Forex Trading - Don't Be A Punter

Copyright (c) 2009 Jay Meisler

I came up with the idea to write about a punter, which is a term used in forex trading. I did some research on the word punt and found a source that gave 33 different definitions. I then narrowed my search by focusing on the word punter. I finally found the definition that related to the subject of this article. It was a British definition that defines it as a person who gambles or bets against a bookmaker or the house.

What is a punter in forex trading? There is no formal definition of a forex trading punter that I have seen and it generally means someone who trades from his gut and most times seems to be going against the market. This is in line with the British definition cited above, more like gambling than trading.

The reason I decided to write about punting is that after decades of trading in the forex market, I still find myself occasionally punting or itching to punt, only discipline holding me back. Maybe it is because of my background as a bank trader, where I started out before there were screens when we had to trade more on instinct and gut feel than anything else. It might be the evolution of electronic trading, which makes it easy to be enticed into trading by watching the price action on a screen. Whatever the case, punting is not a long range prescription for success but rather a road to ruin, no matter how good your instincts might be.

Trading mainly on gut feel alone generally leads to taking profits too soon when you are on the right side and taking losses too late when you are wrong. One reason is because these types of trades are not well thought out in terms of risk/reward with defined stops and profit targets. Rather they are more often than not based on gut feel and hope you have timed it right and picked a top or bottom.

One event that encouraged me to write this article was today?s (Oct 20, 2009) price action in USD/CAD after the bank of Canada announced its monetary policy decision. This is a good illustration of currency trading and what lures in a punter to trade. While there were no surprises in the Ban of Canada decision to keep rates unchanged, USD/Cad firmed following the announcement. It had closed at 1.0298 the prior day after falling sharply in line with an overall weaker US dollar. Prior to the Bank of Canada decision, it was trading around 1.0310. USD/CAD started to firm after the decision and the average punter would likely try to sell it at every pause. I know because that was my instinct as well until I looked at a chart and abandoned the idea. Well, USD/CAD paused at various levels, sucking in the punter and then continued to march higher as weak short positions were squeezed until finally peaking around 1.0525. Even if the punter was lucky to grab a few pips by fading the moves and then buying USD/CAD back quickly, the price action, as illustrated above, offered a poor risk/reward with losses far outstripping gains if the entry was timed wrong.

Punting in forex trading or any other gorm of trading is not a blueprint for long term success. I have said this many times and it is worth repeating here: Those traders who approach currency trading as if they were in a casino (i.e. gamble) will see the same long-term results as when they go to a casino. If you approach forex trading as a business, using solid analysis, risk/reward ratios and proper money management, you have a better chance of success.