Randomness, Uncertainty, and Probability | Nassim Nicholas Taleb

Nassim Nicholas Taleb (2001) - [...] Probability is not a mere computation of odds on the dice or more complicated variants; it is the acceptance of the lack of certainty in our knowledge and the development of methods for dealing with our ignorance. [...] When things go our way we reject the lack of certainty. [...] The epiphany I had in my career in randomness came when I understood that I was not intelligent enough, nor strong enough, to even try to fight my emotions. [...] Although Soros did not deliver anything meaningful in his writings, he knew how to handle randomness. [...] My lesson from Soros is to start every meeting at my boutique by convincing everyone that we are a bunch of idiots who know nothing and are mistake-prone, but happen to be endowed with the rare privilege of knowing it. 

[...] A mistake is not something to be determined after the fact, but in light of the information available until that point. [...] No matter how sophisticated our choices, how good we are at dominating the odds, randomness will have the last word. [...] Mild success can be explainable by skills and labor. Wild success is attributable to variance. [...] Bullish or bearish are terms used by people who do not engage in practicing uncertainty, like the television commentators, or those who have no experience in handling risk. Alas, investors and businesses are not paid in probabilities; they are paid in dollars. Accordingly, it is not how likely an event is to happen that matters, it is how much is made when it happens that should be the consideration.

[...] We do not need to be rational and scientific when it comes to the details of our daily life—only in those that can harm us and threaten our survival. Modern life seems to invite us to do the exact opposite; become extremely realistic and intellectual when it comes to such matters as religion and personal behavior, yet as irrational as possible when it comes to matters ruled by randomness (say, portfolio or real estate investments). I have encountered colleagues, "rational," no-nonsense people, who do not understand why I cherish the poetry of Baudelaire and Saint-John Perse or obscure (and often impenetrable) writers like Elias Canetti, J. L. Borges, or Walter Benjamin. Yet they get sucked into listening to the "analyses" of a television "guru," or into buying the stock of a company they know absolutely nothing about, based on tips by neighbors who drive expensive cars." 

Quotes from:

Nassim Nicholas Taleb (2001) - Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets

Trading the S&P 500 with the Lunar Cycle | Randall Ashbourne

Randall Ashbourne (2011) - [...] stock prices tend to be higher around the time of the New Moon each month and reach a temporary low point around the time of the Full Moon. Now that’s statistically speaking. And there are Lies, Damned Lies - and Statistics! [...] Many of the Lunar trading articles found easily on the internet tend to suggest the potential gains are relatively minor, or that the phenomenon inverts so often that it can’t be used as a reliable trading technique.

[...] What I discovered was that, statistically, the old assertions not only hold up, but when traded consistently over time, produce big profits for small amounts of time exposed to market conditions [...] Buying a single share of the index at the closing price of our starting date on the January 4 New Moon and holding until the close of the June 1 Solar Eclipse New Moon, produced a profit of $44.35 - 3.49% (bottom left corner of the table).

 

 

However, going Long for one share from each Full Moon close to the next New Moon close, produced more than twice the profit - $90.96. So, we were in the market for half the time and twice the profit (the FM-NM green phase label).

[...] Staying OUT of the market during all New Moon-Full Moon phases would have protected us from losing some of our buy-and-hold gains … but delivered much better profits for our Loonytoons strategy by being profitable Short trades. We were in the market ALL the time, but continually reversing positions - to get three times the profit of buy-and-hold. The darker green coloring shows the very profitable trades, the light green shows profitable trades. The rose coloring shows that only ONE “assumed” Short phase would have resulted in a trading loss. But, remember … this is overall, taking into account the full 6 month period.

[...] take advantage of the Quarter Moon dates. So, our trading strategy now becomes to open 1 position at either the New Moon or Full Moon, but to add an extra position at the First Quarter or Third Quarter date. And the table below shows a significant boost to our potential profits: Instead of relying totally on the 14 day Short from NM-FM, we add one extra Short at the 1Q Moon - boosting the overall profit from Short trades from $46.61 to $109.36. And we adopt the same strategy when we reverse to Long trades at the Full Moon - 1 Long at Full Moon and one extra Long at 3Q Moon, boosting our Long profits to $152.56.

 

Taking advantage of the extra Long or Short position at the closing price on the day of the First Quarter or Third Quarter Moon dramatically increases the profits.

 

While the buy-and-hold strategy produced a profit of 3.5%, we could have made marginally more money by Shorting the index for a couple of weeks at each New Moon; twice as much money being exposed to the market for only half of each month from Full Moon to New - and almost six times as much money by playing the odds that the “statistics” will hold true when traded automatically, but consistently, over time.

Reference:

Randall Ashbourne (2011) - Trading the Moods of the Moon

The Lunar Cycle | Carol S. Mull

Carol S. Mull (198?) - The lunar cycle was first studied and presented to the faculty of the Graduate School of Pace University by Frank J. Guarino, in partial fulfillment of the requirements for the Master of Business Administration degree. Later, his thesis was published by the American Federation of Astrologers. Modern cyclists have carried Guarino's work much farther. Today, it is possible to predict the market with 70% accuracy using only the lunar cycle.

 

The Sun and the Moon are in square aspect (90°) during the first and last quarters, in opposition (180°) at the Full Moon, and in conjunction (0°) at the New Moon. They are in sextile (60°) between the New Moon and the first quarter and between the last quarter and the New Moon. For precise work, compute a heliocentric chart for the times that the Moon, Earth, and Sun are in exact aspect. Unless there are other overshadowing influences, trines (120°) and conjunctions will be up, squares will be down, oppositions will be somewhat up, and sextiles can be either direction.

Most financial astrologers will tell you that oppositions (Full Moons) will sent the market down, but my experience does not verify this. Apparently, the momentum of being between two trines will carry the opposition along. If the next aspect following a sextile is a conjunction, the sextile is likely to correlate with an upward movement. But if the aspect following a sextile is a square, the sextile is likely to be accompanied by a downward-moving market. 

Another lunar cycle concerns the elements. The market tends to move up whenever the Moon is in an Air [Gemini, Libra, Aquarius] or Fire sign [Aries, Leo, Sagittarius] and to move downward whenever the Moon is in an Earth [Taurus, Virgo, Capricorn] or Water sign [Cancer, Scorpio, Pisces]. Other recent experiments have attempted to be the Moon's velocity and the angular rates of positive acceleration or negative acceleration to the market. These have been inconclusive. 

 

 

References:

Carol S. Mull (198?) - The Lunar Cycle (disjointed find and fragment of unknown source and context)

Carol S. Mull (1989) - Astrological Methods of Forecasting the DJIA

Carol S. Mull (1988) - Short-Term Market Forecasting via Astrology. In: Traders World, #4903, Issue #3.
Carol S. Mull (1989) - Mercury and the Dow. In: Traders World, #4915, Issue #15.

Frank J. Guarino (1978) - Relationship of Stock Market Fluctuations to the Lunar Cycle  

Kathy Yuan et al. (2002) - Are Investors Moonstruck? Lunar Phases and Stock Returns
Ilia D. Dichev and Troy D. Janes (2003) - Lunar Cycle Effects in Stock Returns

 4X other way (2020) - Moon Trading - Sidereal & Synodic Cycles - Tops and Bottoms Spot on

TimeAndDate.com (2022) - Moon Phases Calendar for New York

AstroSeek.com (2022) - Sidereal Zodiac Gardening Moon Calendar  

 

HERE

HERE

HERE

HERE

3 Day SMA - Day Counts - Reversal Harbingers

A day in which there is a new high followed by a lower close is a downwards reversal day (RB). An upwards reversal day is a new low followed by a higher close. A reversal day by itself is not significant unless it can be put into context with a larger price pattern, such as a clear trend with sharply increasing volatility, or a reversal that occurs at the highest or lowest price of the past few weeks. Short-term reversals are likely after wide-ranging (WR4) and narrow-ranging days (NR4), especially when the open, high, low and close of the daily price bar are altogether above or below of a simple three-day moving average line of daily close prices.

A wide-ranging day is likely to be the result of a price shock, unexpected news, or a breakout in which many orders trigger one another, causing a large increase in volatility. A wide-ranging day could turn out to be a spike or an island reversal. Because very high volatility cannot be sustained, a wide-ranging day will likely be followed by a reversal, or at least a pause. When a wide-ranging day occurs, the direction of the close (if the close is near the high or low) is a strong indication of the continued direction. An outside day (OB) often precedes a reversal. An outside day can also be a wide-ranging day if the volatility is high, but when volatility is low and the size of the bar is slightly longer than the previous bar, it is a weak signal. As with so many other chart patterns, if one day has an unusually small trading range, followed by an outside day of normal volatility, there is very little information in the pattern. Context and selection are important.

An inside day (IB) is one where the high is lower than the previous high and the low is higher than the previous low. That is, an inside day is one where both the highs and lows are inside the previous day’s trading range. An inside day represents a narrow range consolidation and lower volatility. In turn, lower volatility is most often associated with the end of a price move. After a burst of activity and a surge of direction, price has reached a point where buyers are already in and price has moved too far to attract more buyers. Volume drops, volatility drops, and an inside day follows. An inside day is definitely followed by a breakout, either into a continuation of the previous trend or into a change of direction. 

 

References:

 

Larry Williams (2011) - Long-Term Secrets to Short-Term Trading
Toby Crabel (1990) - Day Trading With Short Term Price Patterns and Opening Range Breakout

Oddmund Groette (2022) - S&P 500 Trading Strategies (ES and SPY) 

Larry Connors & Cesar Alvarez (2009) - High Probability ETF Trading

Larry Connors & Linda Bradford Raschke (1995) - Street Smarts: High Probability Short-Term Trading Strategies 

 

See also HERE - HERE - HERE

Playing the Field | Lunar Effects on Mood and Biology

Michael Bevington (2015) - The Earth’s magnetosphere is formed by the Sun’s wind passing the Earth. It surrounds the Earth but is much larger on whichever part forms its local ‘shadow’ or ‘night’ side, where it forms a tail, or magnetotail. The magnetotail extends over 6,300,000 km. 

 

 

[...] Every month, at full moon, the Moon crosses the magnetotail for 6–7 days at about 348,000 km from the Earth. As revealed by recent space exploration, when the Moon traverses the magnetotail’s electromagnetic plasma sheet, it attracts a large electrical charge, thus disturbing the plasma sheet. Ions from the Moon’s surface transfer to the Earth’s magnetosphere. This in turn can influence the Earth’s electric and magnetic field by a form of magnetospheric feedback, since the thin current sheet of the magnetotail has an earthward electric field.

 

[...] The Moon affects the Earth’s magnetosphere differently at new moon compared with full moon. At new moon, on the Sun’s side of the Earth, the Moon does not cross through the magnetosphere. Instead its lunar wake, formed from the solar wind, is blown downstream towards the Earth’s magnetosphere in a relatively narrow pathway, but in a varied way because of the Sun’s 11-year sun-spot cycle and the Sun’s rotating magnetic field. The latter has two effects. Firstly, Earth experiences reversed solar polarity when crossing sectors in the interplanetary magnetic field, typically twice in about 27 days. Secondly, the solar wind travels in a spiral, so the lunar wake is not usually in direct alignment from the Sun. The new moon effect from the lunar wake on the Earth’s magnetosphere can be considered comparable to magnetotail effects at full moon, with evidence of electric fields, and magnetic fluctuations of up to 5 Hz from the plasma of the penumbra surrounding the lunar wake."

The greatest change in the electric field potential occurs as the moon crosses into and out of the magnetotail plasma, which occurs 2-3 days before the full moon and 3-4 days after the full moon.

Some of the reported effects of the full moon on animal and plant biology: tree diameter variation reflects a lunar rhythm; reproduction; changes in the stress hormone; epileptic seizures and unexpected deaths increase during full moon; increase of violent and acute behavioral disturbances during full moon, etc.

References:

Michael Bevington (2015) -  Lunar biological effects and the magnetosphere 

Anna Krivelyova & Cesare Robotti (2003) - Playing the Field: Geomagnetic Storms and the Stock Market 

Lifang Peng et al. (2019) - Effect of Ap-Index of Geomagnetic Activity on S&P 500 Stock Market Return

Basile Despond (2018) - Geomagnetic Storms and the Stock Market

Current Solar Data (from NOAA)

 Solar and Geomagnetic Data

Sun and Markets

Moon and Markets 

Market Structure & 3 Bar Patterns

"Any time there is a daily low with higher lows on both sides of it, that low will be a short-term low. We know this because a study of market action will show that prices descended in the low day, then failed to make a new low, and thus turned up, marking that ultimate low as a short-term point. A short-term market high is just the opposite. Here we will see a high with lower highs on both sides of it. What this says is that prices rallied up to the zenith of that middle day, then began to move back down, and in the process formed a short-term high. For our purposes in identifying short-term swing points, we will simply ignore inside days and the possible short-term points they produce." This is how Larry Williams defined market structure. His concept is universal and applies to all bars of all time frames.

• A Short-Term High (STH) is a bar with a high greater than or equal to the high of the bar to the left and greater than the bar high to the right. Neighboring bars should not be inside. If they are inside bars, the bars that follow them should be analyzed.
• A Medium-Term High (MTH) has Short-Term Highs to the left and and to the right that are below the high of this bar.
• A Long-Term High (LTH) has Medium-Term Highs to the left and and to the right that are below the high of this bar.
  

And for the lows it’s all vice versa: 

• Short-Term Low (STL) = bar with higher lows on both sides
• Intermediate-Term Low (ITL) = higher STL on both sides
• Long-Term Low (LTL) = higher ITL on both sides

In other words: 3 bar patterns are the smallest fractals and building blocks of market structure. Since price is always either in consolidation, in an uptrend or in a downtrend 3 successive price bars must form either a directional pattern (higher highs, higher lows or vice versa), a continuation pattern (inside bar) or a reversal pattern (outside bar, pin bar, head & shoulder, M&W patterns) (see also HERE):

 

  

References:

 

Larry Williams (1990) - Long-Term Secrets to Short-Term Trading

Arthur A. Merrill (1980) - M & W Wave Patterns

 Bill Williams (1995) - Trading Chaos

3 Bar Fractal Break  

Alex's Options - What is #TheStrat?

Inside Days in the S&P 500 │ Toby Crabel

Toby Crabel (1990) - Computer studies suggest that Inside Days (ID) provide very reliable entries in the S+P market. The data used in the studies is daily open, high, low and close prices from 1982 to 1987. All of the following patterns are defined for a computer but can be seen easily on a daily bar chart.

Pattern (1) is simply an inside day followed by a sale (s) on a lower open or buy (b) on a higher open. Entry is on the open with an exit on the same day's close with no stop. This procedure produced sixty-eight percent winning trades with profits of $18,000 after an $18 commission. This is a reasonably high percentage and suggests a strong bias in the direction of the open after any ID.

Pattern (2a) is defined as an ID with a higher close than the previous day followed by a higher open. A buy is taken on the open and exited on the close. The same is done on the sales (Pattern (2b)) if there was an ID with a lower close followed by a lower open. Again, stops were not used. There were forty-four trades as such with seventy-four percent of them profitable. Net profit was $14,914. The percentage has improved and profits are better per trade than Pattern (1). This supports the premise that the closing effects the next day's action and potential breakout. Further tests uncover some variations to above results. Although the opening direction after an inside day appears to be a valid indicator of upcoming direction, there are same specific patterns that show very high percentage profitability without the use of the previous day's closing direction. Specifically, two patterns; one a sale (Pattern (3)), one a buy (Pattern (4)).

Pattern (3): The day of entry is called Day 1. The day of immediately preceding the entry is Day 2 and each preceding day - 3, 4, 5, etc. On Day 1 an open lower than Day 2's mid-range and lower than Day 2's close is necessary. Day 2 must be inside of Day 3. Day 3 must have a higher low than Day 4. A sale is made on the open of Day 1 with exit on the close of Day 1. Profits were eighty percent with winning trades five times the size of losing trades. The only shortcoming is that only ten trades could be found from 1982-1987.
 
Pattern (4) is similar to Pattern (3) with opposite parameters. The only exception is the open on Day 1 need only to be higher, not above mid-range. So to review Pattern (4), Day 1 a higher open than Day 2. Day 2 inside Day 3. Day 3 lower high than Day 4. Results were as follows: Ninety-one percent profits; 860 to 820 average winner to average loser. No stops were used.  Only eleven patterns to the upside were found.

The market action implied in each pattern is a short-term trend with a loss of momentum on the Inside Day.  The open on Day 1 is in the opposite direction of the trend and is an indication of a shift in sentiment. This shift in sentiment causes those who still have existing positions against the opening direction to liquidate longs or cover shorts. Participants covering their positions is more than enough to tip off a directional move.

A slightly different perspective on the same type of pattern is to look for a retracement to the previous day's close after the opening and take a position at that point in the direction of the open. I tested four patterns to demonstrate this principle.

Pattern (5) shows an Inside Day with a lower close on Day 2 than Day 3.  Day 1's open is above Day 2's close. The chances are sixty-two percent that the market will close above Day 2's close on Day 1.

Pattern (6) is an Inside Day on Day 2 with a higher close than Day 3. Day 1's open is above Day 2's close. The chances are seventy-nine percent that the market will close above Day 2's close on Day 1.

Pattern (7) shows an Inside Day on Day 2 with a lower close than Day 3's close. Day 1's open is below Day 2's close. The chances are fifty-nine percent that the close on Day 1 will be lower than Day 2's close.

Pattern (8) shows an Inside Day on Day 2 with a higher close than Day 3's close. Day 1's open is below Day 2's close. There is a sixty-seven percent chance that the market will close below Day 2's close on Day 1.
 
How can you use this information? It suggests a strong bias in the direction of the open especially after a higher open. The prolonged bull market obviously had an impact on these results but in general, a counter move back to Day 2's close after the opening direction is known, should be observed for a loss of momentum and possible entry in the direction of the open.
 
Another totally different test in the S+P has same interesting implications and could be tied in with the previous patterns. On any day that the market has moved two hundred points above the open intra-day, it has closed above the open ninety percent, of the time. Also, on any day that the market has moved two hundred points below the open it has closed below the open eighty-eight percent of the time. This was during the period from 1982-1988.

An application of these results is as follows: Enter in the direction of the initial trend on any low momentum move back to the open and exit on the close of the session. This can be done after the initial trend is established with a two hundred point move in one direction off the open. The main qualification is price action on the pullback. A high momentum move back through the open leaves the initial two hundred point move in question. This can also be applied after an Inside Day very effectively.

I think it is necessary to shed light on how extraordinary the results for Inside Days are: A test on a sale of a higher open or buy of a lower open with no other information to work with provides a winning trade fifty-six percent of the time when exiting on the close the same day of entry. This suggests a natural tendency for the market to reverse the opening direction by the time of the close.

This natural tendency is reversed after an ID. Why? What is it about an ID that produces follow through after the open? An ID is narrower than the previous day. Any narrowing day shows loss of momentum and when within a previous day's range it forms a congestion area. A congestion is directionless trade with the market searching for new information. A temporary state of balance or equilibrium exists.

There is a tendency for the market to trend after a congestion. If an Inside Day is a valid congestion, it will produce an imminent trend day. One can assume from the above tests that there is a tendency to trend after these patterns (ID). These tests support the premise that Inside Days are valid congestion areas. It appears that market participants act on the first piece of information indicating trend after the Inside Day - the open. Also, the direction of the close on the ID will provide further clues on the direction of the breakout when added to the information of opening direction. The increase in percentage profit and relative profits when these variables are added supports this conclusion.

The ID pattern acts as a continuation 62% of the time. A breakout occurs when price closes either above the top of the pattern
or below the bottom of it. Since inside days act as a continuation pattern, expect the breakout to be in the same direction as
the inbound price trend. Wait for price to either close above the top or below the bottom of the pattern before taking a position.
The ID can form midway in a price trend, just like bull flags, wedges and pennants.

Why do these indications work so well in the S+P? The S+P generally is an urgent market. The distinguishing characteristic of this market is its tendency to trend throughout the session. This market is notorious for big, fast moves intra-day. Peter Steidlmayer (Markets and Market Logic) calls it a One-Time Frame market. One may reason that in a One-Time Frame market the inside day is a more reliable indication of upcoming trend than in a Two-Time Frame market. The market principle that is in force is contraction/expansion. The Inside Day is contraction, and in a One-Time Frame market 1-Day contraction is all that is necessary to tip off a directional move.

In summary, the above tests suggest that an Inside Day is a valid congestion area and it follows that all breakout rules for congestion areas should be implemented after an Inside Day forms. The resulting breakout is expansion.

Three-Bar Inside Bar Pattern by Johnan Prathap - HERE & HERE

[...] The Principle of Contraction / Expansion is defined as the market phenomenon of change from a period of rest to a period of movement back to a period of rest. This interaction between the phases of motion and rest are constantly taking place, with one phase directly responsible for the others' existence. A Trend Day is defined as a day when the first hour's trade comprises less than 10% of the day's range or the market has no dominant area of trade throughout the session. Trend days are characterized by an opening near one extreme and a close on the opposite extreme of the daily range. Trend days fall into the category of expansions. Congestion is a series of trading days with no visible progress in either direction. Usually associated with narrow range days or non-trend days. Contraction is a market behavior represented by a congestion or dormant period either short-term (ID) or long-term narrow range (8 Bar NR) and usually reaching its narrowest phase at the end of the period.

References:

Toby Crabel (1990) - Day Trading With Short Term Price Patterns and Opening Range Breakout
Contraction > Breakout > Expansion | Toby Crabel's Price Patterns 

Perry J. Kaufman (2019) - Trading Systems and Methods

Alex's Options - Trading Inside Bars

In Any Bar Chart Only 8 Possible Range Patterns | Larry Williams

Larry Williams presented a free session at the November 2014 Las Vegas Traders Expo in which he discussed 8 possible Range Patterns. He showed that from any bar to the next there are only 4 possible outcomes:

1. Down Range: Last Bar's high is lower than prior Bar's high; and last Bar's low is lower than prior Bar's low.
2. Up Range: Last Bar's high is higher than prior Bar's high; and last Bar's low is higher than prior Bar's low.
3. Inside Range: Last Bar's high is lower than prior Bar's high; and last Bar's low is higher than prior Bar's low. On a Daily S&P500 Chart this occurs approximately 12% of the time.
4. Outside Range: Last Bar's high is higher than the prior Bar's high; and Bar's low is lower than the prior Bar's low. On a Daily S&P500 Chart this occurs approximately 12% of the time.
   

Price action cannot occur in any other way. Within these 4 Range Patterns each last bar can either be an up bar or a down bar. So there are actually 8 possible Range Patterns:

1. Down Range, Down day
2. Down Range, Up day
3. Up Range, Down day
4. Up Range, Up Day
5. Inside Range, Down day
6. Inside Range, Up day
7. Outside Range, Down day
8. Outside Range, Up day

Using these 8 patterns some powerful strategies can be created. Larry Williams presented back-tested statistics associated with trading these patterns using a simple entry and exit technique. He stressed that they were not the best entry or exit techniques but shown because they were easy to understand and program. This strategy is intended only to show where we have a bias or advantage in the marketplace.

• Entry: At market close
• Stop Loss: Based on $ Stop
• Exit: First Profitable Opening

His message was that we could go home and verify using our own software. His results for testing this on the e-mini S&Ps from 2002 forward [to 2015] were as follows:

So, the Down Range, Down Close day [1.] offers the best potential short term 'long' setup based on net profit. This was the take-home message of the presentation.

Larry further dug into the Down Range, Down Close setup to uncover which day of the week offered the best trade: The stats support the 'Turnaround Tuesday' concept.

And further investigating by Trading Day of Month revealed that 1, 17, 19, 22 and 23 were the best days, showing 92% winners and $47,500 net profits with 107 trades.

It was also found that a Down Range Larger Range day was better than a Down Range smaller Range day. $205 Avg 80% Win, vs $33 Avg 85% win,

Also naked close was better than a covered close (naked close meaning that the close was outside of the previous day’s range). $155 Avg 83% Win vs $30 Avg 83% Win

And combining these two concepts:
Down Range, larger range, Covered close: $60 Avg, 83% Winners
Down Range, larger range, Naked close: $215 Avg, 85% Winners

References:

Robert F. Smith (2019) - What Do We Know to Be True About Price Action? 

TPR (2018) - Contraction > Breakout > Expansion | Toby Crabel's Price Patterns
Larry Williams (2015) - Presentation in Moscow
Chris White (2015) - Range Type Scanning and Backtesting in EdgeRater 

Daily and Weekly Market Maker Cycles & ICT Intraday Trading Templates

All financial markets are dominated by investment banks, so called institutional traders or smart money. To be more precise: All financial markets are dominated by JP Morgan, Deutsche Bank, Citi, XTX Markets, UBS, State Street Corporation, HCTech, HSBC, BoC Merrill Lynch and Goldman Sachs. Their positions represent up to 80% of the total volume of the Forex market, the bonds market, the stock market and the commodity market. And yes, they also do take their own speculative positions. But the vast majority of their volume is simply called 'market making activity' because they are buying and selling for their clients. Their main clients are hedge funds, pension funds, commercial banks, corporations, other financial institutions and central banks. In fact central banks are their dearest clients. They practically own the markets. The sheer volume of their orders could never be bought or sold in single lots in any market. Hence the 'market making' and hence the 'liquidity provision'. Big banks do this for commission and they risk their client's money for market manipulation and extra profit.  

This is critical information for the small retail trader as it tells one very important clue: If the big banks are primarily market makers and liquidity providers then they will by default drive the market at will to and from areas of liquidity. Intention, logic, strategy, measures. Price is not random and price levels are predictable. Michael J. Huddleston, the Inner Circle Trader (ICT) and author of most of the smart money trading concepts, comments: "There is always a puppeteer. There is always someone pulling the strings. It's never being left to randomness of buying and selling. There is no support and resistance in the marketplace. These are all notions that promote the idea of free trade. When it comes to the truth of the markets: It's complete and utter control and manipulation. It's a very simple approach. It's about price: It's the open, the high, the low, and the close of the daily, weekly, monthly and quarterly bars. It's not support nor resistance what is moving the price order flow. It's all about where the money is. The retail textbooks will never teach you this: Price moves to where the money is. And the money is at the levels where most retail traders have their entry and stop loss orders - just to get harvested by the smart money during false moves and false breakouts." The good news is that the market makers continuously leave footprints in their accumulation-manipulation-expansion-distribution framework: order blocks, imbalances, fair value gaps and liquidity voids, liquidity pools, stop runs, and equilibrium (HERE - HERE - HERE)

Big banks do not use a lot of indicators and they employ more software engineers and programmers than technical analysts. Both for one good reason: Market making and order processing is completely automated by algorithms that guarantee maximum return. They use daily, weekly, monthly, quarterly and yearly charts, and completely ignore popular retail indicators, forecast methods, and trading systems. Their market making strategy is exclusively focused on how to break down huge orders into tiny chunks, how to buy and sell these continuously and most efficiently and on how to fool the retail trader crowd most profitably. Smart money drives the markets in daily and weekly cycles around the clock and accumulation, manipulation, expansion and distribution is the business model. The typical weekly market maker cycle looks like this: 

(1.) The week starts with a trap move on Sunday night or early Monday morning. 

(2.) Then follows an 'accumulation phase' and the setting up of an initial high and an initial low in the Asian session, during which price is usually held in a narrow range. 

(3.) The accumulation phase is followed by what Wyckoff coined the 'spring', an engineered false breakout against the real intention of the market maker to 'support or resistance levels' to harvest the retail traders' entry and stop loss orders there. The market maker considers these levels as 'liquidity pools'.

(4.) Next the market maker initiates the actual planned market move. This results in the formation of a trend that can be slow and steady, or it could be swift and furious. In the cash market a trend can be just a few hours, in the futures market up to 8 or 10 hours. On the chart the trend will be seen as a series of drives or pushes in the market maker's intended direction.

(5.) Towards the end of the day or the end of the session, there will be a corrective distribution phase and pattern of some type (wedge, pennant, head and shoulders, M or W formation), when price pulls back from the high or the low of the day because the market maker liquidates positions (see also HERE).

There are very high odds for the weekly low or high to form before the opening of the New York session on Wednesday. The odds further increase between Tuesday and Wednesday, focusing on Tuesday's London session to Wednesday's opening of the New York session. Even the market maker doesn't have infinite amounts of capital. Therefore he has to orchestrate retracements to book some profit before to continue. This is why sudden aggressive pullbacks seemingly occur out of nowhere.  

 

To get a more detailed picture of how the smart money's manipulation actually works on a day-to-day basis, Michael Huddleston elaborated six ICT Intraday Trading Templates. They provide an idea of when to expect what, clues related to the daily and weekly bias and range, and a perspective on the internal structure of the daily and weekly market maker cycles: 

1. The Classic Buy or Sell Day Template: This is the best template to make money since it is a wide range trending day that unfolds mostly on Monday, Tuesday and latest on Wednesday during the London session. The New York session will eventually give a retracement to continue with the trend that was set during the London session. The daily range will last for 7 to 8 hours once the profile is established. 

Mostly it will give a rally or drop from the daily opening price to the low or high of the day during the London session. The trend usually lasts into 11:00 EST.

2. The London Swing to Z Day Template: This template is found in the middle of a larger price swing when the trend is exhausted after a large explosive move. It is a narrow range day and ideally occurs on Thursday.

Price will initially drop below the opening price, then run above the opening price and go back to the range into consolidation. It first appears to unfold as the Classic Buy or Sell Template. But if it continues consolidating, do not look for continuation into the New York session. Take profits.

3. The London Swing to New York Open / London Close Reversal Template: The bullish version of this template always begins like a Classic Buy or Sell template with a decline below the opening price before price starts rallying. Once price drops, a buy entry forms, price rallies to a higher time frame Point of Interest (POI), e.g. a bearish order block (OB), into a Fair Value Gap (FVG), etc. If this happens during the New York session, it indicates a classic market reversal. 

The template is used to either reach for a bearish order block on a higher time frame, for a turtle soup raid or to close a range. On a bullish day it will first create an initial low of the day during the London session, run up and create the high of the day during the New York session around the London Close, then run back down and clear the initial low that was created during the London session. Ideally it can pan out after the market is in exhaustion based on the higher time frame's dominant trend.

4. The Range to New York Open / London Close Rally Template: Generally this template is to be expected on days with high or medium impact news events like interest rate announcements, etc.

Ahead of these events price will remain in consolidation during the Asian and London sessions. Lows will be cleared initially and after the news price explodes into a directional move.

 

5. The Consolidation Raid on News Release Template: Unfolding during the New York session on days with high impact news, mostly FOMC press releases. During and shortly after the news old highs and lows of prior consolidation levels will be taken out. Ideally buy when a low is taken out and sell when a prior high was breached.

 

 

 

6. The London Swing to Seek & Destroy Template: This is the kind of day that won’t make you money. The Market Makers clear intention is to take out both buyers and sellers. Initially it would give you a London Open opportunity and setup, but very likely that won’t come to fruition. The narrow range zig-zag template lasts throughout the New York session and will oftentimes create an inside day. The template is usually applied in the middle or at the end of a larger price swing. 

 

 

References:

The Inner Circle Trader

 Stacey Burke - Simple Method to look at Weekly Market Maker Template

Richard D. Wyckoff (1931) -  Method of Trading and Investing in Stocks

 @utilizedtrading

@BraveheartTrade

Market Makers Method