How to Avoid Trading With the Dumb FX money

The dumb FX money is the money that is consistently being taken out of the market by investment banks and hedge funds when trading the currency market. It is generally considered the novice money and is usually the money that is chasing price in a trend. The dumb money is always reactionary in how it trades, it’s rarely entered in the market with a pending order and is usually executed as a market order based on a trader’s reactionary decision.

I am not about to tell you what specific edge you should be using however there are dozens of different trading edges that in my opinion are taught by trading educators that consistently place your money with the dumb money. I must stress that this blog article is specifically referencing the dumb money in the currency market and I am not referring to stocks because the price action in the stock market is very different to the currency market and should not be compared.

Trend following strategies in the stock market can work extremely well because 90% or more of the money that is traded in the stock market is looking for price to rise. In the FX market the buyers and sellers are more evenly split meaning there are an equal amount of people shorting currencies as there are buying currencies. This is an important distinction between the FX market and stock market and it is why so many people who try to apply stock market trend following systems to their FX trading fail. The price action is very different and the swings in price higher and lower are far more frequent and the trends are not as lengthy in my opinion.

If you trade the FX market and try and use a trend following system in my experience you will likely struggle and will end up placing your money alongside the dumb money that is using the “trend is your friend” approach.  The simple trend you learn to follow in the stock market is not your friend in the FX market because a trend and its price action can be very erratic. So, where does the smart money trade in the FX market. 

Let’s me ask you a question. If you had the choice, where would you ideally like to go long or go short when buying or selling a currency? I am hoping you said at the lowest point when you are buying and the highest point when you are selling. The smart money that trades in the FX market, the money that wins bigger than it loses is traded by traders who are looking to enter a new currency trend before it has moved in a new impulsive direction. They are considered contrarian traders, traders who are taking the opposing view to the herd. They are willing to bet against the longer-term trend that may have been in play.

If you are going to trade the FX market successfully what you must learn to understand is why currency values are moving and then dovetail that knowledge together with a technical view. This is exactly how I have been able to make over 25% return on investment in the FX market.  I aim to enter every currency trade when a new direction either higher or lower may be about to occur. This is the secret sauce to how many investment bank and hedge fund traders that I have worked with trade. They are looking to enter a new trend that has not yet developed and therefore they are one of the first to the party. This allows them to always have a win big, lose small approach because if they are right the new impulsive move into a new direction is going to allow them to win big. They will generally always have a tight stop loss and they want to know if they are wrong quickly. For example, they may risk 2% of their account on the trade and if price moves into the new impulsive direction, they will pick up 4% or better in a matter of days.

The dumb money is often waiting for a trend to develop (so they can see it) and when they do eventually recognise an FX trend, they enter their trade and all of a sudden, the trend comes to an end. The trend is not their friend in the FX market and to avoid trading with the dumb money you must learn to understand how the FX market works fundamentally so you can recognise when a new impulsive move is about to occur and can dovetail that fundamental view with your technical entry.

At Trading Mastery, we let our trades know daily what is driving the FX market fundamentally so they are aware at all times of a potential change in trend direction. We do this via a daily written report that is accompanied by a 7 – 10-minute video telling you so exactly where they should be considering entering trades.

Other dumb money strategies to avoid.

  • Trading without a stop loss.
  • Using small time frame charts such as 1 min, 5 min, 15 min and even 30 min charts.
  • Trying to scale out of positions and let trades run. This does not work in the FX market in my experience.
  • Moving stop losses to break even after price moves in your favour. The dumb money moves the stop loss to break even too quickly and often gets taken out.

If you’d like to learn more about how to potentially generate between 25% – 50% return on investment per annum without risking more than 2% of your money sign up for my FREE live training and let me show you how the smart money trades.