What it Market Composition?
In trading Forex I always have an awareness of something I call Market Composition. Market Composition gives you an understanding and an awareness of the positions that are held by other market participants. Knowing where other traders are long, short or, where they are placing their buy and sell orders is incredibly valuable information.
My days as a Floor Trader
When I was a floor trader on the commodity exchanges one of the things we used to do and by "we" I mean all the savvy floor traders, was to get to know the bigger brokers in the pit and find out what orders they had on their books. They were really not supposed to disclose this information, however, like any other kind of secret "intell" it was a case of developing relationships and getting to know the right people and over time. Eventually, if you were lucky, they became valuable providers of the information you sought.
With the knowledge of where the large buy and sell orders were placed and where big stops were located, it became a pretty easy exercise for some big "local" (independent floor trader) or group of locals to push the price up or down to that level so that the stops were hit or other large buy or sell orders were executed. This became like a "cash machine" for making money to a few guys on the floor.
Order books, open positions and other data resources
Nowadays, thanks to electronic trading and the information generated from electronic order placement, customer "books" etc, that information has become fairly open and accessible. We don't have to go through the work of developing relationships with floor brokers anymore.
I teach my Forex course on the Oanda trading platform. One of the reasons I use Oanda is because it really gives a broad range of very useful quantitative data resources. One such resource is the Oanda Forex Order Book. This shows the concentration of longs and short in 16 markets (14 currency pairs and gold and silver) and it also shows all the buy and sell orders above and below the market.
This information is extremely helpful when it comes to your own order placement. You can literally see what "hand" the other traders are holding and with this knowledge you can essentially use their own funds in protecting or supporting your own position.
Oanda has several more resources along these lines and they are all taught in my Forex course, however, suffice it to say that if you understand Market Composition, you will have a tremendous edge over market participants who are just buying or selling blindly based on some chart pattern or moving average crossover.
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