pretty good comparison between rugby and trading
Understanding the Retail FX Market (Pit Traders and us)
As very few of us have any experience of how pit traders (also known as a locals) work, we can have no idea of the ways that price can be manipulated to a professional’s advantage.
Consider this, however. All around the world there are 1000s of traders, of all different skill levels, trying to make money on the movements of various currency pairs. You need to understand where you are in the great scheme of things, and adapt your way of trading to suit.
I can best describe this mass of traders in simple terms; one of the world’s toughest contact sports – Rugby. For those of you not familiar with this sport, it’s similar to American (Gridiron) Football, but without all the padding. A Rugby team will have 15 players on the field at any one time, and a limited number of substitutes. In Gridiron Football you’ll have a bunch of guys sitting on the bench tooled up and ready purely for either offensive, or defensive plays. In Rugby every player has to have a combination of offensive and defensive skills. The rules governing Rugby are more complex, and to the layman can seem impenetrable.
So how can we relate this to FX trading? Well I look at it this way; you have a team of mixed skills; some, called the backs, are speedy and can move fast if an opening presents itself. What they can do is easy to see, if there’s a gap they’ll go for it. If they’re running into trouble they’ll off-load as soon as they can. These are your typical intraday scalpers, and shorter-term traders. They need to be fleet of foot, and have a highly developed sense of self-preservation. Very occasionally, they’ll get the chance to go for a long run and make big yards for a try (touchdown).
In front of them are our forwards; heavyweight hitters who dictate field position, setting up opportunities for the backs to exploit. Without their expertise the team has nowhere to go. The real stuff that goes on amongst the forwards, at times, is beyond even the referee’s ability to apply the rules. When the two sets of forwards get into a scrum, only those in the front-row really know what’s happening. To be honest, even their own backs have little knowledge, or desire, to get involved. All they’re concerned about is will they get a chance to run with the ball?
Pit traders are like the forwards; we don’t understand what they’re up to, and it’s unlikely we’ll ever get the chance. Even if we did, we would be trampled underfoot in no time at all.
So how can we apply this to our trading? If you remember that during normal trading times, when liquidity is low, your local is looking to gain his profit on very small moves in the market. Our forwards are like this, always trying to gain a few yards here, a few yards there. Imagine a situation where a local, or group of locals, are short the market, but the market gives every indication of rising. These guys are looking to get out with any sort of profit, to break-even or, at worst, a small loss. At times of low liquidity it may be possible for them to bid the price enough to shake the confidence of the weaker traders, causing them to cover themselves by selling their long positions. Other weak traders, seeing the market starting to head down, jump in to climb on the sell-off bandwagon.
Now that the locals have moved price enough, they get out of their short positions with whatever they’re happy with and start snapping up (buying) all the sell orders that are sitting around. Price can now do what it wanted to do and head up. This is why it’s hard for newcomers to make money trading the short time-frames. You’re up against people that understand the rules better than you, and they can trade position sizes big enough to affect the market, and so confound your systems.
A classic example of this is the Overbought/Oversold type of indicator. We all make the mistake, as newbies, of poor analysis of the indicators we choose for our trading; falling into the trap of only seeing the points where a trade would have won. It’s human nature to look for the upside, and skip over those same scenarios where we would have had a losing trade. We want to win, so we blank out the negatives.
All I would ask is that you go back over your charts and really look at them. See how long an oversold, or overbought, situation can last. Look at your losing trades and see how you could have been more selective before entering. Just because the indicator is crossing some arbitrary boundary doesn’t mean that the world and his mother has suddenly changed their outlook on where price is heading overall. Balance what you see with what is happening in the next higher time frames. Missing a few pips at the start of a move is immaterial, if it keeps you out of a losing trade.
Just remember, you don’t know what the forwards are doing, and neither does the rest of the on-line trading community, the small-time parts of it, anyway. Let them do their stuff, wait till the move looks set, pick up the ball and run for all you're worth.
But off-load your trade as soon as trouble appears!!!
As very few of us have any experience of how pit traders (also known as a locals) work, we can have no idea of the ways that price can be manipulated to a professional’s advantage.
Consider this, however. All around the world there are 1000s of traders, of all different skill levels, trying to make money on the movements of various currency pairs. You need to understand where you are in the great scheme of things, and adapt your way of trading to suit.
I can best describe this mass of traders in simple terms; one of the world’s toughest contact sports – Rugby. For those of you not familiar with this sport, it’s similar to American (Gridiron) Football, but without all the padding. A Rugby team will have 15 players on the field at any one time, and a limited number of substitutes. In Gridiron Football you’ll have a bunch of guys sitting on the bench tooled up and ready purely for either offensive, or defensive plays. In Rugby every player has to have a combination of offensive and defensive skills. The rules governing Rugby are more complex, and to the layman can seem impenetrable.
So how can we relate this to FX trading? Well I look at it this way; you have a team of mixed skills; some, called the backs, are speedy and can move fast if an opening presents itself. What they can do is easy to see, if there’s a gap they’ll go for it. If they’re running into trouble they’ll off-load as soon as they can. These are your typical intraday scalpers, and shorter-term traders. They need to be fleet of foot, and have a highly developed sense of self-preservation. Very occasionally, they’ll get the chance to go for a long run and make big yards for a try (touchdown).
In front of them are our forwards; heavyweight hitters who dictate field position, setting up opportunities for the backs to exploit. Without their expertise the team has nowhere to go. The real stuff that goes on amongst the forwards, at times, is beyond even the referee’s ability to apply the rules. When the two sets of forwards get into a scrum, only those in the front-row really know what’s happening. To be honest, even their own backs have little knowledge, or desire, to get involved. All they’re concerned about is will they get a chance to run with the ball?
Pit traders are like the forwards; we don’t understand what they’re up to, and it’s unlikely we’ll ever get the chance. Even if we did, we would be trampled underfoot in no time at all.
So how can we apply this to our trading? If you remember that during normal trading times, when liquidity is low, your local is looking to gain his profit on very small moves in the market. Our forwards are like this, always trying to gain a few yards here, a few yards there. Imagine a situation where a local, or group of locals, are short the market, but the market gives every indication of rising. These guys are looking to get out with any sort of profit, to break-even or, at worst, a small loss. At times of low liquidity it may be possible for them to bid the price enough to shake the confidence of the weaker traders, causing them to cover themselves by selling their long positions. Other weak traders, seeing the market starting to head down, jump in to climb on the sell-off bandwagon.
Now that the locals have moved price enough, they get out of their short positions with whatever they’re happy with and start snapping up (buying) all the sell orders that are sitting around. Price can now do what it wanted to do and head up. This is why it’s hard for newcomers to make money trading the short time-frames. You’re up against people that understand the rules better than you, and they can trade position sizes big enough to affect the market, and so confound your systems.
A classic example of this is the Overbought/Oversold type of indicator. We all make the mistake, as newbies, of poor analysis of the indicators we choose for our trading; falling into the trap of only seeing the points where a trade would have won. It’s human nature to look for the upside, and skip over those same scenarios where we would have had a losing trade. We want to win, so we blank out the negatives.
All I would ask is that you go back over your charts and really look at them. See how long an oversold, or overbought, situation can last. Look at your losing trades and see how you could have been more selective before entering. Just because the indicator is crossing some arbitrary boundary doesn’t mean that the world and his mother has suddenly changed their outlook on where price is heading overall. Balance what you see with what is happening in the next higher time frames. Missing a few pips at the start of a move is immaterial, if it keeps you out of a losing trade.
Just remember, you don’t know what the forwards are doing, and neither does the rest of the on-line trading community, the small-time parts of it, anyway. Let them do their stuff, wait till the move looks set, pick up the ball and run for all you're worth.
But off-load your trade as soon as trouble appears!!!