Why Professional Forex Traders Do the Opposite of Retail Traders

11/05/2010 12:01 am EST

Focus: FOREX

The shaded area of this USD/JPY chart also shows that retail traders have been big buyers all the way down. This is a Speculative Sentiment Index (SSI) chart from DailyFX+ and shows that retail traders have opened more than two buy positions for every sell position at the lowest point—all the way up to over ten times as many buy positions for every sell position at the highest point. But yet the market has moved down at the same time. How can that be?

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The direction of a market’s trend is usually determined by the big traders who trade size. They are usually the professionals and are commonly referred to as “institutional” traders. They see the fundamental situation of the USD/JPY as being bearish and continue to sell.

The retail trader, who is usually fairly new to trading, has a habit of trying to pick tops and bottoms. But the statistics show that most retail traders lose money, while professionals, by definition, are profitable. This is not unique to FX, but rather is typical across all financial markets in the world. The professionals trade with the trend, while the new traders trade against the professionals and the direction of the trend while looking for the perfect reversal point.

Guess which group is more profitable? Which group do you trade with?

By Thomas Long, course instructor, DailyFX.com
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