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Forex Mistakes : Never try to pick tops and bottoms

Good day forex trading koalas.

Welcome to a new series under the Koala’s Learn Forex Trading Training College.

Forex Mistakes!

These mistakes are the ones that can cost you your forex trading accounts. Yes. A margin call.

First in this series is about the tenancy to attempt to pick tops and bottoms. This is a common forex mistake made by many and it often results in poor performance leading up to a total wipeout of a forex trading account.

To understand the problem, let us see why people tend to do this.

  • They feel that the current price level is a strong support or resistance line and hence the currency pair SHOULD reverse there.
  • They feel that the price level has gone down or up for far too much and hence the currency pair SHOULD reverse then.
  • They feel that the economic data just released is extremely favorable or unfavorable to the currency pair and hence it SHOULD reverse now.
  • The price action has been stalling for sometime now and hence the only way forward SHOULD be to reverse.

Notice that the statements above all contains the word SHOULD? Yes. Indeed in the world of forex trading, there is no 100% confirmation. In fact the statements above all show a certain amount of guesswork and you won’t want to be guessing with your hard earned money right?

Let us take a look at the counter arguments to the statements above.

  • Support and resistance levels are sentimental in nature and hence if the current momentum is a strongly sentimental, the levels will be rendered invalid.
  • Once again, momentum of a currency pair depends largely on the current sentiments. There is no way to predict a change in sentiments with a 100% accuracy.
  • While the economic data may be extremely favorable or unfavorable, the bigger context may render this insignificant to the market. ( For example, a good Germany industrial output during the height of the Euro Zone budget deficit crisis might well be ignored by the market who was focused on the extent of the crisis )
  • A stall in price action can be due to MANY reasons. Low volume due to a bank holiday, hesitation before a major news or even just simply a lack of interest in the currency pair for now.

Now if you still want to pick tops and bottoms, to increase your chance of success you should always bear these points in mind.

  • Do not place your trade without seeing the price move beyond the region in your favor.
  • Look out for clues in other markets. For example the equities and commodities.
  • Practice proper money management and place your stops well to cut off the trade should the currency pair resumes against your favor.

Take a look at the chart on the right for example. After a strong bullish momentum, the currency pair stalls. Inexperienced traders may see it as an indication that the currency pair is due to reverse. This stalling can be due to one of the many reasons as we discussed earlier.

To increase the chance of success, one should enter a position probably only after the currency pair goes beyond the lower line as a sign of confirmation that a reversal is probably happening.

A stop loss can be placed around the top line as similarly, if the currency pair moves beyond the region upwards, this trader has probably failed to pick a top.

The bottom line is that it takes more than just simple guesswork and visual should bes to pick tops and bottoms. If you really must do so, remember the pointers discussed above to increase your chance of success.

Trade safely

>> Next in the Forex Mistakes Series ( Over Trading )

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