The majority of Forex traders are called retail traders, and they make up over 90% of all traders. The remaining 10% (or less) are smart money traders, such as institutional banks. Smart money traders belong to the richest category of traders and are profitable 99% of the time, while retail traders lose money. What is the secret they hide? The answer lies in how banks trade, and knowing how to trade like them may increase your chances of profitability.
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Smart Money: The top 1%
“Smart money” refers to the entities that drive the Forex market. They are the market makers, meaning they have more money than everyone else, and their trade volumes are large enough to cause significant changes in the real live market. Examples of smart money traders include JPMorgan, Citibank, central banks, hedge funds, large institutions like major insurance companies, and global corporations.
What is the difference between smart money and retail traders?
Now that you know who smart money is, it’s important to understand why they are so different from the rest. Firstly, smart money traders have billions more to trade than retail traders. The volume of their trades gives them the power to move the market. Secondly, they don’t focus on small timeframes. Smart money trades on monthly and daily charts. Retail traders use small timeframes to get in and out quickly, but smart money typically takes a long-term approach.
The Trading Strategy of Institutional Banks
Banks consistently profit from trading Forex. What is their secret? They rely on many strategies and algorithms to make money. However, among these strategies, one is very common: when institutional banks take positions, they often move prices dramatically, creating opportunities for retail traders to follow. That’s why many retail traders study liquidity zones and supply/demand levels to understand where large orders are being executed.
Step 1: Accumulation in Institutional Trading
This is the first step, and banks never skip it because it serves as the precursor to the other two phases. Banks don’t trade all their money at once; otherwise, it would slip through their hands and cause the price to spike. The optimal way for banks to trade is to accumulate their entries. In other words, they start by placing small buy or sell orders. Retail traders might think the price is skyrocketing, but that’s not the case. Big players are building their positions.
Step 2: Manipulations and Stop hunts
This is the second step in the banks’ trading strategy. Many traders refer to it as a false breakout, false push, stop hunt, trap, and more. During periods of consolidation, many retailers place pending orders above or below these zones, hoping to catch the breakout when it happens. Instead, a false breakout occurs, triggering their orders and suddenly reversing direction, taking out their stop losses. Banks manipulate the market to grab liquidity.
Step 3: Distribution Phase
This is the third and final step of their strategy. This is where big players make the final push in their desired direction, revealing their previous hidden agenda. This is often the best time for retail traders to enter and follow the trend. Assume the market begins a downtrend; retail traders then try to follow by selling. However, this is when banks do what they do best: buying when the crowd is selling. Institutional banks start accumulating positions to prepare for the next trend in the opposite direction.
How Can Retailers Follow Big Players’ Footsteps
It is an unprofitable effort to trade against the banks in the long run, so it makes sense to learn to trade with them rather than against them. Firstly, it’s key to trade on larger timeframes, as banks don’t trade on minute charts. Secondly, using tools that can predict the bias of smart money is helpful. These tools can assist you in predicting when smart money is entering or exiting the market, such as oscillators, MACD, and other indicators.
Conclusion: Practice Makes Perfect
It’s important to know that learning to trade with smart money takes time, patience, and practice. There is no overnight success. Since banks won’t show you their agenda, it won’t be easy. That is why you have to test your strategy and keep trying until you find something that works. However, this knowledge of how to trade like institutional banks will set you on the right path.
