During the Swingers, Scalpers, Holders panel discussion I did with Currensee a little while back, fellow panelist Mike Baghdady discussed the idea of taking advantage of the mistakes made by other market participants to improve your trading performance. A question related to that came in which we didn’t have time to address at that point, but I will try to do so here.
Trying to capitalize on other trader’s mistakes seems risky since I presume it implies that we have to counter trend trade?
Actually, individual retail traders have a tendency to be counter-trend traders. That being the case, if you look to trade against them you will, in fact, be tending toward going with the bigger trend.
Having said that, keep in mind that the suggestion Mike gave was to capitalize on the “mistakes”. He did not make a blanket “be a contrarian trader” statement.
The sort of thing Mike was suggesting is to look for points where those trading in the opposite direction to where you would be looking are in a weak position. That means they are likely to be forced out of their position if the market works your way.
Let’s take a look at an example using EUR/USD.
On the chart below, at the blue arrow in mid-March there was a new high above the one three sessions prior, which also saw the market clear of highs from mid-February, and after the market had already broken the late-February/early-March consolidation area. In other words, it’s the type of move which could have attracted go-with long entries.
If you had reason to get short EUR/USD at some point after that break, perhaps when the market failed to hold the move, you could have been in a position to take advantage of other traders’ mistakes. There would have been many traders with stops to protect against the fake breakout. Some would have been close, and some would have been further back. Those stops being hit would have helped to accelerate the downside movement after the breakout was reversed.
On top of all that, we also know that if the market broke the early March low (green line), as it did, it would probably attract go-with shorts, helping to push the losses further, at least temporarily. That would give us an even better exit point.
And after that new lower low was put in, the whole reversal process started back up in the other direction. Those who sold the new lows became weak shorts once the market started moving back higher against their positions.
That’s an example of the sort of thing Mike was talking about, and something you may be able to apply to your own trading.