How a large position is framed

It is very difficult for big investment funds, which manage billions of dollars, to permanently generate a significant profit for such big capitals. In order to provide their customers with a competitive yield, the capital managers have to handle very big positions. And it is more difficult than trading a couple of E-mini contracts.

What difficulties arise when trading big volumes:

• Noticeability in the market. If everybody notices what position a major market participant opens, the other major participants may start to lead the market in the opposite direction in order to make the competitor close his position with a loss.
• Sufficient liquidity. Any trade in the market has two sides – somebody buys and somebody sells. If some fund needs to buy a big position, there should be enough sellers in order to execute such a trade. The majority of markets have a limited liquidity within a short period of time.
• Price shift in the direction of accumulation of a big position. Active buys result in the asset increase and, consequently, in buys at higher unprofitable prices.

So, how should major market participants accumulate big positions at the most profitable prices, staying barely noticeable and having sufficient liquidity?

You need several factors for this:

• Time. A big position could be accumulated rather successfully only during a long period of time – from several hours to several days or weeks. Everything depends on the position size. Namely due to this reason we periodically see flats in the market, which could last rather long. Position accumulation by major players usually takes place during such periods.

• The other side of a trade. In order to accumulate a buy position, somebody needs to sell constantly. But how to involve more and more new market participants into trades, which a major player needs for accumulating his own position? He has to make false movements and imitate level breakouts, so that the majority of market participants would assume that the price would move, for example, down, while the major player accumulates the buy position. Namely that is why false breakouts of the range boundaries take place in bands – the major capital uses them for accumulating its position at the expense of other market participants.
• Relatively stable price. A major market participant tries to hold the price within a narrow range in order to accumulate the position at the optimum price.
• Media support. Quite often, splashes of activity in the market, which occur after publication of important news, are used by fund managers for executing big orders.

If you observe a band with clear boundaries, which stays steady for a long time, in the market within a narrow price range, there is a high probability that a position accumulation takes place before a strong trend.

Let’s see how the cycle stages take place: trend completion -> position accumulation -> new trend commencement.

We will use the ATAS trading platform for analysis. We will use its instruments to analyse:

• What takes place with volumes?
• How is a big position accumulated?
• How should this information be used in trading?

So, we take the EUR futures as an example. There is a steady bearish trend in the daily chart:

Characteristics of a steady downtrend:

• every next low is lower than the previous one;
• every next high is lower than the previous one;
• the day closure tends to be closer to the low;
• Point of Control (POC) is the level of the day’s maximum volume (marked with a number in the chart) located below the previous days’ POC levels.

What could be a warning signal of the trend completion:

• daily candles cease to be trend ones and start to be flat ones;
• the price stands still making false breakouts of previous extreme points. Daily candles start to cast long shadows but the trend doesn’t renew;
• POC stays, approximately, at the same place.

All these signs tell us that, perhaps, a major market participant stops to move out of the current trend and starts to accumulate his position for the reversal movement.