First, let’s get it clear that any trade you make at this stage will have NO effect on the market in any way, shape or form. There will be many days when you get the feeling that as soon as your trade is triggered everyone in the FX world has decided to play against you. You’ll be saying – ‘why do they keep doing this to me?’ It starts to get personal, and this is a fatal attitude. Revenge rears its ugly head. Don’t take anything personally, apart from accepting that you made the decision to trade at that point. Only you can take the credit, or otherwise, for this trade. The market doesn’t even know you exist. Nevertheless, there are plenty of professionals who do.

They don’t know you by name, of course. However, they’ve got a pretty good idea that you, and 100s, maybe 1000s, of small-time traders just like you are about to pull the trigger to go long. They’ll have a pretty good idea where your stops are set. They need to get long as well so they’ll go looking for your Sell Order (your stop loss) and Buy it from you. Bingo, there’s another bad trade, you think. Shortly after away goes price on its merry journey to the next point of resistance 150 pips away, and you’re left sitting on the sidelines. Hard not to get upset when this seems to happen more often than not.

So let’s try and gain a basic idea of how all this works, and how it differs from your normal retail experience. Understanding even this simplistic view of what’s at stake should help you develop a feel for the market’s mechanics.

OK, in the normal retail situation, you walk into a shop, see something you like, and pay the man. After you’ve walked out of the shop Mr Jones, the shopkeeper, couldn’t care less what you do with your purchase. He’s made his profit, and he’s got rid of a bit more inventory, so Mr Jones, and his accountant, and his bank manager will all be happy.

If you sell it at a later date, the only person who’s lost money is you, assuming it’s an everyday item rather than a work of art.

 In FX it’s different. You decide to buy X amount of GBP (i.e. you go long Cable), so you need to sell US Dollars (i.e. you go short US Dollar). To do this someone has to be prepared to sell you X amount of GBP (i.e. he goes short Cable) and buy your US Dollars (i.e. he goes long USD). At our level of trading, this someone will normally be your broker. At the higher levels it will be either another professional, or an institutional trader.

Now here’s the rub. We’ll imagine you went long 100 lots GBP/USD at 1.700. I’ll ignore the spread, we know it exists, but I want to keep this simple. Your broker is sitting there having sold you 100 lots at 1.700, and three days later price has moved up to 1.800 and he’s short the market. Remember, to complete this transaction he has to simultaneously buy your USDs, while at the same time selling you your GBPs. At the present time (last quarter of 2007) the Dollar is in decline, and most retail traders wouldn’t consider buying the US dollar.

At this point a couple of situations will have occurred. The broker will have made a decision on where the market is going and, if he concurs with general market sentiment, will pass the risk to a higher level (i.e. he will also buy X amount of GBP thereby selling his Dollar risk). If, through a superior knowledge of the market, he knows, or suspects, that a change of sentiment is about to occur he may well hold your trade in-house.

The retail market, by which I mean your average micro and mini account trader, although huge, is generally a follower of the market. The volumes simply aren’t large enough to make a trend change direction.

At the top end of the retail market, where a trader is placing substantial amounts through an ECN, the situation is different. Although, in themselves, they may not be able to force a major reversal in a trend, these traders are serious exponents of market analysis; and, more to the point, they understand how the minnows think. They, along with institutional traders, can go hunting your stops in order to enter a position at a more favourable rate.