Thoughts from the Trading Trenches
15 Years ago | October 01, 2013 12/2/23, 12:00 AM
October 1,
In this issue:
State of the Market – A Look Ahead to October
Hope is Not a Trading Strategy
State of the Market – A Look Ahead to October
By Jay Meisler
My plan was to write an article about the state of the forex market (see below) but given the current U.S. political situation, it is worth spending some time talking about trading during a crisis.
According to the Merriam-Webster dictionary, a crisis is defined as “an unstable or crucial time or state of affairs in which a decisive change is impending; especially: one with the distinct possibility of a highly undesirable outcome crisis>.” The key words are a distinct possibility of a highly undesirable outcome as that is what traders and investors look to hedge against. This is why it is often less risky to trade ahead of or in the early stages of a crisis rather than when it reaches a zenith that forces some sort of solution. We all remember the global financial crisis so I do not want to underestimate the dangers of trading in crisis conditions. However, even during the financial crisis the severe meltdowns forced the government to take drastic actions to stem the stabilize markets.
This brings us to 2013 where crisis trading has proved to be a losing strategy as fallout from events, such as the Cyprus bailout, have been contained. So unlike past years, this one has been relatively free of crises and markets have tended to shrug off negative news.
This may be why the current political made by Congress budget crisis is one that has seen a cautious response by markets. Even the partial shutdown of the federal government on October 1 might not have the impact it might have had in other times. Perhaps it is because the key date is not until about October 17 when the government is forecast to run out funds if the debt ceiling is not raised, which would trigger a government default that risks a ratings downgrade. The partial government shutdown is not a big deal, but a default would be major. The longer the shutdown goers on, the greater chance markets will be forced to factor in a debt default. In this environment, it would probably take a meltdown in bonds and/or equity markets for Congress to pay notice and come to its senses. Currently it feels more like a reality show than a crisis but bears watching. .
State of the Market
Rather than go into discussion of the state of the forex market, I would like to sum it up with a post on the GVI Forex (professional) Forum by one of its valued members after the Fed shocked just about everyone by not tapering at the September FOMC meeting.
09:46 GMT September 20, 2013
Post FOMC Hangover
The world (due to massive optionality) went from selling below EURUSD 1.3350 to buying above 1.35 in a few seconds (e.g. above 1.3450, last month's high). The problem for most of us is that there is no volatility before or after and no liquidity during the move. I think that means you need to be very careful trying to board a bus that only speeds or closes its doors.
I will leave you with that thought as I have my hard hat ready in case a crisis does develop.
Hope is Not a Trading Strategy
By Jay Meisler
There is no substitute for sound analysis that produces a good risk/reward trade. When hope replaces reality, you are in trouble. I cannot say it any clearer as too many traders rely on hope and this is a prescription for a losing trade. You may get lucky on occasion and that can turn out to be the kiss of death as the odds are against you when sound analysis is replaced by hope.
What do I mean by hope?
I am sure you have put on a trade and as price action unfolds, you get the feeling that it is just a matter of time before your stop gets triggered. The only thing on your side is hope as technicals have turned against your position. You hold on and wait for the inevitable stop out. It has happened to all of us as no one has a 100% success record. The difference is if your trade idea was well thought out but didn’t work vs. taking a trade and hoping it will work out.
I have seen this occur with relatively tight stops and worse yet, with those who have no stop or stops way out of the money that result in an account being wiped out or so severely damaged that the trader never recovers from it. The common theme in each of these cases is that hope was the only potential savior. This is like betting on the lottery as the odds are stacked against you.
Take Hope Out of Your Forex Dictionary
- Hope is not a trading strategy. Take it out of your forex dictionary.
- Don’t put on trades where your decision is based on a hope it will work out.
- Don’t turn a winner into a loser. This is the easiest way to lose discipline by seeing a profitable trade turn negative and hoping it will move back into positive territory when charts (or news) suggest otherwise. .
- If you overstay your welcome on a trade, don’t replace discipline with hope. Be realistic. If your analysis indicates you should exit the trade, close it out with either less of a profit or even a loss.
- Don’t trade without a stop and unlimited risk. Never leave yourself at the mercy of the market without a stop and your only ally being hope.
- Avoid trying to buy a falling knife if your trade decision is based solely on hope (that you catch the bottom or top). This is not a long-term trading strategy.
To sum up, hope is a trader’s enemy, not his friend. You may get lucky once in a while but basing trading decisions on hope is a long-term prescription for the poor house. Save hope for buying lottery tickets. Keep it out of your forex dictionary.
Jay Meisler is the founder of the Global Traders Association. He is also a co-founder of Global-View.com, the leading forex discussion site for more than a decade and home of the original forex forum where traders from around the globe come for the latest breaking news, flows, rumors and trading ideas.
WARNING: FOREIGN EXCHANGE TRADING AND INVESTMENT IN DERIVATIVES CAN BE VERY SPECULATIVE AND MAY RESULT IN LOSSES AS WELL AS PROFITS. FOREIGN EXCHANGE ANDDERIVATIVES TRADING IS NOT SUITABLE FOR MANY MEMBERS OF THE PUBLIC AND ONLY RISK CAPITAL SHOULD BE APPLIED. THE WEBSITE DOES NOT TAKE INTO ACCOUNT SPECIAL INVESTMENT GOALS, THE FINANCIAL SITUATION OR SPECIFIC REQUIREMENTS OF INDIVIDUAL USERS. YOU SHOULD CAREFULLY CONSIDER YOUR FINANCIAL SITUATION AND CONSULT YOUR FINANCIAL ADVISORS AS TO THE SUITABILITY TO YOUR SITUATION PRIOR TO MAKING ANY INVESTMENT OR ENTERING INTO ANY TRANSACTIONS
