If you ve ever wondered how banks trade forex, you re not alone. While the big money does not trade on minute charts, smart money does. In fact, they typically trade on the weekly, monthly, and daily timeframes. Smart money uses the timeframes to trade for long periods. Traders who try to trade like the banks need to know how the banks make their trades, so that they can predict the bias of their traders and plan their own entries.
The first thing to understand about forex is that currencies are traded in pairs. This means you buy one currency and sell another. For example, if you buy a euro for a dollar, you will increase the dollar s value. Unfortunately, this trade can result in a loss. If you make a mistake, you could lose all your money or more. In such a case, you ll need to sell the euro and buy the dollar again.
The second phase of bank trading involves false breakouts. Also called false push, bull/bear trap, and stop hunt, false breakouts are triggered by banks using orders and reverse direction to sabotage your trades. As the price of an asset reaches an overbought or oversold state, the banks will build their positions and then sell them. Retail traders will be able to ride the breakout when it occurs.
To begin with, the forex market is made up of hundreds of different currencies. The United States dollar makes up a majority of the market, but the euro, which is widely accepted in 19 European countries, is second in popularity. The second-most-popular currency is the Canadian dollar, followed by the British pound and the New Zealand dollar. Individual traders have a much smaller capital base than bank traders. Therefore, it is important to understand the currency market before investing.
The forex market is a global electronic network of traders who trade currency for profit. Central banks are also involved in forex trading. Their goal is to maintain the value of a nation s currency, which is represented by its exchange rate. As the forex market grows in popularity, more banks are joining the fray. This influx of money has created an opportunity for many smaller companies to expand their reach. The only thing that is holding them back is the high fees and high risk associated with this activity.
In the forex market, there are two ways that banks trade: they can be either market makers or liquidity providers. This allows them to take large positions without a lot of price fluctuation. In other words, this way, banks can trade forex with much lower total trading costs, and with smaller net losses than small traders. And it s important to understand that the volume of forex trades made by retail investors is very small compared to that of the companies and financial institutions. While retail investors are not as large as the big guys, they still base their trades on a combination of technical and fundamental factors.
As mentioned, leverage is the amount of money that you ll need to deposit in order to buy a currency. This leverage will determine how large your position will be. The maximum leverage ratio for an online broker varies from 20:1 to 1,000: depending on your jurisdiction and the forex market. You ll also need to know how much of a base currency you ll need to buy a particular currency. A good example is EUR/USD at 1.1700.
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