To become profitable trader, first you need to find an answer to one question.
The question is: What are big players doing? (How are they trading?)
I know that many of you will ask: Who are the big players?
Are they the investment banks, hedge fonds, investment companie, individuals with immense capital,...
The answer is simple. The big players are market makers! The next question is: How are they trading (with large amounts of money)?
The answer to that question can't be seen on the charts immediately. New traders usually don't see further from the chart.They think that everything is shown in the price. It's true that everything is shown in the price if you know where to look. To understand how the big players (market makers) trade with large amounts of money, you need to know that behind the graphs is the entire industry. The cycle which is constantly repeated on the market is made of three phases:
1. phase is Accumulation
2. phase is Manipulation
3. phase is Profit Taking
You are on the one side of the chart and on the other side are market makers. You see the chart and they see all your pending orders. That way market makers can easily make decision when to buy so it could be sold to your pending orders later. This kind of industry is decades old and is constantly doing the same
To understand the accumulation, first you need to know how quoting operates on the market. When a trader with a small amount buys or sells on the market, it doesn't have much of an influence on price while trading with large amounts has influence.
Let's say that we have $10 million and we want to buy a trading instrument at the price of $100.
However, BID volume on the price of the $100 is $1 million so it would be closed only one
transaction of $1 million and then we would get requote, for example $101 with belonging volume.
Now we have two options:
1. option is to continue buying and the price will continue to rise.
2. option is to wait for price to touch $100 level again and then to buy belonging volume again.
We need to repeat that continuously until we spend $10 million which are designated for investing.
(On the market that would be recognized as testing $100 level.)
After we have invested $10 million into a trading instrument at a price of $100, we want price to rise at $120.
$120 should have high liquidity so we could sell all $10 million and make the profit of 20 percent.
If $120 won't have high liquidity, the price will fall and we will have to manipulate the price to rise again. To explain the price manipulation, first I need to tell you why is price moving. Many of you will tell that price is moving because of many factors, for example bid, ask, politics, change of interest rate, unpredictable weather, various news publishing,etc. It's much simpler than that. The price is moving only because of two main reasons and they are believes and news.
I know that many of you will say: Nonsense!
However, try to imagine that your best friend is explaining to you a situation in some firm with details and he makes you believe that firm's stocks will rise. If you believe that stocks will rise, you will buy those stocks. By buying stocks you will influence the rise of stocks. If you don't believe what your friend is telling you then you won't buy those stocks.
I hope that from this example you can understand that price is driven by believes.
Why am I even explaining you that the price is driven by believes?
Because market makers are aware that it's much easier to manipulate the believes than the price itself.
To move the price up or down costs a lot of money and to make a reporter say whatever you want is free. After reporter publishes the article, people will believe that the price will rise and they will start buying.
OK, I know that many of you will say now:" I disagree with you! It's not easy to control the media!"
So lets go trough this example:
A reporter gets a task to write an article about situation on the steel market.
Considering that reporter doesn't know much about the situation, he will go to the steel factory (company).
He will ask questions about conditions, predictions, price at the moment, etc.
Maybe he will go and visit more steel companies and make conversations with experts in that field.
Later he will write an article based on the information's gathered from steel companies. However,
only the one who gave those information's knows the truth about information.
Reporter isn't competent person to make a quality evaluation of gathered information's.
One thing is certain, to write an article, reporter won't ask a fireman, police officer, baker, etc. questions
about situation on the steel market.
Look on TV and check in the newspaper where are market information's coming from. They are coming from the market makers! Market makers have published tons of trading books (Forex e-books). This books are about trading Forex or trading stocks and they are providing free trading courses!
Market makers wish to program you so you can provide them large liquidity at the certain moment (time and price). They need large liquidity to get out from their positions ($10 million). It doesn't cost much for market makers to manipulate the price in a short time period in a way to make most indicators indicate the same thing. When indicators indicate the same thing and the price is in a certain position that will cause a mass effect and people will start buying.
When price comes to a certain price level ($120), market makers start closing their positions and all others start buying (providing liquidity to market makers). That's why every action has a reaction which is defined with Fibonacci retracements. If they don't get rid of all volume ($10 million) in a first try and price touches Fibonacci golden ratio (61,8%) then they start buying again to make the price rise again. They will start a trend to get rid of volume ($10 million). Trend ends when volume of $10 million is sold.
Then everything starts all over again: Accumulation, Manipulation and Profit taking.
($10 million, $100,$120 are just for example purpose and not as a guide)
Cycle is being repeated over and over again. It will never end.
It will end only when market makers decide not to take profit for themselves.
That will never happen!