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Why Retail Forex Traders Are Predictable

November 20
04:46 2011

Being a 'Predictable Trader' Is A Bad Thing!

Long ago I realized a problem in the forex market. I realized this problem only after years of losing money, thousands of dollars lost, and numerous sleepless nights. This problem didnt just affect me but it affected every forex trader I knew at the time. This problem is so prevalent that it no doubt affects 95% or more of all those reading this article. To state it simply, I realized main stream forex education was failing traders, including myself. When you think about it no matter what forex trading strategy you use, for the most part they all rely on the same thing to trigger a buy and the same thing to trigger a sell.

For example, all indicators, trading strategies, EAs, candle patterns, etc. rely on the price beginning to move up to trigger a buy. Some will begin to signal the buy early and some later, but in the end upward price movement is required for a signal to go long. The opposite is true of a trading signal to go short. Therefore while there are literally hundreds of techniques used in the forex market they all boil down to upward movement to trigger a buy, and downward movement to eventually trigger a sell.

I understand this is an over-generalized statement but I believe it holds true the majority of the time. I ask you to not just immediately dismiss this idea but rather give it serious consideration along with the rest of the thoughts that are presented in this article.

Why Retail Forex Traders Are Predictable

If we know what triggers the masses to buy and the masses to likewise sell, then dont you think the banks driving this market do as well? One recent article said retail forex traders make up 250 billion of the daily forex volume. Considering forex is a little over a 3 trillion dollar a day market, retail traders make up close to 8% of the daily volume. If you subtract all the general order flow from 3 trillion dollars a day (currency exchange for global commerce/business) you would end up with a much smaller number that is actually speculative trading.

Lets just assume half of the 3 trillion is speculative and the other half is general order flow from global commerce/business and such. If this is true then the 250 billion in volume from retail traders is in actuality 16% of the total daily speculative order flow. At 16% of the daily speculative order flow this now makes us the average retail trader important to the banks.

As we have discussed before for every buyer there is a seller and for every seller there is a buyer. This is a basic fundamental in every market, and this is what makes us important to the banks. Lets examine an example, and draw a conclusion from the facts.

How Predictability Leads to Constant Losses

If a bank was looking to short 10 billion of the EUR/USD they would need to find 10 billion in EUR/USD buy orders to fill their desired short position. Therefore in order to not drive the price down as they enter their short position, the bank must make retail traders believe the EUR/USD is going up. If traders believe the market is going up they will begin to buy which is exactly what the bank wanted to happen in order to fill their desired short position.

As retail traders begin to buy, the bank then begins to sell into that buying pressure until their position is nearly filled. Its at this point the bank/banks begin to sell more aggressively pushing the price down and thus shifting the belief of retail traders to the downside. Retail traders begin to close out their previous long position (thus selling to close the long position) and not only that but they will often chase the price down only fueling the banks position even more. As it relates to the 3 steps forex bank trading strategy, what was just described here is the accumulation phase where the actual position is entered.

As we discussed in the beginning most all forex trading strategies rely on the same thing to trigger either a buy or sell entry, and this makes retail traders predictable prey of the banks. At this point I ask you to give serious consideration to this thought, and then examine the forex trading strategies and forex systems you have experience with.

Because banks understand this concept as well, they then use it to their advantage as we described above. Again I urge you to use your own reasoning on this matter based on your own experiences in the forex market. Maybe this explains why so many traders say the market turns against me as soon as I enter? The key here is to separate ourselves from the predictable masses so we too don’t have the same negative results! It is my belief that we must learn the forex trading strategy of the banks to achieve success. Learning how they manipulate the market allows us to profit from it rather than being their victims!

Happy Trading,