Currency Trading In Banks

With so many banks in the market offering foreign-currency trading services to their clients, it does not follow that all of them suit you. Many people ask how currency trading in banks actually works. If that question is on your mind, you are already on the right track. See also our guide to Easy Currency Trading Strategy.

Before you start currency trading in banks, it helps to understand first that forex, or the foreign-exchange market, is a huge financial market where investors and traders buy or sell foreign currencies in pairs. It is genuinely one of the largest markets anywhere in the world. The deals struck in this market affect not only a currency’s price but also the cost of your daily life.

One thing to pay attention to when you look to start currency trading in banks is the main ways these pairs are traded, which usually come down to three markets: the spot market, the futures market, and the forward markets. As everyone knows, the markets are open 24 hours a day, and a forex trader can trade currency pairs over the counter, off-exchange, which means there is no physical exchange involved but rather a global network of financial institutions and banks. Alongside that there are central exchanges such as the New York Stock Exchange.

You should also recognise that trading in foreign currency, like any other profession, takes determination and focus to reach what you are aiming for. You may not want to admit that you are not suited to doing the work properly, but it matters a great deal to stay disciplined in your trading to keep your capital safe. In other words, when you put a lot of money into the forex market, you have to put all your focus and time into that market to avoid careless mistakes.

Currency Trading in Banks

More than 60% of the total daily volume in the foreign-currency market is handled by bank traders. These transactions take place in the interbank market, the global network of banks spread across four trading hubs, such as New York, London, Sydney and Tokyo.

That said, it is worth pointing out that banks most often act simply on behalf of their clients’ orders. This means they may execute thousands of transactions a day while probably none of them are carried out for their own accounts. Instead, banks usually trade on their own accounts perhaps two or three times a week. Their moves are highly methodical, so they act only after a series of detailed analyses, both technical and fundamental.

Beginners often make a common mistake of using a whole set of technical indicators to build their analysis. If they are not careful, these tools can overlap and even contradict one another, and as a result they can get a lot of false signals. Bank traders are the exact opposite. They do not use many indicators, so their charts are not crowded with mathematical formulas and coloured lines. Instead, they only need to mark the critical levels on the chart, such as support and resistance.

The reason for this may be that banks are considered major players in the foreign-currency trading market. They trade only in large positions and trade over the long term, usually weekly or monthly. In one way or another they control the market at this stage. At the same time, technical indicators are designed to estimate where the market is heading, so they are simply not that effective for banks.

Fundamental analysis, then, is very important for banks. Economic news data and central-bank announcements can steer currencies and move the market, so bank traders need to keep an eye on such events.

Bank Currency Trading Strategy

Fundamentally, bank money traders use a wide range of strategies, but in general their trading decisions can be summed up as a three-stage process:

Accumulation

In the first stage of the strategy, the smart players usually begin by buying and selling in relatively small amounts. Unlike ordinary retail traders, bank traders hold considerable power in the market, so they tend to avoid trading their money all at once because it can affect the market significantly. Instead, they enter the market repeatedly and make money by building up small positions. They can either accumulate long positions and sell them later at a higher price, or accumulate sell positions and buy them back later at a lower price.

Being able to identify this kind of activity on the chart is a very useful skill for retail traders. If you can spot where the big players are accumulating, you can also work out the direction they are aiming for and take advantage of it.

Manipulation

As the name suggests, this step is where banks try to move the market through their actions or their various methods. Traders are often led to think there will be a breakout, only to discover it is a false push and the trend reverses immediately afterwards. This is in fact very common in the forex market, so it is no surprise that many traders fall for it.

True, the manipulation stage always comes after the accumulation stage and is marked by a short-term market direction. The reason banks want to move the market is that they need to create liquidity for themselves because of their giant trading positions. So they need to nudge traders into a particular direction before taking the opposite position in order to book profits.

Distribution

Once you learn how to avoid being a pawn for market manipulation, it is time to make an actual profit from your trades. Distribution is considered the final stage, where banks push the price to create the real trend. In other words, they no longer play tricks and start to show their true objective.

There is no doubt that this stage is the easiest to spot but also extremely important, so make sure to catch the correct signal from the two previous stages. Remember that the distribution stage should occur after the manipulation stage ends, so only enter when you get a valid confirmation signal to enter the trade.

Central Bank Trading Theory

Almost everyone realises that government-owned central banks also play an important role in the foreign-exchange market. Central-bank policies on open-market operations and interest rates strongly affect currency prices. In addition, central banks set the price or rate of their country’s currency in forex.

When a central bank takes any action in the foreign-currency market, it aims to stabilise or raise the competitiveness of its country’s economy, like speculators do. Central banks also make specific currency interventions to raise or lower the value of their currency. For example, any country’s central bank can decide to make its currency weak by creating extra supply in prolonged deflationary directions for the foreign currency it will be bought with. When this happens, its local currency weakens effectively, leading to more competitive exports in the international market.

Related reading: Trading currencies without a deposit — a safe option; and Mastering currency trading and the strategy for generating returns.

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