The Big Banks
The following is a summary, excerpts and paraphrases from an article written by Patrick of No Nonsense Forex. It pretty much describes (sums up) my understanding of Multinational Financial Institutions...
In the Forex market, do you know who ultimately makes price go up and down on a day-to-day basis? It’s not us. This isn’t stock trading. It’s not central governments either. They’re involved in much longer-term dealings, not so much the day-to-day stuff.
Forex is a 4-5 trillion dollar a day market. It would take entities with extraordinary trading capital to move such a market every day like that. Those entities exist. I refer to them as the "big banks."
You see, the Forex market is dominated by something called the Interbank Market, where banks of all sizes trade among each other. The largest banks control over 50% of this Interbank Market. It is therefore critical that a trader understand how these "big boys" manipulate price, and yes, they do manipulate price, over and over again.
Forex is a rigged game. But that’s the beauty of it! If you know how it’s rigged, you can profit tremendously. If you don’t, you’re always going be on the side that’s getting screwed, so you MUST understand how this works. It’s kind of cool, actually.
The process will be greatly simplified in the following explanation, but it really doesn’t need to be any more complicated than this….
If you are a trader for a big bank, your job is to do two things:
- Take money out of the spot Forex pool (where our money is)
- Redistribute that money back into the market, so you can make the price of a currency go up or down
You see, traders for the big banks get a chance to see something most of us cannot—where the money is sitting. They know if most of the money is currently long or short. They also know where most of the pending orders are sitting—long or short.
Let’s say most of the money and pending orders are certainly net long. Now they have one of three choices to make:
- Take the price of the asset long for a good long while, and reward everyone who went long with a nice profit. (Big Banks lose)
- Take the price of the asset immediately short, forcing most of those long traders to exit out at a loss. (Big Banks win)
- Take the price of the asset long, just enough to trip those long orders, THEN take the asset short. (Big Banks win even more)
They usually chose option two or three, though it’s sometimes option one, and that’s the sneakiest move of them all. Just like casinos, if they don’t give you a win, or even a series of wins here and there, you’re going to give up and stop playing. This is a very bad long-term strategy. But like casinos, big banks are rich beyond belief for a reason. They understand this "long game."
And what do these small "wins" for traders create? It creates people who SWEAR by support and resistance lines, people who SWEAR by Fibonacci trading, and people who will actually come to the defense of something as terrible as the RSI indicator.
Is it because they’ve achieved their wildest dreams in FX trading using these tools? No! It’s because humans are emotional, and they remember the times they won because of how great and intelligent it made them feel, and they wrote off all the losses, because this is just what we do. We’re all guilty of it.
The Big Banks understand this balance between keeping FX traders in the game, and extracting every dollar they can from them at the same time.
Consequently, they still get to use options number two and three over and over again, every trading day of the year, because spot Forex traders don’t learn from their mistakes. They are the gift that just keeps on giving. However, traders can REALLY use this to their advantage.
You see, most Forex traders use primarily technical analysis to trade, which is good, they should be. Technical Analysis in Forex is key to beating this game. The problem is, they are doing it wrong, which is to say, they are all doing the same thing. Because the vast majority of traders are using the same tools, they all tend to go long and short in the same places. This tells the traders for the big banks exactly what to do and exactly where to do it!
Spot Forex traders give the big banks a freaking road map to where to go take their money.
However, a "smart" retail trader can use this fact to his or her advantage. The big banks could care less that there are some of us who consistently win, because over the long haul, they still win big in the overall game. And unlike casinos, if you are a consistent winner, they can’t kick you out!
So this is how we win: We don’t try to "beat" the big banks. We take our cut of the money sitting there in the spot Forex pool, and the Big Banks never even see us do it! We do this by using really great Forex technical analysis, because by having it, it is still possible to predict very accurately where price is going. And just as important…we make sure we avoid the tools that make us part of the popular crowd.
Just like life, once high school is over, the popular kids typically fall apart, and the nerds take over.
(Personally, this sounds to me like a bit of an oversimplification on Patrick's part.) In FX trading, the last thing you want to be is popular. It puts you on the Big Banks radar, and that’s the last place you want to be.
Do not misunderstand this. The big banks cannot see YOUR order personally, but they can see which position is the most popular. So, I’ll repeat: You do NOT want to be popular in the world of Forex trading. Forex trading is all about being hidden from the banks—like ninja!
If there’s a "major price level" at 1.4500 on the GBP/USD for example, don’t you think the banks know that? Don’t you think they know there are going to be tons of orders there? If the RSI indicator, the Stochastic Oscillator and Bollinger bands are all telling you the EUR/USD is "overbought" on the 60-minute chart, you don’t think the banks know that too?
They don’t even need to have these tools themselves. They’ll know right when they see a bunch of short orders popping up all at one time. Avoid being popular. Avoid using the tools that make you popular.
(Patrick writes that there are thousands of these "unknown-little-used-awesome" indicators out there, but I don't believe him. However, even if there is, it doesn't matter to me because I have coded my own personal indicators with which I am well pleased.)
