Who is buying or selling at the 'top' or the 'bottom'?

Beginner Questions
1

I’m posting this here because I KNOW who ‘patrols’ this thread and I’m GUARANTEED an answer (I hope)!!!

I’ve just had an interesting discussion with someone and found that I did not have the answer to a question being asked:

We were discussing the fact that the USD/ZAR is going down i.e. the SA Rand is strengthening against the USD BUT Gold is going down as well so the ZAR SHOULD be weakening against the USD NOT strengthening. Be that as it may I’m just assuming that traders were taking profits (especially those trading ‘naked’ i.e. candlesticks only) i.e. selling USD/ZAR and this has caused the drop.

NOW the question is this:

Assuming that there has to be buyer and a seller I can understand that at the moment those who are taking profit are selling and someone is buying and I can understand this ‘logic’ i.e. nothing has fundamentally changed here in South Africa i.e. interest rates on hold and Gold going down so the ‘logic’ would be that this is only a temporary pullback in price so it could very well be a good idea to be buying USD/ZAR at the moment BUT WHAT IF the USD/ZAR then went to something ‘ridiculous’ like R18 ZAR to $1 USD and this was then ‘widely considered’ to be an ‘absolute top’ and let’s say further that at THAT point traders started taking profits i.e. selling USD/ZAR. Now here’s the thing: WHO WOULD THEY BE SELLING TO??? I mean who would be buying USD/ZAR at this ‘absolute top’??? Someone would have to be buying otherwise you’d never be able to get out of your long trades but I GUARANTEE that on the day that this happened you’d have no problem selling USD/ZAR!!! In other words: how would it be possible to sell USD/ZAR and find a buyer that would not in their right mind buy USD/ZAR at this ‘absolute top’??? I’d find it EXTREMELY difficult to believe that this sort of trade would ‘go down’ or be possible because there would always be new and inexperienced traders willing to buy the USD/ZAR at this ‘absolute top’.

2

Dpat…

You ever think about straddles?

The idea is not to pick the Direction, but to just take the positions and once the Trend gains strength, unwind the other.

It also helps to take both sides, when you have enormous money your putting on, since it neturalizes what effect your having on the instrument.

i.e. a little different that the 50/50 straddle in this example, but same idea behind the trade, to a degree. You have 2 billion dollars you want to short at the absolute top, my thinking is, it would make sense to do a % split on your assets, like i dont know 70% short and 30% long. and forsake of example your 2 billion influences the pair. you could put up a small short and immediately long some, to balance the trade, the whole purpose is to get in as much short as you can before you effect the instrument, then when your alloted 30% is gone for longs drill the market with your remaining amount short. And slowly unwind your longs on the trend down.

You can view your 30% long as after you put on a certain amount short, you want to get a better price for your short so you start a “profit taking bump” on the chart that gets the investors buying in, raising the price so in essessence your 30% is helping you get more of your 70% short at a better price since 100% short all at once would kill it. and its possible if the bandwagon follows you to get out of your long with minum damage possible and still profit trying to swing that direction and once it cools off drop the short bomb on them again. haha repeat often until you fully got your short line.

My thinking is once you have so much money, when you trade you cant trade off trends because when you step in you “are” the trend. So different strategies have to thought of, of how to get in the trade without totally wrecking what your trying to accomplish

This is only idea behind someone or something that has enough money to dictate trends, with their trades i.e. banks, instutions etc.

So long ramble put short, I think a powerhouse would buy at absolute top so they can get more of their shorts in before the price starts to fall.
50/50 stradde, or 70/30 straddle or just simplistic, people are trading on a smaller time frame and totally not concerned with a bigger timeframe trend

My idea behind it anyways

;o)

3

dpaterso - I think your question is who would possibly be on the other side of the trade at the top. Firstly, I would say how would the buyer(s) know it’s the top? Secondly, keep in mind that the market has loads of different participants with a variety of reasons for buying or selling. The trader(s) on the other side of the transaction might have been closing a position, executing a hedge, or any number of other things.

kagin - The idea of a straddle of the sort I think you’re outlining is a slow bleed. Firstly, while you have both legs on you can’t make any money on direction. Second, the carry is going to be against you the whole time.

4

Rhody …

Never said it was for making money as both are going, merely for getting your short in place. if the idea was to go in a certain direction. 70/30

If it was a 50/50 straddle, the carry balances.

your example is outlining “traders” while mine was more leaning towards big “institutions”

5

Yup: I KNEW I’d get an answer. Thanks John.

Yes, that’s exactly what I’m saying i.e. who in their right mind would buy USD/ZAR from a seller if it’s at the top. As to who would know that it’s the top: well I’m just saying that the ‘probability’ of it actually being at the top if it were to go that high is far greater than the ‘probability’ of it weakening still further. But that’s just USD/ZAR that I’m using as an example i.e. there MUST have been (in the past) occasions when something is ‘absolutely at the top’ (like almost a ‘no brainer’) and the question is WHO in their right mind would take the other side of the trade at that point!!!

6

Let me try my humble answer. No, actually there will never be a moment like this . The reason is simple: it just can not get there. the spread will be so big before it got to that extreme point, to a extend that no trade could be executed to reach there. Actually when 50.0000000001% of the total trader think the market will go up, it will go up a little bit until only 49.99999999999% believe it will go up. Then it go down. That is what a market do.

Let say GBP/USD reach the absolute top of 1:100, then at that moment, no one will bid to buy, you will see your qoute as GBP/USD 0.000/100.00, you have a 1000000 pip spread.

In fact if one day GBP/USD 1:100 really happened, it must have gone throw a long period of slowly moving up and a lot thing will prove it has a reason to be 1:100. And those reasons will make 50.000000000001% of the traders believe it should be 1:100.01

then the show goes on…

7

Actually, in all likelihood it doesn’t because you’ll receive the bid rate and pay the offer on both sides of the transaction.

8

You keep qualifying your statement with “probability” and “almost”. That implies it’s not completely sure, which means there’s still a chance. Someone is playing that chance, or they just need to do the trade for some reason and aren’t even concerned with tops and bottoms.

10

umm the spread changes as the rates change… it(0/100) wont happen because unless England gets destroyed or disappear somehow and all that is left if its money, then it will be worthless because there will be no government or country behind supporting its value, but then, it could be sold as antics or something… Anyways the rate will never reach 0/100(GBP/JPY) or anything like that because in forex people make money off others, in other words if there are winners there has to be loosers, so to make money in forex you must be better than atleast 50% of the mass traders, but it gets complicated since forex doesn’t just go up without a little resistance, so thats why people are saying only 5% forex traders make money. I disagree with wq7278 because the rates go up because people are willing to pay more for it, example GBP/JPY is at 2.1/200, people think that the JPY is under valued so they buy JPY which means the sellers will sell it at a higher price since there are more money in the market that are selling, more people really means more money, but sometimes big financial institutions sell and you see billions of dollars are used under one single name, so its really the money that matters…
anyways time to answer the question that what IF people only sell a certain currency because they all think its overvalued. First of all there is the government of that country to stop its money going worthless, for example what is happening in the US right now, peopel are selling USD because they are afraid that it will go into recession, so the US gorvernment butts in and invests 150 billion into its economy, which will have an affect on the mass trader because some people would change their mind think that it will help the US which results in its currency rising. second of all as the currency is devalued its export usually increase which means people will buy the money used in that country, which will result in a positive affect on the currency. Thirdly when a currency pair fall there will be people who think that it will rise again, which means more and more buyers appear as the currency falls, which results in a turning point somewhere. there are more but these are the main points that I can think of right now.

comment on me please

11

Here’s my take on this:

It’s about basic global economics, money is moving in vast amounts all the time for a number of reasons

eg: If you own a big US based company and you needed to buy ZAR produce this would be a nice time to place some big orders.

those are buyers and sellers

I think the ‘forex traders’ are just flies on a big buffalo (global economy) trying to lay a few eggs (make some pips).

Forex traders make noise - they don’t make trends.

silly analogy I guess

12

I like this Brendon:

I think the ‘forex traders’ are just flies on a big buffalo (global economy) trying to lay a few eggs (make some pips).

ROFLOL!!!

And by the way I don’t think it’s such a silly analogy.

However, this thread seems to have ‘lost the plot’ somewhere.

Let me put it another way:

Let’s say that a pair is trading at an ALL TIME RECORD PRICE i.e. NEVER has it breached the price it’s at at the moment AND all the fundamentals and technicals are SCREAMING that this is ‘the end’. What I’m saying is that if I ‘owned’ some of the currency I guarantee that I’d be able to ‘rid myself of it’ i.e. unlike equities, for example, where if I could not find a buyer I’d ‘sit’ with the shares. The point is that in me being able to ‘rid’ myself of the currency then it stands to reason that someone else is going to be on the other side of that trade and I’d find it hard to believe that it would be a institutional trader (buyer or seller whichever the case may be) who knows what’s ‘going on’ and I’d find it equally hard to believe that it’s a new and inexperienced trader(s) that’s allowing ME to ‘get out’ (let’s assume at a profit) and in so doing has just set themselves up for disaster. In other words: is my successful trade only successful because there just happens to be a less experienced or ‘switched on’ trader(s) on the other side???

And by the way: I fail to see what a changin spread has to do with all of this i.e. I can tell you that at my brokers, where I only used the fixed spread options, it ain’t going to change.

13

Dale - You’re firstly assuming that everyone agrees “this is the end”, which I guarantee you is [B]never[/B] going to be the case. There are a great many folks who see new highs as a sign of strength, not a sign the end is nigh and I could point out examples of where everything would have seemed to indicate a market was at its top (or bottom), but kept right on going. Don’t try to overlay rational behavior on price action. It won’t work.

Secondly, keep in mind that the bloke on the other side of your sell order might be someone who has a business need for the currency and is not in the market timing business.

14

I like to pick the top and bottom but experience tell me I’m wrong most of the time :wink: