TECH TALK

Ricardo Menjivar

Understanding What the Smart Money Does in the Currency Markets

By Ricardo Menjivar, PhoenixTradingStrategies.com


Introduction

 

What you are about to be read in on will be the formula that will help you to understand how the banks program their Artificial Intelligence (Robotic Algorithms) to trade the Forex Markets. Why is this important? Because you cannot properly trade if you don’t have the rules of the game and in these cases the Banks create rules by which they manipulate information and their own data to confuse you.

Yes, we say confuse, because people don’t generally like to admit that there are some things which simply don’t make sense in the market. Things that cause FEAR and DOUBT to drive traders to make mistakes and lose money.

Well, today you will learn how to understand what the SMART Money means to the banks and how it will define a plan of action when you trade.

Let’s take a look at the Artificial Intelligence you are trading against. Why is this important? Because you need to understand that even robotics have design flaws. What is its biggest advantage? It can be programmed to follow directions and execute directions surgically. What is its greatest flaw? It cannot reason like you and I.

It can be predictable IF you know what you are looking for.

Here is a picture of your trading nemesis. Meet SMART:

Your opponent is emotionless. He is a creation of mathematical formulas known as algorithms that have a single function: to define and protect the interest of the Banks and all large financial trading institutions. We call this technology SMART, but “he” isn’t perfect and he has flaws that you are going to read about in this chapter.

Let’s talk about who created this/him and why it is important that we define key information that will allow you to ultimately decrypt those rules of conduct that they follow in order to program SMART. These rules of conduct are called protocols. Their creators are known as Financial Engineers, often with PhD’s in Physics, Economics and/or Math.  Another word for them is QUANTS (yes, they are the classic Computer Nerds)

What is a Quant?

The term refers to someone who designs and/or implements mathematical models to correctly price derivatives, build portfolios, assess risk or predict market movements. Algorithmic trading quants write programs which buy and sell assets directly, as well as analyzing the proper assets to capture profit efficiently – which includes Spot Forex among many other instruments 

Why is it important to know what “Forex” is Made of?

It is important because this will give you a foundation upon which to understand how institutions manage risk, which we will be going over shortly.

The Forex (FX) is a market created by a network of banks and non-bank trading institutions that are in the business of buying and selling currencies, for profit. All banks do this, and they are the driving forces behind FX. Most banks and institutions provide retail traders access to twenty-eight (28) pairs that are derived from the eight (8) MAJOR currencies which are the following:

USD, EUR, CHF, GBP, JPY, AUD, NZD, CAD.

These pairs have the most liquidity traded in the Forex markets as they are commonly traded.

The twenty-eight pairs derived from the eight majors are:

EUR/USD      EUR/CAD      EUR/CHF      EUR/GBP      EUR/ JPY      EUR/AUD

EUR/NZD      GBP/USD      GBP/CAD      GBP/CHF      GBP/JPY       GBP/AUD

GBP/NZD      CHF/JPY       CHF/CAD      AUD/CHF      NZD/CHF      USD/CHF

AUD/USD      AUD/NZD      AUD/CAD      AUD/JPY       NZD/USD      NZD/CAD

NZD/JPY       USD/CAD      USD/CHF      USD/JPY

What are the rules of conduct quants use to program SMART?

The 1st Rule is called Currency Portfolio Rebalancing.

What is Currency Portfolio Rebalancing and what does is it mean?

Currency Portfolio Rebalancing (CPR!) is a theory on exactly how the Market Makers/Banks base their decision-making process when they create their algorithms. The purpose of this theory and the protocols they’ve designed are built around managing their risk via exposures to their currency balances in the market. You see, the banks cannot have too much exposure of one particular currency and must maintain a balance between the (8) eight major currencies. So they buy and sell currencies all day long to manage their exposure, make profits, as well as keeping their overall portfolio in balance. Retail traders don't think about this because they get too caught up in other irrelevant information that ultimately does not mean nearly as much.

CPR represents an idea that keeps money in continuous “motion” and that there ultimately must be a balance that is maintained among their portfolios of the eight (8) major pairs. While some currencies are trading within a specific “frequency” of balance, others are taken in and out of balance during the trading day – only to be brought back into a kind of balance at the end of the trading day. It is this in-and-out of symmetry that we can take advantage of with the right tools.

The example below portrays this concept:

Each line represents one of the major currencies.  The ones near the zero line or the mean are in balance and the ones that are out balance are annotated by the arrows and text. This is the Phoenix Radar II:

In this example above you can see the (highlighted Green and Blue) EUR and NZD were the best pair to look at because they were out of balance (moving away from the mean) and because they cannot not be sustained out of that balance too long or they must be brought back into balance, or toward the zero line. This is simply a graphic representation of what is happening to the portfolios, or “inventories” of the institutional currency books.

As you can see we are able to isolate the two currencies that actually predicted the best trade to identify based on our theory, as they are the two most divergent in this particular period in time. In this case we theorized that the EUR would weaken against the NZD currency, (or that the “Kiwi” was going to strengthen against the EUR).

What was the result? 42 pips equivalent to $272.00 on one (1) Standard Lot. You can see that we had Sold the EURNZD pair because our proprietary indicator the Phoenix Radar II identified that both these currencies were out of balance and that they were going to rebalance against one another.

Here is what the FULL chart looked like at the time the trade was executed:

The bottom line is that we always look for currencies that must rebalance because they have either been weakened or strengthened against the portfolio of eight (8) major currencies.

The 2nd rule is called Mean Reversion

What is Mean Reversion Trading? Mean Reversion is the theory suggesting that any instrument with a Price Action that skews either up or down, eventually move back toward the mean or average price. This mean or average can be the historical average of the price, or one of many time frames that are relevant to whatever instrument you are trading in a particular time frame.

How can this help you? Well, if you understand this basic concept, then all you need to know is that the Financial Engineers that created SMART have used this protocol to also manage risk. They build their programs against and utilizing various Moving Averages.

What Moving Averages do the bank’s trading Algorithms use? Normally they use the 50, 100 and 200 Exponential Moving Averages. Why do they use these moving averages? They typically use these three because the many economists that have written papers for their Doctorates have referenced these three (3) moving averages in most of their research when they describe Mean Reversion. So naturally, their knowledge base references that which they are most familiar with.

Here is a Mean Reversion Example:

If you notice in this example, you can see how they use the 200 (EMA) Exponential Moving Average as a point of reference where the SMART Algorithms take price to and then away from it. The same is to be said with the 100 and 50 Exponential Moving Averages (EMA’s). Other EMA periods may be used depending on the periods being examined, but these three are very common.

Now for Volume/Price Analysis:

Let us demonstrate how Order Flow and Volume contain the deception that SMART Money Algorithms utilize to hide their real intent. We want to show you what it is that you’ve never had, but desperately need, in order to make trading more predictable and help you to remove fear and doubt from your decision-making trading processes.

This proprietary Volume Indicator below is basically a “liquidity window snapshot in time”. It is known as PitView, and we are debuting it today.

It is programmed with an external institutional data feed that consist of over twenty Bank and non-bank liquidity providers, including the twelve top Tier One Banks that control most of the liquidity in the Forex Markets. What does this mean to us? That we are not relying solely on using MT4’s price feed to recalculate their tick data. The PitView indicator gives you a far more robust visual picture of how the institutions are manipulating their volume, which defines their intent. It is calculated in real time.

See the example below.

As you can see here the volume indicator clearly shows in the first arrow to the left that the banks and market makers had already “decided” to sell the EUR/NZD pair, based on the crossing of the indicator through its “zero” or mean. The 2nd arrows to the right clearly show our entry in the trade. (As we are writing this chapter in the book this trade is currently positive 42 pips from our entry). 

Now look at the combination of the Exponential Moving Averages with our Phoenix FX Radar and this new Volume Indicator.

See Example Below.

Now we’ll ask you. If you would have had this picture and an understanding of this information wouldn’t you also agree that this is a good trade opportunity? Your answer of course is YES!

So can you beat the institutional SMART robotics at their own game?

The answer is yes, when you know what to look for. Our counter-programming is known as “S.M.A.R.T. Market Technology” and will mean much more to you that simply knowing that their algorithms exist.

What does S.M.A.R.T. mean to you as a trader? It is an acronym you can use daily:

S = SPECIFIC As Traders we are looking for a Specific Outcome when we trade.

M = MEASURABLE As Traders we must always set guidelines that are Measurable.

A = ATTAINABLE You must look at every Trade with real, Attainable outcomes.

R = Realistic Great traders always trade with Realistic Goals.

T = Time Always be in a Trade with the Specific Timeframe that meets your goal.

There are many trading “rules” that we will share with you along the journey. But when you follow these basic guidelines, you will begin the process of gaining control and learning to trade on your own terms -- which is what we want for you at Phoenix Trading Strategies. Allow us to help you understand that if you use the right technology to decode the bank’s and market maker’s intent, you will have a realistic shot at beating the them at their own game. Knowledge is power, and in this case we want to arm you with knowledge you heretofore have not had.

Take into consideration that we have only shared around 10 % of what we teach our students when it comes to decoding Order Flow and Volume Price Analysis. So we hope that you will sign up for our offer at the end of this chapter.

Conclusion

Nowadays we must look at trading as if we were playing Chess against a Robot that is trying to outthink us by 5 to 10 steps.

However, the Robot cannot think for itself because it is not programmed with Reason in the same way we are as humans. So let us take you and your trading abilities to the next level by guiding you on how to out play your trading Nemesis (SMART) using our S.M.A.R.T. Market Technology and training.

This is what you have been waiting all this time for because if you are serious about trading whether you are a beginner or a seasoned trader. We know that we can help you become better. Take a look at our Video below for our Special Offer.

THE SPECIAL OFFER

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ABOUT THE AUTHOR

Ricardo Menjivar

Ricardo Menjivar was a licensed Futures and Forex Broker who started trading over 10 years ago as a retail trader like many of you. He decided to become a licensed Futures and Forex Broker in 2008 where he collaborated with a team of software developers to bring out the first Electronic Communications Network platform for the retail FX traders. As a broker he had the ability to deal with many software developers, CTA, Prop Desk Traders and Money Managers that were trading the Forex Markets. That is where he discovered the protocols that the Market Makers / Banks were using to report their order flow to the Broker Dealers. You will not find a better individual to guide you in this maze of digital warfare.

Ricardo chose to create PhoenixTradingStrategies.com in 2014 for the purpose of helping retail traders learn the truth behind the deceit the banks have created to cheat the retail traders out of their money. He has chosen to share his knowledge to help individuals like you to learn how to correctly analyze and trade these markets.