Never forget why financial markets exist.


When I started my own trading journey over 10 years ago, I began where most newbie traders start, forums, books, news sites etc. The markets appeared to be complicated so surely an approach equally complicated would be required for me to make money. It became a search for knowledge as more knowledge would surely mean I would be a superior trader.

I tried pretty much everything, starting with simple chart patterns and progressing to the more complicated such as Japanese candlestick patterns, Fibonacci, Elliott waves, and of course using endless indicators. To me the markets were a game, just like a casino, where the odds were stacked against me but they could be beaten if I cracked the ‘code’. Fortunately, although it may have taken me a few years, eventually the penny dropped, I had completely missed the point, this is not a game, there is no code to crack, and markets are not complicated.

What I failed to grasp was the fact that financial markets such as Foreign exchange and commodities, have and always will exist for the sole purpose of world trade, not for the purpose of speculation. We as speculators are merely ‘extras’ in these markets and help to provide liquidity. Unfortunately however retail traders are constantly bombarded with the views and opinions of other speculators via news sites and blogs, so it’s easy to miss the fact we are only extras. However, by focusing solely on these views we are inadvertently ignoring the views of the largest group of traders in our markets. Non-speculative or ‘Commercial traders’ account for an average 60% of the trading activity and only by understanding this group do financial markets start to make sense. 

Consider a ship sailing across the ocean. The ship represents the current price of a market while its wake represents its movement over time, in other words its price chart. As speculative traders the focus tends to be on the ‘current price’ and ‘wake’ of the ship in order to determine its likely destination but most never think to consider who is actually driving the ship? The reasons for this are quite simple, 1. it’s in the interest of big businesses within the retail trading sector that you continue to believe markets are complicated so they can provide advice and other related services for a nice fee, and 2. most simply didn’t realise they could ‘see’ what or who was driving the ship.

Knowing who really drives these markets provides a completely different understanding of how they actually work, a recent example of GBP illustrates this point perfectly. 

The image below shows the buying activity of commercial traders in GBP futures (green line) over the last 3 years. Notice how in early 2013 these traders were able to turn the ‘ship’ in completely the opposite direction to where speculative traders believed it was heading. We know this because at this time speculative positions were overwhelmingly on the short side, meaning they believed GBP was headed much lower. It was the first time commercial traders had bought over 200,000 long contracts, which is an estimated $12Billion long position, and one which ultimately pushed this market higher. More importantly, notice how they have managed to build the same long position in recent weeks, at a time when financial news and blogs are filled with doom and gloom surrounding Brexit and other ‘negative’ factors regarding the future of the Pound.
Incidently, you may be wondering what happened in mid-2014 when GBP was trending higher but quickly reversed? Again the ‘ship’ was turned by commercial traders who accumulated one of the largest ever short positions in GBP. What side do you think speculators were on? 


It’s a common misconception that the ‘banks’ control financial markets, banks in the main are simply facilitators to the real traders in the markets, those commercial entities that exchange physical products every day. As they account for the largest slice of market activity, they are the ones driving the ship. Don’t be fooled by the views and opinions of the ‘extras’ in these markets, they are crowd followers and invariably join any party too late. Instead, if you wish to know where a market is headed go straight to those who decide its path.


By Ray Gilmour