If retail traders are able to accurately ascertain what positions the banks and large institutions are making in the forex market, as well as when they are entering the market, they would be able to get inspired and trade more effectively than ever before. Since these institutions control the forex market, it only makes sense to follow their strategies and to reap some of the benefits.
Trading Strategy of Hedge Funds
One of the investment styles used by hedge funds, is using multiple brokers to execute their trades. By doing so, they are able to increase their earning potential based on the fact that they have a greater chance of trading with the broker who offers the lowest current market spread or the broker that offers the best execution of trades (current market depth - liquidity). Hedge funds executing orders in thousands of lots can get slippage of several or even tens of pips, so orders execution is extremely important - like it should be for retail forex traders as well.
The fact is also that the biggest hedge funds are executing orders via several forex brokers with the main goal to hide their real intention and expectations. If the biggest hedge funds would execute orders via only one brokerage company, the employees of the brokerage firm could see all orders of the hedge funds and reveal their expectations. By applying the so-called "iceberg" technique, the real expectation and the real orders that are placed in the market to make money by hedge funds are always hidden to forex brokers.
In case of arbitrage trading, hedge funds are searching for opportunities to buy from one liquidity provider lower while sell to another liquidity provider higher (or vice versa) and making immediate profits. However, these opportunities are usually not available to retail traders.
Consolidation Bank Trading Strategy
Banks and other large institutions tend to enter the forex market during times of consolidation. By doing so, banks and large institutions are able to achieve much better entries. They make money by accumulating a position that they will later buy or sell depending on how they entered.
For example, if they entered by accumulating a long position, they would later profit by selling that position at a higher price and if they entered by accumulating a short position, they would later profit by buying that position at a lower price. Where most retail forex traders go wrong is that they view periods of consolidation as unattractive and useless, not realizing that these may be the best times to enter the markets. Especially when a breakout of consolidation periods appears.
From technical analysis, bank traders are closely watching the most important highs / lows of a market as well as psychological levels and the strongest and long-term support and resistance price zones.
It's just incredible how many accurate reactions after reaching the most important psychological levels can be seen in the chart above. But it is important to say once more that only the most important and the longest-term technical price levels are watched by the bank traders.
And of course, the biggest banks have the best fundamental analysts and thanks to them a perfect overview of what is currently happening all over the world, and regularly analyze how it can influence the forex market to make conclusions or establish a long-term portfolios how to profit from it or at least hedge against it.
It is also important to say that the biggest banks are not always speculating whether a market will go up or down. Banks are very often hedging against certain risks, or are executing orders of their corporate clients. Corporate clients usually need to exchange currencies from one to another, and this brings huge and certain profits to banks.
Banks and Market Manipulation
You have probably heard or at least thought if banks are really manipulating the forex market. And the truth is: Yes, banks manipulate the forex market in order for it to move in the direction that they want it to move in. But it's important to say that banks don't care about retail forex traders. The reason is simple - retail traders are simply too small to be interesting for the biggest banks. The main enemy for retail traders can be their forex broker - in case that their forex broker is not the fair and the professional one.
But the question is - where banks take their profits from trading forex? The answer is from other banks. It's a standard situation if bank A is profitable in their forex activities in the end of a year while bank B is not. And next year, it can be exactly opposite. This is because money and profits in the forex market are not created from the wind, but from other market participants.
Therefore, if banks want to sell a currency pair, they do something (start speaking publicly or start buying / selling intentionally) to change market sentiment and to force other market participants to buy. This triggers the exact response that they want and brings them an opportunity to sell for a favorable price. Banks also often accumulate then manipulate by giving false signals that push the market in the opposite direction to the move they want - providing further opportunities to accumulate more orders. Then, they create a market trend that moves the market in the way they originally want.
Retail traders can benefit by understanding how the large institutions trade and how their approach looks like. Of course, it is not possible to exactly copy or see the trades of the biggest banks, but if you understand how these institutions approach the market, then you will have another important part of the puzzle called profitable forex trading.
Related education and FX know-how:
Forex Education - Basics:
Forex Education - FX Brokers:
Forex Education - Technical Analysis: