How the Banks Trade

How the Banks Trade

This episode really does combine everything we have learnt in this series so far into one episode. By the end of this episode it should make you aware of how the Banks and large Institutions trade in order to effectively evolve your trading technique. 

We always want to be on the same side of the larger players in the market. Over $5 Trillion is traded in volume on the FX market daily, as much as you may think your trade will move the market, in reality it is a tiny tiny drop in a huge ocean. We are effectively reliant on other people to move our trade for us when we enter a position, our positions will not be big enough to cause a large enough shift in the market to capitalize on any movement. As retail traders we will be looking to get on the right side of the market to really capitalise on some lovely moves that the larger players create. For this reason we must understand how the Banks and larger institutions trade from a technician perspective in order to be on the ‘right side of the market’. 

First of all the banks/larger institutions know where and how retail traders trade. The majority of the time they will understand where retail traders will be looking to get into and out of a trade and therefore look to manipulate prices around these areas. However at The Social Traders we have adapted our strategy over the years to cater for this manipulation in order to capitalize on some love moves created once the liquidity is made available to the banks. 

Let’s run through a few examples: 

How the Banks Trade 1

So in order to be on the right side of the market alongside the larger players there are a few different technical techniques we use. The first is the ability to understand Price action and Patterns. Now we have already covered this in a few different videos from ‘Patience’ to ‘Pattern separation’ and within the overall ‘Pattern Play Strategy’.

What we are looking for here is our final reversal pattern to catch people ‘on the wrong side of the market’ what you’ll often see is a small spike from the 3rd touch region at the bar of resistance or support just to see the price action rocket back through in the expected direction. The traders selling on the 3rd touch of resistance would be tagged out of the trade before seeing an aggressive reversal in the planned direction. This is the same with Buy positions.

How the Banks Trade 2

The next example is Pattern Separation – when we covered pattern separation in the previous video we only really covered it as a way to enter a trade instead of buying on the 3rd touch of a trend. This technique is really a way to get people caught on the wrong side of the market and trade with the banks. The majority of retail traders will be buying on the 3rd touch of the trendline as that seems like the most likely area to see the correction continue in its overall trend. However, we know that the banks and larger players will often be looking for that slight pop lower or higher into our area of interest where the majority of traders would be placing their stop loss. This would create the liquidity to see an aggressive continuation in trend.

How the Banks Trade 3

Next up is a more Technical example of how the banks will be looking to trade. This is a break and retest example, we cover this in our ‘Technical Strategy’. Banks and larger institutions love to trade a trend, trends are often formed by a mixture of both technical and fundamental analysis aligning creating a rally or sell off of a certain currency pair. For example with the ongoing uncertainty surrounding the Brexit negotiation deal between the EURO and GBP the risk sentiment for the GBP was quite high, therefore within this period we often saw the GBP sustain periods of rallies and sell offs (dependant on the risk sentiment). The banks / larger institutions know this, they have both technical and fundamental analysts working around the clock to provide data to trade with. We must use this to our advantage. 

A real textbook way of understanding how a pair is trading is to really focus on price action, in the example above you can see that price action failed to print a new low. At TST we always reiterate the importance of breaking a clear new low before trading a retest. If price action drops out of a trendline but fails to print a new low there is a high chance the banks / larger institutions are still looking to continue to buy or sell that financial instrument in future. Take note of this, retests can be incredibly powerful but only if used with the correct price action beforehand.

How the banks Trades 4

The final example to cover is Banks / Institutions using Key levels to manipulate the market. Often opportunities to enter a position arise around these keys levels as this is where the Banks have created previous buy / sell zones. Remember if a financial instrument has been bought or sold off from a particular region before it is likely to do the same in the future due to the ‘mass psychology of the market’ repeatedly and entering similar setups. Again, the banks know this and so when these real ‘clear cut’, obvious entry zones arise there is often lots of manipulation.

At TST we will combine everything we have learnt so far in order to stay ‘on the right side of the market’. We often can use Key Levels above or below price action as a highlighted area where confluences meet. In the example above we have the completion of a 3 touch small ascending channel running into a Key level that is sat above where the majority of retail traders would look to get in. This is great because the banks and large institutions will likely be waiting for the liquidity to be made before reversing the trade; these liquidity zones often lineup with Key Levels.

Backtest this – there are many examples (especially on the most traded pairs) where price action breaks through most retail traders areas of interest to enter the trade, tags them out, then reverse in the planned direction.