This is one of my favorite forex trading tips and the basis for much of my trading.
The forex market is driven by a constant quest to run stops. This may be just my opinion but it is as close to fact as I can tell.
I cannot emphasize enough how important this is to understanding how the forex market works.
While I am not privy to the way all of the algos work, I assume some are programmed to be on a seek-and-destroy mission, which is to probe for stops.
I am not talking about your stop but stops in general as they tend to be bunched around the same levels.
Master this concept and it may change the way you look at trading.
The point is once you recognize that the forex market is on a never-ending quest to run stops, you can put the price action in perspective.
Think about it.
If you have a feel for where the market will look to run stops, it can give you a clue which side of the market is more at risk.
This is true across all time frames but especially true for intra-day trading. You do not need an order book to get a sense of where stops may be resting. It is a skill you can develop over time.
When stops are run
When you see a large wick in a candle or an outsized long bar on a chart, more times than not it is caused by a run-through stops.
On the other hand, when you see an obvious level for stops that trades and quickly reverse without a large wick or long bar, it may, and I emphasize the word “may,” indicate either there were no stops or that they were easily absorbed.
When there are no more stops to run
When there are no stops left to run, a currency will either reverse the direction of trade sideways in a narrowing range. This may explain why the market tends to die off during the US afternoon as there are no stops left nearby to go after.
This is not to suggest basing your trading on guessing where stops are resting and hoping that they get triggered.
However, adding this to your trading mix should help you assess the risk and the strong side of the market at any point in time.
Contact jay@global-view.com with any questions or comments
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