Who are the people making consistent returns in the markets? How are they doing it? Who are the losers, and why do they lose? The answer to these questions is fundamental to evaluate and improve our own trading, and ultimately to be successful in trading.
Forex attracts all sort of people: people trying to make a quick buck, deluded investors, clueless newbies, gamblers, and others alike. But apart from this group, which makes up without doubt the larger part of the traders, there is another group of traders making a living from the markets. These are the professionals of the field. So, who are these traders, and how do they do it? They simply have certain characteristics, gained by experience or adequate teaching, that isn’t shared by the average trader, and which allows them to be successful.
1. Information
They’re informed traders: they know the markets they trade in, and what information, technical or fundamental, to use, and how to use it. To be a surgeon, you need to have substantial information about your field, to be a lawyer you need to know the law, why would it be different in trading? To trade you need information, either technical or fundamental, and most importantly, you need to know how to use it. The way professionals trade is validated by experience and/or serious testing, and that’s how they know how to use the information gathered.
2. Mentality
They trade rationally, opposed to emotionally. Emotions play a small role in their day-to-day trading, as they know that emotional trading is the fastest and sure way to lose money in the markets. The average trader on the other hand, lets himself be subject to emotion:
- Fear of losing, when the prices have already moved too much against him/her, and refusing to close the trade or setting a stop-loss
- Fear of missing out, entering when the market has already made most of the move
- Greed, refusing to close a winning trade to make sure you get all you can from the move
- Impatience, not wanting to sit and wait at the right times, and instead, wanting profits immediately.
These are just some ways our brain plays tricks at us, and the markets, with their constant volatility, specialize in bringing up these basic emotions in unexperienced traders.
3. Market Perspective
They know what other traders are doing: trading is just not about looking at one’s data and deciding when is the perfect entry spot. You can’t expect to look at your favorite indicators or fundamental data, and decide if the market should rise or fall – your analysis has to be confirmed by the market action, looking at price and volumes, to show you that there are other (large-sized) traders with the same perspective. Of course I’m not speaking about the average trader actions here – their trading is too disperse, they’re often wrong and their capital is scarce to make any significant move happen – I’m speaking about institutions and funds. A currency could be massively undervalued based on the interest rates differentials and on exports forecasts; but in the end, supply and demand governs any market, and if the other big players don’t have the same opinion as you and are dumping sell positions in the market, it’s hardly going to rise anytime soon, and so you might want to wait until markets conditions change.
In the next article I’ll develop the first and third points, and show a vital piece of information you can use to understand the markets and do better trading decisions.
Leonardo Barata is a trader for 7 years, who uses prices and volumes to trade in tandem with the smart money. He’s also a coder, and founder of www.analyticaltrader.com, developing tools based on his trading methodology.
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