ZONE CREATION IN FOREX
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BFI's take such large orders that they cannot process orders that large
without disturbing the market. Each currency pair comes with a certain ADR
(average daily range). BFI's must respect the ADR, so over the course of
the month the pair will average out to a certain number of pips per day.
EUR/USD is roughly 68 pips per day average, GBP/USD is roughly 120 pips a
day average. Over the course of the month the daily ranges must average out
close to these numbers. BFI's will work within these guidelines. If a BFI
simply put in an order for 100000 lots (random number chosen for example)
of EURUSD the market would shoot up like crazy(providing that the orders
actually got filled). There would also have to be 100000 lots of the opposite
order being transacted. Meaning that if a BFI wants to buy 100000 lots of
EURUSD, some one has to sell them 100000 lots. Usually the market will not
be able to fill these large orders as there's not enough liquidity available.
So what do they do and how do they get the liquidity?
The generate their own liquidity. They will take both buy orders and sell
orders at the same time and park the market in a range until they accumulate
a large enough of a position size. Once a desired order size is achieved they
will leave the range by initiating price out a range. The will then return to the
range and start dumping the opposite side orders to get out of drawdown. For
example they took both buys and sells and initiated a buy program they will
be in profit on their buy positions as they leave the range; however, they'll be
at a loss on all the sell positions, so they will slowly return to the range and
mitigate out of their sell positions. They'll get rid of some at a loss, some at
breakeven and some in a small profit and then the real move begins
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