In the stock market, operators are big institutions such as fund houses and Big retail investors who decide prices in the open market. In this case, you are pretty much aware of your competitors. How you will fair in that competition is well known to you because you keep track of the activities carried out by these big guys in the stock market, for example, FII and DII data helps you to acquire knowledge about the market actions.
But who is the operator in the currency market? Fund houses or big retail investors do not decide prices in the currency market. Can you guess who decides the prices in the currency market? It is none other than banks. When you trade in the stock market, you are trading based on action taken by the big guys, but when you trade in currency markets, you are betting against the banks which control and make the markets.
There are around 25 major banks who are part of big-league that controls the Forex markets across the globe. Here is the list of some:
2. Citi Bank
3 JP Morgan Chase
5. People’s Bank of China
9. Merrill Lynch
10 ABN Amro
11. All major central banks
Among these JP Morgan Chase, HSBC, People’s Bank of China, Deutsche Bank, City Bank are the major bullies in the Forex Markets.
In India, we have RBI, who is the market operator.
Let us try to understand from the perspective of global markets. Forex market includes all types of currency trading (OFCs, NDFs, Spot, Derivatives, options, etc.)
The big banks know all the data and statistics in the 24X7 markets. They know who is long and who is short. How many longs are present at a certain point, and how many shorts are present in the market? Everything is known to them. When they see that money is being taken away right under their nose they would put restrictions, buy and sell the other currencies, change the peg and do all other miscellaneous activities to take the money back from the traders. The famous example in this regard is the EUR/CHF crash of 2015.
Currency trading is a sort of Casino. The BlackJack Theory is well suited in the case of currency trading. Casino owner always keeps a check on smart guys. Those who win big are in the radar of casino owner, and the owner knows how to make them lose. Both the loser and the winners (one -two-time winners) lose on a bigger scale when the casino owner wants them to lose. It is not a good idea to be a smart guy in the Casino, neither it is a good idea to present oneself too dumb. The person who knows his risks limits his game to a small hand is the actual winner in this game. He keeps on drawing smaller wins from the table without coming under the radar of the casino owner. Let us try to understand with an example here:
There are three persons A, B, C. A is the high profile player and plays big hand with higher stakes in 100,000 or even in millions of rupees, B is another player who is the new entrant in the Casino. C is a low profile player who plays small hands with smaller stakes in a few thousand rupees.
A doesn’t mind playing big and has won 3 times in the Casino, he has won in the tune of 500000, 10K, and a jackpot of 1 million. He is riding high on the win and is very confident. His ego says that he cannot lose with the winning streak. Naturally, Casino owner would be more interested keep a watch on A, learn his strategy and make him pay back at a later stage. Let us call him a smart guy
B is the new entrant in the Casino brings huge bucks and plays Adhoc stakes, sometimes big and sometimes small stakes. He has lost the highest bet which he took, and let us say 5 lacs. He keeps on losing continuously. Casino owner also has B in his radar because he is bringing money to the table and is a milking cow to him. Even though he might have lost continuously due to his poor play strategy and bad risk management, casino owner would allow him to win 2–3 hands at a later stage so that B’s interest doesn’t fade and he keeps on bringing money to the table. Let us call him the dumb guy.
C is a low profile player and is well aware of the casino owner and the Casino. He knows his risk and has a well-defined risk management system. He plays his hands for a smaller amount and bet on low stakes in the tune of few thousand rupees, and he wins, he loses and is consistent in his casino game ( he wins 7 out of 10 games). He regularly draws in the tune of a few thousand rupees now and then. His first win gave him 10000 rupees. Next, he lost 2000, the third game he won 30000 rupees. Casino owner ignores him and doesn’t mind his winning or losing strategy. Ultimately such a person is not in his radar, and he is consistently making money.
Now Casino owner also has to run his business and both A, B, C are his customers and bring money, so he has to let win some of the guys on some days, and other on another day. With A he deals quite harshly making him lose in a big way as well. He allows person B to win on some days, but again B starts to lose. So this game continues. Only the actual winner is C.
In the perspective of the Indian currency market, since we are not the major economy, RBI does not play with such recklessness as what Swiss national bank(SNB) did in 2015. But still, RBI does take actions and reverses the equation whenever there is a strong move in the USDINR pair. There have been several occasions when traders have taken long positions in USDINR due to strong technical indicators and up-move, but RBI quickly jumped into the action and sold dollars in tranches resulting in a sudden reversal of the up-move.
Banks don’t mind dumping dumb money to traders who act like person C in the casino game, but they do keep a watch on big smart guys and losing nerds.
Always play for smaller hands and keep withdrawing smaller profits if you want to remain profitable consistently in the currency market.