How Banks Trade Forex
Learn from the Big Players
A common mistake we’ve noticed among amateur traders is they like to make use of every tool in the toolkit. Fair Forex takes pride in the quality of our trading platform and the tools it offers to our traders. That being said, cluttering your chart with numerous tools and indicators could do more harm than good. One tool could signal that it’s time to sell, but another indicator might say it’s better to hold.
Trading tools exist for a reason, but they can cloud your judgment when you’re looking at all of them at once. If you’re going to depend on the platform’s built-in tools, you must decide which ones to trust and take precedence over the other indicators.
If, however, you feel that you’re not yet adept at using Fair Forex’s tools and interpreting trends, you can study how banks trade forex and base your trading decisions on their moves instead. Why? Because banks are smart money traders, players who make up 10% of the forex trading activity. They are drivers of foreign currency exchange trends and consistently make big profits from trading (the remaining 90% are the retail traders or individuals who trade their money using their personal accounts and do not work for an institution).
Behaviours Characteristic of Banks
Smart money traders or institutional traders like banks have the following characteristics:
- They trade by hundreds of millions, which explains why they are market drivers.
- They are in for the long haul. They do not trade in small time frames but rather weekly or monthly.
The average trader will not have the same luxuries of having millions of dollars to trade or the confidence to stay in the market for a long time. They can, however, make moves based on how banks and other market drivers move.
Of course, it would be impossible to do exactly as these institutions do because the average individual trader cannot influence the market with their trading decisions.
The goal for learning how big banks trade forex is not so you can make the exact same moves but to calibrate your next steps knowing that a specific position by the banks can send the market trends up or down.
Banks’ Trading Strategy
Forex watchers have observed that while institutional traders use many strategies, their trading decisions can be categorized in three distinct phases, as stated in the Dow Theory.
Before we proceed with the three-phase strategy that banks follow in forex trading, let’s briefly discuss the Dow Theory. It is a time-tested technical analysis that was developed by Charles Dow, founder of the Wall Street Journal and co-founder of Dow Jones and company.
The Dow Theory looks at the bigger picture. Traders who abide by it do not look at the day-to-day fluctuations of foreign currency exchange rates but predict the direction of the primary trends. Charles Dow believed that stocks moved in trends and that trends have patterns that traders can study to determine the direction the market is going. One of its three key tenets states that the stock market moves in trends and that trends are assumed to last until there’s evidence suggesting that they have reversed.
Now back to the discussion: how do banks trade forex? They do it in the following phases:
Smart money traders set their positions by selling and buying in small amounts during the accumulation phase. They don’t trade all their money at once because that can drastically shift the market towards the direction they’re targeting. They do it slowly, giving as few hints as possible.
This phase usually happens towards the end of a downtrend. The outlook is pessimistic, price moves are slow, and many retail traders are selling. Banks, however, are buying. This briefly causes a downtrend in prices, which makes the accumulation phase a good time for retail forex traders to enter the market as well.
The banks have the ability to manipulate the market, and they can do it when the market enters into a consolidation stage. Many retail traders keep their positions just above or below the consolidation zone to ride out whatever new trend takes place. If they move too early, though, and bite the bait of a false breakout, they could go the exact opposite of the market trend and wipe out their stop losses.
The institutions’ intentions are no longer a mystery by this point. The market shows an uptrend, and retail traders take that as a signal to keep buying currencies. A word of caution, though: banks often sell when everyone else is buying and buy when everyone else is selling. The distribution phase is another positioning period, so retail traders should watch out for the next trend.
Learning about forex bank trading strategies is just the first of many steps if you wish to master forex trading and do well enough to make it your main source of income. To learn more about forex trading and be part of a dynamic forex trading community, join Fair Forex.
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