It is a well-known statistic that although banks account for just 5% of forex traders, they account for 95% of forex trade volume.
It is undoubtedly a very different trading environment than that of a standard retail trader. Have no doubt, it’s the banks that control the price, and it is essential to understand just how they do it.
Without that understanding, your survival as a forex trader could be in doubt. We can’t teach you how to beat the banks in one short article, but we can help you begin the journey.
The Interbank Market
Crucial to all this is the Interbank Market. Simply, this is a global network where banks and other financial institutions trade currencies with each other. In some cases, banks trade for their customers, but most interbank trading uses the banks own accounts.
It is here that they manage currency exchange rates and interest rates. Around half of all forex transactions take place through the interbank market.
Deals tend to be reasonably large too. While the minimum deal is $5 million, $1 billion is not at all uncommon. Transactions are anything from overnight to six months. Some of the most prominent players include Deutsche Bank, HSBC, JP Morgan Chase, and Citicorp.
Banks trade forex primarily to create liquidity. As banks positions tend to be huge, they must seek large offers from counterparties.
Unlike most retail traders, bankers have little use for technical indicators. They prefer to look much more deeply, concentrating on the fundamental economic indicators. These include:
- Economic data – currency directions that appear disjointed are often the result of announcements form central banks and political instabilities. In politically stable times, central bank policies will move harmoniously with economic data releases. Knowing how economic data releases is likely to affect the market is an important skill.
- Trends and momentum – Bank traders pay careful attention to charts to assess overall trends and underlying momentum and to discover specific entry levels.
- Support and resistance – As a reminder, support is when a downtrend is likely to pause because of increasing demand, and resistance is when an uptrend is expected to pause because of a supply concentration. In range-bound trading, a trader buys at the support line and sells at the resistance trendline. Stop-loss points are placed just above and below the respective upper and lower trendlines.
A Typical Bank Forex Trading Strategy
Different institutions have different trading strategies, and these are likely to change depending on an extensive range of political and economic factors. What follows is just an example of what could happen at any time, so please don’t read too much into it. We include it to show you how things can happen.
Here, ZipBank intends to buy a substantial position in EUR/USD. They need to find similar sellers, but they must do so with stealth, so they don’t reveal their intentions.
The first step is accumulation. Here they accumulate (enter) their position over time – perhaps many hours or even longer. They intend to sell it subsequently at a higher price.
The second step is manipulation. This is a usually successful attempt to manipulate the market at the end of the accumulation phase. They accomplish this by using a false push.
This is where the bank makes its money as the market begins to trend.
Hanging on to Their Coattails
So, how can you use this information? What should be clear is that it is tough to fight it. Once the big players have decided on their goals, certain traders believe the best idea is to try and hang on to their coattails.
In other words, if you can identify their plays in terms of the above, then you will have discovered an opportunity to profit. Identifying those moves isn’t easy, and will be a topic of a future article.