The Importance Of Understanding Buyers AND Sellers
As forex traders we almost always refer to “beating the market” or a phrase similar to this.
But a friend of mine is a professional poker player and gave me a very good analogy yesterday about how poker and trading is very very similar.
I’m paraphrasing but it went something like this and stuck with me.
Poker and trading are very similar. We both use platforms that take a certain percentage. I play tournaments and pay “rake” [that’s about a 5-10% fee to enter a tournament online/live] and you have to pay broker fees [the spread]. They are the real winners but that’s not to say we can’t win too but we have to beat OTHERS to do so.
It’s not about beating the broker or poker site, that’s impossible. Instead it’s about beating other people. You just need to be in the top 1% and you can make top 1% money. That’s why this is important. If I want to make money I need others to enter the tournament. If you want to make money you need others in the market to buy/sell.
That was an incredible point.
He’s a smart guy. I mean he legally makes £200k+ a year all tax free! That’s not a bad way to make a living. [gambling earnings are not taxable in the UK]
I’m not 100% sure he was trying to make this point but it got me thinking.
I have to sell or buy to someone in order to make a profit.
If I’m in the majority, I’m probably wrong.
Because 95% of traders lose money.
This means if I am in the majority (of people not amount of money) I’m probably going to be losing money as I’m in the 95% direction.
Instead to be a successful forex trader you have to think like the people making the most money.
They make fewer trades.
They try to reduce risk rather than maximise profit.
If I want to short the market (let’s just assume that turns out to be the correct direction for this example)
Then I need to sell to someone who wants to buy the market.
I’m going to be “right” and earn money.
They are going to be “wrong” and lose money…. In this example.
If there is no one buying a market there is no value.
Remember trading ANYTHING, not just currency is all about value.
If I think something is worth $100 but it’s going for $80, I’m going to buy loads of that! If I think it’s worth $100 and it goes above $100, I’m going to sell it!
It’s about value exchange and NOT fundamentals, what politicians say or anything else.
Follow the money, but keep one thing stone cold in your mind and ask this question to yourself before you take out a trade.
Who am I selling/buying to/from?
The answer should ALWAYS be the 95% of unsuccessful traders.
If it is not then you won’t be profitable.
If you’re trying to make money from the professional institutions – countries, businessmen who trade forex in the billions or massive corporations… Then you’re going to end up being broke very very quickly.
Always ask yourself this question before you enter a trade. Who Am I buying from? AND WHY.
That’s the most important question.
Let’s think about an example.
If I purchase some currency (buy/long) – I think it is UNDER valued and price will INCREASE.
Now that’s fine.
But why do I think this and who am I buying from?
Someone, somewhere HAS to sell to us.
If you can solve the why then you can be a profitable trader as everything you do comes down to why something will be happening.
If we think that the big corporations, the big money is going to buy soon then that’s fine (we aren’t going to talk about how or why you think that today because that’s a long conversation.)
So let’s say we are right and the big money is going to go into a buy.
But that doesn’t solve our underlying issue.
We have to buy from someone else.
And as I mentioned earlier we want to buy from the 95% most of the time.
So we have to look for technical analysis that shows us that someone in the 95% will be selling. But why are they selling?
Why are they wrong?
This is the tough part but generally its down to panic.
Check the imaginary graph I drew beautifully below.
What happens on the red arrow?
More specifically the 95% believe it is a sell, because that’s the direction the market is going.
But why is this a buy?
Because the big money, the real power behind the market…. AKA the market movers are waiting for a better price to BUY again.
You can talk about this on any timeframe, but one thing stays the same.
Whoever is looking at the “universe above” is going to win. They have more money to invest and hence can move the market further and faster.
UPDATE: I’m Seeing This All The Time
I wanted to write a quick update on how this happens in all kinds of industries. I’ve recently seen this in internet businesses, all kinds of different things. Not only do we have the attention spans of fish, but now we actually struggle to stop being sheep too. STOP BEING A SHEEP!
Most commonly I now see this with cryptocurrency.
The basic rules still apply, don’t participate, ANTICIPATE.
Thanks for reading,