Posted on: 22 Jan, 2020
Multi-timeframe analysis constitutes an essential step that one should perform consistently to stay in tune with the context traded. Have you ever asked yourself, what type of players dominate each of these timeframes? In this article, I break down both camps...
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For an institution managing billions of dollars and aiming to gain significant exposure on let’s say EUR short inventory, even if they will logically be expected to break down the total order size into smaller fractions, they probably won’t be trading based on the read off the 1m or 5m timeframes.
Why is that? Because the concentration of liquidity they find will probably be a major mismatch compared to the compounded order size they are looking to get filled.
Different timeframes, in the real world of trading represent a larger representation of data points captured, which in turn, provides more insights on where liquidity resides.
A bigger timeframe will also be much more accurate in predicting the larger movements as one can align the strategy with the same actors that control and will cause the market to eventually move in a big way. When will the fast money be overcome by the slow money? Is your lower timeframe trade in congruence with the slow money?
Therefore, by understanding the players involved in each time scale in your markets, you can gain new insights on the magnitude and strength of the opportunities that arise. Even if you trade smaller timeframes, you must account for the bigger flows to catch those monster moves.
Ok, so we can divide these players in what we’d refer as the fast money and the slow money. Remember, if you aim to get the right direction in your markets, you must think like a slow money account even if the influence you will exert in your market may be a drop in the ocean.
The fast money consists of traders operating under a limited account size and are largely dominant in the lower timeframes from the 1 minute up to the 30-minute. They also tend to hold positions for much less than 1 day, usually for minutes to a few hours. What’s also important to point out is that the impact of their trade size in the market will be minimal. Something else to be aware of, they can enter positions at market with little risk of slippage.
The slow money consists of traders operating under a much larger account size and are largely dominant in the higher timeframes from the 1 hour up to the 1 month. They usually aim to build and hold positions for a few days all the way to months or years. Besides, in the case of these players, their position size will tend to affect the market in a more meaningful way. These players must be able to strategize their orders by breaking them down into smaller sizes or ‘icebergs’ after considering the liquidity available to minimize the amount of slippage suffered.
Let’s now dissect these two different groups even further.
The fast money includes, first of all, the vast majority of retail traders, either is via manual trading, automatic/algorithm, or via some time of hybrid version by tapping into technology to generate signals yet still assessing the placement of trades manually. These traders will tend to operate, in the majority of times, multiple times per session in the lower timeframes.
Another type of player that must be accounted for include the market makers and its match-making algorithms that have, as main function, act as the counterparty to facilitate business, which is why they also go by the name liquidity providers.
The business model of market makers orbits around quoting both a buy and a sell price for its clients and makes a profit on the bid-offer spread. They stand ready to regularly buy or sell the financial instrument at a publicly quoted price. Most foreign exchange trading firms are market makers and the same applies to many banks.
As part of the slow money, it includes sovereigns such as Central Banks, Middle East sovereign funds or the BIS (Bank of International Settlements). They tend to make structural trades. Some small banks and larger corporates would also clear their FX transactions through central banks, and in turn, these would hedge to maintain a balanced ratio of FX reserves.
Big commercial banks the likes of UBS, Goldman Sachs, Morgan Stanley, HSBC, Deutsche Bank, Barclays, Citi Bank, etc. They are characterized by having a huge client base alongside large prime brokerage businesses. Since their operations are huge, they also have sales force to incentivize interest and turnover from some of its largest clients (hedge funds, corporates…). These commercial banks activity has transitioned, ever since the financial crisis, from riskier non-client funded proprietary strategies into a lot more client flow-driven orders. We then have a much smaller-tier banks that heavily rely on corporates to generate turnover.
Corporates are also transacting huge amounts of money at times, even if the main purpose is to hedge the risk of exchange rate variations. It has become a great business for banks. Banks can gain great insights from certain corporate dealings as these players tend to be the most informed about the industry that they must seek out protection/hedging against.
Real-money funds is another category that tends to be quite passive in nature, even if the amount transacted can be quite meaningful and move the market. They tend to be unleveraged because their transactions are not motivated by making profits but rather as a means to re-balance the books at the end of financial quarters, end of the fiscal year, etc.
Hedge Funds is the next category that makes up the slow money type. They tend to follow a holistic approach by operating all types of asset classes from FX, commodities, equities, as the amount of capital under management is quite substantial. This category is what’s referred to as the large speculators in the CFTC commitment of traders report. They are often also called, alongside the commercial banks, ‘the smart money’ as they tend to be on the right side of the trend, since they are the ones that do produce sufficient pressure in the first place. Note, as part of the Hedge Funds, there will be a few specialized in trading just Forex.
Another category that earns the right to be at the echelons of Forex trading with the big boys is what we call HNWs or High Net Worth Individuals. These are individual retail clients, but due to the success they’ve generated and the money under management, they do operate directly through bank trading platforms. These traders can create a turnover of billions per month.
Some retail brokers that do no provide a genuine A-book business models by not by passing their client orders to the larger clearing center (prime brokerage) they have relationships with would also qualify as part of the slow money as the transactions can be quite big. If as a retail trader, your broker engages in these practices, its labelled as non-STP (no straight through processing). These brokers would take bigger risks by adopting an ad-hoc model by which client flows will be hedged or serve as a vehicle to speculate for bigger profits by not clearing them.
Example of trade placed in the EUR/USD 3m timeframe. This is what we understand as ‘scalping’ the market for a move that could last up to 30m to 1h perhaps. These trades by the fast money can be with the trend as part of momentum strategies, with some predatory funds involved.
As we go higher into the 15m or 30m, the picture gains more clarity as the amount of data at display increases and retail traders are able to contextualize their positions better. Some institutional trading can be involved in these timeframes for sure. The aim is to hold positions for a few hours up to a few days if they can catch a runner. See example of EUR/CAD 30m chart.
As we keep going up, the next timeframes that we use as reference, and here is where the slow money will start to be much more present, include H1, H4, Daily timeframes. If you are a hedge fund, commercial bank, corporate, or the likes, these are the time scales most suitable for them to assess the liquidity available for optimal trade entries with heavy size. In the example below, I illustrate a short in the GBP/USD off the daily chart. Notice where it occurs?
Lastly, we also have the bigger names out there operating based on what the weekly and monthly timeframes communicate. The largest money flows will enter the market derived off these timeframes, with their outlook based on fundamentals, valuations (bond yield spreads) and also the technical context. Some of the turning points (pivots) in these timeframes provide huge opportunities for these players to enter the market with large size trades. In the example below, I provide an illustration of the USD/JPY off the weekly timeframe.
There are a few suggestions I can give you to stay on the right side of those who control the big flows (slow big money). First of all, it’s important that you analyze the price structure in up to 2 higher timeframe charts above your entry timeframes as a rule of thumb. Secondly, pick a set of moving averages, and filter out if these align with your lower entry timeframe.
You can check Global Prime’s Youtube channel for a deeper explanation.
Trading the 5m -> In line with the price structure and moving average from 15m and H1 flows.
Trading the 15m -> In line with the price structure and moving average from H1 and H4.
Trading the H1 -> In line with the price structure and moving average from H4 and D1.
And so forth… and a hot tip for you. If the 2 higher timeframes stay out of sync by providing little clarity or contradict each other, stay out!
Personally myself, in one of the accounts that I trade at Global Prime, my entry technique is based off the 15m up to 30m, that’s the range of vision I apply to decide the price and time to enter. I then skip the H4 chart and prefer to align the entry with the Daily and Weekly.
Why I do this? Because the daily and weekly act as a more solid indicator of the underlying trend direction and therefore set out the directional bias to trade.
See below an example of EUR/JPY for the week of Jan 20th, 2020. I am only looking for longs off the lower timeframes to be aligned with the bullish daily and weekly trend.
With this type of technique, you can definitely put the odds further in your favor by ticking more boxes. That is, increase your win rate and your risk reward. As a by-product of this approach, you can pre-calculate the expectations of your trading time, this makes you become more patience in setting the right expectations on when to get paid.
Make sure that the risk and trade management are optimal too, then you test your entry strategy by simulating the conditions you’ll trade live, and be in a constant workflows engagement tio also master your own psychology as a trader (highly personal).
Bottom line, you cannot lose sight of the forest for the trees. To enter trades that offer the most optimal conditions, you must wait for a trend to form. Within this trend, you then must add further odds in your favor by synchronizing these trends in different timeframes.
You would definitely be on your way to make more profits in the markets by following the slow money. Remember, slow and steady wins the race!
In this presentation, I went through a practical exercise on what Forex markets the slow big money is most dominant vs the instruments where the fast money has taken control. Want to find out what instruments these players have exerted the most command since the start of the new year? Then don't miss the video below.
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