Today I’m going to show you why the forex market is exactly the same as any other market in the world, when I say other markets I’m not talking about the stock or commodity markets, I mean normal markets you can go and buy items from.
Traders don’t know or do not realize that the forex market functions in the same way as markets which they have probably visited in real life, I believe if more traders understood this important point then their perspective of the forex market would change and it would become obvious to them that key to making money from the forex markets is the same as how you would make money from a real world market.
Every Market Works In The Same Way
I’m assuming everyone who’s reading this has been to a market before ?
Here’s Wikipedia’s definition of what a market is…..
“A market, is actual and potential customers of goods and services and marketplace, is regular gathering of people for the purchase and sale of provisions, livestock, and other goods. A place where buying and selling occurs”
Now do you think the quote above accurately describes the forex market ?
I think it does, I mean, everyday people gather to buy and sell currencies for various different reasons, most buy or sell in order to make money whilst others buy and sell for reasons related to business.
The last part of the quote “a place where buying and selling occurs” is the most important.
In all markets there will be someone offering an item for sale and there will be people who wish to buy, the person selling is offering an item a buyer may want to purchase, if I went to a market looking to buy some onions then the only way I can purchase those onions is if someone has onions for sale, if nobody is selling onions I can’t buy any.
Why Do Traders Think The Forex Market Is Different ?
All traders are taught to trade the forex market in the incorrect way with how you make money in any other market.
Traders are frequently told they must “buy high and sell low” in order to make money trading forex, the reasoning behind this advice lies in the concept of the trend.
The concept of trend is grounded in the assumption that once the price moves in one direction, its more likely to continue moving in the same direction than reverse and go the other way. Therefore buying when the price is already going up and selling when the price is moving down is the best way to make money from the market.
The problem with the buy high sell low advice is it’s the exact opposite to how people make money in real world markets.
In all other markets the only way to make a profit is if you sell something you brought for a higher price than what you brought it for, if you went to a market and started selling carpets for £10.00 when you brought them for £15.00, you’re going to make a loss because your selling an item for a lower price than what you paid for it, there is no way for you to make a profit if you operate like this.
So why is the forex market supposedly different to the example above ?
When we look at our charts there are people buying and selling a product i.e currency, the people who buy a currency when its low make money when the price of the currency rises, the people who sell a currency when the price is high make money when the price decreases.
The majority of the traders in the forex market operate in the inverse way, they buy after the price has already increased and they sell after the price has declined, this is not how you would make money in any other market.
Why You Need To Be Lied Too
Now I’m not sure why so many trading books give the advice to buy high and sell low when it’s obviously incorrect with how you make money in other markets, I think a large part of it comes from the trend traders who were active in the 80s. Back in the 80s trends were very different with how they are now, back then trends were vast and the market would simply move in the same direction for a long time without any kind of retracement or consolidation taking place in between.
Nowadays trends are different, usually there will be many moves against the trend and the price will never be able to move a large distance in the direction of the trend before making some kind of retracement or consolidation.
Personally I don’t think people give the buy high sell low advice in order to make traders purposely lose money, I feel like lots of traders give advice which was relevant a long time ago under the impression the advice still holds true today. The concept of buying high and selling low was a good strategy back in the 70s and 80s because trends were different back then, when that advice is applied to today’s markets people end up losing money because the point where a trader decides to place a buy/sell trade is the point where the trend is about to retrace or consolidate.
The banks are the ones who will always buy low and sell high and the retail traders are the ones who end up selling low and buying high, the market needs to function like this because if it didn’t there wouldn’t be any way for the banks to close their trades.
The banks need other traders to come into the market after it has already moved up or down in order for them to have enough orders available to take profits on their own positions.
If no traders placed trades after a rise or a fall then there would be no way for the banks to take any profit off their trades, when somebody places a buy trade they need someone else to place another buy trade in order for them to be able to close their trade because they need to sell what they brought to make a profit.
If another trader doesn’t buy then there isn’t going to be anyone to sell to so its impossible for the trader to close his buy trade.
Here’s an example of how retail traders will sell when the price is already low.
To begin with we had bank traders going short at the top of the move down, when all of their sell trades are placed the price drops, now their trades are at a large profit they need retail traders to come into the market and start placing sell trades so they can secure some of the profits they have made from the move lower.
Whilst there will be a few retail traders selling on the move down the majority of them will begin entering the market in the area where I’ve marked the green box. At this point the price has dropped enough for the retail traders to think the price is going to continue dropping in the future, when the retail traders start selling the banks begin to use the sell orders to take profits off their own sell trades which caused the drop in the first place.
Taking profits off a sell trade require you to buy back some of what you have sold which is why the banks need additional sell orders to come into the market after a drop has taken place, they don’t want buy orders to suddenly enter the market because that would render them unable to take profits off their sell trades.
When you think about the size of the trades these banks are placing you realize just how many additional orders they need to actually close their positions, if only a handful of retail traders brought high and sold low there would be no way for the banks to ever close their trades.
Therefore its imperative for the banks to make as many retail traders as possible buy high and sell low because their ability to make a profit, and more importantly, secure those profits depends on it.
I hope with this article I’ve given some insight as to why the forex market works in exactly the same way as other markets, there are some differences, which mean making money from forex is much more difficult than making money from common markets, but essentially when you think about the fundamentals of how other markets work, you realize making money from the forex market is the same as how you would make money participating in any other market i.e buying low and selling high.
If you buy high and sell low you become one of the people who will be contributing orders to the banks so they can take profits off either the buy trades they have placed back when the price was low or the sell trades they placed when the price was high, when they take profits you’ll lose money because your trading forex in the wrong way, you need to be doing what the banks are doing, buying when prices are low and selling when prices are high, if you trade in any other way you will not be able to generate consistent profits from the market.