I have been reading about forex for 3 months or so. I have built several programs to analyse hourly prices of EUR/USD.
From the programs that I have built + posts and articles that I have read, I got really confused since market prices seem to be RANDOM! While this sounds insane, it makes a bit since to be seen like this for the following reason:
Different strategies being applied by different traders
Different philosophies by different traders
Different targets
So my question is this: how can ever anyone CONSTANTLY make money in such market conditions? Even if you managed to make money up until now, it does not mean that you are trading the right way because in a weeks time you can lose all your profits!
Whilst I have a feeling that a lot of people do not make a dime out of forex, I know that there are actually companies who trade currencies and make thousands!
Hi shoeshine, welcome to BabyPips. This place is a great to start learning forex btw.
I’ll try to answer a couple of your questions, or give you some food for thought. I was in your shoes once too.
You might be getting confused because of informational overload. The best way to find an edge is to focus as narrowly as you can. Try out different things (different timeframes, different styles, etc.) because it is likely that you are a natural fit for only one or a few. All the others may seem confusing or unnatural if you were to try to trade them.
The spectrum of traders usually goes like this:
Position traders – very long term trades – usually focus on longer timeframes like Daily+
Swing traders – medium term trades – usually focus on 1hour and 4hour timeframes
Day traders – short term trades – usually focus on smaller timeframes like 15min, 1min
Scalp traders – extremely short term trades – usually focus on 1min timeframe or less
Whether or not the market is “random” has always been debated. Maybe nobody will ever really know the answer. Personally I don’t think it’s random, based on what I’ve seen it do.
You are correct in all your reasoning for why the market moves around, and why it can even seem random. It’s because there are a million-and-one traders out there. Don’t forget the massive amount of psychology in play here, and also the effects of crowd behavior. These can cause markets to behave in seemingly erratic ways that may not always have a logical explanation.
Your last statement might be true, but I would not have worded it that way. There are companies that make money and also individuals that do. I would argue that individuals – us, the retail traders, the little guys – we have an easier time at this than large institutional traders do.
The market is random and somewhat predictable at the same time.
Money management and trade management are two of the main things that differentiate a successful trader from an unsuccessful one.
I will go as far as to suggest that there really is no thing as an “edge”. That is an individual’s concept that their trading style gives them an advantage over the rest of the market, but in reality thats only in thier own mind.
Out of the millions of trading methods, they all will probably work provided you develop a fundamental understanding of how the market flows.
Finding a trading style is like buying a new jacket, you have to find the one that fits you and then you will have to tailor it a little more so its comfortable and exactly right for you.
With time and perseverance, you can make consistent returns.
You have to differentiate. Where the market goes at one particular time is random. Where it goes over a period of time and many repeated circumstances is not. This is how you get an edge (repeating a process that has r:r >1:1 and w:l>1:1) and how some people manage to make money consistently.
I am basically a trend trader. I look for trend on a number of different timeframes. So even if looking at the Weekly or Daily charts makes the market appear choppy, within that there will generally be periods of clear trend on the Hourly or 240 charts. If I find a clear upward trend on the 240, with good cyclicity, then I will trade it long. If, two days later, the same pair is trending down nicely, I will happily short it. As long as I am seeing a trend with good cyclicity then there will be intra-day trading opportunities (assuming that suits the strategy, obviously). The great thing about Forex is that whether the market is falling or rising you can still trade it. I have made good pips both long and short on EUR/USD, recently. There will always be losing trades, but sticking to high-probability setups your winners can outweigh the losers comfortably. Which makes me conclude that, however random the market can appear, it is predictable enough to trade.
Thank you very much for your reply. Just one question what do you mean with cyclicity? Can you give me an example please!
During this weekend I have spend quite some time looking at graphs and trying to pin point trends from minute graphs , 5 minute graphs and 15 minute graphs!
I will be watching live market stats very soon once Australia’s exchange opens!
Markets are not random. They are chaotic. Which is a big difference.
A random price would be completely independent from the past. A chaotic price is not completely independent from the past. Fact is, the markets price is always related to the last price. You can see the evidence in the true range. This range is more or less equal from day to day. Okay, some day you have 400 pips range and some only 50, but price will not jump up and down in 2000 pip steps like it would if the scenario would be random.
There is nothing to predict. It’s just statistics. Make 100 trades over years and if you have a nice roi and low drawdown and good profit ratio probability will be high it will continue. That is however not 100% sure.
As with every business you can go bankrupt, you can go bankrupt with trading any time.
Whether it’s random or not, that’s arguable. There are plenty of proponents of EMH and random walk, but empirical evidence is pretty scant. If all else fails, you need to realize that countries live and die by their exchange rate. It [B]can’t[/B] be completely random because entire economies depend on it. With that said, I applaud you for making this an academic venture. Not too many of those types of people.
Cyclicity? Sure. Price rarely moves in one strong direction without any backward steps, it is far more common for price to move up, then down a little, then up, then down a little, then up, then down a little, yet still overall be clearly moving in an upward trend. There are many reasons for this (for example that following each rise in price, some traders will take profit, which causes the drop back). People have different terms for this, some call it the market ‘breathing’ in and out, it is often called cycles, whatever you want to call it. Fact is, a steady trend generally moves in such a manner, whether up or down. This is good for us traders, as it both gives us confirmation that there is a trend (as the next cycle is broadly predictable if the trend continues), and gives us opportunities to enter a trade (as the next bounce between cycles is, again, predictable. Basically, it gives you a visual pattern from which you can form a view on where price will go next.
So within an overall trend, you have periods where price will move against the overall trend as it returns to the trend line (the ‘breathing in’ of phase two of the cycle). In an uptrend, if you went long at the point where price was about to retrace to the trendline, you would likely be stopped out. However, if you were to go long at the point of the bounce of the trendline, you could make pips.
Apologies, I am not always very clear at describing these things, and am conscious that this response it rambling on a little. So an example (apologies, am not sure how to upload charts) of a trade I took last week. AUD/USD daily chart, look at the past couple of weeks but focus on last Wednesday evening, 01/12/2010 (1st December in case you are American!). A similar move happened on the NZD/USD, which I also placed, but the cycles are a little clearer on the AUD.
I went long at 0.9669, with a Stop set at 0.9542. My initial TP was set at 0.9844. The rationale for this was that there had been bounces off the long trendline on 8th June, 6th July, 26th August (although price did not get going until 27th) and then last Wednesday, 1st December. You will see that the trade hit my TP1 in two days. I entered on an order, so had price not bounced I would not have been triggered into the trade. You can see from the chart that had I entered long on 21st June, or 6th August, or 14th October or 4th November, I would have been stopped out, as price was actually retracing back to the trendline.
Anyway, apologies for the length of that response, I hope that it is clearer than it seems. Basically, in a clear trend, price generally will actually take two steps forwards, then one step backwards, towards the trendline, then two steps forwards again. I tend to wait for the step backwards, then enter the trade in the direction of the trend, with the previous swing high or a clear S/R level as my initial TP. If I don’t see these cycles then I don’t consider the trend clean enough for me to look for a trade. It works for both long and short, and in any timeframe from 60 upwards (some say it works for smaller timeframes than that, but I find that the win rate drops using this on the smaller timeframes as there is too much noise. I will use the 5 for finesse entry, but will not look to draw trendlines on it).
I hope that that answered your question, and if some of the better teachers on here feel that I have just confused the issue then by all means step in with a clearer explanation!
Hey Simon just actually wanted to ask you something as you’ve mentioned it previously. You paid for a course didn’t you? Who was running the one you paid for?
