Many retail traders are wondering what are the magic indicators of the traders in the big banks and market makers is. What is this great secret that gives them such a huge advantage.
In fact, the answer will be quite trivial and surprising for someone, but actually bankers use only simple systems and usually only one indicator in making a trade decision. Of course, as well known in their arsenal, there is a lot of research and a deep knowledge of the fundamental factors that influence the market, but as far as technical analysis is concerned, JP Morgan’s, City’s traders and other big names in the industry are very conservative.
The first and probably the most favorite indicator of bank traders is Bollinger Bands. The indicator was created by John Bollinger in 1980 and trademarked later in 2011. It consists of a moving average (most often exponential with a period of 20 EMA20). The indicator shows the standard deviation from the moving average and creates probable limits in which the price changes. One of the most common criteria for bankers and market makers is a false breakthrough of the top or bottom Band at high volatility. This way they enter at the top or bottom of the last impulse. It is quite risky and difficult to apply from retail traders because they lack the order book that bankers have.
The second most preferred indicator on Wall Street and City of London is the moving average. Although it sounds almost unlikely, this is probably the most used one. However, it is applied in combination with a specific time range and a specified SMA or EMA period, which is statistically determined. Nearly everywhere on the analysis and forecast sites, we see the moving average of 50 100 and 200 periods. They are accepted as a standard by all traders, but certainly for bankers this period is different for each instrument and timeframe.
The list of top bankers’ indicators also includes MACD. It was created by Gerald Appel in 1970 to show the change in strength, direction, momentum and duration of the trend. Many traders use it to find divergences to find proper entry by looking for fatigue trends. The MACD calculation formula again includes a moving average and the change in two adjacent bars.
As we can see, the technical analysis of the big players is highly simplified and uses basically average values of historical data. The fact is that the simpler a system is, the less likely it is for a human error to appear. Also, when using a combination of many indicators, the probability that any of the criteria is actually inaccurate to the analysis increases geometrically as well as the accumulation of statistical errors. However, it is good to follow a similar structure of the trading plan and include up to two indicators, one of which is an Oscillator.