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How to Beat your Competition in the Forex Market

How to Beat your Competition in the Forex Market

2014-10-03 19:00:00
Tyler Yell, CMT, Currency Strategist
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Talking Points:

*Who Is Your Competition?

*Common Traits of Your Competition

*Your Competition Exposed With DailyFX’s SSI

Never interrupt your enemy when he is making a mistake.

- Napoleon Bonaparte (1769-1821)

If you know the enemy and know yourself, you need not fear the result of a hundred battles. If you know yourself but not the enemy, for every victory gained you will also suffer a defeat. If you know neither the enemy nor yourself, you will succumb in every battle.

― Sun Tzu, The Art of War

Competition brings out the best in some and makes others cower. Either way, trading is fraught with competition and understanding who your competition is and what your competition is doing can help you squeeze the most out of a good trade. When we look at trading as a competition like a race, you can see the importance of limiting losses and how to be positioned against the competition to get the most of a move in order to grow your account.

Who Is Your Competition?

Like all sports, there is the person on the other side of you that is your direct competition but unlike sports there are other facets of competition in trading. The trader must come to the knowledge that they can be their own worst enemy. This plays out in the psychology where they blame themselves or beat themselves up for trading mistakes but there’s another form of competition that trades must come up against.

How to Beat your Competition in the Forex Market

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The final form of competition is high-priced brokers who charge a relatively high spread. This can make trading a negative-sum game in which not only is a dollar gained for every dollar lost between competitors but there is a net set-back in cost for participation that must be overcome in addition to beating your direction competition. This creates a negative-sum game where you need an edge over your competition and a low-priced broker.

Common Traits of Your Competition

We have defined our competition as those on the other side of the trade, unnecessarily high-priced brokerages, and our own mental short-comings that make us ill-equipped to deal with trading in the zone. The competition that we can easily identify and build an edge over are the mass of traders on the other side of the trade. We can build the edge because DailyFX was able to look at 12,000,000 live trades over the span of a year to identify what were the commonalities of traders.

Register for the Traits of Successful Traders Guide for Free Here

The discoveries were powerful and simple. In masse, traders often fight the overall trend and overleverage their account. This gives you a distinct advantage to know how to beat the competition even if you don’t know their name.

Your Competition Exposed With DailyFX’s SSI

How to Beat your Competition in the Forex Market

Courtesy of DailyFX PLUS’ SSI Report

The easiest way to see what the masse of traders are doing on any one major pair is via the Speculative Sentiment Index or SSI. If you see trading as a battlefield then you have a few questions to answer before you engage in a fight. Knowing that you are not bigger than the market and are not able to turn the market yourself, you need to ask, what is the direction of the overall trend? You can also ask if you’re seeing a series of higher highs and higher lows which evidence an uptrend or a series of lower highs and lower lows that evidence a downtrend.

Once you’ve answered the important trend question, you can find out what your competition is doing via the DailyFX SSI tool. The chart above shows Cable or GBPUSD chart with trader positioning overlaid. The green area shows us that a majority of traders are buying and a red area shows us that a majority of traders are selling. The sweet spot as a trader looking to profit from their competition is to buy in an uptrend when the majority of traders are selling and to do so with a broker with tight spreads. Ideally, you’d like to stay in the trade until the trend has flipped and similarly, your competition has flipped net positioning.

The next article will address this example with USDJPY.

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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