Trading turning points refers to any time the currency trends in a specific direction and then clearly changes direction and trends in the opposite direction. This is often referred to a retractment, retracement, bounce or turning point trading by Forex traders.
In order to catch and trade turning points in the market one has to understand what makes the market move. Market movements are caused by the buy and sell order flow into the market. It is as simple as that. You therefore have to become an expert at understanding how the market responds to these sell and buy orders and where they are likely to accumulate.
There are 4 major groups of market participants who cause orders to be placed in the Forex Market.
The first group consist of the major banks and institutions. They have the ability to move the market. You better believe this for your own trading sanity. How often have you been in a transaction which is going nicely positive for an hour or so and then suddenly goes 30 to 50 pips against you for no apparent reason? There was no announcement. There was no major support or resistance where the price turned. It was not at a special time of day i.e. market opening. One of these big players may just have placed a $100 million order in the market.
Often these big players do not like the direction of a particular market trend and then boldly introduce a huge amount of orders in the opposite direction. Because the price is in the middle of nowhere these orders have an overwhelming impact and will reverse the market. They have very little risk as their deal goes profitable almost immediately. This happens 6 to 8 times a day and explains why in spite of following your trading plan to the letter your deals go bad. These moves can be traded if your broker supplies volume information and often you will see the volume go up before the trend moves.
The second group are orders placed by participants in the market based on Technical Analysis approaches. These orders are placed at various strategic price levels and act as entry orders or stop orders. These orders accumulate around support and resistance levels in the market. This explains why when a certain price level is reached there is often a big move in the market as all these orders are activated at the same time. You need to be competent at identifying these support and resistance levels so that you can anticipate these moves. A large part of the market movement is based on these price levels. Round number price levels, Fibonacci levels, Pivot points and historic support and resistance levels are used by traders to trade these levels.
The third group are orders that are placed in the market as a result of economic announcements and news. These orders can move the market over 100 pips in 2 minutes and can also reverse the market over 200 pips in the next 5 minutes. They are orders that are placed as a result of the fear and greed reactions to current news. You need to watch the economic announcements schedule closely to make sure you are not adversely affected by these orders. When in doubt don’t trade these potentially wild moves.
The fourth group are orders that are processed by the financial institutions based on their actual need to buy and sell currencies in order to settle commercial trade transactions or investment money movement transactions. Many times these transactions occur when financial markets open and when they are about to close. This is why trends can occur at these times.
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