4 min read
by Gorica Gligorijevic
Forex traders are those who use price movement in the Foreign exchange currency market to make the profit. Generally, the fact is that most forex traders lose. About 95% of forex traders lose money and giving up at the end.
But you would like to be among 5% of successful traders.
First of all, Forex trading like any trading is a bunch of psychology.
Do you know the most common traps among failing forex traders?
Do you have what it is necessary to be a winning forex trader?
The purpose of forex trading is to exchange one currency for another in the expectation that the price will change. Like any other trading.
For example, you purchase 10,000 euros at the EUR/USD exchange rate of 1.2000. And one week later you exchange your 10,000 euros back into U.S. dollar at the exchange rate of 1.2500. So, the math says, you earn a profit of $500.
The currency you bought increased in value compared to the one you sold.
The aim of forex trading is simple:
You want to buy a currency at one price and sell it at a higher price in order to make a profit. Or, to sell a currency at one price and buy it at a lower price.
But, at the Forex market, the price of one currency pair can change the value several times in a few minutes.
In periods of intense trading, within one minute, the price may change the value tens or even hundreds times.
But you have to know something, the market is not your rival. You don’t have to conquer it. If you want to be a successful trader, you should define the trend and enjoy the trade.
The market can disturb you.
Especially, if you try to get too much with too small capital.
Having the wrong mindset frequently makes the trade too aggressively. Or if you try to go against trends, you are on your way to disaster.
There are so many reasons for the losses, including bad money management, bad timing, or an unproductive strategy. But there is a deeper reason why most forex traders lose.
Majority of forex traders will lose despite what techniques they apply. Every forex trader knows how to trade famously, but in theory. Because knowing and doing are two very different things.
So, why is that?
We are not going to tell you a story about psychological reasons or fears, greed, and hope. Traders Paradise has a different approach. So, let’s see what we have here.
As first, we have to look at how prices move. We also have to know that there is a considerable number of people who will be there, right when the price is about to change.
This is the moment where mass losses happen.
At the moment when buying insanity grips a market, something that will pass!
Of course, everything passes.
But at this very moment, when you see the other people buying! That makes you think that it is the right time to buy and the other people will buy after you.
Every time you execute a speculative investment, you are doing so because you suppose other people will purchase after you. That push the price up. And you can sell for a profit.
Prices only rise if more people are willing to buy, more than are willing to sell.
Yes, we can do some fancy analysis and make forecasts about the price. But all we are really doing is making a bet that people will buy or sell. It is people that buy and sell and cause prices to move. Those people create repeating patterns, that we can trade-off of, in the markets.
The uptrend is generated by more and more people continuing to move the price up.
There is no other way that price can go up. Behind that, always stand forex traders’ will to pay above first established price.
And what happens then?
There are no more traders who are willing to buy at higher prices.
Moreover, there are more traders willing to sell than to buy. The traders who bought near the peak are left getting the losses.
The main problem is that a considerable number of traders are involved near the top.
For instance, some stock has been rising for 3 years. So, as more traders find out about it they start gathering in. But there is a limited number of traders who are willing to buy it. Once the crowds have accumulated, there is no one else to buy. And the forex traders who bought earlier in the trend start to sell. That can scare the traders who bought late in the trend. So, what we have now? The domino effect starts carrying prices back down.
The best example is Bitcoin.
Bitcoin had been rising regularly between 2016 and 2017. But there was not a lot of interest from the traders. In the middle of 2017, traders became motivated. There was an explosion in interest, bringing a whole new batch of buyers into Bitcoin.
People searching “Bitcoin”. Source: Google
This number ‘100’ on the chart above represents the peak popularity.
So many people Googled “bitcoin”. They were searching for information. They wanted to know more about it. And what happened?
The number of people searching for “bitcoin” matched with the price of bitcoin peaking.
image source Yahoo Finance
A whole batch of people who had never heard of bitcoin became interested in it. They helped fuel the rally. When popularity hit its critical mass, there was no one left to buy.
So, participation was the highest near the top.
The smart investors made money off this buying rage, but the masses who created the buying frenzy lost a lot of money.
You have all on the chart.
The point is, most people get involved close to turning points. That means most people lose. They catalyze for turning the market the other way.
The mass insanity causes that limit to be hit.
There will always be plenty of people who don’t want to get included. Such believe that the price is already too costly. But the market keeps going higher and so a few joins in and buy.
The market won’t hit a highest or reverse by itself.
Forex traders have to make the extreme situation and market will explode. The growth and failure cycles will never end. Great uptrends and downtrends are systemic. You will never find one without the other.
Prosperous Forex traders always find something that works and stick to it. They never let others drag them away from their strategy. Unsuccessful traders here go wrong and that’s why the most of them lose money. For example, traders hear that some asset is doing very good. But after a few days, the same traders can hear that asset is doing very bad. And that news is spread by media, forums, experts.
So, what to do?
To bet against everyone and be wrong?
We believe what we hear most often.
It will cost you if you are not part of the masses. You can’t trade with others. You have to walk carefully and alone. Most people will not accept your view. If you trade contrary to the crowd, and you are right, people will hate you.
Because you made money while they lost everything. Sound absurd, we know that.
But if you want to be a winning trader, you must stay strong through major market turns when the majority lose.
People prefer submissive company and they will not love you.
When the outlook is most suspicious, because everyone is losing money in the market and you see how bad the markets are, there is a strong motive to sell and follow the crowd.
Once again, the crowd makes a poor decision, which can’t help doing, and the market turns the other way.
Forex traders lose by acting in mass at the same time.
The masses can’t avoid it. It is an energy that exhausts the trend and reverses it.
Even if a long-term chart of the stock market shows the price of stocks rising, you have to know that most of the people are with empty wallets because they were buying near peaks and selling near bottoms.
Behind the reason for losing money while taking part in the market, lays social influence too.
Victorious traders find something that works.
So, they stick to it, and not let others remove them away from their adopted strategy. On the other side, we have unsuccessful traders. They go wrong, they stay in the crowd, and the crowd loses money.
Such traders can’t jerk themselves away from the crowd when it is time to do so.
When you hear from the media is how good this asset is doing, or how bad that asset is doing, it’s really hard to take an opposite view. We want to believe what we hear most often.
If you make a bet against everyone else and you are wrong, you will experience regret missing out while others profit.
Do you think this social price for not being among others, sounds funny?
You need to walk carefully because most people will not support your view. Assume you have a contrarian view to the masses, and you are right, ha?
Your friends, not only the opponents, may dislike you because you made money while they lost a lot. Is it still funny?
Gaining traders are often “tortured” during major market turns when the bulk lose.
Just recall one name: Warren Buffett. Who like him? But there are a lot of people admiring him.
We will share some of his genius thoughts:
* Rule No.1: Never lose money. Rule No.2: Never forget rule No.1.
* The best thing I did was to choose the right heroes.
* Price is what you pay. Value is what you get.
* We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.
* A public-opinion poll is no substitute for thought.
Why all these matters?
Everyone wants to trade their own way. But don’t end up being with the crowd that loses money. Your social mood, whether it be optimism, greed, fear, is fueled by the same aspect accepted in society.
There is nothing wrong to be part of the crowd.
Yes, it is quite easy to say “I will follow the crowd and get out before them.” But it is pretty difficult because everyone in the crowd believes the same.
Assume you understand bid and ask prices. Right?
When people start to sell there are only so many shares are each price level.
And if you want to get out you need to sell to a lower bid price, then a lower, and a lower, and lower. Not everyone can get out at a good price.
There is only a few quickest who get out before the real loss is done.
Be one of them.