Forex Bank Trading Strategy Explained (Updated 2018)
- Who is Smart Money?
- What is the Forex Bank Trading Strategy?
- Why is Tracking ‘Smart Money’ Critical to Successful Trading
- Step 1: Accumulation
- Step 2: Manipulation
- Step 3: Distribution/Market Trend
Who is ‘Smart Money?’
Throughout this article, you will read the term ‘smart money.’ I use this term to define the largest market participants; those who move massive volume so large that their position cannot be opened and closed in a single order without spiking the market.
This includes the largest banks, prop firms, massive global companies, insurance companies, Hedge Funds, as well as speculative traders in every variety from around the globe.
It is important to understand that although the banks might control the majority of the daily volume, the VAST majority of that volume is those banks acting as a market maker for the other types of traders mentioned above.
Yes, banks do take speculative positions, but the vast majority of the volume they transact on a daily basis is for the purpose of market making, not speculation.
This is critical information, as it tells us 1 very important clue. If banks are primarily market makers then they will by default drive the market to and from areas of supply and demand which is the foundation in how we track them.
What is the Forex Bank Trading Strategy?
Definition: The Forex Bank Trading Strategy is a trading setup designed to identify where large market participants are likely to enter or exit their position based on likely areas of supply and demand, or manipulation points as we term them.
As you can see in the chart above, the top 10 banks control well over 60% of the daily forex market volume.
What if you could determine where they were likely buying or selling?
Do you think this information would be profitable?
Tracking smart money is at the very foundation of the bank day trading strategy. If we can consistently reveal where the smart money is entering, and the direction they are trading, then we have all the information we need to make a profitable trading decision.
We must remember that this is the banks market, and not ours! Retail traders are figurative flies on the wall. Keeping that in mind, why then do most retail forex traders out there attempt to invent or learn forex trading strategies that have been created to try and fit a market we do not control?
It is our strong conviction at Day Trading Forex Live that success in the forex market is only possible when we stop trying to fit different rules to a market we don’t control, but rather learn the trading strategy of the banks! This is their business, and they have a business model (aka forex trading strategy) that we must learn to follow to achieve consistent results!
We do this through the repeatable 3 step process described below. If we learn to trade forex by following their model we will have a much greater chance of success; after all the banks are the ones moving the market!
3 Steps To Success
In any market, there must be a counterparty to every transaction. If you are looking to buy the market someone must be willing to sell to you. Conversely, if you are looking to sell then someone needs to be willing to buy your current position from you.
Knowing that, how can we use this information to track where the smart money is likely to be buying or selling?
If Bank XYZ desires to buy a large position in the EUR/USD, using the principal discussed above they must find an equal amount of selling pressure. As their positions are so large, they are always entered over time so as to not reveal their hand. This leads us to the first step in the process, accumulation of a position.
Step #1 – Accumulation: As discussed above there is a counterparty to every transaction in any market including the forex market. Therefore when a bank or group of banks has the desire to enter a position they must do so by accumulating it over time. Unlike you and I, because of the sheer volume banks push they must enter positions during times most people would term as consolidation or range bound markets.
These periods of consolidation are what we call accumulation as they are areas where smart money enters or ‘accumulates’ their desired position over time.
By doing this through a tight range bound period, banks are able to not only keep what they are accumulating secret to the rest of the market, but they are also able to get a much better average entry.
This is the foundation of how the banks enter positions over time.
Money is made by accumulating a long position they will later sell off at a higher price, or accumulating a short position they will later cover at a lower price.
This is one of the most essential keys to trading forex successfully, and yet it is always overlooked or worse yet called consolidation which is viewed as a meaningless range.
Our single goal should be to track when the banks are entering the market and what position they are entering. As discussed above banks are the ones moving this market, and therefore if you can identify the position they are accumulating, then you can identify which direction the market will move next with a high degree of accuracy. What comes after this period of accumulation?
Step #2 -Manipulation: Over the last decade of educating traders I’ve heard many forex traders say that it feels as if they are entering the market at exactly the wrong time. Many traders feel as if the market is just waiting for them to enter before it instantly turns the opposite direction. Not only is that true, but this crucial step we term as ‘market manipulation’ is critical to tracking banking activity in the forex market.
The first point I want to mention is that we use the term ‘market manipulation’ but you could just as accurately be described as a searching for liquidity, a trapping move, stop hunt, etc. Regardless of the cause, the manipulation or ‘false push’ that comes at the end of the accumulation phase, is the most important factor in tracking smart money.
- A stop run or false push beyond the high of an accumulation period likely means that smart money has been SELLING into the market, and a short-term trend in that direction is likely to start.
- A stop run or false push beyond the low of an accumulation period likely means that smart money has been BUYING into the market, and a short-term trend in that direction is likely to start.
Because the mega-banks positions are so large they must essentially create their own market and induce buying pressure they can sell into or selling pressure they can buy into. How is this short-term manipulation carried out?
Reactive Vs. Predictive Trading Strategies
It starts by understanding that virtually all retail trading strategies are ‘reactive’ in nature. This means that as the market rises the strategies, software, or EA will begin to produce buy signals/trades, and a falling market will produce sell signals.
I term these as reactive trading strategies as they ‘react’ to the market rather than predict based on what smart money is doing. Therefore, a rising market will induce buying pressure and a falling market will induce selling pressure.
Do you see how easily smart money could consistently induce large portions of the retail market into buying right before a large drop and selling right before the huge rally?
If the strategies you are trading are reactive (which they all are), then smart money knows how to get you to buy, and they know how to get you to sell. This is precisely why traders so often say they feel like the market “turns against them as soon as they enter.”
The unfortunate part about this is the fact that this information is actually the most powerful thing the banks give us, but only if we open our eyes to it. The short-term manipulation of price tells us what position they have likely been accumulating, and thus, the direction they intend to drive the price.
I urge you to look back at all large market moves. Before the vast majority of large moves, you will see a tight range bound period (accumulation) followed by a false push (manipulation) in the opposite direction of the trend.
Step #3 – Distribution/Market Trend: After they have accumulated a position through a standard tight ranging market, banks will often create a false push we term as market manipulation. This false push is an extension of the accumulation period as it allows them to finish entering the rest of the position they had been through the previous range.
This as we just discussed is the reason so many forex traders enter the market at exactly the wrong time. If however, we know the tricks they use, we can avoid being a pawn of the bank’s manipulation, and instead profit from it!
If we have correctly identified which direction they have manipulated the market we can then understand which direction they intend to push the price. This is called the distribution phase of the market and is seen visually as a market trend.
Again this market trend comes only after the banks have finished accumulating their position, often seen as tight range-bound price action ending in a false push/stop hunt/search for liquidity.
Hands down this is the easiest area for us to profit from but only if we can properly identify the first 2 steps in the process. Throughout this article, I have marked out this 3 step process on a series of charts. New concepts can be hard to understand with only words and therefore I believe the charts should serve you well in the learning process. As you examine these charts you should be identifying the 3 stages of the bank day trading strategy.
Putting Forex In Perspective
No doubt this strategy is very different from anything you have been using. Realizing the chart is a false manipulation of prices and learning to read the intention behind the moves will take practice.
Anything in life that is new takes time to learn and this will be no exception.
If you are using a forex trading strategy used by the masses I strongly urge you to give some serious thought as to why you feel the outcome will be different for you?
At some point, we all need to realize that maybe it’s not the tens of thousands of retail forex traders that are failing, but maybe it’s the strategies that are flawed, as they don’t factor in the largest market participant, smart money!
What do you do next?
The first thing I would recommend is evaluating your trading strategy to determine whether it is reactive or predictive.
If the trading strategy you’re using is predictive, then stick with it for at least 6 months to determine if it the right strategy for you.
If you find that like most (95% or more) your strategy is reactive, then you need to move on to something else if you ever want a chance of becoming a successful forex trader.
For those looking to learn to trade the official forex bank trading strategy of Day Trading Forex Live then I would recommend the actual Bank Trading Course.