FX TRADING METHOD
A powerful move higher is most likely to happen when the majority of traders become nearly unanimously convinced that every rally is a ‘failed one’ that needs to be sold into rather than bought.
CHART 2
If we take the last bear market as an example, whilst the majority of traders may or may not have realized that equity markets had started bear markets at the end of 2007 they were not prepared to act until they had clear confirmation which they duly got in September 2008. They then waited, hoping for a bounce which did not happen.
The majority sold at the bottom in March 2009. They were doing so whilst the clever minority of traders were refusing to pay higher prices for VIX. They were correctly anticipating the move higher.
How to trade a series of higher lows
The financial markets repeatedly reward those who make the most emotionally difficult trades, while
78 FX TRADER MAGAZINE April - June 2014
punishing those who do the ‘easy’ emotional trades like chasing after any trend. One of the most psychologically difficult actions is buying any security when it is forming several higher lows. The reason is
that if something has
fallen to a multi-year bottom, then briefly recovers and then gives up much of its recovery, the second retreat is perceived as ‘a failed rally’ and ‘proof that a sustained rebound is impossible’.
Most traders become convinced about the likelihood of an upcoming bull market after a series of higher lows is completed. This creates an ideal opportunity, since the greater the number of higher lows which are achieved for any asset, the more likely that it is in a bull market and perhaps even more importantly, the more likely that the big upward phase of that bull market is approaching.
Financial market trading is not easy. It is both difficult psychologically and emotionally. Traders that make emotionally easy trading decisions will never succeed. Unfortunately the majority do so. The most common emotionally easy trade is trading a trend after a major market move. Let us take the current S&P500 bull market. Whilst the vast majority of all market participants whether large or
small, institutional or private
know they should be selling today none will do so until it is obvious that the bear market has started.
Likewise with precious metals, whilst the majority of market participants subconsciously know they are undervalued and oversold, very few will buy until the bull market is obvious. That is the description of an emotionally easy trade and only a small minority are able to trade the emotionally difficult trade.
To be a member of the small band of successful traders you need to understand the following very simple mathematics and apply it. In order to be able to apply it you need to be happy to defer greater gains and accept short term pain and the only way you can do that is by being early or extremely lucky.
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