What is the Forex currency market? Even a novice trader knows the answer to this question. And who trades in the foreign exchange market? That’s right, people. Each person has his weaknesses and shortcomings. And when a lot of people get together in the framework of a project, they become a crowd that has its own stereotypes of behavior.
Today we will talk about the stereotypes of the market crowd and what should be done so as not to mingle with it.
A LONG-VIRGIN FABLE ABOUT A SERIOUS TRADER IVAN IVANYCH
Ivan Ivanych is a serious trader. He every day opens a trading terminal, trying to earn on Forex trading in currency pairs. Ivan Ivanych is not some green newcomer. He read many books on trading, registered at many forex forums. He even independently created a trading strategy.
Let’s look at Ivan Ivanych and see how his trading day is going.
First of all, he starts a terminal where a lot of currency pairs’ charts are open. Ivan Ivanych quickly looks through them in search of clear trade signals.
The search goes idle – there are no signals to enter the market. But the trader does not give up – the deal must be opened in any case! After all, how can you earn on Forex without trading? Said – done, the search for trading signals “starts” repeatedly, but already “more carefully.”
Finally, a trade signal (in fact, existing only in the imagination of Ivan Ivanych) is found, the deal is open. As we have already said, our trader is not a beginner, so he writes down his actions in the trade diary: “I opened a deal to buy a pair of euro / dollar after the trading signal – a sharp drop in the price down and its stop at the moving for a subsequent turn.”
This is the seriousness of Ivan Ivanych does not end. He opened a deal to make a profit, so to make a profit, God forbid, did not go anywhere, you need to set a take-profit. In order not to puzzle, the take-profit is set at 30 points from the current price.
And what about the stop-loss? Ivan Ivanovich – the trader is not only serious, but still reasonable and cunning. Why put a stop? I constantly monitor the transaction and, if that, I will close it with my hands.
The deal is open, the price is in place and, apparently, is not going anywhere. Why waste time? As a serious trader, Ivan Ivanych knows perfectly well that trading Forex creates a psychological burden on the trader. Why not relax while the market “sleeps”? Ivan Ivanych opens the World of Tanks, driving a couple of skating rinks on his beloved bachata to relieve this inhuman strain on the psyche.
In an hour our trader remembers an open deal. Looks at the chart – instead of growth, the price fell by 50 points, the deal gives the deposit a floating loss of $ 50.
A connoisseur of forex literature Ivan Ivanovich is perplexed. What is going on? When was it that it was?
Express analysis of the euro / dollar pair chart leads our trader to the conclusion that there is nowhere else to drop the price, because this time on its way there is already a long-term moving average. Ivan Ivanych opens another deal to buy in the same volume, averaging against the momentum.
Minutes 40 passes in close supervision over all evolution of quotations of a currency pair. The price has slightly receded from long-term moving, instead of a floating loss even a small floating profit was formed.
Ivan Ivanych condescendingly smiles: now you can not deceive, the calculation turned out to be correct. If the price does not fall any more, then to clear the conscience, you can set the stop-loss. But what about without insurance, the trader is serious! Ivan Ivanych with unstrained hand puts a stop-loss in the area of the weekly minimum.
Exactly after five minutes the price breaks the moving, falls further, and our trader’s transaction closes on the stop-loss. Ivan Ivanovich in shock – as it is, this can not be, in fact a moving, because a long-term …
Such here came a fable about a serious trader Ivan Ivanych? Did you recognize yourself? But, as you know, in every decent fable there must be a moral. Here we will dwell on it in more detail.
THE MORAL OF THIS FABLE IS AS FOLLOWS …
I think many learned in Ivan Ivanych himself. Why then is there a sin to conceal, the author of this article was himself the same. For most of the truly experienced traders – this is already a passed stage. But what conclusions can we draw from this?
Such “Ivan Ivanychs” on Forex are whole crowds. And, accordingly, these crowds can identify stereotypes of their behavior, knowledge of which will allow you to make a profit where others lose money.
And since the conversation was about money, then jokes aside. It’s time to consider the most basic stereotypes of crowd behavior that directly affect the market. So, let’s begin.
Mistake No. 1: MORE DEALS OPEN AGAINST THE CURRENT TREND
In simple terms, these are the deals open against the trend, in order to catch the price reversal at its very beginning.
There are many methods for determining the direction of the trend and its reversal, but the facts are a stubborn thing. They show that a prolonged price movement in one direction leads to an increase in the number of people willing to open a deal against its movement. They do not believe that the price can continue, for example, growth, because “it has already grown very much, where much more.”
If you express this in figures, then in the direction of the current trend, only 40% of deals are opened, but against the trend – as much as 60%. As we have already said, this stereotype is based on the desire to “catch” the reversal at the very beginning – on the overcoming of some level or line of the figure of technical analysis.
Mistake No. 2: PROFITABLE TRANSACTIONS “LIVE” ARE HALF AS MUCH AS UNPROFITABLE
The reason for this stereotype is ordinary human fear. We are just afraid. We are afraid to miss the profit, so we are happy to close profitable trades. And we are afraid to take a loss on deposit, so we pull with the closure of such transactions, in the hope that the price will unfold.
It is curious that such behavior of traders leads to the fact that unprofitable transactions in the market are always more than profitable. And that is why the ratio of profitable traders to Forex to unprofitable traders is about 30-35% and very rarely exceeds 40%.
Mistake No. 3: THE TAKE-PROFIT ORDER IS SET MUCH MORE OFTEN THAN THE STOP-LOSS ORDER
The absence of stop-loss trading is a “disease” not only for most beginners but also for many experienced traders. Here again, “guilty” of psychology. We are afraid that the price will catch the stop-loss and go again in the right direction. The choice is simple and erroneous – do not set a stop-loss, and close transactions manually, like Ivan Ivanych. In fact, only 40% of open trades have a stop.
Mistake No. 4: CLASSIC WAYS OF INSTALLING STOPS
Having carefully read the previous paragraph, you should have a natural question – wait, after all, there are the same classical ways of setting a stop-loss order, for example, above the previous high and below the previous low. The logic is simple – if the price broke through the high / low level, then it will continue its movement further. Is not this what the training materials on trading teach us ?
Looks, of course, logical. Previously, it was so. The price is close to the level of the previous extremum, panic was growing on the market, which moved the price further. It was this mechanism that formed the habit of the crowd setting stops behind these levels.
Now the foreign exchange market is already far from the one that was before – the marketplace is ruled by market makers. And such classic levels, on which the crowd installs stop-loss, attract them, like a sweet tooth cake, to open their trades.
The market has changed, but the habit of exposing stops for local extremes has remained. In fact, at such levels, there are twice as many Stop Loss orders as on all others.
Mistake No. 5: TAKE-PROFIT EXPOSES MOST TRADERS
Profit is loved by everyone, so the take-profit warrant is exhibited much more often. In fact, it looks like this:
40% of transactions have a stop-loss, of which 30% also have an established take-profit;
In 80% of the transactions there is a take-profit, of which 30% also have a stop-loss;
10% of transactions have no orders at all.
And why do we need this information, you ask? And then, that the next stereotype follows from it.
Mistake No. 6: THE TAKE-PROFIT SETTING IS NOT TIED TO ANY LEVELS
The technique for setting the take-profit order is much larger than the stop-loss setting techniques. Therefore, such a cluster of take-profits, as it happens with stops, is not observed.
Mistake No. 7: MOST TRANSACTIONS ARE OPENED IN THE ABSENCE OF TRADING SIGNALS
If you track the congestion of transactions at individual levels, it becomes immediately obvious that the longer the price is at a certain level, the more open positions on it.
What does it say? And this means that the deals were opened without any obvious trading signals. That is, the crowd of “Ivan Ivanychi” just opens a deal, because they so wanted. And the reason to “see” the trading signal, you can always find.
Mistake No. 8: AVERAGE. THERE ARE THREE PENDING ORDERS PER OPEN POSITION
According to the results of the conducted research, the number of pending orders, on average, is three times more than the number of open transactions.
This is quite logical, because one transaction can have two pending orders: stop-loss and take-profit. However, the set stop and take is a ratio of no more than 1 to 2, and we have a ratio of 1 to 3. The rest of the pending orders are orders Limit and Stop .
Also, if we take into account the previous stereotypes and the fact that not all the deals have a stop loss and take profit, we will get the following ratio of pending orders in the market:
- Stop-loss – 14%;
- Orders of Stop type – 20%;
- Take-profit – 28%;
- Orders of the Limit type are 40%.
Considering that we are preparing to “go against the crowd”, for us it does not really matter, because, from the point of view of a market maker, it is one and the same.
I CAME TO THE FOREX FOR MONEY …
Above Ivan Ivanych laughed, the stereotypes were dismantled, but what is the practical meaning of this? As one of the users of our forum says: “I came to the Forex for money, but not smart to be.” How to convert this knowledge into material profit?
Figuratively speaking, the crowd at Forex is food for market sharks. The money “Ivan the Ivanovs” is their profit. And moving away from the stereotypes that have developed in the market, you can not be afraid that the sharks of the stock exchange will eat you, but you can tear off from their food and a piece to yourself.
How not to mix with the crowd? Following the recommendations below, this will not be very difficult:
- Open your deals solely in the direction of the current trend.
- Avoid placing stop-loss orders at round levels and in areas of local extremes.
- Do not perceive the setting of a take profit order as an axiom. As a rule, if our forecast turned out to be correct, then in the right direction the price will continue for a long time.
- To set a take profit order, choose levels where “classic” traders display their stops. Most will “knock out” the stop-loss, and you will get your profit.
- Open a deal only if there is a clear trading signal. Do not succumb to excitement and bouts of gambling.
- Pay more attention not to profits, but to losses. Control your losses, always exposing the stop-loss, and the profit from you will not go anywhere.
- More often use in trade warrants of type BuyLimit and SellLimit, thus, necessarily establish in them stop-loss.
Of course, you already know some of these recommendations. However, now you understand their meaning, and going against the crowd, you will be able to profit where the majority leaves at a loss.