Throughout our entire upbringing we are conditioned to believe things like getting good grades leads to great rewards. This concept plays out well in the medical and law professions for the most part. These people get paid for being smart. Now when it comes to trading the financial markets as a profession, being too smart can often hurt you despite what people generally believe.
When you watch the “experts” in the financial media, or when you talk to your broker, or even worse your financial planner, you assume, “These people are professionals, they sound so smart with all this financial stuff, they must know a lot more than me when it comes to investing my money so I will take their expert advice.”
The financial services industry hides behind this illusion of “I went to an Ivy League school for finance or economics, therefore I know a lot more than you about where the market will be a year from now. So listen to me, and pay me huge fees for my advice and service.” Just look at who the big global banks hire. Now I am not saying these are unintelligent people, clearly they are, but my point is this: Intelligence alone is not enough to protect you from the uncertain nature of the financial markets.
I speak to new traders all the time that come from one of these “smart professions”. They tell me things like, “I have a bachelors in economics and I’m pursuing my master in finance, so I pretty much know what I am doing.” Then I ask how they are doing and the response is usually, ”Well these markets make absolutely no logical sense right now, so I’m still trying to figure out a valuation for the US dollar.” Umm, have fun with that.
The important thing to understand about trading financial markets is this: The role of the financial markets, especially futures and forex, is to provide liquidity and act as a mechanism to manage risk. This means the major participants in the market are acting on price to either take on more risk, or reduce it. This action moves prices.
What is most important when you are analyzing these markets is to think in terms of supply and demand at the moment, and not in terms of why prices should do this or that. Price action can give you a sense of what is possible and from there you can measure risk and decide if it is a risk that makes sense for you.
Your focus as a trader should be on the behavioral aspect of the market. It is the actions of the crowd of market participants moving prices. It matters more that you can recognize their actions or lack of action, than the specific reason why they should be taking action. This is about understanding the greed and fear that drives financial markets, and how to control your own actions within that context.
When you are able to focus on the relevant market information, you are then able to see through all the noise that is so prevalent in the financial industry. So the next time you find yourself listening to an “expert” on where the market will be in 6 months, you should know this person doesn’t know any more than you do. If you can develop the ability to listen to the market instead of the “expert,” you will have a much better sense of the true market potential.
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Marc Principato, CMT
*No Relevant Positions
3 Comments on “Are You Too Smart For the Forex Market?”
This is an excellent description of a day trader’s approach to the markets. It spells out the philosophy of technical analysis- based trading.
Believe it or not, however, some people use fundamental macroeconomic analysis to make their medium to long-term positions in the market and make huge sums of money. I wouldn’t belittle someone with that approach anymore than I would belittle a chart technician poring over Fibonacci levels. Its a different approach. And yes, some people can predict where the market(s) will be in 6 months and the ones that can do so regularly make huge fortunes…
Thanks for the comment.
Yes the people who make large sums of money on fundamental analysis are the same ones who can afford to pay for information that most of us don’t have access to. You know any retail traders who make large of sums of money on a regular basis using fundamentals? Please introduce me to them because I would love to learn.
The point of my article is not to belittle anyone. It is to point out intelligence is not enough to protect you from the random nature of financial markets.
Some people can predict where the market will be in 6 months? So can I. I can say it will be higher, rangebound or lower. Whichever condition plays out, I can just then tell everyone that I told you so after the fact.