Let’s look into the way important traders form their positions and define the moments, when strong fluctuations begin, and entry points to make the most of profit.

Who influences market price fluctuations and how

So, let’s find out how currency operations are carried out by central banks, huge hedging funds, investment, and insurance companies. It’s them who support the liquidity of trading instruments on a high level through big trade volumes. Besides, these large speculators use conversion operations for credit allocation, bond issuance, and deposit attraction, and therefore their positions have a big influence on market movements.

Figuratively speaking, big Forex speculators are always a few steps ahead of private traders. They are better informed and that’s way most market participants follow their actions closely.

So, it’s important that most market participants enter the market in the same direction big speculators do to be able to profit from this direction. Thus, a potentially profitable entry point for private traders is the moment when important traders’ orders are executed in the market.

Principles of forming positions by big speculators

This subject is quite a closed section in the analysis of price fluctuations. One still can find some useful information on basic topics on the internet, but this one is hardly ever covered.

There are many reasons for that. The main reason is this method is mostly used by big speculators and they simply have neither time nor desire to set it forth on the internet. However, this method has been mentioned in the old literature on the work on financial markets, on stock markets, in particular. For example, yours truly first learned about this theory from ‘Security analysis’ by Benjamin Graham.

The essence of this theory is that large speculators never enter the market with their whole desired volume. They always take some time to form a position.  It happens because a new speculator doesn’t know how much money is in the market at a given moment. If the market is “thin”, injecting even a few dozens of millions can move the price sharply in either direction. No one is interested in that, of course: every man for himself in the market.  Big fish chase after big fish and small fish (us) content themselves with trying to guess big speculators’ plans. If you move the market in any direction with your money, there will always be someone with a bigger wallet who will want to appropriate your money. And they will do that. That’s the reason for “hiding” your trading operations from other hunters. In most cases, positions are built unnoticed, but speculators sometimes make small mistakes due to these or those factors, and then we can trace the forming of positions.

The picture below shows one of the ways of building “long” positions on  EURUSD:

Firstly, when quite a big position is forming, there’s always a flat. The building itself can only be traced within this flat through the least informative type of market volume - tick volume. Here’s why: when a real volume is forming, a big speculator’s position is splitting up into many small orders, that’s why we cannot see a big “boom”. Instead, we see a smooth growth, which always takes place in the market. But the tick volume shows the number of price fluctuations over a period of time, and that’s what we need. When a whole lot of orders are executed, the tick volume will simply “go off-scale”, which will result in a high column in the chart. An absolutely perfect option would be a forming of high-volume candles during the period of soaring volumes (1,2).

Secondly: the essence of position building most often comes to forming the so-called “lock”. In other words, we open a position to buy and a position to sell of the same volumes at the same time. It’s done not to move the market when positions are being built. Otherwise, in case of big volumes, a “thin” market can move 2-3% in a moment. There’s always a gap between any trades because we cannot open a lock position simultaneously, with 1-second precision. These gaps form high-volume candles.

Thirdly, the more high-volume candles, the more solid the position is and the stronger the price movement will be at the moment of execution.

The position is executed easily: a part of the hedging position is removed from the market. In other words: if the main goal is to buy, half the volume to sell is removed and the first upward leap takes place (3).

The rest is a matter of technique and time. Gradually, in small portions, the whole of the opposite position is removed from the market, which pushes it further upwards. When the whole position has been removed, the main “buy” position is closed, which throws the market down, of course. Why? Well, the market sees that the price is soaring, and speculators start entering against the market to catch the so-called “reversal”. With every new growing price point, a number of sellers grows too, and their volumes will sooner or later become equal to our buyer’s volumes. And at this very moment, the buyer removes his/her buying position, but the sellers’ volume remains! Here’s where a sharp retracement comes from (4).

It’s very dangerous to work in it as there are many tricks of big speculators. Here’s one of them, for example:

At the moment when the buying volume is removed, the market is rushing down, and the game seems to be over. But eventually, the market begins to soar again and throws out all the sellers. How come? The buyer did leave! Not exactly. The buyer removed a portion of the position and was waiting till sellers’ positions are fixed at the retracement. Then, the buyer threw his/her buying volume into the market again and the price soared as there’s not enough selling volume to hold the buyer back now. We saw that so many times in the market. Now you know why it happens.

To conclude, I’d like to add that this principle is not the only working method at the stock exchange. But, once you are familiar with it, you can easily earn either with those who build their positions or against them. The choice is yours, but remember it’s more likely you won’t get on the hook if you work in the same direction as large speculators do.

I recommend that you read my colleague’s articleon how to trace a big speculator and join him/her.    


 

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Price chart of EURUSD in real time mode

How big speculators form positions in the market

The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.

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