Reminiscences of a Stock Operator, Edwin Lefevre
One of the saddest yet oldest and most verifiable truths in trading any market, whether it's FX, options, ETFs or anything is that traders often beat themselves even when a strong trend is in play.
We recently went through the Truths of the FX market in order to help you develop an appropriate view on trading the FX market in order to set you up for success vs. those that come in with sky high expectations and little experience who are sure to be disappointed. This FX trend traders series will walk you through a plan around trading trends that's designed to give you a heads up of what's important, what's not as important as many think, and how you can identify trends, while managing risk.
The Benefits of Trend Trading
Trading with the trend is easier said than done. Unfortunately, the trader's brain encourages said trader to try and outsmart the market where they're up against some of the smartest and well capitalized people in the world. Trying to beat the market is incredibly difficult and depending on the market can be next to impossible because to beat the market you need to be against consensus and if the consensus is with the trend then you're setting yourself up to be doomed to implode as traders have done.
Because the FX market is a dualistic market where one currency is always pitted against another, it's rare a trend will be in one direction, even though we've seen 30 year trends in FX in pairs like GBPNZD or 5+ years in popular pairs like EURGBP. However, trend trading is still the best value for your time even only a handful of trades work out over a month or year while many others result in small losses or break even moves.
The Risks of Trend Trading
Very few traders come into any market because of a lack of market moves. Instead, strong trends often gather steam over time and their progression compounds to the point where rationality flies out the window and the only seemingly logical thing to do is to "jump in with everything." This type of move often is known as a bubble in technical trading. Using an example of another market, the equity market has seen multiple popular peaks which have all recovered from their "bubble pop" top.
Whether you look at 1929 stock market peak, which lead to the great depression, the 1987 top that brought a near 25% drop in a few days, the 2000 top, which had some indices lose over 75%, the 2007 high that ended in the 2008/2009 credit crisis where governments warned that global financial markets were about to come to a halt one common denominator remained. All of these markets had a very strong trend before the floor fell out and the double digit % losses came from people following the trend who didn't know where to put a stop loss, which is only second in importance to trade size for overall trading success.
The Upcoming Series
Traders need to know that long term gains are best gathered from those who follow the trend instead of those who, like the opening quote indicates, end up beating themselves with little help from the market. Trading is less about beating the market and more about joining the market. The following posts, added below as available, are there to help you improve your trading by learning to trade with the trend.