Forex professionals (banks and market makers) act as counterparts to the trades made by home-based traders (you and me). They sometimes have to quote prices artificially, which is not a problem for them because most of the time they can cover themselves on the interbank market. However, during periods of low volatility, individual forex traders can take the upper hand over professionals traders. Following a significant daily movement, the price of a currency pair may reach a critical threshold where the movement loses strength and bounces several times. These price thresholds are often close to a psychologically important round number. For example, following a rise in prices, some traders will initiate short positions near the round number and place their stops above it, as they believe that the currency is over-bought. At this time, the professionals will want to hunt down these traders' stops, the price will break the round number, the traders' stops will be hit and the exchange rate will return to the round number.
On the interbank market, it is difficult to trade these price levels, because the raids on stops by professionals causes a widening of the spread, especially on the ask side. Individual traders can make money thanks to their fixed-spread broker, who will execute the sell order above the round number. The fixed-spread broker is then required to create a market that does not exist on the interbank market. In this particular trading configuration, the non-professional trader has an advantage over the professionals, because he finds a counterpart that the professionals cannot find on the interbank market!
Initially, we must find a directional market that is over-bought and near a round number. Professionals will hunt short sellers' stops above this price level! If the stops are triggered, the price will return below the resistance level.
If the trade does not work out quickly, this indicates that price is supported by real demand and not by stop hunting by professionals. In this case, it is best to exit the trade. This trading configuration works with all round numbers (1.3000, 1.3100,1.3200 etc...), but the probability of success is higher after a strong daily move.
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