Your questions answered
1. Is there someone out there in the market trying to drive me broke? 2. Realistically, I think the question I would like to have answered is how the single largest volume trader of any instrument makes their bets on. TA or Fundamentals? I’d cry if it was Fundamentals since I’m a technician.
I here this question a lot; are the large players in the market fishing out the small guy, and maybe yes it does happen but this shouldn’t deter you or intimidate you either. The markets are still markets and that will never change. What one must remember is that if you enter a trade long and place a stop loss at a certain point you have done two things. You have told the market you feel this instrument is undervalued and will appreciate, and you have also told the market the price at which you are willing to sell your holding.
I feel this is where a lot of people get stop losses confused. If I purchase a house and then decide to sell it, I’m not placing a stop loss, but I am telling the market that at this price, I am willing to sell my house. A stop loss is no different. You are telling the market that at this price you are willing to sell and so if a buyer comes along who is willing to buy at the same price then so be it. All the broker is doing is fulfilling both of your wishes.
I will admit that it does seem at times that prices get pushed one way and then the other, especially when it is known that a lot of market orders (i.e. stop losses) reside, but this is the game you play. If you don’t like playing these fields change your approach. For one, I prefer not to place stop loss orders in the forex markets when trading very short term. This is my preference but I must also be at the markets so as not to lose more than I am willing.
I hope I have addressed your concern regarding the ’someone’ out there who is trying to make you broke. Now on to the next question regarding the single largest volume trader of any instrument.
You may have heard the famous story of George Soros who almost killed the Sterling, by selling it aggressively. The reason; because he knew the Bank of England were buying, which happens from time to time by central banks to manipulate the currency rate. He won this battle and he won big time, yet it didn’t come down to technicals or fundamentals, it came down to knowing his terrain, and knowing what was happening or about to happen in the market place at the time. I don’t call this technical or fundamental analysis.
You need to assess what sort of trader you want to be, whether it’s mechanical or discretionary, and then decide how to play it from there. For example, people associate fundamental analysis with discretionary trading which is not the whole truth, in fact far from it. Take Warren Buffet for example, he is a fundamentalist through and through yet his approach is mechanical. He has a set of rules that he sticks to and does not waver from, even if it takes 10 years for one of his rules to be fulfilled. On the other hand, Jim Rogers, who is famously known as the Commodities guy, uses long term supply and demand and will invest with a 10-20 year outlook.
So you can’t answer your question with one of two answers. For example, I pay a lot of attention to what I like to call ‘exhaustion’, and this is simply when the number of buyers of one instrument become so extreme that no amount of bullish news can push the price higher, and usually this results in a drop in price when everyone expects it to rise (for example, profit announcements etc). I don’t call this fundamental or technical analysis. I just call it knowing my market place.
So once again, it comes down to your preferred style. If you don’t want to get down and dirty and understand the terrain or your market place, it means you are more inclined to be a mechanical trader, and as such you’ll use either technical analysis (if your time frame is shorter), or fundamental analysis (if your time frame is longer). I know a forex trader who uses both technical and fundamental analysis and is strictly mechanical.
So the answer to your question is neither, and the real answer to how the big players succeed is this: They have a method that suits them (mechanical or discretionary), and they play that method with analysis that suits them (technical, fundamental, contrarian, exhaustion, news, etc), and they succeed because the choice of method and analysis suits their personality.
Happy Trading
Dean Whittingham
Pentagonal Trading - Trading Systems
Financial Market Fisherman © 2004 - 2007
