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The Beginner’s Edge When Trading FX

The Beginner’s Edge When Trading FX

Tyler Yell, CMT, Currency Strategist

Talking Points:

-The Beginner’s Edge

-The Experienced Traders Downfall

-An Alternative Path

If your mind is empty, it is always ready for anything, it is open to everything. In the beginner’s mind there are many possibilities, in the expert’s mind there are few.”

-Shunryu Suzuki

Many beginner FX traders look to experienced traders for their knowledge of markets. Their knowledge the beginner’s presume allows them to know all the details of the market, however knowledge that can lead to hubris can come at a cost. Traders simply are looking for low hanging fruit on the charts backed by credible ongoing themes and sometimes, the gentlest approaches are best. This article defines the gentlest approach as not fighting trends but rather following them.

The Beginner’s Edge

Traders seem to be at the highest risk point when they are convinced they know where the market is going which causes traders to put up blinders on information that goes counter to what they expect. Surprising to many, the beginners who admits that they don’t know where the market is going next and therefore manages risk tightly is closer to having the better mindset for trading than the person who supposedly knows what will happen next. The experienced trader who believes they know what will happen next is therefore at higher risk than the beginner of holding on to a wrong view with conviction. Risk is high when this happens because no amount of smarts or insight to what could be around the corner will help them prevent losing their capital trading base by fighting the trend.

Probability on Any Move Is Never 100% But Can Be Over 50%

The Beginner’s Edge When Trading FX

Presented by FXCM’s Marketscope Charts

The Experienced Trader’s Downfall

Any market, be it Forex, Bonds, or Equities, is made up of a large mass of people thinking price is either too low relative to where their understanding of the value lies or too high relative to where they believe price should be. Put another way, markets are consistently being traded by people who agree on the price but disagree where that price will be 3,6,12 months from today.

This article tries to paint the question, is it possible to out think the market?

The answer is a very simple, yes! Many traders like to look at correlations, or sentiment extremes, or stochastics as a way to say something has gone too far too fast. In an extended Bull move, it’s easy to think, “Oh my, this has moved too far too fast and the reaction will be sharp, I got to Sell!” however, without a structural breaking of support in an uptrend or resistance in a downtrend with a corresponding change in fundamentals there is no clean trigger to fight the trend and you’re likely outthinking the market to your own harm.

Trying to Call a Top Can Be Fun but it’s Dangerous for Traders

The Beginner’s Edge When Trading FX

Presented by FXCM’s Marketscope Charts

Of course, knowledge of markets can be a great thing but too much confidence in your knowledge is equally a dangerous thing. Experienced traders often like to think they have seen the exact same set-up on the chart more than once and they’ll often think ‘this is that’ hoping they have a sure thing. However, when that and this are different and price begins moving away from their entry in a bad way, they may find themselves fighting price. Naturally, fighting price is a losing battle and until the trend changes, brave trading is often more exciting than profitable.

Long-Term Oil Prices Are Erratic and Trying to Be "Too Smart" to Follow the Trend is Risky

The Beginner’s Edge When Trading FX

Presented by FXCM’s Marketscope Charts

An Alternative

Instead of outthinking the market, there is a likely better and easier approach. Trade with the trend, use tools like sentiment and pre-trend patterns to help you position in the direction of the overall trend. Always ensure lower leverage though higher balances and using a protective stop. This may not be as exciting a way to trade as you thought was in store but it will likely lead to a more stable and lengthy trading career.

Put another way, can you think simple enough to trade well? Not all can, but the answer to the question is critical.

Happy Trading!

---Written by Tyler Yell, Trading Instructor

To contact Tyler, email tyell@dailyfx.com

To be added to Tyler's e-mail distribution list, please click here

Tyler is available on Twitter @ForexYell

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