Understanding The Forex Game

A Very Profitable Game

Speculating on the price of one currency in relation to another is like betting on a game; in the Forex market, the game is between the bulls, who want to pull prices up, and the bears, who want to pull prices down.  The most successful trader will not put himself in the middle of that game just as you or I would not go onto the field in the middle of a professional football game (unless, of course, you happen to be a professional football player).

Instead, the successful trader will stand above the game for the best view and the best chance to bet on the team with the winning play.  With over 1.5 TRILLION dollars traded each day in the Forex market, it's IMPOSSIBLE for us to influence the outcome of the game between the bulls and the bears – so we don't try; instead, we take our best, informed, educated guess at who will win a given play, and we bet on it – we speculate.

The fact that we are not actually able to influence the outcome of the game, we are simply speculating "betting" on it, is very important to remember, because it means that what matters to us is not so much who has a better quarterback, or whose coach makes better plays.  Instead, what matters is what other people think.  Which team are other traders going to bet on?  The bulls may be superior in a certain play but if everyone bets that the bears will win, then . . . the bears win.

Trading the Forex IS NOT as much about picking the strongest currency, identifying which country's particular economic, social, and political situations make its currency the best buy that day.

Trading the Forex market IS about foreseeing which currency the crowd will pick, picking it before they do, and being right.  You want to be able to predict where the herd is going, but you don't want to get trampled by it in the process.

Trusting the Indicators

That's why judgment-based indicators (charts) and mathematics-based indicators (technical indicators) can work so well in the Forex market if you do it right – because you are not betting on which currency is stronger, but on which currency the crowd will think is stronger and, in turn, bet on themselves.  The Forex indicators we'll talk about in this book don't lead to winning trades 100% of the time.

They lead to winning trades more often than not.  That's because people are predictable.  Based on history, which tends to repeat itself, we can make well-informed, and educated guesses about which team the crowd will pick based the crowd's past picks in similar situations.  In essence, trading the Forex spot market is much more about speculating on people's behavior than on the strength of one currency relative to another.

Bulls Vs Bears in the Forex

In the Forex market, a bull refers to increasing prices, where the trading period's close is higher than its open.  This means that in that trading period the bulls won the tug-of-war: they succeeded in getting the market to close at a higher price than it opened.  A bear is the opposite; it refers to decreasing prices, where the trading period's close is lower than the open.  In a bearish period, the bears succeeded in getting the market to close at a lower price than the open.

There is not, unfortunately, any way to guarantee that your trades will be profitable 100% of the time.  In fact, they ABSOLUTELY won't.  Even the most experienced, disciplined traders take losses.  The difference between experienced, disciplined traders and reckless novice traders is that the disciplined, experienced traders trade based on sound equity management principles so that in every trade they are managing their potential loss (the risk).

While no one can show you a way to make profitable trades 100% of the time, you can greatly increase the probability that many of your trades will be profitable.  You increase the probability that you will profit overall by educating yourself.

1. Learn to Read Charts (I'll be blogging about this a lot)
2. Learn to use chart-based indicators and technical indicators to know when to enter and exit the market

If you educate yourself on the ways to maximize the probability that you will profit, and if you follow the lessons you are now learning on the rapid forex blog, then you should profit on more trades than you lose.

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