market moves, crowd sentiment, who's buying and who's selling

so here we'll talk about why market move, what does it mean when market goes in a direction (up or down), who buy, who sell, and why.

first of all, market partecipants.

there are two kind of people:

the speculators, that are retail traders, institutional traders, hedgefunds, investors, banks (some time), central banks (some time).
we are the speculators, we buy and sell currencies (or cfd) because we want to make money.

the commercials, that are the guys who sell to or buy from us.
commercials, or market makers, or liquidity providers (you choose a name) are banks and companies that make the market, basically if you want to buy eurusd, you need to buy it from somebody, right?
well, you buy it from one of those guys (through your broker), so when you are buying eurusd, these guys are selling it to you, in other words the moment you buy, they sell.
fx liquidity providers are mostly banks (google or wikipedia to find out more).


next post will be about the anatomy of price movements, why price moves (up or down) and what does it mean.

why market move.



the job of commercials is to make a market, it means for example if eurusd is at 1.1500, we'll have the following market:

.........
1.1502 - commercial ready to sell here
1.1501 - commercial ready to sell here
spread
1.1499 - commercial ready to buy here
1.1498 - commercial ready to buy here
.......

if a speculator want to buy eurusd, he will do so, buying it at 1.1501, the first price that the commercials are willing to sell.

at this point, if the speculator buy all the lots that was waiting to be bought from commercials at 1.1501, and he still want to buy some more, he will have to buy eurusd at the next level where commercials are ready to sell, 1.1502!

et voil, the magic of market movement, eurusd will then go up of one pip, from 1.1501 to 1.1502.

the opposite will happen if speculators sell, price will go down.


as we can guess, everytime price go up, commercials are selling and having a drawdown (floating losses).

on a first look, commercials seems pretty dumb, they are basically always on the wrong side of the movements, always in drawdown.


but, this first impression is actually wrong, the opposite is true, they are the ones who make tons and tons of money year after year, and all those profits comes from... the speculators pockets!


how do they do???
next post.

**disclamer: some information in this post may be wrong, just theories.

if commercials buy when market goes down and sell when market goes up, how they end up making money?

let's give a look to the image below (at the end of this post), it is the eurusd, 2011/2012/2013.
the blue line indicator is the exposure of commercials, the green line is the exposure of speculators, you can see that when the blue line go up (commercials have buy positions opened) the green line goes down (speculators have sell positions opened).
it's a 0 sum game, no magic tricks.


in that years, the greece situation was making the market tremble, we had a downtrend, the mario draghi saved greece and everything become beautiful again.

as we can see, in the first black circles, market was flat, speculators was waiting for something, not buying or selling anything.

then something happened, i don't remember what was the catalyst exactly, some european bureaucrat (don't remember if it was an ecb guy or a government guy) was fired and we had a move, a technical breakout, downtrend begun.

speculators started to sell.
commercials started to buy.


like this all the way down untill the lows (red circles), we can see around the lows, the commercials was heavily long (you can't see in this image, but they was about 235.000 contracts, every contract is 1.25lots, so around 300.000 lots in total).
a huge position right?
of course in heavy loss.


then draghi come out with "whatever it take" (his famous words) and speculators started to buy again.
price went up again, and eventually the market was flat again on january 2013.

you can see, market moved 1000pips up from the level of max drawdown of commercials, eventually they have closed it in profit, thanks by the averaging down practice.

on the other hand, all the speculators who sold heavily at the 1.25 level (believing that price will go more down) ended up getting stopped out badly when price went up 1000pips from the lows.


the commercials was holding losing positions for more than one year, huge positions and huge drawdown (300.000 lots only in eur futures, 10 usd * 1000pips * 300.000 lots = 3 billions, aka 3 thousand millions usd of floating loss!).

they didn't get a margin call.
if they need more money on their accounts, all they do is call their central bank and ask a loan with 0% interest rates.


the speculators on the other hand, trade on margin (most of them), and if they sell and they see price go up too much, they have to close their position (manual close, stoploss or margincall) and actually lose money (profit for commercials!).

so you can understand what kind of "fight" between commercials and speculators it is.
on one side we have guys with unlimited money that can wait literally years before make jackpot, but they don't care because there's no hurry.
on the other side we have speculators with their 10-50-100-500 pips stoplosses and margincalls, who are forced to take losses whenever market goes too much against them.