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$50
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An anonymous stock market adage goes, “Bulls make money, bears make money, but pigs get slaughtered.” Apparently, this warning was originally intended to remind stock traders to avoid the emotional pitfall of greediness, but it also applies very well to those looking to trade any market successfully. Just as with stock traders, the forex farm consists of traders who tend to conform emotionally to one or more of the animal personalities listed below.
The bulls
Forex traders who are bulls or bullish on a particular currency pair tend to charge ahead as they optimistically think the exchange rate for that pair is going up, up, up! As a result of their positive perspective, they will take a long position in the base currency and a short position in the counter-currency. For example, they might believe that economic prospects for the country that issues the base currency look great or are due to improve significantly relative to those observed for the country that issues the counter-currency. In addition, perhaps interest rate differentials also favor the base currency country, so traders long that currency will receive income from the positive carry as they hold long positions overnight. Nevertheless, even strong bulls need to remember that the forex market has a tendency to overdo things sometimes and such excessively-directional bullish optimism can often lead to the resulting bubble bursting sharply as the market moves up the stairs, but down the escalator.
The bears
This brings us to the bears. Bears can be grumpy creatures whose sour view on the market gives them pretty much the opposite take to the charging bulls. Accordingly, forex traders who are bears or bearish on a particular currency pair pessimistically think the exchange rate for that pair is going a good way down, and so they will take a short position in the base currency and a long position in the counter-currency. Unlike stocks that can only be sold short on an uptick, forex traders can short any currency against another whenever they can find another forex market participant they can trade with willing to bid. Bears might take this short trade if they think that a particular country is struggling economically and its prospects are likely to worsen, while another country’s economy seems set to blossom or at least stabilize. Like bulls with their excessive optimism, bears should remember that no downward trend lasts forever, so they need to be flexible enough as forex traders to realize when the market has turned to the upside.
The Other Farm Animals
Interestingly, while bulls and bears are perhaps the best-known animals that forex traders tend to emulate as they position themselves in their market, they are not the only ones. This is where the proverbial farm comes in.
- The Sheep and the Chickens The next animals in the forex market barnyard are the sheep and the chickens. Each of these trading animals fails to make money trading forex because they are both too afraid to take a position, although for slightly different reasons. The sheepish trader is just too shy to try something new, while the chicken trader is afraid of getting killed when they enter the market. Together, they just sit on the proverbial sidelines, waiting for the perfect trade, which naturally never comes. Basically, any decent forex trader has to be willing to lose some money in order to eventually come out a winner; neither can they expect to win if they continually override their trade plan when it signals a trade. Taking no risk means receiving no reward, so these self-sidelined traders might just break even after allowing their fear to kill their forex trading business while they wasted plenty of their valuable time watching screens.
- The Pigs Finally, as referred to in the well-known saying at the beginning of this article, the last market animal is the pig. This trading beast tends to succumb to greed and so they refuse to take profits on winning positions when appropriate, as they try to squeeze a few more pips out of the market. Instead of taking their gains and living to trade again, they might even make the classic trading mistake of allowing their initially winning trade to turn into a losing one that costs them money. Eventually, allowing their greed to rule their trading will lead to the slaughter of the pig’s trading portfolio. Maybe no one ever went broke taking a profit, but plenty of piggish forex traders have gone broke by failing to take one. Pigs also tend to take substantial risks boldly and without doing their homework in impatient attempts to make big, quick profits trading forex. Unfortunately, they often end up killing their trading business in the process.
Sure, both bulls can make money and bears can make money as the pendulum of the forex market’s equilibrium rate swings to and fro. Even the chickens might be able to peck a few grains out of the market as the other trading animals pick up profits from the greedy losing pigs. So, what kind of forex trading animal will you avoid being?
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