Have you ever wondered how banks seem to make millions from forex trading? We know that bank traders earn hefty salaries and bonuses just from trading in forex and it is still a dream job for many. So what makes them so special? Do they have an IQ that is way above average or do banks have bottomless cash reserves that they can tap on? Well, the answer is no. They are just like us, and there are limits as to how much they can trade. However, they have access to the years of experience that the banks have accumulated and training programmes that they undergo to hone their skills.
In the rest of this chapter, we are going to open the black box and share the proven techniques and strategies that bank dealers apply to make their millions. Let us first dispell the myth that forex traders must be financial graduates or financial geeks. Although banks do tend to hire graduates these days, this is primarily due to the competitive paper chase that society exposes us to and the truth is that this is not a requirement. It was once normal for an entry-level trader to only have a high school education or diploma, and they still made millions for their banks.
The second myth about forex trading is that it is only for macho, aggressive men. The truth is that there is no gender or age or race discrimination in trading. Some of the top traders are female, and even young students have been known to outperform the professionals.
With forex trading gaining worldwide popularity in the past few years, it is now common for housewives and pensioners to trade in the market to make extra money. The wide range of analysis software, training tools and guides, and strategy services in the market has greatly levelled the playing field. When you understand how the big boys play the game, on top of information that is readily available, what do you think your odds will be in achieving success? The bottom line is that you will never know until you try.
Before we dive into the hard skills of trading, let’s look at the more subtle aspects that help a bank trader excel or how the bank improves their stellar revenue-generating performance. It’s these subconscious factors that people tend to ignore or take for granted that make it seem that the bank’s trading team can generate a multi-million dollar revenue.
In reality, bank traders will tell you ‘off the record’ that almost anyone can be trained in the basic trading skills, although they will make it sound as if they have special talents to justify their big pay packet. But don’t believe the illusion that all traders are born with inherent trading skills—the truth is, they are not. Everyone needs to undergo training and learn from experience, and each of us learns at a different speed and starts at a different point in the learning curve.
Let’s take a look at some of the factors that help bank traders have a better chance of performing well in comparison to the average man on the street. Bear in mind that the list can be adapted to suit your trading needs.
Banks have the luxury of selecting trainees who are the cream of the crop from top universities, and these are further shortlisted to only those who fit their preset trader profile. This means that the bank increases its chances of employing high potential candidates and can accelerate the training programme required for trainees to perform well. In addition, poor performers are asked to leave, as such the team is always made up of the very best.
When you work with top traders, you will raise your game to stay competitive as well as be exposed to the best trading practices. You will have access to mentors who will be instrumental in teaching you the tricks of the trade. So don’t get worked up if you aren’t making the millions that bankers seem to be making. Use them as a benchmark and learn along the way. Remember that if they can make it big, so can you.
Bank traders are exposed to a tense and sometimes explosive trading environment 5 days a week, 10 to 12 hours a day, where everyone in the dealing room speaks the same lingo and focuses purely on trading activities. In a sense, their life is centred around focused on one primary activity—trading and making as much money from it as possible.
What do you think would happen if you were in a similar working environment? You would become an expert in trading. When you are constantly bombarded with financial information and trading regularly, you will become an expert over time.
There is a psychological difference when trading with someone else’s money as opposed to your hard-earned savings. A bank’s funds come from investors and deposits, and traders use these funds to finance their trading activities. Subconsciously, when you know that the money is not yours, the gung-ho part of you kicks in. The chances that a trader would think twice when closing a transaction are slim. The mentality adopted by a bank trader is that every trade is a winner and even if I make a loss it’s no big deal as I can recover it in the next deal. So traders buy and sell at every opportunity, easily chalking up over a hundred deals a day.
On the other hand, individual traders use their hard-earned savings to trade and will feel the pain if they lose it. Therefore, a general advice to individuals is to make sure that any personal funds used to trade is ‘spare cash’. Emotional attachment will cloud your judgment, and you can’t afford this in a fast-moving market.
Banks have hundreds of millions or even billions of dollars to trade, but the pockets of most individual traders are not that deep, even with margin trading. With a large trading line, banks can buy and sell currencies without any significant constraints. Every deal they do is also usually in the millions, as such even small movements in rates can equate to a decent sized profit.
The principle behind an individual trader’s strategy is similar to that of the bank, but it has to be tweaked to suit the amount that he or she can afford. Knowing your limits means knowing how to adopt the appropriate strategy.
Banks generally have a much higher risk appetite and are able to absorb hundreds of millions of dollars in losses if necessary. Even bank traders have limits that are closely monitored. When bank traders make a huge loss, the chances are that they will survive to trade another day, but this may not be the case for an individual trader. Controlling risk is a fundamental principle for all parties, be it a big bank or an individual. As banks have been known to collapse as a result of not controlling their risks, individual traders need to be even more vigilant.
You may not have noticed this but banks do have several levels of risk control and flaunting it can mean automatic dismissal for the bank trader. Since the individual trader and risk controller are one and the same person, you will need to be very disciplined as no one is watching your back. Remember never to bite off more than you can chew.
Every bank trainee trader has to undergo intensive training and assessment before being allowed to trade, so the first few months of their training is simply to watch and learn. Banks have an array of training materials and tools, including the use of simulation trading models to create a realistic environment, or even engaging external professional trainers to get their staff up to speed quickly. Why would a bank spend so much time and money on training? It is imperative for them to make sure that trading skills become second nature to the trader that is let loose into a tense and pressurised trading environment. Banks are not worried about making profits, they are worried about any loss as a single mistake can easily wipe out months of profits.
When we hear about successful trading stories, we instinctively want to follow suit and jump in to get the cash rolling in. Just as it looks easy when you see others riding a bicycle, it is difficult for first-timers to find the right balance. We therefore start with training wheels until we learn to find our balance.
Banks invest heavily in getting research news or real-time market news from news providers such as Bloomberg or Reuters Thomson. Forex trading is affected by world events and any breaking news may have an adverse effect on currency value. Traders are often in the office earlier than most workers to read up on what has happened around the world while they were away from office, and will always hold a briefing before the start of the trading day. Armed with real-time information, a trader can create opportunities or cut losses or simply remain ahead of his competitors.
Newcomers to trading generally do not invest in real-time news systems, they often listen to rumours, half truths or stale news that will put them at a disadvantage right from the opening bell. Hence, to stay on top of the game you need to be on top of what is affecting your currency positions.