Currencies Exchanged (Read Previous Posts for complete understanding)
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Market data shows that the stops are at 1.26910. So at 8.15 am GMT, the order comes to SELL the available liquidity (840 Million Euro sell order). The effect of this is to push the price to 1.26905. Now, the bank’s BUY orders are triggered. Other retail investors now make new buy orders to cover their losses.
The price flies to 1.27099. Here, we might exit our BUY positions gradually (assuming we followed the bank trades). As the trend still seems strong, people buy our orders. On a chart this might be shown by green candles getting smaller in size after upwards trend.
Trade Outcome
So market liquidity rose to 380 + 300 = 680 million euros. We exited at 1.27099 for a profit of 9.9 pips (from 1.27000). Once leverage is considered and the sheer scale of these trades huge sums of money have just changed hands. Banks (and retail investors) both utilise leverage to make big gains from such moves.
This was all purely an example. The truth is that the volumes are huge (4 trillion USD daily). There are a lot of traders, market makers and stakeholders in these markets, but that example is to show you how FX works, and this is fundamental when analysing support and resistance (SR) levels and trends.
These levels are defined by the larger players. They also hold really well because retail investors spot them and use too. The smart money cycle happens in 3 price cycles. We then see a short-term channel where the price is stuck for a bit accumulating strength.
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