Forex day trading has been a big part of my life for the past 35 years. I started out as an Institutional pound/dollar trader at European American Bank in 1982 (before computers and the internet). Since then I have made my living from Forex day trading (Institutional trader 1982-2004; independent trader 2005- 2017).
In my opinion, understanding how computers and the internet are influencing Forex day trading is as important as a good knowledge of technical and fundamental analysis.
Like it or not quality algorithmic trading programs can adapt to changing market conditions faster than us humans and can do so unemotionally (no “worry” hesitation for example) and without the mental biases (such as getting married to a trade idea and ignoring the obvious) that throw us human traders off course.
I can’t prove it but I suspect (based upon what I observe and what I read) that there are algorithms out there that can “sniff out” the big orders and front run them.
And many of the most important economic news releases (some countries but not all) seem to be finding their way into the market before the official release time; the UK key news releases seem to be consistently leaked these days. I base this on the price action observed before during and after the actual release and newspaper / internet articles I have read.
My final observation is bold but it makes sense to me and my gut tells me it’s real. I think the “big guys” whoever they are these days, use a combination of derivatives and cash trades to “influence” a particular currency pair for short periods of time (seconds to minutes and possibly an hour or more).
Here is a simple hypothetical example. Since 07:00BST the GBPUSD pair has moved up steadily from 1.2925 to 1.2975 and its now 09:00BST. Between 09:00 and 09:45 the GBPUSD has been oscillating between 1.2965 and 1.2975 (there seems to be resistance at 1.2975 and support at 1.2965 for short term day trading purposes). At 09:45 the GBPUSD is at 1.2975…
The “big guy” or “big guys” decide it’s a good time to make a “play”. Their first action is to buy 10:00 “one touch” 1.2950 binary puts (that means they make a bet (and get good odds) that the GBPUSD pair will trade at least once at 1.2950 between 09:45 and 10:00.
After they place their large bet at good odds, they go into the cash market and drive the GBPUSD pair down to 1.2950. By doing so they win their “derivative” bet. Some of the profits will be used to close out their short trade in the cash market. If done well they net a handsome profit.
To some of you this might seems too confusing to understand. For others it might seem too simple to work. For others it might scare them off from trading at all (the big guys control the market paranoia).
Savvy traders are asking the right question – how can this help me in my Forex day trading. The answer is you learn how to spot this type of thing and ride the coattails; how exactly to do that is the subject for a follow up article.