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Banks in this century are changed. Because of digital transformation and open banking strategy (opening up consumers’ financial data and allowing third-party payment services to access banking transactions), banks have more liquidity than ever before. This liquidity will enable banks to trade more on financial markets.
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 standard bank forex trading strategy is based on fundamental analysis, price accumulation, manipulation, and distribution. Most bank traders try to enter the trade after the false breakout and manipulation stage. Usually, bank traders make less than three 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.
Before we analyze bank strategy, you should check the free Financial Markets course created by Robert Shiller, a Yale professor. Using this free course, you can learn about banks and financial markets.
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?
Banks 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, the 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).
Institutional traders, when creating intraday or swing trades, try to buy at the lowest low or highest high price. Because of large positions, they need to build positions using several pending orders. In that case, they do not wait for confirmation; they try to buy low or sell high price.
Most often, institutional trades trade long-term positions where fundamental analysis has the most critical impact!
Forex big banks (banks that trade forex frequently)
| 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 use daily, weekly, and monthly charts in their strategies. Moreover, they are primarily long-term traders because fundamental analysis and economic reports can influence the market days and weeks later.
Bank trading strategy and Dow theory
Dow Theory is a framework for analyzing market trends and movements that traders and investors have used for many years. According to this theory, there are three main movements in the market – the main movement, or primary trend, which can last anywhere from a few months to several years; the medium swing, or secondary reaction, which typically retraces around 33-66% of the previous price change; and the short swing or minor movement, which can vary in duration depending on market conditions. Because these movements often coincide, traders and investors must understand how each one influences price action and market trends.
Several tools and strategies can be used under the Dow Theory to analyze market trends and make informed trading decisions. For example, some traders may use technical indicators such as moving averages to identify support and resistance levels or potential price reversals. Others may use fundamental analysis tools such as economic indicators or news events to help forecast future market movements. Ultimately, understanding Dow Theory and how its concepts apply to real-world markets is essential for success in today’s financial markets, whether you are trading stocks, currencies, commodities, or other assets.
Banks’ strategies are usually related to Dow theory and follow Dow’s basic principles. One of bank strategies’ most important rules is that trends are confirmed by volume. In Dow’s theory, it is rule number 6.
How do big banks manipulate the forex market?
Big banks manipulate the forex market because they have massive positions, create liquidity, and have 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. Banks can use monthly CPI and exchange rate changes to create a 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:
Short the three most overvalued currencies (highest PPP fair value figure).
Then, every month, banks can rebalance and remove unvalued or overvalued currencies.
What is the smart money concept?
The smart money concept represents institutional forex trading strategies based on a fundamental approach, long-term positions, and three crucial trading phases principle. Forex smart money concept represents a bank trading strategy based on determining accumulation, manipulation, and distribution trading phases.
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. Moreover, these market participants’ positions can be neither closed nor opened in a single order without spiking the overall market. 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 on this list. However, kindly note that they primarily act as a market maker. It’s also true that these banks have a speculative position, but the essential purpose of these banks is all about market-making. These banks drive the market mostly in supply and demand as the primary market makers.
Keynote at a glance: Smart money is a term to define the most extensive market participants. The smart money has a strong position and influence in the market. Banks are considered one of the prominent participants in market making. Although they hold a speculative position, their primary responsibility lies in market making.
The forex market, or foreign exchange, is the largest global 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 are fascinated by. We will take you into the introductory forex phase to cover how and why traders are progressively more attracted to forex trade.
Whether you call it forex, currency trading, or foreign exchange, a decentralized global marketing system brings the world’s currencies to trade. The exchange rate price paid to exchange one currency for other 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 international forex trade and payment marketplaces. Apart from these currencies, other relatively popular ones are the Swiss franc, Australian, New Zealand, 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 the following:
Who Trades Forex?
Forex is a market that features many players and a variety of players.
- Banks
The interbank market holds the first position regarding the trade’s highest currency volume. This avenue comprises all bank sizes to trade currency and uses electronic networks. However, big banks are the largest significant percentage of currency volume in exchange trade. This is because 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 and government-owned banks 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 forms long-term indicators for those trading in forex.
- Investment Managers &Hedge Funds
Regarding 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 large accounts like pension funds, endowments, and foundations.
Investment managers with 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 payments 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.
Companies engage in forex trade to avoid the risk of foreign currency translation. 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 lower volume of foreign currency trades than 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, and price patterns.
The way business shapes Forex trading.
Collaboration among Forex traders makes the market highly liquid and plays a significant role globally. 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 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 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. This strategy 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 sole motivation is profit. With monetary policies, rare currency interventions, 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 of the market. It would help to discover where the smart money is getting traded. With all these details, you will make a profitable trading decision.
Yes, there are different rules and strategies present in the trading market. However, we definitely can’t control these rules and strategies! 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 more details about this three-step process, please review the following sections.
Keynote at a glance: Understanding the forex bank trading strategy is crucial. 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, you will now need to understand a key fact. In every transaction in the market, there are two primary participants, i.e., the buyer and seller. When buying something from the market, someone must try to sell it to you. Similarly, when looking forward to something on sale, you must be willing to buy it yourself. 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 must 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 a bank trading strategy based on determining accumulation, manipulation, and distribution trading phases. Usually, a smart money bank trading strategy’s main characteristics are medium and long-term positions after the manipulation phase.
Step 1: Accumulation Bank Trading Strategy Phase
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 focus enough on it. However, you must understand this strategy accurately to be a successful trader.
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 their accumulating secret cautiously. You know when smart money will most likely 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 probably move. When you have an accurate idea of where the market will be moving next, it will benefit a profitable trading strategy.
Step 2: Manipulation Bank Trading Strategy Phase
This is the second step that comes after a successful accumulation. Market manipulation is quite a complex concept. You will still be urged to understand this strategy to trade successfully despite the complexity. For example, when you wait 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 wrong short-term push or market manipulation period must be present in every market.
As mentioned, when the “megabanks” are trying to enter or accumulate the market, they will also create selling pressure. More precisely, 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 you will need to be smart and cautious at this point. This short-term manipulation gives you an extraordinary hint about a possible accumulation when the market trend increases.
If you recall any significant market move 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 Bank Trading Strategy Phase
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 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 closely watch these three steps. In this way, you should determine the market’s possible time, volume, and position and then make your trading decision accordingly for lucrative profits.
Smart Money Concept Example
Step 1. Accumulation Example.
As 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 must 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 accumulation, smart money can achieve a better total entry price by keeping costs 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 during this 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 toward the end of the accumulation stage. These two existing accumulations of wrong push are;
Bullish. This is a false push beyond the actual accumulation period’s low, which 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 experienced a very aggressive experience in the short run.
This being the last strategy in smart money forex trading, it is the final step that each retailer hopes will be enjoyable and a mark of the business’s peak. 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?
A 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 most frequently 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 the 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 significantly impact.
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 improve the outcome. Unfortunately, most traders have dropped the trading business following discouraging expectations. Still, the truth is that most traders don’t spend time researching the trade’s different strategies.
Also, traders should analyze strategies, whether predictive or reactive. They need to trade for a given period, say almost a year, to see if it is productive, then choose the right strategy that can work.
Predictive Vs. Reactive strategies.
The basic understanding is about relating 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 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 toward 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 potent fact we require. Still, we will be successful if we are lenient with them and trade as they need. The frequent price manipulation perfectly reflects how far they have accumulated and the desired direction to control the price.
Suppose you focus on how large the market moved before deducing the vast majority of the significant moves. In that case, you will realize a tight and 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. Yet, it’s not as 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
Banks are among the most significant participants in forex trading thanks to their electronic networks. 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 the trends of markets.
Banks focus on a few criteria.
When banks are active in the market, they make up the market. No other entity in the market can perform as competently as banks. First, they make all the decisions based on fundamental and technical analysis of the pattern that happens in 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 make 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 of 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 – years to get perfection 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 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 must also thoroughly grasp how the data releases influence the market.
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 forex markets.
Based on economic data, central banks formulate their monetary and credit policies to accommodate their economy. Thus, if you abide by the data releases and start treading accordingly, you can understand what will happen to the central bank’s forex policy and build your capital base.
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 can traders 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 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 market patterns. In this case, the central bank is behind the smart money, while the rest respond to any market trend.
So we can start trading 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 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 in learning from existing market trends without complicating trading strategies.
This is the process of finding out the strategies prominent market participants use, especially by devising trading setups designed to find 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, 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 smart money operations by introducing certain trading decisions.
The only option for retail traders dealing with forex trade is to 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 look into the market. You will succeed in the forex trade if you gain in these aspects.
He is an expert in financial niche, long-term trading, and weekly technical levels.
The primary field of Igor's research is the application of machine learning in algorithmic trading.
Education: Computer Engineering and Ph.D. in machine learning.
Igor regularly publishes trading-related videos on the Fxigor Youtube channel.
To contact Igor write on:
igor@forex.in.rs
