Sunday April 18, 2010 - 15:15:34 GMT
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Forex Trading - Try Stepping Out of Body
Have you ever had an â€śout of bodyâ€ť experience? What I mean by this is a time when you feel like you have stepped out of your body and view an event as if you are on the outside looking in. I am sure all of us have experienced this but most of the time it is unintentional. The purpose of this article is to suggest that an intentional â€śout of bodyâ€ť experience can be beneficial to your trading.
I had some difficulty writing this article as my contention that moving out of body runs contrary to the importance I see in staying in the moment when trading to be in sync with the market. You may ask how to reconcile these two divergent approaches in a trading experience. That is a good question. I guess the best way to explain it is to emphasize the importance of looking for the forest through the trees so you can put the current market in perspective when trading.
One way to explain what I mean is with an example. Take the past weekâ€™s forex trading where the eurusd gapped higher at the start, setting a high Monday at 1.3691, and then staying bid through early Thursday before retreating and eventually more than filling the daily gap to 1.3494 on Friday. The clue to this market came mid-day Wednesday when Greek-German CDS (Credit Default Swaps) widened sharply, which suggested concerns over Greece sovereign risk were on the rise again. However, the forex market was focused on some dovish comments from FRB Chairman Bernanke and this kept a bid under the eurusd. I, for one, was scratching my head as I pay attention to reaction to news and in this case the euro was not reacting negatively to news that should have seen it trade lower. This is where the out of body experience would have helped. If one thought about the period ahead, widening Greek CDS signaled something was afoot and traders would be wary of carrying long euro positions into the weekend. A good risk/reward trade would have been to short the eurusd with a stop above 1.3691 for if that level held, it would suggest less strength to the rally than the short-term price action was indicating. In this case, staying in the moment made it hard to be bearish on the euro as selling the currency on Wednesday was a losing strategy for most of the day but moving out of body gave a different perspective. Of course hindsight is a great help and I was on the fence given the way the euro shrugged off negative news but stepping out of body might have produced a good risk/reward trade.
Here is another example a lot of us have experienced. A currency is moving higher but you think it is overdone. You act impetuously and hit a bid at 65 (e.g. 1.3565). You then put in a 10 pip stop as that is all you are willing to lose. You are just hoping to make something and havenâ€™t thought of a target. The price immediately jumps higher, putting your trade underwater. It trades 72-74, your stop is under attack. Your stare at the screen intensifies. Your heart beats. Whew, 75 not offered, stop holds. Then it goes 71-73, 70-72 and sits there for what seems forever. Then 69-71, 70-72, 69-71, 68-70, 67-69, 69-71, 68-70, 67-69, 66-68, 65-67, 64-66, 63-65, 62-64, 63-65, 64-66, 65-67, 64-66, 63-65. You click on the offer and scratch the trade, a sense of relief. You are out at even and didnâ€™t get stopped. The market gyrates around those levels for a little longer and then starts to slip and eventually falls 30 pips. You were right but didnâ€™t make anything after risking 10 pips.
You then do a post-mortem and look at the time stamp on your trade. You were in the market for a whopping 1 minute 45 seconds. It felt more like 1 hour 45 minutes. What did you do wrong? You traded your gut without stepping out of your body and looking at the market with a clear eye. Had you done that you might have waited for what looked like a high was in place and then hit a bid rather than trading your gut and hitting a bid during the upswing with hope your stop would hold. At least that way you would have had more conviction in the trade with a stop at a level that had some meaning rather than based on how much you were willing to lose (see my discussion on the use of stops in this free report, A Secret to Successful Forex Trading). You would have taken some of the emotion out of the trade rather than having to stare at the screen so intently looking for a way to get out without a loss rather than looking ahead to how much profit you might make. In other words, by moving out of body, you could have put the current price action in perspective and gone on the offensive with a risk/reward trade rather than trading on the defensive without a plan.
Of course, it is much easier to do a post mortem than execute these strategies in the heat of battle. It takes discipline to step out of your body and look at the market with an objective eye. After more than three decades of trading, I am still guilty of getting caught in the moment and not stepping back to see the whole picture. It is a battle I still struggle with to remind myself I am no longer a bank trader with deep pockets and access to ultimate liquidity. It is something I work on constantly and pays dividends when I see the big picture clearly. Try it. It may pay dividends for you as well.
Jay Meisler has been trading the forex market for more than 30 years, as an interbank dealer, fund manager and independent trader. He is a co-founder of Global-View.com the leading forex discussion site and home of the original forex forum. Global-View is a place where traders come for forex trading ideas, latest rumors, flows and breaking news.
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