to subscribe if you found any of this information useful.

-Shane Guth

Director of Education

Here are some terms used focused around Forex Market Manipulation in the FX365I culture:

 

Accumulation: A range of Price that the Market Makers have stalled the Market at in order to collect orders, and set up a pending Market Move. Accumulation comes in two varieties for purposes of what you are looking for: Short term & long term. Short term accumulation will influence short term direction and quick manipulation moves, whereas long term manipulation will influence the overall direction of the Market.

Average Price: A price that Market Makers and Retail Traders have entered into trades. Average Price is represented by a bright green line on the 1HR and 4HR charts.

Bounce: When price hits an Average Price Line, Dot, Top/Bottom of Box perfectly then moves the opposite direction following.

Box: A light blue square or rectangle found on your 1HR or 4HR chart. This is how Smart Money Profile Software defines Accumulation on a larger time frame.

Breath: While the Market travels Long or Short, it will often temporarily stall and retrace slightly before continuing.

Candles: Price movement as represented by a bar shape on your charts (MarketScope). They will show you where price opened and closed, as well as where price moved within a given time frame.

Closed Positions: The section inside of your Trading Station where you can view your profit and loss of each trade that you have closed out.

Dot: A Bright green dot found on your 5M, 15M, and 1HR charts. These represent short term Accumulation and can be used for a variety of purposes.

FX365i/Forex 365 Institute: Your new Forex Educator. We provide Software and Education only

FXCM (Forex Capital Markets): The Broker that you will be using as a FX365i student. FXCM will be processing your orders when you decide to go into trades. They also provide the trading platform that enables you to watch the Market on your Computer (See Trading Station & MarketScope).

Grid Line: A series of reactive price points.

Indicators: Tools that retail traders rely on to make decisions regarding future price movement.

Limit Order: An order, placed automatically or manually, that closes your trade in the direction you have placed your trade in.

Liquidity: A large amount of money at an area in the Market. Also high volume times in the Market.

Liquidity Line: Blue and yellow lines that appear on your 1HR, 15M, and 5M charts. They represent liquidity and belief levels in the Market.

Liquidity Swap: A manipulation of price meant to change the overall direction of price.

Long: When the Market is moving up, or a Buy Order that you have placed.

Manipulation: When Price is deliberately moved by the Market Makers in order to stop-out Retail Traders, or to build a belief of a certain direction in Retail Traders.

Market Makers: The Financial Institutions that manipulate the Market.

Marketscope 2.0:  FXCM’s program that displays your charts and candles. Also where you are able to add in Indicators to lay over top of the candles.

Net: An area that consists of two Grid Lines.

News: Financial information pertaining to a certain currency pair. Can come in high, medium, and low volume varieties.

Pip (Point In Percentage): A measure of a currency pair’s movement. More simply though, a pip is what we in the Forex would consider a “point” for calculating profits and losses.

Price Alert: A user added line that draws infinitely across all charts on MarketScope in a specified pair.

Price Line:  The blue line (once you have properly set your colors up) that represents the live Exchange Rate between the two currencies you are watching.

Profit Release: A stage in the Market Makers Business Model. This stage takes place following sufficient accumulation and manipulation.

Pullback: Interchangeable with Breath – While the Market travels Long or Short, it will often temporarily stall and retrace slightly before continuing. This is usually a chance to place a trade of your own.

Push: Price has traveled long/short in a relatively short amount of time. Usually consists of 1-5 candles.

Range: The prominent highs and lows set by price in any given time period.

Advanced Rate Indicator: The “Flashing lights” inside of Trading Station. The tool we usually use to enter and exit a trade.

Retail Trader: Any Trader/Investor that does not work for a Hedge fund, or an Investment Bank. These Traders trade their own accounts.

Rotation: Interchangeable with “bounce” – Price nearing a resistance/support point, and turning the opposite way.

Run: Generalizes a gradual large movement of price. Can be characterized by multiple pushes, with multiple pullbacks.

Short: Selling the pair you are watching, or Price traveling down.

Slippage: When the broker is not able to place your trade at your specified price (Usually happens during high news events such as; GDP, Non-Farm Payroll, Rate Decision, etc.)

Smart Money Profile: The name of the software used in the Market Makers Course.

Snap: A quick, medium to large movement of price.

Stop Order: An order used to automatically take you out of your trade to manage your risk.

Stop Out: An outcome of manipulation by the Market Makers. Hitting masses of Retail Trader’s Stop Orders.

Traders Prison: The metaphorical “Prison” that many technical Traders land in by constant system development, usually through technical indicators.

Trading Journal: A means to properly track your trades on a day to day basis.

Trading Station: FXCM’s platform that allows you to view currency pairs, and manage positions, as well as your trading account. This is what FX365i Software is installed into.

Luckily for those of us that trade the Market Maker Business Model, the way in which Forex works is extremely simple.

I’d like to lay out an example of what I would consider a pretty standard technical trading screen. It was built with free indicators that are widely available, and widely used by Traders across the world.

You can obviously see how easy and intuitive this type of trading is just at first glance…

Not so much. And it isn’t even so much an issue of which ones were used in the example. Frankly whichever indicator is added into the fold or taken out is a moot point. In a world where technical system development runs rampant, screens that take this form often fail to produce results.

Less is More

If you have ever been down the road of system development in trading, this thought is sure to have crossed your mind at some point. There is a tipping point where you are being bombarded with information and can not make a decision that holds any water. This is when the balancing act of removing indicators starts to come into play. God forbid you have access to the calculation settings, because that’s where things start to get really crazy.

It is possible to tweak nearly any screen to give perfect signals on any given day. If the market moved in the exact same way day in and day out this would work exceptionally well. Unfortunately reality stomps on that dream. So close.

So how exactly can you apply the ‘less is more’ to system development in Forex trading? Get rid of every indicator?

No we’re getting somewhere. The issue with standard technical indicators, however many of them are used, is that they mask the simplicity of how the market actually works. Using technical indicators can be great if you are playing a metaphorical baseball game. The only problem is Forex would then be football.

The Market Maker Business Model works in 3 stages:

Accumulation

Manipulation

Profit Release

  1. The accumulation of orders.
  2. A belief in retail traders is created and then manipulated.
  3. The market runs the direction most everyone thought it was going to go in the first place.

The moment you add a moving average (or technical indicator) of any type, you have added a mask to this process, as it does not show you when and where money has changed hands. It is based off of price action that will never repeat itself in the exact way for the rest of history.

To conclude, I would encourage anyone looking for the perfect trading setup to research the Market Maker Business Model. If Forex were a casino the Market Maker Business Model is card counting, while everyone else is wearing their lucky socks looking for a machine that ‘speaks to them.’

 

Shane Guth

Director of Education

Representativeness

Representativeness: Used when making judgments about the probability of an event under uncertainty.
Representativeness at its core is overshooting the accuracy of a prediction because of the situations similarity to something else that you would expect to happen. This process usually includes disregarding any statistical evidence of its likelihood. It is the natural stereotyping of people and situations that our brain does in order to keep information tidy and coherent.Let’s examine an example of the representative heuristic.

Tony is an above average size male, twenty six years old. He is good at working with his hands, and enjoys the outdoors. Tony would be described by many as a “man’s man”.
When guessing what he does for work, would you say it is more likely that he works as a Motorcycle Mechanic or as a Retail Salesperson?
The intuitive answer to this question would be that Tony is a motorcycle mechanic. The image in our mind of a strong young man fixing motorcycles, most likely an avid rider himself, fits much better than imagining him standing in the showroom of a clothing store.The problem with jumping to the conclusion is the disregard of statistical data. As of 2012, it is reported that there are 16,800 Motorcycle Mechanics in the United States. The same report says that there are 4,447,000 Retail Salespeople in the United States. The likelihood that Tony is in Retail Sales is substantially larger. As stated above, our minds tend to disregard statistical evidence in order to form a coherent story. In Tony’s case there was no real information in his description that would lend to his working in one field or another. In cases like these the best course of action is to simply look at the highest probability, ignoring your intuition, and go with that answer. Over a large enough sample size you will be correct far more often than not.How Representativeness plays a role in Trading

While trading, the urge to make intuitive assessments of future and current price action is incredibly strong. It takes an amazing amount of discipline to ignore these feelings when they arise. As a Trader, how many times have you done careful research to define the direction, but ended up trading the opposite way because of an overwhelming intuitive feeling? These hunches are usually followed by a negative trade when the market pushes the way you had originally thought it was going in the first place. Oh, you also sacrificed the best entry because you second guessed your original assesment. Merely thinking “there is no way this can push further” is part of the representativeness heuristic. Of course it can push further. The reason we think it won’t is because we have seen a visually similar move at some point that did not push further, which most likely has nothing to do with this current push in the market. While staring at the charts they can take on amazingly similar setups all the time. The representative heuristic is meant to speed up the process in which we make decisions. This works wonderfully in the real world, classifying dangerous and favorable situations quickly, however in trading it can put you into the wrong trade at the worst possible price. The Forex Market takes on countless patterns that are seemingly recognizable. With a relatively small amount of screen time you can start making “intuitive calls” about future price action. This is especially true for a beginner trader. A beginner will be taught a certain way and follow it because they have nothing else to go off of, leading to what many would describe as “beginner’s luck”. Once they have watched price action enough they begin to make their own intuitive judgments and take negative trades because of them. How to disarm the Representativeness heuristic

To keep this heuristic from wreaking havoc on your trading account is by engaging your conscious decision making process. Checklists can be a massive help, as well as writing down the actual direction you suspect the market to run in. If the market is similar to the case of Tony (looks coherent but is lacking real information), the best course of action is to simply wait for more information to reveal itself. None of this is to say that there is no room for intuitive judgment. Intuition is your subconscious mind searching memories for information relevant to the situation, then feeds it to you in a “feeling”. Consider this: Research shows that it takes a Chess Master seven years of playing chess five hours per day to reach the highest level of intuition of the game. That is 12,775 hours of active concentration on a game of chess. This allows them to look at a chess board and quickly come up with many possible counters (some of them creative) to an opposing player’s position.
While there is hope to have a true Master’s intuition on the Market, it takes an awful lot to get there. In the meantime we can simply compile a well thought out list of things we are looking for and make our own “magic intuitions” on the market. By keeping your intuitions under control before they are refined, you can drastically increase your chances of making profitable trading decisions over a large sum of trades. As always, I encourage anyone reading this to do your own research into the subject and form your own viewpoints of these subjects.
There are still many other heuristics that come into effect while we are trading. Be sure to subscribe so you can be one of the first “in the know”.
-Shane Guth

Director of the Smart Money Course
shane@fx365i.com