Trading for profit in the foreign exchange (forex) market is possible. However in order to achieve this goal one must be “mediocre”. This is perhaps an odd statement to make considering that in most walks of life being other than mediocre is encouraged for extra gains.
Let me explain. First let us establish what drives the foreign exchange market. Price movements are driven by investments. If most of the investment is done towards buying a currency pair as opposed to selling it, the price of that currency pair will rise. The velocity of the rise, the “spike”, will depend on the net difference between the two opposing forces.
One important thing to keep in mind is that it isn’t the number of investors who sway the price of a currency pair but the amount of money invested in either buying or selling it. So for instance, if most of the retail investors were betting on the pair EUR/USD to go down in price but the major financial institutions bought it, you will find the price moves up.
This is purely because it is the net amount of money that controls the market not the number of investors. The old adage “follow the money” holds true here. Although in reality you will find that the majority of investors will quickly invest on the side of the money. These smart but at the same time mediocre investors who moved with the money stand to profit.
Hopefully, by now you are beginning to get the idea about what I mean when I say mediocre, it is simply that “being with the crowd”, being an “average Joe” or being “part of the herd”. Safety in numbers is a great survival tactic in the wild, for instance the Wildebeest herding together against attacks by lions and other predators. Surprisingly (or perhaps not so surprisingly) it also holds true when trading the forex market. Being part of the herd will not only make you survive the trade you are in, but will eventually make you profitable.
If you have traded the forex market for any length of time, you will know that the price never moves in a straight line. It appears to swing from a high to a low and vice versa. If these price swings retrace to the same point over and over again, the market is said to be neutral. However, if the price doesn’t retrace back to where it started from and is lower in successive swings then the overall effect is that of price moving lower. The price is said to be in a downtrend.
On the other hand, if the price through the swings has the effect of moving up, then it is said to be in an uptrend. Trends are easier to see on higher time frames. Another important adage that holds true in trading but not just in forex is “the trend is your friend”. As mentioned previously, a trend is formed by the net movement of money in a currency pair. If you identified and followed this trend then you will be safe as an investor.
The key to success and survival in forex trading is to follow the trend, the herd, and to be the average Joe. If you followed this simple rule, it is difficult to see how you can fail in your forex trading career. Some of the most successful currency traders owe their success to their abilities to identify the reversals in trends, the so-called “tops” and “bottoms”.
A top will indicate a reversal in the price going up. The opposite is true for a bottom. A trader who had placed a trade and had been following the trend whether up or down should, when he identifies a top or a bottom, take profit and prepare to trade the price reversal.
For the not-so-skilled trader who has yet mastered the art of identifying these important tops and bottoms, patience is definitely a virtue. By being patient, you will be able to confirm the new trend whether it’s moving up or down.
So, being a patient, average Joe certainly helps in trading the forex market successfully.
To your forex trading success!