I’ve been asked to explain what I meant by the ‘trick-of-the-trade’ I mentioned in my last post so here’s an example, and it obviously only applies to big players in the interbank market.
Let’s say EUR/USD is trading at 1.2270 and I wish to buy 1 billion. I have some choices;
- Go straight to market and buy everything in sight until I get all I want (not recommended). I will drive the market higher and probably buy my EUR at an average rate of 1.2290 say
- Start accumulating quietly. This is preferred but is also risky as the market can start moving against me at any time
- I can get tricky. Ring up three big players in the market and give them each a stop-loss order to sell 200 million EUR/USD on stop below 1.2240. News will get around pretty quickly that there are big stops not far away and the market starts to gravitate towards them. I start buying at 1.2250, accumulate my 1 billion, and then immediately cancel my stop-loss orders (and watch that baby fly higher when all are caught short!!)
This is obviously not happening today but it does happen, especially during the Asian session.