The forex market has at its core the interbank market. It’s a network between the mega banks Citicorp, JP Morgan Chase; Deutsche Bank, HSBC etc. All smaller networks are attached to the interbank market. The 8 biggest mega banks are responsible for 70% of volume which is traded in the forex market every day. These mega banks are the smart money and the driving forces in the forex market.
If we look at the huge volume of the 8 biggest banks then we can agree that the forex game is more or less a battle between 8 big market participants (the smart money) and millions of smaller market participants (the herd). You can guess who will win the fight every day.
Now let’s assume that most members of the herd jump on a trend when it starts to develop, they enter on pullbacks or scalp during fast moves in direction of the trend etc. Most members of the herd seek trends and want to profit from them.
If this is true, then an imbalance within the herd will develop during trends. This means e.g. during an upward trend the herd will throw more long orders than short orders into the market. During a downward trend the herd will throw more short orders into the market than long orders.
So, what happens with this imbalance? Who takes the counterpart of the imbalance of millions of market participants? It’s the smart money (the mega banks). The smart money is therefore taking positions against the direction of the prevailing trend.
Lately I heard that the mega banks are NOT charity organizations. They are indeed acting in the markets to make profits for themselves. What a shock! 😊 So, what do the mega banks do if they take positions against the direction of the trend and their entire position is in a deep drawdown? They need to drive their position into profit and give the position back to the herd (of course with profit)!
What do you think? Please comment.
The smart money takes the imbalance of the herd and therefore must take the position against the trend. They will accumulate an even bigger position before they reverse the trend to make even more profits.