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If you watch financial television programs, you will hear the phrase “the funds are buying” or “the funds are selling.” This is especially true for commodities.
Here’s what’s going on:
Over the years, large hedge funds have hired financial experts, programmers and mathematic wizards to back-test a variety of strategies, while examining decades of price history. These large funds devise methodologies that are based entirely on technical price-based models. Essentially, these programs look for patterns within prices or technical indicators. When these patterns emerge in real time, buys and sells are made in the marketplace. A money-management strategy is added to complete the entire trading model.
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| Funds around the world hire the best programmers and Ph.D.s they can find to create trading models. |
While a fund in New York is creating these strategies, there are other funds in London, Singapore and many other cities around the world doing the exact same kind of research. They, too, are hiring the best available programmers and mathematical Ph.D.s who are creating similar trading models.
All of them are doing their research on the same historical data. The end result is the creation of very similar trading models, even though they are created by different trading personnel all over the world.
The chart above is what is known as a continuation chart for gold. Daily prices are plotted in the upper panel and the weekly prices are plotted in the lower panel.
In the chart, I have marked three price areas: A, B and D, where a new trend appeared to form in the chart. During this stage, prices appeared to have a two- or three-day price trend. This occurs because there are many buyers who are coming in at a short period of time (labels A and D).
It is during this period of time that you may hear “the funds are buying.” While one fund may be buying on one day, another fund may be buying on the following day. Their research is so similar that the “buy signal” is generated near the same time period. One fund may buy before another and yet, at another time, they may change places.
After these funds buy the contracts allocated to the trading model, prices often have a setback for one or more days. You can see this small change in direction very often in the charts. This occurs because the buying momentum of the large funds has stopped. They have bought all the contracts required at the time.
The extent of the market movement caused by these large funds can vary, depending upon the significance of the developing trend. For example, the price decline in March (B) lasted only a few days. This is because the price drop was primarily focused on the daily trend. The selling that occurred may have been more of long liquidation from a failed bull market than the start of a well-recognized bearish trend.
The next major sell wave in May (C) was much more significant and lasted several days in a row. This decline not only confirmed the developing daily trend, but continued a weekly decline that was much more significant. The rally in August (D) lasted several consecutive days. This price movement initiated a new bullish daily trend and surpassed the highs of the previous 15 weeks in the weekly chart. This rally was not only starting a new daily trend, it was causing significant short covering by trading models that may have been based upon weekly data.
There are certain price points within a trend where funds from around the world have a similar trading signal. As mentioned, these price points are not at the same value, but they are often very close in time or price. This is because their research has narrowed down an area of interest where historical price patterns suggest a trade that is supported by either a continuation of the trend or a mathematical return, based upon statistics and money management.
Through time and study, a trader can begin to identify these trading opportunities and make a profit, as the large funds take the account on a profitable ride.
Best wishes,
John Sheely
Senior Instructor at The Weiss Center for Investor Advancement
P.S. Want to learn more about how to pinpoint these trends in fund movements? Starting Feb. 24, I will be hosting a three-part course designed to teach investors just like you about the most common technical indicators found on almost every charting platform. Being able to spot these trends can help reduce losses and gives you the potential to generate higher returns. Click this link today to sign up for this informative course presented by The Weiss Center for Investor Advancement.
