How The Large Institutions Operate In The Forex Market

Introduction

Large institutions like banks and hedge funds dominate the forex market. It's said the transactions they make, account for more than 70% of the total daily volume the forex market generates. In fact, more than 30% of that volume comes from just two different banks who participate in the market. Citi & JP Morgan * With the banks controlling such a huge percentage of the market, it makes studying them and understanding how they operate a huge priority for us. Knowing the conditions they need to be present in order to place a trade or to take profits off a trade, is hugely important because it will cause movement in the market, movement which we can take advantage of if we understand why its occurring. The purpose of this book is to detail to you exactly how the large institutions navigate the forex market. We'll take a look at things like, how to find where the banks have placed their trades - how to figure out when they are likely to place trades - why they will split their trades up into smaller amounts when they want a reversal to take place and why when they split their trades up, their biggest trade will always be placed first followed by smaller trades. On top of this, I'll show you how to determine when the banks have started taking profits off their positions by looking for changes in the price structure along with the impact different trading sessions have upon the market and finally, how the banks will help each other out when it comes to making money from the markets. There's lots lots more which I'll leave you to discover for yourself, hope you enjoy the book.

The Three Decisions A Trader Can Make

To start, I think it's a good idea if we spend a bit of time looking at the three trading decisions traders are able to make in the market. 3 The key to trading forex profitably is knowing how other traders trade. Retail traders have this idea in their heads that the banks and other large institutions trade the markets very differently to how we trade them. This is wrong, the banks actually trade in a very similar way to us, not in terms of strategy but in terms of the decisions they must make in the market. All the decisions we make, are exactly the same as what they make. The big difference is they need certain conditions to be met in order to make actually make their decisions whereas we don't as I'll now explain. Here are the three decisions all traders in the market must make.

1. When to place a trade
2. When to close a trade
3. When to take profits on a trade

Let's take a look at what retail traders need to make one of the decisions listed above.

Retail Traders

Placing A Trade: Retail traders will typically place a trade upon seeing some sort of criteria filled based upon technical analysis. It could be a moving average cross, a candlestick pattern at support, or any one of the other many methods that technical analysis encompasses. The fact is, getting into a trade is not a problem for retail traders because their trades are so small.

Closing A Trade: Retail traders will close their trades in one of two ways. The first would be the market hitting their stop loss which is likely to have been placed based on the maximum amount of money they're willing to lose on the trade instead of being placed at a predefined point in the market where they know their reason for taking the trade is proven to be wrong. The second method, would be when a retail trader ends up closing their trade manually. Traders close their trades manually either because the trade they have open was only going to be held for a short space of time and they were present to watch the unfolding price action, or they close their trade manually because they never thought to put a stop- loss on their trade when it was placed and their position has ended up going into a huge loss.

Taking Profits: Retail traders will tend to take profits off their trades when they feel like they have made enough money. Sometimes take profit orders will be placed by the trader at a predefined price point and the trade will be closed automatically once it reaches a certain amount of profit.

Institutional Traders

Placing Trades: The way Institutional traders place trades, differs greatly from how retail traders place trades. When a retail trader decides to place a trade he doesn't have to think about if there's enough buy or sell orders present in the market to get his trade placed, because the size of the trade he's placing is so small, it's easy for it to be matched with an opposing buy or sell order. Institutional traders on the other hand are placing trades many times the size of the trades being placed by retail traders. The only way the institutional traders are able to get these trades placed, is if there are enough opposing orders available in the market. For example, If a bank wanted to buy 100,000 Euros, he needs other people to be selling 100,000 Euros otherwise he's not going to be able to buy. Another way in which retail traders and institutional traders differ when it comes to getting trades placed, is what the institutional traders need in order to make a profit on the trade they plan on placing. Retail traders do not think about how they are going to make money on a trade because they don't know how money gets made and lost in the market. I talk about this more in my Zero Sum Fun book and my “The Biggest Secret In Forex Trading” article on my site. In order for someone to make a profit on a trade, another trader must lose money. The bigger the amount of money someone wishes to make, the larger the amount of traders who need to be losing money. What this means is, the banks will only place a trade when they know a lot of retail traders are going to lose money. If the banks see that only a small percentage of traders will lose money in the event of them coming into the market and placing trades, they won't even bother to enter. Instead, they'll wait until the price has fallen or risen enough for lots of retail traders to be entered into trading positions. When enough traders have placed trades in the same direction, the banks will enter the market and cause a reversal to take place.

Closing Trades And Taking Profits: Similar to how banks place trades, closing trades and taking profits can only be achieved when there are enough orders present in the market. If a bank had a big sell position placed, the only way they're going to be able to take profits off the sell position, is if other traders come into the market and place sell trades. The reason why is because when a trader wants to close a sell trade or take profits off a sell trade, he must buy back some of what he sold at a lower price. In order for someone to buy back what they've sold, other traders must be selling, because the only way to buy is if another trader is selling, if no other traders were selling a transaction would not take place. The larger the amount of profit a bank or trader wishes to take off a trade, the higher the number of traders needed to be placing trades in the same direction to which to the trade 6 has been placed. If not enough people are selling, then it won't be possible for the trader to take the amount of profit he wants off his trade or worse, close his trade at all.

Recap:

• Placing trades – closing trades and taking profits, is not something the banks can do whenever they want. There must be the necessary amount of buy or sell orders in the market, if there aren't enough orders, the banks won't be able to complete one of the three actions listed above.
• When the banks are looking to place trades, one of the main things they'll look at is if there are a large number of retail traders in the market who the banks know will lose money in the event of the price moving in the opposite direction to which these retail traders have their trades placed.
• You can see how the banks have to think about things which retail traders would never think about themselves when making their own trading decisions.
• It's really important before we continue that you understand what the large institutions need to make their trading decisions, if you don't then it could be difficult to follow the next few chapters.

When Will The Banks Place Their Trades?

Like I said in the previous chapter, for a bank to place a trade two conditions must be met.

• One they need a lot of traders entered into trades which they know will lose money if they were to enter their own trades and push the market in the opposite direction.
• And two, they need enough orders in be the market to actually get whatever trades they want placed. ( more on this later )

By understanding these two conditions, we can come to some conclusions as to where the 7 bank will be placing their trades into the market. First, we need a figure out when a large number of retail traders have entered trades. It's only by understanding this, will we be able to determine when the banks are likely to enter trades because the primary condition the banks need to get a trade placed, is the knowledge that a significant number of retail traders will lose money once the banks have got their trades placed into the market. So essentially what we need to find out, is the one thing which will make a large number of retail traders enter trades. This 'one thing' is a concept you already know The trend.

Most of my Zero Sum Fun book is based on teaching people why the trend is a concept that has been made up to make people purposely lose money in the markets. The ideas which surround the theory of the trend, make very little sense in the market and for the most part, cause people to always enter trades at the point when the trend itself is about to reverse or consolidate/retrace. The whole theory of trend is based on the assumption that the longer the market has been moving in one direction, the higher the probability of it continuing to move in the same direction in the future. Because of the fact that virtually all traders are taught to trade in the direction of the trend from the very beginning of their trading careers, it means most of the traders in the market believe in the concept of trend and the idea that, the longer the market has been moving either up or down, the more likely it is to continue moving up or down rather than turning and moving in the opposite direction. Really what this means is the longer the price has been traveling in one direction, the higher the number of traders who will be placing trades in the same direction. So what the banks really need to see to enter their trades is a market which has been moving in the same direction for a long time. Because they know if a market has been moving in one direction for a long duration of time most of the traders in the market are going to be placing trades in the direction it has been moving in due to the concept of trend and the assumptions it makes about how the market works. Here's an example to better explain what I mean.

The image above, as you probably already know, is the trend reversal which occurred on USD/JPY a few years ago. The banks were the ones behind this reversal and they placed their first buy trades back when USD/JPY was in a downtrend. At this point, the price of USD/JPY had been in a downtrend for almost 5 years meaning most of the traders in the market would have been selling because of their beliefs about the trend. They would have looked at the market and said to themselves “The market has been falling for the past 5 years therefore the downtrend is really strong and it's highly unlikely for a trend reversal to take place”. With so many traders being short in the market, it means the banks can make a massive amount of money if they place trades and cause a trend reversal to take place. If the market was to reverse, all the traders who are currently in open short trades would end up closing their trades at a loss because the price will move against the direction to which they've placed their trade. In order to actually close a sell trade, you must use a buy order. With so many retail 9 traders closing losing trades, it means a huge number of buy orders come into the market and push the price higher, causing all the buy trades placed by the banks to go into a large amount of profit. After the trend has reversed, the retracements and consolidations which form during the up-trend offer the bank traders the chance to get more buy trades placed albeit at a smaller size.

The reason why is because the only way the banks can get a trade placed, is if they have enough orders coming into the market which are the opposite to the trade they wish to place. In the example, this means if the banks want to get additional buy trades placed in the direction of the up-trend, they need sell orders to come into the market otherwise their buy trades can't be placed. So they need to make other traders place sell trades in order to get their buy trades placed. The banks do this by taking some profits off their existing buy trades. When they take profits the buy orders which are currently coming into the market from retail traders buying because of the up-trend are consumed and the price begins to fall. When the price falls the retail traders who were in long positions start closing their trades because their long trades are now at a loss, whilst lots of additional retail traders begin placing sell trades because they believe the drop is a reversal is taking place. Both sets of traders are putting sell orders into the market even though they are taking completely different actions. These sell orders are what the banks will use to get more buy trades placed in the up-trend. Once the banks have placed their buy trades, the sell orders coming into the market from retail traders selling are consumed and the price begins moving back in the direction of the trend. Another point to make, which I mentioned earlier, is in order for the banks to make a profit on the buy trades they've placed during the retracements and consolidations they must have a set of traders who they know will lose money once the price starts rising again. Due to the way retracements and consolidations will make a lot of traders place sell trades because they think the market is reversing, the banks know once their buy trades have been placed, the price will move up and all of the traders who placed sell trades will close have to close their trades at a loss, which will make the price rise and push the buy trades placed by the banks into profit.

Locating Where The Banks Have Placed Their Trades?

So far, we have learned the banks will only place trades once they know a there is a large number of traders are going to lose money. What I want to show you now is to how to find where the banks have entered the market and placed trades. We know the one thing which causes a large percentage of traders to enter trades is a trend, therefore all we need to do to figure out when the banks are probably going to enter the market is look for a currency which has been in a trend for a long time. We can't know exactly when the banks will enter their trades because determining if a market has been in a long trend depends on the time-frame being observed and on information we don't have access to such as how many buy/sell orders are currently coming into the market Despite this at least we have a guideline in place we can use to have an idea of when they are likely to enter their trades i.e. after the market has been moving in one direction for a significant length of time.

Even though we can't predict exactly when the banks will enter trades, we can see when 11 they have entered the market by looking for changes in the price action. Take a look at the image above of a reversal I found on the daily chart of EUR/USD. This is an example of finding out where the banks have entered the market by understanding the changes in price structure. To begin with EUR/USD had made a sudden move up after it had been moving lower for around a month. A sudden move up can only mean one thing. Someone has come into the market and placed buy trades. We know it can't be retail traders as they don't trade at a size which would have a large effect on the market price, therefore the up-move must have been caused by bank traders placing buy trades.

When the move up comes to an end we see the market enter a consolidation. Eventually the consolidation ends and another up-move takes place which breaks far past the highs made during the time the consolidation was taking place. The move up tells us the banks have been placing buy trades somewhere inside the consolidation, the question is where ? To figure this out we must come back to what I was saying at the beginning of the book about how bank traders enter the market. Banks can only enter a trade when there are enough orders available and the orders they need to get their trade placed, must be the opposite to the trades they wish to place. In the example we saw the price move up because the bank traders had placed buy trades. The only way they were able to get these buy trades placed is if a significant number of other traders were placing sell trades. So in order for us to find the exact point where the banks placed their buy trades, all we need to do is identify the places where lots of traders would have been entering sell trades as the banks will have needed the sell orders generated by these traders selling to actually get their buy trades placed.

I've marked the places where the banks were placing buy trades with an X in the image. You can see three swing lows which formed when the market was consolidating. These three lows are the points where the banks placed the buy trades which caused the up- move to occur. The banks can only place trades when the price is moving in the opposite direction to which they want it to move. In the example the banks wanted to place buy trades which means they need people to be selling, if they waited until the price was moving higher before placing their buy trades, it's unlikely their trades would have been placed because most of the traders in the market are also placing buy trades, not sell trades which is what the banks need to get their buy trade placed. Now we know where the banks have placed their buy trades and the reason why they have placed their trades at these points instead of another location, what we can do is watch for the market to come back into the region where they were buying in case they want to buy again in the future. What we would do is mark an area around the swing lows where we know the banks have placed their buy trades.

Why the market may return to the zone where they have placed their previous trades, is because the banks may not have been able to get all of their buy trades placed during the time the price was consolidating. The reason for this is due to the fact that usually the banks will not have enough orders coming into the market to get all of their trades placed, this means they must manipulate the market price to cause people to buy or sell in order to create orders for them to use to get the rest of their trades placed. ( More on this later in the book ) So in our example, the banks might still have buy trades which they need to get placed before the main reversal occurs. In order for them to get the these buy trades placed, they must make the market move lower. The banks do this by taking some profits off the buy positions which they placed when the price was consolidating. They take just enough profit to ensure the buy orders coming into the market are consumed and the price moves lower. When the price falls back into the region where the banks placed their other buy trades in the consolidation, they buy again using the sell orders which have been generated by people selling on the move lower. When the buy trades have been placed, the price moves up again, creating a higher swing low which I've marked in the image.

6 days after this swing low was made the NFP news comes out. The news turns out to be negative for EUR and the price ends up dropping back into the area created by the bank traders placing buy trades. Most traders who were watching the market as the NFP came out, would likely to have believed the price was going to continue falling a large distance as the size of the drop caused by the NFP being released was huge. When the market rises or drops by a considerable amount in a short space of time, many traders will enter trades in the direction of the drop or rise because it makes them feel as though the market is certain to keep falling or rising. The bigger the rise or drop is, the larger the number of traders who will be entering trades. With so many traders going short because of the drop, it means the banks have a huge amount of sell orders at their disposal which they can use to get the rest of their buy trades placed into the market. When the price drops into the zone where we know the banks have placed buy trades on 4 previous occasions, they buy again. All of the sell orders coming into the market from traders selling are consumed and the price begins to climb higher, causing all the people who sold to on the move down to begin closing their trades at a loss as the market is now moving against their positions.

Because the only way to close a sell trade is by buying back what you sold at a worse price than what you brought it for, it means when the traders who sold on the move down caused by the NFP release close their trades, vast quantities of buy orders come into the market which causes the price of USD/JPY to rapidly increase. I hope it's obvious from just this one example how powerful it can be knowing where the banks have placed their trades. Traders seem to think it's incredibly difficult finding out where the banks trades have been placed yet as you can see, with just a little bit of understanding, it's actually quite simple. The process described above of how the market will return to the points where the banks have entered their trades, will only occur if they did not have enough buy or sell orders present in the market to get all of their trades placed. If the banks have been able to place all their trades, the market will NOT revisit the point where any previous trades were placed. This only tends to occur when they're placing trades onto retracements in the trend. Usually when they are setting up a trend reversal the banks will not have enough orders to get all their trades placed and you will see the 15 price make more than one thrust down or up ( depending on which trend change is taking place i.e up-trend to downtrend ) so they can get all of their trades placed before the reversal gets underway. The reversal situations are the times when you want to be identifying where the banks have placed their trades as its likely they'll need to make the market come back to the area where these trades have placed so they can get the rest of their trades placed.

To know weather the banks will make the market return to a point where they have already placed trades, requires a timer to be set on how quickly the market should return to the area after an up or down movement has taken place. The rule I always use is the market must return to the area where you have identified the banks have been placing their trades within 45 days. This 45 day rule only applies to areas which you mark on the daily chart. For the 1 hour chart the market should return to the area 24 hours after it has been created. You can have a little bit of a cushion because nothing in the market is dead set in stone. You might see the price return to an area 27 hours after it has been created and work out exactly as planned, just make sure the market doesn't take an extreme amount of time to return to a area like 40 hours for an area found on the 1 hour chart or 60 days for an area on the daily chart. The banks want to get all of their trades placed as soon as possible, but because they're operating off different time-frames it means we have to use different rules as their time horizon's are not the same. I'm going to go through one last example now of finding where the banks have placed their trades.

Above we have an image of a reversal which took place on the 1 hour chart of EUR/USD. The two arrows denominate the points where the banks had placed buy trades. We wouldn't know this until the market had moved up and made a new high. Once the move up has occurred, we can begin waiting to see if the price drops back into the area because we know the banks may not have been able to get all of their buy trades placed due to their not being enough sell orders in the market. You can see I've marked this area differently to how I marked the area in the last example. In the previous example I marked the area to encompass the three swing lows which the banks traders had placed their buy trades at but with this area I've marked the area up to the point where the large move higher had originated from. The reason I've done this is because a lot of the time when the banks want to make a reversal occur, they'll be forced to enter the positions which they weren't able to get placed to begin with at a slightly higher ( or lower if it's a up-trend to downtrend reversal ) price than what the other trades were placed at. This is due to the way the market structure will change once the banks have got some of their trades placed. It doesn't happen as often as the typical reversal when all of the banks trades will be placed at a very similar price, but it happens enough that it should be taken 17 into account when drawing area's based off where the banks have placed their trades. If you see the banks have placed their trades and caused a large up or down movement to occur, make sure you draw the area to encompass the point where the up or down movement originated from like I have in the previous image. 22 hours after the big move occurred, the price drops back into the zone and the banks enter the remaining buy trades which they were not able to place before the price had moved up due to a lack of sell orders being present in the market at that time.

The last thing to look at when your trying to determine if the banks are going to get more trades placed, is how the movement created by them placing trades is constructed. If you look at both previous images, you can see the up-moves caused by the bank traders placing their trades, had virtually no retracements or consolidations taking place during the movement. The reason for this is because the banks want to make the market to move back into the area so they can get more trades placed. Earlier I said the only way for the price to move back into the area is if the banks take profits off the positions they already have placed. Taking profits reduces the size of their overall position, which means if they want the market to move back into the area where they have already placed trades, they cannot take a large amount of profit off their trades during the move up or down. If they do then they run the risk of not be able to take enough profits off their trades when they want the price to fall back into the area. If you go back and look at the first image where I showed you the area where the banks were buying on the daily chart of EUR/USD, you can see the only evidence there was of the banks taking profits off their trades during the move up was a tiny drop which only lasted a day. Before and after this tiny drop there was no signs of the banks taking profits trades.

Recap:

• To find where the banks have placed trades into the market all you need to do is look for where a move up or a move down originated from.
• The banks will only place trades when the price is moving in the opposite direction to which they want to get trades placed. e.g. If the price is climbing higher the banks can only place sell trades, if it's moving lower only buy trades can be placed.
• When the banks have only been able to place a few of their positions into the market they'll take profits off their trades to make the price return to the region where their previous trades have been placed in order to generate enough buy or sell orders to get their remaining trades placed.
• You'll most often see the price return to the point where the banks have placed trades, when they are trying to cause a reversal to take place.

How To Identify Where The Banks Are Taking Profits

Taking profits off trading positions is something which the banks must do frequently due to the size of the trades they have placed. Similar to when the banks are placing trades, taking profits off trades can only be done when the banks have enough orders coming into the market in the direction to which their trade has been placed. For example, if a bank had placed a buy trade on EUR/USD in order to take some profits off that trade, they would need other traders to be placing buy trades. How many buy orders there are coming into the market from other traders buying dictates how much profit the banks are able to take off their own buy trades. Knowing when and where the banks are taking profits is quite simple. All we need to do is 19 think about when we would look to take profits off our own trades and then combine that with our understanding of what the banks need to actually take profits off their trades i.e. orders coming into the market. Like us, the banks will want to take profits off their trades when the market makes a large move in the direction to which their trades have been placed. If you had placed a buy trade and the market advanced 100 pips higher, the first thing you would want to do is secure some of the profit. This is exactly the same as what the banks want to do, the only difference is we can take secure our profits whenever we want, the banks can't until they have the necessary amount of orders coming into the market. I'm going to run through a little example now of how the banks take profits off some buy trades they placed which caused a reversal to occur in the market.

The image above shows a perfect example of identifying when banks are beginning to taking profits off their trades. I want you to look at the square I've marked in the image with the blue lines. Whilst the market was in this square the banks were primarily getting buy trades placed. The bulk of their buy traders were placed at the swing low seen at the bottom of the square because it 20 was at this point where the most sell orders were coming into the market. It's important to note, lots of retail traders will have still been selling as the price was moving up to the top of the square. The reason why is because the price action seen as the market moves up is still relatively bearish, lots of the bullish candles have wicks on them and there are a few bearish candles forming. If you could only see up to the point where the market had moved to the top of the square, there's a strong possibility you'd think the price has a high chance of continuing to move lower and will have been placing trades accordingly. Most traders would have thought this especially because the market made a big drop lower prior to the move up taking place.

The banks can see lots of traders are selling and begin placing tiny buy trades onto each little drop lower as the price is rising. The banks know that by buying up all the sell orders they will eventually push the price higher, putting the traders who are placing sell trades at a loss and in turn forcing them to close their trades. Now I want to cast you attention to the up-move I've marked in yellow. If we compare the price structure seen in the square and the structure marked in yellow, we can see there is a clear difference. In the square we had lots of signs of selling still taking place even though the price was moving higher. In the yellow box there are virtually no signs at all of any selling taking place. There are a small amount of bullish candles which have tiny wicks on them but these wicks were not big, and for the most part only took up around half of the size of the candlestick itself. What has caused this up-move to take place is the banks placing buy trades back when the market was in the square. There comes a point in the square when the bank have used up all of the sell orders which were coming into the market from the retail traders selling. When these orders are consumed the price shoots up, now all the people who placed sell trades in the square are put at a loss on their positions. Some traders probably sold near the bottom of the square and will have been at a loss even before the price shot up out of the square. These traders will be the first to close their 21 losing trades because they will be the ones are put at the biggest loss on their trades when the price starts moving higher.

All of these traders closing losing sell trades is what causes the majority of the movement seen in the yellow box. When a trader wants to close a sell trade he must use a buy order because he must buy back what he sold at a worse price than what he sold it for. So because we have loads of traders who placed sell trades now closing their trades at a loss, it means there are thousands of buy orders coming into the market which is pushing the market price higher and higher. The move higher means the buy trades placed by the banks are now in a significant amount of profit. If the banks want to take some their new found profits off these buy trades, they need other traders to come into the market and place buy trades. The only way other traders are going to come into the market and buy, is if they believe the price is likely to rise for a long duration of time. Because the up-move is heavily bullish and the price simply keeps going up and up with no retracements or consolidations taking place in between, it lures traders into thinking the price will continue moving up at the same rate in the future. The further up the price moves, the higher the number of traders who start placing long trades because of the concept of trend and the assumptions it makes about the market. The traders who start entering long trades are not exclusive to the 5 minute time-frame, there's also traders buying on the 15 minute – 30 minute and 1 hour time-frames as well because they also see an up-move taking place.

Looking at the 1 hour chart we can see how the up-move on the 5 minute chart creates a bullish large range candle. If you've already read my Zero Sum Fun book then you'll know large range candles make a significant number of traders place trades in the direction of the candle. So a trader who was trading the 1 hour chart would have seen the bullish large range candle and probably placed a buy trade because the size of the candle makes him think the price is about to make a large move higher.

Eventually the up-move marked in yellow comes to an end and we see a small drop take place. This small drop is the first sign of profit taking we have had from the bank traders who were placing buy trades back when the market was in the yellow box. The reason the banks start taking profits here instead of at the beginning or middle of the up-move, is because by the time the price has moved up this far, the banks have had enough traders come into the market and place buy trades for them to be able to take profits off their own buy positions. They couldn't take profits before this because not enough traders were going long. The price must increase to the point where lots and lots of retail traders believe it's set to continue higher. When this point is reached, lots of retail traders will enter the market at the same time and the banks will suddenly have a far bigger amount of orders available to use to take profits off their trades than what they had at the beginning and middle of the move up. Look at how the structure of the market changes after the move up in the yellow box is over. The price continues to rise but there is a lot more selling going on in the market. Every swing high is followed by a retracement and the price is unable to close a large distance past each new swing that is made.

The selling we can see is the bank traders taking more profits off the buy trades they placed back in the square. As the price moves higher more and more traders begin placing buy trades because they believe in the concept of trend. “If the market has been moving in one direction for a long period of time it has a higher chance continuing to move in the same direction in the future than it does of reversing.” This is why the number of retail traders placing buy trades increases the further up the market moves. The banks need the number of traders placing buy trades to increase because the profits on their own buy trades are also increasing as the price rises. The bigger their profit becomes the higher the number of opposing orders needed to take some of that profit off their trades. So it's actually essential for the banks to have other trades to come into the market and place buy trades the further up the price moves because if they don't, the banks will not be able to take the amount of profit they want off their trades.

Eventually the price has risen to a point where there are enough traders placing buy trades for the banks to take a much much bigger amount of profit off their own buy trades. This bout of profit taking will show up on your charts in the form of a retracement which is 25 much bigger than the retracements seen previously in the up or down swing. I'm going to quickly run through one last example of spotting where the banks are taking profits and then we'll move on to how the banks place their trades into the market.

Here we have a down-move seen on the 15 minute chart of EUR/USD. To begin with we had the banks placing sell trades inside the area marked between the blue lines. When the sell orders from the banks sell trades consume the buy orders from the traders buying, the price drops lower. Now all of the traders who placed buy trades start closing their trades at a loss which puts sell orders into the market and causes most of the down- movement seen in the yellow box. When the market is falling there is only a small amount of sell orders in the market which the bank traders can use to take profits off their sell positions. This is why there are only two instances of profit taking we can see on the down-move inside the box. The banks probably want to take more profits off their trades but are unable to as they need more traders to come into the market and place sell trades. There comes a point where the market structure changes considerably and we start to see 26 more evidence of the banks taking profits off their trades. When the price moves out of the area marked in the box, we can see more buying enter the market. This bit of buying is the banks taking profits off their trades. By this point the price has fallen enough to convince traders in the market the price is likely to continue moving lower in the near future, they then start placing sell trades to capture what they believe is going to be a continuation of the down-move. The banks now have enough sell orders in the market to take small bits off profit off their sell trades placed back when the market was in between the two lines. The arrow seen immediately after the yellow box is the first sign we have of the banks beginning to take a larger amount of profit off their trades.

The two arrows seen after this, give us more signs of profit taking entering the market. Notice how the retracement located above the third arrow is much bigger than the tiny retracements above the first two arrows. The size of this retracement tells us the banks have taken a bigger amount of profit off their sell trades. The only way they are able to do this is if they have more sell orders coming into the market than what they have had previously. 27 After another drop lower, the market stops falling and begins consolidating. A news event then comes out ( I think it was the NFP ) and the price shoots back into the zone where the banks have placed their sell trades. They place more sell trades using the buy orders generated from the NFP and the price advances lower for the next few days.

Recap:

• A change in market structure signals the point where the banks are beginning to take profits off their trades. Look for signs of an increased amount of selling to come into the market if the market has changed from going down to going up. If the market has gone from going up to going down, watch for signs of buying i.e. lots of bullish candles and swing lows getting closer together.
• The banks need other traders to come into the market and place trades in the direction to which the banks themselves have got trades placed in order to be able to take profits off their trades. As the price moves in the direction the banks have got trades placed, the profit on their positions increases as does the amount of opposing orders needed to take profits off these trades.
• Because most traders believe the longer the price has moved in one direction the higher the chance it has of continuing to move in the same direction, it means more and more traders will be entering trades as the market falls or rises, giving the banks traders the orders they need to take profits off their trades.
• There will come a point in every up or down swing where a large number of traders enter trades and the banks will be able to take a much bigger amount of profit off their trades than they have been able to previously. You can see this on your charts as a retracement which is bigger than any of the previous retracements or pauses seen previously in the up or down swing.

How Do The Banks Place Their Trades?

Now we are going to look at what I believe is the most important chapter in this book. 28 Earlier we looked at where the banks place their trades and how they take profits off their trades, but now we're going to look at how they actually place their trades into the market when they want a reversal to take place. This is highly important for your understanding of the market as it explains why you commonly tend to see the price move up and down multiple times prior to a reversal taking place. Usually when the banks want to cause a reversal, they will not be able to get their entire trading position placed into the market. The reason why is because there will not be enough buy or sell orders present to get all of their trades placed. You've got to remember, in order for the market to change direction a huge amount of orders are needed and because the banks will always want to make as much money as possible from their trades, it means they will have to split their trades up into smaller more manageable amounts so they can get all of their position placed before the reversal gets underway.

If they didn't split their trades up and only placed one trade which contained their entire position, what would happen is all the orders coming into the market would be consumed, part of their trade would be placed and the price would rise or fall ( depending on the trade they're placing ) until enough orders were found to fill the remainder of their position. Example: Let's say the banks wanted to cause a trend reversal on EUR/USD. For the sake of the example lets assume the market was in a downtrend. At the current time of the market falling, there are 10,000 sell orders coming into the market from retail traders selling. The total size of the position the banks wish to place before they cause the reversal is 100,000 buy orders. If they were to come into the market and place one buy trade which consisted of all 100,000 buy orders, it would mean only 10,000 of those orders will be executed and the remaining 90,000 wont be placed. The price will then begin moving higher because more sellers need to be found so the remaining 90,000 buy orders can be placed in the market. How far up the price will move depends on how many orders there are left to be placed. The bigger the orders left, the further up the price will move.

The biggest problem the banks would have if they were to place one huge trade into the market is all of their trades will be placed a different prices. Like I said in the example the price will move up until enough sellers are found for the 90,000 buy orders to be placed. If only another 10,000 sell orders were found, it means only another 10,000 buy orders can be placed. Once that happens the price will move up again because there's still another 80,000 buy orders left to be filled. What the banks end up with, is buy orders placed at increasingly higher prices in the market. Because their trades are being placed at increasingly higher prices it means the banks are making less and less money on each trade that gets placed as it's becoming easier for a big seller to come into the market and send the price down which would cause the banks to start losing money on some of their positions. This is why it's essential for the banks to split their trades up into smaller sizes and try to get them placed as close together as possible. By splitting their trades up, they reduce the risk of not being able to get all their trades placed at the price they want like I explained in the example whilst also allowing them to place their trades at a similar price, which allows them to make a similar amount of profit on each trade rather than making a smaller and smaller amount of profit like they would if they were to enter the market with one huge trade that contains all of the orders they want to place.

The Banks Will Always Place Their Biggest Trade First

Now you know the reasons why it's essential for the banks to split their trades up when looking to cause a reversal to take place, what I want to show you now is why when their placing their trades, they will always place the trade containing the biggest amount of orders first, followed by trades which contain a much smaller amount of orders.

The image above shows a reversal which occurred on the 1 hour chart of EUR/USD back in October last year. As you can see from the image, the reversal occurred in stages. First the market fell after making a new high, then a consolidation took place before the main down-move got underway. There were two locations where the banks placed sell trades in order to cause this reversal to take place. Their biggest sell trade was placed first which is what caused the first movement down against the up-trend. The rest of their sell trades, which were much smaller in size than their first sell trade, ended up being placed on the swing highs which formed during the time the price was consolidating. The reason why the banks placed their biggest sell trade first was because of the amount of buy orders coming into the market when the price was moving higher.

Here's what the market looked like before the first down-move had taken place. Any retail trader who was looking at the market when it was at this point would have thought the price was going to continue higher. The fact the price has been moving higher for what the traders would consider to be a pretty long time and the fact that the gradient of the move up was getting steeper as time went on, means the majority of the retail traders in the market will have been placing buy trades at the point I've marked with the blue square. The banks know that once they have placed their first sell trades the price will fall and lots of retail traders will begin selling. If the market was at any point to make a move higher after the drop caused by the banks placing their first sell trades, there isn't going to be as many traders going long as there were before the drop took place, because they have already seen the market move lower which has changed their perception of the future market direction. To make the rest of this example easier to follow, let's assume that in total the banks 32 needed to place 100,000 sell orders into the market before the main reversal got underway.

At the green box marked in the image there are only 40,000 buy orders coming into the market which means the banks can only get 40,000 of their 100,000 sell orders placed at that price. When they place their 40,000 sell orders the price moves down because all the buy orders coming into the market from traders placing buy trades have been consumed. Important Note: Part of the analysis the banks will do when they want to cause a reversal is “are there lots of other traders in the market who will lose money in the event of a reversal taking place” ? If there isn't enough traders who will lose money, the banks wont place any trades and a reversal will not occur. In our example there are large amounts of retail traders entering long trades because they have seen the market move up for a reasonably long length of time. 33 The banks know if they place sell trades it'll push the price down and all of the retail traders in long positions will be forced to close their trades at a loss, causing the price to fall which increases the profits on the sell trades placed by the bank traders. Now the banks still have 60,000 sell orders left they need to get in the market before the main reversal begins.

In the image above I've marked all the places where the banks would have placed the remaining 60,000 sell orders into the market. One important thing to remember about how the banks place their trades, is they'll always be placed when the market is moving counter to the direction to which they want the price to move in. Looking at the image on the previous page, you can see the remainder of their sell orders were placed whenever a swing up occurred. The reason for this is because the swings up are the only times when the majority of the orders coming into the market will be buys. The banks can't place sell trades when the price is falling because there isn't any buy orders for their sell trades to be matched with. If you think back to the beginning of this chapter you'll remember I said one of the reasons the banks split their position up into smaller trades is to avoid moving the market against 34 themselves and having their trades placed at increasingly worse prices. I also said when they split their trades up they'll try and get all of them placed at a relatively similar price in order to maximize the profit potential of each trade.

Here's the same image we looked at a minute ago only I've used lines to mark the swing highs where the banks placed their sell trades. You can clearly see from the image that the banks sell trades were all placed at a similar price. Each trade placed when the market was consolidating was never placed at a price which was far away from where the previous trade was placed. The only sell trade which has not been placed at a similar price to the other sell trades is the first trade the banks placed, which as it happens, is also the biggest trade they ended up placing. This trade will make more money than the others due to the fact it has been placed at a higher price, thus giving it a higher risk to reward ratio than the other trades. When the main reversal gets underway all the sell trades the banks have placed on the up-swings in the consolidation go into a similar amount of profit. One advantage this has is it makes it easier for the banks to calculate how many additional sell orders they'll need to take profits off their trades when the main reversal get underway. If the banks had loads of sell trades placed at prices which were far away from each other 35 it would mean every sell trade would require a different amount of sell orders to come into the market for the banks to take profits off their trades. By having them placed at roughly the same price they avoid this problem because they know each of their trades will require a similar amount of sell orders to come into the market. Let's take a look at another example of how the banks place trades into the market.

The image on the previous page shows a reversal on the 1 hour chart of AUD/USD. The way this reversal is structured clearly shows how the banks split their trades up and entered them at different points in the market. At the beginning of the reversal the market was falling as evidenced by the price action marked in the green box. Now even though the price had not been falling for a long time, there will still have been a significant number of retail traders entering short trades due to the size of the bearish candles which made up the move lower. The banks see there are quite a lot of traders going short and decide to cause a reversal to take place in order to make these traders lose money and make themselves a profit.

The problem the banks have is the buy trades they want to place are too big, there are not enough sell orders coming into the market for the banks to get their whole position placed, therefore they must split their position up and place the buy trades at different times when there are enough sell orders available. Now the banks know they must place their biggest buy trade first because most of the retail traders are placing sell trades. The banks understand that when their first buy trade has been placed, the price will move up and the retail traders outlook on the market will change, which means from this point onwards in the reversal, there will never be as many sell orders coming into the market from traders going short as there is now. When the banks have placed their first buy trade the price climbs higher which causes the retail traders who had sell trades placed late into the down-move to close their trades at a loss. When these traders close their trades buy orders are put into the market which makes the price rise even more. The next step for the banks is to make the price drop because they still have more buy trades left to place. To get these remaining trades placed they need people to sell as this will put sell orders in the market the banks can use to match with their buy trades.

To make the price drop they take some profits off the buy trade they have just placed. This consumes all of the buy orders coming into the market from traders who are now buying because they see the price moving up and the traders who are closing losing sell trades placed before the move up took place. When the price drops the retail traders who were buying on the move up now start closing their buy trades at a loss, which puts sell orders into the market. Additionally there will be lots of traders placing sell trades because they see the price is falling. When enough sell orders are in the market the banks place their second buy trade and the price begins rising again. This second move up manages to break the high made on the first move up. The break of the high is significant because it's the first signal retail traders have had that the market may be getting ready to move higher. This is important because it means even less people will be selling if there is another move lower which tells use the last trade placed by the banks must have been the smallest of the three trades they have placed. The banks now carry out the same process they took on the previous move up. They take a little bit of profit off their buy trades to make the market fall and cause any retail traders who brought during the move up to close their buy trades at a loss so they can generate enough sell orders to place their third and final trade. With enough sell orders in the market the banks place their last buy trade and the market ends up advancing for the next two days.

Recap:

• When the banks want a reversal to take place 90% of the time there will not be enough orders in the market to fill all of their trades. This means they must make the price fluctuate up and down in order to get people to place buy or sell trades (depending on the reversal) to enable them to get the rest of their trades placed into the market.
• The banks biggest trades are always placed first because that is when there will be the largest amount of buy or sell orders coming into the market. Once their first trade has been placed, the price will have moved in the direction the banks want the market to reverse and people will begin to believe the price has the capability of 38 moving in the opposite direction which means there will be less orders coming into the market for the banks to use to place any additional trades.
• To get their second – third and fourth trades placed, the banks must make the price move in the opposite direction to which they want the reversal to occur. The way they do this is by taking profits off the trades which they already have placed.

The Banks Set Each Other Up

The last concept we're going to take a look at, is the way the banks will set each other up to make money in the market. Each trading day is constructed of sessions in which there are different traders and banks active in the market. In total, there are four trading sessions which take place at different times during the day: All the times below are based on GMT The London trading session begins at 8:00 am and ends at 5:00 pm The NY session begins at 1:00 pm and ends at 10:00pm 39 The Australian session begins at 9:00 pm and ends at 6:00 am The Tokyo session begins at 11:00 pm and ends at 8:00 am Each one of these sessions are traded by the banks and traders who live in the time zone being represented. For example the London session will see the traders and banks in Europe trading the markets. The NY session has the banks and traders in the US come into the market and begin trading. Now the intra-day bank traders who will enter the market during their respective trading sessions all need to make money. The only way for them to make money is if they make other traders lose money. This can be a problem if the market has only been moving in one direction before their trading session begins.

For example: Let's say the price has been moving higher over the course of the morning ( GMT ). In order for the bank traders who come into the market when the NY session starts to make money, the price must move lower. Whether it's a small retracement or a pause in the up-move something has to happen to make retail traders place sell trades otherwise the NY traders will not be able to make any money nor get any of their own buy trades placed in the market. In an effort to help the bank traders in NY get their buy trades placed, what the London traders will do is take some profits off the buy trades they have already managed to get placed. When they take profits, all the buy orders coming into the market are consumed and the price moves lower. The move lower makes a large number of retail traders who have brought on the move up close their buy trades because they feel like they are about to lose money or come out with a smaller profit than what they currently have. On-top of this there will be a percentage of traders who see the down-move caused by the London traders taking profits as a reversal and will begin placing sell trades to try and 40 capture what they believe is going to be a large move lower. With sell orders coming into the market from long traders closing losing trades and reversal traders placing trades, the NY traders have both things needed to place their own trades and make money. They have sell orders to match with their buy orders and they have a set of traders who are going to lose money in the event of the market moving higher which are the reversal traders placing sell trades. When the NY traders buy trades are placed the sell orders are consumed and the price begins moving higher, causing all the reversal traders who sold during the move lower to close their trades at a loss, which pushes the price up further and increases the amount of profit being made on the buy trades placed by both the NY traders and the London traders.

To show you an example of how the banks will help each other out I've found this up-move on USD/JPY. I talked about this up-move in small detail on my blog post for the 22 April, although I got the times slightly wrong as the MT4 I typically tend to use is based on NY close candles 41 instead of GMT close candles so things can get confusing sometimes. The image above is taken from a different MT4 which is based on GMT time. First I want you to look at the price action I've marked in the green box. What we see taking place in the green box is the bank traders in the US placing long trades in anticipation of an impending move higher. When the price dropped lots of traders started placing sell trades either because they thought the price was going to continue to drop or because they were liquidating a losing long trade placed before the price fell. With lots of sell orders coming into the market the US traders decide to place buy trades knowing the impact their trades will have upon the market price will be small due to the amount of activity taking place at that time of the day. Bank traders will only take an action in the market when there is lots of activity. The markets are most active when trading sessions take place concurrently. For example when the NY session begins the London session is still going on, which means you have all the traders in Europe placing trades - closing trades etc and all the traders in the US placing and closing trades. Lots of activity means there are lots of buy and sell orders available which makes it easy for the bank traders to complete an action in the market such as placing trades/closing trades or taking profits off trades. When there is only one trading session taking place there is not much activity which makes it difficult for the banks to complete any action that requires a large amount of orders to be present in the market. The easiest way to see when only one trading session is taking place is by looking for a large drop in volume to occur. Volume shows activity, low volume = low activity.

Take a look at the space between where I have marked the green box and the red box. This space marks a period of time when only the NY session was taking place meaning only the NY bank traders were present in the market. The red arrow shows where the NY trading session ends. You can see that for 4 hours the volume declined significantly because only the NY traders were active in the market. With only one set of traders being active, it means placing and closing trades is incredibly difficult for the NY bank traders as there is not enough buy or sell orders available for them to use. As the NY session comes to a close the Australian trading session begins. What's interesting about the next bit of price action is how the volume of the candles seen after the NY close ( red arrow ) decrease with each successive candlestick. The reason why the volume is declining, is because there is even less activity in the market now the NY session has closed. 43 Even though the Australia session has just started it doesn't mean the Australian bank traders will be trading USD/JPY. Typically the bank traders who come into the market during their respective trading session will primarily trade the currencies represented by their country. When the Australian session begins the banks will primarily want to trade the currency crosses which have AUD as the base currency.

If you look at a chart of AUD/JPY you'll see how the price and volume both increased when the Australian session began. This is because the Australian bank traders would rather trader their base currency ( AUD ) against the Japanese Yen then trade another countries currency like (EUR - USD – GBP) An hour after the Australian trading session has started we see the Tokyo trading session begin. Again nothing really happens until 1pm when we see sudden drop occur in the form of a bearish candle. The volume on this bearish candle is much bigger than all the candles seen over the past 5 hours which tells us a larger number of traders were doing something during the time this bearish candle was forming. Two important things have happened by the time this bearish candle has closed: Japanese retail traders have placed short trades because the bearish candle which caused the drop is a large range candle, the type of candle which entices people to place trades due to it's size and the way it make people feel as though the price is about to drop a large distance. By the time the bearish candle has closed the 109.300 level has been broken by the drop and this level is very close to a swing low which formed back when the London and NY session was taking place. Retail traders who were taking part in these sessions are likely to have placed their stops below the swing low. When the bearish candle penetrates the low the sell stops are hit and the Japanese traders are able to get some of their own buy trades placed into the market.

The next candle is a bullish pin bar. The pin saps more retail traders into placing short trades because of the fact it looked heavily bearish during it's creation. More sell orders come into the market as a result of this and the Japanese traders are able to get a few more buy positions placed. On the next two candlesticks the volume drops off again which tells us very few 44 transactions are taking place in the market. At 5:30am this changes with the release of the Tertiary Industry Activity announcement. Although the figures from the announcement were good for JPY crosses, on USD/JPY the release acts as the catalyst for the impending move up. So far we have two out of a possible three sets of bank traders entered into the market. The bank traders who placed their buy trades during the Tokyo trading session. And the bank traders in the US who placed their buy trades towards the end of the London trading session. The bank traders who are active during the London session have not been able to make any money from the move up as they have not had a chance to get buy trades placed into the market.

In order for them to be able to place a buy trade they need sell orders to come into the market. The problem is the price is moving up, which means most of the orders in the market are buys, if they want to place their buy trades something must happen which causes the price to fall. They decide to contact the Tokyo bank traders who they know already have buy trades placed to tell them to take some profits off their trades. 45 The London traders know if the Tokyo traders take profits it will consume the buy orders coming into the market from retail traders placing buy trades and cause the price to fall. Forcing the retail traders who are long to close their trades at a loss, which will put sell orders in the market whilst simultaneously making a large number of retail traders enter short trades because they'll see the down-move as a reversal which puts even more sell orders into the market. These sell orders allow the bank traders active during the London session to enter the market and place buy trades. In order for the London traders to actually make a profit on their trades, there has to be a set of retail traders present in the market who are going to lose money in the event of the price rising. This set of traders are the retail traders who placed sell trades because they believed the down-move caused by the profit taking was a reversal. The London traders know when they place their buy trades all the sell orders will be consumed and the market price will start rising, causing all the people who sold to be put at a loss on their trades which they'll eventually close due to them not wanting to lose any more money. As the price moves higher more and more reversal traders will begin to close their sell trades at a loss which only puts more buy orders into the market and pushes the price up even higher, increasing the profits on the buy trades placed by the London - Tokyo and NY traders.

Recap:

• The banks will help each other out in order to make money and get trades placed in the market. Typically the big banks who contribute the most to the volume in the forex market will hold a presence in each major city which trading takes place in i.e. Tokyo/London NY/Sydney.
• In order for the banks to take an action in the market there has to be a lot of activity as this is when there is a significant amount of buy and sell orders coming into the market.
• The markets are most active when two trading sessions crossover and take place concurrently such as the NY session and the London session.
• Times of low activity are seen on the charts as low volume periods. Usually this will be because there is only one trading session taking place. When there is only one session going on the banks will not be able to make any big trading decisions as there will not be enough orders present in the market.
• Each trading session sees different banks come into the market and place trades. If these banks wish to make money on their trades they need to have other traders who they know are going to lose money when the banks trades are placed.

Summary

Well we've finally come to the end of the book. I hope this book has given you a far greater understanding of how the large institutions participate in the forex market. The key to becoming consistently profitable trading forex is knowing how the different people in the market interact with one another. My real goal with this book was to mainly show you how the banks depend on us to make all of their decisions. They need to make lots of retail traders do the wrong thing at the wrong time so they are able to complete an action in the market and make money. If they didn't have lots of retail traders selling then they wouldn't be able to place any buy trades nor would they be able to make any money from their buy trades because they need retail traders to be losing money in order to make money. The trading method the banks use isn't based on things like technical analysis or chart patterns, it's based on how retail traders think and make decisions in the market. They know when a large movement occurs lots of retail traders will enter trades in the direction of the movement, they use this knowledge to take profits off the trades they have placed. Additionally the banks promote the concept of following the trend as the only way they can 47 make more and more profits off their trades, is if an increasingly higher number of people come into the market and place trades in the same direction the banks have their trades placed as time passes. If more people don't begin entering the market after it has been moving in the same direction for a long time, the banks wouldn't be able to take profits off their positions because the further the price moves in one direction the bigger the amount of profit the banks trades are in and the higher the number of opposing buy or sell orders needed by the banks to close and take profits off their trades.