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Currency Trading Like the Banks: Key Points and Top Technical Indicators

Dave

New member
Bank forex traders are long-term traders who make currency trading decisions based mostly on fundamental analysis (which they have a deep knowledge of). They rely on technical indicators to a lesser extent in order to get a sense of price trends and momentum.

To digress a bit, price trends and momentum may appear similar, but they’re quite different. In momentum investing, you first look at the fundamental factors such as a country’s economy, its prevailing political atmosphere and the decisions by its central bank. Trend following doesn’t care so much about fundamental analysis and focuses on capturing price upswings and downswings.

Using economic fundamentals to inform your currency trading decisions


Bankers use economic data releases for information on how economies around the world are doing, based on macroeconomic data such as GDP, inflation, industrial production, non-farm payroll and interest rates to name just a few. Retail investors can access one of many economic calendars tracking important events and economic indicators that drive the forex market.

Have a look at this economic calendar on a popular forex trading forum. It estimates the possibility that a country’s economic event will have a low or high impact on the corresponding currency.

Knowing the bank forex trader’s way of trading


Banks dominate the forex market. The big banks dominate total currency volume trades. They have huge positions to create liquidity for themselves.

Bank forex traders trade for clients and carry out a small number of their own trades. As they are able to place large orders - the likes of which are impossible for retail traders to match - banks can influence the price to move to certain levels at certain times so as to buy low and sell high.

So, retail traders can get FX trading tips from bankers, essentially joining their trades. Here are some currency trading ideas:
  • Identify the positions that banks are accumulating to see where the market may possibly be headed in the future
  • A huge accumulation is followed by a sell-off and the market appears to move in a different direction. Try to make a profit during this false push.
  • The market then enters the distribution phase where prices keep ranging over a long period of time. This is an opportunity to enter a short position.

What are the areas of demand and supply? Where can a price reversal take place? Answers to these questions will help you set up a profitable trade. To determine where the market is going, you need technical indicators, which bankers use to gauge trends, momentum and support/resistance.

The best forex trading tips on technical analysis


As mentioned before, banks use technical indicators but base their currency trading decisions mainly on fundamental analysis. They still need to ascertain the direction of the market, time their entry in the market and establish when to exit the market at a profit. In other words, they need to identify support and resistance levels, a key forex knowledge area.

One of the technical indicators you can use as support or resistance is a moving average. It represents the average closing price of the market for a specific time period, and is a good indicator of current market momentum.

If the price is trading above the moving average, it suggests that buyers are controlling the price. This is when your currency trading strategy should be to buy and capitalise on the trend. If the price is trading below the moving average, then it indicates that sellers control the price. Long-term traders use the 50-day and 200-day moving average.

Bank forex traders are also interested in understanding which currency pairs are susceptible to a breakout. Moving average convergence/divergence (MACD) and relative strength index (RSI) are the technical indicators commonly used by the FX trading community to confirm price breakouts.

The MACD consists of a bar chart/histogram and exponential moving average (EMA) that measures trend direction over a period of time, placing a greater weight on the most recent data. When the slope of the bar chart rises then it indicates a rise in momentum (bulls are gaining strength). A fall indicates a market reversal, that is, the bearish momentum is high.

The RSI oscillates between 0 and 100. It is used to determine how long a trend has been overbought or oversold. An RSI value greater than 70 shows an overbought market while a value approaching 30 points to an oversold market.

Technical indicators are best for identifying situations that offer currency trading opportunities with favourable risk/reward characteristics. To improve your profits and effectively manage risks, a combination of technical indicators, fundamental analysis and sound risk management is advised.
 
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