There is another main thought to consider along side with market timing
and the trend. It is really understanding who is on the other side of
your trade. We want to make sure the person on the other side of our
trade is a new forex trader. Let's use this USD/CHF chart as an
example and use a simple thought process to make sure that when we
sold short, we were selling to a buyer who had no idea what they were
doing. The circled area on the chart is where the smart trader
had entered selling short into the supply level to the left. The key
is who was the buyer and what do we know about them? Inexperienced
traders always make two key mistakes. The buyers in this trade were
making three and they are as follows:
The buyers who bought from us were buying after a rally in
price. This is a big mistake in trading. Think about how you buy
things in other parts of your life. Do you ever get excited about
buying after prices rise? If you would not take this novice action
when buying things in any other part of life, don't do it when trading
and investing.
They were buying at a price level where supply exceeded demand big
supply/demand imbalance . The chart already told us that yellow
shaded area . This mistake is even worse than mistake number one. They
were buying in the context of a downtrend. This is not smart trading.
During a downtrend, the odds are with the shorts which is why we focus
on identifying supply levels as entry points during downtrends.
In that circled area which is where we were selling short,
the buyer was buying after a rally in price, into a price level where
supply exceeded demand and in the context of a downtrend. The odds are
so stacked against the buyer which is why being the seller like we
were meant that the odds were stacked in our favor, the risk was low
and the profit margin was high. Understanding who is on the other side
of your trade is a key factor in trading. Those who trade against the
trend tend to pay those who trade with the trend.
If an economy is growing and experiencing increasing
inflation, central banks will slowly begin to raise interest rates to
slow the economy down to head off rampant inflation. As an economy
slows, central banks will lower rates to help spur economic growth.
Generally speaking, in Economics 101, the first part of an expanding
business cycle will see a currency increase in strength, while a
slowing or shrinking business cycle will see a currency decrease in
strength.
The debate on how effective central banks are at influencing the economic
cycles has been the subject of thousands of website posts covering
millions of words over the past few months and years. Suffice it to
say that I believe a true free market economy, uninfluenced by
government regulation, will always be faster and more effective than
an economy influenced by government intervention.
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