Forex is the largest and most active currency trading OTC exchange in the world. Due to its high volatility nature, investors believe that forex trading is quite risky. We can group the forex market players into two. Retail investors and institutional investors.
The big question is how financial institutions like banks, insurance companies, and central banks make so much money in the forex market while others lose. This article walks you through the nuances of forex trading like banks do.
Quick Insights
How do banks trade forex?
Banks do manage forex trading in two ways. In one way they trade on behalf of their clients and in the other way, they perform trades from their own trading desks for their profits. Hence, banks profit in two ways in forex trading, as a dealer and as a speculator on currency fluctuations.
Big banks are the market makers by having massive positions in the forex market and taking almost 80% of the volume., Hence, they drive the market and maintain liquidity in the market for easy trading.
Since banks drive the market, bank traders usually possess tremendous knowledge on both fundamental and technical analysis. The fundamental factors include macroeconomic reports and central bank interest rate reports, which can influence the market sentiment.
Common mistakes in forex trading
It is very common for individual investors to lose money in forex trading, provided the huge volume and extreme volatility. Everybody’s question is what makes forex trading so difficult? Knowing the banker’s way of trading in forex helps you to avoid losses and make trades in a professional way.
No matter which market you are in, an attitude combined with a consistent and simple approach makes the trade right.
Learn more: Dos and Don’ts in Forex Trading
Paralysis of analysis
In general, investors tend to use all the possible tools in the chart provided by the trading platforms. This may lead to ending up with a flawed interpretation.
Cluttering the chart is the worst mistake any retail trader can commit. When too many charting tools are used, the indicators will be overly conflicting with each other. That means one indicator signals a buy whereas the other one signals a sell.
Smart traders make the most consistent and great profits than retail investors. They generally have a sense of the trend and momentum by taking only the essential tools into consideration. Their trading volumes even change the trend of the market.
Why do banks win?
There are numerous participants in the forex market, yet the smart monies are the ones that majorly driving the market. There are a few reasons why smart money traders such as large financial companies and banks make easy profits from forex markets.
- The first thing is that they have plenty of money to trade. They have tens and hundreds of millions to trade in the market.
- Smart monies generally trade on a daily, weekly, or monthly basis and always longer timeframes.
- They formulate advanced strategies and algorithms to perform their trades.
- Banks don’t trade with all their money at once. Instead, they make a number of small buys or sells in intervals. This forms a trend and continues for a while. Retail traders, after seeing this short-term temporary trend, try to enter to make profits.
- Banks manipulate the market through false breakouts and stop hunts. Investors wait for a breakout of a consolidation zone or a break of a support and resistance level to enter and end up trading in a bull or bear trap.
- Banks also do contrarian trading which means, buying when the crowd is selling and selling when the crowd is buying. Banks generally accumulate positions to prepare for the next trend in the opposite direction.
Conclusion
Forex markets are driven by smart monies like banks, which are the significant market participants. In order to trade forex like banks, one should be ready to hold the positions for several weeks to months as a positional trader. It is quite easy to follow the banks’ trade, rather than going against them.
Pro Tip
Understanding the banks’ strategies in forex trading provides valuable insights for individual investors. To explore in detail, visit our trusted forex brokers today.
