Happy Thursday traders! It’s time to continue with our Educational Series on how to become a successful trader with a professional trading approach. It's holiday season, and closed markets mean more time to sharpen our trading skills! Let's go...
In the last post, we touched on the main ingredients of a successful trader (check the link to "related idea"). Let’s reinforce those again:
1. Market Analysis – Your “Analyst” side. Here, you are going to combine Fundamentals, Intermarket analysis, Sentiment analysis, and (the correct) Technical analysis (FIST approach).
2. Trading – Your “Trader” side. Once the analyst in you spots a promising trade idea, the trader in you is responsible to execute the trade with proper entry and exit levels.
3. Management – Your “Manager” side. Every trader is a risk manager. Your manager side is responsible to manage your trade and risk levels, scale in and out of positions, open the correct position sizes, evaluate the reward-to-risk of your trades, etc.
Alright, so far we are still covering your “Analyst” side. Your analyst side determines whether you will buy EURUSD, sell GBPJPY, buy gold, and sell silver. It’s the part of your trading that constantly scans for profitable trade ideas and setups in the markets, and passes them on to your “Trader” side.
Why You Shouldn’t Rely on Technical Analysis?
The majority of new traders I see in the retail space place too much attention on technical analysis. They search the internet for TA articles, look for the “holy grail” indicator, read dozens of technical analysis books, but still don’t manage to improve their trading performance.
The truth is, they don’t understand the markets. I don’t care how many TA books you’ve read in your entire life, if you don’t understand how markets work and what moves prices up and down, you won’t succeed as a trader.
Unfortunately, almost every retail trading website promotes and publishes those articles, because they are attracting clicks of inexperienced traders.
Here is a hint: When I worked in the trading department of a large European bank, I didn’t even look at charts. There are almost no charts and no indicators on the trading floors of big banks and hedge funds!
Do you really think that banks will move hundreds of millions into a trade because the 50-day MA crossed the 100-day MA, or because the price formed a Head & Shoulders pattern? The first time you do this in a bank will likely be your last day as a professional trader.
So why do retail traders trade like that? Because they don’t know of better ways to trade. No one has taught them that trading based purely on technical analysis will never work. It’s in nobody’s interest to teach you this because large market participants need the “dumb money”. Yes, they make a profit when you trade badly and lose money.
So, what’s moving the market if it’s not technicals?
The Forex market is the marketplace for the world’s currencies, and currencies are influenced by supply and demand. To be more precise, interest rates influence currencies, with higher interest rates increasing demand for a currency (therefore leading to higher prices) and lower interest rates decreasing demand for a currency (therefore leading to lower prices.)
We as Forex traders are interest rate traders. We trade currencies based on (short-term) views about their future interest rates. For example, let’s say the market expects higher inflation rates (inflation represents the change in the price of goods and services during a year) in Australia, which could lead to a response from the Reserve Bank of Australia by hiking interest rates. This will create demand for the AUD (remember, global capital is always chasing yield), which in turn would lead to a higher exchange rate of the AUD.
If you only followed technicals and identified a bearish divergence on the RSI in AUD/USD - and you entered short - it’s your fault. The pair would likely move higher on higher interest rate expectations in Australia.
So, when do technical levels work? When the market trades in fair value (in fundamental equilibrium), you’ll find that simple technical rules work. If large market participants agree that the current exchange rate of a currency pair is “fair” given the current fundamentals, smaller players may move the market when the price reaches a support or resistance level, or when the price breaks above or below a triangle. Unfortunately, markets are always in a state of flux and rarely in equilibrium, so following other analytical disciplines (besides technical analysis) will improve your trading performance dramatically.
This chart shows the Band of Agnosticism. This band represents a span of exchange rates where fundamental-based traders are unlikely to join the market because the market is already in a fundamental fair-value zone. As the exchange rate starts to approach the upper or lower band, fundamental-based traders (which happen to be large banks and hedge funds) start considering opening new positions. The volume of their orders pushes the price back inside what is considered fair value.
Professional traders first look at a variety of other factors before they decide what currency pair they want to trade. Once we identify a good trading candidate (our “Analyst” side does that), then it’s time to open the chart and find areas where we could enter with a long position (and those are not trendline breakouts!)
We will cover all of this, step by step, in the coming Educational posts.
Don't forget to FOLLOW to receive all future trade ideas and educational posts!
Happy holidays everyone. 🎆
In the last post, we touched on the main ingredients of a successful trader (check the link to "related idea"). Let’s reinforce those again:
1. Market Analysis – Your “Analyst” side. Here, you are going to combine Fundamentals, Intermarket analysis, Sentiment analysis, and (the correct) Technical analysis (FIST approach).
2. Trading – Your “Trader” side. Once the analyst in you spots a promising trade idea, the trader in you is responsible to execute the trade with proper entry and exit levels.
3. Management – Your “Manager” side. Every trader is a risk manager. Your manager side is responsible to manage your trade and risk levels, scale in and out of positions, open the correct position sizes, evaluate the reward-to-risk of your trades, etc.
Alright, so far we are still covering your “Analyst” side. Your analyst side determines whether you will buy EURUSD, sell GBPJPY, buy gold, and sell silver. It’s the part of your trading that constantly scans for profitable trade ideas and setups in the markets, and passes them on to your “Trader” side.
Why You Shouldn’t Rely on Technical Analysis?
The majority of new traders I see in the retail space place too much attention on technical analysis. They search the internet for TA articles, look for the “holy grail” indicator, read dozens of technical analysis books, but still don’t manage to improve their trading performance.
The truth is, they don’t understand the markets. I don’t care how many TA books you’ve read in your entire life, if you don’t understand how markets work and what moves prices up and down, you won’t succeed as a trader.
Unfortunately, almost every retail trading website promotes and publishes those articles, because they are attracting clicks of inexperienced traders.
Here is a hint: When I worked in the trading department of a large European bank, I didn’t even look at charts. There are almost no charts and no indicators on the trading floors of big banks and hedge funds!
Do you really think that banks will move hundreds of millions into a trade because the 50-day MA crossed the 100-day MA, or because the price formed a Head & Shoulders pattern? The first time you do this in a bank will likely be your last day as a professional trader.
So why do retail traders trade like that? Because they don’t know of better ways to trade. No one has taught them that trading based purely on technical analysis will never work. It’s in nobody’s interest to teach you this because large market participants need the “dumb money”. Yes, they make a profit when you trade badly and lose money.
So, what’s moving the market if it’s not technicals?
The Forex market is the marketplace for the world’s currencies, and currencies are influenced by supply and demand. To be more precise, interest rates influence currencies, with higher interest rates increasing demand for a currency (therefore leading to higher prices) and lower interest rates decreasing demand for a currency (therefore leading to lower prices.)
We as Forex traders are interest rate traders. We trade currencies based on (short-term) views about their future interest rates. For example, let’s say the market expects higher inflation rates (inflation represents the change in the price of goods and services during a year) in Australia, which could lead to a response from the Reserve Bank of Australia by hiking interest rates. This will create demand for the AUD (remember, global capital is always chasing yield), which in turn would lead to a higher exchange rate of the AUD.
If you only followed technicals and identified a bearish divergence on the RSI in AUD/USD - and you entered short - it’s your fault. The pair would likely move higher on higher interest rate expectations in Australia.
So, when do technical levels work? When the market trades in fair value (in fundamental equilibrium), you’ll find that simple technical rules work. If large market participants agree that the current exchange rate of a currency pair is “fair” given the current fundamentals, smaller players may move the market when the price reaches a support or resistance level, or when the price breaks above or below a triangle. Unfortunately, markets are always in a state of flux and rarely in equilibrium, so following other analytical disciplines (besides technical analysis) will improve your trading performance dramatically.
This chart shows the Band of Agnosticism. This band represents a span of exchange rates where fundamental-based traders are unlikely to join the market because the market is already in a fundamental fair-value zone. As the exchange rate starts to approach the upper or lower band, fundamental-based traders (which happen to be large banks and hedge funds) start considering opening new positions. The volume of their orders pushes the price back inside what is considered fair value.
Professional traders first look at a variety of other factors before they decide what currency pair they want to trade. Once we identify a good trading candidate (our “Analyst” side does that), then it’s time to open the chart and find areas where we could enter with a long position (and those are not trendline breakouts!)
We will cover all of this, step by step, in the coming Educational posts.
Don't forget to FOLLOW to receive all future trade ideas and educational posts!
Happy holidays everyone. 🎆
