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1. Measuring Market Opinion and Sentiment
Hi Joe! What about Market Sentiment reports? Sometimes these reports agree and sometimes disagree. What is your opinion on the sentiment reports?
Although these reports sound scientific, theres is little about both futures and crypto trading markets to measure with scientific precision. Commodity futures & forex market measuring devices are simply not too accurate. There is no practical purpose for measuring a market precisely and most market measurement is at best only a rough estimate. When we measure futures markets, we are basically also measuring human behavior, and human behavior is not easily measured.
When it comes to forecasting financial market conditions or market sentiment it makes no sense to strive for extreme accuracy. Commodities futures and forex market prices are based on human opinion.
When measuring human behavior in the marketplace, the statistical error is substantial, generally running with results of plus or minus 5%. An estimate of trader or investor opinion is merely a guess because not everyone has the exact same opinion, and because it is difficult to accurately measure an opinion.
The variations in these 2 factors are indicated in the statistical “standard error.” The best a commodities market sentiment report can offer is a statement of probability based on a few important assumptions. Let’s face it a sentiment report assumes that the universe being measured is actually real. Another assumption is that the measurement of the opinion is reliable.
I have seen this phenomenon in action. When I owned a farm and mingled with other farmers at various meetings, it was obvious that the farmers never told the county agent their true planting intentions. Yet, the department of agriculture issues a report on “Planting Intentions.” Farmers intending to plant soybeans would tell the agent they were going to plant corn (and maybe also trade their corn trading system. Farmers intending to plant corn would tell the agent they were going to plant wheat.
The assumption that the universe was real was often met because the agent did indeed poll farmers. The second assumption that the opinion was reliable was hardly real because for various reasons some farmers may have lied to the agricultural agent. It's difficult to measure a market opinion. And just because an opinion or intent is stated, doesn’t mean the person giving it will act on what they say.
These issues have a direct bearing on forex, futures, stock market and commodity trading. As forex traders, unless we are trading (with 100% technical or forex chart analysis), we are also trying to assess current opinion, and anticipate what forex prices will do based be it up, down or sideways, based on that market direction opinion. Forex market price action is a reflection of what humans do and what they see and think others are doing, and many traders base their decisions on the potential reaction of other traders. So at the heart of trading is the idea that market opinion is measured accurately by the current commodity or stock price.
It's believed by forex market experts everything known about a market, which can affect global forex prices, is already mostly built-into the forex or futures price, and anything not known is not reflected in the action of the futures price. It is also accurate to say that on seeing the current forex price or latest market conditions, forex traders react in certain predictable ways. For the most part, when forex prices decline, forex traders tend to become fearful and sell their positions to protect their remaining capital, and buy again when they see prices rise so as to satisfy their greed. Of course, the opposite is true of Forex traders who tend to be short sellers. But fear of rising prices by short sellers and fear of falling prices by those who prefer to be long is hardly the main fear ingredient in the marketplace. The greater fear seems to be that of missing a move. That fear is directly tied to greed.
A major principle of all market theory is fx Forex traders and investors react to certain market conditions in a consistent and predictable fashion. Famous old trader W. D. Gann visualized these reactions in the form of geometrical angles, shapes and patterns. Elliott saw them as waves (now known as Elliott-Waves), and Charles Dow saw them as an interrelationship among the industrial, transportation, and utility sectors of the markets. However, there is good reason to doubt if market prices truly reflect the opinions of those who participate. There is also doubt as to whether or not market participants react to market situations consistently.
It seems like human behavior is too difficult to measure and people (including traders) do not consistently act on their opinions, attitudes, and beliefs. It has proven to be very difficult to measure human behavior, and people do not respond with regularity to situations, even identical situations.
When we assume that futures markets traders will react consistently to particular forex market conditions and thereby form the forex chart price patterns outlined in classical trader Technical Analysis texts, we are placing the trade horse before the cart. We are then assuming that humans will always act the same way to certain situations and conditions. However the truth is that forex trader do not act consistently. Rather they react consistently. Forex chart patterns are a reflection of all that is known in the forex marketplace. What we see when we trade from chart patterns is the way forex traders and investors react to market conditions.
Our estimates of what futures traders and investors will do are merely best guesses, and potentially inaccurate ones. Market sentiment attempts to estimate how FX traders will act. That is where to a certain extent it loses its value. It is much more accurate to estimate how people will react to what happens in the Forex Market. So when you are trying to anticipate what forex market traders will do, keep in mind that trader reactions are not necessarily seen with the precision of geometrical shapes, elliott wave counts, market sector relationships, or a market sentiment index. There is no such thing as trade certainty. When I meet the person who can tell me with complete accuracy and consistency where the next tick or pip will be, I will surely have found the Holy Grail of Forex Trading and forex day trading!
2. Getting in Step with the Forex & Futures Market
Early in the forex trading day, as part of your daily trader preparation (you do have a daily preparation, don’t you?) it's helpful to practice a little to get a "feel" for what you might do and how you might trade forex today. One way to do it is to make a few small trades, using just a small percentage of your normal trading size and your forex brokers account equity. Putting on a small trade position helps you focus.
Once you have entered the market, see how the commodity or forex trade is working out. If you use technical indicators look to see if they are in agreement with your prediction of the futures, stock or forex price action.
If you anticipated a good forex or commodities trade setup from the technical analysis indicator, did that actually happen? Was it good enough so you would trust it again? Forex traders who attempt to “trade in the zone,” try to get the feel of the price action. They want to be in step with the ups and downs of FX price movement.
Some days you just may not be as good as you are on other days. When you are not in tune with the fx market, it should be a signal to you that “this” isn’t your day. If it isn’t, don’t trade. Every trader will have trading slumps, periods when trades just don’t seem to work out. During trader slumps, it simply does not make much sense to keep trying. You are not fit to trade, so don’t. You will not be trading at your best.
Professional commodity futures and FX traders suggest standing aside when you or your trades are not having a good trading day. Ultimately, it’s a good idea to take a break from trading, to try again later. The break may be hours or days. When I’m in a slump, I take off an entire week. I don’t begin trading again until I see trades and markets going my way.
3. Don’t Deny Reality
If you want to be a successful forex or futures trader, you must make sure you do not deny reality in any phase of your trading. You cannot deny losses, price direction, mistakes you make, being under-capitalized, or a whole host of things you would rather not think about.
Many traders think the best way to deal with unpleasant ideas, events, or personal character flaws is to shut their eyes and pretend they don’t exist.
Let’s face it, FX and commodity trading can be difficult, at times very difficult and it's essential that you focus on reality. Denial takes your focus away from the very thing you need to be concentrating on—the action of prices—regardless of time frame. Your mind must be clear so that you can look at the market and see what is really there.
The way I learned to handle denial was to simply write down and confront all possible ideas I had trouble accepting. Some thoughts I could fix and others I just had to accept. But facing the truth of what and who you are is the only way to deal with denial. You have to realize that for the most part the only things you can change are in yourself. Other things you just have to accept. You have to accept the reality of slippage, for example. You have to realize that indicators often give false signals and that there is no magic moving average nor is there a magical oscillator.
You have to realize that some winning trades are just lucky trades and had nothing to do with your skill as a trader. By the same token, you will also experience the bad luck of having prices make a sudden and unexpected move against you.
Rather than wasting your time in denial, concentrate your mental energies on improving yourself and improving your trading skills. Work at improving your abilities to observe. Realize that you have to survive the markets in order to benefit from the experience of the markets.
There is really only one true problem with your trading—that problem is you! However, the problem manifests in two ways: 1. Market conditions have changed and you haven’t. 2. You are no longer doing what you did when you were winning. You have drifted. You are not consistent.
The first aspect of the problem is due to poor observation. The market has changed and you haven’t changed with it. Poor observation stems from a variety of lesser but very important problems. You have married a market, or a forex trade. You may have allowed your ego to get the best of you and you are no longer humble. I’ve named just a couple here. I challenge you to think about the many things that can distract you from seeing when market conditions have changed. Make a list of those things and confront them.
The second aspect of the problem stems from trader inconsistency. Here again, you should make a list of those things that cause you to be inconsistent.
"Perhaps I was a good trader at one time, but the market conditions have changed and I may not be able to keep my reputation up." This is an issue that all traders face at some point: keeping up their reputation. When one makes big profits trading, it's tempting to tell neighbors and friends how well you are doing. It's great when you're making the big profits, but keeping up appearances is often the downfall of even the most astute trader. Again, denying your need for fame and glory, or pretending that you can maintain an unrealistic reputation, will use up your psychological energy and interfere with your ability to concentrate. Huge profits tend to go to the humble, so try not to build up your reputation. Admit that you will have difficulty keeping up appearances and just quit doing it.
One fact that a trader wrestles with continuously is the notion, "Trading is not a legitimate job." Many traders struggle with the legitimacy of trading. Some traders find that they can simply remind themselves, "Trading provides liquidity and helps control prices." Other traders, however, think this isn't good enough and need to find more meaning in their daily trading activities. For example, they may focus on how trading helps them provide for their family, or may plan to donate some of their profits to charities they view as personally
valuable. The point is, don't deny the possible truth to such ideas. You will be better off acknowledging and working thru them, and then just moving on. Denying they exist, on the other hand, will use up both time and energy.
Unacceptable beliefs tend to lie in the back of your mind. They remain there, lurking, and when you are vulnerable, they can powerfully influence your outlook. So acknowledge unacceptable ideas, and once you admit the possible validity of such ideas, you will neutralize their potential influence. This will free up limited psychological resources, allowing you to focus all your energy on trading profitably and consistently well.
4. Trading losses
Hey Joe! Losses are a major problem for me. I know I’m supposed to “learn to love them.” How do you deal with these discouraging events?
After a series of highly successful trades, a trader should not become discouraged by normal successive losses and brokerage account equity draw-down, but learn to expect them. Notice I didn’t say, “learn to love them!”
Alright let’s say you just took a sizable hit and equity draw-down in the forex market. You feel guilty and angry. You wish it didn't happen. You would like it to go away. You tell yourself, “This is part of the price you pay to become a profitable and successful trader.”
Is this right thinking? Is this trading is all about? Do you really need to go into a trade expecting to lose?
Don’t you believe it! Though you see such statements set forth as truth, believing them is not going to help you to become a successful trader.
If you think to yourself, I just lost a lot of money and dwell on that thought you will soon be in trouble. If you think, “I can't just write it off,” then train yourself to think of it as a minor setback and move on. I know that’s difficult, but that's what you have to do.
As a forex market trader, you have to think of the long term. You have to believe that if you work smart enough, and make the good fx trades under the right market conditions, you'll come out ahead. However, there is no way that that kind of thinking comes easy. It takes an enormous amount of discipline and self-control to handle trading losses in a positive way. Why? Because losses hurt—they hurt no matter how long you’ve been trading.
If you have trouble taking a loss, you are not alone. All traders suffer losses. As a trader, the losses you take may be a fact of life, but that doesn't make them easy to handle, and you certainly don’t have to learn to love them.
As a trader you should control the amount of losses by keeping them small, and ride through the draw-down until another sequence of winning trades begins. Nevertheless, you may find yourself feeling guilty over taking a loss. Why do we have this feeling of guilt about losses? A part of that guilt feeling stems from a strong human urge to protect oneself. So when you lose money, even as a professional and active trader, it hurts when you think of the things for which you could have used the money you lost. You were probably taught to think that way.
The social and cultural values of protecting yourself were programmed into you at an early age. When you lose money on a trade, you feel guilty and maybe even a little panicky. It's quite natural and understandable, but who says that traders are natural or even that they act in an understandable way? As an active professional trader, you have to change your thinking about losses. You have to resist your natural inclinations and learn that losses are a part of every business. Retail stores take losses from breakage, shoplifting and employee theft. Insurance companies take losses from false claims. Tobacco companies are sued. Chemical companies make bad batches and have to throw them away. Farmers lose crops. Ranchers lose livestock. I cannot think of a business that does not experience losses.
So what do you do about the way you were programmed from childhood? You must confront your feelings and deal with them. Recognize that you are experiencing guilt. Understand why you are having those feelings. For each of us the underlying reason may differ in kind and intensity. It helps to admit the fact that there may be adverse consequences of taking risk with your hard earned money, and keep in mind that feelings of guilt associated with the loss of money that you cannot afford to lose is even worse. No one has any business trading with money they cannot afford to lose.
When trading with money which has been specifically set aside for trading, and you and your family (if you have one) all agree that this is money you can dispense with in the event of a loss it takes away a lot of the pressure of losing. Actively avoiding losses through intelligent risk management also helps to relieve stress and to lower the probability of a catastrophic loss. When you know that you've done everything you can to minimize risk and you feel certain that you can survive a major hit on your account scenario, you'll be able to more easily handle losses. Effective risk, money, and trade management go a long way towards building your confidence and relieving the stress from trade losses.
Once you have taken care of risk, money, and trade management issues, you must also ensure that you have sufficient trading capital. One of the most certain ways to end up a failure in the forex markets or other futures markets is to go into them under-capitalized. The largest percentage of business failures of all kinds are from under capitalization. The U.S. Small Business Association states that only 1 in 1,500 small businesses startups is successful at the end of 5-years. The majority of those business failures come from businesses that are under capitalized.
It's not different for the business of forex and other futures trading. You have as much chance of succeeding in the trading business starting out with a small $5,000 account as you do of winning the State Lottery.” Regardless of what level you start out with you must cut trading losses immediately. The faster your trading takes a loss, the higher the probability you will eventually be profitable. By learning to take losses quickly you will succeed sooner.
Trading losses are a business expense. In one sense, trading losses are part of the cost of doing business. In another sense, the cost of losses is part of what you pay to learn the business of commodity futures trading.
Losses are a fact of life in a traders life. Losses are not easily accepted. But you certainly don’t have to learn to love them.
5. Trading Panics and Fast Markets
Hey Joe! With all the talk of a possible panic, do you believe the government will intervene to ameliorate a crash?
When a trading panic is gripping the market, ask yourself what the government will do to restore sanity and protect its best financial interests. During stock markets panics, the Federal Reserve injects instant liquidity by repurchasing government securities, and lower interest rates. In October 1987, T-Bond futures rallied $10,000 per contract, when the Dow crashed 508 points in one day, which was considered a gigantic market crash based on the low DJIA during that time period. There were times when no NYSE stock was traded, because there were no buyers. It took one trader 4-days to get through to Charles Schwab to confirm a trade. The phone was on automatic redial from 7 AM to 7 PM, during that 4-day period. It took 14 days to confirm the trade!
It is my firm belief based on evidence in my possession that the government really does have a Plunge Protection Team, an offshore entity that enters the stock market at times when prices are falling too fast. This entity buys whatever, wherever, and whenever needed to keep the stock market from an outright crash.
When grain prices rise sharply due to flood damage news, is it in the best interests of the government to allow further price rises?
Consider the inflationary effect of the heavily grain weighted CRB Index. When grain prices increase due to growing problems, farmers feel resentment against Chicago traders, who may profit from farmers' misfortune. The government may issue false reports to drive grain prices lower. The 1993 floods affected 70% of the corn and 50% of the soybean producing states, yet yields were higher than 1991 production levels except for three states. How could this be? Were government figures altered to hold inflation down? You bet they were. Watch for late 1993-type bullish government grain market releases to propel grain markets substantially higher when conditions of flood or drought appear.
UF.ORG is our Trademark - All Rights Reserved. This traders article is also copyrighted by Joe Ross & Reprinted with permission. Some article additions, comments, enhancements and editing has been done by the UF website editor (in particular involving FX forex markets and forex traders), thus the entire traders article text is not all attributable to Mr Joe Ross, though most was contributed by Joe.
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