TRADING METHOD FX
Luck unfortunately cannot be relied on.
Let us say you buy an asset for $5 when everybody is selling and it rises to $50. You will have made a 1000% return. Te majority of traders will wait until the upside trend has been established before buying. Let us assume the upside trend is established at $12 and heavy buying c omme n c e s . Tey will make a return of 417%. In other words they have given up more than half of the total gain by missing out on the first $7 of the rally.
However as explained above in reality the situation is far worse for the majority of traders. Financial products rise in a series of higher lows rather than in a straight line. Traders view this unfavourably. Te more this happens the more every rally is perceived as a ‘failed rally’ and even though a series of higher lows are being created nobody bar the small minority is buying
the corrections. Witness
current price action in gold and silver as both make a series of higher lows. Traders will only rush to buy when both metals are making higher highs. Tis is the emotionally easy trade.
This scenario is currently being played out in the markets, just as in March 2009 when the S&P500 hit its low of 666 coincided with the heaviest selling, today we have the reverse with the S&P500 trading at an all-time high coinciding with
the interaction all asset classes have with each other. Identifying and understanding the most relevant indicators and applying them in the correct and most timely manner is what the small band of elite traders do. They understand and never forget that in order to be able to sell high you need to buy low first and vice versa.
Identifying and understanding the most relevant indicators and applying them in the correct and most timely manner is what the small band of elite traders do
record inflows into the market.
Another current example is copper which is currently trading at a 4 year low. The vast majority of traders are unwilling to take advantage of what is a bargain and are in fact waiting for further falls to confirm the ‘trend’ at which time they will sell short and whilst selling short an asset trading at a 4 year low may provide short term profits the trade is flawed as the mathematical example above proves.
Analyzing the above clearly shows
Using and understanding correct indicators such as VIX and COT is an important step in helping a trader make the difficult move from the majority camp who lose money to the small elite group of successful traders
who consistently undertake the emotionally difficult trades. As long as you remember that the markets benefit
the small minority at the
expense of the vast majority you will have taken the first step to long term success.
The second article in this series of three will look at how to determine which economic data is a leading indicator and which is a lagging indicator.
Karim Ghaidan FX TRADER MAGAZINE April - June 2014 79
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