Who's your trading opponent and what do they do?
Friday saw an explosive move of half-a-cent higher in 6A (AUDUSD futures) during the Asian session.
When the FSE opened I recommenced trading on the long side. My trades (first image below) are self-explanatory. The green arrow, however, is the period it took me to accept the market was communicating things had changed. Not in terms of bars printing on a chart, but rather the speed of bids and offers, trade volumes and other order flow characteristics synonymous with a recent program trading participant.
This participant can not be identified by studying historical data. It takes real-time observation and trading.
During my time spent at the coal face, I've observed this particular participant ignore areas of acceptance, VWAP and standard deviations.
I'm also aware of the current 6A backdrop - nearing year's close; larger players are winding down, while multi-year price highs attract FOMO speculators (chasing returns). Conditions are ripe for an aggressive trading program to dominate direction and force recent speculators to exit.
At the time I cut my long, I also entered a short trade, committing to size. Notice how reactions at variances in acceptance couldn't overpower the directional selling?
The position was flat before the LSE open.
Change of sessions sees this participant disappear. Doesn't stop me getting caught selling lows and buying highs, crystallising two small losses, failing to adjust to the new behaviour. However, minutes later, the same participant returns so again I commit with size. Once again, price moves through acceptance, VWAP and standard deviations. You can see the partial profit-taking/scaling back-in until I get entirely flat at around 0.7530.
First of all, I want to acknowledge the trading mistakes I made:
failing to kill my entire long hypothesis earlier than I did.
Trading almost immediately once the LSE had commenced trading.
Both mistakes resulted in losses.
That aside, my main point is while traders continually search and scan for their next opportunity, I continue to observe and trade a single instrument every day. I have developed an acute awareness of many themes and characteristics in 6A that enough of my opponents (every other trader in 6A is an opponent) providing real edge.
Only by differentiating between different participants and knowing the tactics they implement was I able to maximise my output as per the trade above.
Note: You first need to know the antics of market makers, HFT's, program trading, primary producers, relative value players, etc. before you can begin to differentiate and narrow in on who your current opponent is and what they are doing.