Originally posted at forexfactory on February 13, 2011:
Hi grkfx, I’ve really enjoyed your posts here. I wanted to offer a thought based on this post: is the notion of mispricing a creation of the retail forex market? I’m not sure (really don’t know) is institutional traders think this way.Big banks, hedge funds, etc, are always in the market with positions going both ways. If the euro falls 100 pips, they have positions that are in the money by 100 pips, and positions that are down 100 pips. So when the market stalls, they create the stalling process by dumping some of the positive positions and…
Well you can call it mispricing or the stars aligned for you, or whatever you want. It doesn’t matter what you call it. The only thing that is important is that it generates order flow and moves prices. Because the only thing that will determine if you profit or not is the order flow and behavior of other market participants that can and will move price.
Big banks and hedge funds always have positions that go both ways? Really? Why would they want to do that? There must be sometimes they think the price should go a certain way and just bet on that. Why the hell would they want to hold positions that are both 100 pip in profit and 100 pip in losses? Now maybe the market makers have inventory that they need to manage, but that would be the big banks only and not the hedge funds.
You seem to make the assumption that somehow the market makers balancing their books and hoping to bail out of trades always causes market movement. Well I don’t know too much about that. But they are not the only thing that generates order flow. Sometimes they can play a big role, other times their order flow and liquidity is just a drop in the bucket.
I just focus on things that I can objectively potentially measure.
As for what the big guys view, I just think about their positions, their emotions, their expectations, their potential pain tolerance, their sentiment etc and figure out when they can generate order flow and move price.
Sorry if it wasn’t the answer you were looking for, but that’s just what is going through my mind.