A professional and experienced money manager in charge of managing your forex managed account is more likely to be using a specific trading technique, such as trading on breakouts, or hope that recent trading ranges will hold or trade on major chart support or resistance levels.
If the money manager can determine when the market is ranging, trending or breaking out, then without a doubt, that forex manager would be the best in the market racking up the biggest gains.
Unfortunately, most forex managers rely on one particular trading system or favoured way of trading. Trend trading is by far the most popular method of trading, whereby the trader attempts to follow the trend. In order to determine the trend, the most trusted method is to compare current prices to the previous 5, 10, 20, 50, 100 or 200 days. If spot is above all trend line indicators, then trend is positive, so you trade long. If the spot price is below all or more importantly the long term indicators, then the trend is negative, which is why such traders are more likely to trade short the market.
But the market is not always trending. Sometimes, it simply range trades, stuck between 5 big figures. Other times, the market trades on major chart support or resistance levels, so each time it touches a major support line, traders buy and push prices higher and each time it approaches or touches a major resistance line, traders sell and push prices lower.
At a particular time the market will make a break out of recent ranges, or above/below particular support/resistance levels. That is when a breakout occurs and is the start of a trend. Does it always work? I’m afraid not. Many times the market does several false breakouts, that is when it breaks above a major resistance level or a particular level that had been holding for a long time, it retreats back again, thus frustrating most traders.
Let’s say the recent range on EURUSD has been 1.40-1.45. This means range traders and those following support/resistance levels will be shorting the euro each time it approaches 1.45 with stops above, let’s say 1.4550. Breakout traders on the other hand will be going long euro every time it goes above 1.4500, let’s assume at 1.4550 in an effort to catch a major move to 1.50.
So each time the price touches or goes above 1.4550, the majority of forex traders will be going long euro – one group to stop their positions, the other in preparation of a major move up. You can imagine the frustration of everybody, when the price hits 1.4560 and then retreats back to 1.4400!
Rest assured, the major players with full knowledge of the stop loss orders will be the driving force behind this frustration, which in the process will be causing huge losses for the small or retail forex traders, but making solid gains for their forex dealing rooms.
Such a process can go on for a long time but at one point, the market will make that convincing break and head higher or lower. This is why timing is very important in the forex market and why forex trading needs a lot of discipline, since no matter how many times they hit your stops, you need to trade with stops, and no matter how much they frustrate you, the day will come when the market will make the breakout and start trending. When that happens, no forex trader will like to be on the wrong side of the market.
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