How do large banks trade on Forex?
Every day on weekdays, we publish Forex analytics, in which for two years there has been an insider table of existing and pending orders of large banks. The entry, take profit and stop levels were described in sufficient detail, and the current and final result of transactions was also displayed.
Unfortunately, the service stopped transmitting transactions (due to a conflict with the data source), but constant monitoring allows us to analyze the trading of banks on Forex, analyzing the transactions of currency traders of large banks - the "pillars of the financial industry." We got a very interesting study and today we invite you to get to know him - you will find out what strategies the largest world banks use in the Forex currency market, how long they hold their positions and how effectively they trade.
Regular readers of daily reviews remember that the table included the positions of 15 banks, which can be conditionally divided into “eternal drains” and companies trading in plus.
Profitable trades are of most interest, therefore they are subjected to comprehensive analysis. Banks with a negative result are withdrawn from the review. In the future, when the exact hypothesis of the appropriateness of such a trading style appears (hedging of third-party positions, "fundraising", etc.), we will certainly devote a separate article to this.
Forex Market in 2018
The review includes an analysis of bank transactions during 2018. To better understand how traders of these financial companies trade, we’ll look at how the trends in the Forex market developed in the reporting year.
The overall picture can be traced by six major currency pairs - on the charts of four of them the flat, clearly visible until the end of March, a sharp trend until the middle, and in some until the end of the summer, is clearly visible. Autumn and winter after relatively short trading in the range is a period of continuous discrepancies in changes in the exchange rates of major currencies.
To better understand how these periods affected the trading strategies of currency traders, the review is divided into a separate analysis of trade for each bank.
How Morgan Stanley Trades
Forex Traders Morgan stanley for the half of 2018, the bank brought 3518 pp profit, which is a strong result, given the medium-term trading strategy - transactions were held on average up to 18 days.
From March to October, the bank entered the market 29 times and “made a mistake” in 7 cases, “catching” 749 pp of losses on the stops. Traders took first place in terms of net profit and forecasting accuracy, which reached 76%.
Despite the second place in the number of transactions, Morgan stanley used a multi-currency trading strategy, breaking inputs into 18 instruments.
During the flat during the period of January-March, the bank did not make transactions on the main currency pairs using cross-countries. At the same time, positions in GBPNZD, EURCAD, EURAUD, NZDCAD were opened 1 time and were never repeated, and the CADJPY, CHFJPY, CADCHF pairs were traded at least one more time.
It's obvious that Morgan Stanley traders prefer to use only trending systems, choosing cross-currency instruments at the time of flat on the main pairs. As for the accuracy of determining the direction of the transaction, then, as can be seen from the graphs, in all cases they were chosen correctly.
The following features of spring trades are interesting:
- Transactions of various unsystematic durations, that is, even in the case of a predicted trend, for example CADJPY, a position is opened in the same direction after six months or does not repeat at all (GBPNZD, EURCAD, EURAUD, NZDCAD);
- Traders "outstay" CHFJPY loss and frankly average in CADCHF.
Such a lack of any unified approach to trading makes us think about insider trading, the deals presented on the charts have only one thing in common - they are all closed by trailing stop, not reaching the set profit goals.
The hypothesis of the preferred use of cross-currencies during the flat period of the major pairs is confirmed by the accumulated Morgan stanley positions on them in May-June, when EURUSD was in lateral movement.
A pair of USDCAD, which is considered one of the main ones, has joined the company of “one-time trades” EURNZD and EURJPY, which can be explained by the indistinct dynamics of changes in quotes of the “Canadian” during 2018.
If there is nothing unusual in opening and closing positions for cross pairs with the euro, EURNZD closes with a profit by trailing stop at the trend rollback, like EURJPY, but for another reason - a long flat period, then USDCAD trading is abnormal.
Trader Morgan stanleyHaving correctly determined the beginning of the trend, it does not follow it with a trailing stop, as was done in other instruments. Sitting in a position for a month, he waits for a reversal and waits until the last, until the position closes at stop loss. Such anomalies can only be explained by the fact that the bank was counting on some kind of insider.
For the remaining major currency pairs, the largest number of transactions fell on EURUSD, USDJPY and AUDUSD - they equally divided the attention of traders; least open positions in USDCHF (not including USDCAD).
Major currency pairs Morgan stanley started trading in the spring, the first attempts to open in EURUSD and USDJPY seemed to traders unsuccessful, so they “turned over”, but in the remaining pairs the directions of transactions did not change.
EURUSD - stubbornly trading against the trendalthough the first position at the end of April was open in the right direction. Two months in holding shorts Morgan stanley earned 377 points, closing at the pullback of the market.
Having taken a break in trading that lasted exactly a month, and, obviously, taking into account the formation of a double bottom to break through local resistance, the trader opens a long at 1.1600. Despite the many options for closing or tracking a position using a trailing stop, Morgan stanley allows the deal to close at minus 1.15 to immediately make a deal at the bottom, not afraid to catch the “falling knife”, opening at 1.1350. The duration of the trade will be less than a week, but due to the strength of the rebound from the bottom, the transaction will bring the bank 277 points.
Breaking unwritten rules and postulates of trading, Morgan stanley closes with two deals more than 500 pp on EURUSD.
USDJPY is also trading against the trend, repeating the typical "errors" on EURUSD. The first position was opened successfully according to the trend, sustained long enough to bring the bank 313 pp, closing at a statically set take profit of 110. After the break, the “bottom search” begins, but the trader manages to close the deal at +10 pp on the market.
Despite the next USDJPY growth to new local highs and the classic visual picture of the trend, the trader opens a sale at the bottom of the correction for growth. The flat that happened next allows you to close the deal in plus. Despite a number of technical signals that the position is open correctly, the bank somehow goes right before the quotes take off to new highs.
Pair Trading Style AUDUSD differs from others in the attempt to build a pyramid of deals in trend trading. The bank opened three positions in the direction of falling quotes - the first was the most successful and long-term, it was closed in the market with a profit of 256 pp.
At the end of the same month, having an open position, traders are increasing the short, "unexpectedly" closing it in plus at the fourth session, despite the active downward movement of quotes. A break in trading fell on a strong bounce of the market up, but for some reason the bank ignored a further fall, opening a dangerous short at the bottom, "catching the knife" from the lows of the year.
The trade turned out to be successful, and the value of AUD again updates the lows of the year, but traders at the same time shift the stop at almost breakeven, without taking profit, the order closes at minus 10 pp after the next bounce from the bottom. At this point the downtrend is over, quotes are being restored and the bank is not making any more attempts to trade this instrument.
Trading on the USDCHF pair indicates that there are some “unpredictable” movements for traders. Positions were opened in flat, while the bank opened the sale almost at the bottom. But both transactions were successful and were closed on the market with minimal profit, having managed to bring 48 percentage points.
The most popular among the "cross" with traders Morgan stanley turned out to be GBPJPY pair. As you know, the instrument is used by intraday speculators due to volatility, the average range of which reaches about 170 pp, due to impulse trends.
Trading in this instrument in 2018 did not bring good luck, despite the fact that transactions were opened according to the trend, shorts were successful only in the first of them, closing at plus 250 pp. The remaining positions were unprofitable, but in general, the cumulative minus of 209 pp was less than the first profit.
In the two minus deals of the short, it is not clear what caused the entry. In the first case, the transaction is completed immediately after the close of the profit, preventing the quotes from rolling back (or gaining a foothold at a new low), in the second case, the weak tendency to fall did not allow the quotes to touch new lows.
That is, both inputs were made at the bottom, which can only mean the presence of some fundamental information, and not technical prerequisites. This is confirmed by the fact that the downtrend continued its development, but traders Morgan stanley no longer traded on this instrument.
For the remaining cross-pairs, traders completed two transactions per year, which are characterized by the following features:
- CHFJPY - the downtrend was guessed from the first deal, which brought the maximum profit of 391 pp, but the second position was open at the bottom, which forced traders to close at a loss slightly better than the stop loss of 149 pp;
- CADCHF - an attempt to average the long was unsuccessful - the quotes were in the flat stage, therefore both deals were closed after a week with a profit of 21 and 49 pp;
- AUDJPY - traders managed to "outperform the loss" and close the shorts with a profit, the second time a position was opened in the same direction was more successful - a sharp drop brought 160 pp profit, despite the continuation of the trend, the position was closed in the market;
- EURCHF - the bank did not guess with the trend in the first transaction, but managed to roll over and open a long one at the bottom, which made it possible to compensate for the loss in the bounce and earn a total of +16 pp.
How does DEUTSCHE BANK trade
Traders DEUTSCHE BANK showed the highest profit factor, earning 1325 pp, while losing 105 pp. This is explained by the small number of positions - 6 transactions per year, one for each pair: EURCHF, CHFJPY, NZDUSD, CADJPY, AUDJPY, EURGBP. The only loss was the deal for the last pair, in other cases, a profit was recorded.
Trade Features of DEUTSCHE BANK:
- Lack of positions in the main pairs, except for NZDUSD, the predominance of crosses with the Japanese yen;
- One instrument - one trade;
- Long-term trading - the average holding time of an order during the quarter.
Traders DEUTSCHE BANK consistently, on a quarterly basis, they bought the yen against the franc in January, the Australian in March and the Canadian in June, which in all cases brought them profit.
Against this background, the decision to buy the euro against the franc and sell the single currency against the pound looks a little strange - this violates the correlation approach used in trading in pairs with the yen. Departure from the principles was “punished” by a loss in EURGBP.
How does BOFA MERRILL LYNCH trade
BOFA MERRILL LYNCH - showed a significantly better result than Morgan stanley by profit factor, having lost 200 percentage points while earning 1091 percentage points. This is the fourth result among the other participants in the rating, which was obtained in four transactions on currency pairs: EURUSD, GBPUSD, NZDUSD and AUDJPY
Trade Features of BOFA MERRILL LYNCH:
- Emphasis on trading in major currency pairs;
- One instrument - one trade;
- The average position holding time is one month.
Bank traders “guessed” the downtrend in EURUSD, having made perfect entry and exit at the local maximum and minimum of the market, respectively, having received 771 pp profit for the month the transaction was held. In the remaining main pairs, trading was correlated, but was not so successful. In NZDUSD, where the position fell into flat, the trader managed to get out with a profit and unexpectedly closed the long GBPUSD in the market, although the pair continued to grow.
The loss occurred on AUDJPY: the trader went into the instrument on the rollback, and stayed the loss for about two months - there was no upward movement and quotes went lower, catching a stop.
How JP MORGAN Bank trades
Traders JP MORGAN earned 881 pp, making four transactions without loss. Such a high result was obtained in a long-term strategy - the average time spent in a position was the highest among banks and amounted to 62 days. Used trading instruments are cross-pairs: EURCHF, EURAUD, AUDCHF and the main NZDUSD.
Trading Features JP MORGAN:
- Retention of position despite loss;
- Accompanying the order with the movement of take profit, and not the use of a trailing stop;
- One instrument - one trade.
Unlike previous banker strategies, traders JP MORGAN did not use correlations, as can be seen from multidirectional transactions for pairs with EUR.
A deal with EURCHF looks abnormal - the target on take profit was 1.15, but the position was closed on sharply shifted TP by 1.1650, despite the recoilless daily trend, which was developing in the right direction.
How NOMURA Bank trades
Traders earned 744 pp, having lost more than 30% of this profit, having completed five transactions during 2018. The bank focused on GBP pairs with the currencies CAD, USD and CHF, as well as the EURCHF pair.
NOMURA trade features:
- Relatively low position holding time - an average of 15 days;
- GBP trading by correlation strategy.
The bank was waiting for the trend to strengthen the pound against other currencies and managed to earn on this in a pair of GBPCAD. Further attempts to trade in this direction led to losses, as well as an attempt to turn around, making money on sale. Traders chose the GBPCAD pair for this, which brought profit on the purchase, but the short was closed at a loss.
The situation was saved by a long-term deal on the EURCHF cross, which brought 276 pp for one month of holding the position.
How does CRÉDIT AGRICOLE bank trade
Bank traders lost about half the profit earned in six transactions at 719 pp trading on GBPCHF, EURCHF and USDCAD.
Features of the CRÉDIT AGRICOLE trade:
- Correlation trading in pairs GBPCHF, EURCHF;
- Using a medium-term strategy, with a transaction holding time of an average of about a month;
- Several transactions for one instrument in one direction selected at the beginning of the year.
The big loss of half of the profit earned on EURCHF and USDCAD is to blame for the outstripping of the loss - traders allowed to go negative by more than 300 pp on GBPCHF. This was the second deal in this pair. Perhaps the profit in the first position allowed us to count on the restoration of a growing trend.
How does ANZ bank trade
Traders Anz showed little activity on Forex, having earned 496 points in three transactions and losing 168 of them.
Features of trading traders of ANZ Bank:
- Specialization in cross pairs AUD;
- Counter-trend trading.
Despite the fact that traders traded two pairs with AUD, they opened multidirectional positions in these instruments.
At the same time, persistent trading against the trend in the AUDNZD instrument is of interest. The bank allowed it to stay out of profit and after a loss of 168 pp - it still opened later in the same direction in the long. The second deal was successful - the AUD purchase was held at the minimum local values, and holding the position for a month brought 391 pp.
How does BNP PARIBAS trade
Traders BNP PARIBAS conducted five transactions, holding open orders on average for a month, but lost 80% of their profits, earning 435 pp and receiving a loss of 352 pp. The bank traded on three instruments: EURCHF, USDJPY and EURJPY.
Trade Features of BNP PARIBAS:
- Cross-currency trading EUR;
- Pair Arbitration Strategy.
It is possible that the choice of three pairs is a complex arbitrage model, which is hinted at by three transactions made at about the same time. Traders bet on the strengthening and weakening of the EUR, while believing that the yen will increase against the European currency and fall against the US dollar.
The resulting “three-legged” construction ultimately brought a loss, and the main profit fell on EURCHF, this instrument managed to saddle the trend, which lasted two months and brought 380 pp profit.
How does CREDIT SUISSE trade
Traders CREDIT SUISSE showed the lowest result in the rating, retaining only 49 points of profit from 293 received for 4 transactions on instruments: EURJPY, EURUSD and EURGBP.
Features of the CREDIT SUISSE trade:
- Trade by correlation;
- Narrow specialization in cross pairs with EUR.
Throughout the year, traders traded in the right direction, selling the euro. Despite a significant weakening of the European currency during 2018, the bank's entry points were unsuccessful, which brought them only one closed transaction in profit.
Analysis of transactions showed that the bulk of commercial banks trade long-term trends, rarely changing the direction of transactions during the year. At the time of the flat of major currencies, traders open positions in cross pairs. These tools are used most often, while currency pairs that are the same in terms of the numerator or denominator are often traded based on correlation in the same directions.
A counter-trending strategy is rarely used, but there are market entries that are inexplicable in terms of the logic of technical analysis. It can be assumed that banks use insider information in trading.
Holding positions at all banks is long - no one trades below daily charts. Hello to all intraday traders! 😉
Judging by the number of errors, the size and frequency of stop loss, it is obvious that Forex is not a 100% predictable market, even in the case of initial access to unpublished news.