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Need Explanation from a Veteran Trader

  • #1
  • First Post: Sep 15, 2009 11:33am Sep 15, 2009 11:33am
I was not able to get a decent response to my question on the Rookie Forum so I'm posting here:

This is from FXCM SSI Primer:

"Forex trading crowds tend to fade momentum. Most often we see the majority of traders sell into rallies and buy into declines. During trending market conditions, this means that we use the SSI as a purely contrarian indicator. If the majority of traders are short, then we would expect price to continue rallying."

I get the contrarian issue but can someone please explain why most traders are selling into rallies and buying in declines?

Thanks.
  • #2
  • Sep 15, 2009 11:54am Sep 15, 2009 11:54am
Being a contrarian is not as simple as just buying when the market is going up. A true contrarian trader such as Paul Tudor Jones waits until things get to an extreme, such as 1987 when everyone and their sister were buying. At that point there is no one left to buy, so you fade everyone.

As to why the average punter is selling into rallies it's because they don't want to pay $4 today for something they could have bought yesterday for $2. It's really that simple.
  • #3
  • Sep 15, 2009 12:02pm Sep 15, 2009 12:02pm
Nobody, that you or I have access to, has any idea where price is going to go on any particular trade. Some traders like to fade a strong move, hoping that overbought or oversold conditions will cause a countermove to form, thus allowing them to close in profit. When will that countermove actually materialize? No one can answer that question. Maybe after 50 pips, mabye 100, maybe more. G/J made a move almost 2 years ago that went on for over 800 pips before there was any kind of significant retrace. So how does one know if a countermove is going to happen? With all due respect...there is no way to know. You make your trade and adhere to strict Money Management, and hope for the best. I'm not sure if that answer is what you were looking for. I wish you all the best...

Regards
  • #4
  • Sep 15, 2009 7:22pm Sep 15, 2009 7:22pm
Sounds like absolute nonsense to me. By definition, the 'crowd' follow, they get in late. The sheep get in when the move has gone on for some time when their indicators have fired off signals to get in once those who made the move happen are taking profit, effectively taking the other side of their positions. The triggering stops of the crowd then fuel momentum as price swings back the other way. The market is a flow of money from those who don't know shit and can't trade (the crowd) to those who do understand the market and consistently profit. Of course it is not as a simple as just being a contrarian all the time, or as simple as FXCM make it out; following momentum all the time, but perhaps you should consider that FXCM might have incentive in making you think that it is. Look for education elsewhere.
  • #5
  • Sep 15, 2009 9:13pm Sep 15, 2009 9:13pm
As some one who has been there, the public usually tends to sell on rallies and to buy along the way down is mainly because they miss the initial trend.
they see the market picking up and trending but fear prevents them from entering a trade , they keep waiting for a pullback that never comes and here their gets into the equation and they start selling the uptrend , just to prove that price will go down to the place where they wanted to buy or at least near it.
then they start selling and selling , thinking and saying to themselves , now the pullback should come but unfortunately it never did and the market keeps going in its way.
Enter Signature
  • #6
  • Sep 16, 2009 12:12am Sep 16, 2009 12:12am
just my thaught

if you cant find your edge in the:fade:method y not look for another?
  • #7
  • Sep 16, 2009 12:27am Sep 16, 2009 12:27am
Quoting Duitman
I was not able to get a decent response to my question on the Rookie Forum so I'm posting here:

This is from FXCM SSI Primer:

"Forex trading crowds tend to fade momentum. Most often we see the majority of traders sell into rallies and buy into declines. During trending market conditions, this means that we use the SSI as a purely contrarian indicator. If the majority of traders are short, then we would expect price to continue rallying."

I get the contrarian issue but can someone please explain why most traders are selling into rallies and...
FXCM offers a more detailed explanation on their members-only page:

Quote
In general, when traders start having adverse movements against their position, many tend to increase the size of their position with the purpose to average down their entry price in one last attempt to recover from previous losses. However, the higher the number of short orders in a bull market the more dangerous is to take additional shorts because many of those traders who just entered the markets are also leaving their protective stop losses just above the current price action.

One important point to remember is that the SSI represents only the FXCM order book, therefore the sentiment of individual traders with small portfolios compared to institutional players. Because non-professional traders will often try to chase the market, extreme SSI readings are a possible indication of the big players having positioned themselves and the rest of the market playing catch-up, thereby exposing themselves to stop-hunting by hedge funds etc.

The grain of salt that this information should be taken with is that SSI represents only a very small segment of the Forex market, so I would advise using it only as a timely update to COT sentiment, and only if you have access to the twice-daily updated members' site.
  • #8
  • Sep 16, 2009 12:13pm Sep 16, 2009 12:13pm
Quoting Duitman
I was not able to get a decent response to my question on the Rookie Forum so I'm posting here:

This is from FXCM SSI Primer:

"Forex trading crowds tend to fade momentum. Most often we see the majority of traders sell into rallies and buy into declines. During trending market conditions, this means that we use the SSI as a purely contrarian indicator. If the majority of traders are short, then we would expect price to continue rallying."

I get the contrarian issue but can someone please explain why most traders are selling into rallies and...
Two reasons. Traders like to pick tops and bottoms in the market. "It can't possibly go higher/lower...." Second, no matter how illogical it seems, many traders average into losing trades instead of cutting the loss. Emotions are very powerful. I also like CHFJunkie's example.
  • #9
  • Sep 17, 2009 9:44am Sep 17, 2009 9:44am
Also, it just hit me, the EUR/USD thread in the Interactive Trading section may be a good place for you to ask why they're selling into the rallies. Would make an interesting sentiment indicator itself to judge the number of traders vocally saying they're going short/long then see how often they're right/wrong.
  • #10
  • Last Post: Edited 10:27am Sep 17, 2009 10:09am | Edited 10:27am
Quoting Jason Rogers
Also, it just hit me, the EUR/USD thread in the Interactive Trading section may be a good place for you to ask why they're selling into the rallies. Would make an interesting sentiment indicator itself to judge the number of traders vocally saying they're going short/long then see how often they're right/wrong.
I doubt if any of them know. Probably a couple of 'em said it must go down, the rest jumped on board and now they need to justify the trades.

Don't make new members suffer by sending them there - they won't learn Jack Shit.
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