Being focused is good, at least it is in many fields of our daily lives, but in trading, it might hurt your trading performance.
When I am referring to being “too focused,” I mean by focusing on just a few or only one market instrument. It is rather typical that beginners start with what they know.
If you are a UK based trader, you will probably focus on GBPUSD as you know the ins and outs of the UK economy, while Europeans and Americans, will focus on EURUSD, and Australians center on AUDUSD.
This behavior is natural and well documented, and called home bias in the academic world.
Before I explain why and how you can get out of the trap of being too focused, let’s start by outlining the two main ways to make money trading: trend following and mean-reversion.
The first way is to trade is to follow the price trend, e.g., if the market is rising, we buy with the hope of the price continuing to rise, while if the price is declining, we short-sell with the anticipation that the price will continue to slide so we can make a profit.
A typical indicator used in trend following trading is the average directional index (ADX).
The other typical way of trading the market is to apply a range-bound strategy, which is also called mean-reversion.
Here we figure out what the average price of an instrument is and buy when the price is too low relative to the average, or short-sell when the price is too high relative to the average.
A typical indicator used in this sort of strategy is the relative strength indicator (RSI), and simple horizontal support and resistance levels.
As a fun fact, according to most brokers retail FX positioning, the average retail trader will be focusing on mean-reverting strategies.
Now, which camp you choose is not important as there is good trend following traders, and good mean-reverting traders, but I prefer a trend following strategy, as there is an ample amount of academic research support the trading strategy style, and myself I have been profitable since 2014.
Don’t Be Too Focused On One Market Instrument
As we have now outlined the two typical trading strategies, let me explain what the problems are with being too focused.
Every market instrument will either be trading sideways (range bound) or trending, then the volatility will either be high or low or somewhere in between so you are dealing with at least four if not six different market types.
As the typical trader applies a mean-reversion strategy, they will perform well when the market is trading sideways and lose hand over fist, when the market is starting to trend, as their mean-reversion strategy stops working.
Many are not aware that the change in the market is the reason for them losing money and not the strategy, so they struggle and look elsewhere.
But it is usually not the strategy that is the problem, it is the market, so being focused on just one pair will not help the average trader, as they will need to be an expert on trend-following and range-bound trading, and this is not an easy feat, I tried it, and it is extremely difficult.
Instead, I decided to become an expert on trends. This meant that I am no longer just focusing on EURUSD.
Instead, I scan all available pairs that my broker offers to find the best trend and then figure out how to trade them; I would also look for markets that were about to start trending.
Not only that, I have since many years focused on other asset classes such as commodities, stock market indices, and cryptocurrencies, and the reason for this is that it that Forex pairs are not always trending.
As an example, at the time of writing in late February 2019, the EURUSD had been trading sideways for 18 weeks, the same applied to AUDUSD, GBPUSD, and NZDUSD, and in these conditions, it is dangerous to be a trend-follower.
Instead, I have been trading stock market indices and commodities; this way I am still able to extract some profit from the markets.
Trading just one market instrument such as the EURUSD or GBPUSD can be time-consuming and difficult as the trader would need to be an expert on trend and range-bound trading strategies.
They would also need to be able to navigate high and low volatility environments, which affect where one should place stop loss and take profit orders.
As an alternative to just trading one market or one asset class, Alejandro Zambrano, trades trends, in several asset classes, this way he only needs to be an expert on trend-following markets to be a consistent trader.