8 stereotypes of the market that have not worked for a long time
What is the currency market ? Even a beginning trader knows the answer to this question. And who trades on the currency market? That's right, people. Each person has his own weaknesses and shortcomings. And when many, many people gather together in some project, they become a crowd, which has its own stereotypes of behavior.
Today we'll talk about about the stereotypes of the market crowd and what to do not to mingle with it.
A long, long fable about the serious trader Ivan Ivanovich
[info_block align="right"]Ivan Ivanovich is a serious trader. He opens a trading terminal every day, trying to make money by trading currency pairs. [/info_block]
Ivan Ivanovich is a serious trader. He opens a trading terminal every day, trying to make money trading currency pairs. Ivan Ivanovich is not some green novice. He's read a lot of books on trading, registered on many forums. He even created his own trading strategy.
Let's drop in on Ivan Ivanovich and see how his shopping day is going.
First of all, he launches the terminal, where there are a lot of charts of currency pairs. Ivan Ivanovich quickly looks through them in search of clear trading signals.
The search goes on in vain - there are no signals to enter the market. But the trader does not give up - the deal must be opened in any case! How is it possible to make money on the market without trading? It is done, the search of trading signals is started again, but more thoroughly.
Finally, the trading signal (which actually exists only in Ivan Ivanovich's imagination) is found and the trade is opened. As we already mentioned, our trader is not a beginner, so he writes down his actions in the trading diary: "I opened a buy trade in euro/dollar pair after the trading signal - a sharp fall in price downwards and its stop at the muving for the subsequent reversal.
This is not the end of Ivan Ivanovich's seriousness. He opened a trade to make a profit, so to make sure that the profit, God forbid, does not go anywhere, it is necessary to set a take profit. In order not to break your head, take profit is set at 30 points from the current price.
What about the stop loss? Ivan Ivanovich is not only a serious trader, but also a reasonable and cunning one. Why would I put a stop loss? I am constantly watching the trade and, if anything, I will close it with my hands.
The deal is open, the price is in place, and apparently it's not going anywhere just yet. Why waste time? As a serious trader, Ivan Ivanovich knows very well that trading puts a psychological strain on the trader. Why not relax while the market is "sleeping"? Ivan Ivanovich opens World of Tanks, runs a couple of rolls on his favorite battchat to relieve this inhuman strain on the psyche.
An hour later, our trader recalls an open trade. He looks at the chart - instead of growth, the price has fallen by 50 pips, the trade gives the deposit a floating loss of $50.
Ivan Ivanovich, a connoisseur of literature, is perplexed. What is going on in general? When has there ever been such a thing?
Express analysis of the EUR/USD chart leads our trader to the conclusion that the price has nowhere to fall further, because this time the long term moving average is already in its way. Ivan Ivanovich opens another buy trade in the same volume, averaging against the momentum.
About 40 minutes passes in the close observation of all the evolutions of the currency pair quotes. The price has rolled back a little from the long-term muving, instead of a floating loss even a small floating profit was formed.
Ivan Ivanovich smiles indulgently: you can't cheat now, the calculation was correct. Since the price will not fall again, then to clear the conscience, we can put a stop loss. And without insurance, as a trader is a serious trader! Ivan Ivanovich with a steady hand puts a stop loss in the area of the weekly low.
Exactly five minutes later, the price breaks through the muving, falls further, and our trader's trade is closed at the stop loss. Ivan Ivanovich is shocked - how can it be, it can't be, because the muving is long-term...
Is this the fable of the serious trader Ivan Ivanovich? Did you recognize yourself? But, as you know, every decent fable must have a moral. Here we will dwell on it in more detail.
The moral of this fable is this...
I think many people recognized themselves in Ivan Ivanovich. What the hell, the author of this article was the same way. For most of the really experienced traders it's a bygone stage. But what conclusions can we draw from this?
There are crowds of such "Ivan Ivanovichs. And, accordingly, in these crowds, you can identify stereotypes of their behavior, knowledge of which will allow you to make a profit where others lose money.
And since we are talking about money, jokes aside. It's time to look at the most basic stereotypes of crowd behavior that directly affect the market. So, let's begin.
Stereotype #1: More trades are opened against the current trend
In simple words - these are transactions opened against the trend, in order to catch the reversal of the price at its beginning.
There are many methods for determining the direction of a trend and its reversal, but facts are stubborn things. They show that a long price movement in one direction leads to an increase in the number of those wishing to open a deal against its movement. They do not believe that the price can continue, for example, growth, because "it has already grown very much, how much more".
If you put it all in numbers, then in the direction of the current trend opens only 40% trades, but against the trend - as much as 60%. As we said, the basis of this stereotype is the desire to "catch" the reversal at the very beginning - when overcoming some level or line of the pattern of technical analysis.
Stereotype #2. Profitable deals "live" twice as long as unprofitable ones
The reason for this stereotype is normal human fear. We're just afraid. We're afraid of losing profits, so we willingly close profitable trades. And we are afraid of taking a loss on the deposit, so we procrastinate in closing such trades, hoping that the price will turn around.
Interestingly, this behavior of traders leads to the fact that there are always more losing trades in the market than profitable ones. And that is why the ratio of profitable traders to unprofitable ones is about 30-35% and very rarely exceeds the value of 40%.
Stereotype #3. Take Profit order is set much more often than Stop Loss
The absence of stop-losses in trading is a "disease" not only for most beginners, but also for many experienced traders. Here again psychology is "to blame". We are afraid that the price will catch a stop-loss and go in the right direction again. The choice is simple and erroneous - not to put a stop loss, but to close trades manually, like Ivan Ivanovich. In fact, only 40% open trades have a stop loss.
Stereotype #4. Classical ways of installing feet
Having carefully read the previous paragraph, you should have a natural question - wait, there are also classic ways to set a stop-loss order, for example, above the previous maximum and below the previous minimum. The logic is simple - if the price has broken through the level of maximum/minimum, it will continue its movement. Isn't that what we are taught trading training materials?
It certainly looks logical. It used to be like this. The price approached the level of the previous extremum, and panic grew in the market, which drove the price further. It is this mechanism that has formed the crowd's habit of placing stops behind these levels.
Now the currency market is far from what it used to be - the market is ruled by market makers. And such classic levels, at which the crowd sets stop-losses, attract them like a brownie to open their trades.
The market has changed, but the habit of placing stops behind local extremes has remained. In fact, there are twice as many Stop Loss orders at such levels as at all other levels.
Stereotype #5. Take Profit is set by the majority of traders
Everyone loves profits, so a take profit order is placed much more often. In fact, it looks like this:
- 40% trades have a stop loss, of which 30% also have a set take profit;
- 80% trades have a take profit, of which 30% also have a stop loss;
- 10% trades have no orders set at all.
Why do we need this information, you may ask? Because the following stereotype emerges from it.
Stereotype #6. Take Profit Setting is not tied to any levels
There are many more techniques for setting take profit orders than there are for setting stop losses. Therefore, there is no such accumulation of take-profits as there is with stops.
Stereotype #7. Most trades are opened in the absence of trading signals
If you track the accumulation of transactions at certain levels, it immediately becomes obvious - the longer the price is at a certain level, the greater the volume of open positions at it.
What does this mean? And it means that trades were opened without any explicit trading signals. That is, the "Ivan Ivanovich" crowd simply opens a trade because they feel like it. And an excuse to "see" a trading signal can always be found.
Stereotype #8. On average. There are three pending orders per one open position
According to the results of studies, the number of pending orders, on average, three times more than the number of open transactions.
This is quite logical, because one trade can have two pending orders: stop-loss and take-profit. However, the set stop and take profit is a ratio of no more than 1 to 2, and we have a ratio of 1 to 3. The rest of the pending orders are Limit and Stop orders.
Also if we take into account the previous stereotypes and the fact that not all deals have a stop loss and take profit, then we get the following ratio of pending orders in the market:
- The stop loss is 14%;
- Stop type orders - 20%;
- Take Profit - 28%;
- Limit orders - 40%.
Given that we are getting ready to "go against the crowd," it doesn't really matter to us because, from a market maker's point of view, it's the same thing.
I didn't come for the money...
[info_block align="right"]I came for the money, not to be smart[/info_block]
Ivan Ivanovich was laughed at, stereotypes were dismantled, but what was the practical point? As one of our forum users says: "I came for the money, not to be smart. How can we turn this knowledge into material profit?
Figuratively speaking, the crowd is food for market sharks. The money of "Ivan Ivanovich" is their profit. And moving away from the stereotypes formed in the market, you can not be afraid that you will be eaten by the sharks of the stock market, and you can tear off a piece of their food and yourself.
[info_block align="right" linkText="Best time to trade" linkUrl="https://mr-trader.com/forex-for-beginers/trading-psychology/luchshee-vremya-dlya-trejdinga" imageUrl="https://files.fortrader.org/uploads/2017/04/time-for-trading-730×452.jpg"]How to choose the best time to trade? [/info_block]
How do you not blend in with the crowd? By following the guidelines below, this will not be very difficult:
- Open your trades only in the direction of the current trend.
- Avoid setting stop-loss orders at circular levels and in areas of local extrema.
- Don't take setting a Take Profit order as an axiom. As a rule, if our forecast turned out to be correct, the price will go in the right direction for a long time.
- To set a take profit order, choose levels where "classic" traders set their stops. Most will "knock out" at the stop loss, and you will make your profit.
- Open a deal only when you have a clear trading signal. Do not succumb to gambling and bouts of gambling addiction.
- Pay more attention to losses than to profits. Control your losses by making sure you set stop losses, and your profits won't go anywhere.
- Use orders like BuyLimit and SellLimit more often in trading, and be sure to set a stop loss in them.
Of course, some of these recommendations are already familiar to you. However, now you understand their meaning, and by going against the crowd, you will be able to make a profit where most people leave with a loss.