In terms of FX Trading Psychology if everybody expects something to happen in FX trading chances are it won't because the outcome is discounted in the price and this is really the basis of contrary trading and in this article I want to look at two scenarios in which you can use this to your advantage.

The two scenarios we are going to look at are trading breakouts and trading the Non Farm Payroll number.

Breakout Trading – Unexpected Breaks

Breakout trading is a popular method of trading and a timeless way to make bigger profits In terms of breakouts from congestion areas if a break occurs and there seems to be no logical reason chances are the break will follow through. If most traders see a break coming and its heavily featured in the media it will be less likely the breakout will follow through.

To explain Bruce Kovner in “Market Wizards” makes reference to the Heisenberg principle in physics which postulates:

“if something is closely observed, the odds are it is going be altered in the process”

Translated into plain English terms this means - when know one expects the event and can see no logical reason behind it, the odds of trading the break are far higher than when they do.

The concept behind this is “The Less Observed, the better the trade” so when a breakout occurs no one is expecting it and it's uncomfortable for you to trade, go with it. In terms of the major currencies this happens frequently but the crosses often provide better trading set ups because these currencies have less speculative interest and are “less observed”

Non Farm Payroll High levels of Interest and How Far the Number is Discounted

A number which always generates huge interest among traders is non farm payroll. Very often a number comes out as expected and the result is a move opposite to the way the traders expect. In terms of perception of the event, non farm payroll is a great number to look at and apply this strategy.

If you have a the Dollar at a bullish or bearish extreme coming into the number and the number is expected to support the extreme it is very often a day when the Dollar makes a contrary move on the number. Because everyone has an opinion on the number and expects it, the forecast number is discounted in the price.

Non farm payroll day, is one where you can look for the number on target to do nothing, in terms of supporting the prevailing trend and also, you always have the possibility of a bullish or bearish surprise.

If you want to trade the number - do NOTHING until at least 2 hours after the announcement so the market can settle and you can also check stocks and bonds for clues to where the Dollar might go next. Be patient and look at the market after this time and also at the close to put your trades in and don't get caught in the initial volatility when the number is first realized.

Final Words

FX trading Psychology moves markets – its peoples perception of the facts not the facts themselves which are important and if you use the above two strategies, you will gain an edge in your quest for bigger profits with your trading strategy.