How can you know what the professionals are doing in the spot market? At first glance, the answer is, “You can’t.” Transactions executed by banks for their clients (or their own accounts) are confidential, and we don’t even learn the size of trades; volume is not reported in spot forex as it is in equities.
Professional traders at banks and brokers like Citibank, Deutsche Bank, UBS, and other huge institutions have the inside track on where the “real money” is going. They can then follow it or, in some instances (if they see it coming), front-run it.
What is real money? Real money clients are major multi national corporations, global investment houses, central banks, and other official institutions. These clients are considered “real money” because they have true underlying business reasons to buy or sell currencies.
For example, let’s say you are the manager of a global mutual fund that requires you to have 30 percent of your funds invested in Japanese stocks. New investor money comes in, and now you have to buy shares in every stock listed in the Nikkei 225 Stock Index.
To do that, you must buy Japanese yen. Now let’s say the Nikkei is reconfigured to add a few new stocks and drop a few old ones. You need to sell the stocks being kicked off the list and buy the ones being added to it, and the ones being added are usually more expensive, contributing to a bigger demand for yen. If you are the yen trader at a major bank and you are keeping track of the reconfiguration of the Nikkei Stock Index, you know that your fund managers will be buying yen and you can stock up ahead of time.
Then there is the “hot money.” Hot-money traders don’t have an underlying business reason to be doing the trades; their trades are purely speculative. It’s called hot money because it’s fickle and often short-term in nature. This is traded by speculators such has hedge funds, commodity trading advisors, high-net worth individuals — or the guy sitting just a few desks away who is trading for the bank’s
own portfolio, as are his cohorts at the other major banks and brokers. Traders who trade the bank’s own money are called “prop” traders, for “proprietary.” Not all prop traders are in-and-out artists, but some are.
Nobody knows the ratio of real money to hot money. Most traders say hot money is a bigger proportion of total trading than real money, but real money is the better bet to follow — if your client is making the trade, others in the same business are probably making the same trade, and thus you are going to get a price trend (or at least a longer lasting price move). In fact, the real money will provide market“support” in some cases. In the extreme case of central bank intervention, the real money is very real and the support level is well-advertised.
That’s the first clue to finding the professionals’ footprints — support and resistance, which can be a specific price right down the fourth decimal place, or a general area 10 to 20 points on either side.
Real-money traders often have a timing choice, and theywill be consistent buyers at what they consider a low, or consistent sellers at what they consider a high. Speculators also estimate support and resistance levels, which are always mentioned in the endless stream of market commentaries available in print and on the Internet. Market News, Reuters, Bloomberg, and the sites of banks, brokers, and advisors chew over support and resistance levels every few hours, since support and resistance are (usually) moving targets.
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