Big banks make up a large volume of trades on the currency market - but how do big banks trade forex?
How do these large financial institutions make their trades and what are they looking to accomplish with them? Can understanding their strategy and long-term goals help smaller traders like retail traders find profitable strategies? We do some investigation here...
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How do big banks trade forex?
Simple trading systems
Big bank traders don’t have sophisticated trading systems. They mainly stick to the basic driving forces of the market - sentimental analysis, fundamental analysis and technical analysis.
News events are powerful price drivers and much of the trading that traders at big banks engage in take advantage of these events. And when these moments occur, a lot of attention is paid to them so that the execution is timed precisely to take advantage of the price moves that result.
Junior traders vs senior traders
The traders that work at big banks typically have finance degrees and come fresh out of university. They start out with a junior role, where they are given significant earnings targets, but also significant drawdown limits. These targets and limits, though significant, are not as large as those provided to senior traders.
Senior traders started out as junior traders and earned their senior roles by succeeding as junior traders. Junior traders are given smaller earnings targets. These smaller targets come with smaller risk limits. As experience increases, only then does risk increase.
Retail traders would be wise to follow this as well. Your risk limits should correspond to your capital and profit targets.
The most successful trading is the result of an effective trading plan. See our 8-Step Trading Plan Checklist here>>
Traders at big banks have annual earnings goals - and retail traders would benefit from doing this as well. If a bank trader has an annual target of $180,000, that means that he or she must make $15,000 a month. If you break that down into weeks, that comes to roughly $3,500 a week. Visualising this helps to grasp the profit that must be earned for each period of time.
In addition to targets, institutional traders also have limits. These include limits on position size as well as drawdown limits. These drawdown limits can be daily, weekly and monthly. When a trader violates one of these limits, his or her career can be on the line. This is a way of instituting responsibility in a world where you are trading with other people’s money.
The retail trader is already trading with his or her own money, so the consequences of poor trading are more personal and immediate - but this doesn't mean that we always keep them in mind. Drawdown limits are absolutely something that retail traders should implement in their own personal trading plans.
Having drawdown limits that take you out of the action if you surpass a certain limit will keep you motivated to keep your losses in check. This will help deter you from chasing your losses, which is one of the biggest mistakes you can make.
Don't make the same mistakes as other traders. Read the 3 Most Common Trading Mistakes - and how to avoid them!
Establishing a routine
Many retail traders start out with a full- or part-time job in some other field, working for someone else. They often think they can take their day off and use that for trading. Unfortunately, this is not realistic.
Trading opportunities don’t present themselves on demand. Successful forex trading often means a lot of waiting. Big bank traders have the time and patience to wait for the right opportunity.
When we try to take one day out of the week and make it the day we are going to succeed at trading, we often find later on that we were trying to force the market. The market is not forced - it gives up successful trades on its own time. It is a matter of finding these times and being able to switch on when these opportunities present themselves and switch off when the market has nothing to offer.
Reset each day
With big bank traders, they are often trading with someone else’s money. This can help soften the blow a bit, though reaching your drawdown limit can be a significant career-threatening event and losing out on a performance bonus can also put you in the dumps.
For retail traders, you are losing your own money or winning your own money. This can make retail trading quite an emotional rollercoaster. Due to the complex emotions that can develop, it is of the utmost importance to learn to reset each day when it comes to your results.
Let the past go off into the past and let today be a new day. For this reason, do everything you can at the end of the trading day to close the chapter on it, so that when the next trading day begins, you can begin fresh without the baggage of whatever happened the day before, whether good or bad.
Setting a stop loss is key to limiting the risk in a trade. See our blog on Where to Set Stop Loss - and Why It's Important>>
Don’t get overconfident
Working with other traders at a large bank can certainly keep your overconfidence in line. If you get a big head, you will become unbearable to your coworkers. They will immediately straighten out any overconfidence issues you have.
If you are a solitary trader of a retail account, it may be harder to keep your own overconfidence in line. One way to keep it in check is to review your results on a regular basis. However, if you have had a lot of recent success, it might still be easy for it to grow out of control.
That’s why it’s vital to keep all your results in perspective. You may have had a great week, but there is a whole month ahead and a year after that. Recognise that you will need to keep performing at the same level to maintain your streak at higher timeframes.