{quote} Hi, Thank you for the clarification. Very good What I get is: 1)The smart money is always building a long position on a downtrend and always building a short position on an uptrend 2)They will create a reversal by moving the market that will appear as a "reversal pattern" to entice the herd to follow, Let's say the Herd is net long and accumulating more longs and the interbank market (SM) is net short building more shorts, Can't the SM go bust eventually due to a sustained up trend ?
your points 1) and 2) are correclty reflecting what I said
To your question:
Let's say the Herd is net long and accumulating more longs and the interbank market (SM) is net short building more shorts, Can't the SM go bust eventually due to a sustained up trend ?
No the smart money can't go broke. They are too powerful and it's their game. It's their job (their role as a market maker) to take the imbalance and they (the 8 biggest banks) are responsible for 70% of the daily volume in the forex market. They can drive the price to any price level they want/need. They will win because they are the biggest players.
A sustained uptrend only happens because the smart money has accumulated a huge long position before the trend started and is still sitting on a net long position which must be distributed to the herd with profit.
Imagine this theoretical situation: There is only the smart money (the 8 mega banks as the market maker) and YOU as the only active trader in the world. YOU as the only active trader in the world want to take long position of 1 Million EURUSD.
1. If you have access to the interbank market directly then one of the banks will take the counter part short position directly from you.
2. If you have only access to a smaller network like currenex then you place your order there (in the currenex network). If the currenex can't match your order with another trader in the currenex network then the network will hedge your position against the interbank market. Then again the smart money is your counter part.
3. If you have only access to the market via your retail broker then the retail broker can take the counter part of your position (if he is a market maker) or if he knows that you are a good trader (or if he is an ECN who don't take the counter part of his clients) then the broker will pass your order to the network e.g. currenex. And then, as described in point 2, if the currenex can't match your position the network will hedge against the interbank market. Then again the smart money is your counter part.
What i wanted to emphasize with this example is: The smart money (as the market maker) is automatically building a position because it has to take the imbalance. It has to take the imbalance of all long term, medium term and short term market participants. Therefore, the smart money is automatically fighting against all long term, medium term and short term participants. And therefore, the smart money accumulates a position from different cycles (time horizons): long term, medium term and short term.
E.g. all long term players of the herd (as a whole) like pension funds who hold positions for years have build a net long position. Then the smart money holds a short position in this long term cycle because of the imbalance. And all medium term players of the herd (as a whole) who hold the positions for days/weeks have build a net short position. Then the smart money holds a net long position in this medium term cycle because of the imbalance. And all short term players of the herd (as a whole) who hold the positions intraday have accumulated a long position. Then the smart money has accumulated a short position in this short term cycle because of the imbalance.
Therefore, the smart money is always holding a long position and a short position at the same time. But the positions are hold from different time horizons / cycle sizes. And the smart money will always make the necessary actions to close their positions in profit.
E.g. what often happens during an NFP Friday is this:
Why does this pattern occur? The smart money is clearing their order books!
The smart money closes (parts of the) long positions to the upside if they see good amount of long stop orders to the upside. And the smart money closes (parts of the) short positions if they see a good amount of short stop orders to the downside. After that they decide their next tactical move (driving the price up or down).
The smart money will always win against the herd. It's the law of nature: The big eat the small
And back to your question: If you see a big sustained long trend then you can be assured that the smart money has accumulated a big long position before the trend started.
Here is the link to an interview with Scott Tuddenham originally available on moneyshow.com. I found a copy of this interview here: https://uploadfiles.io/5gr91
Besides a lot of other interesting information he says that the mega banks are giving access to their order books among themselves. So the mega banks can really act as one single unit. They do the necessary actions in the markets which are the best form them as a whole.
