Almost all intellectually curious traders, who have never had the benefit of working in an institution, or on the 'other side of the fence', will at sometime begin to wonder; "where do the big players trade?"
Institutional traders, for example, working at a tier 1 bank, or well renowned hedge fund would have access to: intelligence, hardware and software that is out the reach of most retail forex traders.
However, there is one aspect of their trading methods (aside from attempting amateur algorithmic trading through expert advisors) that private traders can replicate, albeit with not as much speed or accuracy, I term it "level headed trading" and it requires very little in the way of state of the art solutions, hardware or software, particularly if intraday or day trading.
By now you will have no doubt noticed how the price of any pair 'reacts' to support and resistance, most charting packages offered free of charge from your brokers will allow you to select these options, automatically re-calibrating each trading day (although I'd recommend being aware and alert to the fact that different R and S readings are applicable depending on whether or not you are using a USA based broker's package).
If you pull up a chart of this morning's action there's some fascinating evidence to 'prove' the point, I've used half hour candles in the examples..
EUR/USD; the R1 line is at 12910, price reached 12907 then retraced, approx three candles later it moves through to 12913, retraced back to 12904..at the time of writing it's pushed back up to 12917 with a daily high of 12918..
USD/CAD; the S1 line is at 10092, on the 8:30, 9:00, 9:30 candles price hits S1 on each candle. Pauses on the 10:00 candle to then break support on the 10:30 candle reaching a low of 10087 on the 11:00 candle..at the time of writing it's pushed down again to 10087 currently printing at 10095..
Now these are obviously the most prominent selective examples available from this morning's action and I've selected them to make my point, but this pattern is repeated many times, on many securities, on any given day, on any given week in the market.
The daily pivot is also an essential level, then we have perhaps the most widely used level in 'trade land'; the 200 ma or ema. To begin to fashion a very robust trading strategy, by using only these key levels, is fairly straightforward and I'll leave you with an example of such towards the end of the article.
So why do so many big players hunt near these key levels? Well there could be two reasons, the first is fairly obvious, because historically that's where price action happens most of the time, and secondly why does price action happen there most the time? Because that's where the big money players literally 'place their bets', move the market and leave the gaps for us retail mortals to feed on.
Institutional traders do not possess the time or inclination to become proficient at technical analysis, their skill set and job description does not contain the exploitation and examination of hundreds of trading strategies underpinned by indicators. That's a luxury we have that provides one of the few advantages we have over and above the Street, we can use our 'smarts' to exploit movements in a far more precise way.
There's a fascinating book called Street Smarts, I'd recommend it as reading. In it Linda Raschke describes where we 'fit in'. We shouldn't aim to replicate the actions of the market movers, we'll never move the market, (given retail specific trading accounts for less than 8% of the daily volume), but what we can do is be far more agile than the big players, in order to be ready to occasionally take advantage of price movements by using a far more nimble mechanism than elite bankers and traders.
In fact this represents the only key edge we can ever develop over the huge market players and participants, and it's a very good one to exploit.
So how can we fashion a simple strategy from levels trading, a simple strategy forex traders could employ with the minimum of screen time? I'll cover this in more detail in our trading strategies section but for now here's a few basics to consider. You may prefer to experiment with this and observe how price reacts before building a strategy using the levels.
Placing orders at (or slightly below or above) R1or S1 is the obvious method, you could take a view that price may reject these levels and 'mean revert', or break through. If the 200 ma is close to either R1 or S1 then in terms of probability your trade has a greater chance of success.
For example, if price has broken up through the daily pivot, the next stop is R1, the 200 ma is clustered in close proximity and there is a 'v' shape to candles and ergo the price action is positive, then the potential trade has an excellent chance of success. You'd simply reverse this method for going short..
The 200 ma may have already been broken, price may have already smashed through the daily pivot and be heading towards R1 or S1, again this should be a HPS (high probability set-up).
Sounds too simple to be effective? Well we could get even simpler..Take a look at a vanilla daily chart with only the key levels on it. Now look for the 200ma, could you justify buying or selling at around this line only? Could you develop an effective strategy buying or selling by placing orders around S1 or R1? Doesn't look, or read as ridiculous does it?
Whilst undoubtedly our indicators give us precision, we can at times suffer from 'chart blindness' which in turn leads to decision paralysis. If you strip down the charts (to a close on naked appearance) you can experience a far better perspective, you get to see the bigger picture. In seeing the bigger picture you're also watching the market from the big players' viewpoint, the most important viewpoint there is.