Want to play a game the computer, Joshua, asked Matthew Broderick’s character in War Games. It’s the story of a researcher who applied game theory to create computers that could play games and learn from their mistakes. That and Joshua, the government’s rendition of the researcher’s work was trained to simulate war games. Your losses may feel like the end of the world, but it is not reality. Learn to take advantage of traders’ mass thinking that it is the end of their trading world to make money.
What do poker and Forex have in common? According to game theory, both require that sometimes you win and sometimes you lose, in essence.
Forex is like a balance, for one person to lose money, another person must gain money. Most people do not realize that, but it is a principle of this system. This concept deems Forex a zero sum market.
Forex: How To Play The Market
Learning about Forex means that new opportunities to become a better trader emerge constantly. How can you use the zero sum market to make better trades? For starters, do you conduct technical analysis that focuses on the current price in the market? This is where you get to apply game theory to an actual market.
You are probably losing out on money-making opportunities if you are only focusing on the price when you are focused on technical analysis. Instead, analyze the conditions and locations where traders lose money.
How do you do that? Anytime the market dips, slides, or drops, it means the buyer lost money. When the market rises, the traders who sold lost money. That’s a fresh perspective on the market.
To demonstrate this let’s take a look at the USD/JPY currency pair back in 2011. The market had been in a long spell of a downtrend, as you will see looking at the chart. It was a rough ride with a jarring and violent upward movement. Why? Becuase a lot of people were short in the market while the downward trend was ongoing.
Basically, traders were following Trading 101 principles of market inertia. It is that the longer a trend exists it is more likely to stay that way. So, traders were living long-term in a downtrend that it was expected to stick around a long time at that point.
By association with this principle, most traders were shorting the currency if it rose even a little bit, because it surely was going to shift back down, right? Well, it meant that thousands of traders in USD/JPY went in a moment from making a gain to suddenly taking a loss.
Traders have a fear of losing money even like the average Joe, so even they sell when the market shifts. This gave the upside more momentum. The sell position was closed by a by order. They would need to sell back what they bought at a worse price.
If Nothing Else, Learn This Point
This is the fuel that shifts from downtrends and uptrends to moving the market in the opposite direction. Yet, people are not good at timing markets either.
Look at this chart again, the 1 minute chart shows short trades closing losing trades, with a downtrend on the 1-hour chart with traders on the long position closing their losing trades. Look carefully and learn the correlative here: when more traders close losing trades, it equals a bigger trend.
Think Like A Trader And Make An Educated Guess
Technical analysis is not going to predict when and where losses will occur. Study the participants instead. Use those special linear thinking skills good traders are gifted with to discern the most popular trading strategies.
If you know that most traders are using Forex 101 rules, then you also know at some point the trend will lead to a massive selloff or buying to shift a trend. It will be volatile, and many people lose and gain all at the same time.
Guess at what most traders are doing that keeps everyone in a downtrend or uptrend. What is the likely short position for most of those traders who are keeping the market in a downward trend? During a protracted upward trend, what are the long positions? While you can only guess, and not truly time it, this is a piece of real information that sheds light on what traders might do.
In certain scenarios even the professional and more seasoned amateur traders let fear color their trades. A market shift is one of them. Reason gives rise to fearful buying or selling. Can you make money from it? Of course.
If you can anticipate a selloff at a loss, then that means someone has to take the money and win. Why not be there to take their money?
The key to the markets is to remember that there is psychology, game theory, and the simplest concept of all: someone wins and someone loses on every single trade that occurs.