Who are the foreign currency whales and why should small fish traders care? Veteran traders Jeff Wecker and Stephen Nos Biggs Gibson outline four types of whales in today’s Trading Lesson. Look for more Trading Lessons every Friday on MoneyShow.com.

There is only one prime reason to learn how to follow the “whales” of the market.

These entities, The whales control direction of price and liquidity.  For “small fish” like most of us reading this discussion, we should accept reality and simply learn to follow their lead and avoid anticipation of price movements.

For our definition we assume that a whale has over $50 billion USD at risk as a minimum daily.  

Algorithm trading so now so sophisticated that the whales can “paint the candle charts” with bullish and bearish chart patterns in lower time frames that act as merely “chum” for the little fish to have them congregate for whales to devour sometime during a trading session.

But who are these whales? We can agree they are four primary categories.

  • Banks 
    The greatest volume of currency is traded in the interbank market. This is where banks of all sizes trade currency with each other and through electronic networks. Big banks account for a large percentage of total currency volume trades. Banks facilitate forex transactions for clients and conduct speculative trades from their own trading desks.

    When banks act as dealers for clients, the bid-ask spread represents the bank's profit. Speculative currency trades are executed to profit on currency fluctuations. (Currencies can provide diversification for a portfolio that's in a rut. )

    But even the big banks have been caught in scandal and fraud so do not think of these groups are friendly. Consider them as the “whale sharks” … hungry creatures who roam the forex oceans seeking stops to take out and retail traders to devour.
  • Central banks 
    Central banks are the largest whales and thus extremely important players in the forex market. Open market operations and interest rate policies of central banks influence currency rates to a very large extent.

    Many believe that the secret G20 meetings are where the whales set ranges for the next 2 -5 years for their currency in relationship to other members.  Central banks are responsible for forex fixing (translation: whale shenanigans). This is the exchange rate regime by which a currency will trade in the open market. Floating, fixed and pegged are the types of exchange rate regimes.
  • Investment managers and hedge funds 
    After banks, portfolio managers, pooled funds and hedge funds make up the second-biggest collection of players in the forex market. Investment managers trade currencies for large accounts such as pension funds and endowments.  Here there are groups with more clout than many central banks and these entities should  be considered as enemies of the retail trader. These whales  lay sophisticated traps that appear to be consistent with price action then suddenly prices reverse and trap and or devour your stop.

    An investment manager with an international portfolio will have to purchase and sell currencies to trade foreign securities. Investment managers may also make speculative forex trades. Hedge funds execute speculative currency trades as well. Think George Soros as an example and the Quantum Fund.
  • Corporations 
    Firms engaged in importing and exporting conduct forex transactions to pay for goods and services. Consider the example of a German solar panel producer that imports American components and sells the final goods in China. After the final sale is made, the Chinese yuan must be converted back to euros. The German firm must exchange euros for dollars to purchase the American components. Think Porsche which makes more trading currency than with car production in many years. See their annual report for details.
  • Individual investors 
    Most are simply not relevant to the markets’ movements. The volume of trades made by retail investors is extremely low compared to that of banks and other financial institutions. Usually, these folks are losers short term and longer term.

    But the forex trade is growing rapidly in popularity. Retail investors base currency trades on a combination of fundamentals (interest rate parity, inflation rates, monetary policy expectations, etc.) and technical factors (support, resistance, technical indicators, price patterns). In our opinion, these traditional methods will lead to disaster.  You need an edge.

It’s our belief that by learning to see the whales’  intentions (we call it directional bias) on monthly time charts and then using a reliable EA or system  that trades in the direction you can see on the monthly chart  is  a consistently solid method to build success with forex trading for the “little fish” like us.

One EA we particularly like is Forex Forager, developed by Jeff Wecker, former CBOT member and moderator of the well-known international Skype group Currencies, Coffee and Croissants (CCC). The group consists of 90 currency traders from 33 different countries who meet on Skype daily to discuss robot strategies and specific trades.  Forex Forager is well known among forex pros as a great news player.  It is also an expert at entering swing and long-term trades with less than 15 pips of risk.

Stephen Nos Biggs Gibson has been active with clients since 2012. Since retiring from public education in 2013, he has devoted full attention to trading and education activities  with clients  in Europe, Australia, Taiwan and the USA.

The Currencies, Coffee and Croissants group is open to all traders interested in currencies. Just contact Jeff Wecker here to join CCC.

Learn more about Black Belt Trading here...