Diamond hands in $AUD (RBA trade)
And who likes puzzles?
Note: "diamond hands" is a social media term referencing buyers holding onto their positions, regardless of price moves against the purchase price.
Moments after the release of the RBA's rate statement yesterday, I actively scalped the long side. The scalping transactions, when added to a chart, look like the following.
Were my trading actions based on "price action?"
No, they weren't. The chart is displaying the historical locations of the trade executions that occurred. How I attacked the above sequence was a function of the narrative I observed prior to the statement release, while the timing was a function of monitoring the tape.
An important point before continuing: I've worked alongside side traders who process market information much faster than myself, which gives them a superior edge for scalping (over me and the majority reading this.) While I could compete at scalping on this occasion, it's not where most wannabe traders will prosper. However, as you'll soon see, the scalping component was not where the significant payout resided.
Below are extracts from my preparation before and during the trading day.
In summary, longs entered with size during the US session. By contrast, at a slightly higher level (see prep notes) shorts had entered on mass.
I hypothesised longs were controlling the play while shorts were entering at a miscalculated level, and unknowingly, would facilitate price moving up aggressively as they covered their losing positions.
How I arrived at this view
Program trading often works in tandem with more prominent positioning. During 2020, tactical positioning built short positions to entice other shorts to enter that later became the fuel for short-covering moves higher.
Liquidity is currently down across asset classes. To compensate, the controlling players (longs) increased their positions in concert with program trading driving prices beneath the long entry price.
The upcoming RBA data kept participation out of the market, so controlling the play was easily achieved in a low liquidity environment.
The reason for this tactic? A theory I had was if the market appears weak, shorts will stand their ground. By contrast, if the market seems strong, many shorts will throw in the towel without the need for price to reach their initial line-in-the-sand levels. The potency of a sharp move upwards is proportionate to the number of shorts having to cover.
So what did the market do?
Yesterday I tweeted, "I think just about everyone enjoys the feeling of solving a problem or puzzle. It's what makes trading so appealing."
While I can make many executions during a trading day, most of my trading time involves solving puzzles like the one above.
Speaking of puzzles, I've observed the tactics mentioned above frequently occurring during the early part of the European trading session. So...
Just how large is this long position?
What sized payout is required to make the cost of initiating the trade worthwhile?
Can I extrapolate where the price will advance if tactics continue influencing the play?
Answer these questions correctly and you have the makings of the next hypothesis, and so on!
Learned skills from the essential trading skills applied to the day's trading include:
develop high probability hypotheses by extrapolating scenarios from multiple data studies and observations
uncover and exploit ever-evolving chess-like multi-move plays created by participants to build short and long inventory at various price levels to fuel significant price movement