The Path of Least Resistance in Forex
Incase you assumed otherwise, no one knows what the market is about to do with any degree of certainty. Be cautious of anyone who takes a strong stance on what they think the market is about to do (particularly if they’re charging you for their opinion).
“Nobody knows if the stock’s going to go up, down, sideways, or in fucking circles, least of all stockbrokers.” – Mark Hanna (The Wolf of Wallstreet, 2013)
But the truth is that those who are making money in the market don’t need to know.
What we need to know is that the market is lazy. Price fluctuations are governed by supply and demand in the buying and selling activity of other humans, which means they tend move in predicable patterns. Like water and electricity, the market will flow through it’s path of least resistance.
While we never know with certainty what the market will do next, we can identify with certainty the path(s) of least resistance, and act accordingly.
In doing that, we trade with a slight edge on each position, knowing that over time – the market will trade through it’s path of least resistance more times than not.
If London Open represents a thunderstorm, our job is not to predict exactly where the next lighting bolt will strike. That would be impossible to consistently identify beyond the realm of luck. Rather, our job is to lay down thick, insulating rubber matting across the paddock, and build one or two tall metal towers on high points.
In trading language, we look for as much resistance as possible to place between our entry and stop loss… and then build big towers (set entry orders) in areas where there is very little (or no) resistance between entry and profit target.
Sometimes, despite our best attempts to erect these metal towers to “catch the lightning”… said lighting will bypass them all together and smash straight through our rubber matting, setting them on fire. This is the equivalent of losing a good trade. But we know, that over time, if we keep betting on the metal towers being hit, we’ll be right more times than not.
The amazing opportunity in trading is this:
- We know exactly when the thunderstorm happens every day.
- The market has already padded the entire paddock with insulating rubber mats. Just open your eyes and look for key support and resistance… it’s been laid for you already!
- The market erects a few tall metal towers each week. We don’t have to build anything! We just need to see them in the distance.
- All we have to do is show up at the right time, find the path(s) of least resistance, risk manage so we don’t get electrocuted when the towers aren’t hit… and consistently trade that path!
Catch 22 (The Mental Game): Sometimes… we’ll go through a streak of losing trades – where the metal towers are not hit 2, 3 or even 7 times in a row. Our minds will then start looking for patterns. Perhaps the old dam by the farmhouse might keep getting hit. Our greedy brain will want to start betting on the dam… but despite short term patterns to the contrary, the path of least resistance remains the same – and it is trading in line with that path of least resistance that will yield the best results in the long term.