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How I day trade - Finding the lonely trader

A big advantage when you day trade is being able to be prepared with the limited time you  in a fast moving market.

This promotes calmer decision making, less mistakes and lower divorce rates. One method I did this as a day trader was to look for the lonely trader.

I don’t mean to go stalking other traders houses, looking for the lonely trader who has lost their social skills, friends, hygiene habits and pants due to their obsession with trading.

I have never done that. Promise. Well there was this one time, in band camp...

The lonely trader

The lonely trader is the buyer or sellers who get into a position only for things to go pear shaped soon after their position opens. We all have those trades, and none of us like being wrong, let alone wrong immediately.

While I feel sorry for them, these traders are golden, and easily exploited. Trading is nasty game some times.

While the disciplined trader would have been stopped out of this position automatically with their pre-set stop. Others may have yet to have placed the stop in time, others might have moved theirs, and yet more may still be in their positions but not liking what they see.

There is no way to know where traders will be in the future, but this is one way to get an idea on where traders may still be.

Why are lonely traders useful?

If we can find the lonely trader, the trader left stranded after a quick move against them, we give ourselves a chance  to know where existing orders are.

If we know they were a buyer just before a sharp drop, we know they are now sellers when price returns as they will want to get out of a trade gone wrong.

When we place a trade, we want others to do the same as us, in the same direction, just slightly later. It is always best to have the crowd behind us than in front. An empty alley is an easier walk down than crowded street.

If we suspect they want to sell, and we know where they bought, then we can get in front of them hoping they may be now sellers.

Sure we don’t know how big a buyer or seller they were, but we know they were there. As retail traders, especially volume-less spot Forex traders, that is about as close to knowing market participants as we can get.

An day in the life of the lonely trader

Here is an snapshot of the Asian session from Monday, 3rd September 2012 (i.e. yesterday as of time of writing).

Red lines are resistance because they are previous buyers who are now sellers. Green lines are support for the opposite reason.

All lines are drawn after strong moves take out weak buyers and sellers (click to enlarge):

You can see as buyers and sellers were taken out quickly, the market reacted back at those same points.

Couple this with the traders that moved the market against the lonely trader initially, and you have a trade area that you can prepare ahead for.

In day trading, if you can prepare in advance for a trade, you are half way to a profitable system.

Happy trading.