Number 1 Mistake Made by Forex Traders
(Plus Bonus Mistake)

Number 1 Mistake Made by Forex Traders (Plus Bonus Mistake) - InvestGrowRepeat.com

What is the number 1 mistake made by forex traders? With evidence in hand, I'm going to prove to you the number 1 mistake that over 70% of retail forex traders make over and over again, year after year.

But first, rather than immediately tell you what the number 1 mistake is, let me show you something really important about forex trader sentiments. All of the following evidence is provided by OANDA, which is one of the most reputable forex brokers in the industry.

Related: Stocks vs Forex: Why Trade Forex?

Forex Trader Sentiments at OANDA

Forex trader sentiments is the percentage of forex traders who are long or short on a currency pair at any given time. The following graph is the historical position ratios on the EUR/USD provided by OANDA.

Notice a trend?

As the price goes up on the currency pair (black line), the number of short (sell = orange) positions increases – this is the exact opposite of what should happen. If the EUR/USD price is increasing, then traders can make money by going long on the pair (buy = blue).

However, the exact opposite happens, and not just occasionally but ALWAYS. If the price goes down, the number of long positions begins to increase. When the price goes up, the number of short positions are beginning to increase.

And trader sentiments in the forex market as a whole are actually more extreme than at OANDA. If OANDA traders are 70% short, then forex traders as a whole are typically 76% short (6% more).

Why in the world would anyone sell a currency pair that is increasing in value? Why would anyone buy a currency pair that is decreasing in value? That seems like the very definition of insane. Yet this is exactly what happens on most currency pairs, year after year.

Forex traders are consistently trying to predict the trend reversal, and this is the number 1 mistake they make over and over again. They are hoping to sell at the very top, only to be short on a pair that continues to increase in value.

Talk about a huge loss!

And what's worse is that the moment the trend reverses from an uptrend into a down-trend, the number of short positions begins to decrease! Since the trend is now beginning to go down, shouldn't traders begin to short/sell?

No wonder they lose so much money.

But where's the proof? Let me show you.

Ratio of Profitable Accounts at OANDA

During the 2nd quarter of 2017 in the above graph (April, May, June), the percentage of traders short at OANDA while the price is going up is about 64% in April and 67% in May and June. In the overall forex market, the ratio was closer to 73%.

Likewise, the percentage of traders long at OANDA during this period was about 36% in April and 33% in May and June. For the overall forex market, the percentage of traders long while the market was going up was only about 27%.

These numbers are important because they correspond perfectly with the percentage of OANDA's ratio of profitable accounts.

Every 3 months, OANDA publishes the percentage of their accounts that are profitable and unprofitable. Here is a snapshot of this same time period of their traders' accounts:

Now, OANDA actually has one of the highest ratio of profitable traders in the industry. Many other brokers have significantly less profitable traders, which corresponds to them also having more people taking the wrong side of the trade.

This fact just goes to show that there is almost a perfect correlation between trader sentiments (long vs short) and profitable accounts.

The 67% of unprofitable traders are trying to predict the trend reversal by selling the currency pair when the prices is going up. Conversely, the 33% of profitable traders are following the money by buying the currency pair as the price goes up.

Reading this, you might wonder how it is possible for forex traders to be this stupid, but actually trying to predict the trend reversal is an extremely easy trap to fall into. I also would try to predict the trend reversal when I first started trading in the forex market, and of course I was wrong most of the time.

In fact, most of the money I lost in those early days was from thinking the trend was going to reverse, instead of confirming that the trend had reversed.

People often email profitable traders asking what they think will happen during a news event. They ask, "How will the market react?"

Why are they asking a question like this? Because they want to gamble. They want to take a bet on the direction the market will take before the news event.

Here's the truth: The market doesn't care what you or I think is going to happen. Even when a news event is good for a country, sometimes the currency still depreciates against your expectations. So, you have to let the market tell you what it IS doing, and then you just need to follow the money.

In fact, the only way to make money in the forex is to trade long-term and just follow the money once a trend has confirmed a reversal. Granted, there is a little more to it than that, but that's How to Win in Forex in a nutshell (click the link to learn more about why trading long-term is more consistent and profitable than daytrading).

Bonus: Another Huge Mistake Made by Forex Traders

It is reasonable to conclude that since the majority of forex traders consistently lose money, that you should not trade how the majority trade. And how do the majority trade?

Let's take a look at a graph of OANDA's open positions in their Forex Order Book:

Let me explain what is going on in this graph.

The overall trend on the EUR/USD is going up. The left side is short positions, and the right side is long positions.

The colors represent profitability, with blue being unprofitable and orange being profitable. As you can see in the bottom left blue section, most traders are short when the price is going up.

However, I want you to notice something different in this graph. Notice that the majority of the trades are clustered extremely close to the current price.

No matter when you look at OANDA's Forex Order Book, this trend is basically always present (look at the right graph of "Open Positions"):

Why is this trend always present? Because most traders are daytrading, or otherwise trading short-term.

And sure, there are traders who are clearly profitable (orange) in this graph, but are they the same traders consistently?

Take a look at the forex traders that are more than 100 pips away from the current price.

There are a ton of them who are short (blue) and -200, -300, even as much as -800 pips in losses (clearly these traders did not use a stop-loss -- they let their losing trade continue to run).

However, there are about 5% of traders (circled in red) who are +200, +300, or even +800 pips profitable.

They went long over a month ago on the EUR/USD, following the money, and are now over +500 pips in the profit. These are the smart forex traders, who trade long-term and follow the mega-trends.

These smart forex traders know How to Win in Forex.

Want my advanced forex knowledge?

Learn how I win with advanced risk-reducing techniques and leverage management, as well as the buy/sell signals I use. Normally available for $50, you can have access for only $29.

 

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Disclaimer: Purchasing does not guarantee success, although it may significantly increase your chances of success – you are always trading at your own risk. All transactions are final.

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