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Forex Institutional Trading, Order Flows, and Stop-Hunts

If you are a retail trader, understanding the role of Institutional Trading is the same as a little Penguin knows when and where the white sharks go for hunting. This little information can save its life numerous times.

Profiling Institutional Traders

Institutional traders are large players managing great sums of trading capital. They include Investment Banks, Hedge Funds, Mutual Funds, Investment Firms, and some large Commercial Corporations. Institutional traders can manage their funds but also their clients’ funds. The Euromoney Survey can provide a good insight into the top institutional players in the Forex market.

The Euromoney Forex Survey

According to the 2017 Euromoney Foreign Exchange survey, Citigroup continues to hold the top ranking amongst currency trading companies. Note that the market share of the top five (5) global banks has diminished to 41.1% compared to 61.5% in 2009.

Foreign Exchange Market Volumes

Volume is a leading market indicator that can help traders to recognize strong trends and reversals, but also to identify the current market phase and to think ahead of the current price action.

In general, analyzing market volumes can be helpful in:

• Evaluating the strength of a price trend

• Confirming the breakout of a key support/resistance level

• Recognizing the market phases of accumulation/distribution

• Indicating signs of potential price reversal

• Optimizing the time to enter/exit the market

The VIX or else the "S&P500 Fear Index” is a market thermometer measuring the risk appetite of equity investors. The VIX is a contrarian indicator that can help identify extreme market movements and potential reversals.

Introduction to the VIX Index

The Volatility Index or else the VIX Index of the Chicago Board of Exchange (CBOE) indicates the expected volatility of the S&P 500 Index Options. In other words, it predicts the future volatility of the S&P 500 stock index. The Chicago Board of Exchange introduced the VIX Index in 1993 but added a VIX futures contract, not before 2004.

The VIX index measures the level of fear or greed in the stock market. In general, investors trade the VIX for hedging and speculation:

• Hedging against the volatility risk of their existing S&P 500 positions, as historically, the VIX Index is negatively correlated to equity prices

• Speculation on potential VIX volatility movements

  Read more: Trading the VIX (CBOE)

The Algorithmic/Mechanical Trading Tutorial

Algorithmic or automated trading is the process of trading the global markets without any human intervention. Algorithms analyze market data over multiple timeframes, and open positions when certain conditions are met. Later, these positions can be automatically altered or closed by the machine. An automated trading system can manage multiple accounts by eliminating fatigue and emotional/psychological influences.

Defining Algorithmic Trading

Algorithmic, Algo, Mechanical, Systematic, or Rule-Based trading, refers to a trading method where order execution is based exclusively on a pre-defined set of rules and instructions.

• Mechanical trading usually involves automatic execution (automated-trading), but it can also involve manual execution

• Rules and instructions include variables such as price, time, and volume

Who Applies Algorithmic Strategies?

Several different market participants apply algorithmic strategies, such as investment firms, hedge funds, high-frequency trading firms, large individual traders, and small retail traders.