When

When the time comes to buy, you won't want to

Much of what we write about in these articles is about the mindset and behaviour of traders and trading. The reason for this is quite straight forward; it's because it's the decisions that we make and take that will ultimately determine how we perform as traders.

 

Yes, of course, price changes in the markets will play their part but, in the end, it's our decision whether to get involved or not and that determines how much capital we commit to trade, how long we hold the position for, and what the ultimate outcome of the trade will be.


Hidden costs

When we examine the costs of trading, we tend to focus on commissions and spreads and our PnL, but there are other costs, costs that we don't consider when really, we should.

 

These are the costs of inactivity and indecision, the costs of listening to outside influences more than to your own inner feelings and intuition. They are the costs of missing out, what economists call "opportunity costs".

 

Self-doubt among traders is not unusual, and in truth, it's better to exercise a degree of caution than to be 100% confident about everything you do. Hubris has been the downfall of many traders, and we certainly advocate being prudent with your risk. That said, It's always worth testing your thinking and assumptions and checking that they are still valid before you trade.

 

The problem comes when you start to talk yourself out of the trade entirely. After all, trading is a risk and reward business. There can be no profit without the possibility of loss.

 

A trader's job is to try and ensure that the risk that they take is in proportion to the potential rewards they could make. Not taking that risk could be limiting your potential as a trader which in turn may be limiting your rewards or returns. 

 

Moments of clarity


Sometimes as a trader or investor, you will enjoy a moment of clarity, a moment of pure thought and insight, in which you can see exactly how a market setup or situation will playout. Moments when you just know you are right

 

If that moment of clarity coincides with significant moves in the markets, then that can be a very valuable situation indeed. But only if you act on it.

 

Allow me to tell you a personal story. During the great 2020 downturn in oil (where a Saudi/Russia price war caused prices to go NEGATIVE), I found myself holding oil from $30 a barrel and riding it all the way down watching in sheer horror. I kept buying the dip. How much lower could it go, I thought? I ignored every rule and everything I've written in the past about this. I didn't put a stop loss on. I told myself it was a long-term trade that I would stay in forever. Prices surely couldn't go below $20. That's madness. Then… The unthinkable happened in the futures price – it went negative.

 

Thankfully, Fusion's price didn't go negative (we use Spot Crude oil) but with spot prices at $15, I was sitting watching Netflix on my couch, and my heart raced as I saw it go down like World War III just started. The news sites told me nothing new had happened (funny how we search for any narrative to make sense of it all). Here it went. $14. $12. $11. Back to $12. Back to $11. $10. $9. Thoughtful me knew these prices were unsustainable. I told myself I would hold until it hit $0 if it had to. My account was down 70%. I'd never suffered such steep losses. I felt sick. I then couldn't sleep. I woke up, and it was still down a lot but had recovered from $7.


Watch out for the narratives.

 

I started to read more about what others were saying. What the hell was going on? Would this happen again? Yes, there was nowhere to store the oil (so the narrative went) but surely rationality would prevail. Seriously, how could you have negative prices? It was impossible to find anyone bullish in the media or otherwise. People assume if something just happened, it will occur again Goldman came out and said to expect more negative pricing. But I just couldn't believe it was so cheap. I knew it was time to buy more!

 

But then I didn't buy it. I waited for another opportunity for when I knew "the worst was over" I was so sure things would bounce back, but I didn't have the guts to buy one more time, and the opportunity passed me by forever. I let the external narrative cloud my previous judgement. But I was just so worried I couldn't think properly. Within days, it had doubled back to $15 a barrel. Then it was $20 a week later. At the time of writing it is $40 a barrel. By the time you read this, it might be $60 a barrel. Who knows? All I knew was fear and too much outside influence completely warped my view, and I failed. I just wanted to survive the calamity. While I survived to write you this, I did not do as well as I could have.


Self-belief


People often talk about having the courage of their convictions, but in trading, it's not really about courage, it's about belief, belief in yourself and your ideas and be prepared to back them, rather than talking yourself out of them, or allowing yourself to be talked out of them by others.

 

We all like to take advice and read and hear the opinions of so-called experts. But the absolute truth is that nobody really knows what going to happen next in the markets.

 

For example, nobody was predicting that an 11-year bull market in equities was going to end and end so abruptly in Q1 2020. Or that US unemployment would spiral to +14.7% in a single month.

 

Do not get me started on the rebound from the lows in March. To be bullish on the markets in April and May of 2020 was to look like you had lost your mind given the narratives surrounding COVID.

 

So-called "market legends" like Druckenmiller and Buffett told everyone it was not the time to buy. Sadly, so many would have listened.

 

Let's not forget Yogi Berra's famous saying "It's hard to make predictions, especially about the future" which is why it's best to take these so-called forecasts with a grain of salt. The best that any expert can do is to make a prediction or forecast about the future. And the longer the time frame that the forecast is over, or the more unusual the circumstances under which it is made, then the more significant the room for error and the higher the chance that they are simply wrong.


Loss aversion

As humans, we are subject to subconscious emotional biases that can cloud our decision making. One such bias is loss aversion.

 

Loss aversion can hamper a trader in two distinct ways. It's most commonly associated with the practice of running losses, ignoring stops and breaking money management rules when a trader can't or won't accept that they were wrong and refused to close a losing position.

 

The other way that loss aversion can muddy the waters is in our initial decision making. You see as species we are poor judges of risk and reward; we don't calculate probabilities very well, and the upshot of this is that we do not like uncertainty.

 

To the extent that when we are faced with situations that have a series of potential outcomes, we tend to favour the outcome with the highest degree of certainty. Even if that outcome is the least beneficial to us financially. Which, of course, is the exact opposite of the risk versus reward culture that we spoke about earlier.


Fortune favours the bold.


Though we might not like to admit it, our subconscious is often trying to talk us out of taking risks. Outside influences from the media, fear, our aversion to loss and a preference for certainty may often be our worst enemy as traders.

 

As Howard Marks said, "If you're doing the same thing as everyone else, how do you expect to outperform them"?

 

There have been several once in a generation trading opportunities over the last six months. I wonder how many of us were bold enough to seize the day and take advantage?

 

 

 

 

 

 

 

 

 

 

 


Getting

Getting Sentimental

We believe that wherever possible, we should remove emotions from our trading psychology and try to act logically and systematically when making trading decisions. That’s because there are facets of our emotional selves that are just no good when it comes to making money. Impulses that encourage us to snatch at profits, make rash trades and run losses can be detrimental to our wealth in the same way that running out into a stream of moving traffic could be very detrimental to our health. We could go so far as to say that there is no room for sentiment at all in trading, but if we said that we wouldn’t be entirely correct. Because while it’s true that we want to remove sentiment and emotion from our own trading, we should be quite happy to take advantage of other people’s sentiments.


Picking the right wave

Trading is effectively a three-way competition. First, you compete with yourself and your psyche, of course, you also compete with the market in the same way that a surfer competes with the ocean. That is reading the changes in the swell and the wind in order to pick to the right waves. However, you are also competing with other traders, because in forex for every winner there is a loser, and to make money, you need to try to ensure that other traders and not you are on the losing side, more often than not. To succeed, we need to follow a rules-based trading strategy that helps us back only the best trading opportunities that the market presents to us. We also need to try and develop an edge over our competition, that is other traders.

Of course, we don’t and can’t know who these other traders are, and even if we did it wouldn’t do us much good, because there are millions of them spread out across the globe trading away at any one time. However, the fact that there are so many competitors out there can work in our favour. Why? Because a crowd that big leaves a trail that we can follow and that can provide us with an edge.


Tracking the markets thinking

One of the methods that we can use to gauge what the rest of the market is thinking and doing is to look at what they are buying, selling and saying. That is measuring the sentiment towards the markets, and doing that in aggregate.

 

There are several ways in which we can do this. For example, we could study the weekly Commitment of Traders reports that are produced by the US CFTC which track changes in positioning in listed futures contracts (including FX majors) among key investor and trading groups. However, these reports are released three days in arrears, late on Friday afternoon in the USA. What’s more, they are not exactly user friendly in terms of their layout or the way that the data is presented or in the ease of interpretation (the CFTC is not known for its beautiful charts!).

 

Perhaps a more simplistic way to track trader sentiment is to look at what’s happening to the prices of safe-haven assets such as gold, the Japanese yen and Swiss franc and government bonds. If these instruments are rising in price, then that’s a sign of Risk-Off sentiment among traders.

 

If those safe-haven assets are strengthening when risk assets such as equities and Emerging Market currencies like the South African rand, Brazilian real and Turkish lira etc. are weakening, then you will know it’s risk-off. Of course, if we see risk assets appreciating while safe-havens are falling in price, that’s an indicator of Risk-On sentiment among market participants.

 

However, there are quite a few items to monitor the strategy outlined above. Since we are trying to gauge the aggregate sentiment of the crowd, it would be good if we had an indicator to gauge sentiment across a wide range of assets as well.

 

True we could try to use the VIX and other volatility indices, volatility is a measure of the rate and severity of price changes within an instrument or market. It tends to rise sharply as markets become fearful and trend lower when fear subsides and greed re-asserts itself. But once again, this would mean monitoring multiple items from different sources, to which we may have varying degrees of access.


A single gauge of sentiment?

Instead, what if we had one indicator that could tell us what others in the markets were thinking?

 

Fusion Markets has partnered up with some very talented engineers to simplify this even further.

 

Using cutting-edge artificial intelligence techniques known as Natural Language Processing (NLP), we can use machines to take in hundreds of thousands of data points across the web to gauge sentiment.

 

Are people talking about the Aussie dollar? What are they saying exactly? Are they positive or negative?

 

What about Gold? Is the crowd bullish or bearish?

 

To do this, yourself (e.g. scour hundreds of thousands of sources across the web) would be impossible. That’s why we always say there’s never been a more exciting time to be a trader (at least with Fusion anyway) and have these tools available that were previously only available to the world’s best hedge funds and asset managers.

 

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We’ll leave it to you as to whether or not the crowd thinking it is highly bullish is a good signal to trade or a bad one and the strategy here (if you’ve read our views previously, you will know the answer!). Still, while it is not the holy grail as a single strategy, we believe this is a handy weapon to add to your arsenal to get an edge over others.


Why

Why Trading Costs Matter So Much


Fusion Markets prides itself on its low-cost approach to trading, but have you ever wondered why access to low-cost execution is important and what part it might play in your long-term success as a trader?

 

You might not even link the two things together, and I can see why. After all, a few pips of spread, or dollars and cents of commission paid, is small potatoes when you are trading in tens of thousands of dollars’ worth of currencies and other instruments daily, right?

 

But not so fast because these costs do make a difference in the long-term and that is the timescale that Fusion Markets wants to be your partner in the markets.

 

Let’s look at some numbers and imagine that you are a moderately active trader, with a strategy that you deploy across five instruments on a daily basis. And that on average you make 20 trades per day. Let’s call you Trader A. You have a friend who deals with another broker using a similar strategy, but they don’t offer Fusion Markets low commission rates let’s refer to them as Trader B.

 

You pay our low commission rate of USD $2.25 per trade whilst Trader B pays $5.00 per trade. You both trade 20 times a day, five days a week. That means, that you, Trader A, pay $225 per week in commission while your friend, Trader B, pays $500 in commission per week and that’s +275 dollars more than you pay.

 

Now let’s scale that up:

 

Over a month, that’s a difference of around +1,100 dollars commission and over the course of the year, Trader B pays an additional +14,300 dollars more in commission than you, for the same or similar trades.

 

That means that over five years of this type of active trading, Trader B will pay away an astonishing +71,500 dollars of additional commission.

 

Now not only does Trader B pay those additional costs, he or she also “pays” the opportunity costs of not having that money available to them. Money that could have been saved or invested or that could have helped pay off the mortgage or the car loan that much quicker.


Money that might have been put into a nest egg for the kids in later life. And all that before we even consider the possibility of compound growth on that money over time.

 

Tighter spreads matter too

 

Now not only do lower commissions benefit your trading and finances so do tighter spreads. After all, some brokers charge astronomical amounts in spreads.  

 

Spreads are the difference between the bid and ask prices in the market, the prices at which you can buy or sell a financial instrument like a currency pair or equity index.

 

Each we time we buy or sell an instrument at the market price we are said to be” crossing the spread” or if you prefer incurring the cost of spread in our trade.

 

The spread is seen as a cost because we have to make it back before our trade moves into profit.

 

Think of it like this: Instrument A is priced at 100-101 we can sell at 100 and buy at 101.

If we buy a unit of instrument A at a price of 101, we incur an immediate running loss. That’s because our trade is valued at the price that we can sell the unit of instrument A for, and in this case, that’s 100.

 

In making the trade we have incurred the spread as a cost, to make those costs back we need to see the price of instrument A move up to 101-102, or higher. If it does that, it means that we now can sell our unit of instrument A at the price we paid for it. That is, we are now at breakeven on the trade.

 

And if the price of instrument A moves to 102-103 then we have a running profit on our trade because the bid price of Instrument A is now above our trade entry-level.

 

Spreads in FX trading may appear to be small but don’t forget that trade sizes are typically larger here.  Remember that a standard FX lot is US$100,000 of notional value.

 

What’s more FX trading is leveraged meaning that clients can gear up their account and at the maximum available leverage of 500:1 that means that a deposit of just US$ 2000 could control 10 FX lots or US$ 1,000,000 worth of a currency pair.

 

Even a small value like the size of the spread in EURUSD grows pretty quickly when you multiply it by another 6 or 7 figure number. So, the difference between a 0.1-0.2 pip spread, that you typically find at Fusion Markets, in this most active of currency pairs, and a 1-2 pip price that you might well find elsewhere, quickly becomes material (in your head you can do the math - 10-20x the figure is a LOT)

 

Quite simply, the narrower or tighter, that the spread you pay is, then the more chance you have of your trade moving into profit and doing so more quickly. Which, in turn, means more of your trades are potentially viable. Of course, you still have to do the leg work and get the direction of your trade right, but tighter spreads also mean that if you are wrong, and you cut or close the position. then you are doing so at a more advantageous price and that can help to keep your trading losses to a minimum.

 

Think of trading like an Olympic hurdle race. With a low-cost broker, you have a tiny hurdle to jump over in the form of lower costs. Your friend at Broker B has a giant hurdle he has to jump over every single time he enters a trade. Who has the better chance of success here? Do you want to jump over a 1 ft hurdle or a 6 ft hurdle?

 

Successful trading is not a get rich quick scheme it’s about finding and honing a style or system of trading that works for you and applying that to the markets over time. Successful traders often talk about slanting the odds of success in their favour and they try to do this not just for the trade that’s in front of them now but for all of their trades during the months and years they are active in markets. Having a trading cost base that works in your favour can play a key part in this. It means your the margin for error can be 10x lower than what your friend pays at Broker B.


Your

Your reptile brain is hurting your trading

These are unprecedented times for all of us. Not only have we seen the financial markets crash, moving from an 11-year bull market into a bear market, with a -33% correction (only to see it bounce back up 25%!), in less than a month, but we have also seen the oil price collapse, thanks to a price war between two of its biggest producers and an oversupply. On top of which we have the small matter of the Coronavirus and associated lockdowns and isolation to contend with. What a time to be alive! 

 

Life has changed dramatically in the space of just a few weeks and things we took for granted can no longer be relied upon.

 

If you watched the way the financial markets have been performing over recent weeks you will have experienced a rollercoaster of emotions that has matched, if not exceeded the peaks and troughs of the market. What kind of market are we in? General fear and greed? Are professional Investors rushing to cash and dumping everything they can? Algorithms? Passive Investing/ETFs exacerbating moves? Everything and anything is being put on the table but these moves are unprecedented.


 If you're not confused, you're not paying attention. 

 

You‘ve probably been conflicted, part of you may have wanted to bury your head in the sand and hope it all goes away. Another part of you may have wanted to sell everything and “head for the hills” except (literally speaking) of course you can't because you are under lockdown.

 

Let’s be clear these are stressful times. Even hard-nosed professional traders who have seen market crashes before are in unchartered territory at the moment and are trying to work out what to do next.

 

And just like you, they have been behaving a bit like a rabbit caught in the headlights. That is, not sure whether to run or stay put.

 

Before we can decide what to do next, we need to take a step back and examine why we’ve been behaving and thinking as we have.

 

Firstly, we need to realise that it's not personal or unique to us. Everyone is stressed at the moment, they are out of their routine and under immense pressure. concerned for the wellbeing of families, friends and finances.

 

At times like these our everyday decision-making processes take a back seat and the way our brain and body operates undergoes subtle but important changes.

 

When we are severely stressed our blood chemistry changes dramatically, adrenalin, noradrenaline and cortisol are produced by and pumped around our bodies.


These chemicals increase our heart rate, our pace of breathing. and ready our muscles for action. Without us being aware of it we are preparing for fight or flight.


Why does this happen?

Well, the truth is that a prehistoric part of our brain is taking control of our actions. There are "Two-yous" in your brain. A rational, deliberate, thoughtful you. And an emotional, fast-thinking you.

 

The frontal cortex of our brain, which is the part of the brain that we normally use for decision making, becomes less active and a part of the brain that's sometimes referred to as our reptile mind, called the amygdala, takes over.

 

The amygdala is an almond-shaped cluster of neurons and nuclei buried deep in our brains, frankly, it’s a “throwback”.  It has its own independent memory systems and it deals with our emotional and physical responses to stress and fear.

 

The amygdala evolved to make us alert to danger and to keep us alive if, for example, we came face to face with a large predator. These days, for most of us, confronting a large predator, is a remote possibility.

 

However, the amygdala's response to heightened levels of stress and stressful situations have become baked into our brains thanks to millions of years of evolution. Such that it’s become part of our subconscious, and something we are only faintly aware of and are not able to control.

 

So if you have been watching the markets or financial TV recently and have felt your heart pumping, your brow sweating, your muscles tensing and have found yourself only able to focus on the screen, even ignoring someone who is speaking to you, in the same room, you are not alone or to blame. You only need to watch five minutes of television or visit a news site to see blaring counts of the death toll, economic shutdown and other news that puts your amygdala in the driver's seat.

 

When our reptile brain takes over our decision making becomes short- term and driven by fear and our long-term strategic thinking goes completely out of the window.

 

That's why it's so dangerous to make financial decisions under stress at the heat of the moment if you will.  A few rash decisions or actions that are taken then can easily undo years of hard work.

 

So how can we try and counteract these primaeval forces in our brain and psyche?

Well, the first thing to do is break the cycle, so walk away from the source of stress be it the TV or the computer screen and gather yourself. If you can get into the garden or get some fresh air for a few minutes that will help.

 

Having removed yourself from the situation you can try to re-impose some order.

 

Think about the timescales you are investing or trading over. If you are trading FX you may be taking short term positions, but they are likely to be part of a longer-term plan. Perhaps you can re-appraise this as a once in a generation buying opportunity?

 

Remind yourself what your investing goals are and over what time scales were you trying to achieve them.

 

I very much doubt your plan was about weeks or even months was it?

 

Your plans were probably conceived to play out over several years, weren't they?

 

It also helps to think about who you are investing and trading for and why.


Perhaps it's for you and your family or other loved ones, thinking about these long-term goals can help you centre yourself once more. When I'm investing or trading I think about 65 year old me retiring and ask myself "Will I care about today's trading result then? Or even in one year?"

 

If you do need to make a decision or take action on your portfolio, try to make that decision when the markets are shut and you are free of distraction. You will find that you can think a lot more clearly in those circumstances. That clarity is only likely to benefit your finances over the longer term. Take a minute to take some deep breaths.


Remember, this too shall pass.

 


Your

Your Edge Over Professional Traders

Why You've got a bigger advantage than professionals
 
You’ll often hear in the media or from professional market participants that retail clients “shouldn’t try to compete with the professionals”.
 
Ignoring the condescension here for a moment (“the adults will take it from here”) it is my firm belief after ten years of trading that this isn’t always true.
 
Sure, any beginner will find it challenging at the beginning to trade successfully, but you can’t expect to play like Roger Federer after one match of tennis, can you?
 
Charlie Ellis, the man who oversaw the $24 billion Yale endowment fund in the US once, said “watch a pro football game and it's obvious the guys on the field are faster, stronger and more willing to bear and inflict more pain than you are. Surely you would say ‘I don’t want to play against those guys.”
 
But Charlie is wrong in a few ways.
Yes, professional traders and institutions have many advantages at their fingertips. They get news faster than you do. Their trades go more quickly than yours. They pay far less than you do. You get the picture.
 
But it’s not all doom and gloom. Here are a few reasons why:
 
Time
 
No, not in the sense that you have more actual time to trade than them.

You probably don’t.

You’ve probably got a full-time job.

You might have kids or ailing parents to look after.

Trading is like a side hustle for you.

BUT your time horizon is different from theirs.

You can hold a trade for days or weeks without a Manager yelling at you “Why the hell are you selling euros, you dummy… the market is going up”. You might enter a trade on gold and plan to hold it for months.

A professional fund manager or trader might not have that luxury due to quarterly reviews, investor pressure or whatever else.
 
Professional Risk

Professional or Career risk is one I picked up from famed value investor, Howard Marks. In his book “The Most Important Thing” (one of my favourite investing/trading books of all time – buy it!) he talks about how in the GFC there was so much pressure on investors to not look silly by calling the bottom of the market or “catching a falling knife”. No one wanted to be the guy in the office who was buying Citibank at $1 per share!

Similar to my time point above, you don’t have that problem.

You don’t have your colleagues questioning you why you’ve bought or sold some instrument. Or a boss that is screaming at you and putting you into an emotionally defensive position trying to justify your actions.

Will you lose your job for selling USDJPY? No.

Does a professional trader get fired for always missing targets or taking on too much risk? Yes.

You need to work out what you’re happy with in your trading goals and go for them.

It’s entirely up to you what you define as success. The Pros don’t have that luxury.

Benchmarks

Which brings me to my next point.

Most professional traders and investors have a benchmark. If you’re a fund manager you’ll send out your monthly report to your investors saying “here is how much we made/lost.. and here is what the benchmark did”.

If you miss that benchmark, get ready for investor withdrawals. As a professional, you’re judged on your performance. Simple as that. The more investors leave. The more you have to sell. The more you sell, the worse your performance!

What’s your benchmark? You get to set your own. Happy with 1% a month? Awesome.

What about $100 a month so you can buy your wife dinner? Happy days.

Or $5,000 a month so you can pay off your mortgage? Even better.

It comes back to autonomy and your desires. No one else decides that but you.
 
Fees and Expenses

Believe it or not, you do have a HUGE advantage here, especially if you’re trading with a low-cost broker (hello, Fusion!)

If you’re a professional investor/manager, you’ll often have a significant research team, a very fancy office with lovely views, staff bonuses, visits to various investment conferences etc.

Not to mention all that travel to see your clients and investors!

Putting that aside for a moment, if you choose a good broker, you’ll pay zero spread and a small commission that is not far off what the pros trade. They’ve got $100,000,000 though, you’ve got one thousand!

So, ignore the haters telling you to stay out of the market because its only for the big boys.

However, let me be clear.

I’m not saying trading is easy and (unlike some) and that you can soon retire on the beach. It’s not. Trading FX, in particular, is a highly challenging exercise.

But don’t just assume because there are so many professionals in this that you can’t succeed or you’ll never be good enough. You have to play your own game, and for me, that’s the best part. I set my own rules as to what I consider success. That’s something the pros will never get.  
 
If you’d like to fund the account, just click here

One final thing, if you had any feedback for me or about your Fusion experience, then please don’t hesitate to let me know.

We love to hear back from customers about how we can improve your experience. It’s what separates us from our competition.

Hope to hear from you soon.


Why

Why not be a passive FX trader?

New and novice traders spend a lot of their time worrying about how they will recognise and spot trading opportunities as they occur, and what will be the best way to exploit them when they do. They can spend hours researching and reading, looking at charts and trying to apply technical or fundamental analysis to the current market setups.

 

That investment of time and effort on their part is commendable, but all too often it's time and effort wasted!

 

It may seem harsh to say that, but here at Fusion Markets, we believe in telling it like it is.

 

We say that it's time and effort wasted because, despite all the research, reading and studying of charts, many newbie traders will still put the wrong trade on and more to the point not realise they are doing so.

 

Driven by sentiment

Financial markets are primarily driven by sentiment and momentum, which itself is created by crowd behaviour. That's something that was identified and put into print as long ago as 1841 and though the technology of trading has changed considerably in the intervening 179 years, the psychology of trading hasn't. 


We could go as far as to argue that while there is no longer a physical crowd on a trading floor or exchange these days, there is, in fact, a much bigger crowd whose voice and actions are amplified by modern communications. Real-time information through social media, for example, can enable the instantaneous exchange of information, prices and views across the globe.

 

The transfer of information 

There have always been communication channels between markets and their end customers, of course. But it is the speed of modern networks that differentiates today's trading from what went before.

 

Flags and telescopes on high towers, carrier pigeons and messengers all played their part in the transfer of information. Those methods were superseded by the telegraph, which in turn was replaced, at least partly by the telephone. The internet, the world wide web and the rise of mobile telecoms have ushered in a new age of high-speed data that can reach almost any corner of the globe, at the same time.

 

The net effect of all this is that the trading crowd is much larger, better informed and able to act and react much quicker than ever before.

 

Weight of money 

In trading, the majority rules, in that markets move in the direction that has the most impetus. If most of the crowd is bullish, then demand outweighs supply and prices will rise until fresh supply (sellers) are attracted into the market. This is why people go on about what the “Smart money” is doing. While we don’t necessarily agree with them being “smarter”, they certainly have more capital!

 

Conversely, if supply outweighs demand, that is there are more sellers than buyers to satisfy them, then prices will fall as new buyers are drawn into the market.

 

If these price changes persist for any length of time, they form what is known as a trend which is nothing more than a series of continuous, repetitive movements in price.

 

It's not only modern communications that have amplified crowd behaviour and sentiment.


The rise of tracker funds, ETFs and other passive investment vehicles have also played a role. These types of investment don't try to beat the market. Instead, they aim to match it.

 

Trillions of dollars have flowed into these trackers over the last decade and a half, and indeed you could argue that they have become so successful and so large that ETFs are now capable of creating the market's trends rather than just following them.

 

In fact, the world's largest fund manager is also one of the world's biggest passive investors (Blackrock).

 

Passive FX trading  

The influence of tracker funds is not as prominent in FX, as it is in say, equities or bonds; however, the principles are the same. The crowd dictates the trends in the markets and those trends tend to stay in place until new information emerges and cause a change in sentiment, which in turn can cause a change in those market trends.

 

Now the big mistake on the part of newbie traders that we mentioned at the start of the article was putting on the wrong trade, typically by opposing the prevailing trends in the markets.


The more entrenched the trend, the more likely new traders, are to try and oppose it. Ever heard the saying “trying to catch a falling knife”?


How can we become passive traders?

The most obvious way to be a passive trader is to follow the existing trends in the FX market, which occur in even the most widely traded pairs. Nevertheless, here's a few ways you can become more passive. 

 

For example, EURUSD trended lower for almost two years between February 2018 and February 2020. You didn't have to stay short of the rate (that is, have sold the Euro and bought the Dollar) for two years to benefit from that move. As long as that downtrend was in place, it was pointing you in the direction of least resistance and with that being the case why would you oppose it?

 

1) Check your charts.

 

Sometimes you will be able to follow existing trends, but there will be other times when individual instruments or markets are ranging or moving sideways, checking your charts and knowing your levels can aid you here.

 

A chart can speak a thousand words. It contains loads of useful information that's conveyed visually to the viewer. Get to know where the key support and resistances (watch for breakouts too) are situated over daily or weekly timescales; shorter-term charts are too noisy (I’m looking at you, 5-minute chart!).

 

2) Know where key levels and moving averages are.

 

The way that price reacts when it meets moving averages, or support and resistance can dictate the direction of the next trend. Knowing when and where this can happen will put you on alert to "jump" in once a new trend is confirmed. Fusion puts out trade ideas and analysis on Telegram and Facebook.

 

3) Look for clues about trends in sentiment tools

 

Tools that track what traders are thinking and doing are incredibly useful.

 

Given what we said above about retail traders opposing market trends, the passive FX trader uses these sentiment reports as reverse indicators.

 

We quite like FX Blue’s sentiment indicators which you can find here

 

The rule of thumb is that the more biased retail trader sentiment is in an instrument, the more likely that the market will move in the opposite direction.

 

A passive trader wouldn't preempt that move, but they would be prepared for it when it happens, or join it if it's already begun. 

After all, one of the most famous quotes in the markets is "the trend is your friend"... So don't fight it.  

 

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