If you were to ask what separates failed from successful traders, one of the most common responses would probably revolve around the importance of strategy.
Make no mistake; strategy is key if you’re to achieve success in what’s a volatile and highly leveraged marketplace, particularly if you’re to bank the kind of returns enjoyed by skilled investors and large institutions.
But is it really possible for retail traders to adopt the same strategies and approaches deployed by large forex institutions? Here are some viable strategies that can help you to invest like an institutional trader.
#1. The Trading Strategy of Hedge Funds
Trading institutions often optimise their resources by forging hedge funds, which are effectively financial partnerships that leverage pooled funds and employ numerous strategies to drive profitability.
One of the most common hedge funds strategies is to use multiple brokers for the purpose of executing trades, with the ultimate aim of optimising earning potential over an extended period of time.
This strategy works by alternating between brokers that offer the lowest real-time market spread or optimal execution of trades, which can minimise slippage when processing a large number of orders simultaneously.
This should be considered important for any type of investor who engages in high-volume forex trading, so it’s a viable strategy whether you’re an institutional or retail trader.
Often, this technique can also be deployed to disguise a hedge fund’s real intention and expectations. After all, creating several degrees of separation between your orders makes it hard to identify any kind of discernable pattern of strategy, whereas this is all too apparent when trading through a single broker.
This may not be a particular concern for retail traders, but it could be considered as an additional benefit of adopting this strategy in the forex market.
#2. Arbitrage Trading
In some instances, hedge funds may also make purchases on one exchange and sell on another simultaneously, utilising arbitrage as a way of optimising gains.
Usually, further arbitrage opportunities are created by variable pricing, whether this is a result of mispricing on the market or the differences that exist between alternative liquidity providers.
Such opportunities are abundant thanks to the simple fact that forex is an over-the-counter (OTC) marketplace, which means that a chosen currency pair will see its price fluctuate in real-time and depending on location. This rule applies in part to both institutional and retail traders, so it’s important to explore this as an emerging and standalone investor.
Ultimately, the goal is to buy an asset from one provider at the lowest price possible, while selling to another at a much higher value.
#3. Consolidation Bank Trading Strategy
If you follow banks and large financial institutions, they tend to enter the forex market during periods of consolidation.
This provides them with the ideal entry point into the marketplace, enabling them to scale and accumulate their position over time before buying (or selling) and realising the desired profit.
For example, if an institution entered into the market with a long position, it would accrue a profit by selling the underlying asset at a significantly higher price at a predetermined point in the future.
The reverse is also true, with the key factor here being the selection of the entry point and subsequent market movements.
There’s a clear takeaway here for retail investors, who typically consider periods of market consolidation to be unattractive and largely unfruitful. Instead, they tend to target periods of increased volatility, but this makes it hard to secure a foothold in the market and generate any kind of sustainable profit.
However, they could consider trading like large institutions, by targeting key breakouts of a consolidation period to suit their position type.