“ Bids tipped at 1.1000”. Sounds like some kind of code language...and if you're like me, the first thing that comes to mind is “who's tipping what where?”.
No, we're not talking about COW Tipping here...
Bids (interest to BUY something), Offers (interest to SELL something), Options Barriers, Stops, are all elements that are frequently reported in our Skype Trading Room, as they are on other professional news feeds. But what exactly are they, and what can they do for you?
First it should be clear that the big dealers in FX (investment banks) do not open their order books directly to just any outsider, because that information is very valuable in FX – more than in other markets given there is no central trading hub or clearling house. As Carol Osler has demonstrated, market share and a more comprehensive order book usually mean more profits for the investment bank that has it (http://people.brandeis.edu/~cosler/publications.html). So people claiming they have some software that shows the order books for the FX market are being a little shady because there is no real 'Depth of Market' for the FX market.
Touted order flow information is something different, and it usually travels down the grapevine through people that have some connections in the trading industry, mostly as they worked as traders in the past. However, even if the information can be very reliable, it is best used as complimentary information and not trade signals.
It's logical to understand why. In the grand scheme of things in the FX market, relying on a discretional piece of information is like betting on “black or red” at the casino. It could work, but it also might wipe you out. After all, orders get pulled all the time and while we may know where some orders are clustering, we cannot know the size of the mentioned orders so they might not have the weight to stop the market and push it back.
So observing the market's behaviour, and staying on the right side of directional "trendy" flows as a filter are paramount.
EurGbp 1H - Source: FXCM Marketscope
In the chart above, we have highlighted the two most influential levels touted for a recent session (Monday March 9th 2015). Why are 7220 and 7185/90 the most influential levels to analyze? Simply because they encompass more than one side of the market. There are not simply “bids” or “offers” at these levels. There are also stops. Why is the presence of Stop Orders (so stop loss, as well as stop entry orders) so important?
It's the “2-way traffic” principle. Where there is room for error (expecting the “bids” or “offers” to push price to the expected side) there is room for profit. And by simply observing these “2-way intersections” you can take advantage of the reaction, and profit at the cost of those that are blindly fading levels or catching spikes.
So let's magnify the levels a little more, and drop down to a 5Min chart.
EurGbp 5Min - Source: FXCM Marketscope
The example illustrated a typical behavioural trait of these zones: they will react, potentially more than once, but the first touch is usually the best place to look for a playable reaction. Secondly, one of the trades was a potentially excellent entry. The other was potentially suicide. And yet, they are both “2-way intersections” and carry weight.
The fact is that we need to keep the larger picture in mind and not miss the forest by focusing on the trees. We are in a clear downwards move with a clearly observable trend behind us. So the players that are trying to pick a bottom by playing the stop-hunt at 7220 are the weaker hand, as are the players trying to catch the falling knife at 7185-90. And they get washed out pretty quickly.
There lies the most logical way to use this complimentary information: inserting it into a trading plan that rotates around evident trend-backed moves, in stark contrast to “playing every level, anywhere & everywhere”.
Good Luck!
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