The true thinking process of the banks - Forex Master Pattern
Hello there traders, in this article I have compressed information which will be useful for every trader. There is this trading methodology which very little know of (Even though its public information) that revolves around a market cycle which consist of an contraction, expansion, and trend.
This article will just open the doors to your understanding of these principles, and will just go over the basics, to master it you must practice it a lot and identify many different zones in the markets.
Practice Makes Perfect
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What will be gone over in this article?
This article will explain what exactly are contraction phases, expansions, and trends and how to identify these different market phases.
Get a basic understanding of what institutional traders look for and how they operate vs Retail.
What exactly is the value line and how it acts like the "center of gravity".
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What is the Forex Master Pattern?
The “Forex Master Pattern”, is a alternative type of Technical Analysis which shows the true psychological patterns of the Financial Markets. This pattern has 3 Phases, which is known as the Contraction, Expansion, and the Trend Phase, which will complete one market cycle in this term.
This pattern also creates a concept known as the “value line,” which is the fair value zone or the neutral belief zone where buyers and sellers agree is the fair value. Consider it in terms of the center of gravity.
This pattern is present on every timeframe and in every market with enough liquidity and volume, and shows the behavior, psychology and activity of retail, professional traders, institutional traders and investors and market makers.
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The Contraction Phase
The contraction phase is the setup and it indicates a period that the market is in consolidation, with a tight and narrow range. During the contraction phase there is going to be low institutional volume and they are avoiding positions and trades. It is best to avoid trade entries in this phase and wait for a clear trend after the expansion.
The Expansion Phase
The expansion phase is the play and its when the institutional traders begin to accumulate positions. There are many things that institutional traders would do in this phase. If the institutional trader or "market maker", main goal is to buy the asset, they will drive the price lower with their money to draw in retail traders to place shorts and sell their positions which will generate liquidity for "smart money" to buy cheaper. and vice versa.
If the institutional trader or "market maker", main goal is to sell then they will make the price go up a little with their own money to lure in traders who will buy their bags so that "smart money", can sell in a profit and overvalued.
The Trend Phase
The trend phase is the final phase that completes this market cycle. Once the institutional traders feel like it is time for them to start taking profits, will commence the distribution cycle which causes price to move down. All this profit taking from "smart money", will eventually lead retail traders to understanding that they were in the wrong side of the trade and the panic, liquidations, and stops start. Eventually they panic and start buying back in, and this generates liquidity for institutional investors and traders to take profits, leaving retail with overvalued bags, for the cycle to repeat itself again.
For the short scenario it'll be a vice versa too, they will move price up with their own money, cause retail to believe the price is going up so that they get into wrong trades (Retail buys, Smart Money Shorts), they start accumulating short positions or selling their bag and with the trend drive price back to value or even below, and at this point retail again begin the panic, liquidations, and get stopped, and ultimately sell their bags to institutional traders who buy at a discount.
This pattern is also similar to the accumulation and distribution cycle and are basically the same theories with different executions.
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What is the value line?
Previously in this article I have explained how contraction zones create fair value lines. Value lines can be described as the average price and the neutral belief zone for price. It sorta acts like an center of gravity. Knowing the HTF value lines can be your key to success since you will understand the general direction of the market.
Value lines help you visually understand what territory the market is in, like if its consolidating at value you should avoid entering any trade at all cost and wait for the expansion and perhaps the trend.
These value lines and contractions can also be used to find certain broadening wedge ranges and the longer price stays in a proper broadening wedge the more volatile it will get. The broadening wedge starting from the origin of the contraction is rare to find but can create some pretty good scalping environments and conditions.
Conclusion:
Well I hope this was educational, and it gives you another way of understanding the markets. This article was pretty basic in understanding this pattern and methodology but hopefully now you have more awareness. The best way to start understanding these principles is to practice in the charts and learn to identify the three phases.
This isn't a strategy but more like a theory or a concept which explains the behavior of the market. With proper understanding you can create many different strategies since this is extremely versatile and works on any market and timeframe if the liquidity is there.
So go on the charts and try to identify the three phases and see how you can improve your trading game!.
