What are the keys to understanding how bank trade recommendations work
With so many trade recommendations available online from a variety of different banks how do they work and, more importantly, how can you make then work for you?
Bank trades are often based upon monetary policy of central banks
The currency markets don't just move at random. They move for a reason. Every developed nation has a central bank that has a core duty to ensure currency stability and that the interest rates of their nations are correctly set.
Contrary to what some people might think, central banks want to inform the market about their intentions. They do this in order to ensure that price remains stable and under control and so as to avoid large volatile swings in price.
A volatile currency is bad for domestic businesses as they import and export goods, so central banks release information in order to assist traders in pricing their currency. The vast majority of bank trade recommendations work by studying central bank's forward guidance and making it clear which direction they think the currency will go in.
So, for example, at the time of writing 8 April, 2019, Barclays opened a EUR/USD short position from 1.1310 after the ECB was dovish concerning future rate guidance on March 7. Barclays said that, 'our short EUR/USD recommendation by the manifestation of many of the factors that represent a nearly complete reversal of the developments that boosted EUR/USD from its cycle low at the end of 2016 to 1.20'. The trade was opened as a direct response to the ECB's dovish shift in monetary policy.
Use bank recommendations by comparing multiple sources
The single most useful aspect of trade recommendations is the collective resources they bring to you. In having a continuous stream of sentiment interpretation and trade recommendations from many different sources you have a very good idea of what different players are thinking and how they are placing their orders.
It is particularly interesting and illuminating to compare conflicting views. For example, let's say you get one trade recommendation to go long on the USD/JPY and another one to short USD/JPY, you can read into the detail and see the reasoning for them.
Whose argument best stacks up with the facts? Have they both considered the same key points, or has one recommendation been guilty of confirmation bias and simply ignored all contradictory data? You might like to read bank recommendations to see if you are missing any key fundamental data in your analysis. Sometimes, you will find a factor mentioned that you have overlooked.
Use bank recommendations to gain insightful information
You will also find that you can glean decent information by reading a variety of sources. You will come across multiple factors, some of which you would not have considered before
Use bank recommendations to recognize key fundamental shifts
Some trade recommendations are given after key central bank decisions and statements. The trade suggestion may highlight that shift to you and mean that you start to develop a bias for that market, long or short.
Use bank recommendations to recognize key technical levels
Some trade recommendations come out simply because price is at a major turning point. So, it could be because price is at a key weekly horizontal resistance and support level or a fib level. Often by looking at the trade recommendation you may be alerted to price being at a key inflection point in the market.
Then any significant fundamental news that comes in, while price is at the inflection point, will give you excellent technical places for putting your stop.
Don't miss key shifts in price
Holding multiple factors together, across multiple currencies, can be a challenging task for even the most seasoned of analysts and traders. The chances of missing some key data is possible even for them.
How much more likely are you to miss key data points and sentiment shifts if you have limited access to the markets. Say, for instance, you are swing trading and accessing your trades around a full-time job. By reading bank trade recommendations you will be alerted to any gaps in your knowledge that you can then follow up.
They are interesting
It is always a nice curiosity to look at a bank trade. How are they entering, where is their stop? When are they taking profit? In a way the trades can also critique your own view. Maybe you are long NZD/USD, but you read a bank is recommending a short NZD/USD?
Well, ultimately this will sharpen your trading process. It is always very satisfying when you can see a recommended trade and you know the reason why there are wrong. Considering different points can be a great help in formulating your own trading plans, as well as stimulating and focusing your own analysis.
They can betray a trader's lack of conviction
Well, one of the reasons that people will want to follow trade recommendations will be due to the belief that the authority sharing the recommendation is 'well informed'. It is this belief that leads some to trust the authority more than their own decision-making process.
Did you favorite respected analyst make a trade call? Perhaps a bank's name that you know are calling for a long on the USD/JPY pair. They have got to be right, haven't they? They are the authority after all.
This reason is simply evidence that someone is not ready to be trading. Unsure of their own decisions, they need someone else to give them conviction to trade. So, reasons for not following trade recommendations include an abdication of personal responsibility/conviction.
They can be hiding malicious influences
Have you heard of pump and dump? This is the well-known market phenomena where people will 'talk up' an asset to simply sell it at a profit. Tell the world that such and such is the next big thing to buy, wait for the price to rise (pump) and then, sell at a profit (dump).
The world's hysteria is their profit. It happens a lot. Some trade recommendations are only opportunistic wolves seeking easy prey. Don't become their victim, avoid the 'secret' or 'must buy' stock you have never heard of.
Even some 'respectable' sources have been known to engage in this behavior. In the currency world this can be a little more transparent for the informed trader since currencies are driven by central banks which publish their monetary policy.
It is hard for a bank to claim inside knowledge of a central bank's future policy, and if they do indicate a 'special' or 'unique' knowledge beyond good analysis, then let the buyer beware.
This article was submitted by the ADSS research team.
