Although he thinks most people trading forex are doing so using technical analysis, Christopher Webb, of ForexMentorOnline.com, believes this is not the type of market analysis to be undertaking. Instead, he goes into detail about why the forex market is a zero sum market and what that implies.
Most people who trade forex do not understand what kind of market their participating in. The forex market is a zero sum environment, if you want to be successful in trading then I suggest you pay attention to what I’m going to be sharing with you today as it may just change your trading.
A zero sum market is where one person’s losses equate to another person’s gains. In forex, this means when you win on a trade the amount you make is dependent on how many traders have lost on their trades by getting the market direction wrong, conversely, when you lose money on a trade, the money you have lost has essentially been taken from you by someone who has got the market direction right.
The concept of zero sum markets applies to everyone who trades forex, whether they’re working at a trading desk in a bank or trading from a laptop at home it makes no difference, the only way for any entity present in the market to make money is if they take it from somebody else.
I would bet most people trading forex are doing so using technical analysis, the problem with technical analysis is all of the studies that it encompasses focus on what the current price is in the market.
This is not the type of market analysis we need to be undertaking. If we know the only way we are able to make money is if other traders lose money, then we should be analyzing the market for locations and conditions where we expect a lot of traders to lose money.
Anytime you see the market move up it means the traders who sold are losing money, if you see the market go down, it means the traders who brought are losing money, virtually all of the movement you see in the market is generated by traders closing losing trades, how far the market manages to move is entirely dependent on how many traders have been caught on the wrong side of the market.
Go and look at the beginning of the uptrend on USD/JPY way back in 2011.
Before the uptrend began the market was in a very long easily defined downtrend. This is apparent to anyone from just a quick glance at the chart.
The reason why the market moved up so violently is down to how many people were short in the market when the downtrend was taking place. Traders are taught from an early stage that the longer the trend, the more likely it is to continue in the same direction, this means when USD/JPY suddenly shot up thousands and thousands of traders who were short in the market had their trades go from being at a profit to being at a loss, when traders are faced with a sudden loss like this, their fear of losing money causes them to close their trades.
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By Christopher Webb of ForexMentorOnline.com
