times in 10minutes.
 
 
 
 
 
 
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Pre-FOMC, establish the range and fade the extremes.
Remember that you are a trader, not an economist. On the daily chart the wildgyrations will barely be visible, so use the 15 min charts to wait for the market todecide where it wants to go, and follow these simple dealer maxims:
Never chase.
Never trust the first price.106 Beat the Forex Dealer
 
EURUSD 15m Chart 261
by NEWS RELEASED: {DEALERSMy CLEAR THEIR} Pr BOOKS —
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time7 200 «00 600 G00 10:00 1200 1400 1600 1800 2000 2700 @ 200 400 800 00 1000 1200 1400 1600 1800 2000 2200
The trade: recognize the obvious stop level and trade with the dealers.
If the statement was in line with market expectations, fade any move outside therange and remember the typical price action: the first 15 min will see the dealers hitthe high stops, hit the low stops (or vice versa) and return to the pre-announcementlevel before making the big move. Recognize that these illiquid markets are astop-running feast for dealers, so be sure to identify “typical” stop-loss levels(ordinarily below/above the previous highs/lows) and go after them along with thedealers.Trading the FED 107
 
 
AUDNSD 15 mintes, # 695.+0.90100.8990THE PAIR MAKES ITS MOVE IN THE PRECEDING yen.DAYS AND THEN SETTLES INTO A RANGE pore
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@i1-Finance.com Data is reat time pO856011:00 18:00 0200 11:00 1600 0300 11100 1%00 O00 11:00 1800 0800 11:00 1800 ox00 11:00 1800 0x00 11:00a 2 Fe 3 23 30
 
Another typical FOMC setup.108
 
AFTER THE FOMC DECISIONIS RELEASED, THE PRICE QUICKLYTAKES OUT THE TOP OF THE RANGE,REVERSES DIRECTION AND TAKESOUT THE BOTTOM OF THE RANGEBEFORE RETURNING TO PRE-FOMCLEVELS.
THIS IS STOP HUNTING AT ITS BEST,AND YOU CAN TRADE WITH THE DEALERSBY FADING MOVES OUTSIDE OF THE RANGE
@lT-Finance.com Data is real time
 
1800 03:00 11:00 19:00 63:00 11:00 1800 030023 30 3
Another example of FOMC trading.
Beat the Forex Dealer
 
10.90100.8990
0.8740+0.872070.87000.8680,+0.8860+0.8640
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 19Fading News
 
In the same vein as the FED trade, dealers often like to fade “headline” ne’
‘WS
numbers if they feel that the market is still in a clear trend. Depending on what
the market is focusing (growth, inflation, etc.) some news releases tend to take
on
greater importance than others. In times of growth concerns, an always anticipatednumber is the non-farms payroll data, released on the first Friday of every month.
 
 
 
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Whenever possible, trade in the prevailing market direction.110 Beat the Forex Dealer
NFP days are known for their volatility, and traders routinely get chopped up tradingthe headline number. It is important to note that one piece of data is generally notenough to reverse a clear trend, so even though the number may come in worsethan expected, it is still preferable to fade the release and trade in the prevailingtrend. Only a monumentally bad piece of data or a series of bad releases can shakea currency from a clear trend, so take a clue from the dealers and fade the movesonce the knee-jerk reaction is over.
In this case the setup is typical. The EURUSD comes into the all-importantpayroll numbers in a clear downtrend, which will only be reversed by some fun-damental shift in expectations. The following price action can usually be seenbefore/after all eagerly awaited economic releases and should be traded accordingly.
 
 
 
[E77 EURUSD 30m Chart
TRADERS LIMIT THEIR EXPOSURE AND ACLEAR RANGE DEVELOPS IN THE DAYS BEFORE THE RELEASE
 
1.1945
 
 
 
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Before the NFP number EURUSD settles into a range as traders limit their exposure. Therange limits should be seen as obvious stop levels.Fading News 111
 
 
[EBT EUROS Sm Chat
 
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Bad data (but not that bad) and the immediate knee-jerk reaction is to sell USD. Dealersare happy to fade the move higher and are soon gunning for the intra-day stops.
Since news releases and other important events are “open season” on traders, youshould always be on your toes. If you find that you are at your trading best duringnormal trading hours, then you should think about skipping data days altogethersince the initial flurry of activity is often impossible to trade, especially becauseretail brokers tend to shut down their systems altogether to limit their exposure.
If you are coming into an important news event with a position, it is best tolighten up and remove or place stops far enough away so that dealers will not getto them. If you are eager to trade, then wait for the initial knee-jerk reaction tobe completely reversed (on 3 min charts) and then enter your desired position. Use15 min charts to trade the market, which will smooth out the market noise andmake the market’s intentions more evident.112 Beat the Forex Dealer
 
 
 
“7 EURUSD 30m Chart
MARKET IS CAUGHT LONG,DEALERS AND FUNDS FADE THE MOVE‘AND BEGIN TO SELL AGRESSIVELY
 
RETAIL SPECS STOPS GET TAKEN OUT‘AS THE LONGER-TERM PLAYERS |FIND BARGAIN LEVELS TO SELL |
AND CONTINUE THE EURO DOWNTREND-
 
 
 
 
 
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After a flurry of activity, the euro returns to its established downward trend.
Always trade in the direction of the trend. Do not assume that one piece of news
is enough to reverse an established trend (or range).20FX Analysts: Who Cares?
 
As more and more retail traders enter the FX market, a critical lack of marketinformation has led to the rise of a new FX superstar: the analyst. Retail forexbrokers are hiring and promoting the skill of these guys in droves, partially tooffset their client’s well-founded fears of the market. Don’t know how to trade?Don’t worry, we have the people that can teach you. Can’t tell which way the eurois going? Don’t worry, we have the experts.
Analysts are master peddlers of excuses and explanations as to what did happen,but will never really tell you what will. I would love to host a trading competitionbetween those popular retail FX analysts and some of Malkiel’s dart-throwingmonkeys. Rest assured that my money is on the chimps.
Sadly, it seems as if the general investing public did not learn much of a lessonfrom the scandals following the internet boom era IPOs. If a firm is taking acompany public, do you really think their analysts will give the stock anything buta “strong buy”? A similar conflict of interest arises in the retail FX world, nowlittered with analysts more than willing to share their views on TV, print, or chatrooms.
Let us take a look at these guys and gals to see exactly why it is that you shouldavoid listening to anything they say.
First of all, who are they? Not traders, that is for sure. A look at their bios willprobably show you an ivy league degree and briefcase full of theoretical knowledge.Is any of this knowledge applicable to day-to-day FX trading? Probably not, butwhat do they care? They have a nice cushy salary that has nothing to do with theaccuracy of their predictions. Trust me, if their forecasts were so good, they wouldhave been smart enough to start their own fund long ago.
What are their job requirements? Look good on TV and write convincingly.Basically they must be able to spew mountains of meaningless FX jargon andeconomic figures in order to back up their views.114 Beat the Forex Dealer
 
So what is their job? Like any job in the world, their role is simple: to makemoney for the company. How do they do this? By providing traders with “valuable”information intended to make them trade more. Notice that they are always full ofgreat trading ideas, but never once have I heard one say “stay flat”. Since brokersonly make money when you trade, in their opinion there will always be somethingworth trading. A wise trader will never trade from the advice of their broker.
I will let you in on the FX market’s little dirty secret: some moves just “happen”and nobody really knows why! Since corporate flows routinely make a mess ofintra-day markets, most moves have no fundamental or technical reason behindthem, yet no self-respecting analyst will ever be caught without a neat explanationat hand.
Take a look at some of their great analyses. The chart below is from the FridayNon-Farms Payroll before a long holiday weekend in the US. Just by looking atthe chart, we can see the price flat-lining until the payroll data comes out, followedby immediate dollar buying and then a gradual retracement of the move by theday’s end. If any analyst had just mentioned that, they would have received a goldstar in my book. But alas, their overwhelming need to show their FX knowledgeurges them to fill the trader with tons of superfluous — and downright false —information.
Here is what one prominent FX analyst had to say about the day’s events:
The dollar immediately gained ground after the above-mean NFPnumbers were taken by the macro crowd as a sign that US economicgrowth is not showing any signs of slowing down. Investors boughtdollars aggressively across the board, betting on a strong US economy.Towards the end of the day, so-so confidence numbers forcedinstitutional investors to re-think their strategy and they took backsome of their dollar longs as the new data did not meet theirexpectations of a robust US economy.
Sorry? Do these people really think that insurance companies, pension funds,etc., trade off tick charts? The thinking of macro funds therefore goes somethinglike this: “The US economy is stronger than what people thought; let’s buy USD.Oh wait! Apparently it’s not. I'll take back my position”.
Long-term players are exactly that — long-term. One number will not changeanyone’s view of the economy, and certainly no one in their right mind wouldplace a trade based on US economic prospects only to reverse them after anothernumber comes out. Notice they did not even mention the fact that it was the FridayFX Analysts: Who Cares? 115
 
 
 
 
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Analysts will always have an explanation for the day’s moves, even if none exists.
before Labor Day weekend ... meaning that it is doubtful that institutional traderswere even at their desks!
If we look at the same move from a price-action perspective, however, we canget a much more reasonable (and probable) explanation for the day’s events:
e From the EURUSD’s rise in the days before the data release, we can be surethat the market has positioned itself for the possibility of a terrible number(the previous five releases had been worse than expected). The market wastherefore long EURUSD going into the release.
° Payrolls actually come out better than expected, and those betting on a weaknumber are forced to lighten up their positions.
e As dealers begin to close their books early ahead of the long weekend, ashort squeeze develops that catches the intra-day crowd wrong-footed.
e Once the top-side stops have been run, the price returns to its pre-NFPequilibrium level. No macro fund was anywhere to be seen.116 Beat the Forex Dealer
 
 
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Steady euro buying.
If you still choose to blindly follow the forecasts of experts, then you may be inter-ested in a recent survey conducted by the Economist. The UK magazine asked fourex-finance ministers, four captains of industry, four Oxford economics students,and four garbage collectors to predict GDP, inflation, and oil prices for the comingyear. Not surprisingly, the garbage collectors came in first place ... the financeministers came in last. 
DEALER TRADES21Trading Against Dealers
 
If you are trading through a dealer, then you are essentially trading against him.It is a bit simplistic, but if you buy, he sells, and one of you is going to end upwrong. In the world of spot trading dealers have a big advantage over the averagetrader: order-flow information.
Imagine a poker game where you can see everyone’s cards but are allowed tokeep yours tight to your chest. How your playing would change! Knowing theother player’s intentions would enable you to fold, bluff, and, more importantly,call their bluffs with ease. In this scenario you would be hard-pressed not to leavethe table with a nice chunk of change, which is exactly the position FX dealersoccupy. With the spreads they collect and the order-flow information they possess,dealing desks are such guaranteed money-makers that banks have the luxury ofstaffing them with tens of pimply-faced dealers who may or may not end up beinggood traders.
THE INFORMATION FLOW
Flow information is the most valuable commodity for intra-day FX traders, sincein the end large flows are what shape intra-day prices. If your contacts are tellingyou that all they see are buy orders, then you can be fairly sure that the pair isgoing up. If, on the other hand, they tell you that everyone who wanted to buyalready has, then you might think that the market is saddled with longs and ripefor a reversal. As we can see in the charts below, a large flow placed strategicallycan have a meaningful effect on prices, and a market participant aware of theseflows can simply position themselves ahead of time to enjoy a free ride at another’sexpense. The easiest and lowest-risk trades all involve taking advantage of yourcustomers, since by doing this you are essentially taking the risk off your booksand passing it on to your client. A market maker with a big order on his bookknows that it is his most precious asset and may trade the information to hedgefunds or other investors in exchange for business (commissions).120 Beat the Forex Dealer
 
The vast majority of intra-day moves are the result of speculation, rumors, psy-chology, and a few facts (the Greenspan death rumor is a market classic), and thelarger you are the higher up you are on this information chain. If some juicy bitof information is available (“company X needs to get rid of 3 billion euros by theend of the day”), the best customers will receive the “first call”, after which theinformation eventually trickles down all the way until you see it on your news wire.By the time retail traders get in the loop, the info has already been out and tradedon, which only helps to propagate the “buy the rumor, sell the fact” scenario.
 
 
 
 
 
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Market-moving flows are free money for the dealers executing the orders.
Getting the first call on market-moving information can be incredibly valuable toshort-term traders, since rumors that some UK clearer “must do” a large cable buyorder before the London fix can have a direct impact on the price. Front-runningis standard practice in the FX world, and dealers with large orders on theirbooks are keen to “piggy-back” their customer’s orders to receive a quick profit.Unfortunately, retail traders have virtually no access to this information and aretherefore placed at a great disadvantage. Individual traders can, however, gainaccess to the CFTC’s commitment of a trader’s report, which highlights the futuremarket’s positioning on a weekly basis (www.cftc.gov). Although it may seem abit dated, the weekly report will highlight any extreme positioning and can be seenas a warning sign. As a retail trader you may not have direct access to this privilegedTrading Against Dealers 121
 
 
 
 
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Front-running news releases. Traders with privileged information sell seconds before thenews is released and get a quick 20 pip head-start on the competition. Just another facet ofthe FX market.
information, yet the price action before the fixing times can also provide clues intoa dealer’s intentions.
Most FX operations trade on at least some flow information, and for manyprofessional traders a typical day might start like this. Get into the office, quicklyglance at what Tokyo did, have a chat with the overnight desk, then get on thephone and start making the rounds. Who’s doing what? Where do you see stops?Etc. The responses may be anything from “dead market” to “these Russian guyshave been buying all day” or “a yard of stops sitting under the figure”. A coupleof calls like that and you have a fair idea of where the market stands and where itwants to go.
TRADING LIKE A DEALER
As we have seen, traders and dealers are two very different breeds and a successfuldealer would not immediately translate into a successful trader. In fact, most dealerswould make terrible position traders. Making markets for corporate clients requiresan entirely different skill set than what is required of a good money manager,for example, yet there are things that the average trader can take from dealers122 Beat the Forex Dealer
 
and apply to their trading, especially when it comes to mentality. A dealer’s “gowith the flow” trading mentality and the “always be fading” attitude toward newsevents can be immediately put to use by the individual trader, which I have triedto highlight throughout this book.
The following are examples of dealer trades that will prove useful to intra-dayspeculators interested in picking up some easy, low-risk pips. According to ourresearch, the Big Figure Trade alone has a historical success rate of over 70%,and although rare, identifying these typical dealer setups will enable you to focuson high-probability trades. These trading techniques are intended for experiencedtraders already involved in the FX market.22The Big Figure Trade
 
As noted earlier, retail FX operators are at a disadvantage because they act as atrader’s sole counterparty and in this function they are sometimes forced to makeartificial markets. Although making markets for clients is most often not an issuefor FX brokers since they simply offset their risk in the interbank market, in illiquidtimes this represents a big problem for them — and an opportunity for the trader.
The Big Figure Trade is one example of how you can take advantage of yourretail] FCM’s limitations. As all traders know, every now and then the marketwill test a critical level. The actual level is not important, since it may be awell-defined Fibonacci level, a trendline, or more likely than not a big figure.During sharp, one-sided intra-day price moves, the market will often reach a crit-ical level where traders believe it “cannot go higher”. Since price moves in FXtend to be self-fulfilling, traders initiate short positions near that level (assumingthe pair has been trending higher) and the market will immediately proceed to takethem out. Usually there is a nice, big, round number that short sellers set theirstops above, confident that an O/B market will not have the energy to push pastthe presumed option structures and the psychologically important (but often tech-nically useless) number. In these situations, dealers wet their lips as they mounttheir attack on the stops.
The typical price action is for the price to fail near the figure a couple of times(heartening the short seller’s resolve and prompting new shorts) before dealersproduce a quick, coordinated attack on the number, overwhelming any option pro-tection and quickly setting off the stops lying above. In an instant, the rate is backbelow the big figure. Most traders have had this happen to them before — a quickblip and your position is busted, only for it to promptly crash in your expecteddirection almost immediately. Nothing is more aggravating to a trader than thissetup, knowing that your money was so quickly taken away.
This trade works especially well with retail brokers because their fixed spreadsand “guarantees” force them to make a market where there is none. When thedealers push the rate higher and trip stops above the big figure, the action is soquick and one-sided (shorts forced to buy back their positions) that in the real124 Beat the Forex Dealer
 
interbank market virtually no trading is possible at those prices. Spreads widen andtypically only the offer side of the quote runs higher since no dealer in their rightmind wants to be long above the figure. Although a true bank dealer may not beable to get a fill at those prices, you can. Because of their fixed spreads, as long asthe rate traded is there most retail brokers will fill you at those prices, just as theywould have if they were filling your stops instead! This is how traders can fightback and actually use the dealers’ tactics against them. The beauty of this trade istwo-fold:
1. Your risk is limited and predetermined. If the trade goes wrong, you knowexactly how much you are going to lose, which is a big plus when tryingto determine position size, etc. Remember that money management shouldalways be at the forefront of your trading decisions.
2. You get to be a thorn in the side of the dealers, which you should consideras bonus points.
Pulling off this trade requires identifying the setup, knowing the dealer’s gameplan, and staying one step ahead of them.
 
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The setup.The Big Figure Trade 125
 
Step 1. Identify the Setup
Look for one-way trending markets, O/B readings, obvious targets (round number).Know your dealer’s game plan. You know what they want to do, so trip stops above150.00 and collect some quick pips. As soon as the stops are tripped, the price willquickly drop back below the figure.
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Set your orders beforehand to profit from the quick move.
Step 2. Set Your Orders
Sell 1 at the figure, sell 2 at 5 pips over the figure, sell 3 at 10 pips over the figure.Stops for all are set at 20 over the figure, with a profit take for two-thirds at 5pips below the figure. If all goes well, you should be short a total of 6 at 150.06(position size will vary according to your account). Risk for this trade is 14 pips.Profit take is 11 pips.
Wait a minute! What happened to the money management that I have beenpreaching all along? Is it completely out of whack on this trade? Not exactly.126 Beat the Forex Dealer
 
Because of high probability of this trade working out in your favor, it is better totake the quick profit than risk losing it all by waiting for a deeper correction. Weknow the price action (spike higher to trip stops, then a quick decline), and that iswhat we are trying to exploit. Remember that we are trying to take advantage ofthe dealer’s actions, not predict the future. The last third is left on the table in caseyou did happen to pick the top, although more often than not the rate will continuein the prevailing direction.
 
 
 
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The aftermath: price action is typical. Dealers make a quick move beyond 150, stops go off,and the price trades briefly over 150 (only a couple of ticks) to print a high of 150.06. Weonly get filled on 2 out of our 3, and the price quickly drops under the big figure. Our profittake at 149.95 is then executed for a quick profit. Not bad for ten seconds of work!
KEYS TO THE TRADE
° Be prepared ahead of time and stay vigilant. If the trade does not work outimmediately (maximum 15 min) then get out. The price action is telling youthat the move is supported by real-money demand, not just dealer initiated.
° Although the moves are similar near most round numbers, this trade worksbest at the end of an O/B intra-day trending move, coupled with psycho-logical numbers like 1.20, 150.00, 2.00, etc.The Big Figure Trade 127
 
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