Let’s now cover another very important subject that pertains to forex trading, and especially pertains to anybody, trying to build a profitable forex trading system. The subject that I would like to discuss here is lack of singularity in the forex market. Remember, we talked about the stock market being singular, and we discussed that theoretically it makes some sense to predict human behavior technically and systematically when they are buying and selling one stock with speculative interest behind their purchases? Well…remember, the forex market is not singular, it’s traded in pairs, which complicates the whole situation a lot more, and therefore makes it a lot more difficult to approach it systematically. In fact it’s even a lot more complicated than having two pairs. Let’s say you are a stock trader, you did some analysis, and it looks like the company is doing very well, you looked at some charts, and you see that the stock is at a major support level technically, so you think that nobody in their right mind is going to short this stock when the stock market opens tomorrow, so you wake up tomorrow, you buy that stock, you put your stop/loss below that support level, and indeed the stock goes up, and you make money.
Let’s now say you are a very smart and advanced forex trader, you do your analysis, you see that the UK economy has been doing well, and the U.S. economy has been doing poorly. You see that the GBP/USD is relatively low and it is at a major support level, and you feel that nobody in their right mind will short the GBP/USD now. So you go long on GBP/USD, you put your stop/loss below the support level, and you think you have a sound trade. After all, this is very strong support, and nobody in their right mind will short the GBP/USD right now. So a couple of hours go by, and all of a sudden you see that the GBP/USD went down below the support level, took your stop/loss out, and you lost money. You scratch your head, and you are wondering what happened. Well…what happened was Retail Sales came out very weak out of Australia, so bank traders and other speculative traders in Australia decided to sell some Australian dollars, but of course because they sold Australian dollars, they had to buy something else, so they bought U.S. dollars, they bought some Japanese Yen, and they bought some Euros, and because forex market is moved by supply and demand, since the U.S. dollars were being bought, GBP/USD went down in exchange, towards US dollar strength. So you think that support level should’ve held, while in reality those Aussie traders weren’t even looking at the GBP/USD, they just did what they had to do, and the price reacted, without paying any respect to the UK versus US fundamentals, and especially some technical levels. Remember, nobody cares about technical levels, but people, and with such complicated interrelation in the forex market, most technical patterns have either absolutely no merit, or very little merit.
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