Alan's Forex Blog

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The Killer is in the Randomness Posted: 13 Sep 2010 12:42 AM PDT Guest post from Kris Matthews (http://tradeforexfundamentally.com) Many traders underestimate that killer that is lurking behind the corner, just waiting to suck the life out of your account. He finds ways to deceive you and lure you into taking trades and is happy to see you lose money. What is this killer? Randomness. The market is more random and thus unpredictable than many of us our willing to admit and ends up causing us to take trades that we shouldn't be taking. So many things happen on a daily basis that are simply unpredictable: order flows of big banks in the London session, forex options market price manipulation during the New York session, low liquidity hedge fund orders in the Sydney session, and the list goes on… Not even technical analysis can help us predict these periods of random behavior in the market. But do you know what the worst thing is? The random behavior during these periods produces many patterns and signals in our indicators that may lead us to believe it's time to enter (head and shoulders patterns, MACD divergence, etc. ), when in actuality, it's a trap. So how do we distinguish between traps and genuine opportunities? Let me ask you this: take a look at the following charts and tell me which channel breakout scenario you would rather buy (for beginners, a typical trading strategy is to wait for price to break above the high of a sideways channel to buy the market, and break below the low of a channel to sell). Most people would take either as a buy signal, but upon closer look, there seems to be a very slow, cautious break of the high in the case on the left, compared to a more decisive breakout on the right case. The price action, as indicated by the very large, full bodied candles on the right case indicates that the market had a lot of conviction and there was aggressive buying sentiment. Let's see the result: In the weak breakout case (left), price barely holds above the previous highs and comes back down, whereas in the strong breakout case, price moves upward in a sustainable fashion. The lesson? Pay attention to the strong moves in the market. These moves probably only happen 20% of the time, but are the most reliable, for the other 80% of price moves cannot be trusted. The forex market is driven not by technicals or fundamentals, but rather sentiment. After all, the market is made up of human beings, not lines, charts, or economic numbers. If you can catch moves that happen due to a surprise in the market you are more likely to win in the long run. Share and Enjoy:

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