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 big banks trade forex? Answer: Bank traders use different strategies from swing to trend trading strategies, but the most common approach 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).In this article, you will not find a bank trading strategy as “buy if this indicator shows this, etc.. ”
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 chapter “Most common forex trading strategy” for details.
Do banks trade forex? Bank manage forex transactions for clients and trade forex from their own trading desks, mostly 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 generates 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 and weekly, and monthly charts, mostly in their strategies. They are primarily long-term traders because fundamental analysis and economic reports can influence the market in days and weeks after.
How big banks manipulate the forex market?
Big banks manipulate the forex market because they have massive positions, create liquidity for themselves, and almost 80% of the whole forex market 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) are usually entering their positions. The manipulation phase is a false breakout phase. In the distribution phase, markets follow a big trend. Of course, these phases are theoretical.
How do big banks trade forex?
Are you wondering if trade forex like the banks? If yes, then this article will be quite apt for you! In this article, you will reveal complete details on the forex bank trading strategy. For example, you will disclose comprehensive information on smart money, forex bank trading strategy, and critical steps for ultimate success.
Banks usually use 80% fundamental analysis and 20% technical analysis. In 20% technical analysis, there are no a lot of indicators. Their technical analysis is based on price levels.
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 three currencies that are the most overvalued (highest PPP fair value figure).
Every single 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 largest market participants. Please note that these participants have an extremely crucial and significant 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, largest banks, massive global companies, prop firms, and speculative traders.
Among this list, the banks indeed hold a vital position in the market. Kindly note that they mostly act as a market maker. It’s also true that these banks do have a speculative position, but the key purpose of these banks is all about market-making. Being the primary market makers, these banks indeed 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 surely has a strong position and influence in the market. Banks are considered to be one of the major participants in the market making. Although they hold a speculative position, their primary responsibility lies in the market making.
When it comes to the financial market, the forex market or foreign exchange is the largest globally. As per a Triennial Central Bank Survey conducted in 2016, forex trading far surpasses the stock market. Its transactions per day average a volume of $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 phase of forex 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, it is a decentralized global marketing system that 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 global official currencies surpass 100 in number. However, in most international forex trade and payment marketplaces, the U.S. dollar, euro, British pound, and Japanese yen are the most used. Apart from these currencies, other relatively popular ones are the Swiss franc, Australian, New Zealand, the Canadian dollar, and others.
Currency trade can be conducted via spot transactions, swaps, forwards, and options contracts with currency as the primary instrument. Among the businesses that operate 24 hours every five days of the week worldwide, currency trading is also on the list.
Before we analyze bank trading strategy, we need to know :
Who Trades Forex?
Forex is a market that features not only a lot of players but also a variety of players.
Banks
The interbank market holds the first position in terms of the highest currency volume being traded. This is an avenue that comprises all banks’ sizes coming together to trade currency among themselves and using electronic networks. When it comes to the big percentage of currency volume in exchange trade, big banks are the largest. Banks 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. The policies that central banks make on operations and interest rates on the open markets greatly influence currency rates. Also, central banks take charge of fixing the rates or price of the currency of its nation on forex.
When the central bank takes any action in the FX market, it is to stabilize or raise the competitiveness of its nation’s economy. Like speculators, Central banks may carry out certain currency interventions to have their currency appreciated or depreciate. 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 biggest 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 do buy and conduct currency sales to trade foreign securities. These investment managers can also conduct speculative FX trades; meanwhile, certain hedge funds that conduct speculative currency trades have their investment strategy.
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 again to US 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. 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 deficient volume of foreign currency trades when compare 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 big role in the global market. The fluctuation of exchange rates impacts inflation, and corporate earnings and balance payments account incurred by each country.
When countries with higher-yielding interest rates start dwindling back toward countries with lower-yielding, it results in carrying trade unwinding. Then investors sell the higher-profit investments they have. For example, if the yen carries trade unwinds, 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 yields and foreign yields. It is a strategy that leads to a large 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. Trading and hedging currencies involve many strategies like carrying trade, which presents forex players’ impact on the global 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 to profit. With the monetary policies, currency interventions though rare, and exchange regime setting, central banks always have strong control of the forex market.
Understanding who trades in forex and the reason it is important is essential for investors.
Before becoming a successful trader, it’s essential to determine the forex bank trading strategy’s nitty-gritty. To be more precise, it’s a trading setup primarily designed to identify where the largest market participants will enter/exit their respective positions based on the probable areas of supply and demand.
Also note, top ten banks control more than 60% of daily forex market volume. Since these top ten banks are considered smart money, tracking them is really important for finding out the overall trade success. Kindly note that tracking smart money is the basic foundation of any forex bank trading strategy. Thus, as a successful trader, you must check where the smart money is moving in and moving 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 be able to make a profitable trading decision.
Yes, there are indeed different rules and strategies present in the trading market. We can’t definitely control all of these rules and strategies for sure! Since we do not have the ability to control these strategies, we will attempt to learn smart money’s trading strategy, i.e., megabanks. Please note that these banks follow a specific business model. Understanding this business model is really quite important as it will help you achieve consistent results in no time! 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 details.
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, such as accumulation, manipulation, and distribution.
Key steps for the ultimate trading success
In theory, the forex bank trading strategy is based on a three steps process. We will discuss the details of these three individual steps in the following sections. But, before that, all you will now need to understand a key fact. In every transaction that happens in the market, there are two primary participants, i.e., buyer and seller. When you are trying to buy something from the market, there must be someone trying 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. We will need to track and trace the areas where the smart money is most likely buying and selling their shares/trades. Let’s now give you a good example: please consider that smart money is all about buying a huge portion of trades in the EURUSD market. At the same time, they should have an equal amount of selling pressure based on the rule that’s discussed above.
Step 1: Accumulation
In the forex bank trading strategy, accumulation really plays a vital role. The interesting 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, then 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 find out their accumulating secret cautiously. Knowing the timing when the smart money is most likely to enter the market and their respective positions in the market will be your key to success. This is because — if you can identify and find out the areas/positions that smart money is accumulating, then you can also identify the directions where the market will most probably move in the upcoming 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. Needless to say, 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 what is known as market manipulation, which is basically a false push. After a big accumulation period, s short-term false 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 huge accumulation. This is a short-term manipulation period where the market trend may move in a different direction. During this time, it may appear that the market is behaving against you! But, at this point, you will need to be smart and cautious. This short-term manipulation gives you a great hint about a possible accumulation when the market trend will possibly go up.
If you can recall any large 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 clearly avoid being a pawn of market manipulation. You can rather make a profit out of it. After the phases of accumulation and manipulation, there is a distribution phase of the market. This is the time 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 analyze their moves, you must carefully follow three steps, i.e., accumulation, manipulation, and distribution. Before any large market moves, these aforementioned three steps are bound to happen. 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 where the market will go up 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 at least to see an hour of sideways accumulation. This stage is a critical stage of 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 market bullish push. No economic impact on the price to go bullish.
Forex traders have been feeling insecure with this trading stage since they feel it is wrong to enter the market. Many traders experience market changes that seem to move towards 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 stage of manipulation in the forex always comes immediately after the initial accumulation stage. This is a stop run stage before moving to the final stage, i.e., market trend, especially when the market is operating on a given consistency.
The manipulation stage is the most crucial to monitor smart money regardless of it being termed as a ”false push” because of the market conditions coming towards the end of the accumulation stage. These are two existing accumulation of false 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 actual market.
Step 3. Forex Market Trend Example.
The forex market trend is the final phase in the forex 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 is hoping to be enjoyable and a mark of the business peak point. The truth is that every stage is important, especially when a visionary trader is experiencing the manipulation stage since this is the important stage to distinguish determines retailers/traders from others.
Bank traders SELL after a short-time bullish trend !!!!
Importance Of Mastering Trading Strategies.
Forex trading needs serious 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. 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 majorly 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 major 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 will be lenient to them and trade as they require. The frequent price manipulation is a perfect reflection of how far they have been accumulating and the desired direction they are planning to control the price.
If you focus on how large the market moved before you can deduce the large moves’ Vast majority, definitely, you will realize a tight and the actual accumulation which is 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 can make sound decisions based on this. Yet, it’s not that easy as it reads. We’ll discuss here how banks trade forex. Banks execute their trading based on a set of sound practical data. And, there’s hardly any other consideration while trading forex.
The extent of banks’ forex share
When it comes to forex trading, banks are among the largest participants, thanks to their electronic networks. The largest ones in the economy take the lion’s share in forex trade. Banks play a critical role in influencing the volume of forex to affect trends of markets.
Banks focus on 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 do. They make all the decisions based on fundamental and technical analysis of the pattern that happens on the market. They make the decision superfast.
Banks focus on the real parameters. There is no place for human emotions to influence investment decisions n forex trade. They focus on price and fundamentals. This enables them to a sound decision.
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 there are many factors 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. They’re vested with the responsibility of taking care of the whole forex market in the economy they represent according to the country’s law.
A large volume of forex
The most important factors that influence trade are two. First, you must have a ground understanding of the way the fundamental analysis work. You also need to have a thorough grasp of how the data releases influence the market.
The second aspect is how you should act (execute) without being influenced by any exterior factor and solely with market data with razor-sharp precision. The economic data that come out are the most influential in affecting forex markets.
Note that central banks formulate their monetary and credit policies to accommodate the economy they operate in based on the 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 7 main releases on data happen.
The number of countries that have made the market are the main global forex pairs is eight. And, these eight countries add the total turnover of in seven main currencies.
The seven currency pairs include the Euro/Dollar pair (EUR/USD), the British Pound Sterling/US Dollar (GBP/USD), the Dollar/Japanese Yen (USD/JPY), the Australian Dollar/US Dollar (AUD/USD), the New Zealand Dollar/US Dollar (NZD/USD), the US Dollar/Canadian Dollar (USD/CAD) and the US 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, important 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 have a close understanding of 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 good capital management system essential?
It’s important to formulate and execute a tough 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 make a reflection on the trade for the whole day for which you will not have to spend hours monitoring the market.
How does the real trade go on?
Many of the 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. They are never at the computer for over a few hours. We advise you to take a similar approach. If you comprehend the markets’ fundamental and technical aspects and have a thorough professional capital management system, you can move forward.
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 important price levels in the trend distribution phase.
Once you are clear with all aspects, 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 are there to 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 the majority of daily market volumes, other subsidiary banks act as the market makers for several types of traders, including some mentioned above. The banks play a major 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 trying to find out the market strategies used by large market participants, especially by devising trading setups design 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 are always tracking the paths to which smart money is waving since they are among the able market participants who can successfully drive the market forces and can alter the smart money operations maybe by introducing special trading decisions.
The only option that retail traders dealing with forex trade can do is follow the market trends and the rules set by large market participants to achieve consistent results rather than introducing their rules in the market and ending up losing their chances of success.
There are no shortcuts or gimmicks that could help you in the forex trade. No system of indicators exists similar to the market. You must understand how the main players are bankers in trade and look into the market. If you gain in these aspects, you are a great success in the forex trade.
