[I][B]If you know yourself, and know your opponent, you need not fear the outcome of 100 battles[/B].[/I]
[I]Paraphrase quote from Sun Tzu, 6th century B.C. Chinese Military General[/I]
For all of you who are trading forex… the reason most fail is because they know neither themselves, nor their opponent. Knowing yourself is relatively simple. Simple, but not easy. Why do you trade? What is your goal? What is your trading plan? What is your method or system? How do you handle loss? How do you handle fear and greed?
Questions like these can help one gain an understanding of oneself. However, an equally important component to successful forex trading is to know your opponent.
Who exactly is on the other side of your trade? What are their intentions in the marketplace? How and why do they place their orders? Who is joining you on your side of the trade? Are you buying at a time and price that a major market participant is buying?
For many who have some experience in the forex market, it is “common knowledge” that you want to trade with the “big boys”, I.E. banks, hedge funds, and large commercial traders. It is often assumed that the biggest players in the market are regularly trading using strategies such as:
[ul]
running stops
following the trend
buying the pullback
fading the gap
selling the gap fill
[/ul]
And so on…
Although these are indeed strategies used by the larger institutions as well as many retail traders, these strategies all combined do not add up to even 50% of the current daily volume in the forex markets.
The strategy used most frequently, by the biggest forex players, actually ignores nearly all news events. It doesn’t take the trend into consideration whatsoever, and it couldn’t care less where the stops are placed. And most retail traders are simply blind to this strategy, the strategy that accounts for over 55% of the volume in the forex market.
Of course, if we stopped to consider for a moment why the forex market even exists, it would make perfect sense… but that would be “knowing your opponent”, and that is something that most retail traders never consider, and one major reason why most retail traders consistently lose.
Here is a quote from an article I found recently:
“According to Deutsche Bank, ‘passive’ players – such as corporate treasurers who are looking to hedge currency risk or to facilitate their core business, not to make a profit – account for more than 50 per cent of currency flows.” By definition, these passive players are not out to make a profit, and exchange currencies only because it is necessary to simply conduct business."
to read the entire article, here’s a link:
Passive Currency Investing Rises in Popularity Due to Increase in Forex Hedging Activity | Forex Blog
In other words, the single largest segment of the forex market puts trades in at fixed prices within the market because they are buying or selling at levels that they NEED to, in order to obtain various currencies at the prices they need to conduct their basic business.
These are the types of orders that are put in the market, and just sit there. They don’t chase a trend, they don’t “pop stops”, and it’s doubtful the traders behind these orders are even very aware when GBP consumer sentiment comes out 3% below expected, or that canadas core retail sales number is off by 1%, or even that U.S. home sales dropped 100K below expected.
They don’t care about this because when an american company needs to pay it’s factory works in Japan, it ABSOLUTLY needs to convert USD to JPY. If the USD were to start dropping in value to JPY, they are in REAL trouble come payroll time…so they hedge at certain price points.
So for those of you who think that a news spike suddenly turned down because a “big boy” jumped in and dumped on the market… you are often wrong. What more likely happened is price pushed into an order that was ALREADY THERE, and most likely put there by someone who didn’t even know that news report was coming out… someone who needed that currency at that price, regardless of world events and market trends.
In fact, they needed so much of that currency at that price that they absorbed all the market orders to buy, and still had a large chunk of sell orders sitting there. How can we deduce this? Because if their order had been completely filled, price would have been able to move up past that turning point 
“Know Your Opponent” - once the retail trader realizes that the biggest type of market transactions are entities who are hedging in the market… that those “hedgers” have fixed orders and various price levels… one suddenly gains a new paradigm from which to base their strategy on.
And hopefully, it is a strategy that capitalizes on how the “big boys” REALLY trade: by putting very large limit orders in the market at various price points to ensure their business can run smoothly, regardless of trend, macroeconomic reports, or what any indicator you have on your screen says.
Jay
