EP116: How to Predict Forex Market Direction

Truth About Forex

7 years ago

What’s the best predictors of who wins the superbowl?

In this episode of Truth About FX, Walter digs into predicting the market direction — or is it really possible? He talks about managing your trades rather than trying to “anticipate” the market. So, how do you know what is going on with the markets while you’re at the game? Walter also talks about moving to breakeven, starting with the right mindset, defending your trade, and a bit about trailing exits. More of these in this episode…

Download (Duration: 05:56 / 6.80MB)

In This Episode:
00:39 – follow the cockroach
01:28 – court case
02:40 – defense
04:22 – pick and choose

Tweetables:
Do you know how to manage your trades? [Click To Tweet].
Trading is a court case and you are the judge [Click To Tweet].
You don’t have to predict everything [Click To Tweet].

Announcer: Sometimes, forex trading is a wild and wooly place to be. That’s why Hugh is here, to post your questions to Walter, the naked forex guy. Hugh’s got questions and Walter’s got the answers. Here at the Truth About FX Podcast.

Hugh: Hi, Walter. Somebody asked, “How do I know which direction the market is likely to go?”

Walter: Well, I think it turns out one of the best predictors of who wins the superbowl, right?

Hugh: I feel like a fissure or something, right?

Walter: Yeah. You can just follow the cockroaches on the wall and see which way they’re going. No, all jokes aside, we don’t know. Obviously, we don’t know and the best traders in the world, they don’t know and they don’t care.

They just wait for the market to go so probably the more important thing to look at is how do you know how to manage your trades once you’re in one because there’s a couple of questions here.

One is predicting in the market which is kind of like a loser’s game, in my opinion. But, the second thing is how do I know what’s going on when I’m in a trade? Now, if you don’t have a hard and fast trailing exit or targets or rules around there, then you’re going to be kind of at the wimps of emotion.

Which is probably not the best place to be but one thing, one simple trick that you can adopt and everyone can adopt listening to this is when you’re in a trade, what you might do is before you’re in a trade, you need to have the mindset that everything, it’s like a court case and you’re the judge.

Everything is to line up. You have enough evidence to say, “Okay, yes. You’re guilty.” “Buy or sell.” Once you get that, that’s great but then as soon as you’re in a trade, your mindset shifts to how quickly do I defend this position.

In other words, when it goes in my favor, how quickly do I move to breakeven? I do it really quickly because I like to have trades that ends up as breakeven. I’ve considered a lot of those could have been losers and I save myself.

Now, some of them… Like in fact this week, I had one where — well it was last week but basically it was managed this weekend — what happened was the trade was stopped out at breakeven for me but a lot of people in the private forum who held it, they made money because it just barely hit my breakeven entry and then it went to target one and target two.

So, the important thing here is number one, you’re not going to have to predict. You don’t have to predict. You don’t have to predict where the market is going to go to make money.

Number two is you should have a mindset of, “I really don’t want to take a trade but if everything is lined up and my system is telling me to take a trade then, I’ll take a trade”. Once you’re in the positions, it should be something — in my estimation — it should be something along the lines of defending.

You have to go to defense. Everything you do is geared towards defending that trade, making sure that it doesn’t turn to a loser, making sure that you get out of it when you should. Everything goes towards defending it and not trying to be too aggressive.

Hope that makes sense. It’s like you want every reasons to not take a trade before you’re in a trade and then when you’re in a trade, you want every reasons to make sure that you don’t let it turn into something bad like a losing trade or something where you just want to wait too long. These sorts of things.

Now, if that’s part of your system… If you have a trailing exit, you don’t have to worry about that because a trailing exit will pop you and if you’re using a Metatrader or any other charting program like Tradestation or whatever. You can have that on your chart and you don’t have to worry about it. You can let all that go.

One of the smartest things I’ve ever heard in terms of trade management was — and I’ve tested this, it’s really cool — you split it up into 4 positions.

What I usually do is I’ll have two positions or three positions, each would be with a more aggressive target. So, the first one might be 1:1, the second one might be 2.5:1, the last one might be 4:1, something like that.

I think for a lot of traders, it would make sense for lot of traders to test something along those lines. It doesn’t have to be all four of those but you might take, pick and choose some of those and see if that makes sense for you because we’re always going to kick ourselves when a trade goes farther than our target and we’ll always going to kick ourselves when trade goes almost to our target but doesn’t get us out.

In both of those cases, our trailing exit can help so that’s something to think about.

Hugh: Yeah, totally. I think those are great points and also it’s important to remember that you can be right about the direction but depending on your trading system you could lose money. Right?

Walter: Exactly, that’s right. That’s the importance of stops. We know that having a really tight stops is going to reduce your win rate because of exactly what you have just said. You could be right that the Euro is going to go up, buy the EUR/USD.

You’ve got everything setup. Euro is going to go for 600 pips over the next two weeks, all that could be right but if you have something wrong like your stop loss is 12 pips, it doesn’t matter. That sort of thing.

Hugh: Okay, cool. Appreciate that. It’s great to think about it like defending your position. That’s awesome!