Have you ever contemplated who you are really competing with in the forex market? Does it really matter? You just want to make some money. Who cares right? It matters because you can gain great perspective from understanding why different market participants operate in the market.
Contrary to what many of the retail trader conspiracy theorists believe, your broker is not your greatest problem in this environment. Yes, they take the other side of your trade, but remember your broker is in the business of providing liquidity and balancing a book of buyers and sellers. They are in the business of moving volume. They are just one piece of the puzzle when it comes to the order flow in the forex market.
The other participants consist of large banks and institutions, money managers and professional traders large and small, and then of course the retail traders. Each participant trades the forex market for different reasons. For example, banks and institutions may be using the forex market to facilitate business transactions or as a way to control risk. A money manager may be using the market for hedging purposes or could be speculating on a global macro level. Another money manager may be taking short term directional trades or using a proprietary portfolio of algorithms to take advantage of temporary inefficiencies that only a computer can see.
Then there are the retail traders, the large group of mostly randomly motivated traders who are doing similar things for a whole host of irrational reasons. As a group they provide a source of liquidity and profit potential for their brokers and broker’s prime broker.
Understanding how each group operates in the forex market can help you focus on what information and strategies to adapt and avoid. For example, you won’t be able to trade like a bank, and you cannot operate like a broker. That leaves you with either emulating a money manager or a retail trader. Well we know retail traders mostly lose, and they all follow the same strategies and consume the same information. So that leaves us with the money manager.
Money managers who actually perform for their clients are traders who have found a way in the market. These traders are usually highly observant, creative and flexible. They evolve with the market and know what is working now may not work the same in the future. So they continue to learn and adapt.
You don’t have to manage someone else’s money in order to develop yourself as a money manager. You are simply recognizing the ineffective habits and routines of the retail trader and avoiding them. This also means you will be able to acknowledge that markets are random because of the countless forces from different participants acting on it at all times.
Yes we know that professional managers and traders all have a lot of discipline and money management plans. What do they do differently from the retail trader though? What information sources do they rely on to make decisions? Do you think it is the same free resources that you have access to? How do they evaluate their strategies?
Most importantly, some of the best information you can glean from your competition is what their weaknesses are. For example, the retail trader is probably the weakest link in this trading environment. They are the most unstructured, impulsive and likely to over react frequently. Understanding this can help you develop specific strategies aimed at taking advantages of such weaknesses. Our entire methodology that we teach in our futures and forex program is based on such concepts.
Many inexperienced traders seem to think trading is all about technicals and fundamentals. This is what they are exposed to all day and conditioned to believe. They fail to realize that trading is really more about understanding the actions behind the forces that move prices. It doesn’t matter why they act, but it does matter how they act and/or react to information as it unfolds. Valuable information is available all around you, you just need to develop your ability to appreciate it. Analyzing your competitors and how they utilize the market microstructure can offer great insight into how you can better recognize and exploit market opportunities before they are obvious.
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Marc Principato, CMT,
*No Relevant Positions