Rogue, man, If I ever write a book on trading, I’m totally gonna quote the last two posts. Classic. Honestly. I couldn’t make stuff up as good as this. It’s these emotions, and lack of planning, and lack of a true understanding of auction market dynamics that makes trading difficult.
There is so much I would like to say to these two posts, but let me cover just the basics, and some very simple suggestions. First off, I applaud you for making your first venture into the capital markets a public one… and I think about 98% of readers of this thread will identify with your mistakes here.
First of all, a plan is absolutly necessary. Every ssuccessful trading plan I know always consists of three things minimum: A plan of entry, a plan of taking profits, and a plan of taking losses… such as what triggers an entry order, at what point will a trade be closed for a loss, and what point will a trade be closed for a profit. These are absolutely crucial. A study was conducted on decision making in trading, and it was found that making a trade affects the same regions of the brain that are affected when a drug addict takes their drug of choice, or when a gambler makes a bet. This is NOT the recipe for objective decision making! So, a premade plan is about as necessary as oxygen for a trader to be successful.
Second of all, in spite of your preconceived notions regarding what makes markets move… it actually all boils down to Econ 101: Supply, and Demand. If there is more demand at a price level than supply…price will move up. If there is more supply at a price level than demand, price will move down. News and economic events DO have an impact, as it will influence the amount of demand or amount of supply for some market participants, and eventually all market participants, however, for weeks, months, and even years, these “fundamental” concepts can be out of alignment with the reality of market movement.
Also, you need to “know your opponent”. The majority of the activity in the forex market are corporate entities who are HEDGING, not SPECULATING. For example, I have a brother in law that is CFO for a 500 million dollar wood products company. This company is canadian based, yet half of their facilties and employees are in the united states. He has to hedge in the USD/CAD market at specific price points because he is trying to make sure they can make PAYROLL, and BUY RAW MATERIALS, and convert PROFITS FROM SALES from one currency to another, without losing their profit margins. He explained once to me that his company was buying or selling USD/CAD currency pair at specific price points to insure they could maximize ROI… NOT because his company believed that the USD was going to gain in value to the CAD, or some such thing like this.
In other words, he doesn’t care one bit what the news or world economic events are… he needs to make payroll in two different currencies for several thousand employees. So he has fixed points in the market where he is buying or selling millions of USD and CAD. Regardless of what happens, he must hedge to maintain profit margins. He does this, and so do the MAJORITY of forex participants. Here is a quote from one of the most prominent swiss banks in the world, and the one i believe that is responsible for 5% - 10% of the entire foreign currency transactions in the world these days:
“According to Deutsche Bank, ‘passive’ players – such as corporate treasurers who are looking to hedge currency risk or to facilitate their core business, not to make a profit – account for more than 50 per cent of currency flows.” By definition, these passive players are not out to make a profit, and exchange currencies only because it is necessary to simply conduct business."
So, with this being known, if a large corporate or even government entity such as Bank Of Japan decides has an order to buy or sell 200 million in the AUD/USD at a price that is about 20 pips under current market price… and say AUD just announced a worse than expected employment number… well, you may have price spike down about 20 pips as 120 million AUD/USD are sold due to a panic reaction… I can guarantee you that this spike down will reverse! Why? simple… 20 pips down, there is more demand than supply… the entity that is providing the market demand is NOT going to change because an economic report. period. it’s not. They need to buy AUD/USD at that price…regardless of the news.
Now, what if ANOTHER, SEPERATE entity has ANOTHER large order to fill… say, 10 pips below the first entity. Say 80 million in AUD/USD. And what if a third corporate entity has to fill 135 million in AUD/USD just a few pips below that one?
Well, i can tell you in spite of the bad news… aud/usd won’t move down much more than 20 - 35 pips, and at that point…with all the “speculators” who were scared, and wanted to sell out having done so… well, there is nothing left in the marketplace to push price down, but there are massive resting buy orders to support price, and the only speculators left are those who are willing to buy at those price points… the speculators will push price up, since the large corporate entities with their resting (limit) buy orders have absorbed, for now… all of those speculators who wish to sell.
With simply no one left who is willing to sell, and large blocks of buy orders where price currently is… the market will rise. simple as that.
THIS is what moves the market my friend. not the news. The assumption that an economic report or situation is going to change a market place hedging entity is simply completely false. And this is the majority of the marketplace
I personally base my entire trading methodology off of determing where these large blocks of orders are, and put my own order just a pip or two above or below them, knowing that there is a high probability that these large resting orders will overcome the short term speculation price movments, and I will have correctly choosen a turning point in the market. This provides me a high probability trade, with relatively little risk, and relatively large reward potential.
I do this with confidence because I know a simple fact: The forex market is dominated by entities who hedge. Their orders sit in the marketplace until completely filled, regardless of economic change. Because they are responsible for the majority of orders in the market, are the “traders” who have the greatest influence on price direction. Therefore, I look to identify where they place their orders in the market,and I know that these places will provide a likely market turning point.
But I digress…
Point is, you came into this game with some preconcieved notions, and a lack of understanding of how you would handle your own emotions, as well as if your ideas of how the market work…actually match up to how the market works!
We ALL make the same mistakes in the beginning. I KNOW I did. The primary reasons you haven’t succeeded are twofold:
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You didn’t have a plan on how you would handle exiting the market…either with a profit, or a loss.
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You didn’t (or don’t) have an accurate understanding of what are the dominating forces that drive short term market direction (short term being anything less than 3 - 6 months)
If you can gain a proficient understanding of these two concepts, and have a way to apply them successfully in the market, you will make a fortune. Otherwise, you will simply second guess yourself, be confused as to why this happened when you expected that to happen, and you will then make emotional decisions that will result in a loss.
Since you seem to have a longer term perspective, I would recommend a book: Trend Trading by Michael Covel. Brilliant book, with real examples of real traders who trade long term concepts successfully. I don’t follow this methodology, but it works now, and those that do follow it well can make 20% - 50% per year… year in, year out.
Another book I recommend is “Market Wizards”. It is bit old, but it interviews about 15 of the most successful traders of all time. Some have obtained returns that AVERAGE over 100% per year, for 10+ years running. I recommend this because it is an absolute classic, and it will give you a great idea of how some of the best traders make their decisions in the marketplace. One in particular credits 50% of his 100 million dollar success to one simple concept: When news comes out, wait to see how the market responds. If it responds counterintuitive to what you would expect, trust the price change, not the news. He has said he made over $50 million trading off this idea alone… so much for markets doing what is expected!
Don’t believe this statement? just check the 10 year U.S. bond futures market today. Check out the september expiration contract… look at how price has moved up since the “S&P downgrade” of the u.s. bond market. In fact, the biggest rally was on the day of the downgrade!
Hope this gives you some direction in what to consider. Read both those books, starting with market wizards. Gain a better understanding of market dynamics. Come back and practice for 3 months to a year with a very small amount of real capital while you master your emotions, and develop a plan to trade… and then grow your own personal fortune.
Welcome to trading. Good Luck!
Jay