Forex Trading From a Bank’s Perspective - by Olumide Adesina
Editor's note: In this article, Olumide Adesina debunks some of the widely speculated misconceptions regarding institutional forex traders.
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JP Morgan, UBS, and Deutsche Bank, the three biggest participants in the FX market, account for around a third of all foreign exchange transactions worldwide.
Only 5% of all Forex traders are bank traders; the remaining 95% are speculators. However, 5% of bank traders account for 92% of all Forex trading volume.
Let's start by debunking the first misconception regarding institutional forex traders.
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The Facts
They don't spend their days sitting there deciding on proprietary trades. Most of the time, they merely represent the bank's clients.
You aren't really "Trading" with "Banks" directly under your Retail Client Agreement. You are competing with a market maker who poses as an "ECN/STP broker.". Banks and Model Funds do not trade in Mini and Micro lots What a Bank considers a "Standard" lot.
They take on the role of the counterparty in your transactions using that credit. Let's say you begin trading regularly with an experienced trader rather than the usual "B-Book" gambler who will quickly blow their account.
Your "Broker" (Market Maker) is forced to "A-Book" your trades and lose your money elsewhere (passing on the risk) in that scenario.
Many retail traders never leave "B-Book" territory, and their orders are never fulfilled in the actual interbank market. The "Brokers" back-end server, where "B-Book" trades usually end up, never receives your order.
Banks are not scaling billions of dollars on a five-minute hot tip trade. Given their size, they need to solidify their positions over time.
When the masses are selling, institutions are purchasing to take a position. After gaining a position, institutions typically sell, but the public purchases.
The price will eventually reverse and begin moving strongly in the opposite direction from most retail "dumb" money—as they call you when they laugh their way to profits—due to the "pattern" of institutional position building. You will get the sense that the market is dynamic as a result.
Banks perform better than individual investors in analyzing fundamentals and macro events because of the bank's extensive client/customer network and software tools like Bloomberg Terminal.
Banks benefit from companies and investors positioning themselves for such events and gaining access to "private" information that individual investors do not.
This means that retail Forex traders tend to “significantly” hold back on delivering prices before key data such as traders snatching up deals and entering the market as nonfarm payrolls are released, pushing bid-ask spreads into banks that are roughly three times larger.
Risk-reward ratios, timeframes to utilize, currency pairs to trade, price action methods, and trading strategies are all included. One skill that a typical bank trader needs is the ability to evaluate data quickly.
Although trading requires a lot of math, it is represented visually through charts that use technical analysis patterns and indicators.
Traders must, therefore, sharpen their analytical skills to recognize patterns in the charts. In the forex market, a trading advantage is a strategy that offers you a competitive edge over other traders. Some retail forex brokers offer such options
Banks have a strict risk management system and do not ignore the possibility of loss as often. When the market moves in the opposite direction, a trader can use this strategy to mitigate the negative effects of a losing deal.
It makes your trading process special or something you excel at. Examine your Forex trading brokers' strategies to determine if you have a competitive edge.
Check popular methods for risk management, opportunity discovery, and entry and exit strategy charting.
The Forex market lacks a clear formula for success, just like any other financial market. The ability to navigate this extremely volatile market and the willingness to do so are crucial.
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