On Thursday, we held a popular webinar regarding common retail trader issues and how to fix them.  In this article, I’d like to illustrate one of the recurring bad habits that we spoke about, using a trade example I saw a trader perform recently.

Meet Darth Fader

There’s no better name for this trader. Here is the trade I’d like to analyze today:

Darth Fader bought USDJPY on the red triangle – perhaps looking at some micro support-turned-resistance logic. Whatever logic Darth Fader was using, he was doing exactly what his fellow retail punters were doing:

Source: Shark-FX.com

In mid-July, retail participants were steadily increasing their long exposure as USDJPY peaked and began to trend downwards again. Darth Fader was using the same consistently unprofitable reasoning: fade the strong downtrend!

Invert, Always Invert

Source: OANDA Open Order Indicator

The chart above illustrates a breakdown of OANDA clients’ open positions. There is a clear predominance of long positions (blue) that have been accumulated during the recent decline, with traders still holding positions even after 400-500 pips of adverse movement.

This is the same behaviour that various retail brokers have been highlighting for years. And yet, it seems that retail folk are unable to change their consistently poor behaviour.

The lesson is clear: since, as a group, retail traders tend to be consistent losers, we need to invert their bad habits and invert whatever reasoning they are adopting in order to remain consistently profitable.

Over to You

Avoid being Darth Fader, and adopt the mentality of Luke TrendWalker.  Usually there are strong fundamental reasons for a strong evident trend. Retail participants usually adopt a purely technical view to their own detriment because as the following chart shows, it’s not that difficult to stack the odds more firmly in your favour by following the fundamental narrative, hence following the reasons for the existence of the strong trend in the first place.

If you can learn to follow evident trends and keep tabs on the fundamental narrative behind the move, you’ll be placing yourself on the stronger side of the market because you will be automatically taking the opposite bet of those consistently unprofitable retail traders that typically:

  • fade trends
  • cut winners
  • hold onto losses
  • ignore fundamental developments
  • use high leverage.

If you can invert these bad behaviours, your trading will never be the same for the better!

About the Author

Justin is a Forex trader and Coach. He is co-owner of www.fxrenew.com, a provider of Forex signals from ex-bank and hedge fund traders (get a free trial), or get FREE access to the Advanced Forex Course for Smart Traders. If you like his writing you can subscribe to the newsletter for free.