How Bank Order Volumes REALLY Move The Forex Market

Big banks are the big boys of the forex market. They can start new trends or stop them in their tracks. And if you want to avoid getting smashed, it is advisable to never trade against them. As for making profits, these are the smart money. And following their positions is the easiest way to make the biggest returns in Forex. In this video, you're going to find out how you can improve your results as I explain how bank order volumes really work. I'm the former bank trading floor trader and I've made millions trading for myself from home. And if you've watched my last video, you know how market makers provide liquidity. But they're only the supply side of the market. The demand side comes from the customers. And this is perhaps even more important in determining the direction the price moves next. Customers are essentially anyone who wants to exchange currencies, whether buying or selling. A customer who needs US dollars will pay for them in euro, or a customer who needs euro might pay for them with US Doll. These are seen as deals carried out on the EUR US dollar exchange pair. And notice how the market maker is selling the customer of US dollars and taking euro as payment and selling euros and taking the US dollar as payment. In Forex currencies are the product. Now, customers can be speculators like retail traders and hedge funds, but the vast majority are trading for utilitarian reasons. That means they exchange currencies to facilitate some other objective. They may be buying or selling products and services.

They may be investing in some other asset in a different country. Whatever the reason, they need the foreign currencies to do something with it. You and I as retail traders will buy a currency and we hold onto it as an asset, hoping that it goes up in value so that we can profit from the increase. We are absolutely interested in where the price goes next after we buy the currency. A manufacturing business will buy a currency and use it to pay for materials from a foreign supply. And therefore they don't care what happens to the value of the currency because they've already spent it. A pension fund will buy a currency to pay for shares in foreign stocks. And although they've spent the money, they do care about the future change in value. If their stock investment goes up by 20%, but the currency loses 20% when they sell the shares and convert the mine back to their domestic currency, their profit has been wiped out. So different objectives and concerns of different customers means they all trade in a slightly different way using different techniques. In the forex market, anyone who wants to make a straight Exchange of one currency for another will use the spot market. And this is where straight exchanges happen and you take delivery of the currency. You and I use this when we trade. Anyone who could potentially suffer from future price changes and wants to protect themselves will use one of the other segments of the forex market, such as swaps, futures and options. These are used for hedging and taking out insurance. When people talk about the $7.5 trillion a day being exchanged in forex, most of it is in these other markets, not in spot where we trade. For example, a Canadian company may sell products in the US and therefore accumulate US dollars, which they exchange back into Canadian dollars so they can use them for day to day domestic operations. But they also have to pay a US based supplier next month. And if the US dollar CAD exchange rate changes between now and then, it could cost them more when they make their sales. One US dollar might cost 1.3 Canadian, but 30 days later when the invoice comes in, it might be 1.5 Canadian. To protect themselves against that, they will take out a futures or option contract allowing them to exchange next month at today's favorable rate, basically negating the effect of any price fluctuations. For us as retail traders, the market appears quite simple. We look at a chart and we can simply hit the buy or sell button and instantly enter a deal. For everywhere else it is far more complicated. Due to the size of their orders, which can sometimes be in the billions, plus the fact that they often involve multiple legs spread between spot cash trades and forged contracts, most customers rely on specialists to execute the orders for them and those specialists are bank deed and desks. If a US business needs Japanese yen for whatever reason, they ask the bank and the bank makes the exchange for them. The job of the bank is to trade in the interbank forex market on behalf of their customers. And therefore, when we talk about the customer side of the market, we are talking primarily a bank to bank dealing desks. These guys are the size of whales and they really move the market. A bank dealing desk is the busy trading floor that you see depicted all the time in movies and in the media. The primary job of the individual traders on those floors is to execute orders on behalf of customers. A lot of online businesses will use payment processes using US dollars, but the company itself may be in the UK for example, so they've got two accounts, one in US dollars and another in pound sterling. In an online banker, they can transfer money from the US dollar account into the sterling account at the click of a button up to A certain amount, and let's just say that's $10,000. A transaction that small is done internally on the bank's B book, and it is automated. But for a larger amount, let's say a million, they would have to get a quote. And what would happen is they submit a request to make the transfer like normal, and it immediately flashes up on the screen of one of the traders on the Bean desk floor. That trader then looks at the interbank market to see where the current price is and will then return a quote for what exchange rate the bank will offer. The merchant clicks the button to accept the quote, and the trader then makes the trade in the real market or the A book. The vast majority of bank dealing desk activity is like this. They get customer requests flash up on the screens or coming over the phone, and they execute a trade on behalf of that customer. And the size of their orders that they are executing can go up to billions. For example, recently a UK software company bought out a subdivision of Hewlett packard in the US for $8 billion. Well, to do that, the UK company had to convert their British pounds into US dollars to pay the US company. And that would have been done via a bank divindesk. Every transaction like this follows the same process. Any organization wanting to exchange currencies goes through their bank and the bank executes the transaction or on their behalf in the market. The banks are the guys that shift the most money and move the market. And one way we can follow their moves is by looking at volume. Now, Forex has a reputation that real volume is not available due to the decentralized nature of the market. But that is only true of the spot segment swaps. Futures and options are all traded on central exchanges, and true order volumes are reported. Swaps are the largest segment before its market, and the swap is a spot trade in one direction and a simultaneous futures trade in the opposite direction. When a trader opens a futures contract to buy 50 million euros as one leg of the swap trade, we know they've also simultaneously just sold 50 million euros in the spot market as the other leg of that swap deal. So we have a kind of backdoor method of monitoring real order volumes. And professionals have been using this volume for years, but retail traders have no idea that it's available. If we can see that there was $20 million worth of selling volume and $40 million worth of buying volume, we would know there's twice as much buy in pressure and we could accurately determine the price is much more likely to go up than down. And with real volumes, we can even see what kind of customers are submitting those orders. You've probably heard of the commitment of traders report issued by the CFTC once a week. They split customers into three main categories. Commercial non commercial Non reportable commercials are utilitarian traders. They are primarily hedging to offset risks elsewhere. So these tend to be able to hold positions for longer because they are unleveraged and any losses in one market are offset by their hedged positions. These these aren't bothered which direction the price goes. Non commercials are the large speculators and are specifically trading for profit. They are bothered about which direction the price goes. They are well informed, often leveraged and will change their positions much more quickly to avoid losses and aggressively pursue gains. The non reportables are generally small over leveraged traders, including the retail sector, who are typically late to the moves or on the wrong side of the market and are quickly pushed out of their losing positions. It's obviously a huge advantage to be able to see which type of customer is trading. And on top of that we can even track the type of order to determine if it's a new order being opened or closing an existing position. For example, imagine the price as being in an uptrend and a hedge fund sales 50 million. If that order will was closing a previous buy position, that's money being taken out of the market. They no longer have any interest in this move and with less money and less interest, the price is more likely to go into a sideways range. But if Matt was a brand new sell order opening a new position and adding more money to the market, there is a higher chance that this is the start of a new downtrend. So customer real order volumes give us a wealth of information telling us which direction to trade. And the best thing about real volume is it's a lead in indicator. Orders are submitted and executed, thus registering reported volume and then the price moves on the chart. So very often the volumes build up or drop off before the price really responds to it. Which means you can act the head of the crowd if the volumes switch from small selling imbalances and begin building to higher buy in volumes. But the price hasn't really started moving yet. It can be a great early warning of a decent move. A banked to take off you get into before the crowd is aware of it. And when the price starts moving, more and more and more people jump in. They don't want to carry your trade into profit. It's like a legal form of front running. And the same thing can happen for your exit. The price may keep going up as latecomers in the crowd finally join that move, but the smart money is now exiting, so as the buy in volume drops off, you can exit at a higher price before that reversal takes hold. This is how pro traders trade and this type of real volume data is available from several professional providers and there are even a number of indicators and robots now utilizing this data and producing some incredible returns. If you want to know more details about following bank order volumes and what tools to use, please let me know in the comments. This video is part of my basic series where I'm just introducing the concepts in simple format and I really hope you find this enjoyable and eye opening, but if you let me know that you are interested, I will go into much more depth in future videos. If this has been helpful or interesting, please leave a comment, click the like button and subscribe as it will really help support the channel and I will continue to create more advanced lessons that show you step by step how to make more money in your trading. I'll see you next time.