Table of Contents
Recently I had a podcast interview with Bryan Mason, a former trader in large banks, and our topic was “Be a successful trader with forex bank trading strategy.” Using theory from books and this interview, we will try to answer the question:
How do big banks trade forex?
The most common bank forex trading strategy is based on fundamental analysis, price accumulation, manipulation, and distribution. Most bank traders try to enter into the trade after the false breakout, manipulation stage. Usually, bank traders make less than 3 positions per week and don’t have sophisticated trading systems.
Banks usually use 80% fundamental analysis and 20% technical analysis. In 20% technical analysis, there are not a lot of indicators. Their technical analysis is based on price levels.
What is the forex bank trading strategy?
The Forex Bank Trading Strategy is designed to identify price levels (manipulation points) based on supply and demand areas. Banks usually enter into trades during consolidation times, and they need liquidity in the market to enter into positions.
This article describes something different. Describe the bank traders’ approach. If you hurry and can not read whole articles, see the “Most common forex trading strategy” chapter for details.
Do banks trade forex?
Bank manage forex transactions for clients and trade forex from their trading desks, primarily using fundamental analysis and long trade positions. Banks make profits trading forex in two different ways. When a bank act as a dealer for clients, a bank generates profit from the bid-ask spread. When the bank trades forex as a speculator, the bank creates profit on currency fluctuations (the same as retail traders).
Forex big banks are:
| Rank | Name | Market share |
|---|---|---|
| 1 | United States JP Morgan | 9.81% |
| 2 | Germany Deutsche Bank | 8.41% |
| 3 | United States Citi | 7.87% |
| 4 | United Kingdom XTX Markets | 7.22% |
| 5 | Switzerland UBS | 6.63% |
| 6 | United States State Street Corporation | 5.50% |
| 7 | United States HCTech | 5.28% |
| 8 | United Kingdom HSBC | 4.93% |
| 9 | United States Bank of America Merrill Lynch | 4.63% |
| 10 | United States Goldman Sachs | 4.50% |
Top 10 investment banks that trade forex
But bank traders have tremendous knowledge about fundamental analysis, and they use daily, weekly, and monthly charts, mostly in their strategies. Moreover, they are primarily long-term traders because fundamental analysis and economic reports can influence the market days and weeks later.
How do big banks manipulate the forex market?
Big banks manipulate the forex market because they have massive positions, create liquidity, and almost 80% of their volume. Banks trade for clients and for themselves too. Banks drive the markets in 3 phases: Accumulation, Distribution, and Manipulation. By Dow’s theory, the accumulation phase starts when the big investors ( institutions) usually enter their positions. The manipulation phase is a false breakout phase. Finally, in the distribution phase, markets follow a big trend. Of course, these phases are theoretical.
Bank trading strategy example:
For example, let us replicate one simple bank trading strategy. The OECD Purchasing Power Parity figure represents a way to assess each currency’s fair value versus USD in the month of publishing. Bank can use monthly CPI changes and exchange rate changes to create fair PPP value for the month before the current month.
Buy trade:
Go long three currencies that are the most undervalued (lowest PPP fair value figure)
Sell trade:
Go short the three most overvalued currencies (highest PPP fair value figure).
Then, every month, banks can rebalance and remove currencies that are not undervalued or overvalued.
What is smart money? Smart money trading forex
Let’s start this article with smart money. This term is widely used to describe the most significant market participants. Please note that these participants have an extremely crucial and substantial part of the market. What’s more, these market participants’ positions can be neither closed nor opened in a single order without spiking the overall market. For your reference, here’s a list of smart money or largest market participants — Hedge Funds, insurance companies, most significant banks, massive global companies, prop firms, and speculative traders.
The banks indeed hold a vital position in the market among this list. However, kindly note that they primarily act as a market maker. It’s also true that these banks do have a speculative position, but the essential purpose of these banks is all about market-making. Being the primary market makers, these banks drive the market mostly in supply and demand.
Keynote at a glance: Smart money is a term to define the most extensive market participants. Smart money indeed has a strong position and influence in the market. Banks are considered one of the prominent participants in the market making. Although they hold a speculative position, their primary responsibility lies in the market making.
The forex market or foreign exchange is the largest globally when it comes to the financial market. As per a Triennial Central Bank Survey conducted in 2016, forex trading far surpasses the stock market. Its daily transactions average $5.1 trillion, compared to $84 billion of equity volume globally. The forex market also features digital sites that run the currency exchange trade and has multiple distinctive qualities that new traders get surprisingly fascinated by. We will take you into the introductory forex phase to cover how and why traders find themselves progressively more attracted to forex trade in particular.
Whether you call it forex, currency trading, or foreign exchange, a decentralized global marketing system brings the world’s currencies to trade. The price The exchange rate price paid to exchange one currency for another drives the forex market.
The official global currencies surpass 100 in number. However, the U.S. dollar, euro, British pound, and Japanese yen are the most used in most international forex trade and payment marketplaces. Apart from these currencies, other relatively popular ones are the Swiss franc, Australian, New Zealand, the Canadian dollar, etc.
Currency trade can be conducted via spot transactions, swaps, forwards, and options contracts with currency as the primary instrument. Currency trading is also on the list among the businesses that operate 24 hours every five days worldwide.
Before we analyze bank trading strategy, we need to know :
Who Trades Forex?
Forex is a market that features a lot of players and a variety of players.
- Banks
The interbank market holds the first position regarding the highest currency volume being traded. This avenue comprises all banks’ sizes to trade currency and uses electronic networks. However, big banks are the largest in the significant percentage of currency volume in exchange trade. This is because banks because bankss enable forex trade for their clients and handle speculative trades on bank trading desks alongside their usual banking business.
When banks play the role of dealers for customers, representing the bank’s profits, these currency trade speculations conducted by banks are a strategy to take advantage of currency fluctuations for profit.
- Central Banks
Central banks and government-owned and play a significant role in the foreign exchange market. Central banks’ policies on operations and interest rates on the open markets greatly influence currency rates. Also, central banks fix the rates or price of their nation’s currency on forex.
When the central bank takes any action in the F.X. market, it is to stabilize or raise the competitiveness of its nation’s economy. Like speculators, Central banks may carry out specific currency interventions to appreciate or depreciate their currency. For instance, any country’s central bank can decide to render its currency weak by creating additional supplies in lengthy deflationary trends for foreign currency to be purchased with it. When this happens, its domestic currency is weakened effectively, leading to more competitive exports in the international market.
It is with these strategies that central banks calm inflation. Such action also plays the role of long-term indicators for those trading in forex.
- Investment Managers &Hedge Funds
When it comes to the most significant Forex market player collection, banks, central banks, portfolio managers, hedge funds, and pooled funds come second in position. Investment Managers conduct trade currency transactions for significantly large accounts like pension funds, endowments, and foundations.
Investment managers who have a global portfolio buy and conduct currency sales to trade foreign securities. These investment managers can also execute speculative F.X. trades; meanwhile, certain hedge funds that execute speculative currency trades have their investment strategies.
These are inflation-calming strategies that central banks use. This also presents forex traders with long-term indicators.
- Corporations
Firms in the import and export businesses also engage in forex trade to execute payment for their goods and services. For example, let’s take an American solar panel firm that imports German components and then sells the finished products to Japan. At the end of the cell, the firm’s Japanese yen has been converted to U.S. dollars. The American firm must also exchange U.S. dollars for euros to buy more German Components.
The reason companies engage in forex trade is to evade the risk that comes with the translation of foreign currencies. So, for example, the same American firm might purchase euros from the spot market or engage in a currency swap agreement to receive dollars before buying components from this German company, which reduces exposure to foreign currency risks.
- Individual Investors
Retail investors make a low volume of foreign currency trades compared with financial institutions or firms. Retail investors focus on the following fundamentals; inflation rates, monetary policy, and parity in interest rates. Expectations. They also considered chemical factors such as support, technical indicators, resistance, price patterns.
The way business shapes Forex trading.
Collaboration among Forex traders makes the market highly liquid and plays a significant role in the global market. Moreover, the fluctuation of exchange rates impacts inflation and each country’s corporate earnings and balance payments account.
When countries with higher-yielding interest rates start dwindling back toward those with lower-yielding, it will carry trade unwinding. Then investors sell the higher-profit investments they have. For example, suppose the yen takes trade unwinds. In that case, it can perhaps result in big Japanese financial institutions and investors moving their currency back to Japan, provided they have substantial foreign holdings. This is because of the tightening of the spread between domestic and foreign yields. It is a strategy that leads to a considerable reduction in equity prices worldwide.
Forex remains the world’s largest market for a reason. It endows central banks, retail investors, and everyone else to take advantage of currency fluctuations that characterize the global economy. Moreover, trading and hedging currencies involve many strategies like carrying trade, which presents forex players’ impact on the worldwide economy.
There are varying reasons to engage in forex trading. Whether it is speculative trades that banks carry out, hedge funds, financial institutions, or individual investors, their sold motivation is profit. With the monetary policies, currency interventions though rare, and exchange regime setting, central banks always have robust control of the forex market.
Understanding who trades in forex and why it is essential for investors.
Before becoming a successful trader, it’s essential to determine the forex bank trading strategy’s nitty-gritty. More precisely, it’s a trading setup primarily designed to identify where the most significant market participants will enter/exit their respective positions based on the probable supply and demand areas.
Also, the top ten banks control more than 60% of daily forex market volume. Since these top ten banks are considered smart money, tracking them is vital for determining the overall trade success. Kindly note that tracking smart money is the foundation of any forex bank trading strategy. Thus, as a successful trader, you must check where the smart money moves in and out in the market. You also need to find out where the smart money is getting traded. Having all of these details in hand, you will make a profitable trading decision.
Yes, there are different rules and strategies present in the trading market. However, we can’t control all of these rules and strategies for sure! Since we cannot manage these strategies, we will learn smart money’s trading strategy, i.e., megabanks. Please note that these banks follow a specific business model. Understanding this business model is essential as it will help you achieve consistent results quickly! This business model is based on a three-step process. If you want to know more details about this three-step process, please look at the following sections for more information.
Keynote at a glance: Understanding the forex bank trading strategy is very important. It’s primarily based on their business model. The business model follows a three-step process: accumulation, manipulation, and distribution.
Critical steps for the ultimate trading success
In theory, the forex bank trading strategy is based on a three-step process. We will discuss the details of these three individual steps in the following sections. But, before that, all you will now need is to understand a key fact. In every transaction in the market, there are two primary participants, i.e., buyer and seller. When you are trying to buy something from the market, someone must try to sell it to you. Similarly, when you are looking forward to selling something, you have to be someone willing to buy it from you. Thus, buying and selling are the two counterparts in every transaction in the market.
The same thing applies true for smart money as well. Therefore, we will need to track and trace the areas where the smart money is most likely buying and selling their shares/trades. Now, let’s give you a good example: please consider that smart money is buying a considerable portion of trades in the EURUSD market. But, at the same time, they should have an equal amount of selling pressure based on the rule that’s discussed above.
What is the forex smart money concept?
Forex smart money concept represents bank trading strategy based on determining accumulation, manipulation, and distribution trading phase. Usually, medium and long-term positions after the manipulation phase are the main characteristics of a smart money bank trading strategy.
Step 1: Accumulation
In the forex bank trading strategy, accumulation plays a vital role. The exciting part is that it’s even considered one of the essential factors for successful trading. Unfortunately, most people/traders consider this strategy vague and meaningless, and they never give enough focus or attention to it. However, if you want to be a successful trader, you need to understand this strategy accurately.
Your goal should be to track and find out the areas where, when, and how the smart money, i.e., banks, are planning to enter. To be more precise, you need to cautiously find out their accumulating secret. You know when smart money is most likely to enter the market, and their respective positions will be your key to success. Suppose you can identify and find out the areas/positions that smart money is accumulating. In that case, you can also specify the directions where the market will most probably move in the future. When you have an accurate idea of where the market will be moving next, it will benefit a profitable trading strategy.
Step 2: Manipulation
This is the second step that comes after a successful accumulation. Market manipulation is quite a complex concept. Despite the complexity, you will still be urged to understand this strategy minutely to trade successfully. Consider an example, when you are just waiting to enter a respective market area, you will soon notice the market moves in the opposite direction. That’s known as market manipulation, which is a false push. After a considerable accumulation period, s short-term wrong push or market manipulation period must be present in every market.
As mentioned earlier, when the “megabanks” are trying to enter or accumulate the market, they will also create selling pressure. To be more precise, they will drive and manipulate the market to sell off their stuff after a considerable accumulation. This is a short-term manipulation period where the market trend may move differently. It may appear that the market is behaving against you during this time! But, at this point, you will need to be smart and cautious. This short-term manipulation gives you an extraordinary hint about a possible accumulation when the market trend will possibly go up.
If you can recall any significant market move that has happened before, you will surely notice a tight range-bound period known as accumulation. After that phase, there will be a short period of false push in the opposite/different market trend direction, known as manipulation.
Step 3: Distribution
After the megabanks have accumulated a position in the market, there will be a period of false push or market manipulation. Many forex traders may consider this market manipulation period at the wrong time. But, if you can carefully visualize and analyze the market, you can avoid being a pawn of market manipulation. You can instead make a profit out of it. After the phases of accumulation and manipulation, there is a distribution phase of the market. This is when the banks will attempt to push the price of the market area. Finding the market’s distribution phase is also quite tricky, and it closely depends on its previous two steps, i.e., accumulation and manipulation.
Megabanks play a vital role in the overall market. As a result, it’s paramount to carefully observe and analyze their moves so that you can be successful in trading. To study their movements, you must carefully follow three steps, i.e., accumulation, manipulation, and distribution. Before any significant market moves, these three steps above are bound to happen. Therefore, as an ambitious trader, you must have a close eye on these three steps. In this way, you should determine the possible time, volume, and position of the market and then make your trading decision accordingly for lucrative profits.
Most common forex trading strategy – example how to do big banks trade forex
Step 1. Accumulation Example.
Like we said, accumulation is the first step of the market in the bank trading system. Smart money trading without accumulation may not allow banks to take any position in any currency market. During this first phase, smart money accumulation must be identified when looking for a market setup. There is no alternative option that smart money can enter the market other than through this accumulation period. Before moving to the next phase, we need to see an hour of sideways accumulation. This stage is critical for the trade setup since it is not advisable for the smart money to spike the market because this may give away what they had already accumulated. During the accumulation stage, the smart money can archive better in total entry price by keeping the price relatively stable and entering overtime.
In this example, we have bad economic news for EURUSD see :
Step 2. Manipulation Example.
In May, we see a bullish market push. No economic impact on the price to go bullish.
Forex traders feel insecure with this trading stage since they feel it is wrong to enter the market. Many traders experience market changes that seem to move in the worst direction, but that may not be the case since this stage is inevitable; it is also crucial in the product market. This point is what we term the manipulation stage. This forex manipulation stage always comes immediately after the initial accumulation stage. This is a stop-run stage before moving to the final stage, i.e., market trend, mainly when operating on a given consistency.
The manipulation stage is crucial to monitoring smart money regardless of being termed a” false push” because of the market conditions coming towards the end of the accumulation stage. These are two existing accumulations of wrong push are;
Bullish. This is a false push beyond the low of the actual accumulation period, and this means that the short-term period is beginning since the smart money seems to have been buying into the real market.
Step 3. Forex Market Trend Example.
The forex market trend is the final phase in the smart money cycle. In this stage, the market experience a very aggressive experience in the short run.
These being the last strategy in smart money forex trading, it is the final step that each retailer hopes to be enjoyable and a mark of the business peak point. However, the truth is that every stage is essential, especially when a visionary trader is experiencing the manipulation stage since this is the crucial stage to distinguish determined retailers/traders from others.
Bank traders SELL after a short-time bullish trend !!!!
What time frame does smart money use?
Smart money strategy is created for more extensive time frames such as weekly and monthly. This strategy is part of position trading strategies where traders hold positions for several weeks or months.
What time do banks trade forex?
Banks trade forex usually after the daily opening range (half an hour after market opening) and during the high liquidity when market trading sessions overlap. For example, EURUSD’s most frequent trades are after US market opens when EU banks working hours overlap with US banks working hours.
However, banks trade long-term positions, and daily trading hours do not have a big impact.
Importance Of Mastering Trading Strategies.
Forex trading needs severe analysis and more research on new and productive ways for a unique and profitable trade. Forex learners should invest more time learning different trading strategies to bring a difference in the outcome. Unfortunately, most traders have dropped the trading business following discouraging expectations. Still, the truth behind this is that most traders don’t spend their time researching the trade’s different strategies.
Also, traders should analyze trading strategies, whether it is predictive or reactive. They need to trade for a given period, say almost a year, to see if it is productive or not, then choose the right strategy that can work.
Predictive Vs. Reactive strategies.
The basic understanding is about relating the trading activities with the nature of being reactive. This means that the trading software will start producing buy signals, and the falling trade market indicates the sell signals when the market rises. Following the rise in the market, this will lead to more buying pressure, while falling in the market induces selling pressure.
Almost every primary strategy used in trading is reactive, so smart money automatically identifies how to convince you to buy. Also, they know how to direct you towards selling. This is why traders often talk about the trading market that seems to be experiencing a tremendous change in buying or selling once they enter.
The quite uncertain thing about this scenario is that smart money is the only source of information and the actual information is the most powerful fact we require. Still, we will be successful if we are lenient to them and trade as they need. The frequent price manipulation perfectly reflects how far they have been accumulating and the desired direction to control the price.
Suppose you focus on how large the market moved before deducing the significant moves’ Vast majority. In that case, you will realize a tight and the actual accumulation followed by manipulation in the other direction of the market trend.
Trade forex, like the banks, means a lot of fundamental analysis.
As more and more people show an increased interest in trading forex, intuitional entities like banks are equally active in forex trade. Indeed, they are likely to be engaged more because of money, power, and quality think-tank. Further, they can research the market themselves and make sound decisions based on this. Yet, it’s not that easy as it reads. So, we’ll discuss here how banks trade forex. Banks execute their trading based on a set of valuable practical data. And, there’s hardly any other consideration while trading forex.
The extent of banks’ forex share
Thanks to their electronic networks, banks are among the most significant participants for forex trading. Moreover, the largest ones in the economy take the lion’s share in forex trade. As a result, banks play a critical role in influencing the volume of forex to affect trends of markets.
Banks focus on a few criteria.
When banks are active in the market, they make up the market. There is no other entity in the market that can perform as competently as banks. First, they make all the decisions based on fundamental and technical analysis of the pattern that happens on the market. Then, they make the decision superfast.
Banks focus on the actual parameters. There is no place for human emotions to influence investment decisions n forex trade. Instead, they focus on price and fundamentals. This enables them to a sound judgments.
Banks’ forex trading behavior is solely influenced by fundamentals that affect economic decisions. Several factors influence the market trend and hence the direction in forex trade. As many factors are involved, it’s hard to accurately say which factor/s was/were responsible for bringing out the market change.
Fundamental tendencies in the market are highly complex, and it takes a long time to come – years to get perfections in analyzing the market. Besides commercial banks, central banks also take part in forex markets. According to the country’s law, they’re vested with the responsibility of taking care of the whole forex market in the economy they represent.
A large volume of forex
The most important factors that influence trade are two. First, you must have a ground understanding of how the fundamental analysis works. Second, you also need to grasp how the data releases influence the market thoroughly.
The second aspect is how you should act (execute) without being influenced by any external factor and solely with market data with razor-sharp precision. The economic data that come out are the most influential in affecting forex markets.
Central banks formulate their monetary and credit policies to accommodate their economy based on economic data. Thus, if you abide by the data releases and start treading accordingly, you can understand what will happen consequent to the central bank’s forex policy, and you can build your capital base.
Important facts
Each month not less than seven significant releases on data happen.
The number of countries that have made the market are the leading global forex pairs is eight. And, these eight countries add the total turnover of seven main currencies.
The seven currency pairs include the Euro/Dollar pair (EUR/USD), the British Pound Sterling/U.S. Dollar (GBP/USD), the Dollar/Japanese Yen (USD/JPY), the Australian Dollar/U.S. Dollar (AUD/USD), the New Zealand Dollar/U.S. Dollar (NZD/USD), the U.S. Dollar/Canadian Dollar (USD/CAD), and the U.S. Dollar/Swiss Franc (USD/CHF).
Every month there are quite a few trading opportunities in the forex market. This is clear from these facts:
Every month you get not less than 56 opportunities in forex trading. However, when it comes to the number of trading days, it is 20.
It’s, therefore, vital that you should not do things hurriedly. You should gain patience and closely observe the trends in the market. You should look for the best trade opportunity.
Have a well-thought-out capital management
To bring out the maximum amount, it’s essential to understand system capital management. The capital system is critical because it brings you the necessary experience to judge the market’s quality and take decisions accordingly.
Why is a sound capital management system essential?
It’s essential to formulate and execute an authoritarian system of capital management that addresses risks concerning capital controls, the ratio of risk to reward, and the whole trade plan – the values at exit and entry. When you make the trade in this manner, the most important thing you should do is look for entry levels.
Such a sound system of capital management will mitigate the stress, let s you reflect on the trade for the whole day for which you will not have to spend hours monitoring the market.
How does the actual trade go on?
Many traders at various banks keep moving around the room to witness the deals and keep moving to the other traders. Alternatively, they take a short break and go out with the brokers. As a result, they are never at the computer for over a few hours. We advise you to take a similar approach. You can move forward if you comprehend the markets’ fundamental and technical aspects and have a complete professional capital management system.
How to trade like the big banks?
To trade like the big banks, you need to be ready to hold a position for several weeks or months as a position trader, analyze macroeconomic data, and monitor critical price levels in the trend distribution phase.
Once you are clear with capital management, market fundamentals, and the like, you need to understand simple strategies to apply your knowledge.
Conclusion
According to current market definitions, the term smart money is the actual source or the cash invested by experienced investors, with the collective force of a certain amount of money that can change the market patterns. In this case, the central bank is the force behind the smart money, while the rest respond to any market trend.
So we can start trade like banks, to think long term.
Talking about banks as one of the main aspects of the smart money that controls most daily market volumes, other subsidiary banks act as the market makers for several types of traders, including some mentioned above. Of course, the banks play a significant role in controlling the daily volume, but many traders trade daily, and they are the basis of daily market making but not speculations. This strategic-based information is provided to educate traders on important tips in smart trading. It also helps teach banks the role of primary market makers and direct traders on learning from existing market trends without complicating trading strategies.
This is the process of finding out the market strategies used by prominent market participants, especially by devising trading setups designed to find out likely areas of demand and supply. This process is sometimes referred to as manipulative points.
It may be easy for a retailer to find the likely point where smart money traders buy and sell. Still, the difficulty arises due to the issues about the financing capability to drive market forces. The central banks continuously track the paths to which smart money is waving since they are among the able market participants. The latter can successfully drive the market forces and alter the smart money operations, maybe by introducing certain trading decisions.
The only option retail traders dealing with forex trade can follow the market trends and the rules set by prominent market participants to achieve consistent results rather than introducing their rules in the market and losing their chances of success.
There are no shortcuts or gimmicks to help you in the forex trade. No system of indicators exists similar to the market. You must understand how the leading bankers in trade and look into the market. If you gain in these aspects, you will succeed in the forex trade.
