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In my opinion, these days, traders should be categorized on the basis of behavioral approach they take while trading Forex. In my opinion, the traders can be categorized into three main categories.
- Price-action or price-volume Traders
- Trend Reversal Traders
- Trend Followers
- Social Traders
Price-Action Traders or Price-Volume Traders
These type of traders use the old technique of Price-Action to trade. It is also known as Price-Volume trading technique. This technique is still useful in the stock market. The method mainly focuses on the dirty money sitting up in the market upon which the operator would act. Basically, the Professional traders try to identify the action of the operator and figure out the price range where the action will happen. How they identify the action by the operator? They look for volume changes in the financial asset and its price movement. There is a supply-demand zone defined based on the operator action, or you can say where the operator will start selling is the supply zone and where the operator begins to buy is the demand zone. Such techniques are perfect for stocks, indices, including their FNO.
But does this type of Trading technique useful in Forex? In my opinion, it does not work in Forex, The operator here are the banks, and they decide where the price would move. At the beginning of my career, I tried to combine price-action with Donchian channels in an experimental setup which is still running. However, I have stopped relying on price-action, but it seems to have its applicability for the USDINR pair. I have covered my experimental setup in another article based on the use of Technical Indicator Donchian Channel.
The same cannot be said for INR based other pairs. EURUSD, USDJPY and GBPUSD are not suitable candidates for application of Price-action theory. Why did I stress this? The reason is simple if you read my article on the currency market operator and the article where I explain the possibility for a single currency to depreciate more than 20% then perhaps you will understand why I am making such a statement.
The traders those who are coming from the Stock market background and expert on Price-Action theory try to use this even in Forex markets and they miserably fail because of the reason explained earlier.
Trend Reversal Traders
There is a class of traders who try to gauge the market thermometers. These class of traders are hunters of market tops and market bottoms. These traders rely heavily on the overbought and oversold situations to reach the conclusion that market has toppled or bottomed out. They use those technical indicators which offer to signal overbought and oversold conditions. These things mostly work in Stock Markets and certain commodity markets. Do they really make sense in currency markets? I don’t think so. Look at the charts of USDINR pair and compare with the charts of EURINR, GBPINR and JPYINR. USDINR over the long Time Frame has been appreciating and has moved 70% since 2008. While GBPINR has been moving within a large range. Same can also be said for EURINR and JPYINR. If banks decide that currencies should continue to fall it will fall and if they decide currencies should continue to appreciate, they will appreciate. In this regard, though RBI intervenes just to cool off the heat in the USDINR Pair and too some extent in other INR based pairs, but since EURUSD, GBPUSD and USDJPY are also available for trading, this article also explains in the perspective of 3 major currency pairs as well. Yes, If Banks in Europe or in fact in UK and US decide that the currency pair EURUSD has to appreciate/depreciate more than 5–10% in a single day, they will do it. Banks are always on lookout for bad money sitting on other side of the horizons. They will rejig the Forex market as per their own convenience. This news article must prove my point. Then in such situations, where will these traders find bottom or top in the currency markets? In such scenarios these traders fail miserably and provide liquidity to the markets.
They were popularized by famous groups of traders who go by the name of turtle traders. Their philosophy is very simple, stick with the trend and when the trend reverses, get out. These class of traders will be on the lookout to check when the trend has started. They will watch closely when the operators have taken action and initiated the trend, and they will follow the trend, one of their favorite indicators is the Donchian channel. They will ignore the principles of Price-Action, Volume, bottom fishing, etc. and will focus only on on-trend. In Forex, only these traders survive because they have gained experience over the years. They take the trade when the confirmation has been achieved that trend is continuing. They will sell when the prices hit lower and will buy when the prices have hit higher. This type of trading is based on the fact that after the price has moved up, more people will join the band and will keep on pushing the price. They will then enter the trend and continue until the last when the trend starts to reverse. It so happens that trend might get paused and after consolidation again picks up. Now in this situation, the perfect trend follower will exit half of his position and will trail with the other half till the trend has reversed. The technique also works in the downtrend.
These are some less known group of traders. Their emergence has been credited to the social networking groups and sites. New types of brokers and websites in the overseas markets are offering people to start and learn trading simply by following experts. It is a spoon-feeding programme. People open account with the brokerage and then they are given access to the dashboard where they can watch and follow Pro traders and their trades blindly without giving any thought to the reasons behind trades taken by these pros. The sites even mention that if any loss happens to these experts, the same loss could also happen to the people following them. Yet, still, people follow blindly and make a fool of themselves. Such type of trading has not picked up in India, however, but we can’t be sure of the future. These type of traders depend throughout their lives on others and cannot even trade on their own. What do you think they will achieve in Forex markets? Forex Trading is a challenging field and social trading is a laughable stuff in this market.
Any comment, suggestion and feedback are welcome.
Disclaimer : This post first appeared on medium.com and also authored by me.