The first step in the bank trading strategy is identifying areas of liquidity which is what we term as a likely manipulation point. As I said in the beginning I firmly believe in simplicity.
Therefore I use this same approach when identifying potential manipulation points.
If you were to take 1,000 traders and place them in a room what is one strategy all traders would understand? Some would understand a variety of indicators, some would use chart patterns
or price patterns, while others may use strategies involving volume or countless thousands
of other strategies and systems. One thing however, that every single trader would more than likely understand and a strong majority would use in one way or another is, support and resistance.
Nothing else attracts traders and thus liquidity like major previous turning points
in the market. This fact is true of the largest hedge funds, trading institutions, prop fims,
ect. More than anything else previous turning points in the market attract and consolidate
liquidity from all market participants, ranging from retail all the way to institutional.
So am I simply saying to look for reversals from support and resistance, NO! The vast majority of you reading this will have tried something similar to that and because you’re reading this you more than likely did not experience the results you were looking for.
The key is finding areas that the rest of the market is going to view as significant. I recommend
picking manipulation points from the chart that you intend to take your entries from. Because I use the 15M chart for all my entries, I also use the 15M chart to pick all manipulation points.
The longer the time frame, the longer term perspective you should take with that trade.
Trades taken off of 15M levels are intra-day trades and thus they should have intra-day
targets. Trades taken from daily levels should have targets that correspond to longer term
price swings. For the examples in this book I will use the 15M chart.
I start picking manipulation points for the following day during the Asian session. The question I’m asking myself is, “is the rest of the market looking at this level?” The first level we typically look to use is the most recent high and low that has been created. Let’s break down what is happening at the last high. For those in the markets that are short the likely stop location becomes the last high.
Placing initial stops or trailing stops down to the most recent high or low is one of the most frequently used techniques and unfortunately is one of the worst locations to do so. Why?
If Smart Money is going to continue the price to the downside they will likely drive the market into and through the previous high (area of liquidity) before continuing the price down. This allows them to sell into any buying pressure triggered by hitting stops above the previous highs.
Gbpusd January 30th 2015:
Because we do not know the manipulation point that will be used to reverse the price we
choose multiple levels within that currency pairs average daily range. Therefore, if the market
breaks through the first manipulation point without producing a trade we have additional
Beyond the most recent high or low as shown above, we will frequently use the previous days overall high or low. This often represents another point of interest that is not only a key stop location but also a breakout point.
Either way these areas often attract entry and exit orders and thus are frequently broken before the market changes direction.
The next logical question becomes which level should we take the entry from. If we have
multiple manipulation points then how do we know which level to take the trade from?
How do we know if the market is just going to break through this manipulation point or if
they intend to actually reverse the price from this level.
To make that decision one entry
technique that we use is the confirmation entry. Using this technique we look to take short
positions from manipulation points that are above the current price when the trading day starts and long entries from manipulation points below the current price.
Confirmation Entry Technique
The beauty of the confirmation entry is how mechanical it is. One of the biggest struggles
new traders have is the inability to take consistent entries. Because the confirmation
entry has a black and white rule set it allows traders to produce consistent results without
discretionary trade analysis. This entry technique has 3 simple steps.
Step #1 – The first step in the confirmation entry is a 3 pip break of the pre-selected
manipulation point. This is the only rule of the stop run candle. How the candle closes is
not important. The only criteria I look for is whether or not the manipulation point has been
broken by 3 pips. The illustration below shows 3 valid stop run candles that visually look
different. Although they all look slightly different they all satisfy the one rule of the stop run
candle by breaking the manipulation point by at least 3 pips.
Step #2 – The next step in the process is the confirmation candle. Let’s break down a short setup. First a candle must break an upper manipulation point by 3 pips as discussed in step one. The confirmation candle must then close below the body of the previous candle and it must close in its lower 1/3rd quadrant. All three examples below show a valid stop run followed by confirmation candle.
Step #3 – After a valid confirmation candle forms we then need to see the market pullback. The pullback serves the purpose of allowing us to use a 20 pip stop loss while still getting the stop loss above the high when taking a short or below the low of the stop run when taking a long. Simply put, when the entry price would be within 15 pips from the high or low of the stop run then the entry can be take. At that point if a 20 pip stop is used it will allow the stop to clear the high or low of the stop run candle. Here is an illustration of a 3 candle confirmation entry.
It’s important to understand that the illustration of the stop run candle is a perfect 3 candle
setup. The confirmation entry can however be a total of 5 candles as a maximum. Candle
1 will create the stop run but there may not be a confirmation candle until the 4th candle
and then the 5th candle could provide the pullback. It is also important to understand
what invalidates a trade setup. When two consecutive candles open and close beyond the
manipulation point the trade gets thrown out and we then wait for the market to come into
the next selected manipulation point.
This is a basic overview of a confirmation entry.
The video below is over an hour long breakdown of the confirmation entry and all different aspects of it. The video is actually from one of our training sessions we run twice per week
as part of the continuing education.