Manipulated Markets: A Strategy To ProfitI would like to present an extremely powerful strategy that does not rely on standard indicators (99.9% of indicators are made up of 2 factors, mainly being historical/current price but also time) or ‘SMC’ trash etc - stuff with no real theory/baseless claims. But a strategy (and just the tip of the iceberg) that incorporates and focuses on a 3rd variable, instantly giving you an edge over other more classic market participants.
This is of course the art of market participant analysis (or more commonly known as just volume analysis). In 2023 it is a fairly well known fact that financial markets are, and by nature, manipulated. Using tools I will discuss later we can actually spot this manipulation (or just aggressive activity to be objective as possible) in real time and in the past and use them in conjunction with each other!
In terms of manipulation, the spot FX market is no different to any other, here is a scary fact: Many, many different players take part in actively trading, investing or otherwise participating in the forex market everyday such as;
- Commercial banks
- Hedge funds
- Real money
- Retail traders
- Sovereign wealth funds
- Prime brokers
- Retail brokers
- Proprietary trading firms
- Money transfer/remittance companies
- Foreign exchange fixing
- Commercial companies
- Governments and central banks
And yet, quite shockingly but undeniably factual, just 10 individual banks control around 80% of all spot currency volume;
Just for a second, begin to imagine the insane edge that this provides them. This is their game that we are playing. Fascinating, here's another much more recent, 43rd annual survey of liquidity consumption in the global forex market by Euromoney. This is the top 10 overall by market share in 2021;
They both show an equally grim picture, no matter how great your faith in any institution/firm/bank may be. Okay enough theory, but just to drive the point home if there are still any doubts, simply search up some variation such as ‘bank trader manipulation / conspiracy / fines / lawsuits / evidence’ as well as specific bank names…
The actual real ideology and theory behind the strategy provides us with a mission and a mindset as to what we actually want to achieve, unlike the infinite trash - green crosses red and so on strategies with no value and more importantly no meaning (no ability to specifically define your edge and definitely no meaningful theory behind it). What do we want to visualize in this specific strategy I'm presenting?
- Where the largest market participants were active (trading) both within a specific time period (standard volume analysis - volume by time) but most importantly, the exact price levels where they traded (in-depth volume analysis - volume by price).
- When/where/how volumes are traded once price comes back into contact with these predetermined, high volume areas/clusters (Aggressive? Heavy? Bullish/Bearish? etc).
It's that simple… so lets start! The tools we will be using to visualize the above two goals are 1) Volume Profile and 2) Order Flow respectively.
Before we go further there are some important things to note. I use and is recommended to use FX futures for analysis for greater precision and accuracy on all levels, this is called level 2 market data. There are ways to use spot forex data to input into these tools, but the result is always less accurate. Next I will go on the assumption that you the reader and trader are already familiar with the tools listed, however if not I will try my best to label everything I can, so you can delve further into researching the tools if needed.
Using the prior day's trading range and volume distribution (via volume profile) to categorize, confirm and then look for significant volume clusters within the trading range of which we will look to trade a rejection of this level(s) if price makes its way to the area in question. We will confirm this and add confluence/propensity to the trade by analysing order flow when price arrives at these areas, looking for a multitude of confirmations - Bid x Ask Imbalances, Accumulation, Large Limit Orders, Delta, Cumulative Delta Divergence etc.
To set up:
- A fixed period, daily volume profile, showing (In detail) the volume clusters within the day’s trading range.
- Order flow (numbers bars) showing bid x ask volumes, delta, cumulative delta etc.
- Spot FX & FX futures level 2 market data
The following post will be straight from my old trading journal associated with this strategy and lastly I am not selling anything, nor will I ever even link any product etc. My only motives are the hope of expanding my trading network with other serious, talented traders. I intend this thread to facilitate the discussion of all aspects of that strategy including - general related questions, testing/research, real time trading and the potential evolution of the strategy.