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what positioning is all about? The big players, the big traders in the marketplace that are looking for these big trades. They don’t necessarily involve themselves with short-term scalping, or are very short positions in the marketplace like many traders do. What they look to do particularly is hedge funds, develop a very consistent very well thought-out, fundamental trade decisions, based on a lot of fundamental analysis on decision making for many large market participants. Institutions such as, finance institutions and hedge funds, the very essence of the training will target long term price changes, as a result of changing macroeconomic variables. Their decisions are thus a result of very carefully conducted fundamental analysis, so this can help us as well if we know a large institutional is positioning itself within the marketplace. If we have a feeling, or a sense, or perhaps news that would dictate with which direction they’re looking to trade, that will certainly aid us in our decision. As well in the build up to large news events, source institutions will build large long or short positions in the marketplace. The objective is either for protection from risk or from profit, obviously profit being a main objective for long term fundamental price change, why would they look to perhaps protect themselves from risk ? Well if they perhaps know that there’s going to be a large appreciation, or depreciation in the currency, they may have a lot of other assets denominated in that currency, and the objective could be to position in the market, to actually look to hedge that risk within the currency markets themselves.
So with many different objectives, they look to take these huge positions in the market. It is often these large market participants, that cause large swings and volatility when realities do not meet the market expectations. And that’s absolutely the case, what we’ll do is actually look at a few examples here, to explain what we mean when we see market positioning go wrong. Here we have the Brexit vote, and this is the cable or pound US dollar market. Obviously very significant in terms of a world non-economic event, but it was a huge piece of news, a huge shock to the market at the time and obviously we can see how the currency itself reacted. What we see is fear within this price charting, moving down we see a little bit of a price Channel form with a support level of resistance, however, that fear and uncertainty leading up to the week’s just before. These are daily candlesticks, the week before the actual decision, shows that there is some fear and uncertainty and some money coming out of sterling in relation to the dollar. What we then see is market positioning!
What I do remember when week before, we see a lot of fundamental analysts coming out, with their forecasts to say it was more or less a done and dusted deal! There was no way the UK would be leaving the European Union, and we see this reflected in the market price. Market positioning then hits the bottom with many green candlesticks in a row, suggesting that this has been priced in. These large market participants are really pricing in, and a stay vote that the UK will certainly stay within the European Union, and that’s reflected as the price trades up within this week, leading up to the decision itself. Then what we see is the brexit leave vote, a massive shock to the market, we see some serious volatility to the upside and downside and then the currency actually trades down the whole way from one around 147 to 133 within one day. Trading an absolutely huge percentage loss in the overall price of sterling, a huge shock to the market, we can see and it’s technically racing. they’ve given high market positions were actually gearing up for a stay vote. They were all proved wrong! Inevitably if we look closer at this price actually what we see within the price action, the candle stick structure here tells us a fascinating story of higher market participants began to prematurely price, in the expectation of a brexit stay vote. Heavy long positioning accumulated in the pound u.s. dollar, almost a week before the fundamental decision was made. So they’re trying to position, they see a very strong probability that the UK will obviously vote to stay, and Sterling value will increase over the medium to long term. Certainly that does not happen, they are proven wrong and they suffer the consequences.