Wednesday, February 25, 2015

FOREX THEORY


Fade the Breakout (Part 2)

If a support level is broken, that means that the general price movement is downwards and people are more likely to sell than buy.

Conversely, if a resistance level is broken, then the crowd believes that price is more likely to rally even higher and will tend to buy rather than sell.

Independent retail forex traders have greedy mentalities. They believe in trading in the direction of the breakout. They believe in huge gains on huge moves. Catch the big fish, forget the small fries.

In a perfect world, this would be true. But the world is not perfect. Frogs and princesses do not live happily ever after. What does in fact happen is that most breakouts FAIL.

Breakouts fail simply because the smart minority has to make money off the majority. Don’t feel so bad. The smart minority tends to be comprised of the big players with huge accounts and buy/sell orders.

In order to sell something, there must be a buyer. However, if everyone wants to buy above a resistance level or sell below a support level, the market maker has to take the other side of the equation. And let us warn you: the market maker ain’t no fool.


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