After almost thirteen years of activity in the global financial markets, I still to this day believe that currency trading is by far one of the very best entry points into the world of trading for almost anyone who is interested. It is so versatile that it also lends itself to the more experienced investors and market speculators. This is a huge market which must be considered for any active portfolio. However, with all good things there are also a few other aspects that must be taken into account before jumping straight in, most of which come from the lack of quality information available to us and incorrect guidance thrown in for good measure. Let’s clear a couple up trading myths right away.
Trading Myth #1 – Forex Markets Are Fair
One of the single worst trading myths that I hear touted around on various broker and trading news websites is how FX has the huge advantage of being a “fair” market, more so than others. So what does this actually mean? Typically, this is usually referenced with regard to the economic news schedules which impact currency prices on a daily basis. I have heard the statement that there is very little or nowhere near any insider trading in FX because the market is too big and due to the fact that all economic news is released publicly at the same time. This illusion alone encourages newer traders to place orders around the major news events, like Non-Farm Payrolls, while attempting to jump on board a major market move for a quick profit.
Without doubt, this is probably one of the most reckless things a trader can do and makes the art of market speculation into nothing really more than a low odds gamble. Major banks, institutions and professional traders all know the dangers of trying to predict the news outcomes. They instead allow price to come to them. Sure, now and then you could take a breakout play off the back of a news statement and make some quick easy cash, but trying to do it over and over again probably won’t pan out. In the long run, trading the news is nothing like having a detailed and sophisticated trading plan to work from which stacks the odds in your favor for the long haul. The big players know how novices react to news, because they are wrongly educated to do so, and then capitalize on the fact by pretty much doing the opposite. This is a zero-sum game after all.
How many times have you seen good data releases push a currency pair higher in a very short space of time, only to then witness it practically stop, reverse down and continue to fall for the rest of the day? This can also happen vice-versa, and it is more common to see initial knee-jerk moves in price followed by complete reversals in sentiment which have little if anything to do with the actual news release itself. A professional FX trader can take advantage of these events though, when they truly begin to understand how prices in the markets really behave. Here at Online Trading Academy we teach our students the rules of price in the real world, highlighting the simple fact that markets only go up and down because of imbalances in Supply and Demand created by institutional buying and selling. The professional trader simply knows how to look through the noise of the media and technical chart patterns to see where the biggest market players are entering into positions. Once you know what to look for you can simply trade with banks and not against them.
The biggest institutions will create major supply and demand imbalances with their buying and selling activity due to the size of positions they take and how they have to trade. Also, due to the global nature of the FX markets, these imbalances and trading opportunities can present themselves to the astute market speculator all around the clock as well.
Forex Trading Myth #2 – European Market Hours Provide the Best Opportunity
Another common trading myth about the currency world is that the very best trading setups only take place during the European market hours. Sure, this is one of the most liquid times of day buy it is not the only time to trade. It also does not mean that we have to be there in front of the screen to be able to trade either. Let’s be honest, if you live in Europe and have a full time job, you can’t suddenly take the mornings off to trade can you? If you are based in the USA, then you would have to get up in the middle of the night and that’s not really practical in the longer term either.
Rest assured my friends, while the European market hours do offer many solid trading opportunities, if you learn to read the charts objectively and find your levels to enter ahead of time, you can easily “set and forget” your trades and let them play out in the background, no matter the news or fundamentals surrounding the trade.
In a recent XLT session on August 7th, we did that exact thing on the NZDUSD, well ahead of the RBNZ Official Interest Rate decision a few days later on Aug 10th. Below you will see a screenshot of the NZDUSD as we are drawing in our level of Demand to buy the pair:
Having set up our trade to buy at the institutional level, with a stop loss if wrong and a profit target at the previous highs, there is nothing more to do than let time pass and see what happens. A few days later, the cash rate was announced with a lowering of the rate from 2.25% to 2% which is typically bearish for a currency, although our strategy said it was a great time to buy. Here is the result over the next few days:
As you can see, the market rallied nicely from our pre-determined level of demand, providing a decent risk to reward profile and all around the news, even though it was a set and forget opportunity.
I learned early in my trading career that attempting to follow news is not the way to go if you hope to achieve consistency in the financial markets. The news will typically trap you into doing something you shouldn’t be doing, rather than making the objective choice that is in line with how money is really made in any business. My advice is avoid these trading myths by: checking your charts, placing your orders and then living your life! See you next time.