Have you ever been in a forex trade and
price reversed and went against you almost as soon as you entered the
trade? Have you then got stopped out only to watch the price go in your
intended direction without you? Why does that happen? Well, it is easy
to think in such situations that the forex markets are against you or
that someone must be watching your every move. And to a degree – you are
right, someone is watching over your shoulder and the markets do move
against you. The problem is that unless you know what to look for, then
this will continue to happen again and again.
The question is how can you prevent it
from reoccurring? How can you ensure you are on the right side of the
market rather than on the wrong side? Let’s break down what is going on
in the mind of a retail trader and then look at what is actually
happening in the market.
Retail traders thought process – in this case, we will use the example of a forex trader called Mike:
1. Mike has been trading forex for some
time now and loves the forex markets. He regularly follows many blogs
and websites as well as listening to many trading gurus. He has read
numerous books on trading and has bought some online courses and
strategies which state that anyone can make money trading them. Mike
even paid to attend a week long course on trading ran by a big trading
education company and has been demo trading for a few months but is now
ready to trade with real money to make a monthly income for his family.
He feels he know forex works. He has decided that he wants to be a
trader and quit his job to pursue his dream. Mike is intelligent,
numerate and committed.
2. Having chosen to be a Forex day
trader, Mike prepares himself for each day by reading the news
overnight, analyzing the trend, plotting his various indicators and
moving averages as well as support and resistance levels. He has back
tested several strategies and is keen to see how they perform in a live
environment. He focuses on the major USD pairs, especially EURUSD and
GBPUSD and looks for opportunities each day.
3. He likes trading breakouts especially
when the price is moving with momentum so looks for setups which meet
his rules each day.
Now the character above, Mike depicts the
average retail forex trader. Chances are that such a person is losing
money regularly for the simple reason that they are using retail tools
to trade a professional market. Mike would also think he knows how to
trade forex properly. If any of the above resonates with you and you are
currently in that category I would like to ask you a question….how is
your trading really going? Are you making the kinds of returns you were
hoping to make when you started this business? If not, don’t worry as
help is on the way. The fact is that it is possible to make money
consistently in the markets – the only problem is that unless you have
the right tools and know how to use them, then this will be virtually
impossible.
When I started out forex trading many
years ago – the first few years were really about me seeking out what
works and what doesn’t – mostly finding out what doesn’t! The problem is
that unless you know where to look then you can continue to search in
vain. Now before we speak about what approach works, let’s look at
what’s wrong with the above way of approaching the markets
Let’s take it to the Forex charts…
The chart below is a chart of GBPUSD and
I’ve annotated how a typical retail trader like Mike would typically be
thinking as well as how the institutions actually move the markets:
how Forex works, how most traders trade the markets example
Mike’s experience can be summarized as
this; He entered a forex trade in the direction he thought the market
was going which was long, he was proven wrong and got stopped out. Mike
then thought “let me reverse my trade to recoup my losses” and
rationalizes that he was wrong and the trend must be down for the day.
He shorts on the break of support and the low only to see price reverse
against him and go up. Mike has taken two losses for the day and feels
confused and exhausted. Unfortunately, this is the experience of many
retail forex traders and it’s a repeating cycle of losses intercepted
with the occasional winning streak of trades which are just enough to
give you hope that you need to keep going, but not consistent enough for
you to make a reliable income.
The Institutional Perspective
how Forex works, how professional traders trade the markets example
The Breakdown:
Can you see the difference between how a
retail trader and professional trader read the market? In the above
example, smart money had a bias to take the market up but unlike retail
traders who are happy to buy at just any level or even on a break of a
high, smart money is always looking for a place to buy at value. Also,
institutions are looking to put very large positions into the market and
as such are looking to buy at the places where they have the largest
build up of orders. This means that if theyx are looking to buy then
they need to identify the price points in the market where they can find
a large number of sellers to match their positions.
If they cannot find such a place then
they simply cannot transact the volume of orders that they need to. So
in the above example, the only way they can entice enough sellers into
the market is by manipulating the market to go down so that it looks
like the trend is down which attracts traders like Mike to enter a short
position. This takes place in circle A and we can see that price
quickly retraces back up after having trapped a lot of traders short.
What happened next is that smart money
may have realized they didn’t have the number of sellers they needed for
their buy positions that they would need to entice more sellers another
way. What they then did was to push the price up and suck buyers in at
circle B. The buyers at circle B are mostly retail forex traders like
Mike who saw that price had made a false break at circle A and now feel
confident that they should be buying to fall in line with the overall
current bullish trend. Most of these buyers will place their stop losses
just below the most recent low which is circle 2. What happens next?
Smart money reverses price when it is
soon discovered that the buying pressure at circle 2 is not that strong
overall causing the price to fall to point 3. Now point 3 is where smart
money accomplishes their business plan. They push price down to entice
new sellers who were on the sidelines and also those who would have now
been stopped out from the long position to now go short. In pushing the
price down below point 2 they will also have hit the stop losses from
those who bought at the top. In this way, smart money would have
collected a large number of sell orders to match their buy orders and be
finally in the position to drive the market higher which is exactly
what happens as price ends up breaking out of the consolidation.
This Happens Frequently…
The above happens on a daily basis and is
the main reason why most retail forex traders are unsuccessful in
trading Forex. They do not know how to trade forex properly. Chances are
that at least 8 out of every 10 people who read this article have had a
similar experience to Mike and been the victims of market manipulation.
The question is how do you identify it? That takes skill and practice
and our Forex Course focuses on that specifically.
I encourage you to check it out as it
will help your trading immensely and finally put the edge in your favor.
In the meanwhile just be aware that the next breakout you take in the
direction of the most obvious trend may not be the easy trade it appears
to be. Also, put yourself in the shoes of an intuitional trader who
needs to put hundreds of millions into the market at the best possible
price – where would you prefer to buy? Where are the areas of value you
can see on your chart? Doing these simple things will help your trading
improve immediately.
