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How Big Players Operate: The Psychology of Key Levels in Forex Trading

For many Forex traders, the psychology of the big players is a mystery. So let’s shed some light on the matter.

Why is this important?

Because how the big players (bank traders) operate, directly impacts market structure.

Understanding how they think provides you with insight into why the market ranges and breaks out, and why key levels act as support and resistance.

Once you understand market structure, you can build a strategy that flows with it instead of fighting it. The reality is most retail traders end up being on the opposite side of the professional – don’t let it be that way with you.

But first, let’s start with a common misconception.

The big players don’t care about your stops

Have you ever been a victim of stop hunting?

I know I thought I had been.

But the truth of the matter is that retail traders’ stops don’t flash on the radar of bank traders at all. In fact, professionals don’t even see retail stops on an individual level, nor could they care less because the sizes are too small.

Big players care about groups of stops

That is not to say professionals don’t care about stops. Stop orders are very important to the institutional traders on an aggregate level. They care about where large groups of stops are sitting.

For example, imagine a large number of retail traders’ stops are sitting at the same level, or it could be where a corporation or fund has orders placed. Even though a bank trader only has knowledge of their own book, this grouping of stops is generally happening across a number of banks at the same time, so they will make assumptions about the positioning of the market.

The price is attracted to the supply at key levels

Once the trader is aware of the supply of liquidity at a certain level, the market will often trade towards it.

Why? Two reasons:

  1. The motivations of the trader
  2. Liquidity

For bank traders, their first motivation is safety – they don’t want to lose money.

The key levels are where there the liquidity is the deepest, where it is safest. If a bank trader needs to execute a trade, they need a supply of orders to execute it against.

If there is no liquidity at a certain price, then they will have to rapidly re-adjust both their thinking and their positioning because they are at risk. Conversely, if there is plenty of liquidity at a certain price, then the bank trader can go about their business without fear of the market getting away on them while they are holding a large position they are obligated to execute.

This way they can minimise their chance of losses and safely make money from the order execution.

What does this all mean?

Prices reverse off key levels

Once supply is taken out at a key level, it will often reverse. This makes key levels excellent places to construct low risk/high reward trade ideas.

You can see some examples on these charts of how the price action is dictated by the key levels.

The key level will be taken out before reversing

The next important point is that the price will often scoot through the key level before reversing.

Let’s think about this logically. Traders tend to put their stops on or behind the key level – not in front of it. So if the supply is going to be taken out, then the price needs to go through the level.

This is why retail traders think their stops are being hunted, but in reality it is just basic market psychology at work.

You can see on this chart where stops have been taken out before the price reverses.

As you can imagine, it can be a good idea to keep your own stop away from this area. Not only to improve your profitability, but to keep a healthy trading mindset. There is nothing more frustrating than seeing your position stopped out just before price action reverses and hits your profit targets!

The big players are not so different from you

One final point. There’s no ‘special’ information you need in order to start using key levels in your Forex trading.

The charts are all a trader needs: they operate as a window into the psychology of the big players.

This is even true of bank traders. While understanding the flow can be helpful, the bank trader still uses:

  • Pattern recognition
  • Support and resistance
  • Fibonacci levels

The professional’s main asset is experience in interpreting where key levels lie, and now with the knowledge of how they operate, you can gain that experience too.

Pepperstone is authorised and regulated by the Australian Securities and Investment Commission (ASIC) and the Financial Conduct Authority (FCA). We take pride in our strong culture of regulation and compliance. The security of our client funds is of paramount importance. Pepperstone maintains segregated client accounts with National Australia Bank (Australia) and Barclays (UK).

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