Are you the trading poker fish? There have been a lot of comparisons made between poker and trading. Many of them are true, especially one. They say if you are at the poker table, and don’t know who the fish is, you are the fish. A poker fish is someone who doesn’t really know how to play poker well and loses a big amount of money.
So if we don’t want to be the poker fish, we must learn a little bit about who is at the table (i.e. the market structure) and what our role should be, in order to be successful. We can do this by looking at the Commitment of Trader (COT) reports. I think you might be amazed to what we will find.
Using Oil as an example, take a look at this recent COT report – click here. What this shows is that just 4 traders have over 32% of all contracts opened. The top 8 traders have 53% of all the open interest. You think that, well this is just Oil, a relatively small market compared to the equity markets. Think again.
Arguably the most heavily trade equity index future is the SP500 E-mini – click here for its recent COT report. Here we see the top 4 traders have 30% of the open interest and the top 8 traders have 48% of the open interest in the market. For the NASDAQ it is even worse nearly 80%, controlled by just 4 traders. Did you realize this? Just what does this mean to you?
Out of he literally 100s of thousands of traders across the globe, the only thing that really matters is what these 4 to 8 people do. Who are they? Most of these players are large banking institutions. They make the decision whether the markets go up or down. And do you not think that this select group of people are not on a first name basis (or at least the managers of the trading desks)? No, there is no real market, it is just a mirage. You need to understand this. Does this mean we should throw up our hands and declare that the markets are rigged, and we can’t possible win?
The poker fish is not necessarily the one that has the smallest pot, rather the person who does not understand this market structure. Yes the markets are some what rigged, but to not be the poker fish, is to understand how we can profit from this knowledge. The disadvantage of these large players, is that they can not move their hoards of money around easily. If they want to enter or exit the market, they can’t, with out effecting the price – but you can. This is why trends tend to go farther they we think.
These large players knowing that most of the poker fishes are leveraged too much and have no idea of the structure, they make the market oscillate back and forth to get the market to hit your stops, and they then cash in. It’s a money machine for them. Stop trying to anticipate when these players decide to make a market directional move (i.e. picking tops and bottoms), rather focus on being the fly on the back of a stampeding horse (i.e. following the trend). Don’t be the poker fish.
Blue Point Trading, William Thompson