Please welcome Arnold.
Arnold is a bodybuilding chef who trades from Pipfornia.
He, like many other traders, uses a breakout-based mechanical technique.
Arnold has even given it a unique name: the Terminator System.
He adheres to his approach with rock-solid discipline (thus his abs and bazooka biceps) and without emotion.
He intends to terminate enough pips to be able to get his own Harley Davidson and ride down Pip-nice Beach.
Unfortunately for Arnold, while sticking to his game plan and not succumbing to market forces, he struggles to generate consistent profits.
A typical scenario for Arnold
As EUR/USD breaks out of its present resistance level, Arnold receives a buy signal from his Terminator System.
He purchases in the market.
After a few pip gain, the price flips and stops him out. He receives another signal a few minutes later. This time, the strategy is to short EUR/USD.
Arnold, like any smart trader, sticks to his system and sells at market value.
He’s up 10 pips in a few seconds, and the pair appears to be heading for additional lows. The momentum is suddenly gone, and the pair begins to consolidate.
Another several minutes have passed… The price then abruptly reverses back up and strikes Arnold’s stop loss order…only to drop another 100 pips!
“I’ll be back,” he tells himself.
Only only Arnold had known the basic truth…
It’s a game with no winners!
As we have repeatedly stated, trading in the currency market is not a simple undertaking.
You can be the most diligent trader, constantly following his trading plan and adhering to his risk management procedures, yet still see the bulk of your deals fail.
Worse, after being stopped out, you see price eventually move in your favor and hit your profit targets.
It is important to remember that forex trading is a zero-sum game.
When you place a purchase or sell order, there is ALWAYS SOMEONE ON THE OTHER SIDE OF YOUR TRADE.
Someone is victorious, and someone is defeated.
The majority of the time, the person holding these positions is a forex dealer.
Forex dealers are professional traders who take the opposite positions as ordinary traders, so providing the liquidity required for the forex market to function properly.
Banks, on the other hand, are in the business of making money, and dealers can make a lot of money by promptly dumping their positions and profiting from the spread.
The truth is that forex traders win the majority of the time. As a result, you should try to trade like a dealer.
You’re probably thinking… “Are you a dealer?” I’ve heard so many negative things about dealers: they never fill in at the appropriate price, and their spreads are ridiculous. “Why would I ever want to be like one?”
To be honest, dealers are just like you: they want to make money every time the market rises or falls.
However, because dealers have so many benefits (the spread, order flow information, etc.), retail traders are at a significant disadvantage.
You may overcome these obstacles and become profitable if you understand how dealers think and trade.