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10 - Dealing Range

In the realm of financial markets, the concept of the "Dealing Range" is pivotal. This concept provides a nuanced understanding of how markets oscillate and how liquidity is managed. Below, we delve into the intricacies of the Dealing Range, breaking down its components and explaining its relevance in trading.

10.1 - The Genesis of Market Ranges​

Markets don't move in a linear fashion; rather, they oscillate within certain boundaries, known as ranges. Comprehending how these ranges are formed is crucial for understanding the mechanics of price movement or "price delivery," as it's often termed in trading jargon.

10.2 - What Constitutes a Dealing Range?​

A Dealing Range comes into existence through a specific process. Traders execute buy and sell orders, thereby providing liquidity on both the "buyside" and the "sellside." This activity culminates in the formation of a new price swing, characterized by its own distinct high and low points. The span between these high and low points is what we refer to as the current Dealing Range.

10.3 - The Interbank Price Delivery Algorithm (IPDA)​

10.3.1 - IPDA Definition​

The Interbank Price Delivery Algorithm (IPDA) serves a specific function: to engineer liquidity within financial markets. Contrary to common misconceptions, IPDA is not designed to create buying or selling pressure. Instead, its primary objective is to facilitate a smoother flow of transactions by manipulating price movements. Interestingly, the algorithm's underlying logic is designed to mimic human emotional reactions in trading scenarios, which adds a unique layer of complexity to its functioning. Although unconfirmed, there's a widespread belief that central banks are the architects behind IPDA. In this setup, retail money acts as the primary source of liquidity that the algorithm targets. Further, IPDA also serves to more efficiently connect buyers and sellers through optimized price delivery mechanisms.

10.3.2 - IPDA Mechanics​

The IPDA employs a robust, multi-tiered strategy to realize its objectives. Each of these strategic steps serves to optimize the price delivery process, enhancing market efficiency in various ways. Here is a detailed breakdown of the key procedures implemented by IPDA:

  1. Rebalancing Inefficient Price Action: The algorithm starts by pinpointing areas of the market where price imbalances exist. It does this through a series of analytics that evaluate the buying and selling activities within a particular timeframe. Once an imbalance is identified, the algorithm intervenes to adjust prices so as to restore equilibrium.

  2. Offsetting Distribution and Accumulation: A significant feature of the IPDA is its ability to maintain market stability by neutralizing the effects of both accumulation (buying activity that drives prices upward) and distribution (selling activity that pressures prices downward). It achieves this balance by actively seeking liquidity beyond the established market highs and lows. Specifically, IPDA strategically triggers buy stops and sell stops, providing a counterforce to imbalances generated by excessive buying or selling.

In summary, the Interbank Price Delivery Algorithm serves as a sophisticated tool for engineering liquidity and enhancing market efficiency. Its complex, multi-tiered approach, coupled with its capacity to mimic human emotional responses, sets it apart as an innovation in the landscape of financial algorithms. The common speculation regarding central bank involvement only adds another layer of intrigue to this already complex financial tool.

10.3.3 - IPDA Role​

Within the Dealing Range, the Institutional Price Delivery Algorithm (IPDA) plays a vital role. It actively seeks Price Delivery Arrays (PDArrays), Fair Value Gaps (FVGs), and other forms of what is known as "Internal Range Liquidity." In simpler terms, IPDA is the mechanism that scans for opportunities within the existing Dealing Range, aiming to match buy or sell orders with willing market participants.

note

PDArrays stands for Price Delivery Array and can represent various types of blocks such as high/low, order, breaker, mitigation, FVG, or Volume Imbalance.

10.4 - Power Of Three (PO3)​

The Power of Three (PO3) is a trading concept aims to provide traders with insights into how they can maximize their gains by capturing the lion's share of a financial instrument's daily price range. It is particularly focused on four vital reference points on a daily chart: the Open, High, Low, and Close (often abbreviated as OHLC).

10.4.1 - PO3 Components​

  1. Open: The opening price is critical because it sets the tone for the trading day. Any deviations from the opening price signify either bullish or bearish sentiment, thereby acting as an initial indicator for traders.

  2. High: This is the peak price level reached within the day and is a crucial gauge for assessing market enthusiasm. A high price often serves as a resistance level, making it an essential point to watch.

  3. Low: The lowest point reached during the trading day represents the bottom-most sentiment, a point where selling pressure has likely exhausted. It often acts as a support level.

  4. Close: Closing prices are considered by many traders to be the most important of the four components, as they represent the final consensus of value for that day. They can be indicative of future market moves and are often used as reference points for trading strategies.

10.4.2 - PO3 Phases​

The Power Three concept divides the trading process into three crucial phases, each with its unique characteristics and purpose.

  1. Accumulation: In this initial phase, the idea is to enter a trade near or below the opening price on days when you're bullish. This allows you to take advantage of the entire price range for the day. Essentially, you're "accumulating" your position at a point where there's maximal room for the asset to appreciate, ideally capturing gains as the price rises throughout the day.

  2. Manipulation: While the term "manipulation" often carries negative connotations, in this context, it simply refers to the period when prices might experience volatility or go against the primary trend temporarily. This is the stage where less experienced traders might get shaken out of their positions, making it crucial to adhere to your initial analysis and trading plan.

  3. Distribution: In the final stage, the aim is to sell your accumulated shares near the day's high or at the closing price to capture the maximum range. This is where you "distribute" your positions, ideally when the asset has reached peak valuation for the day, thereby capturing a higher return on your investment.

10.4.3 - PO3 Application Across Different Timeframes​

While the Power Three concept is primarily designed for daily charts, its principles can be effectively scaled to suit various timeframes, be it weekly ranges or even intra-day periods like morning and afternoon trading sessions.

  • Daily and Weekly Ranges: When you expand the concept to weekly ranges, the same principles apply. The aim is to capture the bulk of the price range for the week by utilizing the OHLC data points as your primary guide.

  • Intra-day Sessions: For traders who prefer shorter timeframes, the Power Three methodology can also be applied to individual trading sessions. The three phases—accumulation, manipulation, and distribution—still hold, but you would focus on the OHLC within those smaller windows of time.

10.5 - Setting Targets Using Standard Deviation Projections in Manipulation Phases​

In the context of trading during manipulation phases, we can enhance our prediction of potential targets by using the standard deviations derived from the manipulation leg. This is achieved by employing the Fibonacci retracement tool, which we will adjust to include specific levels:

  • 0 (baseline)
  • 1 (first standard deviation)
  • -1 (negative first standard deviation)
  • -2 (negative second standard deviation)
  • -2.5 (midway between second and third standard deviation)
  • -4 (negative fourth standard deviation)

Typically, the price action gravitates towards the zone ranging from -2 to -2.5, especially when a PDArray (OB/IB/FVG) is present within this area. Moreover, in cases where the trend demonstrates considerable strength, the price may extend towards the -4 level. These specified zones serve as strategic potential targets for traders to consider.

10.6 - Liquidity Dynamics: Internal and External Range Liquidity​

Liquidity within the Dealing Range is not static; it's dynamic and can be categorized into two types:

  • Internal Range Liquidity: This refers to the liquidity that exists within the current Dealing Range. Here, interbank traders aim to match buy or sell orders with other willing participants, thereby maintaining the existing range.

  • External Range Liquidity: This is the liquidity that exists outside the current Dealing Range, either above the high or below the low. Traders often look to offload their positions to willing participants in this external range, thereby potentially creating a new Dealing Range.

10.7 - The Fluid Nature of Market Movement​

The market is in a constant state of flux, transitioning from internal range liquidity to external range liquidity and vice versa. This fluidity is a natural part of market dynamics, although there are instances where manual intervention can disrupt this flow.

The concept of the Dealing Range in trading is a sophisticated way to understand market dynamics. It goes beyond the simplistic view that markets only move up or down, offering a more nuanced understanding of liquidity and price delivery. This concept is particularly useful for traders who aim to grasp the underlying mechanisms that drive price action, thereby allowing for more informed trading decisions.