No data day: stops, options drive the moves

14.15 gmt

There is no data out today, apart from the low-impact German Factory Orders which came out slightly better than estimated. The market, particularly the Euro, is waiting for the ECB statement and press conference tomorrow. On such days the price moves  are mainly dictated by where the stops are and where the expiring option strikes are.  Since we have just had a huge run-up in all the pairs, the natural direction is to move lower since that’s where the stops will be. So far, the market action tells me we will rebound, probably before the ECB press conference. Long experience in the market will tell the trader which are key levels, near where stops will be, and the break of which key levels is significant. Such knowledge gives confidence in a trade even when it seems to be going against you.

People may get the impression that I am calm and collected as the market moves against my positions. I sit in my living room talking to my wife and family while monitoring the markets on my laptop. They don’t realize that I might be up +10 or down -10% on the day, or that a battle is going on in the markets, as I converse with them. I do handle stress better than most people, having had a lot of practice over the years ;-).  But that doesn’t mean I don’t panic, get tense, or suffer impaired judgement under these conditions. Far from it!  In fact, as I have evolved and improved as a trader the most difficult behaviour change in myself has been to learn patience, confidence in my analysis, to see the bigger picture and not let minor ripples worry me.

Most newbies in the forex market fret about what govt officials say, or what today’s statistics were, or why the market doesn’t seem to agree with their understanding of economics. That is the completely wrong approach to succeeding in the forex market. The first and most important step towards success is to embrace the idea that the market is a crowd, and you are a member of that crowd. Try to understand what drives the crowd, and how it behaves under different stimuli. That will give you clues as to where the market is headed next in the short-term. Technical analysis is a graphical representation of crowd psychology.

The second part is to understand one’s own psychology. Analyze your reactions to the crowd and your reactions to stimuli in an objective, dispassionate manner. See what makes you behave the way you do and work on removing the unhelpful aspects of your psyche. This is very, very hard. One has to master a ‘detachment’ from the material world around us.

A Zen state of mind, that is the ultimate goal.

Isn’t it ironic that to earn lots of money in markets one has to learn to view life as a zen monk and realize that one doesn’t really need money to be happy in this life?

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