With the amount of manipulation and inefficiencies in the market, long-term currency forecasting is difficult. Instead of trying to determine where the euro will be a year from now, retail traders should instead take a cue from their FX dealers and focus instead on identifying and exploiting high-probability trades.
The “Big Figure Trade” is one of these dealer-inspired trades, and it is simple and effective. We all know that markets have a tendency to test critical levels. The actual level is not important; it may be a well defined Fibonacci level, a trendline, or more likely than not a nice round number i.e. big figure.
During sharp, one-sided intra-day price moves, the market will often reach a critical level where traders believe it cannot go higher. Since price moves in forex tend to be self-fulfilling, traders initiate short positions near that level (assuming the pair has been trending higher) and the market will immediately proceed to take them out. Usually there is a nice, big, round number that short sellers set their stops above, confident that an overbought market will not have the energy to push past the psychologically important (but often technically useless) number. In these situations, smart traders learn to trade with the dealers and set a couple of orders in the market to profit from the usual stop-hunting price action. Pulling off this trade requires identifying the set-up, knowing the dealer’s game plan, and staying one step ahead of them.
Retail traders will get short just under the big number figuring the psychological resistance will hold and then put their buy stops right above the big number. The dealers will go fishing for those stops popping the market and allowing you to get short at prices most traders couldn’t get filled at. When the dealers exit their longs to take profits you trades become profitable (see charts).
This trade works especially well with retail brokers because their fixed spreads force them to make a market where there is none. When the dealers push the rate higher and trip stops above the big figure, the action is so quick and one-sided (shorts forced to buy back their positions) that in the real interbank market virtually no trading is possible at those prices. Spreads widen and typically only the offer side of the quote runs higher since no dealer in their right mind wants to be long above the figure. Although a true bank dealer may not be able to get a fill at those prices, YOU CAN.
The beauty of this trade is two-fold, since with fixed orders in the market your risk is limited and pre-determined, and the high-probability nature of this trade means that it can be used separately or to augment your normal trading methods or systems.
Keys to the trade:
Be prepared ahead of time, and stay vigilant. If the trade does not work out immediately (max 15 min) then get out. The price action is telling you that the move is supported by real-money demand, not just dealer initiated.
Although the moves are similar near most round numbers, this trade works best at the end of an overbought intra-day trending move, coupled with psychologically significant big round numbers.
Remember that we are not here to predict the future (reversal or continuation?), we are simply riding the dealer’s coattails. It might continue higher for another 50 pips, it might top-out and collapse. Either way we do not care; we are in it for the low-risk 10-15 pips that the dealers are generous enough to cough up for us.
We only want to trade the first stab above the big figure, since that is the one hiding the stops.
The Big Figure Trade is only one in a number of dealer-inspired trades that traders can use intraday to benefit from predictable FX price action while minimizing their downside risk. Like a true dealer, short-term traders should only be interested in engaging in “sure-thing” trades, leaving long-term currency forecasting to the flip of the coin.
By Agustin Silvani
