The following article aims to provide:
- Information on why the way price approaches a level is important
- An overview of the emotional roller-coaster of novice entries
So lets say you have identified a possible level, then you evaluated it by using the Enhancers, and now you are ready to trade it as soon as price returns to the level for the first time. As price approaches, you are also looking out for any last moment opposing levels that could obstruct or hinder your trade. But that's not all, there is another thing you can look out for, and that is the way price approaches the level. Note that this is applicable only to those last 10 to 20 pips before price reaches your level, not more. It might sound counter-intuitive at first, at least until you hear the reasons, but it is best if price moves fast towards your level until it hits it (for these last 10-20 pips). The opposite is also true, if price moves too gradually towards your level then it is probably an early warning that your level might not perform well.
It might sound counter-intuitive at first, at least until you hear the reasons, but it is best if price moves fast towards your level until it hits it (for these last 10-20 pips)
In order to better understand why this is true, you have to know who are the main movers of the markets and why they do what they do. Despite the fact that Forex has become accessible by the masses and that retail traders can be found around the globe, the vast majority of the volume is still being traded by banks and institutions. Whether they trade only for their own account or for their clients too, they understand very well how the markets work.
Well, you could say that it is easier to understand how the markets work if you can move it (short-term) by yourself, which wouldn't be far from the truth. Although it is not as easy or as simple as it sounds, it is not as rare as you would like either. After all, price naturally moves when either buyers or sellers have exhausted themselves at a specific price, which means that one of the two sides is much stronger than the other. And this strength is not measured by the number of traders each side has, but by the total size of the trades.
Naturally this means that one large institutional trade alone can overpower the combined trades of thousands of individual traders on the other side. And if we take this one step further, we could say that on average the novice accounts are much smaller than any professional accounts, which simply means that there are never "enough" novice trades and volume to fill the hungry institutional orders on the other side, at least near valid levels representing Supply and Demand imbalances. That is also one of the reasons we constantly say that if you cannot see the novice trader on your charts, then you are the novice trader.
Novice traders jump in the market thinking they actually have a valid reason for doing so, usually at the worst time possible
So by now you have probably figured out why the way price moves during those last 10-20 pips before it hits your level is so important. Fast market moves create all sorts of emotions, from greed all the way to fear, from the feeling of missing out on the move all the way to plain impulsive trades. Let alone the fact that most of these arbitrary calculations (set up with arbitrary parameters, and with arbitrary meanings attached to their results) that we call indicators and oscillators, will start producing all sorts of buy and sell signals making novice traders jump in the market thinking they actually have a valid reason for doing so, usually at the worst time possible. So yes, if price makes a last fast move just before it hits your level, it sometimes means that a powerful player would like to create some emotion in the wrong direction and fill some extra orders near or within the level. If you got such players on your side, or to put it more accurately, if you choose to join the side of the powerful players instead of following the herd, then you got the chances on your side.
In the above example, you can assume that a trader who is jumping (buying) on the upwards move that leads price right into the Supply level (speed-bump) at point A, is doing so out of emotion, ignorance or impulse, and/or is following the suggestion of some indicator or oscillator, and/or because price made a "new high" or some kind of a "break-out". There is no valid reason to buy right below an area where Supply is very likely to exceed Demand, so you will not see any prudent professionals do it. On the other hand, you will see all sorts of novice traders do it for any reason that crosses their mind, making someone else very happy in the process. And novice traders act on emotion (or at least emotion clouds their thought process), making trading for a living seem like an impossible endeavor for them.
But what happens if price approaches a level gradually, possibly hovering above the level for a while, then slowly cutting its way through the level? It simply means that for ANY reason there is probably not enough of a Supply/Demand imbalance in the level.
It could be any number of reasons, from plain wrong evaluation of the level (including a larger opposing level overriding a smaller level), all the way to unforeseen and unpredictable reasons (including any bank or institution with sufficient financial power deciding to kill a level for their own reasons, like e.g. killing a small Demand level in order to fill their own larger-than-usual Supply). Sometimes even anticipated big news announcements can deter traders from trading otherwise healthy levels (or even holiday seasons lowering the liquidity), thus making the level weaker than it would have normally been.
Never forget that despite how good a level setup looks, no level has a guaranteed outcome. It only has a statistically meaningful outcome, which means that trading enough valid levels gives you the mathematical edge by stacking the probabilities on your side. And what this article aims to do is to give you a way of seeing an early warning that a possible level might be weaker than you initially thought, or is going to fail for reasons outside your control. This early warning will let you skip (or early-exit) any levels that show signs of carrying lower probabilities than those you should aim for as a Supply and Demand trader.