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How Stop Being Dumb Money and Start Winning in FX
Retail traders are often viewed with scorn by the rest of the FX market, known as “dumb money” by most interbank dealers because they are considered to the least informed players in the game. That aspersion is generally quite accurate. Most retail traders have no clue as to what’s going on and rarely take the time assimilate even the most cursory of headlines.
Yet even those retail traders who follow the macro news have very little edge in the market because the market often moves on unforseen rumors and leaks. Unlike the stock market, the FX market has no insider trading rule. If you have lunch with Chairman Bernanke and he tells you that he will be raising US rates tomorrow by 50 basis points, you are free to load up on yards and yards of USD/JPY without any fear of repercussion.
That dynamic goes a long towards explaining some of the day to day movements in FX and is one of the reasons I watch very carefully the actions of the Russian Central Bank which tends to be a very well informed player whose buys and sells I often imitate. But retail traders are known as “dumb money” not only because they are uniformed, but also because they often trade without rhyme or reason.
No one is more guilty of engaging in random and compulsive over trading that I. In fact, it would be fair to say that for many years I was the poster child for “dumb money” as I chased one bad idea after another. My trading only improved when I started to follow these three words.
Yes, I know that this is just one word, but it is perhaps the most important word in a trader’s dictionary. Successful trading is all about waiting for the right opportunity. You may have a an outline for a reasonable trading system, but every trading system needs a filter in order to have even a modicum of a chance of being profitable over the long run.
Right now I am working with my RSI Bungee Jump idea, but the more I trade it in real market conditions the more I see its weaknesses. These are sometimes very small but important factors that you would never be able to pick up through a simple backtest (which is why if you’ve been reading me for a while you know I detest backtesting). The only way to determine the true value of your trading methodology is to trade it live and constantly refine it by eliminating low-probability trades.
The key to not being “dumb money” is to only play the game when the odds are in your favor.