Using Order Flow To Understand Where The Banks Have Got Their Trades Placed

In today’s article, I’m going to show you how to use a small understanding of order flow to figure out where the bank traders got their trades placed to cause an up or down swing to occur in the market. Lots of traders have this assumption that it’s impossible to find out where the banks have placed their trades, but as you’ll see in the article, it is actually quite easy provided you understand a couple of simple order flow facts about how the banks must get their trades placed into the market. Also, knowing where the banks have got their trades placed is required for when my “How To Determine The Strength Of A Supply Or Demand Zone” article comes out, as you’ll be comparing the points where their trades have been placed to find out which one formed as a result of them placing the largest trade into the market.


How Do The Bank Traders Place Their Trades ?

To start off, I think it’s best if I give you a little lesson in the conditions that need to be met for the bank traders to get trades placed, as this will help you understand why they can only place them at certain times and at specific locations in the market.

For us retail traders, placing trades is something we never need to give much thought to, by that I mean we never really think about when and where we can place our trades because we know it’s possible to place our trade whenever we want and wherever we want. The only reason we can place our trades when and wherever we want is because of the way trade placing works. In order to place a trade, there has to be someone else in the market at the same time as we’re placing our trade executing the opposite order. If I wanted to place a buy trade, the only way that trade could be placed is if there was someone else in the market selling at the same time I wanted to buy.

Now the amount I’m able to buy or sell is determined solely by how much other people in the market are buying or selling at the time I want to place my trade. If I wanted to buy 100,000 EUR, there would have to be other people selling 100,000 EUR at the same time, otherwise no transaction would be able to take place. The thing about us retail traders, is that we’re not buying or selling at a level where we can affect the market, our trades are small, which means they only require a tiny number of opposing orders to be in the market for them to be placed. The fact they’re so small allows us to buy and sell wherever we want, because there’s always enough orders availbile in market for our trades to be placed.

With the bank traders things are quite different, because the trades they’re placing are much much bigger than ours, which means it’s far more difficult for them to actually get their trades placed, because the amount of currency they need other people to be buying or selling at the time they’re placing their trades, is much greater than what we need to place our own trades. Because of this, the only time the banks can actually get any of their trades placed is when they know there is a large number of other people in the market buying or selling.


Finding Where The Banks Have Placed Their Trades

Although we can’t determine exactly when they are going to buy or sell, what we can do is find out where they have bought or sold based on the simple fact that they would’ve needed lots of other traders to be in the market doing the opposite to them when they wanted to get their trades placed.

We know they can’t buy unless there are lots of other people in the market selling, which means that whatever buy trades the banks placed to cause a move up in the market to occur, had to have been placed at the most recent points when the market was falling, as that would’ve been the only time when there was a large number of traders in the market selling. If they had caused a down-move to take place by placing sell trades, we know those sell trades had to have been placed at the most recent points when the market was rising, as that’s the only time when there would’ve been a large number of traders buying.

Lets take a look at some moves which created supply and demand zones and see if we can locate the points where the banks got their trades placed to cause the moves to occur.

image of demand zone on 1hour chart of usd/jpyHere’s a demand zone which formed on the 1hour chart of USD/JPY.

The up-move which began after this demand zone formed has been caused by the bank traders placing buy trades into the market. To find out where these buy trades have been placed, we need to look for the points where people were selling before the move up occurred, as we know using our understanding of order flow that the banks can only get buy trades placed when there are lots of others traders placing sell trades.

image of swing lows created before upswing Here’s the same image again, only this time I’ve marked all the possible points where the bank traders could have got buy trades placed to cause this move up to occur.

You can see that each one of the points I’ve marked is a swing low. The reason there all swing lows is because when the banks place their trades they consume all the orders coming into the market from other traders placing trades. In this example the banks placed buy trades using the sell orders entering the market from people selling, this ended up consuming all the sell orders which caused the price to rise and form a swing low.

Here’s another example.

In this image you can see after the demand zone formed the market moved up, it’s moved up because the bank traders have got buy trades placed. Where have these buy trades been placed ? The swing lows made before the move up began!. Before each one of these swing lows formed the market would’ve been falling, which meant that most of the traders in the market would have been placing sell trades at the time the banks wanted to place their buy trades. When the banks decide to enter the market and place these buy trades the sell order from the traders selling are consumed and the price moves up creating a swing low in the process.

In this image you can see I’ve marked a supply zone that formed on the 1 hour chart of USD/JPY.

This supply zone has formed as a result of the bank traders coming into the market and placing sell trades to make the price fall. The points where the banks have got these sell trades placed, are the swing highs seen just before the drop. They had to have been placed here, due to the fact the banks can only place sell trades when most of the people in market buying. These swing highs are the most recent points where most of the people were buying therefore their the only places where the banks could have got sell trades placed.



The main thing I want you to understand from all this, is that when the market is trending lower, the banks are getting their sell trades placed at the swing highs seen before each swing down takes place, and when the market is trending higher, they are getting their buy trades placed at the swing lows seen before each swing higher takes place. All you need to do to find out where they’ve got their trades placed to cause a supply zone to form, is look for the swing highs that formed before the drop creating the supply zone occurred. To find out where they’ve got their buy trades placed to make a demand zone form, just look for the swing lows that formed before the move up creating the demand zone began.

You’ll see in my next article how we put all this information together to determine how strong different supply and demand zones in the market are, so be on the lookout for it in the next couple of weeks.

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