Okay, it seems as if ‘price action’ has become a fad in recent times. Many people teach it for a fee, which is fair enough.
But the smart money is keeping watch. If most of the dumb money (i.e. retail traders) are using price action ‘signals’ to enter trades, wouldn’t it make sense to be the counter-party to dumb money? Maybe price action ‘signals’ will eventually be used by the smart money to sucker-punch retail traders, and should therefore be used as a contrarian signal? e.g. if a bearish pinbar is telling you to go short, then you should actually go long.
My grandfather would tell you PA?, same suit different color. All methods are based directly or indirectly on price movement. He would also tell you your logic when it works you feel like a genius . . .when it doesn’t you’ll feel like an idiot :17:. Stick with the trend
Just happened across this while searching “Is Technical Analysis really working or it’s just an illusion?” take a
look at the dates.
08-21-2006
One particular topic I have been thinking about recently is technical analysis. The markets never change because human behavior will never change. Anyone involved in the markets will know that we are not really trading the markets. We are trading other people. Thus human behavior reflects market behavior and we are able to exploit recurring price patterns to profit from. That is the core belief in technical analysis.
However, technical anaylsis and price patterns have mainly been studied and researched for daily charts. In intraday trading, do this patterns still remain valid? Classic price patterns such as the head-n-shoulder and triangles have become widely popular among the trading public. What was once an edge is no longer present. That is why false breakouts, pattern failures have become a popular trading strategy among professionals.
My biggest question is this: do technical analysis work when day trading the futures markets? From my personal experience specializing in the dow mini futures, the answer is no. Let me explain:
Classic head-n-shoulders patterns can stilll be traded successfully with a different set of guidelines. The only reason why they work is simply because price is unable to make a higher high than its previous peak. This indicates weakness and traders will usually short this pattern. Amatuers will usually short the break of the neckline. This is usually too late into the move. I have learned that trading soley on technical patterns is a sure way of losing. Many professionals are fully aware that amateurs love trading price patterns. Therefore, they have made tweaks in the rules and guidelines for trading these patterns. Pattern failure is fairly common in the dow futures.
Another favorite by the trading public is double bottoms and double tops. Amatuers love shorting new lows. In the dow futures market, the markets will usually trade 5-8 points below the previous low just to reverse and rally. The markets need to test new lows and highs to see if there is significant buying or selling pressure in these levels. When professionals realize that the only participants involved are small traders, they will usually reverse it in the oppposite direction.
Regardless of any pattern or technical indicator, price is king. Tape reading and volume analyis are pure information that can help you trade with an edge. In the futures markets, you need to be able to define key support and resistance levels. These are the high probability trade zones. There are different ways in finding these zones using, fibonacci cluster levels, pivot points, moving averages, etc… You must find something that you feel comfortable trading with. I specialize in using pivot points, pivot point clusters, and market profile. Others prefer moving average cluster zones. I strongly believe trading off these key levels give you a higher probability trade than relying on technical price patterns.
I have had the opportunity to day trade with many professionals . I have yet to meet a trader who relies soley on technical price patterns. Of course we are all aware of the pattern. The only time I will trade a pattern is when it lines up with a key price level in my market analysis.
Do your homework and know your market. Hard work and preseverance is the key to trading success. Soultrader
The only problem I see with “smart money” being the counter-party to the dumb money so that they may sucker punch them on their reliance of patterns of any type is: I don’t think the “smart money” cares one little bit. Retail traders are essentially bothersome gnats to Barclays, Citigroup, DB, UBS, etc., if that.
The guestimates vary, but from what I have read retailers make up anywhere from 4% to 8% of the spot fx market. Assuming even half of all retailers relied on patterns (which, itself, is a rather large assumption) and assuming that half of those traders used the same patterns, then assuming they interpreted them the same way and further assuming they weren’t walking the dog or painting the kitchen but were all actually trading and then entered at approximately the same time…
I can’t see traders at JP Morgan moving hundreds of millions across multiple pairs over extended periods really worrying too much about how they can stop out retail trader Orville Jones of Springfield, Ohio and his micro-lot short on the EUR/USD or even worrying in the slightest at the thought of all the retail traders in the world who may have entered on the same signal that Orville Jones did which would move the markets only a small fraction of a percent for a few ticks.
I just find it highly improbable that those traders at JP Morgan are gathered around a screen, snickering, as they buy up the EUR/USD and then quickly sell the EUR/USD to create a bearish pin bar on the 15 minute time frame so they can then make life miserable for poor Orville Jones of Springfield, Ohio. But what do I know? Maybe that is exactly what they do.
I dont would say its a fad because the method is not new. Don´t know how much you offered in studying price action method but the basic knowledge tells you not to short only by seeing a bearish pin bar. Price action trading is like reading in the CANDLESTICK MATRIX. See the candlesticks as a language which often can be spoken in different slangs and always has to be understood with the whole context. I myself nearly got confused after I read that a pin bar is a revearsal and happily started jumpin in trades - loosing them and was wondering the same question as you. “They wanna take me for a ride” I thought. But then I also couldn´t believe that so many should have nothing else to do with their time than writing books and blogs about price action just to play someone for a sucker. So I went on looking on the charts and candles to find out what these guys wanna tell me. Researched for serious price action blogs (Strat’s Forex TradingForex Price Action Trading Signals | Candlestick trading singals e.g. only many more out there), watched videos on you tube, read steve nisons book which is here for free http://rnd.psychonauticresearch.com/Reading%20Room/Japanese%20Candlestick%20Charting%20Techniques%20by%20Steve%20Nison.pdf and slowly I started to “read” them in the right way. Never use a single candlestick as a signal without checking the overall trading environment – candles are only “a part” of technical analysis (I combine them with support and resistance areas and sometimes use stochastic. I only use them confirmed in higher time frames 4hour or daily and also have look at overall trend. You also have to do fundamental and sentimental analysis.
You have to get a feelingfor understanding and not misinterpreting them which can only be based on experience and practice. Dont get confused. Also following John Leonard - dont believe yourself to be a market maker.
I know what you’re saying. However, suppose we know that retail money enters the market on simple signals like price action candlestick patterns. In general, 4-8% of forex speculation is done by retail traders as you say. But during these moments, wouldn’t be logical to expect a rush of retail money, so they now constitute perhaps 10-15% of the market at that particular moment? And if you’re an institutional trader with clients who need filling, wouldn’t this make a good opportunity to get those orders filled? And who would be the best counter-party for those orders? Retail traders aka dumb money. As a strategy, this looks like a no-brainer to me.
We obviously have very different opinions on what factors influence institutional traders’ decisions but I will play along. Let’s suppose you are correct. Let’s say you have cracked the trading code and this is exactly how institutional traders look at the world of currency pairs trading and this, of course, explains why the aforementioned Mr. Orville Jones cannot advance his trading account balance.
Let us further stipulate that a certain, substantial percentage of retail traders all use the same candlestick pattern on the same timeframe, interpret it the exact same way and place trades in the same direction at the same time and institutional traders began high-fiving each other and laughing uncontrollably at the thought of once again sucker punching poor Orville…
Wouldn’t bearish engulfing bars be bullish signals? How about inverted hammers? Bearish outside bars? Three black crows? Bearish haramis? What about the larger patters such as inverted head and shoulders, bearish wedges and pennants and…
Since institutional orders are constantly being placed then they must constantly take the opposite side of whatever price action patterns Orville Jones thinks is important so that you can place your no-brainer trade in the opposite direction from the rest of the retail trading world (and especially so that you too can enjoy sucker punching Orville). After all, using your assessment, retail traders just moved the markets 10% at a particular moment and UBS and Citigroup have been waiting patiently for this moment all day just to enter at a slightly better price for their clients (all of two pips better on a one hour time frame) when their combined orders over the coming week will move the markets tens of thousands of pips up and down with every segmented order they place – ignoring their own algorithmic trading which will move the market up and down hundreds of thousands of pips.
Or maybe they could just take a peek at the pending commercial orders they have worth hundreds of millions that they must enter into the markets at their clients’ request/demand, watch the bid/ask order flow to gauge where a likely opportune entry point will be…
But the life of an institutional trader must be boring. To alleviate that boredom they target the 5 minute pin bar aficionados of the retail trading world like Orville and their combined trading weight which is, essentially, inconsequential.
If retail traders are learning to trade ‘price action’, institutional traders will view price action signals as high-probability, high-liquidity setups that will get their orders filled from the liquidity provided by retail traders.
Anyway, I’m not interested in a snarky debate. Good day to you, JohnLeonard.
I don’t believe I said anything that was “snarky.” If so, it wasn’t intended. I simply disagree with your underlying premise. Anyway, if you believe that 1/1000 of fx market volume provides the liquidity that institutional traders are seeking and that they are following price patterns to sock it to the little guy – and you are trading based upon that supposition, I wish you the best of luck.
Don’t we all! Multi-billion dollar international corporations are gunning for the guy and his pin bars. If only he would trade a moving average crossover strategy once in a while, maybe an overbought oscillator… he could keep the nefarious international bankers confused long enough to squeak out a small profit.
John, sometimes Orville does actually get noticed.
Now if Orville stays within his limits, trades a small 1k a/c, even if all his cousins and in-laws are following his system and they too are trading 1k a/c’s, and even his distant friends and even some of his enemies get to know his system, they all see the pin bar and you know ‘price action’ being so good - they too trade these pin bars.
Now we know that all inst traders are pretty stupid, they know nothing about pin bars - too busy with the fundies - the mail guy comes in and say’ look Orville is trading a pin bar, he would like you to take the opposite side’.
This is how I see it. A six-handed poker table is populated by poker sharks of similar skill level (poker sharks = institutional traders). None of them possess an absolute edge over each other. But replace one of the sharks with a fish (equivalent of a retail trader, our ‘Orville’), the dynamics of the table changes. The five remaining sharks don’t have an edge over each other, but they all have an edge over Orville.
Whenever Orville plays a hand, the sharks will be interested in playing the odds and joining to get his stack. And they know how Orville plays because Orville keeps a newbie book by his side (equivalent of ‘How To Trade Price Action’).
You know how Orville plays. Out of all the opponents on the table, you know you have the biggest edge against him. Why would you [B]not[/B] play against him? Stack size doesn’t matter. A chip is a chip, and busted fish (or retail traders) rebuy all the time.
I love how you used dumb money as a reference to retail traders, which in fact is a great term compared to Smart Money (banks, hedge funds etc…)
I 100% understand your point ‘bearish pinbar is telling you to go short, then you should actually go long’, but that depends on which time frame a person is looking. SM does what we call a Stop Hunt before pushing price in their direction.
How many times have traders’ said that they had the direction right, but got stopped out before it went their way.It’s a cycle that repeats itself over and over.
Rather doing the opposite of what Price Action signals indicate, focus on the timing of an entry after SM has taken stops and trapped traders in an opposite direction.
“Smart Money will trap you into bad traders and scare you out of the good trades.”
They care less about the specifics of why that trader got in and more about where the liquidity will be. Stops are great because they’ll turn into market orders and allow them to fill without slippage (or at least not as much).
Understand that this applies to forcing out the weak hands, regardless of whether they’re retail, a hedge fund, or an investment bank. The liquidity will be the liquidity and it’s more common for brokers to just simply communicate where large clusters of orders are coming in rather than some insti-level players taking the time to reverse-engineer what one specific subgroup of another subgroup is doing.
And they could be hunting that liquidity for a multitude of reasons. An aggressive hot-money leveraged fund might be accumulating long positions while trapping the weak shorts to then eventually run the stops and take their profits at the stops with minimal slippage. Yay, short-term predatory plays.
Then there’s a macro-minded hedge fund that uses some of its resources to help facilitate a stop run when there isn’t much of a resisting force against them (say the volumes are lighter and the buying interest is low, they might dedicate capital specifically to sell just to drive price low into stops). Then, accumulate larger long positions at those stops because they feel the longer-term fundamental trend is to the long side (in this scenario) and they wanted (a) a better price in general but more importantly (b) the liquidity so they could enter with minimal slippage.
Then you’ve got banks that are simply working for a corporate client. Some higher-level business might simply need to exchange its euros for USD to pay American workers on profits from Greece. These guys want the best price they can get and so the bank they go through might use some of its own resources to help manipulate price and toy with stops and weak hands in the market to try and get that client’s order filled at the best price with no slippage, and only MAYBE make a profit on the prop trading it’s doing in that scenario.
So anyway, I think you’re on the right thinking track, but instead think more in terms of the general question, “Who’s the weak hand right now and where will they get out / what will force them out?” This is more relevant than, “Try and assume how a very small group of traders will be trading and always assume those traders will be the weak hands.”
. . .when it doesn’t you’ll feel like an idiot :17:. Stick with the trend
