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Trading Like A Dealer: Treasury Management With High Risk

  • #41
  • Dec 24, 2014 9:16am Dec 24, 2014 9:16am
  •  Neio
  • Joined Oct 2012 | Status: Can't think outside?Enlarge the box | 688 Posts
Quoting FXMasterSK
Applying Newton's Laws of Motion to Trading Part IV =================================================================================================================================== Law 2: Momentum is produced when strong one-sided order flow acts on limited available liquidity. The greater the liquidity of a currency pair, the greater the amount of one-sided order flow needed to create momentum in that currency pair. ===================================================================================================================================...

Hi FXMasterSK,

Enjoying your posts. I also came to a similar conclusion as you regards momentum, and tick volume being correlated to real volume:

http://www.forexfactory.com/showthre...33#post7956633

Regards

Neio
An expert is a man who has made all the mistakes which can be made
  • #42
  • Edited Dec 25, 2014 7:59am Dec 24, 2014 4:20pm | Edited Dec 25, 2014 7:59am

Applying Newton's Laws of Motion to Trading

Part V

===================================================================================================================================
A basic summary of Newton's laws of motion applied to Forex and how it relates to actual market mechanics
===================================================================================================================================

Let's review our laws again:

Law 1: Price will remain the same unless acted upon by strong one-sided order flow on limited available liquidity. As price moves it will continue to move with the same momentum and in the same direction unless acted upon by induced contrarian order flow as it moves in that direction.
Law 2: Momentum is produced when strong one-sided order flow acts on limited available liquidity. The greater the liquidity of a currency pair, the greater the amount of one-sided order flow needed to create momentum in that currency pair.
Law 3: For every price movement, there is a leftover gap in the order book which creates a liquidity black hole/vacuum.

Price tends to move in impulsive waves which leave behind vacuums that attract price. This is because when strong one-sided order flow comes into the market, price must move to induce contrarian orders to fill that order. This leaves behind a gap of orders and it normally takes much less effort to fill that gap unless there is strong order flow pressure there. In a trending market, after the initial impulsive wave price begins filling that vacuum and becomes attractive again creating additional order flow pressure. On a chart, this looks like an impulsive wave and a retracement thats having a hard time filling that gap. After that order flow pressure eats up available liquidity, price creates another impulsive wave and this pattern repeats until momentum and the trend dies out. On the other hand, some vacuums completely fill and this could signal price exhaustion. A good example of this is when a stop run happens. A pattern I have observed is the market has been ranging and there are tight stops nearby. Dealers or other participants know there are tight stops because traders are predictable, even I know they are there without ever looking at a DOM. They intentionally hit the stops for liquidity, but then all of a sudden we see price reverse course (fake-out) and breaks out to the other side.

Now in order for us to trade someone has to take the other side of our trade. Who guarantees to take the other side? Well usually brokers, but who guarantees brokers, commercial businesses, and funds trades? Market makers! So if there is strong buying order flow pressure on the customer side in a bull market, the market makers must take the other side of the trades and are net short. These guys don't want the market to run away against them too much so they want as much of that gap filled as possible as it represents inventory they are holding. Why do you think impulsive waves are strong, but the retracements are slow and puffy movements? Because they are taking pieces off their short trades off and closing out that unwanted inventory as price fluctuates to balance their books so they are with the trend. On the other hand, when customers are net short in a bull market, market makers will be net long. All they have to do is wait for the trend to reinforce and they make some quick easy money. That is a huge part of their strategy and how they handle speculative trades to make their budgets. They have a better advantage of knowing whether there really is strong buying pressure there or if price is ready to reverse because they can see their customers order flow, but just watching price give clues as to whether it's ready for the next impulsive wave or if it's exhausted and a good trader with good risk management skills can make good profits from this.

The way price acts in a vacuum can tell you a lot about where it wants to go next. When a gap is completely filled, it represent price exhaustion which means there is no real backing to that move and price may breakout the other way. When you see a retracement into a gap not able to fill the gap, this means there is real backing to that move and price may continue in that direction. In a trending market, there is always an impulse move followed by a retracement. Unless that impulse wave move gap is completely filled, price will continue to trend in that direction. Once it does get filled, price will likely move the other way and a retracement after that gap fill as long as it doesn't fill the new gap creates an optimal entry. We must take into consideration whether the trend is really over or if this is just a bigger correction as it relates to the Elliot Wave Theory. This is where my fundamental, global macro, and sentiment analysis come in handy as I know at a macro level whether a trend really is over or not. Risk management and following the latest price developments as they occur is also key.

I may talk a little bit about how I apply the basic framework behind Elliot Wave Theory and Dow Theory in my trading later on, but for now I have given plenty of information for some of you guys to wrap your head around. See if it can help you in any way and if it can, great. If not, that's fine too. Figure out other ways of using technical analysis the real way it was invented to be used and not what the retail trading world has turned it into. Good luck everyone!
  • #43
  • Dec 24, 2014 4:23pm Dec 24, 2014 4:23pm
Quoting Masterrmind
{quote} The ASX shares were a bit of a so so affair but far better than bank interest but require a bit of a juggling act at times just to keep the gains reasonable. You still have to keep up with your portfolio shares and make sure they are on track or not but far less work than day trading the FX market. I do trade FX over the longer term with several positions however...
Hey Masterrmind,

This resonates with me because I use the same sort of method when I scalp. Momentum is key and with the right risk management in place, careful use of leverage, and a good entry system you can make some nice returns. Some traders can't handle it because they can't keep their emotions in check, but to me it's more like I'm playing a video game.

In the past I would trade short-term time frames, but if I felt the entry was right on a 1Hr+ time frame I would change up my lot sizing and hold onto it for a bigger ride. It worked out well, but I stopped doing it because it gives me a good feeling booking in my profits at the end of a trading day. I do carry overnight positions if I feel it may benefit me, but these positions are managed with stop losses (although not tight as to avoid it being hit by short-term fluctuations) just in case. There's just no way of knowing what can happen while you're sleeping. And these positions are usually half or a third the size of my normal ones so as to not give back profits already booked in.

I like the idea behind your method and would love to see you posting some of the trades you took when you start trading again. What currency pairs do you usually track?

Glad you are enjoying the thread. It was pretty quiet here and at least you were around to help keep it going.

Wish you a happy and merry Christmas eve!

-FXMasterSK
  • #44
  • Dec 24, 2014 4:25pm Dec 24, 2014 4:25pm
Quoting KingHussain
Hello buddy, I have a feeling soon you will offer some paid service, correct? what do you plan to offer?
Hey man,

I have no plans on going commercial and no paid service in the works. I'm a firm believer that most (not all) people that have to offer a paid service aren't actually making money in the markets and aren't cut out to be traders. That is not me. I only started this thread to track my progress and keep my analysis in one place. Rather than doing that on my hard drive, I felt if I posted on here it may help some other traders develop their own views on the markets and understand how markets really operate.

Trading isn't just a job, it's my passion. Since I'm not currently trading due to the reasons I've already stated, I decided to write up some information about markets in a unique way to help others. It's pretty time consuming, but it's what I love to do.

Hope all is well and how are those positions coming along? I think earlier I saw you're making a nice steady come back. Gotta love how the markets will teach you new lessons day by day. Every day you can choose to learn that lesson and become a better trader or ignore her lessons and become a failure. That's life I guess. All in all you can still say you're up from your initial deposit and made some nice returns.

Good luck!

-FXMasterSK
  • #45
  • Dec 24, 2014 4:28pm Dec 24, 2014 4:28pm
Quoting kprsa
{quote} Hi, this is a very nice observation. I have myself been using a similar concept, called Weis waves in my recent trading, which basically measures the total volume over a given wave/Zigzag leg, but also taking into account the pip movement and the time (wavelength) with similar conclusions...
Hey kprsa,

That sounds interesting. I'll have to check it out. The whole momentum calculation thing I kinda concluded myself as it was sort of a common sense thing relating momentum and volume*(pip movement/time) to force and mass*(velocity/time), but I know many others have developed similar concepts. It'll be nice to see how other traders do it and I'll find a copy of that book.

How are you measuring volume in FX?

And thanks for the heads up on the P.S. I wish I could fix that as I am the type of person who hates when people say things without actually researching or having any backing to what they are talking about, especially how the media corrupts peoples minds even though they have no facts behind the story. But sadly, I cannot edit it anymore.

Thanks for reading. Glad you stopped by and I wish you the best!

-FXMasterSK
  • #46
  • Dec 24, 2014 4:30pm Dec 24, 2014 4:30pm
Quoting Neio
{quote} Hi FXMasterSK, Enjoying your posts. I also came to a similar conclusion as you regards momentum, and tick volume being correlated to real volume: http://www.forexfactory.com/showthre...33#post7956633 Regards Neio
Hey Neio,

Thanks for stopping by and it's good to know there are people out there that are actually reading/liking the stuff I post. It does take time and effort to write all of this stuff up.

Regarding your post on alexx's thread, that sort of thinking is exactly what you need to develop a good understanding of markets and why technical analysis really does work when used properly. And it makes developing highly profitable systems a reality.

Good luck and feel free to continue posting some of your own trades from time to time as to keep this thread from being too boring! It's always interesting to see another traders view on trading.

-FXMasterSK
  • #47
  • Dec 24, 2014 8:29pm Dec 24, 2014 8:29pm
Quoting FXMasterSK
Hi, I am starting this trading journal to collect my thoughts, analysis, charts, records, etc. all in one place. I have been studying and trading the FX markets for a little over 2 years. I long ago left the retail FF community in favor of the academic research/textbooks. I have a strong understanding of order flow, market microstructure, price and liquidity's interaction, momentum, crowd behavior, dealer risk management tactics, etc. I primarily trade the 3 kingdoms (borrowed from FTI). This includes EUR/USD, GBP/USD, and USD/JPY. I also usually...
How do you know when price is low?
The road to pipland is arduous and fraught with challenge.
  • #48
  • Dec 25, 2014 1:23am Dec 25, 2014 1:23am
Quoting FXMasterSK
{quote} Hey kprsa, That sounds interesting. I'll have to check it out. The whole momentum calculation thing I kinda concluded myself as it was sort of a common sense thing relating momentum and volume*(pip movement/time) to force and mass*(velocity/time), but I know many others have developed similar concepts. It'll be nice to see how other traders do it and I'll find a copy of that book. How are you measuring volume in FX? And thanks for the heads up on the P.S. I wish I could fix that as I am the type of person who hates when people say things...
Hi,

you can find out a bit more here. The mt4 indicator can be found coded by some good souls at the platform tech subforum.
The Weis'es book is imo quite good, it is focused on the practical application of the method, also using the point and figure (!) and renko charts. I am a fan of Wyckoff, and this is very much a continuation of his work.

In Forex I use just the tick volume. My broker offers the indicator for the real volume (well at least for orders executed through it, forex is not centralized) on its proprietary platform. I personally don't like this platform because it is not extensible, but I did check that this volume correlates very well with the tick volume data. It should, at least in theory, work even better for the summed/integrated quantities like the volume of a swing.

Happy holidays and all the best,
k
  • #49
  • Dec 25, 2014 5:35am Dec 25, 2014 5:35am
Quoting FXMasterSK
The way price acts in a vacuum can tell you a lot about where it wants to go next. When a gap is completely filled, it represent price exhaustion which means there is no real backing to that move and price may breakout the other way. When you see a retracement into a gap not able to fill the gap, this means there is real backing to that move and price may continue in that direction. In a trending market, there is always an impulse move followed by a retracement. Unless that impulse wave move gap is completely filled, price will continue to trend...
Let me see if I get it right, I have marked two vacuum zones, first gets filled, it's exhausted, therefore price continues in the opposite direction (green up arrow). Second zone gets a partial fill, interest stays high, so price returns, fills the gap (green down arrow) and goes even further to suck in dumb money and then rockets up (not included in the screenshot, I see it on my chart). Am I essentially getting it, master SK?

Happy festive season!

C.
Attached Image (click to enlarge)
Click to Enlarge Name: vacuum fill.PNG Size: 52 KB
  • #50
  • Dec 25, 2014 8:49am Dec 25, 2014 8:49am
Quoting traider
{quote} How do you know when price is low?
Hi traider,

It's actually quite simple when you look at trading in the same way I do.

I buy low and sell high depending on the market enviroment. It's the same method institutionals and funds practice. In an uptrend enviroment I buy on dips and in a downtrend I sell on rallies. In ranging markets I buy at support and sell at resistance. I never chase price. How do I know whether those support/resistance levels will hold? I can read the clues from price. Sentiment analysis tells me whether we are in a bull, bear, or ranging market on the macro level. Technical analysis on 1Hr+ gives me a road map and a picture of where we are as it relates to that macro trend. The short-term time frames have their own trends, but it's all related to the bigger trend. That's why multiple time frame analysis is important. Experience definitely helps.

-FXMasterSK
  • #51
  • Dec 25, 2014 8:50am Dec 25, 2014 8:50am
Quoting kprsa
{quote} Hi, you can find out a bit more here. The mt4 indicator can be found coded by some good souls at the platform tech subforum. The Weis'es book is imo quite good, it is focused on the practical application of the method, also using the point and figure (!) and renko charts. I am a fan of Wyckoff...
Hey k,

Thanks for the link. I'm familiar with Wyckoff and I once use to trade his method a while ago. Cool to know Weis is related to his works. I glanced over it and it looks interesting. I'll read it more in depth when I get more time as I'm pretty busy today with the holidays. Just taking some quick time to answer some replies while I can. Once I get through it and see what it's all about I will get back to you and maybe we can discuss some more about it.

You use FXCM too? I'm quite happy with them. The marketscope charts are one of my favorites because I usually trade naked, but you are right that it's not extensible. That's actually why I perform my technical analysis on MT4, but for my trading I switch between MT4 and the broker's charts. I actually usually have both up and running on my computer while I am trading.

Hope all is well! I will talk to you later!

-FXMasterSK
  • #52
  • Dec 25, 2014 8:51am Dec 25, 2014 8:51am
Quoting candero
{quote} Let me see if I get it right, I have marked two vacuum zones, first gets filled, it's exhausted, therefore price continues in the opposite direction (green up arrow). Second zone gets a partial fill, interest stays high, so price returns, fills the gap (green down arrow) and goes even further to suck in dumb money and then rockets up (not included in the screenshot, I see it on my chart). Am I essentially getting it, master SK? Happy festive season! C. {image}
Hey candero,

Yes you are getting this concept down pretty well!

I use this method quite extensively for some quick leveraged scalp trades, but you must not let emotions get the best of you. Don't hope, don't get greedy, and don't get fearful. Let price tell you what it wants to do next. She speaks to you and tells you over and over where she wants to go. If you listen, you can make money. If you don't, she will take your money. Take into account the overall trend and how momentum looks for each wave.

My next series of posts will work on replicating this concept on a bigger and more complex scale. It's quite extensive so you'll have to give me time, but it's how I make money.

Good luck!

-FXMasterSK
  • #53
  • Dec 25, 2014 1:18pm Dec 25, 2014 1:18pm
Quoting FXMasterSK
{quote} Hey candero, Yes you are getting this concept down pretty well! I use this method quite extensively for some quick leveraged scalp trades, but you must not let emotions get the best of you. Don't hope, don't get greedy, and don't get fearful. Let price tell you what it wants to do next. She speaks to you and tells you over and over where she wants to go. If you listen, you can make money. If you don't, she will take your money. Take into account the overall trend and how momentum looks for each wave. My next series of posts will...
Thanks for your answer! When I started to mark the zones, it really got complex, some zones are created to be left unvisited for a fair bit of time. Will wait for your next posts and take your time, too many posts and I'll overload
  • #54
  • Dec 26, 2014 3:39am Dec 26, 2014 3:39am
I have a question - until now we have discussed gaps in-between bars acting like vacuum, but what about significant wicks? Illustration below.

Thanks!
C.
Attached Image
  • #55
  • Dec 28, 2014 10:42am Dec 28, 2014 10:42am
Quoting candero
I have a question - until now we have discussed gaps in-between bars acting like vacuum, but what about significant wicks? Illustration below. Thanks! C. {image}
Hey candero,

Hope you are doing well.

To answer your question, before that wick became a wick, what was it? A bar! Now I wasn't there to see the price action unfold before my eyes so I can't be certain on this, but if that wick was forming without any resistance on its way down it in itself can become a vacuum. It can also be a signal of temporarily strong selling pressure entering the market since that big bullish bar was eaten up and led to it becoming that shooting star. I say temporary because it could also be a part of a bigger correction. My next series of posts will help you understand that better.

Here's a tip not just for you, but for everyone: Don't get too caught up on trading candlesticks and candlestick patterns. This is rigid thinking, and rigidness in trading kills. We are trading price in real-time as it forms, not price patterns. Patterns can mutate over time and turn into some other pattern giving conflicting signals. This is why we must follow the latest price developments. Instead of looking at it as candlesticks and candlestick bars, look at it as buying pressure and selling pressure interacting with available liquidity to determine where price will go. For example, a big bullish bar isn't just a big bullish bar. It means that a good amount of buyers came into the market and there wasn't sufficient liquidity to fill their buy orders, therefore due to price mechanics price had to go up to find liquidity. In a shooting star pattern, buyers were strong and ate up available liquidity. Due to a downside vacuum or little pockets of vacuums left behind and exhaustive buyers there is less resistance to the downside. As sellers were induced into the market, there wasn't enough buying pressure behind that move to sustain it and we get left with that shooting star looking candlestick. Add on things like momentum, exhaustion, volatility, trend, etc and you can get pretty good at guessing where the market will most likely go next. Quoting FTI, "Listen to price as she speaks to you and gives you clues over and over again telling you where she wants to go next. Listen to her heartbeat, her rhythm, and learn to dance with the market." Can thinking this way and combining it with other order flow generating scenarios and analysis help you position yourself for likely price movements? Of course! The game, after all, is finding a statistical advantage over the market. Risk management is key as it is what makes or breaks a system. Don't get caught up entering and expecting every trade to be a winner. Price will do what she wants and it is up to you to manage that risk, essentially keeping profits large and losses at a minimum. That, is how you trade like a dealer.

-FXMasterSK
  • #56
  • Dec 28, 2014 12:10pm Dec 28, 2014 12:10pm
Quoting FXMasterSK
Hi, I am starting this trading journal to collect my thoughts, analysis, charts, records, etc. all in one place. I have been studying and trading the FX markets for a little over 2 years. I long ago left the retail FF community in favor of the academic research/textbooks.......... -FXMasterSK
Hello FXMasterSK,

This is perhaps the best thread I have yet seen on FF.

I have been in the game a long time but the clarity of your explanations of precisely how the order book interacts with liquidity to produce the price action we see is opening these old eyes to even greater insights.

It never ceases to amaze me that there is always something new to learn in this game!

Many thanks indeed for your powerful insights and the time and care you take with your clear explanations.

I am looking forward a lot to reading more of your thoughts.

Please accept my humble vouch as a token for your efforts....

Kind regards,

Old Dog

.
  • #57
  • Dec 29, 2014 2:09am Dec 29, 2014 2:09am
FXMasterSk,

An outstanding thread you have going. One of the best on Forex Factory. Keep it
coming. I am always trying to learn more. May the New Year be most kind to you.

_____________________________
  • #58
  • Dec 29, 2014 7:06am Dec 29, 2014 7:06am
Quoting Old_Dog
{quote} Hello FXMasterSK, This is perhaps the best thread I have yet seen on FF. I have been in the game a long time but the clarity of your explanations of precisely how the order book interacts with liquidity to produce the price action we see is opening these old eyes to even greater insights. It never ceases to amaze me that there is always something new to learn in this game! Many thanks indeed for your powerful insights and the time and care you take with your clear explanations. I am looking forward a lot to reading more of your thoughts....
Right on, Right on.
  • #59
  • Dec 31, 2014 4:27pm Dec 31, 2014 4:27pm
Quoting FXMasterSK
{quote} Hi traider, It's actually quite simple when you look at trading in the same way I do. I buy low and sell high depending on the market enviroment. It's the same method institutionals and funds practice. In an uptrend enviroment I buy on dips and in a downtrend I sell on rallies. In ranging markets I buy at support and sell at resistance. I never chase price. How do I know whether those support/resistance levels will hold? I can read the clues from price. Sentiment analysis tells me whether we are in a bull, bear, or ranging market on the...
Thanks.
The road to pipland is arduous and fraught with challenge.
  • #60
  • Jan 2, 2015 10:16pm Jan 2, 2015 10:16pm
Really enjoyed reading this thread and appreciate the effort you have put into the posts. Thanks. Like you I find the best way to understand a concept is to be able to explain it to others by writing about it. Imparts a lot of discipline into the learning process.

Have you looked at the work by Mark Whistler? He has a similar approach of looking at market dynamics through a physics lens with a keen interest in momentum.
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