Understanding Institutional Market Structure

Oct 13, 2024

Lecture Notes: Institutional Market Structure and Price Action

Introduction

  • Date: November 2016
  • Topic: Institutional market structure
  • Focus: Analyzing correlated and inversely correlated assets to determine smart money behavior.

Key Concepts

What is Institutional Market Structure?

  • Analysis of correlated assets against inversely correlated assets.
  • Purpose: Identifying smart money's accumulation or distribution.
  • Currencies: Best analyzed using the U.S. Dollar Index.

Identifying Institutional Market Structure in Forex

  • Compare price swings in the U.S. Dollar Index with foreign currencies.
  • Symmetrical Market:
    • Higher U.S. Dollar Index = Lower foreign currency prices.
    • Lower U.S. Dollar Index = Higher foreign currency prices.
    • Non-symmetry indicates smart money activity.

SMT Divergence

  • SMT: Smart Money Tool/Technique
  • Look for divergences between correlated or inversely correlated assets.

Price Movements and Expectations

Symmetrical Market Conditions

  • Expectations:
    • Lower low in the dollar = Higher high in foreign currencies.
    • Higher high in the dollar = Lower low in foreign currencies.
  • Avoid: Reversal patterns in these conditions are not highly probable.
  • Turtle Soup: Anticipate market moves before they happen using divergence insights.

Non-Symmetrical Market Conditions

  • Indicators:
    • Dollar makes a lower low, foreign currency fails to make a higher high.
    • Dollar fails to make a higher high, foreign currency makes a lower low.
  • High Probability: Stocking reversal patterns.

Case Study: British Pound USD (Cable)

  • Timeframes: End of April to mid-June 2016, August to September 2016.
  • Observations:
    • Higher highs in Cable without corresponding lower lows in the dollar index.
    • Indications of dollar index strength and foreign currency distribution.

Technical Insights

  • Tools: Use MT4 indicators to overlay charts for better analysis.
  • Action:
    • Look for false breakouts (Turtle Soup) using SMT insights.
    • Identify and act on smart money accumulation/distribution signals.

Practical Application

  • Use daily charts for long-term analysis.
  • Focus on identifying underlying strengths and weaknesses in the dollar and foreign currencies.
  • Apply insights to trading strategies:
    • Short-term: Execute trades based on 60-minute or 4-hour blocks.
    • Day Trading: Sell above opening prices following specific insights.

Conclusion

  • Framework: Provides clarity and removes ambiguity in market analysis.
  • Focus: Use institutional market structure for better trading decisions.
  • Outlook: Continuous learning and application of these principles for trading success.
  • End Note: Always double-check foreign currency movements with the dollar index to identify potential manipulations and smart money tactics. Good luck with your trading!