A quite radical approach to forex trading

I'd like to share a quite radical approach to this forex trading arena.
I'm going to give a "live" scenario as an example.
In this scenario, banks have their own insider/volume/positions info as an edge.

Scenario: EUR/USD trading

Start time: 8 Dec 2010 bottom (1.3180)
At this point of time, there were lots of buy-limit positions (entry and exit positions) below 1.3180 but only few sell-stop positions, so it was definitely very difficult for the price to go down further.
Also at this point, there were already lots of buy-stop positions above 1.3180 but only few sell-limit positions.
Banks saw this fact, so they decided to "move" (manipulate?) the price up abit. They bought EUR/USD and moved the price up a little. Since there were lots of buy-stops but few sell-limits, so the price easily kept going up as buying volumes were larger (buy-stops vs sell-limits).
By the time EUR/USD hit 1.3320, the scenario was reversed.
There were now lots of sell-limits and few buy-stops above, but lots of sell-stops and few buy-limits below. Banks who could see this info decided to again "move" the price down abit. Now the price easily kept going down as selling volumes were now larger than buying (sell-stops vs buy-limits).
When it hit 1.3164 bottom, the condition was again reversed back to what it was when EUR/USD bottomed out at 1.3180 before. Banks, again, "moved" the price up abit and voila, it's been going up until recently.
Now, banks are waiting to observe whether there are lots of limits and stops above or below.
If later there are lots of buy-stops but few sell-limits, banks will likely "move" the price up. If there are lots of sell-stops but few sell-limits, banks will likely "move" the price down. Whichever will be easier for the price to move.

Conclusion:
Forex prices almost always go to a direction where there are lots of stops but few limits so it's easier for prices to move in that direction. Forex trading is a stops-pounding/smacking arena. Obviously far more stop positions are usually triggered/executed than limit positions.
The only exception is if there's an intervention by central bank, but even central banks normally have difficulty against the market.

Therefore, we have to be careful in putting stop-losses.

Is this approach true?

Great post dude, I'd say your post is true and hits home with my thinking.

I like to think of it this way: How do our brokers make money? With the spread. More trades = more spreads paid = more money. Price isnt going to hang around a level when there's 20x more trades 100 pips above or below. Banks/brokers (not too clear of this part yet) make trades to make money. Price goes to where orders are ready and willing. After they're all eaten up, price is going to find more liquidity.

uh oh.

why even mention brokers? they play no part in the prices on the chart. they don't MOVE anything except the part of the spread they bake-in into their account while waiting for it's clients to stuff up and blow their Nth account at which point all the money is then theirs to put into their account.

to the op : why wouldn't prices move in the path of least resistance. this is what you are suggesting. this... is not revelatory :/

sorry abt that. thanks for clarifying some nubcake. im still learning the structure.

traex is noticing price action going to the levels where popular stop losses are and so am I. makes sense though, stop orders are potential market orders which add to the flow.

it'd pay for anyone who hasn't already, to either do some googling about the structure of fx, or read all of Darkstars posts because he pretty much covers it all anyway for you in nice neat packages... or do both for a double win.

here's a tip : if at any time you find yourself thinking you know why prices move and who is moving it, then chances are you are wrong. banks are the biggest crooks / champions (depending on your perspective) there are, and only they know the true truth about what goes on and why. it's their money after-all.

OK that isn't radical lol. Bear in mind that each dealing bank will have its own order book, so one dealer may have interest in price going up whereas another may not. Plus it's not all about hitting stops, there are always client market orders coming in and an imbalance from one side means price moves in a direction to balance it, i.e. lots of big buy orders coming in, dealer fills them and offsets on interbank consuming available offers, thus moving price up for everyone - even if most stops are below. It's not always to make the spread either, stop orders are valuable for liquidity consumption because dealers can dump accumulated positions into them. BTW anyone notice the stop hunt this morning? Yeah it was stops triggered, just had to watch the speed it shot up after going over ~50, went back down even faster.
http://i55.tinypic.com/krnz9.gif

Stops get triggered all the time.

But hunting a pool of stops works different because the weaker orders were executed on different price levels.
The banks and MM are going for the whole size and force them out while cutting off liquidity at the same time.

When the prey panicked usually a reverse occurs where the big guys again unload and profit.

G'day Traex,
... very good observation and I can assure you, that this is happening all the time especially in regards to EUR/USD
but, that isn't some sort of manipulation by the banks or anything alike, that's simply the levels of supply and demand.
So, don't worry about someone hunting stop-losses ... just trade with "big boys" and profit like them ...
... I know, this is not so easy, but believe it is possible ... 'cos that's what I'm doing ... day after day ... every week.

Hi Traex,

where are you watching those stops? Is it Level 2 information, oanda order book or something else?

Thanks.

I get all my orderboard information from Fluffy the Forex Fairy. She sits on my shoulder and whispers into my ear where all the stops are.

pillager, I don't have access to any of the orders info. I just imagine them in the chart then make trade in their direction heh. Profitable.

Thanks for all the opinions.