Market Manipulation: Consolidation vs Indicators
Indicators distract the trader from what is actually happening in the market. The structure of price at any given moment will always give more insight into the future than any indicator based on the average movement of price.
Indicators LAG. They do not reflect the market in it’s current state.
Price based indicators will always give the signal (to buy or sell) after the price has shifted, as the indicator is only a reflection of the price.
Buying or selling based off of an indicator that reflects the change in price is the equivalent to trading blind.
Lets take for example the “EMA” , one of the most commonly used indicators (and most easily manipulated) in the financial markets.
An “EMA” or “Estimated Moving Average” is exactly what it says. An indicator that is set based on the estimated average movement in price over a given time period.
Taking everything we just learned above into consideration, lets ponder on this fact about the market.
Fact – Asian Session Consolidation: Characteristic of about every trading pair. This extended consolidation period will hold price in an extremely tight range for anywhere from 6 to 12 hours or more.
How might an indicator that is based off the average movement of price, react to the 6 to 12+ hours of consolidation?
Think of it like a mouse trap, that needs to be “set” in order to trap the mouse.
The extended consolidation phase is the setting of the “trap”. The “trap” is “triggered” when a “larger than normal” move occurs in the market.
The image above shows a great example of a false sell signal. (The signal is given upon the cross of the white and red EMAs) The EMAs in the above photo are 14 & 50 which is an extremely popular combination. However, the combination or numbering of the EMAs does not matter.
Notice the above photo shows a chart (GBPUSD 15m) with extended consolidation for hours. Take a look at the size of the candlesticks outlined in the blue box. The candlesticks are all extremely small, until we see the large red candle break out of the consolidation phase to the downside. This single candle alone is at least 5x larger in size than any of the previous 15 candles that proceeded it.
Notice, not until five candlesticks after the large breakout candle, do the moving averages actually cross (giving the signal to sell) after the move has already occurred.
Check out the photo below, this is a great example of simple indicator manipulation. Large candlestick causes EMAs to cross, giving the signal to sell. Then shortly after a massive injection of buy orders flood the market causing price to soar.
This sudden massive shift in price causes the EMAs to cross back over (signaling a buy) , inducing the retail herd into buy positions.
After buyers are induced, the market then reverses once more to hit stop losses of buyers that were induced moments before.
Above is a photo showing the series of false signals given by these price average based indicators. These indicators are so easily manipulated due to the asian consolidation phase that occurs on a daily basis.
Thank you for reading, this was my attempt to explain a little understood concept that plays a major role in the way the market works.
Share with your friends that use indicators to trade!!
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