We are traders; we trade one thing for another and we pocket the difference. The difference can be positive or negative. It either works out for you, or it does not. This is a very binary game and you must understand that before we begin. There are only two methods to gain; buying low or selling high. You can buy something that the market considered “cheap” at the time and you can also sell something that the market considered “expensive” at the time. We are traders looking for great deals, and we try hard not to get ripped off with deals that are not worth our time or effort. This concept of things being “binary” in the financial markets is very important and must always be kept in mind.
If the only methods are either buying something low or selling something high, then the next question becomes how low is low and how high is high? How cheap is “cheap” and how expensive is “expensive”? One trader may consider it cheap while another trader may consider it expensive. Finding the answers to these questions is the essence of your job as a trader, whether you are trading seashells or whether you are trading a financial instrument. This course is designed entirely around the answer to that question, and will help you understand how to identify these great deals, before we can learn to execute flawlessly on those deals, and then and only then can we begin to develop the proper psychology that will allow us to let those deals fully play out to our benefit.
In all financial markets, there are only a few Banks and Financial Institutions (BFI’s) that do most of the buying and most of the selling. When you click buy or sell, nothing happens. When a BFI clicks buy or sell, something happens. If not much happened, then a BFI did not click. Now we all understand these are not clicks these days but rather programs to click, or algorithms, which are nothing but a computerized “if” “then” set of instructions.
The main differentiator between the orders of BFI’s and the orders of everyone else is the VOLUME of the orders flowing into the exchange. Volume just means orders , a buy-order or a sell-order. They are packed with volume, meaning they consist of orders for tens of thousands of lots. In our beloved currency markets, only four banks move roughly half the entire daily-volume, or total amount of orders transacted in one day. The top ten banks move over 80% of the daily volume. This does not mean they are always moving that much volume, but it does mean that they can if they decide to wake up and get active.
You need to understand that almost every order has “BFI” written on it as the originator. We need to also understand that the retail “slanted lines and indicators” methodology simply does not address the proper understanding of the “why” behind the price-movements. We must really understand what is actually going on behind the scenes. The BFI and their methods of operation is the key missing piece for most traders and trading alongside them is the most efficient approach to trading the financial markets and especially the currency markets.
In the currency markets, the entire retail trading industry accounts for less than 5% of this total daily volume, and we will see where the retail industry fits in future chapters. They tend to be the collateral damage and especially in the currency markets, which I believe are the most manipulated on the planet.
Now, this word “manipulation”, is an interesting one, which we will dive very deep into. In the currency markets, the “manipulation” is within the design of the system, and the essence of the manipulation is simply to manipulate you, the trader, not the price. The real manipulation can be summed up as “leading you into clicking the wrong button”; to click buy when you should click sell, and to click sell when you should click buy. We will discuss the specifics of manipulation, and how it is designed into the system, in the future chapters. Manipulation is key to our approach and the proper understanding of what is manipulation and what is not is crucial and will be heavily focused on.
In the end, the entire market consists of a flow of many orders; a buy-order or a sell-order. The flow of orders entering an exchange can be very heavy and have huge volume, during times of high liquidity, or the flow orders can have very little volume; during times of illiquidity. Orders are just like the flow of water, and the flow of the orders becomes powerful just like a large water hose becomes more powerful when there are large amounts of volume being transacted, specifically in the NY and London sessions. So we need to understand this “OFV” or “water” flowing throughout the system, because the two most important things are which direction the water is flowing , and how strong is the flow.
Who moves the price? There are many buyers and sellers who are buying and selling. They submit certain amounts of order-flow volume into the exchanges. As we know, the main market participants in the currency markets are banks and financial institutions, BFI’s. They do the majority of the buying and the selling, and they are responsible for the price movements. Although there are millions of buyers and sellers, there are only a handful of them who conduct the majority of the buying and the majority of the selling. Only four banks are responsible for over 50% of the daily volume. The top ten banks are responsible for over 80% of the daily volume. Individual retail traders account for less than 3% of the volume and are absolutely insignificant. In other words, there exists only a few banks that do almost all of the buying and selling, and we are only interested in studying their market actions since they are the movers of the markets.
Why does price move? The only information the chart can transmit to your eyes consists of neutral up-ticks and down-ticks. Simply put, these up-ticks and down-ticks price moves are caused by an imbalance in the buy and sell order-flow entering an exchange. There are only two types of orders: a buy-order and a sell-order; nothing else. The price moves based on which stack of orders is taller; the stack of buy-orders or the stack of sell-orders. The price moves because of the imbalance in this buy/sell order-flow and these large imbalances are caused by BFI’s.
In the next section, we will cover a very important but tricky candlestick that will help us become more accurate in the markets; the pinbar candlestick.
The Pinbar Candle - REJECTION vs REACHING:
This is not a price-action course. This is not a course designed to teach you about all the candlesticks and candlestick patterns, but there is one candlestick that must be discussed and it is the pinbar candlestick. It is this WICK of the pinbar candlestick that is the cause of a lot of stress for traders these days.
THE WICKS WE WILL BE FOCUSING ON.
Rejection: Price DOES NOT WANT to go in that wick direction because it is likely being rejected.
Reaching : Price WANTS to go in that wick direction because it is likely trying to reach further.
A PINBAR CANDLESTICK HAS PRINTED; LET US ANALYZE IT AND DETERMINE IF THE WICK IS REACHING OR REJECTING.
Our focus with this candle is on the wicks, because every trader is taught to immediately assume that the wicks are REJECTING price, and the price DOES NOT want to go in that direction. In this example, we have a pinbar candlestick that has printed. Our job is to validate this pinbar candlestick in order to determine whether this wick is rejecting lower or is the wick reaching lower, without immediately assuming that it is automatically rejecting.
STUDY THE CONTEXT OF THE PINBAR AND ASK THE TWO KEY QUESTIONS.
1. The first question is concerning the previous highs/lows. In the case of a pinbar wick to the downside, we will look at the lows of the previous candlesticks. In the case of a pinbar wick to the upside, we will look at the highs of the previous candlesticks; we must see whether or not previous highs/lows were broken.
2. The second question is concerning the location of where exactly the pinbar candlestick was printed; was it printed at an edge of the price-action, or was it printed somewhere in the middle of price-action. Ignore pinbars in the middle and respect pinbars that print at the edges. Pinbars at the edges are likely rejecting, and pinbars in the middle are likely reaching and may get filled.
THE PINBAR HAS BROKEN MANY PREVIOUS LOWS AND ITS RIGHT IN THE MIDDLE OF PRICE-ACTION; IT IS LIKELY REACHING.
In this example, after studying the context of this pinbar, we have determined that it is likely REACHING, and not rejecting. In cases where the pinbar is reaching, WICKS GET FILLED . Wicks that are reaching tend to become candle bodies, as in the example below.
THE WICK OF THE PINBAR IS REACHING LOWER AND LIKELY NOT REJECTING LOWER.
A CLASSIC PINBAR CANDLESTICK THAT IS REJECTING.
This is a good example of a classic rejecting pinbar candlestick printed at an edge; these are the rejecting pinbars that deserve our respect.
Remember to validate your pinbar candlesticks and you will immediately become more accurate and you will not experience any surprises as you operate and trade the financial markets. In the next section, we will begin discussing timeframes and we will learn how to use them efficiently in order to trade properly.
Using Timeframes Properly
There are many traders that fail before they even start. They have their focus on so many different timeframes with a very vague idea of what a good deal looks like. Understanding how to use timeframes is an essential component of successful trading. Most traders are taught to go through all the timeframes through a top-down approach. Although this may be useful for a new pair or financial instrument that you’ve never analyzed, this approach does little to help us in extracting consistent profits from the markets.
Most traders will open a pair, go through ten different timeframes and see ten different charts, and then hope to make an accurate decision based on what “looks good”. Multiple different timeframes means multiple different charts that all look different. This is not the proper way to approach dealing with timeframes and this is not the path towards clarity in trading any financial instrument.
Our focus will be strictly on two timeframes for that specific trade idea; a macro-timeframe and a micro-timeframe, as we will explain in this section. We will only be thinking in ‘macro’ and ‘micro’. We need the big picture, and we need the small picture. Both are important and each is used for a specific purpose.
Timeframes and the exact timeframe a trader uses is one of the most important aspects of efficient trading. As a BFI Trader, you will use timeframes in couples, using only two timeframes at a time; a macro-timeframe and a micro-timeframe . We must properly understand the relationship between the macro and the micro, and we must begin wiring the brain to see the chart only on your macro and micro timeframes. Let us define these important terms first:
macro-timeframe: larger timeframe which helps us see the bigger picture; to be used for analysis only – used to accurately draw and validate our Buy-Zones and Sell-Zones.
micro-timeframe: smaller timeframe which helps us see the smaller picture; to be used to observe price as it enters a valid zone and to accurately determine an entry point.
Combining the proper macro and micro timeframes will give us a complete and accurate picture of the current price action, where price is coming from, and where price may potentially be heading. The ability to properly move back and forth between your macro and your micro timeframes is key in being able to see any potential opportunities with a high degree of accuracy as there is much less information for the brain to keep track of when dealing with only two very specific timeframes; a macro and a micro.
◄ The Weekly timeframe [MACRO] is coupled with the 4H timeframe [MICRO] for our entry. ►
◄ The 4H timeframe [MACRO] is coupled with the 15m timeframe [MICRO] for our entry. ►
This means that if you draw your valid zone using a Weekly chart for your macro, then the 4H is your micro timeframe; to be used when it is time for a potential entry inside our macro-zone.
This means that if you draw your valid zone using a 4H chart for your macro, then the 15m is your micro timeframe; to be used when it is time for a potential entry inside our macro-zone.
Usually, you should be on your macro. However, if the potential opportunity presents itself as price enters a zone; you should be on your micro trying to determine the proper timing of an entry-point.
The best way to go about using these timeframes properly is through the split-screen option, as shown in the images below; macro-timeframe on the left, and the micro-timeframe on the right.
A macro Weekly Zone is coupled with a 4H micro for determining an entry.
A macro 4H Zone is coupled with a 15m micro for determining an entry.
Monthly Timeframe – Our Directional Bias
When analyzing a new pair or financial instrument, it is always advisable to begin with the monthly timeframe. This timeframe is not used to trade but rather to understand the bigger picture and to better understand the current positions that the BFI’s are holding.
There are only three scenarios that can be playing out on the monthly timeframe:
- Bullish; the most recent market price-action is performing a clear upwards impulsive move. BFI’s are likely holding long-positions and that trend is likely to continue.
- Bearish; the most recent market price-action is performing a clear downwards impulsive move. BFI’s are likely holding short-positions and that trend is likely to continue.
- Potential Reversal; the most recent market price action is showing a potential reversal, where the previous impulsive move may be coming to an end. This third phase is the tricky one of the three monthly scenario’s but with practice and experience you will develop a better understanding on how to identify when we may be potentially reversing on the monthly chart.
The monthly chart is either in a downward impulsive move, an upward impulsive move, or it is potentially reversing.
There are only two kinds of trades we can take, a low-probability trade (LPT) and a high-probability trade (HPT). By definition, an HPT is a trade that is in alignment with the monthly directional bias and an LPT is a trade that is against the monthly directional bias. We treat these two kinds of trades differently, and I do not mean in terms of risk more or risk less. Risk is another animal entirely and your exposure on any one trade is something between you and yourself.
[HPT]’s; Since these trades are in alignment with the monthly directional bias, it is in your best interest to let the entire trade run instead of closing half of it or closing it all out entirely. In terms of a target, HPT’s have a further target.
[LPT]’s; Since these trades are against the monthly directional bias, it is in your best interest to get pay yourself as the market makes more money available to you. Since at any moment the trend can continue and go against you, it would make more sense and cents to close partials. Whether that be 10% or 50% is up to you; the point is to pay yourself sooner rather than later. In terms of a target, LPT’s should have a closer target.
This course is not about giving you an extremely rigid and specific set of rules on how to operate in the markets as a trader. Nobody can hand you that not for any price. You must first understand how the markets operate, and then understand the style of trading that suits your personality, and then develop your own unique rules and guidelines on managing your exposure. As you go through this education, you will begin to see more clearly that style of trading that you gravitate towards and that is the style of trading you should begin to master.
In the next section, we will discuss one of the most important elements to understand the engineering of the system; the ZONES.
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