By the time World War II ended, most currencies were pegged to the US dollar, which was further pegged to the gold standard. With the end of the Britton Woods Agreement, the gold standard ended and currencies worldwide subscribed to the floating exchange rate. This was beneficial for trade, since people who wanted to convert their currencies no longer had to convert them first into US dollars and then into the desired currency. Cross currency transactions were now enabled, which made international transactions easier and cheaper. With the advent of electronic trading systems, cross currency pair trading flourished. What are Cross Currency Pairs? Technically, cross currency pairs are defined as pairs that don’t include the US dollar. Naturally, they exclude the major currency pairs, like EUR/USD and GBP/USD, which are the most traded currencies in the world. Instead, the EUR and Japanese Yen (JPY) are common currencies in these cross pairs. Further examples of cross currency pairs include GBP/JPY, EUR/GBP and EUR/CHF, all of which are prominent cross pairs. Currency pairs including the euro are often termed as euro crosses. Over the years, cross currency transactions have grown in volume. According to data by the Bank of International Settlements (BIS), an average daily volume of US$82 billion was recorded in April 2016 in cross-currency swaps, which was a significant increase from the US$54 billion figure in 2013. Calculating Cross Currency Rates Most trade terminals come with calculated rates of cross-pairs. As the system of converting currencies into US dollars first has been bypassed, only a single transaction is required and only one spread to be considered. With the increase in trade volumes of cross currency pairs, spreads have also become tighter, which means lesser slippage and transaction costs. But, it would be good to understand the mechanism of calculating the cross-rates. Let us consider two currency pairs that have the USD as the common denominator. Let’s take the GBP/USD and USD/JPY. Together, they make up the popular cross currency pair, GBP/JPY. Now, suppose the GBP/USD rate is 1.3195 (Bid) / 1.3197 (Ask) And USD/JPY rate is 110.52 (Bid) / 110.56 (Ask) To get the bid price of GBP/JPY, we will multiply the bid prices of GBP/USD and USD/JPY, which comes to 145.83. Similarly, to calculate the ask price of GBP/JPY, we will multiply the ask prices of the major currency pairs, which gives us 145.90. Hence, the bid/ask rate for GBP/JPY is 145.83/145.90. Note that this is an approximate value. Market rates can fluctuate across different brokers. Did you know that the GBP/JPY is often referred to as Guppy in market slang, and the EUR/JPY is called Yuppy? High Correlation between Some Currency Pairs While the US dollar represents over 90% of daily forex transactions. There are dozens of currency pairs that are affected by each other. Take for instance the euro and the British pound. Till June 23, 2016, when Britain decided to leave the European Union, these two currencies were highly correlated to each other. Britain and the EU are active trading partners, which results in a high amount of currency exchange on a daily basis. The EUR/GBP is still one of the most liquid cross-currency pairs to trade, with a low average true range (ATR). Another good thing about this pair is that it offers good liquidity in most time zones, including Tokyo, Hong Kong and New York. With the current Brexit negotiations, the pair has shown volatility in recent times. Since the euro is the domestic currency of the Eurozone, comprising 19 different nations, economic releases have a diluted effect on the currency. Historically, with the exception of the EUR/USD, euro crosses have generally shown lesser volatility in response to US news and economic releases. On the other hand, GBP pairs show a lower tendency for stagnation. They either show an uptrend or downtrend on the charts. UK-related events are also few and easily understandable. The GBP/CHF pair is another attractive cross-pair. It is much faster than EUR/GBP and has comparatively higher ATR. On the other hand, EUR/CHF has a shorter history of the two currencies, having a significant opposing effect. They were significantly correlated until 2015, when the Swiss Franc was unpegged. Cross Currency Pairs in Carry Trades Currency carry trade revolves around uncovered interest arbitrage. Low-yielding currencies are borrowed by investors in exchange for lending in high-yielding currencies. This is usually seen in commodity currency trading, where investors own a high-yielding currency like the Australian dollar (AUD) or the New Zealand dollar (NZD), and sell a low-yielding currency like the Japanese yen. A trader attempts to gain profits from the difference in the currency rates, which can be significant with the leverage included. Also, the interest rate spreads between these commodity currency pairs, like the AUD/JPY and NZD/JPY, tend to remain high. The currency that has the lower interest rate is the “funding” currency. Traders borrow the funding currency and sell the “asset currency,” with the higher interest rate. These trades are preferred during times of lower market volatility. Another thing to consider is the monetary policies of the central bank of the funding currency. Economies of countries that have similar exports make up good cross pairs. For example, the AUD/CAD pair relies heavily on commodity exports. Risks Involved in Cross Currency Trading Firstly, settlements of cross-pairs are not as simple as major currency pairs. Ample liquidity in these pairs will provide tighter spreads, but on exiting the position, profits will be denominated in a currency different from that of the home currency. Cross currencies could also be expensive to trade. Currency pairs that exhibit volatility against the US dollar will generally show volatility as a cross pair. An example of this is the CAD/JPY or AUD/JPY. In these cases, the bid/ask spread would be higher. Carry trades have interest rate risks associated with them. The future direction of interest rates is a high risk factor. The 2008 Icelandic financial crisis owes its origins to the significant amount of carry trade activities. Unless a position is hedged properly, small movements in exchange rates can lead to catastrophic losses, particularly when high leverage is involved.
The oil industry produces more than four billion metric tons of crude oil each year, of which about a third is contributed by Saudi Arabia. According to the IEA, the global demand for oil is expected to reach 1.4 million barrels per day (bpd) in 2019, a rise from the 1.3 million bpd in 2018. As of 2019, the United States surpassed Saudi Arabia and Russia to become the largest crude oil producing nation in the world. This means that any event related to the US economy will have a ripple effect on the world’s crude oil prices. Crude oil is one of the most popular commodities to trade, given that its market is extremely active, with even the tiniest news leading to price fluctuations. This offers multiple trading opportunities, especially for swing and day traders. What You Should Know Before Trading Crude Oil As you would with any other asset, familiarising yourself with the basics of the crude oil market gives you a strong foundation for trading. Here are some things you should know: Oil Spot Prices These prices provide information on the cost of purchase or sale of oil, and taking delivery “on the spot” or immediately. This is in contrast to oil futures, which represent the estimated value of oil at the end of a predetermined period of time in the future. Types of Crude Oil There are different grades of physical oil that are traded across the world. The two main crude oil grades are West Texas Intermediate (WTI) and Brent North Sea Crude, which is known as Brent Crude. Brent Crude has a sulfur content less than 5% (at about 0.37%). Brent is mainly produced in the North Sea and other Brent oil fields. Its price is the benchmark for European, African and Middle Eastern crude oil. Brent prices control the value of about two-thirds of the crude oil produced globally. WTI, on the other hand, forms the benchmark for crude oil prices in North America. It is produced in the United States, as the name suggests, and is a combination of a number of light, sweet oils. While Brent is better suited for the production of fuels, WTI is used mainly for the production of gasoline. Cost of Crude Oil The cost of crude oil usually ranges from $3 to $4 per barrel for shipping to the United States from Europe. The cost of storing crude oil is different in the North American and European trading hubs. The price difference between WTI and Brent fluctuates between $2.5 to $4. Trading Crude Oil You can participate in the crude oil market in several ways: 1. Futures Here, two parties enter into an agreement, known as a futures contract, to buy or sell a specific quantity of crude oil at a predetermined future date, at a pre-decided price. Both Brent and WTI are traded via such contracts on the NYMEX, with a standard contract being for 1,000 barrels. This means that every $1 move in the price would lead to a gain or loss of $1,000. These contracts are settled through the physical delivery of the oil barrels, which might not be something that traders want to get into. So, one will have to closely follow the expiration date of the contract and either roll over the contract for an additional timeframe or close the contract before it expires. 2. Options Similar to futures contracts, in that here too the trader pays to gain the right (although not the obligation) to sell or buy a specific quantity of oil at a pre-decided price and for a pre-determined timeframe. This is the most commonly traded energy derivative on the NYMEX, which is among the largest derivatives markets globally. Being a derivative instrument, you don’t actually buy or sell crude oil but the futures contracts. However, crude oil options tend to be expensive. 3. Shares & ETFs If you don’t want to deal directly with the commodity, you can still participate in the market by investing in stocks of oil companies, as well as crude oil ETFs. Share prices of oil companies are significantly impacted by oil prices and, therefore, offer trading opportunities with fluctuating prices. For those with a low risk appetite, investing in exchange traded funds or a basket of stocks belonging to the oil industry may be a good idea. 4. Contracts for Difference This is one of the easiest ways to participate in the crude oil market. A contract for difference (CFD) is an agreement between two parties to exchange the difference in value of an asset between the start of the contract and its close date. Here, the trader enters into an agreement based on their estimation of where the prices of oil futures and options are headed through the tenure of the contract. You can also trade WTI and Brent spot prices via CFDs. Both long and short positions can be taken, based on whether you expect the market to be bullish or bearish. Moreover, the contract sizes are much smaller than futures contracts, although brokers do offer leverage to enter into larger contract sizes. Trading Tips to Keep in Mind Just like trading forex, commodities trading also requires a good umderstanding of technical analysis, fundamental analysis and effective risk management. Why Fundamental Analysis? The key influencer of crude oil prices is the usual supply and demand equation. So, anything that alters the balance between supply and demand will lead to price fluctuation. Geopolitical factors play a crucial role in supply and demand. Anyone who drives a car knows how acts of war, terrorism, trade sanctions and coups can send oil prices sky rocketing. In addition, oil prices follow a seasonal pattern, with crude oil prices tending to rise in August and dipping around September-October. In addition, weather conditions in the largest oil producing regions also influence supply, such as hurricanes in the Gulf of Mexico. So, following seasonal trends can be useful for making informed trading decisions. Did you know that crude oil prices are strongly correlated with the strength of the US dollar? When the US dollar rises in value, crude oil prices tend to decline and vice versa. So, you can actually get a quick idea of the strength of the former from the value of the latter. Of course, this is only an indication and should not be the basis of a trading decision. For effective fundamental analysis, it is useful to keep track of crude oil output and consumption forecasts. Here’s a look at some other reports that you should track to stay informed. Reports Every Crude Oil Trader Should Follow Weekly updates about oil inventories in the US are an extremely important piece of news for oil traders. This inventory data is a crucial measure of global crude oil demand. For instance, if the crude oil inventories rise, it usually indicates a decline in demand and vice versa. To stay updated on inventory status, two weekly reports are important: 1. The Department of Energy Report: This report offers information regarding crude oil and refined products inventories. It is released every Wednesday at 3:30 pm GMT. 2. American Petroleum Institute Report: This weekly report contains data about the most crucial petroleum products that form about 80% of the refinery production and crude oil inventories. It is released every Tuesday at 9:30 pm GMT.
Forex is emerging in popularity. Foreign currency trading has been around for over a century since there was an exchange for the price difference in gold between international currencies. In order for the deals to go through, and for money to be made, an exchange has to be brokered. The role of a broker is to basically be a go-between for the buyer and seller. Brokers make their money in a few different ways – typically through commissions or a flat rate per trading position, such as a fixed spread. With a variable spread, the broker simply marks up the price over the interbank prices that they receive. Since there is a growing demand for retail Forex trading, there is also an equivalent growth of brokers or firms to help traders. The problem is, with so many choices, how does a trader know which broker to use? How To Find a Good Forex Broker The first thing a trader needs to do when researching a broker is to find out if they are a registered brokerage. The marketing power of the Internet makes it easy for scam artists and unlicensed individuals to con people with a fake, or even just poorly run, brokerage websites. To avoid this, traders (especially in the U.S.) need to make sure that the broker they are interested in is registered with the NFA. The NFA is the National Futures Association and is basically a watchdog for legitimate trading establishments. They are also monitored by the Commodities Futures Trading Commission (CFTC), run by the government. These organizations not only watch over but have taken action against individuals and firms who engage in illegal or abusive activity against traders or the financial institutions. Making sure you trade with a registered broker is the best protection you can have on the world ‘wide open’ web. After finding a safe broker, you should determine if the broker will be able to meet your needs as a trader. Not every broker is created equal. Some brokers will not support your trading platform, certain trading tools that you might want to utilize, or even your trading style. Below are a few things you should consider: 1. Trading platform: MetaTrader is probably the most commonly used, and there are a couple of versions of it, i.e., MT4 and MT5. Also, many brokers have their own trading platforms. The importance of comparing is that different platforms may not be compatible with Macintosh or other systems. Also, different indicators, scripts, or automatic traders may or may not be able to be used with every platform. In addition, mobile trading is becoming more and more popular, but not all brokers offer this feature. 2. ECN or Market Maker: The Forex market is made up of large banks and financial institutions. These are the only two ways to trade within that system. An Electronic Communications Network actually connects directly with the live market, whereas a market maker creates a smaller market within the raw prices coming in – setting their own bid/ask prices. There are big pros and cons with each of these; it just depends on the trader’s needs. ECN are great for scalping. And though it is a more controlled environment, market makers have been known for some underhanded tricks like stop-loss hunting. 3. Lot sizes: A lot size is simply the size of contract or money amount a trader can use. With retail Forex there are standard lots (100,000), mini (10,000), and micro (1,000). The smaller the lot size, the less money you need to trade with. This can be good to know for new traders with a small budget. If you are starting off with only a few thousand dollars, you’re probably better off using a mini-lot account – as opposed to a standard-lot account. If you are starting off with just a few hundred dollars, a micro-lot account may be more suitable. 4. Reviews: It is important to do research on any broker you are interested in. A great way to help sort out good Forex brokers from the bad ones is to look at customer reviews. Brokers may say all the right things on their websites, and seem like they would meet your needs perfectly. However, reading some reviews from traders who have personally used their services in the past can be helpful. Different reviews may show a pattern of stop-loss hunting, slippage, platform issues, or other insights that could affect your decision. 5. History: In addition to learning about if a broker is registered or not, it can be helpful to know how long a broker has been in business. The longer a brokerage has been around (in other words, the more established they are), the more likely it is that the brokerage pursues best practices and the more likely it is that the brokerage has a history of satisfied customers. These are just a few tips for finding the right Forex broker. Other things to look for may include their customer service availability. With a 24-hour trading market, finding a broker with a 24-hour contact can save you when your computer or something happens in the markets you need help with. Look for hidden fees or costs that may not be part of the initial order fee or commission. Check out their FAQ page. A trader can find a lot out about a broker by looking at their questions page. For instance: What kind of paper work, I.D., costs, timeframe will it take to open an account, or withdraw money? What is the policy on depositing or withdrawing money? Is there a minimum/maximum limit? One more really important tip is to determine where the broker is actually located. Even though the website or your trading platform is where you will typically do your trading from, for a U.S. trader, the broker must be located within the United States. Due to new laws passed by the Dodd-Frank Act, a U.S. trader can no longer legally trade with overseas institutions. That has not, however, stopped some overseas brokers from allowing American traders to open accounts. As the trader, you will be responsible for any legal repercussion due to illegal trading. Finding the right broker may seem overwhelming. However, by doing a little research, and knowing what your needs are as a trader, it can easily be done. Due diligence and common sense are your best tools for finding a good Forex broker.
How would you like to start turning your losses into wins? Sound impossible to you? Well, in a way, you’re right – it pretty much is. A loss is a loss is a loss. But if you can take the lesson from your loss, and use it to make darn sure that you never make that mistake again, then ultimately that loss can become a win. You’re human. You make mistakes. No matter how well you think you have mastered the mental challenge of becoming a successful trader, you will still slip up. No matter how many times you have read Mark Douglas’s masterpiece, The Disciplined Trader, you will still make mistakes. Yes, it is inevitable. You will make a mistake. You will allow outside circumstances to influence your decisions, or to distract you. You may cancel a stop loss order, or make a trade that far exceeds your usual trading size or something of a similar nature, and the absolute worst that can happen, will. You will find yourself facing a loss of substantial size, and you will be punching yourself in the face because you know it is all your fault. The key is in what you decide to do next. First off, acknowledge that you are human. You are, aren’t you? You’re not some kind of trading robot. And human beings make mistakes. Face it, they do. They are not perfect. But you need to also realize that mistakes are opportunities for learning what to do, and what not to do. As stupid as it may sound, and as comforting as it may be (NOT!), there is a silver lining in that grey cloud. You can use it to your advantage if you choose to. Secondly, define the mistake. Was it just one mistake, or did you make a series of mistakes? Did you rush a trade before your plan indicated an entry? Did you ignore a stop loss or an exit signal? Did you throw your entire trading plan to the wind and go completely on instinct? Did you get too aggressive, in an attempt to make up losses, and increase your trading position size beyond your regular parameters? Next, examine the circumstances that led to the mistake. Identify the actions and especially the emotions involved. Were you fighting with a loved one? Were you distracted by an event, either good or bad? Once you suffered your initial loss, did you then compound the problem by engaging in revenge trading? When you are emotionally involved in something else, you cannot be dedicated totally to your trading. It’s hard to be unemotional when you are clearly emotional. In these circumstances, it is far better to refrain from trading until the situation is resolved. Likewise, when you are distracted either physically (cannot be present at your trading desk) or emotionally, it is best to stop trading until you can give your trading your full attention and effort. Finally, make sure you don’t do this. Don’t try to make up a big loss in just one trade. Trying to make up a big loss all at once is bad money management and a sure-fire recipe for disaster. You must understand that a 10% loss will require a gain of 11% in order to get back to even. A loss of 25% requires a gain of 33% in order to get flat. You have made a mistake, you have suffered a loss far larger than your regular system losses, and you are upset about it. The most critically important thing for you to do now is to return to your regular trading strategy. You need to bring your emotions back under control and get your discipline going again. Acknowledge that there is no quick or easy way to get back to where you were, and that to try to do that is to pile on more mistakes. Resolve to learn from this error. Resolve that you will not allow this particular situation to EVER happen again. You may make more mistakes in the future. After all, you are human. But if you can manage to truly learn, to derive meaningful knowledge from your mistakes, then that is the way to turn a loss into a win.
New traders, those who jump right into trading without careful analysis and preparation, often make a range of mistakes, from silly accidents to potentially career-ending whoppers. Novice traders, entering the market with a false sense confidence, can succumb to a variety of common trading errors and miscalculations. Veteran traders usually have learned these lessons the hard way, by experiencing all or most of them first-hand. If you are able to fully understand and implement these lessons just from reading about them, you are well on your way to a great career as a successful trader. Unfortunately, however, these common trading errors tend to be ones that everyone must make at some point in their career before they can overcome them. The key is to learn from these common trading errors when you make them. 7 Common Trading Errors All Traders Make (but Successful Traders Learn From) Sometimes the difference between making consistent profits and losing your shirt is whether or not you can learn from your mistakes. If you don’t even recognize that you are committing these common trading errors, you will never change your bad trading habits. With that in mind, let’s look at some of the most common trading mistakes. Below are 7 of the most common trading errors: 1. Focusing only on the potential gains This is the exciting part of trading, the potential to make a lot of money in a short amount of time. Everyone sees the headlines: “I turned $1,000 into $1,000,000 in three days!” (OK, that’s a *bit* of an exaggeration, but not by much.) These sorts of claims are especially common in regards to some of the most dangerous investment vehicles available to the general public: Forex, futures and options. The flip side of that claim, which no one ever mentions, is “I wiped out my entire account in three days.” Anything that offers the possibility of making a lot of money quickly also offers the possibility of *losing* a lot of money quickly. You can’t have one without the other. Keeping this fact in mind is one of the first lessons you MUST learn if you intend to trade for longer than a few months. The calculation of potential loss must be a part of every planned trade, and this calculation must provide the lowest possible potential loss for the highest possible potential reward. If you are not aware of the risk/reward ratio for your trading system, then you are not trading a complete plan, and you are opening yourself up to failure. 2. Incorrect position sizing One of the reasons that Forex, futures and options offer such incredible potential gains is because of the amount of leverage that is permitted in such accounts. When you trade a stock using leverage (also known as on margin), the most you can trade is two times the amount of available cash in your account. With Forex and futures, however, the level of leverage is much greater. In Forex, you can usually trade up to 50 times your cash. Some brokers even allow 400:1 leverage. This is, quite frankly, a crazy amount of leverage. If you trade 400:1 leverage with a small account, you are almost guaranteed to wipe out your account within just a couple of losing trades. Because of your high leverage, you will likely set your stops very tight, so that you don’t “lose too much,” but these tight stops will probably just serve to restrict your trade, and stop it out before it has time to develop properly. A couple of bad trades, using enormous leverage, and your entire trading account is gone. Most experts advise that you never trade beyond 10:1 leverage, even when you become more experienced. 3. Overtrading This can happen for a couple of different reasons. First, you might set small target prices, and be happy that your win average is increasing. You might take 5 long trades in one day, for 5 pips each, and consider yourself very successful. On the other hand, you would have done better, by avoiding the spreads, to have made only one trade for 25 pips. A second common reason for overtrading is when a trader becomes impatient. Your trading strategy does not provide frequent-enough signals, and you get itchy to “be in a trade” instead of sitting on the sidelines. This leads to trading off-plan. If you must do so, the best way is to do it in a practice account or in a small, experimental account, rather than in your main trading account where you trade your established plan. 4. System-hopping Also known as “searching for the Holy Grail.” Veteran traders have lived long enough, account-wise, to understand that there is NO PERFECT SYSTEM. Every system has its flaws. There is no such thing as a system that will always win and never lose. There are only systems that have performed well in the past and are fairly reliable predictors of good performance in the future. Finding one of these “good” trading systems is difficult, but it can be done. However it takes time and effort, and one of the hardest things is trying out a system to see if it works for you. Inevitably, when you try a new system that appears to have worked well for others, it will start out working not-so-well for you. The common error is to assume immediately that it is “broken,” or that it no longer works, and to move on in your search for another. Trading systems have ups and downs, they have occasional strings of losses, and you must test one out thoroughly (backtesting and demo trading) and give it time to work, before you dump it for another. 5. Trusting everyone but yourself Sometimes, as a new trader, you will look to advice from a more seasoned trader, rather than relying on your own knowledge. OK, as a newbie, you will do this pretty much *all* the time. You don’t know enough, in the beginning, to trade strictly from your own knowledge. This is the time when you should probably be trading only in a practice account, but that’s another issue. Once you have an established base of knowledge, however, and possibly a trader or two who you respect and can follow their methodologies, it is better to cut off most of the “noise.” It can be far too distracting and destructive to listen to many people offering a myriad of opposing opinions. Spending too much time on other people’s opinions will only serve to confuse you, and make you doubt your own plans. 6. Going against the market This can also be phrased as “The Trend is Your Friend.” Unless you have demonstrated an exceptional talent for picking reversals, your best bet is to make your trades in the same direction as the prevailing trend. Yes, the trend is broken from time to time, and you may be one of the incredibly-skilled traders who can determine in advance when that will happen. But a much higher probability of success lies with those who trade with the market, and not against it. One of the most common novice trading errors is try to trade against the market, whether traders are unaware of the significance of the trend, or they are trying to utilize advanced counter-trend or trend reversal trading techniques. Counter-trend trading techniques should only be used by traders who are already consistently profitable in the market, and are seeking to expand their trading repertoire. 7. Revenge trading Taking revenge for a loss? You might not think that is what you are doing, but chances are, if you don’t have excellent control over your emotions, it is *exactly* what you are doing. Have you ever thought, “I need to make this loss up,” or “Just 50 pips and I am back to break-even”? Any time you are thinking of your upcoming trade in terms of what it means for previous trades, you are engaging in revenge trading. Revenge trading is usually quite aggressive, and can cause you to disregard your trading plan. You might force an entry or an exit, or you might place a trade with a position size far greater than your rules dictate. Whatever the method, the outcome is likely to be even worse than the initial losing trade, compounding your anger and desire for “revenge.” You cannot get “revenge” on the market. The market does not have emotions, it does not say, “damn, that trader got his money back from me.” The market does not care about you, or your trades, and you must not either. Any individual trade can lose; that is the nature of trading. Move on to the next one, and let your edge play out over time. The most common trading errors that novice traders encounter generally have to do with mindset. Beginning a career as a trader without the proper study and practice would be like beginning a career as a doctor without going to medical school and becoming a resident. In the case of traders, though, the only damage they can do is to themselves. Take the time to learn and practice. Learn from the common trading errors that others make. Don’t repeat these mistakes when you make them. Listen to the truly successful, not the braggarts. Be prepared to work hard at this. There is no shortcut to trading riches.
When people think of someone trading in the Forex market, they are likely to think of someone who has knowledge of finance, global economics, and Wall Street. It would be presumptuous to imagine they would be equally astute in the ways of Sigmund Freud or Carl Jung, yet that is exactly what is necessary to become successful at trading any financial market. One of the building blocks of being in the market is to know that the market is not merely made up of numbers and money, but also people. Every trade has at least two people involved as the buyer and seller, and every price point is set because that is what a person is willing to pay. Understanding Mass Psychology of the Forex Market Professional trader, author, and psychiatrist, Dr. Alexander Elder, states, “Each price is a momentary consensus of a value of all market participants, expressed in action. Price is a psychological event – a momentary balance of opinion between bulls and bears.” Mass psychology, or consensus of value, simply articulates the idea that a large group of individuals will act in a similar manner because they believe by doing so they will achieve a particular goal or outcome in a given situation. This is also sometimes simplified as a “herd mentality,” and is instinctual to humans as a means of survival. This is seen in the innate belief that there is safety in large groups; or that through large masses of people dynamic and powerful circumstances can occur. One example of this phenomenon in Forex is the trend. A trend is created because a large number of traders believe a price is prevailing in a specific direction, and as a result, they continue to buy (or sell) into it, forcing it to grow in strength over time. One popular example of how this can be dangerous in trading is the Tulipmania of 1637. In the early 1600’s tulips began to gain popularity throughout Europe and as a result a ‘market’ was started to sell the bulbs, or future contracts for bulbs. By 1637 people were trading so much so fast, a single bulb could exchange up to ten traders in a day, and prices were ten times what the tulips were worth. Then suddenly one day, people decided not to show up for the auctions and prices plummeted causing one of the first major financial bubbles in history. Understanding psychology’s role in the market is not hard, but practicing it can be, and it’s what often makes or breaks a trader’s success. You can be mentally prepared, and have your trading plan ready. Then you step in front of your computer, and suddenly realize that the market is moving swiftly, and your herd instinct will kick in. You have to fight the urge to do what other traders are doing, and abandon your trading plan. This happens day after day and time after time to your average trader, which is one reason that most individuals who try their hand in the market never learn how to trade profitably. Being aware of a few dangers to watch out for, and implementing a couple of simple tips, can help you avoid the mass psychology pitfalls of Forex trading. Herd Mentality Hazards: Fear: One of the main reasons for following the crowd is fear. As a trader, when you see a turn in the market and everyone jumping, your fear instinct kicks in, and you want to enter in a trade. This feeling of fear usually stems from at least one of three main anxieties: 1. Loss – You may fear losing a good trade by staying out; or (if currently in a position) that your trade will end in a loss. 2. Doubt – Being convinced you don’t know what you are doing, and the crowd does, so you go with them instead of as an educated trader with a plan. 3. Greed – You think that you may be able to make a boatload of money in what you reason will be an easy trade because everyone is doing it. False Security: When a mass of people do something, even something we know shouldn’t be allowed or we do not understand, there is a false assuredness that the endeavor will be successful – simply because so many are participating. This false security can lead us to believe we can enter a trade and be successful, even if it doesn’t line up with our trading system. Not Following a Plan: It cannot be said enough: Develop a trading plan and stick to it! The temptation to abandon your plan because you see a big move in the market can be extremely overwhelming. But when you do that, you are gambling not trading. Emotions are dictating the decisions, not intellect. Tips to Help Avoid the Herd: Emotional Checkpoint: First you need to check your own emotional state to make sure stress, fatigue, anxiety, or anything else is not clouding your judgment. Then you need to assess the market and its emotional state. Is it trending, or is it risk averse, ready for a breakout? Are there long tails on the candles or constant reversals indicating an indecisive crowd? Stop and Think: Being reactive in Forex trading will kill your account for sure. Stop and ask why you are about to enter a trade. Does the set up follow your trading plan? Is there a logical, proven method behind your reasoning? Don’t get swept up into the crowd, you are an independent trader so don’t forget to think for yourself, and be confident in your decision. Trading Plan: It has been said: If you fail to plan, you are planning to fail. No trader is successful just being a cowboy, making trade decisions based on emotional reactions. Learn a proven trading strategy and stick to it! Understand that the market is made up of people, and driven by emotional decisions. If the trend is your only friend, how will you ever learn to trade reversals or breakouts? The key is not relying on the crowd to confirm or make trading decisions for you, but to think independently, making smart trades.
The London Inter-Bank Offered Rate or LIBOR is an interest rate, released on a daily basis by the Intercontinental Bank Exchange (ICE). LIBOR signifies the daily interest rate at which banks around the globe provide short term loans to each other. For a better understanding of the various aspects of LIBOR, let’s start at the very beginning. A Timeline of Interest Settlement Rates The rapid development of the market for products based on interest rates led to the need for uniformity among financial institutions. - In 1984, interest settlement rates were introduced by the British Bankers Association (BBA) and the Bank of England to fulfill this requirement among domestic as well as international banks. These went on to form the basis of the LIBOR rate system as we know it today. - In 1986, the actual term “BBA LIBOR” came into existence. - LIBOR has evolved significantly since the inception of interest settlement rates. The Wheatley Review of 2013 brought about several reforms too. - On August 14, 2014, the Intercontinental Exchange Benchmark Administration took control of LIBOR from the BBA. Since then, the rate is officially referred to as “ICE LIBOR.” Currencies under LIBOR In 1986, there were only three currencies with their rates fixed under LIBOR. These were the British pound sterling, the Deutsche mark and the US dollar. Till the creation of the euro, this list included 16 currencies. Following the merger of several European currencies to form the euro in 2002, the LIBOR currencies were reduced to ten. The reforms of 2013, under the Wheatley Review, reduced the list to five currencies, the euro, Swiss franc, Japanese yen, and the US dollar. As of 2019, LIBOR is calculated for these five currencies and seven maturity rates, including overnight, one week, one month, two months, three months, 6 months and 1 year, making it a total of 35 rates per day. Most often, LIBOR rates are closely correlated with short-term Treasury rates. However, during times of financial crisis, the rates tend to sharply rise, while Treasury rates decline. A key example of this was during the 2008 credit crisis. How is LIBOR Calculated? There is a specific group of banks assigned to each currency and tenure pair in the LIBOR panel. The ICE Administration considers only banks that play an active role in the London market as eligible. To calculate LIBOR for a particular pair, member banks are asked what rate they would charge for a loan of a particular tenure. Once the responses of all the banks are recorded, the calculation is done through the trimmed average method. For this, the highest and lowest four values of interest are discarded. Then, the average of the remaining values is computed, which becomes the LIBOR for the day, for the currency-tenure pair under consideration. ICE Benchmark Administration releases LIBOR rates every day at 11:45 am GMT. Why is LIBOR Important for Forex Traders? LIBOR is one of the most important global benchmarks for short-term interest rates. In fact, derivatives and financial products worth more than $350 trillion are linked to this rate, especially the US dollar-denominated rates. LIBOR is usually considered the floating rate for future contracts, swaps, student loans, mortgages and corporate funding. It is also referred to while establishing the settlement price for interest rate futures contracts, which is used by companies to hedge against interest rate exposure. So, keeping track of LIBOR can provide insight into the expectations of central banks and other important organisations regarding interest rates, going forward. There are various ways to calculate LIBOR for an informed trading decision. An easy and quick way to determine market interest rate is to check quoted currency forwards and futures. This is because a forward contract is priced based on spot and a LIBOR (or comparable) contract for the specific maturity in question. What this means is: Forward price = spot rate – interest rate differential of the currency pair. For instance, if there is a 3% difference between two currencies in terms of their respective 12-month interest rates, the forward price on a 12-month forward contract would be discounted by 3%. In addition, short-term interest rates give a fair idea of the market expectations of futures rates and even allow you to calculate the potential rise or decline in the rate that the market expects. This can help make informed trading decisions. Rate Rigging Scandal of 2012 Although LIBOR panel members had earlier been accused of malpractice and manipulation of interest rates, the biggest controversy was witnessed in 2012. A prominent newspaper, The Financial Times, published a report on July 27, 2012, in which a former trader disclosed that LIBOR manipulation by banks had been actively going on since 1991. Subsequently, in September 2012, Barclays was slapped with a fine of £290 million as punitive action for its attempts to manipulate LIBOR rates. Employees who were directly involved in rate rigging were also punished. In addition, investigations were carried out against several other banks for their role in the manipulation. The main motive behind this malpractice was to increase the profits of traders who had invested in LIBOR-based financial securities. Traders requested the banks to keep the interest rates at low levels and banks provided false rates to the BBA for LIBOR calculation. As a result of this scandal, the control over LIBOR was transferred from BBA to the ICE Benchmark Administration. The Future for LIBOR UK’s Financial Conduct Authority announced on July 26, 2017, that it is considering removal of LIBOR by the end of 2021. The main reason cited for this was that in the current global market scenario, banks have slowly moved away from providing loans to each other. Since LIBOR is calculated using these loan transactions, a change in lending trends will make it difficult to calculate LIBOR accurately. So, a global and reliable substitute for LIBOR is being searched for by the Bank of England as well as by the central banks of other countries, so that the existing system can be phased out.
If you want to make it as a trader, you need to consider that the time you spend trading and studying the markets is just like having a job. You may do it full-time or part-time, in the evenings and on weekends, but it still should be treated exactly as if it is a job to which you are committed. Anyone who works at any sort of job has to deal with distractions that can take their mind away from their work, which can sometimes be extremely detrimental to the task you are performing. But when you work from home, or when you are trading from home, you may be faced with other sorts of distractions that someone who works at a “regular” job does not encounter. First of all, if you are at home, there are plenty of things that can pull you away from sitting in front of your computer and executing your trading plan. There are chores that need to be done, there are errands that need to be run, there are pets that want to be played with, there is a kitchen full of food that beckons. You can sleep as late as you want, or take a nap in the middle of the day. You can watch TV and play video games. You can read a book (my personal distraction trap). In short, there is really nothing that can FORCE you to sit at your computer and work, so you must develop the discipline for yourself. Below are some tips for limiting distractions while trading from home: The best way to develop the discipline you need to trade successfully from home is though the use of schedules and checklists. You need to define your workday in terms of both hours that you will trade (and do NOT let yourself quit early) and possibly in terms of tasks that you will accomplish. Daily goals are best, but weekly goals will work too. A second problem can come in the form of others who interrupt you. For many people who work from home, they find that their friends and relatives do not truly understand and respect the boundaries that need to be in place when you work from home. You should not be expected to clean the house or do the yard-work while you are trading. You should not be expected to care for someone else’s child. You should not be expected to drop what you are doing and go shopping just because someone wants you to. In other words, it will be up to you to ensure that your friends and family respect your trading schedule as you define it, and that they do not interrupt you repeatedly while you are working. If they would not do certain things while you worked in an office somewhere, they should not do it while you are trading from home. The third way to keep distractions to a minimum is to strictly limit the materials that you allow in your trading environment. The TV should not be on, unless it is tuned to CNBC or Bloomberg. You should have no books or magazines in your office, except if they are trading-related. You should not be surfing websites like Facebook, playing online games, or chatting with friends. Another thing that definitely zaps concentration is communication. Retrieve and read your emails only once per hour. Use a different ringtone for personal phone calls than the one you use for business calls, and only check your personal voicemail once an hour. When you have to seriously concentrate for a period of time, turn off the phone and the email altogether. Frequent eating can be a very big distraction for some people. The refrigerator is only a few steps away, and you might not even notice how often you go to the kitchen, until the pounds start piling on. Again, this is when a schedule comes in handy. You might feel stupid, actually writing into your schedule a 10-minute coffee break and a 30-minute lunch break, but it will help cut down all those trips to the kitchen as well as the unintentional overeating. Trading from home is like any other career in which you work from home. There are huge advantages to such a set-up, but there is some downside to the situation as well. If you want to trade successfully, you will need to develop discipline and organizational skills to keep you on track and productive every day.
You have probably seen the much-published but unsubstantiated statistic that 95% of traders fail. Whether it’s a true fact or not, it’s not a difficult number to believe. It certainly does seem that trading is at times an impossible business and that far more than half of all traders lose all their money and quit in disgust or despair. The good news, however, is that traders are actually more a product of environment than of nature. In other words, even if you don’t have an instinctive feel for the market, you can still become a great trader. This is because trading, like many other fields, can actually be taught. You don’t have to be a natural. You can start out with nothing, and via education and practice, you can become a great trader. This theory has actually been proven when two commodities traders in the 1980s decided to put it to the test. In 1983, Richard Dennis and Bill Eckhart debated whether or not trading was an innate talent, or whether it was a skill that could be taught. Eckhart argued that the talent came from within, while Dennis put forth the proposition that trading was a learned skill like any other, and that anyone with the proper education could become a great trader. Dennis set out to prove his point by taking on 23 students, from all kinds of backgrounds, and he dubbed them the “Turtles,” since he intended to grow them from “babies” to adulthood. He gave them a brief 2-week education in commodities futures, along with a strict set of trading rules to follow, and then turned them loose with $1 million each in a practice account. Once they proved they could follow his instructions, he gave them real money to trade. The system they followed was a trend-following system, and it included rules for entering and exiting positions, as well as how to size and when to add to positions. There was, however, a degree of discretion allowed in how the rules were implemented. The experiment ended 5 years later, reportedly with a final account balance in the neighborhood of $100 million. Since then, many of the original Turtles have disappeared from the public eye, but some still manage money very successfully, although they do tend to keep a low profile. The Turtle experiment was judged a resounding success and has been held up ever since as an inspiration for millions of traders. The exact rules that Dennis utilized has been published repeatedly, as have many accounts of the lives of the Turtles themselves. Amazon, for instance, has some good books on the Turtles. This story has become a legend among traders of all kinds, proving definitively that great traders can become that way through education, practice, and discipline (sticking to a proven trading system). Where most traders fail in this process is the discipline part. It’s extremely difficult to stick to a trading plan through the inevitable downturns, and that is the point when many traders will start to abandon one method in favor of another, which inevitably leads to system-hopping and potential failure. The lesson that should be learned from the Turtle experiment is not necessarily the exact methods and rules that they used, but the fact that a system with an edge, any system, can be learned, and that learning can lead to success if applied properly. Great traders are not just lucky. They are smart, they are disciplined, they learn from their mistakes, and they practice continuously. They view the process of trading as a learning process, and they continue to educate themselves and to expand their knowledge. Remember, *no one* is born a great trader. All great traders are made. And that means that YOU can be a great trader too.
While currency values are tied to the performance of their respective nations’ economies, they are also impacted by geopolitical developments. And, every world economy publishes reports and statistics related to inflation, GDP, unemployment rate, retail sales and other economic parametres on a regular basis. This data gives a good idea of how a country’s economy is performing, which, in turn, indicates where its currency value is headed. This is why it is always recommended to keep an economic calendar handy. Staying abreast of the latest developments may help traders identify good trading opportunities. But before you begin, you need to also know the types of news releases that have the greatest impact on the forex market. Most Important Economic Releases Before you start trading news in forex, you need to keep track of the reports or stats to be released in the current and upcoming week. Also, it helps to know which data is more important than the others. Some of the most crucial economic releases that are relevant to all countries are: - GDP - Non-Farm Payroll - Unemployment Rate - Consumer Confidence - Consumer Price Index - Industrial Output Reports - Retail Sales - Inflation - Business Sentiment - Trade Balance - Federal Funds Rate (FOMC meeting outcome) The importance of these may fluctuate over time, according to the state of the economy. So, it is important to also stay updated on the type of data the market is focusing on. Best Currency Pairs to Trade The first step when starting off with trading the news is to select a suitable currency pair. The most important currency pairs for trading news are: - GBP/USD - USD/CHF - USD/JPY - EUR/USD These currency pairs have the tightest spreads and offer a high level of liquidity. This is why they can help minimise risks associated with forex trading during times of high volatility. Risks Involved in Trading the News in Forex: Slippage Slippage is a major challenge when it comes to trading news events. It occurs due to delays in order execution or a highly volatile environment, where a difference of minutes could make or break your trade. To minimise slippage, keep a track of the economic calendar and trade in accordance with the new events. Although there will still be surprises that can throw your strategies out the window, it is best to be prepared. Duration of Impact of News on the Market A study published in the Journal of International Money and Finance states that the market can react to and absorb the impact of news releases within hours of their issuance. It was also found that a majority of the effect occurs in the first two days and does not stay till the fourth day. On the other hand, in the case of flow of orders, the impact is still visible up to the fourth day. Some Strategies for Trading the News in Forex A well-defined strategy will not only help you manage risks effectively but will also help during volatile market conditions. Here are some of the approaches you can choose when trading news in the forex market. 1. The Slingshot Approach Due to the highly volatile nature of the forex market, your stops may get triggered even before the price starts trending. This could prove to be very harmful for your trade. The slingshot strategy can prove to be beneficial in these cases. Before you open a position, the first thing to do is to identify the resistance and support levels. These two are the cut-off points that can help you to close a position in case the price moves against you. It is also useful to define a stop loss range before the release of a news report or government statistical report. In order to lower risks during the volatile period that ensues after a news report, two basic steps might help: - On the H1 chart, if the price is 10 pips below key support, you may consider a BUY STOP 10 pips above that level. This will help you when the market reverses after the swing period is over. - If the price is 10 pips below a particular key level, you may consider a SELL STOP order that is 10 pips lower than that level. This strategy helps to evaluate winning positions when the trade moves in your favour. When the prices move in your favour and there is uncertainty about the duration for which they will last, you can partially close out your position. If the price keeps moving towards the favourable zone, you can repeat the process at different levels. 2. Trade on the Basis of Expectations This approach is relatively simple to follow. There are mainly two types of market sentiments, long term and short term. The first thing to understand is the forex market’s sentiment towards a specific currency and the open position with regard to this trend. Short term sentiment is primarily governed by news pertaining to the economy of a country. So, to get the maximum out of volatile situations, you need to keep a few things in mind. 1. Stay updated regarding future events and report release dates. 2. Keep a close eye on the current news reports and look out for market reaction. 3. Understand the relationship between the different types of statistical reports to predict forthcoming numbers. Trading news presents a variety of options and opportunities to traders all year round. This is because a lot of analysis goes into economic releases that directly affect the currency markets. A thorough analysis of the various factors that affect the market can help you estimate future outcomes with greater accuracy. This will give you an edge when it comes to trading news in forex.
Many traders make the mistake of not regarding their trading as a real business, and pay a high price for this negligence in terms of lost time and money, and personal anguish. Because there are no employees, vendors or customers, the perception of trading being simply a ‘way to make money’ is easily held. But if you look at trading as you would any other business, then look at the causes of failure for the two groups, you’ll find that there are seven causes common to both. In this article, let’s take a quick look at these and what you can do to protect your trading business. 1. Lack of Industry Experience. No matter what the business is, if you are the one that will be organizing and running the business, and you don’t have experience in that industry, the odds are immediately against you. There are few occupations that prepare you for trading, which only confirms the importance of focus on building skills and working knowledge. 2. Lack of Training. Like other professions, trading is definitely skill-based. In order to trade well, it takes more than simple discipline sticking to your system (but yes, that is important to be sure). Successful trading also requires that you be good at what you’re doing, possessing a knowing competence. 3. Lack of Business Experience. A great number of traders get their first experience at owning their own business and working for themselves when they become traders. As an employee working for someone else, there is the convenience of having the company direction, structure and all the other details taken care of. As a trader, you have dozens of other business decisions to make, and without business experience, this aspect is often either neglected or very stressful. 4. Insufficient Startup Capital. The startup of any business will take some time and resources before it can sustain itself. When there is insufficient startup capital to get the business fully mature, this puts a strain on both the business and the owner / manager as now much needed resources are not available, at least not in quantity enough to provide efficient activity. In this circumstance, some businesses essentially starve and die. 5. Underestimating the Time to Profitability. Even with what would normally be sufficient startup capital, if the owner is overly optimistic and as a result, the time to achieve sustained profitability extends well beyond an efficient growth and development curve, the business will likely run out of capital and need additional funds to survive. This is undesirable for any business investor. 6. Lack of Financial Controls. One of the greatest dangers to a business is wasted resources, particularly during the startup and growth stages. During this period, it is essential that the business gets the benefit of all resources available. 7. Lack of a Business Plan. Ask any Venture Capitalist, bank or Angel Investor for funding without a having a business plan and they won’t even give you the time of day, let alone any money. Experience has proven time and time again that without a proper business plan that details how the business will succeed, that odds are strong that it will fail. The good news is that taking the time to create a proper business plan often foregoes the other six causes, as one is brought to attend to each of them in a business-like and thoughtful manner. While writing a business plan can be daunting, with the right help, it can be a very manageable task – and one that might just make the difference for you and your trading business.
If you’re fairly new to the Forex markets, you might not yet be familiar with the trading methodology known as the “carry trade.” It’s also known as interest-rate arbitrage. The concept is simple. Borrow (sell) a currency from a country that charges low interest rates, and invest (buy) in a currency from a country which pays a high interest rate. That way, you earn the higher interest rate and pay the lower interest rate on your position. This is one of the most common methods of making money in the world today. In fact, banks do it all the time. They pay a low interest rate on the money that they “borrow” (in the form of their customers’ deposits) and they reap a large rate on the money that they loan out. Even if the difference in the two interest rates is only four or five percent, the leverage that is possible in a Forex account can make the potential returns extremely attractive. For example, one of the most popular carry trade currencies over the past decade was the AUD/JPY. For many years now, the Japanese yen has been stuck at an essentially zero interest rate, while the Japanese economy has stagnated. And the Australian dollar, because of high inflation in the country, was paying in the neighborhood of 5%. If you go long the AUD/JPY, which is essentially buying the AUD and selling the JPY simultaneously, you would earn approximately 5% per year. But leveraged to even a low 10%, suddenly that 5% becomes real money. And many Forex brokerages offer higher leverage than 10:1. The danger, of course, is that the currency pairs do not remain static while you hold this position. The pair could move up or down, and a sharp move in the direction opposite your position will wipe out your gains quickly. Some people have referred to the carry trade as “picking up nickels in front of a steamroller” because of the nasty way that a carry trade can go bad suddenly. So the key to a good carry trade strategy lies not only in evaluating the currency pairs for their interest differential, but also to determine how likely it is that the pair will move in the wrong direction of your trade. The AUD/JPY carry trade was very popular for a long time because the Australian economy was stronger than the Japanese economy, and the pair trended upwards, which is the correct position for this carry trade. A look at a weekly chart of the pair will show that from 2009 through the beginning of 2010, this was an excellent strategy. Not only did an investor earn the tremendous interest rate differential, but he also benefited from the capital gains he earned if he took some of the position off the table by closing some or all of the position. For a great resource for information about the central bank interest rates in each country, check out the FXStreet.com World Interest Rates table. It covers the interest rates of 23 currencies, including the last time they were changed. Today, the Aussie is yielding 3.25%, and the Yen is only .1%. That is still an attractive differential, and fine for a trade if you can only trade major pairs in your Forex account, but better pairs can be found now in the European currencies. The Hungarian forint (HUF) yields 6.25%, and the Turkish Lira is yielding 5.75%. Depending on your broker, you may or may not be able to utilize these “exotic” currencies. However, if you can, they will probably be paired with the Euro, which is currently yielding 0.75%. (If you can get them paired with the USD, even better, since the USD now yields 0.25%.) Your position for the EUR/HUFor the EUR/TRY must be short, not long, if you want to earn the interest differential. Fortunately for carry-traders, these pairs have been trending downwards as the Eurozone has struggled this year. So these pairs do have both of the criteria needed for a good carry trade: interest rate differential plus trend. The key to the carry trade is not to be greedy, to be sure to leave plenty of margin for the pair to fluctuate without wiping out your account. It’s tempting to put all of your available cash into the position, but not smart. Calculate how much margin you would need to ride out a large swing, like 1000 pips, or even more, and be sure to always leave that much of a cushion in your account. While in a carry trade, you also want to keep a closer eye on the economic fundamentals of your currencies than if you are trading using a technical analysis based trading method. Be aware of any major government policies or business shifts that could affect your countries’ economic situations, and be prepared to “unwind” your trade if things start to go in the wrong direction.
Volatility is a quantitative measure of standard deviation, which is the amount of dispersion of a set of values from their mean. When you apply standard deviation to a long-term return rate in the market, it gives you the volatility present in that particular market. For example, volatile stocks deviate greatly from their average price, which means that the standard deviation values are large. On the other hand, stable stocks lie between a lower price range. A very good example of a volatile market is the forex market. Just like other financial markets, it is affected by various macroeconomic factors, with liquidity being the most important one. This is because liquidity is directly connected to demand and supply. So, currency pairs such as GBP/USD tend to be less volatile than GBP/JPY, since the former is more widely traded. Types of Volatility Now, volatility can be of two types, implied and historical. Any sudden, abnormal, or recent future price action is categorised as implied volatility. Conversely, volatility that is present over a longer period of time, such as a year or a month, is historical volatility. At times, the forex market may become quiet for several sessions or days. This can give you the idea that it is easy to trade in forex. Then, suddenly, there could be a movement of hundreds of pips in a matter of a few hours. So, to properly navigate through this temporary, chaotic phase, it is important to know the various volatility trading methods that can help you minimise risk and maximise chances of success. Minimise Losses When there is high volatility and price action is choppy, it is better to make use of small stops and set larger take profit targets. This volatility trading technique can prove to be useful in case of a highly volatile forex market. If the price has stayed within a specific range and is continuously trading within it, you can put stops just above the top, when you want to sell, and below the bottom, when you want to buy. It is very difficult to predict when the price will break out of this range and for how long it will run when that happens. So, it is generally better to put a tight stop loss. Increase Portfolio Diversity Diversification is a good technique to survive the financial market over the long term. Many large institutions make it a point to increase the diversity of their portfolios by adding many different instruments in different markets. When it comes to high volatility situations, the importance of diversification cannot be overemphasised. Under normal trading conditions, it is not possible to accurately predict the result of a trade and this uncertainty increases exponentially in a volatile forex market. So, by spreading your capital across various currency pairs, in different directions, you could decrease your risk exposure and improve chances of profit. For instance, if you are selling EUR/USD near the resistance level and buying AUD/USD near the support, when the strength of the USD is about to end, you may get two profitable trades. And, in the worst case, you will simply hedge the losing trade and eliminate its losses. If this is done with several pairs, there is a chance that some can lead to profits, while others might break even. Consider the Overall Impact of Volatility Overtrading in a volatile forex market can be as bad as high leverage. You will be unable to concentrate on your trades properly if you open too many of them at the same time. Your logic can become blurred and finding a good direction can be difficult. A volatile forex market may give you the idea that there it has no definite direction, confusing you further. So, it is useful to examine the bigger picture to avoid the influence of short-term factors. In this way, you will be able to see the important resistance and support levels of higher timeframes. This will prevent you from overtrading with smaller timeframe indicators. Keep in mind that patience and perseverance are important during volatility trading. Other Useful Tips Some other tips that can be helpful in volatility forex trading are: Keep an Exit Plan Ready Before you decide to buy or sell, you need to decide on a proper exit position. This will help you stay calm and not let emotions rule your trading decisions. Ensure that you follow these exit levels and avoid moving them at any point of time. Look Out for Delays In a situation where the prices are in freefall, you could face a problem in accessing your trading account. In this situation, consider telephone access with your broker, so that you can initiate orders, if needed. Keep Track of Price Changes Due to high volatility, there is likely to be high volume of trade, since most people will try to limit their losses or cash in on rising prices. Remember that an order you have placed at a particular price in such a market situation might be completed at a different price. To avoid such price gaps, you can place limit orders that define the price at which you will buy or sell. Understand that Different Approaches Work Differently If you have tasted success by implementing a strategy on a particular instrument, it is not necessary that it will always work equally well. You need to make constant adjustments and changes to your volatility forex trading approach, to ensure that it remains fruitful. During a volatile forex market, the most recommended approach is to play it safe. However, if you have a tried and tested strategy that has worked in the past and you feel confident, you could use it but be careful to stick to your strategy and not get swayed by emotions of fear or greed.
One of the most remarkable features of the forex market is that it operates 24 hours a day. This allows investors to trade according to a time of their convenience. The market is divided into three manageable sessions: London, New York and Tokyo. Knowing about these sessions and how they work is an important part of most trading strategies, since they affect market liquidity in specific currency pairs. Certain currencies peak during certain intervals, while other suffers from poor liquidity. Knowing what and when to trade can help traders formulate a strategy accordingly. In this article, we take a look at the Asian FX session, popularly known as the Tokyo session. There are other regional exchanges operating during this time. But it is generally accepted that the Asian session begins when the major Tokyo banks open for the day, due to the enormous trade volumes they handle. Also, the Japanese Yen (JPY) accounts for more than 20% of all global forex transactions. Timings of the Asian Session Tokyo, the financial capital of Asia, starts the Asian forex session on Monday at 09:00 am JST, ending the session at 6:00 pm JST, in other words, the Asian session lasts from 12:00 am – 9:00 am UTC. In EST time, it operates between 4:00 pm and 5:00 am during spring and summer, and between 7:00 pm and 4:00 am during fall and winter. It is an important time for anyone trading Asian currency pairs. However, the European and American sessions are closed during this time, so liquidity is low compared to other sessions. This is the time when the market consolidates, and currency prices move along a narrow range. Some traders seek trading opportunities under these conditions, by preparing to trade the upcoming price breakouts. This usually coincides with the time when the Tokyo session gradually shifts to the London session, resulting in increased trade volumes. Japan is not the only nation that trades during this session. Other major countries include Hong Kong, Malaysia, Singapore, Australia (Sydney) and Russia. The Sydney session is closer to this time zone, which is why the Australian and Asian sessions overlap. The Sydney session takes place between 5:00 pm and 2:00 am EST. So, technically the Asian session doesn’t end with the closing of the Japanese market, considering that these markets are so scattered. Characteristics of the Asian FX Session After the weekend, when liquidity returns to the FX market, the Asian markets are the first to experience the impact. Forex trading hours actually start with the Asian session. Many European and American traders look at the session’s outcome to create strategies or modify them for the rest of the day. Here are a few things you should know about the Asian session: 1. Lower Liquidity in Major Pairs It’s not uncommon for some sessions to generate more trading opportunities than others. For instance, the overlap of the London and New York sessions is considered the most liquid period, since maximum traders trade the US Dollar and Euro based currency pairs during this time. But, these liquid pairs, like the EUR/USD or EUR/GBP, do not make large moves in the Asian session. So, traders tend to find this session less liquid. 2. Lower Volatility Lower liquidity means lower volatility in the major currency pairs, like the EUR/USD or GBP/USD. However, there are some currencies that perform better during this session. 3. Currencies to Watch in Asian Session Major FX pairs traded during the Asian session include JPY crosses, such as the AUD/JPY and GBP/JPY, USD/JPY, AUD/USD and NZD/USD. Some other FX pairs traded during this period include the EUR/CHF, AUD/CHF and NZD/JPY. Some exotic pairs, including the Thai Baht, Hong Kong Dollar, Singaporean Dollar and Philippine Peso, are traded at this time too, although liquidity is lower in these emerging market currencies. The choice of currencies, based on the forex session, is important for day traders, who look to leverage small currency movements in either direction. Sufficient liquidity in these pairs are required in order to capture volatility. 4. Reports Closely Watched for During the Asian Session Monetary policy announcements by the Bank of Japan (BoJ) and People’s Bank of China (PBoC) impact the market. In recent years, the influence of China in this region’s trade flow and supply chains has grown tremendously. It is the largest economy in the region. So, the daily fixing rate of the Chinese Yuan by the PBoC has an impact on the trading session. Any devaluation could lead to negative impacts for emerging currencies. Apart from this, important reports by the US Federal Reserve and other US bodies tend to cause volatility in Yen trading. The Japanese Yen is a popular safe haven asset. So, when the developed markets seem to falter, investor money tends to flow into the Yen. Japan’s economic strength is based on its export strength, so balance of trade reports are critical. Hong Kong is a prominent global financial hub. Thus, traders find that the major players in this session include large commercial banks, investment banks, export companies and central banks. Macroeconomic reports coming out of Australia are also important. The most active part of this session is during the morning, when major data releases take place. 5. Clear Trade Levels and Risk Management The relatively quieter nature of the Asian session can provide clear entry and exit levels. Many traders could find that they are able to manage risk effectively too. Traders can also spot key support and resistance levels easily, since they coincide with trading ranges and are usually well-defined. This is a useful feature for breakout strategies. When the Tokyo session ends, the London session begins. More liquidity can lead to sudden price breakouts from the established price ranges. The choice of session is critical for every trading strategy to meet long term goals. Knowing the characteristics of different sessions can also help traders address and spread risk accordingly. The Tokyo session sets the tone of the FX market for the rest of the day. So, it is an important one to determine stop losses and take-profit levels.
One of the most crucial aspects to consider when you start trading in the forex market, is choosing a broker who provides a robust terminal to trade on. In an age where trading and investment technologies are evolving at a rapid pace, outdated systems put you at risk of competitive disadvantage. This means missed trading opportunities and security threats. MetaTrader 4 and MetaTrader 5 are two of the most sought-after trading platforms by millions of traders worldwide. These feature-rich platforms provide multiple benefits to users in terms of knowledge, flexibility and liquidity. Here’s why such systems are so important for forex traders. Non-Latency in Trade Execution Execution speed is one of the major benefits of a good trading terminal. It is critical for your long-term trading success. Non-latency allows trading activities to be conducted smoothly, without the system hanging, so that traders can execute trades at the desired prices. Inability to do so could lead to negative slippage. Negative slippage occurs when orders get executed at a price less than what was desired at the time of placing the order. This happens because by the time the order reaches the market, the price might have moved downwards. This means that the ask price increased for long positions and the bid price decreased for a short position. This affects trading outcomes, especially for short term traders like scalpers, who get into multiple positions through the day. Strong trading terminals like MT4 or MT5 can offer average execution speeds of a few seconds between the time the order was received and the trade was executed. Both MT4 and MT5 offer a feature called one-click trading, where you can execute trades with just a single click, without having to enter any secondary information. It simplifies the process and reduces execution time, so that your trades are executed at the expected price or as close as possible to that price. Plus, they have multiple types of execution modes and orders to provide flexibility in price. Smart Technical and Fundamental Analysis Technical and fundamental analyses are vital to gauge the markets accurately and make informed decisions. Both MT4 and MT5 have varying categories of charting tools and technical indicators for traders to study currency price action and predict future trends. You can also set 30 in-built technical indicators in MT4, while MT5 provides 38. Plus, you get access to analytical objects and unlimited charts that can be opened at the same time, in multiple timeframes. If you want to build your own technical indicator or buy custom ones built by other expert traders, you can do so through the MQL4 marketplace. Also, you can access plenty of forex signals to enter or exit positions. So, a good trading terminal allows comprehensive technical analysis to base your trading strategies on. Now, currency rates depend on domestic economic health. MetaTrader 5 allows traders to set alerts for financial news or economic data releases. By staying updated with key economic performance indicators, you can estimate the direction of movement of a currency pair. These alerts are sent via an economic calendar. So, a single platform can take care of both fundamental and technical analysis and give traders flexibility of choice and market knowledge. Risk Management Tools Leveraged forex trading is risky, since any sudden volatility could result in magnified losses. This is why risk management tools are an essential part of every strategy. Trading terminals like MT4 and MT5 have many tools that can stop your trades immediately if the market takes a downward turn. This helps you salvage any profits you might have made and protect your account. Some of the orders include: - Stop Loss - Take Profit - Stop Limits - Guaranteed Stops - Trailing stops Each of these orders allow you to customise your risk management strategy in terms of price movements, profit limits and more. For instance, the trailing stop order allows you to move the stop order levels, when the market moves in the right direction unexpectedly. This way you don’t exit positions too early. Multi-Device Operability Perhaps one of the most significant advances in forex technology is the ability to access all features of these trading systems on multiple devices. Many platforms today, including MT4 and MT5, are operable across mobile devices and laptops, regardless of whether they are iOS, Android or Windows-based. This has enabled huge flexibility for traders to monitor their positions, make deposits and withdrawals, and conduct technical analysis to enter/exit positions from anywhere and at any time. All they need is a compatible device, login credentials and an internet connection. It is like carrying your trading account in your pocket. In the coming years, with the advent of 5G connectivity, trading could become much faster, providing high frequency traders a competitive advantage. Depth of Market Through trading terminals, you can see live streaming of market prices of all currency assets your broker provides. In MT5, the Depth of Market feature doesn’t just display the best bid/ask currency rates live, but also volume of buy/sell positions held at these prices. This allows you to track market sentiment and alter your strategies accordingly. You could also end up trading with the tightest spreads. Strategy Back-Tester MetaTrader 4 and MetaTrader 5 allow you to access expert advisors or trading robots. These are automated trading tools that can enter and exit positions on your behalf, according to your instructions and can also stop trading when the markets go haywire. Along with this, you can also optimise these trading robots, based on past price data. This gives you a chance to judge the efficacy of these automated strategies, before deploying them in real market conditions. There is an in-built optimisation function too, which lets you arrive at the best trading parameters, which can help reach your goals. These were just a few of the many benefits of efficient trading terminals like MT4 and MT5. There are plenty of other uses, such as customised email settings, customised profile settings, VPN access and chat functionalities with other traders, for an enriching trading experience. Before choosing a system, consider trading on a demo account first, to know whether the system suits your style and goals.
The empty spaces between the close of one candle and the open of the next are called forex gaps. These are sharp price breaks, with no trading in between. Gaps can occur in both the upward and downward direction. Unlike the stock markets, the forex market operates 24 hours a day, 5 days a week. It is usually during the weekend that such gaps can be seen. When the market opens on Monday, it is seen that prices have jumped up or down, from the closing price on Friday. One reason for this is that while retail traders operate 24/5 in the market, institutional traders do so 24/7. Buying and selling goes on continuously, even over the weekend, for central banks and related organisations. Therefore, based on supply and demand, prices change too. Gaps can also occur after the release of important news and economic reports, over very short timeframes. These news releases can also occur during the weekend. With 52 weeks in a year, weekend gaps are the most common gaps found in the forex market. Importance of Gaps Gaps are important to gauge market sentiment. When the market gaps up, it means that there are no traders willing to go short at the levels of the gap. If the market gaps down, it means that there are no traders willing to go long at the gap level. Gaps can also result in price correction at times. After a gap occurs, prices have a tendency to reverse and “fill” the gap. When it is said that the gap has been filled, it means that prices have reversed to the original pre-gap levels. If gaps are filled on the same day on which they occurred, it is referred to as “fading.” Gaps can provide traders with extra confluence when drawing support and resistance levels. This, in fact, is known as confluence trading, which is based on identifying areas on the chart where several levels come together, like maybe a trendline and a Fibonacci level. The more the confluence at this level, the more likely it is that the level will hold. If that level is used in a suitable price action strategy, with the right amount of bullish and bearish momentum, there could be chances of success. Traders have started trading Sunday evening gaps in recent years. This is because technically speaking, it can be considered that the price will always fill the gap. However, it is to be noted that gaps cannot be filled as soon as they are formed. It might take 200 pips from the opposite direction before the price gets filled. Sometimes, gaps take up to two days to get filled, when the price moved 80 pips in the opposite direction before returning to fill the gap. In many cases, traders may see a false signal created by the gap. Prices can often fill only a part of the gap area. Let’s look at some tradable gaps usually seen in the forex market. Types of Weekend Gaps Technically, gaps can be divided into 4 types: 1. Breakaway Gaps These gaps occur at the end of a price pattern, to indicate the beginning of a new trend. The price breaks out of the consolidation phase and proceeds up or down, with a strong momentum, so much so that a gap gets left behind. This is usually triggered by a breaking event. 2. Runaway Gaps /Continuation Gaps These gaps form within a trend, indicating trend continuation. When combined with price action tools like support and resistance levels, trend lines or pivot points, these gaps could be the safest to trade. Traders usually wait for the gap to close, before they assume continuation of the price momentum in the existing trend direction. 3. Exhaustion Gaps Exhaustion gaps also occur near the end of price patterns, and could result in a final attempt to reach new highs and lows. This is the final push before prices start to lose momentum and reverse. This is rarely found in the forex market. 4. Common Gaps Random price gaps, which cannot be placed within a price pattern, are common gaps. These are the most “common” ones that occur when the market opens on Monday morning, after a weekend. They are most likely to be filled by a few price bars, and can, therefore, be used for short term intra-day trading strategies. Trading Common Gaps Important events, news releases or economic releases can occur over the weekend, which provides clues that gaps are likely to occur after the weekend. Weekend gaps are usually traded on the assumption that the Sunday evening opening price might return to Friday’s closing price. The first step is to locate the chart pattern that defines the gap. Depending on the gap, the trader can try to locate the first candle, high or low. One could enter immediately or at the break of the candle high. Stop-loss can be placed below the candle high or above the candle low. The target can be placed at the close of the gap or 3 pips above or below it. This is usually a strategy for the opening of the Tokyo session at 7:00pm ET. The prices at this time move towards the gap close. Some Tips to Trade Gaps in Weekends Traders prefer to trade gaps that are in the overall direction of the price trend. For this, traders can look at hourly charts. Also, currency gaps need to form significantly above or below a key resistance level on the 30-minutes charts. This price has to retrace to the original resistance level, which indicates that the gap has been filled. There has to be a candle indicating price continuation in the direction of the gap, so that it is ensured that the support will remain intact. For gap trading strategies to succeed, high volatility currencies like GBP/USD could be apt. Also, when trading starts at the start of the week, it is better to see if the gap is at least 3 times the average spread of the currency pair. If the trader’s strategy is only gap trading, it is useful to remember that on some weeks, there might not be any gaps present on the charts, and even if there are, not all of them are worth trading.
Leonard Ravenhill once said, “The opportunity of a lifetime must be seized during the lifetime of the opportunity.” Though Ravenhill was an evangelist, his quote is very apropos to that of day trading. Never in the history of the world have everyday individuals had the unique opportunity to change their lives so dramatically as those who are taking advantage of the retail Forex market. With some basic knowledge, discipline, and computer and internet access, you can literally change your life. But with that freedom, also comes some realities if you truly want to be successful at it. And who better to listen to than those who have gone before, and can reassure you of some of the insights that will make you a successful trader. In this article, we will look at 12 of the most important trading tips from market gurus. 1. Get a good Forex education. You don’t have to go to college or take classes in order to be well educated in Forex trading. There are plenty of online resources for free, or some affordable instruction and mentoring that can give you a really good foundation for trading. In addition, there are books like “Trading in the Zone”, “Technical Analysis of the Financial Markets”, or even “Market Wizards”. 2. Self-examine to assess your mental, emotional, and financial limits. Before you even sign up for a trading account you need to know your abilities and limitations very well. Know how much money you have to put into the market, and define what your risk tolerance should be. Also, know yourself. “What is it that turns ordinary betting into a reckless gamble? Desperation on the part of a heavy loser is one factor.” (Bernard Baruch) What stresses you out, and how do you react to it? Being psychologically unprepared is what kills most traders. 3. Choose your broker carefully. You can’t trade without using a broker, so make sure you do some research. Look at reviews, what platforms the brokers offer, the spreads, other costs, and maybe even try their paper trading (demo) platform to see how their technology works and keeps up without actually risking money. 4. Plan your trades and trade your plan. Develop a profitable trading plan and stick to it. Too often newbies will try to trade their plan, as well as random trades they think will be good too because their emotions tell them so. Don’t do it! Stick to your plan. That is why you have it! 5. Limit the number of currency pairs you trade. Even though there are 8 major currencies being traded, limit yourself to just 1-2 to focus on. Each of them have their own personalities and can react differently within the market. Take your time to master one, then move on to more if you want to. 6. Begin with small sums of money and let it grow naturally. Don’t keep putting money in your account. Just put in a certain amount, and other than your trading activity leave it untouched for a period of time. If you are successful at trading and it’s growing, you can leverage more. And if you are not successful, you will naturally be limited and not just dumping money into an account. “Why risk everything on one trade? Why not make your life a pursuit of happiness rather than pain? I decided that I had to learn discipline and money management.” (Paul Tudor Jones) 7. Only do what you understand. There are hundreds of trading methods out there. Don’t try to use the Turtle method or the Cornflower Blue if you don’t understand it. Look for something that is simple, fits your style of trading, and that you are comfortable with. 8. Keep your emotions in check. The statistics that the vast majority of Forex traders fail is true, and the main reason is because they cannot control their emotions. Without mental discipline, all of these other rules and factors go out the window and don’t matter one bit. 9. Keep a trading journal. There are no hard and fast rules as to what to put in your journal, but keeping track of your trades, e.g., why you took them, how they turned out, and your emotional state at the time. This will help you to shape and hone your trading skills. 10. Learn to be a great looser! The reality is even the most successful traders are going to lose a percentage of the time. You cannot chase the loss. That is how you will get wrapped up in your emotions, and loose a ton of money before you even realize what happened. Know when a trade is not working, and let it go. Physically step away from trading for a while if you need to, but don’t try to chase or make up for your losses. Don’t let a losing trade run in the hopes it will turn in your favor. Get out, and move on. “Experienced traders control risk, inexperienced traders chase gains.” (Alan Farley) 11. Humility and high probability. Never believe the lie that you can control the market because you can’t. You can only control yourself. Remember to stay humble enough to realize that, and watch for high probability trades that reveal a good set up for your trading plan. As John Maynard Keynes said, “The market can remain irrational longer than you can remain solvent.” 12. Perseverance. Michael Marcus said it best when he said, “Being a successful trader also takes courage: the courage to try, the courage to fail, the courage to succeed, and the courage to keep on going when the going gets tough.” Anything worth doing well will take time. Follow the above rules with patience, and you will become successful in time. Trading Forex can be an amazing and rewarding venture. By learning trading tips from those who have been successful, and adapting a few basic rules, you too can be on your way to being a satisfied and successful Forex trader.
If you open up a Forex trading platform you will probably see a set of tabs that look like M1, M5, M15, M30, H1, H4, D1, W1, and MN. What these tabs do is to set your trading window to a particular time frame ranging from 1 minute, all the way up to one month. For novice traders the concepts of multiple time frames can be very confusing. But once you learn how they work, you can decide how to best use the different trading chart time frames in your own trading strategies. There are a couple of simple concepts when trying to understand how the trading chart time frames work separately, yet together. If you click on the AUD/USD H4, then quickly switch to the AUD/USD M15, you are looking at the same trade at different points or moments in the movement of that trade. One way to think about this is like looking at something through a microscope. If someone puts a blood drop on a slide and looks at it under the lens they will see smaller particles within the blood that they couldn’t see with the naked eye. If they use the magnification lens on the microscope and turn it to 40X or 100X power, then they could see even more details of the individual cells within the blood. It doesn’t change the blood; it just gives you a more detailed look. Multiple time frames are like that too. The trade is the same on the M5 as on the H4 you can just see it with greater detail on the lower time frames. It is like a micro versus macro view point. The logical mind would then want to reason that if the trend is moving down on the H4, then it should be the same on the M5. When newbies shift around to the different times and see that they aren’t always the same, they get confused. If you were mapping out a road trip from Raleigh, North Carolina to Los Angeles, California you would notice your driving route will not go in a straight line. Roads leading from one place to another, especially if they are long trips, will not go in a straight line. There are obstacles like mountains, waterways, and cities that prevent a linear approach to a road trip. There will be times where you will have to drive northward or southward in order to end up west. It is the same with longer and shorter time frames. The D1 is your long-term destination and the shorter time frames are your individual roads. Although the daily trend may be down, there will be lots of up and down moves to get there. Understanding these concepts will help you to understand how the time frames work together and individually. Trading an hourly system like the Cornflower Blue, the long term destination is what the H1 shows. But you can use the M15 and the M5 to show you a better entry or exit point. Knowing how to read the different time frames will also help you decide the best trading plan and what kind of trader you are. Scalpers look for quick, small trades. They will not be trading on the M30 or H1 time frame because they create new candles or bars too slowly to know what is happening minute by minute. A scalper sticks to short time frames like the M5. An intraday trader will stick to the H1, or in some cases the H4 time frame, for their systems, because the moves are slower but bigger. Swing traders like the really big moves so they like to use the D1 or possibly the W1 time frame, depending on their trading strategy. Pros and Cons of the Different Time Frames: Short-term time frames Pros: More trade opportunities by only needing to hold a trade a short term. You also won’t be holding trades over night and have the fees and possible reverses when you are not watching. Cons: You can’t really employ a strategy as the moves happen too fast for analysis and set ups. The trades are small and more numerous, so your fees will be higher due to frequent trading. Moves happen so fast it can be easy to get stopped out by spikes and small reversals. The trading will be intense due to quick short moves and the need to have amazing timing. Median time frames Pros: You will be able to use solid trading methods and have time to analyze the trades. You will still have opportunities for multiple trades within a day. Moves are slower and you can usually see reversals or stalls and have time to react intelligently. Cons: You will still have more trading fees because of frequent transactions. Your entry and exits may not be as precise. Long-term time frames Pros: The chance to look at longer term trends and make larger amounts of pips. Less likely to get stopped out because of reversals or sudden market changes. You have more time to watch the trade and make wise, less emotionally driven decisions. Not as many trades made, so you will have less transaction costs. Cons: There will be less trading opportunities. Trades will be held overnight so you are subject to those fees. With less trading opportunities you need to make sure your system works really well on the longer time frame, as you will naturally get fewer setups while swing trading. There is no right or wrong, best or worst trading chart time frames to trade on. Like other smart trading decisions you use the time frame that best works with your trading style and system. But realize that just because you concentrate on one particular time, doesn’t mean the others won’t be of great benefit to you. Take the time to observe and understand how they all work together, so you can be as successful a trader as you aim to be.
In case you haven’t heard of him, Seth Godin is a business philosopher. At least, that’s what I call him. He’s a seriously deep thinker, and he applies his thinking to the purpose of understanding and improving business and businesspeople. Most of his endeavors have been in the specialty of marketing. He coined the phrase “permission marketing,” and was one of the first to recognize that, due to new technologies and consumer habits, the entire concept of marketing needs to change significantly, from “interruption marketing” that bothers people and interrupts what they are doing, to “permission marketing,” which is something that people look forward to receiving because it adds value, is personalized, and is relevant. On December 5th, Seth wrote a blog post, “Confusing Lucky With Good.” I feel this is completely relevant to Forex trading and decided to explore the topic further. People are wired to accept good things that happen to them as contingent upon something they did, and bad things as something that happened to them without their input. This is human nature. When something good happens, we are likely to take credit for it; when something bad happens, we are likely to blame it on others. The problem with this sort of thinking is that we often accept credit for circumstances that really didn’t depend on our actions. An excellent example of this is the money that was made during the 1998-2000 technology stock bull market. During that time, it was almost impossible NOT to make money. Nearly everyone who participated in that market made money at that time, and for many of us (myself included), it was substantial money. I personally thought I was a genius. What I didn’t understand, and what many of my fellow traders didn’t understand, is that we were not smart, and we were not talented. We were lucky. Of course, the technology crash of 2000 made fools of us all, and we quickly learned that lucky was not the same as smart. This is the fallacy inherent in trading. A string of winning trades may make a trader feel that he is “good,” that he really knows what he is doing, and that may, in turn, encourage him to trade more aggressively. But when it turns out that he was just lucky, he is apt to get clobbered. “Good” requires effort, study, and persistence. Godin says that “Success at the beginning blinds us to the opportunity to get really good instead of coasting.” What he means is, if you are lucky at the beginning, you tend to not put in the work required to actually get “good.” You do not spend the time and energy in learning, which is what is really needed. You do not apply that knowledge to your trading practice, in order to gain experience. According to another great business thinker, Malcolm Gladwell, author of “Outliers: The Story of Success,” it takes approximately 10,000 hours’ worth of practice to get really good at something. 10,000 hours, broken down into a 40-hour work week, 50 weeks a year, is in the neighborhood of 5 years. Gladwell breaks apart the idea that there is any such thing as an “overnight sensation.” In his research, he discovered that most such people actually put in thousands of hours of work before they achieved success. He applied this concept to everyone, from the Beatles to Bill Gates, demonstrating that hard work is the key to success – not luck. The key to talent, as opposed to luck, is that the action is repeatable. If you once have a great winning streak, and then can never again do the same, then clearly you were just lucky. In order to make your results repeatable, you have to have a definite pattern that you can utilize more than once. Strict adherence to a well-planned trading method can make your results repeatable. On the other hand, if you can’t clearly outline what you did that was successful, then you can’t repeat it, and it definitely proves that you were lucky and not good. Going back to Godin’s blog piece, he concludes that most successful people did not succeed on their first try, or their second, or even their third. They did not find success until they had put in a significant effort. Thus, persistence and practice lead to success. Or as the old proverb goes, “Luck favors those who are prepared.”
Boris Schlossberg published an interesting article this weekend in his weekly column, “Thoughts on Trading.” Boris, in case you aren’t familiar with him, is one-half of the BK Asset Management trading team, founders of BK Forex. He appears regularly on CNBC, as does his partner, Kathy Lien, author and commentator, frequently quoted by all of the major financial resources. In this article, he posited the idea that pure algorithmic trading is dead, as is pure discretionary trading. The reason he gave for the death of algo trading is the fact that these trading methodologies, also known as High Frequency Trading, or HFT, are no longer as profitable as they once were, now that many firms are using the same or similar systems. They amount to a bunch of super-fast computers, all attempting to gain a tiny edge by trading a millisecond faster than everyone else. Now that so many companies are doing it, they are battling each other and wiping out the profits that once existed. He suggested that the best methodology for most traders is a combination of the two, using something that he calls “grey boxes.” These are software systems that function as decision support tools, rather than decision-makers, and they analyze the market objectively to provide quantitative insight for discretionary trading. Boris compares the grey box software to card counting in a blackjack game. It can’t provide the right decision every time, but it sure evens up the odds in the player’s favor. It helps to put the probabilities back on the trader’s side, providing the trader with a slight edge of the market. The casinos in Vegas know this concept well. A tiny edge, over millions of transactions, adds up to enormous profits. That’s all the casinos need, a tiny edge, and they stay in business. For a trader, if the probabilities are on your side, the fact is that over the long-term you are going to be a winner. Over the long-term, you have a better chance of winning if you have a dependable edge over the market. Of course, this doesn’t mean you won’t suffer losses, or even a nasty string of consecutive trading losses. Those are the breaks. Anyone who says that he has a 100% sure-fire system, with no losses ever, is a liar. Computer-assisted trading systems can help you sort through unbelievable amounts of data quickly, and they can parse out just the information that you want to see – the information that you have deemed important to how you trade. Do you want to see moving averages, trend lines, trading volumes, or any other criteria? These programs can analyze and summarize the information into one easy-to-digest chunk, a line, a bar chart, or a point on a graph. Your immensely-powerful human brain can then take that information and distill it down to a single action – buy or sell. Another advantage of computer-assisted trading is that a person can only focus and become familiar with the nuances of a limited number of trading vehicles at a time. A Forex trader should theoretically focus on a select few pairs, and really get to know how they trade. With the use of a computer-assisted trading system, a trader can analyze many more pairs, getting the computer to do the work of data mining for the patterns that the trader likes. The ability to trade multiple pairs, rather just one or two, brings with it fewer chances of making a career-ending mistake than if a trader was only concentrating on two pairs. Boris still advocates the use of discretionary trading, in order for the trader to utilize his own knowledge and experience, to detect patterns and behaviors that the computer cannot. While the computer is designed and programmed to adhere to a strict set of criteria, the human brain can view the same scene and discover new behaviors, new patterns, new ideas, etc. that the computer cannot because of its limitations. The combination of computer-assisted trading and a good old-fashioned trained eye can become the most powerful trading system ever designed. Using the best traits of each, a trader can significantly tilt the odds in his favor, and over the long run, make sure that he is nearly guaranteed to come out ahead.