Seeing Cognitive Errors to Discover Unique Trades. Recency Bias Trade In AUD Today
The yellow line in the chart below calculates weekly volume-weighted average price (WVWAP). The slope of WVWAP is trending up, as we would expect, given the massive upside gain this week. Generally, price trading above WVWAP is a signal to maintain long positions.
See how price price has broken below WVWAP, only to reverse back to the upside, as shown by the blue ellipses? What's this signalling to traders?
One signal shows recency bias. And I'll present a recency bias trade opportunity.
If we look at the orange ellipse, we see the market again break WVWAP and reverse. Buyers drive up the market with their buying.
Yet notice price doesn't follow the same path on it's climb up as the blue ellipses? This change of behaviour was the initial catalyst to consider the short side.
But what if you missed entering short at 0.6750 or better? Well, there is a second level to consider a short trade.
We hypothesise traders are using the recent reversal below WVWAP to signal to enter a long trade.
And on that basis, a break below this level could signal the trade has failed, triggering exit orders. Long traders likely placed stop-loss orders with their brokers beneath the lows.
Now, this is where we can add another dimension to the trade. When there is a concentration of sell orders, traders compete for the best price.
The chart below shows November's volume profile. The higher the acceptance the higher the volume traded and the wider the profile. The lower the acceptance, the lower the volume traded and the narrower the profile. The blue area (as highlighted) shows November's least accepted prices.
And what happens if a concentration of sell orders occur at low acceptance? Where there has been little prior interest in trading?
The lack of buying interest from buyers creates downward pressure on the price. What unfolds is a steep declining move.
As a short term trader, scenarious like this are ideal because it requires a sharp move in price. If a sharp move doesn't ensue, it's a clear sign your hypothesis isn't playing out. You can often exit the trade without having to wait for a stop-loss trigger to get you out of your trade.
Curious about what level the price stopped falling? As soon as the price reached the high acceptance level of 0.6700, buyers stepped in.
A second move of larger magnitude set up early into the European session.
