Derivatives are said to have existed as far back as the ancient Greek and Mesopotamian civilisations. Of course, at that time, derivatives were merely verbal agreements, not as complicated as the ones we have today. Derivatives have gone through significant evolution, such that now you can trade almost any financial instrument using a derivative. Contracts for Difference (CFDs) and Futures are two types of commonly used derivative contracts, since their values are derived from various underlying assets. They enable traders to speculate on price fluctuations without actually owning the assets. They both are highly leveraged financial products, offering traders higher exposure with a small initial investment, equivalent to a small portion of the real value of the underlying asset. Futures A futures contract is an agreement to buy (long position) or sell (short position) a financial product, based on an underlying asset, for an agreed price on a predetermined date. These contracts include the exact quantity, location and date of sale/purchase of the physical asset, as well as the predetermined price. On the expiration of the contract, it might be settled in cash or by debiting or crediting money from the concerned party’s account or via physical delivery of the underlying asset. Futures contracts are traded only on specific exchanges, which precisely define the parameters of each trade. CFDs CFDs are agreements to exchange the difference in price of an asset between the beginning and the end of the contract or simply a transaction, based on fluctuations in prices of an underlying asset. The trader speculates on the price movement and if they conclude that the prices will increase, they take a long position, and if they believe prices will fall, they take a short position in the market. The party that gets their speculation right reaps the profit of the fluctuation in the prices. Futures vs CFDs: What’s the Difference? 1. Spread This is the difference between the buying and selling price of an asset. Both futures and CFDs are traded using spreads. However, the spreads tend to be small in the futures market. Often, CFD providers use the futures market to hedge their own positions and offer a larger spread to trade in the CFD market. 2. Standardisation Both are derivatives products, although they differ in terms of where they are traded. Futures contracts are traded in official markets, such as the NASDAQ Futures Exchange (NFX), Euronext, London Stock Exchange and more. This makes futures contracts highly regulated and standardised, with fixed parameters. Just the date of settlement differs from contract to contract. Contracts for Difference are over-the-counter (OTC) traded instruments. They are mostly not provided by official exchanges but by brokers who have their own terms and conditions. CFD providers organise a market for assets to trade and also create and disseminate prices in real time. 3. Contract Size Futures are traded on large exchanges and are created to be used by large investment institutions. So, these contracts have a large minimum size. For example, the minimum unit of crude oil contract at COMEX is 1,000 barrels. Comparatively, the size of one crude oil CFD is 10 barrels. Contracts for difference provide much more flexibility and are accessible to individual small traders, who cannot afford large exposure. 4. Flexibility of Leverage Leverage enables a trader to gain much higher exposure than they would be able to using only the amount in their account. The increased leverage can multiply the profit potential, although increased exposure would also mean higher loss potential. In the case of a futures, leverage varies from contract to contract, but it isn’t very flexible. The initial margin or the amount to be deposited to buy a futures contract is determined by an exchange or a clearing house. This margin is about 5% to 10% of the actual value of the contract. CFDs are created by brokers, giving power to the broker to set the initial margin of the contract. This provides a variety of options to choose from in terms of the initial margin for individual traders, based on their risk appetite. 5. Expiration Date In the futures market, there is a predetermined date for the expiry of the contract. This date, under the terms of the contract, determines when the underlying asset is to be delivered at the agreed upon price. The expiration date of the contract is set by the exchange, facilitating the trade. Most futures contracts are settled before the date of expiry, since traders enter into such contracts with no intention of taking the actual delivery. They just want to make a profit out of the fluctuations in the market. A contract for difference has no predetermined price or expiration date. A trader enters into the contract and liquidates it when the price of the underlying asset goes against the acquired position. The difference between the price at the beginning of the contact and the price at the termination of the contract is the profit or loss made by the trader. 6. Regulations There are fewer regulations when it comes to CFDs, as compared to futures, making it easier to open an account to trade CFDs. Futures contracts are highly regulated by the exchanges, making it a complex process to open an account. Less regulations also facilitate trading with much less capital in CFDs than futures. Conclusion Both futures and CFDs are mark to market, meaning they are priced on a daily basis. They have almost similar underlying assets, but futures backed by commodities are the most commonly traded. Futures come with high minimum commitment, but there is no such issue when it comes to CFDs. With evolving trading strategies and traders looking for quick results, CFDs seem a more viable option due to the flexibility this trading type offers individual traders, although these are high risk products. However, remember of regardless of what you are trading, having appropriate risk management strategies and market knowledge is key to long-term success.
High volatility in the market can be extremely nerve-racking and can put a trader’s skills to the test. However, this is what makes trading more exciting, as volatility presents more trading opportunities. A market that is characterized by strong and frequent price movements is more attractive for intraday traders, presenting numerous options to take positions. No wonder then that most strategies focus on identifying entry and exit points when there are distinct price movements in the market. But what happens when the market moves sideways? Intraday and day traders are often perplexed and a little frustrated when the market is quieter, either moving sluggishly in one direction or within a very narrow price range. It is during these periods that tunnel trading can help to identify entry and exit points. How to Use a Tunnel Trading Strategy Low volatility typically occurs when the market is waiting for important financial, economic or political news. Before the breaking of such news, traders are unsure which direction the prices might move in and to what extent. Many don’t place trades till after the market has responded to the news, while those who do place trades counteract each other, preventing large price fluctuations and resulting in the market moving sideways. Tunnel trading is suitable for markets experiencing low volatility. When prices move sideways, it’s possible to identify a section where the prices are concentrated. This is called a congestion zone. Tunnel trading involves drawing two horizontal trendlines on the congestion zone. The upper limit of the average price movement becomes the resistance and the lower limit of the price movement becomes the support level of the tunnel. So, it’s important to have an understanding of these concepts before using a tunnel trading strategy. Resistance is the level beyond which the price of an asset is unlikely to rise. This, therefore, becomes a point on the pricing chart where traders expect maximum sell off. It is always above the current market price. The possibility of the price rising beyond the resistance level, absorbing the demand for selling and then falling is high. Support is the level beyond which the price of the asset is unlikely to fall. Therefore, support levels are points on the pricing chart where traders expect maximum buyers for any asset. Whenever the price falls below the support level, they are expected to rise. This level is always below the current market price of the instrument. The possibility of prices falling up to the support level, absorbing all the demand and then rising again is high. Wait for Breakout Once the tunnel has been drawn, the trader waits for the price to break out of the range. When the support or resistance level of the tunnel breaks, it indicates the beginning of volatility in prices, providing opportunities to take positions. The price may break either the upper or lower boundary, and both present an opportunity to trade. However, the indication is stronger when the breakout occurs in the direction in which the market had previously been moving (in the direction of the overall trend). Less experienced traders may wait for the price bar to close outside the tunnel before taking a position in the direction of the breakout. In cases where the price breaks one trendline but doesn’t close outside the tunnel, and instead moves back into the range, it would be best to refrain from opening a position. Traders may need to draw another set of trendlines if this happens. Determining Stop Loss and Take Profit When the breakout occurs, apart from placing positions, traders would also need to know how to set stop-loss and take-profit levels. The stop loss can be set just behind the broken boundary of the tunnel made by the breakout, a few pips away. This allows the trade some space to move, if the price returns to the broken level again. Take profit orders can be set near the support or resistance level, depending on whether you are buying or selling the asset. Advantages of Tunnel Trading The main advantage of tunnel trading is that it’s very simple to use. One doesn’t need to use any indicator and the strategy can be used for trading any asset and in any timeframe. Sometimes, the price becomes extremely volatile after breaking a tunnel trendline, offering more attractive trading opportunities. New traders can wait for the volatility to subside a little before opening a position. The biggest advantage of this strategy is the risk/reward ratio. The stop-loss order is placed only a few pips from the currency market prices. So, even if a few trades turn out unprofitable, one profitable trade can more than make up for this. Disadvantage of Tunnel Trading Traders need to be cautious of false breakouts and possibilities of sudden whipsaws. There are a lot of trading strategies to choose from, making it difficult for beginners to find just one that works best for them. Trading is a process of trial and error, where you need to try out many strategies to find the one that is best suited for you. Experiment, change and improve. No strategy is perfect, but tunnel trading can undoubtedly help to maximise chances of success, if used and executed properly.
Key Information to Look for in the NFP Report 1. Employment Rate as a Percentage of the Overall Workforce The unemployment rate is defined as the number of people looking for a job. It is calculated as a percentage of the total labour force. It is the headline number of the report and a key part of the Federal Reserve’s evaluation of the US economy. It reflects the labor force that is not employed and its effects on the economy. A crucial aspect to note here is that the employment rate is not directly proportional to the NFP figures, since an increase in the number of jobs might not alter the unemployment rate. 2. Participation Rate Generally, it is assumed that a drop in the unemployment rate reflects that there are less people actively searching for a job in the country. However, this is not always the case, given that the unemployment rate is calculated as a percentage, rather than the total number of people looking for a job. Participation rate plays an important role here, as it provides the actual number of people who are in search of a job. These people are either underemployed or are completely out of work. This report doesn’t include the number of people who don’t want to work or are unable to work, such as a student or a stay-at-home dad or mom. 3. The Sectors Influenced by Jobs The NFP report provides information about an increase or decrease in jobs in each sector of the economy. It is useful for forex traders, since it provides insight into which sectors of the economy are growing and which are stagnating. 4. Average Hourly Wages Job gains can lead to an increase in wages. If the same number of individuals are employed but are being paid more or less for that job, it has the same effect as subtraction or addition of people from the labour force. 5. Revision of the Previous NFP Report This is an important aspect of the NFP report, which affects the prices in the market, as traders re-evaluate prices based on the numbers mentioned in the Revised report, particularly if the changes in the numbers are significant. Impact of NFP A high non-farm payroll figure is a good indicator of the health of the US economy. This is because an increase in jobs contributes to more robust and steady economic growth. Individuals with a job tend to spend more, leading to economic growth. Forex traders usually look for an increase of at least 100,000 jobs in a month. Any increase beyond this helps fuel the gains of the US dollar over other currencies. Here’s a look at some of the other impacts of the NFP: - An expected change in the numbers on the NFP report receives mixed reactions from the forex market. Forex traders expecting a change in the NFP report will analyse other sub-sections and items to gain insight or direction for their trading decisions. The unemployment and manufacturing survey payroll sub-sections act as key indicators. If the unemployment rate decreases or manufacturing payroll increases, forex traders tend to speculate a stronger position for the USD and growth for the US economy. If the opposite happens, traders will prefer other currencies over the US dollar. - A lower payroll number is harmful for the US economy. Like any other economic report, it has an adverse impact on the US dollar, affecting markets and trades worldwide. If the NFP report shows a decrease in jobs below 100,000 jobs, it indicates that the US economy isn’t witnessing growth. This will result in forex traders looking to move to other currencies, instead of the US dollar. There are many other key economic indicators, such as personal spending power, retail sales with PCE and CPI, that affect the movement of the capital markets. But the NFP report is the most important one, since it provides insight into inflation, sentiment and potential growth via an all-in-one report. The NFP report impacts most financial markets of the world, although the quickest reaction is witnessed on US indices like the S&P500, NASDAQ and major currency pairs like EUR/USD, USD/JPY, GBP/USD, and gold and oil prices.
Trading is all about making informed decisions, keeping emotions at bay. And yet, despite much effort, sentiments do end up affecting not just a single trader’s decisions but also the way the markets move. Investor behaviour has a considerable impact on asset prices and demand for specific financial instruments. Behavioural economics says that investment decisions are highly influenced by risk, emotions and future cash flows. Trading sentiment refers to the overall attitude of traders towards a particular financial market, asset or instrument. For instance, rising prices usually leads to a bullish trading sentiment, while falling prices would result in bearish sentiments. These sentiments play a vital role for investors, especially those who like to take positions in the opposite direction of the current market trend. Indicators to Determine Trading Sentiments The good news is that there are ways to analyze the mood of the market and the direction the market sentiment is moving in, to help to identify potential opportunities. Here’s a look at some of the key indicators that can help a trader determine market sentiment. 1. Commitment of Traders (COT) This provides details about how the biggest traders, such as banks, corporations and hedge funds, are positioned and how committed they are to the current trend in the market. If these traders shift their positions, it indicates that the market is going to experience some movement. 2. High/Low Sentiment Ratio This is one of the easiest ways to determine trading sentiment. It involves calculating the average and comparing assets heading to 52 weeks of highs to stocks heading to 52 weeks of lows. If the average direction of the market is close to the highs, then its bullish, and if the average direction of the market is closer to the lows, it is bearish. 3. Put/Call Ratio In this indicator, the number of put options is divided by the number of call options. If the ratio is above 1, it indicates that more investors believe that the market is going to be bearish. If the ratio is below 1, it indicates that more investors believe the market is going to experience a bullish trend. Factors Affecting Trading Sentiment · Macro-Economic Factors Macro-economic factors, such as interest rates, inflation and strength of the overall economy, influence investor behaviour. Studies have proven that inflation and money growth have significant impact on the returns generated from the stock market. · Herd Behaviour This refers to traders following a common path. If any seasoned trader invests in a particular asset, then others might follow the established trader’s lead and make similar investments. Herding can be based on the inclination of investors towards the same source of information, analysing indicators in similar ways and, therefore, increasing the chances of similar trading decisions. Small markets with low liquidity can also lead to herding, since it isn’t possible to execute trades without following other investors, due to a lack of options. · Risk and Cost Factor This depends on two features of investor attitude, stability of the market and high risk leading to high returns, if the trade is successful. Investor decisions are also affected by stability and good governance, and the belief that risks and returns are directly proportional. Impact of Trading Sentiment · Ambiguity Aversion This is a situation where an investor prefers to choose known risks over unknown ones. This behaviour was explained through the “Elisberg Paradox,” where people preferred to bet their money on the outcome of an urn with 50 blue and 50 red balls, instead of betting on the outcome of the urn with 100 balls but unspecified number of blue and red balls in it. · Familiarity Bias Here, people prefer investing in familiar portfolios from their own region, state and company. Some investors will avoid foreign or international assets, investing in domestic or local assets due to the bias, despite the return on investment. · Active Trading This trading strategy involves taking advantage of short-term price movements. It focuses mainly on financial instruments in high demand, such as stocks, currencies and derivatives. It could be focused on a specific industry as well. This type of trading involves continuous analysis of and speculation regarding market movements. Tips to Control Your Sentiments while Trading 1. Treat Trading as a Business Design a trading strategy, with specific, realistic goals and daily activities, to keep your sentiments in check. Stick to your plan despite the market conditions. This will help you prevent sentiments from colouring your trading decisions. 2. Use Candlestick Sharts Often, early entry and misinterpreted indicators lead to unnecessary losses. So, analyse candlestick charts to fully form before making any trading decisions. Mid-candle decisions tend to be impulsive. This will not only help you control your emotions but will also improve your performance as a trader. 3. Research before Investing Do not completely depend on trading sentiment, do your own research too. It might help you explore new opportunities for trading, while ensuring that your decisions are information based. 4. Paper Trade Use demo accounts and dummy trading tools to test new strategies, new indicators and new ideas before investing real money in the live markets. Focus on your strategies and work them through to figure out any loopholes. Use new strategies or try new assets only after you gain confidence through practice. 5. Educate Yourself There is always something new in the market to broaden the horizon of your trading. Learn about some new indicators, instruments, strategies or some advanced trading tools. With advancements in technology and internet penetration, today, you can easily access books, coaching academies, webinars, etc. This will help you assess and improve your current trading plan. The financial markets are influenced by emotions, providing trading opportunities. Understanding trading sentiment is key to making informed trading decisions. Analysing trading sentiment as part of your trading plan is only useful if you can utilise it to gain an edge in the market and take positions at the right time. How the market feels about the current scenario and how it feels about the future provide potential opportunities for traders. So, make sure you learn how to assess and analyse market sentiment and your own emotions to fine tune your trading decisions.
When you put in a request to purchase or sell an asset, that order goes into a handling framework that puts in a few orders before others. Securities exchanges today are totally automated, kept running by PCs that do their work, depending on an arrangement of standards for handling orders. However, you have the freedom to choose the way in which your order is processed, based on the price you choose to trade at. You can execute your trade at market prices via market execution or give instructions to trade at a specific future price via a pending order. What is Market Execution? Market execution is the most basic type of trade execution and is used to buy or sell securities at the current market price. Trades are executed at the current ask and bid prices. The advantage of using market order is that it guarantees that the trade will be executed. If a trader wants to get into or out of a position, a market order provides the most reliable method to accomplish just that. But it can lead to the execution of an order at a less favourable price. A market with high liquidity provides viable opportunities for market orders, otherwise crucial slippage can occur in trades. Stop loss and take profit cannot be used in market orders. What is a Pending Order? This is an order to buy or sell securities at a desired price. In a pending order, a trader instructs their brokerage to buy or sell an asset at a pre-determined price. Pending orders are used to execute a trade at a position that will be achieved by the market in the future. There are 4 types of pending orders that can be placed for execution. 1. Buy Limit This involves the buying of a security at a specific future ask price, if that price matches the predetermined price. Generally, the current price of the asset is higher than the value of the pre-determined price. These orders are placed because the trader expects the price of the security to drop down to a certain level and then witness a bullish trend. 2. Buy Stop This also involves buying of a security at an ask price in the future, if and when the price matches the predetermined ask price. Here, the current price of the asset is usually lower than the pre-determined price. These orders are places when the trader predicts that the price of the security will reach a certain level and will keep rising. 3. Sell Limit It involves selling of a security at a bid price in the future, if the price matches the predetermined bid price. Generally, the current price of the asset is lower than the pre-determined price. These orders are placed when the trader anticipates that the price of the security will increase to a certain level and then will witness a bearish trend. 4. Sell Stop This involves selling of a security at a specific bid price in the future, if the price matches the predetermined ask price. Generally, the current price of the asset is higher than the pre-determined price. These orders are places when the trader expects the price of the security to reach a certain level and then continue falling. While placing pending orders, it is important to ensure adequate risk management through the use of Stop Loss and Take Profit orders. Stop Loss This is used to reduce losses if the price of a security starts to move in an unfavourable direction. If the price of the security touches the stop loss level, the position will be closed automatically. It is usually attached to a pending order or an open position. This order is always placed below the present bid price in a long position and above the current ask price in short positions. Take Profit This is used to limit the levels of profit if the price of a security rises to a specific level, to avoid losses if the market suddenly changes its direction. Take profit orders lead to the closing of a position and are always attached to a pending order or an open position. This order is generally set above the current bid price in long positions and below the current ask price in short positions. When to Use Market Orders When does the use of market order make most sense? If you are stuck in a position where the market movement is against you, a market order will help you get out of that position quickly. Generally, investors are worried about prices when entering or exiting positions, but there are times when buying or selling is more important than the price itself. You might wish to acquire or get rid of an asset quickly and this could prove risky. Therefore, it is important to make careful, informed decisions for market orders. Using Pending Orders There are some things that traders should keep in mind while using pending orders, such as: - Determining the Entry Point: The trader has to calculate the minimum and maximum price at which the trends will continue in a favourable direction. Sometimes, pending orders can be placed by assuming that resistance and support of a price range will break. Another way an entry point can be determined is to wait for the release of important news. The trader will need to analyse the timing of the news and place the trade accordingly. - Placing Take Profit: This depends on the speculation and goal of the trader, based on the current market situation. The trader will need to assess the size of the potential gain and the probability of loss if the market changes direction before placing an order. - Placing Stop Loss: Stop losses are placed based on the trader’s risk appetite and trading strategy. It is useful to define the terms of expiration to ensure that the pending order is executed according to guidelines set by the trader. Both market execution and pending orders are important to make the most of all types of market conditions. However, traders need to be careful to not allow emotions to colour the decision to implement one of the two types of orders. Instead, they should work on technical and fundamental analysis, charting tools and other tools at their disposal to make informed decisions.
Since the Great Depression of the 1930s, no financial crisis in history has ever had such far-reaching consequences as the 2008 recession. This was probably because times are different, with greater media coverage and an inter-connected global economy, where every country’s economic affairs are affected by what happens across the world. It has been more than ten years since September 15, 2008, when the investment bank Lehmann Brothers collapsed. America’s fourth largest bank, the kingpin of securitising sub-prime debt, declared bankruptcy. So high had been their risk-taking activities that the effects magnified to a global level. In the next three weeks, world leaders and financial regulators worked tirelessly to prevent a possible collapse of the world financial system. Despite their best efforts, the global recession occurred. According to a report published by the US GAO, the 2008 crisis caused the US alone $22 trillion. How it All Began While September 2008 was when the world sat up and took notice, the factors that contributed to this crisis came into play a long time back. Let us look at the causes and understand how things unfolded. Consider them the main actors in a full-fledged theatrical production (there are plenty of guest stars too!). 2006: Fall in Real-Estate Prices The US housing market started to decline, but realtors believed that the market was just overheated and would soon return to sustainable levels. What they didn’t know was that too many home-owners had questionable credit scores. The reason? The Gramm-Rudman Act 1987 allowed banks to trade in profitable derivatives, to be offered to customers. These mortgaged-based securities were supported by home-loan collaterals and created increasing demand for more mortgaged-based loans. Banks started letting people get loans at 100% or more of their home values. This was a time when years of lesser inflation and stable growth of the global economy had resulted in complacency and increased risk-taking by financial institutions. Irresponsible mortgage-lending started in the US, to “sub-prime” borrowers, who barely managed to repay them. Pooled-Mortgage Securities The big banks turned these risky-mortgages into low-risk securities and put a large number of them in pools. Risks related to each loan have to be un-correlated for pooling to work properly. But the big banks’ theory, that the housing markets in different American cities are unrelated to each other, proved false with the housing slump of 2006. Now, these pooled mortgage-backed securities, known as collateralised debt obligations (CDOs), were divided into different categories, based on the level of exposure to default. Credit rating agencies, on the behest of big banks, gave them generous scores. Investors trusted these scores and these instruments, which provided them higher returns, compared to other products in the market. Lower Interest Rates The emerging economies around the world, like China, took a stance of “saving over investment” in their countries. Those savings found their way into safe US government bonds, driving down interest rates. Economists often consider the prevalence of lower interest rates as a major contributor to the overall mess. Lower interest rates made investors go for riskier securities with higher returns, as did banks, hedge funds and other bodies. They went one step further by incentivising these borrowers, on hopes that returns would exceed the cost of borrowing. Investors put their money in longer-dated, higher-yielding securities. A Chain Effect Starts With the fall of the housing market in the US, a chain of reactions started in the money markets. Pooling didn’t provide protection to consumers and CDOs turned worthless, despite all the high ratings. So, many banks relied on short-term funding, using property assets as collateral, but now none of these assets had takers in the market. The “mark-to-market” accounting rules required banks to revalue their assets at current market prices. Losses that hadn’t yet taken place had to be put in the books. Capital reserves of major banks depleted. AIG and Its Credit Default Swaps Why did small pension funds invest in such risky assets? They believed that Credit Default Swaps protected them. The seller of such an instrument agrees to pay the buyer, in case the third-party defaults on loans. Here, it was AIG, a US insurance giant, who sold these swaps. As the derivatives failed, AIG realised that it didn’t have enough cash reserves to honour its swaps. The whole system was revealed as a major Ponzi scam. Banks had inflated their account statements, with not enough capital reserves to take in losses. A Dangerous Cycle of Mistrust between Financial Institutions As Lehman Brothers went bankrupt, panic set in the markets. Trust deficit prevented banks from lending. Companies worldwide froze their operations, unable to pay workers and suppliers. The global economy went down. Regulators had made the mistake of allowing Lehman Brothers to go bankrupt, thinking that it would solve issues and reduce government intervention. But things didn’t work out quite as planned. To curb panic and possible violence, government regulators worldwide went into a recovery mode, rescuing many companies from bankruptcy. From October 5 to 11, 2008, £90 billion was wiped off the value of Britain’s companies, a record since the Black Monday crash of 1987. As the credit crunch magnified, the IMF was sent requests for emergency loans by countries across the world. Other Causes of the Meltdown As we pointed out earlier, many factors came together to create this crisis. For example, the failure of the US Federal Reserve to see global current-account imbalances. Net capital inflows from Asian countries and the big capital inflows from European banks were overlooked too. All this created lenient or loose credit conditions in the US. The ECB didn’t see the current account imbalances in the EU region, due to overheated housing markets in countries like Spain. They thought it irrelevant in a monetary union. But, bankers and regulators are not the only actors responsible for economies, political entities are too. They encouraged risk taking among consumers. In short, excessive financial liberalisation in the latter half of 20th century, combined with a lack of regulations, can be said to be the cause of the 2008 recession. It left millions of people unemployed and homeless, which is why lessons need to be learnt from this debacle so that history doesn’t repeat itself.
About $150 billion was wiped off home values in Sydney after property prices recorded the highest ever annual decline since 1990 on November 1, 2018. With around 60% of the wealth of Australian households invested in a family home, such fluctuations in property prices could have a serious impact on the economy of the nation. Housing Price Index and the Currency Market The Housing Price Index (HPI) is used to measure changes in family house prices across a particular market. It is not only important for real estate, but policymakers as well. HPI has been used by policy experts and economists to analyse long-term trends in customer behaviour and the financial condition of an economy. HPI becomes important as fluctuating house prices also indicate the direction of probable change in a country’s economy. Along with the gross domestic product (GDP), the consumer price index (CPI) and unemployment statistics, HPI is a crucial indicator analysed by currency investors before making an investment decision. HPI helps economists and policy experts to predict the range of inflation, with constantly rising HPI indicating inflation. Inflation is a key factor in the decision making of central banks. When inflation is low, interest rates are reduced by central banks and when inflation is high, interest rates are increased. When interest rates are raised, people are bound to avoid taking loans, especially for property purchases, and keep their money in banks because the bank offers higher returns. With an increase in interest rates, the demand for that currency also increases in the foreign exchange market. This is because higher returns on investment are guaranteed on that particular currency. So, the demand and value of a currency rises following an increase in the interest rates in the nation that the currency belongs to. With a dip in the HPI, inflation decreases and banks reduce their interest rates. This results in a decline in the value and demand for that currency in the foreign exchange market. This is why investors keep an eye on a country’s inflation and HPI as key indicators of inflation, with each release of an HPI report being followed by a fluctuation in the demand for a currency. Impact of a Property Slump on the Economy Property prices serve as a barometer for the health of an economy. Any decline in property prices, or even prediction of a decline, is likely to impact the financial markets. It has serious consequences for consumer confidence on the market too. A prediction of falling prices tends to make people skeptical about investing in real estate, resulting in a further decline in prices. Falling property prices will reduce consumer spending and aggregate demand in the economy. This may result in lower growth and may even lead to an economic recession. Impact of a Property Slump on Currency According to Daniel Blake, chief economist at Morgan Stanley, a slowing or slumping housing market can force a reevaluation of gearing and may lead to household balance sheet recession. This is likely to have a severe impact on the economy of a nation. A balance sheet recession takes place when high levels of debt in the private sector make individuals focus on saving money by paying down debt, instead of spending or investing. This leads to a slowdown or decline in the economic growth of the nation. Recession will, of course, affect the exchange rate of the nation’s currency, by decreasing its value against other currencies. For example, you own Pound Sterling and you want to buy US dollars. If the UK market enters a recession, then the Pound Sterling’s value will depreciate against the US dollar, making it more expensive to buy USD. If you wish to invest in property in USA or import machinery from USA, you will need more GBP to pay the total amount in US dollars. This happens because when a market enters recession, it sends out negative signs about that economy to the global market. Interest rates are decreased, to make borrowing cheaper and promote more investment. Unemployment rises as businesses attempt to cut costs to survive in the market. Customers begin to focus more on saving then spending. In general, the economy becomes less prosperous. All this makes it unattractive for foreign investors to invest in that economy because the potential of returns on investment decreases or is limited. This weakens the domestic currency, as demand for it decreases in the global market. Recession doesn’t, however, guarantee that the value of the domestic currency will fall. For example, the UK is in recession while the Eurozone isn’t, although recently the value of the GBP has increased to a record high against the euro since 2008. This is because the political framework of the UK is more stable and rigid than that of the European Union. The UK economy is unlikely to collapse in the near future, while there is a possibility for European Union to disintegrate after the Brexit. This is due to major EU economies mulling an exit from the union, similar to the UK. This only goes to show how recession in an economy or slump in property prices doesn’t play a dominant role in the foreign exchange rate. Benefits of Falling Property Prices If property prices fall, it reduces consumer spending as well. It also reduces inflation in the economy. And, if the inflation rate falls below the targeted rate, the monetary policy committee or central bank will reduce interest rates. The decline in interest rates, in turn, will decrease the overall mortgage repayment amount. This will prove beneficial for entities with high mortgage interest repayments. This could also slowdown the price decline in the property market and make investment in property lucrative once again. It could also make buying property achievable for first time buyers. In addition, it would decrease the need to save more for mortgage deposits, enabling consumers to invest more. Decreasing property prices might also increase the purchasing power of foreign investors in the property market. The real estate market is a significant contributor to the economy of a nation. Growth and decline in this sector have direct influence on the GDP and the domestic currency of that nation.
There is a new buzzword trending in the cryptocurrency space these days – Security Token Offerings, or STOs as they are popularly called. Unlike the common Initial Coin Offerings or ICOs, STOs are based on tokens that act as “securities.” This essentially brings them under the purview of the existing securities laws and regulations for investor protection. Experts predict that 2019 will be the year of the STO, when the crypto industry will get a formal regulatory structure, rightfully deserved by it. But first, we need to understand what “security tokens” are. The Concept of Security Tokens If we are to ascertain the exact definition of a “token,” it is a digital asset that represents something of value within an ecosystem. This could be voting rights, access to a service or dividend payouts; the list is endless. This asset or utility-representing token is put up for sale to investors via ICOs. Initial Coin Offerings are a type of crowd-funding initiative, where investors put money into a project in return for future advantages on the platform. The concept of STOs brings significant parity between the two terms – tokens and cryptocurrency coins. Cryptocurrency coins like Bitcoin (BTC) or Ether (ETH) can be mostly used as a transactional medium, even outside their native platforms. On the other hand, a token represents functionalities only within a particular ecosystem, until it gets listed on exchanges. So, in short, a token could provide multiple ways in which investors benefit monetarily. In the past, ICO owners got into trouble with token offerings that were essentially investment contracts. The US SEC termed these tokens as “securities” in disguise that should actually fall under the purview of securities regulations. Security tokens embrace the idea of being treated like securities, and their offerings should be structured in a manner that is beneficial to both the issuing company and the investor. The Howey Test The infamous Howey Test was a result of a 1946 legal battle with the US Supreme Court. Howey, a Florida based real-estate company, was sued by the US SEC, on grounds that their land contracts provided monetary benefits to investors, and, therefore, should be termed as “securities.” Today, the Howey Test is a benchmark for ascertaining whether a particular transaction is an investment contract or not. When the DAO tokens failed to pass this test in 2016, and were classified as securities by the US SEC, a common framework was put in place, in partnership with FINMA, to judge whether a token was a security token or a utility token. So, a token that passes the Howey Test is deemed a security token, subject to US federal laws. Broadly speaking, in the Howey Test, for a financial instrument to be classified as securities and fall under the US SEC jurisdiction, it has to fulfill certain conditions, including: - Investment of money is necessary. - There has to be profit expectations at the end of the transaction. - Both these above points have to take place in a common enterprise. - Profits have to be generated through a third party. Security token issuers in USA need to comply with specific guidelines for registration, such as: 1. Regulation A+ SEC-approved securities can be offered to non-accredited investors with investment of up to $50 million. 2. Regulation D A company’s token offering will be exempt from being registered by the US SEC, provided that Form D is submitted by the token creators after the token launch. A company that gets this exemption may offer their securities to investors under Section 506C. 3. Regulation S This regulation is for token offerings that occur outside the US. The securities regulations of the country in which the sale is taking place will come into play. The Importance of Security Tokens Through tokenised securities, companies will no longer try to circumvent regulations, which will help bring down instances of the sale of illegal and unregistered security tokens. This, in turn, will instill investor confidence in the digital asset industry, which has long been riddled with scams and security threats. Through STOs, companies will be able to structure “programmable ownership,” with all material information programmed within the software, with the option for modification at a later time. This will be a great way to attract institutional investors, who mostly stay away from the crypto space due to vague token economies and real tangible rights. They will now be able to ascertain what their interests will be in an STO company, at any given time. “The tokenization of the economy, for me, is real. Cryptocurrencies are real but not in the current form.” These words were recently said by JP Morgan’s co-president, Daniel Pinto, who stressed on the importance of regulatory frameworks for crypto assets to flourish. The presence of institutional investors is necessary in the crypto markets, for the digital asset class to be considered a viable part of the global economy. Apart from bringing credibility back into the industry, security tokens will also improve traditional financial transactions, without the need for middlemen. STO companies will be able to offer their tokens to investors in any country, enhancing free market exposure. This will lead to a significant increase in crypto-asset valuations and enhanced liquidity in the market place. Through the licensed security token trading platforms, investors will find it easier to liquidate their holdings. STOs will provide an opportunity to make the securities market more transparent and transferable. With links to smart registries, security tokens will lessen a lot of unnecessary documentation and expenses in the public capital markets. Service provider functions, like those provided by law firms, can be automated. This will also reduce legal fees. Security tokens could rise as an alternative form of blockchain funding. This is good for the financial industry, considering the amount of scrutiny that ICOs are being subjected to at present. A lot of negativity concerning ICOs surfaced in 2018, following the revelation of rampant scams. Security tokens might prove to be a viable alternative.
If you’ve never traded the HK50, you might be missing out on a great opportunity to capitalize on economic growth in a promising foreign market. Although the Hong Kong Stock Exchange is the third-largest stock exchange in Asia, and the sixth largest in the world, it often gets overshadowed by the Chinese and Japanese markets—not to mention the markets in New York and London. But seasoned investors are aware of the trading opportunities available in Hong Kong, especially with the HK50. The Hang Seng Index, or HK50, tracks the 50 largest and most liquid companies on the Hong Kong Stock Exchange (HKSE), offering a reliable reflection of the economic strength of Hong Kong as well as China. Here’s an overview of the HK50, including a primer on how to approach trades in this market. Understanding the HK50 The HK50 is a massive index relative to the overall size of the Hong Kong Stock Exchange, accounting for roughly 65% of the exchange’s total market capitalization. The majority of the index is comprised of financial, utility, industrial, and property companies. It is comparable in design to the S&P 500, which brings together 500 of the largest U.S. companies to provide a reliable barometer of the American economy at any given moment. In a similar way, the performance of the HK50 is regularly used to take a quick temperature check of the Hong Kong economy as well as China’s economy. For international investors, this can be helpful when trying to identify trade opportunities, whether they’re looking at forex pairings or other investments in Asian stocks. In fact, due to the capital restrictions of the Chinese stock market, the HKSE and, in particular, the HK50—which are free of those restrictions—can actually provide a more accurate portrait of the Chinese economy than the Chinese exchange itself. Even if you aren’t specifically interested in investing in the HK50, it’s useful to become familiar with its performance over time, what its price movement says about the Hong Kong economy in particular, and how it affects Asian markets in general. Why Should Traders Want to Invest in This Market? The HK50 has enjoyed a long history of strong performance, growing in value by more than 20,000% since its inception in 1964. Although the trading hours for the HK50 aren’t ideal if you’re based in London, New York, or another Western city, the HK50 does still enjoy global popularity among investors thanks to its strong growth over time and its optimistic outlook for the future. Here’s a look at a five-year chart for the HK50, underscoring the dramatic long-term gains of this fund—especially in contrast to similar indices around the world: Since it’s a large but still emerging market, traders can enjoy high volatility that creates profit opportunities for well-researched investments. Additionally, many HK50 investors use exchange-traded funds (ETFs) as a simple way to capitalize on the overall growth of the Hong Kong and Chinese economies. Diverse Investment Options The HK50 offers multiple options for investing in an emerging financial market, ranging from day-trading opportunities to long-term investment vehicles. While Hong Kong has risen in popularity as a destination for forex investments, for example, ETFs are a popular method of investing in this foreign market, especially for traders trying to overcome a time zone difference. American depository receipts (ADRs) and contracts for difference (CFDs) are also common vehicles for capitalizing on live trading opportunities. While CFD trading brings an additional degree of risk to international investments that already pose a greater liability than domestic investments, experienced investors may see this increased risk as well worth the potential payoff. Other Advantages to Trading the HK50 The HK50’s global popularity can be credited to a number of advantages that come with this index. In addition to the diverse options offered by the HK50, traders also appreciate that the index has a strong performance history, making it a more stable index option that appeals to both novice and experienced traders. Dividend earnings are also higher with the HK50 than with other indices, and it gives traders a financial foothold in a fast-growing economic region—while also insulating traders from the economic uncertainty that comes with Asian indices tied to India and other developing and volatile nations. As a modernized economy that is home to a number of global businesses, Hong Kong is a logical choice for traders looking to capitalize on gains in the overall global economy. It’s worth noting that many multinational corporations have established headquarters and operations in Hong Kong in part to insulate those businesses against recessions affecting the United States and other parts of the world. In a similar way, traders can use investments into the HK50 to diversify their risk profile while protecting their profit potential. Disadvantages to Trading the HK50 While the HK50 is a strong, stable index that offers a degree of reliability to traders, it also lacks the market volatility that gives traders strong, swift profit opportunities. Indices based more heavily in the Indian and mainland China markets, for example, have historically seen better returns as the markets represented by those indices develop and grow. Related to that reduced volatility is the fact that the HK50 is benchmarked at a fixed rate to the U.S. dollar. This means that a decline in the value of the U.S. dollar can lead to a depreciation of the value of HK50 holdings, which may not be desired by traders looking to diversify beyond their U.S. holdings. In the chart below, notice how the HK50’s value has dropped and displayed greater volatility since the start of 2020. While this period of time portrayed is greatly affected by the development of the COVID-19 pandemic, it is notable how dramatically the index drops in value over the course of March, when the pandemic reached the United States in full force and brought that country’s economy to a halt: Keep in mind, too, that even with safer, diversified HK50 investments such as ETFs, trading in overseas markets can carry greater risk than domestic investments. With the HK50, this is largely due to the unreliable political track record in China as well as the country’s history of intervening in market-based activities. Despite these risks, the volatility and growth potential of the HK50 are attractive to many investors. Conclusion If you’re unfamiliar with the HK50 but interested in foreign investments, especially in Asia, it’s worth taking time to get a better understanding of this index, including the investment options it offers and the context it can provide in evaluating the Chinese and Hong Kong economies. Given the high-risk, high-reward nature of the HK50, it’s wise to do your homework before opening positions in this market.
On June 23, 2016, over 30 million people voted in a referendum to decide whether the United Kingdom should leave or remain in the European Union. The option to leave won by 51.9% to 48.1%. On March 29, 2017, UK Prime Minister Theresa May submitted the Article 50 withdrawal notification to the European Union. It gave a period of two years to the UK and the European Union to negotiate an agreement regarding Britain’s exit from the EU. The UK and the EU agreed on March 19, 2018, to an adaptation plan spanning 21 months, which has been called a “Soft Brexit.” It will help if a formal agreement doesn’t take place before the deadline of March 29, 2019. The European Court of Justice ruled that the UK could officially cancel its Brexit application unilaterally. Approval from no other EU organisation is needed for the withdrawal. What is a No Deal Brexit? A No-Deal Brexit is a term used to describe what might occur if the UK withdraws from the EU without reaching any exit agreement. The UK, led by Prime Minister Theresa May, and the EU agreed on a draft of the withdrawal agreement. Getting the approval of the House of Common on the proposed plans seems difficult at present for Ms. May. Ireland and the other EU nations have started preparing for a situation where the UK exits without a deal. If a withdrawal agreement is passed by the House of Commons, an adaptation period will begin at end of March 2019, when the deadline set by Article 50 of the Lisbon treaty ends. Every trading contract and relation between the UK and EU will remain the same until December 2020 and possibly until December 2022, for future negotiations. If the UK exits without any agreement being reached, there will be no transition period and all current regulatory and trading relationships between the EU and UK will end immediately. It will push the UK into international isolation and could lead to economic and political crisis as well for the nation. Where Does the Brexit Deal Stand Today? The current deal between UK and EU includes two parts: 1. Withdrawal Agreement: This is a 585-page, legally binding text that will decide the terms and conditions of Brexit. It contains issues such as debt on the UK, what will happen to EU citizens living in the UK and UK citizens living in EU states. It also provides a solution to avoid the return of a physical Irish border. 2. Future Relations: This is a 26-page, not legally binding text. It draws a map of the long-term relationship between the EU and UK across various sectors, such as defense, security and trade. Consequences of a No Deal Brexit The Economy The impact of a no-deal Brexit would be terrible for the economy. Some reports indicate a further decline in the already disappointing growth, which might even end in a recession. Indications are that the Pound Sterling would fall in a confused no-bargain situation. In its November Inflation Report, the Bank of England says that a smooth change to the deal would lead market participants to anticipate “a smaller hit to UK real incomes than currently, causing the exchange rate to appreciate.” In any case, the question is by what amount, and when? Markets won’t sit tight for March 2019 to respond. Rather, the sterling would take a hit if no clear deal occurs. Many expect the pound sterling to promptly decline at the same rate it did after the referendum in 2016. Analysts also expect a more than 10% drop in the value of the currency in case of a no-deal because the referendum drop was not based on any real financial disturbance. Inflation A declining GBP will increase inflation. Inflation would reach its peak due to the immediate disruption caused to trade and relocation, which would lead to a fall in the supply of goods and services, thus pushing up prices. The sudden addition of tariffs on trade and cross border movement will push inflation and the declining pound will only make it worse. With an increase in trade barriers, the prices of raw material will rise, and lower immigration will lead to higher demand for staff from companies, decreasing productivity in the short term. According to experts, the consumer price index will be at 2.9% in 2019 with a no-deal, rising to 3% in 2020. Inflation is expected to rise to 2.7% in case of a No-Deal Brexit. Trade In the absence of a deal, the UK will return to the rules established by the World Trade Organisation on trade. External tariffs would be paid by the UK on the export and import of goods, pushing prices further up. Some products manufactured in the UK will be rejected in the EU and might require new certification and authorisation. Manufacturers dependent on raw materials from the EU might relocate to the EU to avoid the tariffs and delay on materials. Around 33% of the UK’s food supply is dependent on the EU. Delays at customs will create food shortages in the UK. Production has already been affected by drought and the heat wave caused by global warming. Trading tariffs will be imposed, as high as 74% on tobacco, 22% on squeezed orange juice and 10% on automobiles. This will drive up the price of imports and inflation, while lowering the standard of living. Individuals The UK would be able to control the movement of people and set rules for EU residents. The EU will be able to do the same for British citizens. This could lead to long delays at international borders. The future of 1.3 million UK nationals living in the EU and 3.7 million Europeans living in the UK and their right to work and live will be uncertain. A No-Deal Brexit will just make things worse, since there is currently no solution for these fundamental issues. Laws EU laws will become null and void in the UK, following Brexit. The nation will be no longer be under the jurisdiction of the European Court of Justice, although it will still be bound to the European Court of Human Rights. Transfers The UK pays £13 billion to the EU annually. With Brexit, the nation will no longer have to pay that sum. The EU will suffer losses, since it will no longer be able to benefit from subsidies and no-tariff trade. The issue of the border between Northern Ireland and the Republic of Ireland would also remain unsolved. With the time for negotiations almost at an end, Britain is unlikely to get what it wants. All signs appear to point to a No-Deal Brexit for now, which could have severe consequences.
The economy of every nation depends on one commodity or the other. This is why commodities play a crucial role in the growth of the global economy. There are hard commodities that have to be mined or extracted, such as oil, natural gas and metals like gold, copper, platinum and such like. Soft commodities are mainly agricultural products, such as wheat, corn, coffee and livestock. The world of commodities is a very interesting one. Here’s a look at some amazing facts about commodities. 1. First Oil Production The very first time that oil was produced in the world was in China in 327 AD. Bamboo pipelines were used by Chinese engineers to drill 240-metres to extract oil. In those days, oil was called “burning water” and was used to evaporate brine and make salt. 2. Organisation of the Petroleum Exporting Countries (OPEC) According to OPEC data and the United States Energy Information Administration, members of the OPEC generate over 45% of the world’s crude oil and house around 81% of the world’s fully recognised crude oil reserves. The price of oil is mainly dependent on the laws of demand and supply. And, demand has been dependent on global economic performance, with prices generally rising in times of economic boom due to higher demand for oil, needed for production and transportation. Oil prices fall during economic slowdown. On the supply side, OPEC has a great influence over the prices, but this has declined with the rise of the US as a shale producer, which is not an OPEC member. Political turmoil in the oil producing region also affects the supply and prices of oil. 3. The World’s First Futures Exchange The world’s first futures exchange, the Egg and Butter Board, was established in 1848, as a subsidiary of the Chicago Produce Exchange. It was restructured as the Chicago Mercantile Exchange in 1919 and was dominated primarily by agricultural commodities, until the creation of bond futures contracts in the 1970s. 4. Bulls & Bears An upwardly mobile market is said to be bullish because a bull raises it head and horns to attack. On the other hand, a bear swings its arms and claws to attack, making a bearish movement a downward one. Chicago’s sports teams reflect these trading symbols quite accurately, with the Chicago Cubs being the baseball team, Chicago Bulls being the basketball team and Chicago Bears being the American football team. 5. The First Metal – Copper Copper was the first metal used by human beings and archaeological evidence suggests that it was first used during the prehistoric age, around 11,000 years ago. The oldest known copper artifact used by humans dates back to 8700 BC and was found in northern Iraq, home to one of the most ancient civilisations in the world, the Mesopotamia Civilisation. 6. Latin America Produces the Most Copper Over one third of the world’s copper production comes from Latin American countries. According to the United States Geological Survey, Chile produces 5.5 million tonnes and Peru produces 2.3 million tonnes of copper. China and the US are next in the list of top producers, with 1.74 million tonnes and 1.41 million tonnes, respectively. 7. The Crucial Commodity for Industry Copper is a very good conductor of both heat and electricity and is even corrosion and weather resistant. It is one of the main components in the manufacture of electrical wires, machinery, pipes and such like. It is also a key component of alloys like brass and bronze. The price of copper depends mainly on the economic output. Supply is affected by infrastructure issues, trade disputes, seasons, especially for major producers such as Chile and Peru. 8. China Leads in Gold Production China is the leading producer of gold in the world, followed by Australia, Russia and the United States. Gold is a precious metal, used primarily for jewellery production and as an instrument of investment. It is also used in the medical and mechanical industries, since it is a good conductor of electricity and is resistant to chemical reactions. It is considered as a stable investment, as it has a stable value or its value increases during times of economic slowdown and political crisis. Gold price has an inverse relationship with the value of the US dollar, so traders tend to invest in gold when the value of the dollar declines. 9. Impact of Trade Wars on Commodity Prices Commodities may show the real impact of the Trump-China Trade War. The impact of an increase in tariffs by the US on Chinese products can be seen on the commodities market. Copper futures on the London Metal Exchange have been trading at lower prices since the changes in tariff were announced, with a drop of around 16% from the peak prices of June 2018. China’s iron ore imports also decreased by around 1.6% in the first six months of 2018, in comparison to 2017. Steel prices have remained strong, with China witnessing an increase in its steel PMI. 10. South Africa is the Largest Supplier of Platinum South Africa produces around 120,000 kgs of platinum annually and extracts 75% of the world’s platinum. The nation has the highest reserves of platinum group metals (PGM). Platinum provides extreme resistance to corrosion and is a good catalyst for the refining of oil and for other laboratory applications. It is also used in dental alloys, electronic devices, glass, biomedical applications and turbine blades. 11. Coffee is the Second Most Traded Commodity Coffee is the primary source of caffeine in the world and is the second most traded commodity, after crude oil. The coffee market is worth over $100 billion worldwide. Coffee futures contracts involve two varieties of coffee beans: Arabica and Robusta. Arabica is considered more premium because it has around 50% more caffeine content than Arabica. Two-thirds of the world’s coffee is grown in North and South America, 90% of which is in developing countries. Brazil, Vietnam and Colombia are the three top producers of coffee. 12. Liquidity is Essential for Commodities Trading Liquidity is the most crucial factor for commodity traders. The higher the volume of contracts available, the easier it becomes to buy and sell with narrow spreads and less slippage. Gold and crude oil always attract a large number of investors, while timber and frozen fruits futures contracts suffer from liquidity issues. Supply and demand are the main factors affecting the liquidity of a commodity. 13. USA is the Main Producer of Soybean A majority of soybean is grown in the US, followed by Brazil, Argentina, China and India. Its prices are affected by demand for biodiesel, animal feed and meat and dairy substitutes, such as soy milk. Weather conditions can also affect prices. Since the US is a major producer, the strength of the USD also affects the prices of soybean. Speculation about the Chinese tariffs on US soybean have had an impact on prices. The commodities markets can be highly volatile, creating opportunities for traders to take long or short positions. However, make sure you base your trading decision on solid analysis.
One of emerging areas in global economics and finance is behavioural finance, which investigates the emotional and cognitive factors that impact the financial decision-making process of individual investors, families and even large organisations. A combination of the field of psychology and money management with conventional economic theories, the aim of behavioural finance is to establish how certain people or groups make investment decisions. What factors influence their decision making and how does it all impact the financial markets on the whole? Why Behavioural Finance? The Efficient Market Hypothesis (EMH) is based on the assumption that in any liquid market, prices reflect all the important information at any given time. But, studies over a long period of time have found that apart from prices, investor mentality also plays a part in how markets move. The basic assumption that investors always act rationally is flawed, and this limits various finance models from providing accurate predictions. Behavioural finance brings the psychological biases of humans into the equation. These biases are responsible for many irrational financial decisions an individual can make. We are able to gain insight into why markets collapse and bubbles burst. What makes people panic sell at lower prices or what makes them buy instruments at a high price? Another way in which this field serves is by helping financial companies create better products to suit their customer needs and aspirations. Marketers can create strategies, capitalising on investor psychology, which, in turn, could be influenced by optimism or conservatism. Portfolio managers can be more aware of their own decision-making process when faced with market fluctuations. So, behavioural finance has brought in modifications to the foundation theories of standard finance, such as: - Investors are not “rational,: they are “normal.” What separates rational investors from normal ones? According to Miller and Modigliani, it is the reluctance to accept losses. - Markets are not efficient. Investors cannot simply create portfolios based on the mean-variance portfolio theory. Returns are determined more by risk. Let’s take a look at some popular theories on this broad subject. Herd Instinct of Investors A popular psychological bias among investors is the “herd instinct.” People follow trends blindly without any logic of their own. It is a common phenomenon in the stock and forex markets, which accounts for panic sell-offs and rallies. This gives rise to the theory of “empathy gap,” which says that under tough constraints, individuals generally do not make wise decisions. Herd mentality encompasses many other psychological biases. For example, “attention bias,” which suggests that people tend to invest in shares of big and well-known companies, even if other shares can offer better returns. Confirmation Bias This theory suggests that investors only pay heed to information that supports their existing opinions or biases, rather than any information that refutes it. This one-sided approach towards evaluating market dynamics can prove to be disastrous. The theory is another explanation as to why bullish investors tend to remain bullish or bears continue to be bearish, despite the market indicators suggesting a different path to be taken. Behavioural Portfolio Theory Introduced by Shefrin and Statman in 2000, this theory is based on the premise that investors have many mental goals when it comes to investment. It is sort of a portfolio pyramid, where every goal is placed according to their importance in a person’s life; it could be marriage, children’s education, retirement, buying a home or even planning vacations. The attitude towards risk varies according to the different layers on this pyramid, which determine wealth allocation towards each of these goals. So, a person might invest more in children’s education rather than a vacation cruise. It could be true the other way around too. Factors like age, sex, economic and social background come into play here. How is Behavioural Finance Used to the Investor’s Advantage? It is a surprising but true fact that more often our investment decisions are not governed by careful deliberation of risks and returns, but by our subconscious, which is responsible for our emotional reactions. When these emotions are misguided, we make mistakes. There are three main factors to consider here: 1. Role of subconscious thinking 2. Emotional reactions 3. Value of practicing strategies. Logical thinking and emotions are two forces at play in our subconscious. While the former is all about stats and figures, the latter is about comfort. The phenomenon of motivated reasoning is the interplay between these two factors. As investors gain more experience, they tend to identify the decisions that led to losses as bad and those that led to gains as good. This is called the “self-attribution” bias, a habit of attributing unfavourable outcomes to external events, rather than one’s own faulty decisions. This rationale undermines the importance of risk management. Most people also consider their decision making abilities superior to that of others. They don’t express regret over bad decisions and move away from rationality. Recognising such tendencies is important to avoid losses. So, by practicing self-aware investing, investors can refine their decisions over time. The most successful traders have benefitted from trading journals, where they record their thoughts and emotions while making investment decisions on a daily basis. Through this, they identify behavioural and reasoning patterns in a given market condition, over time. This helps traders identify what factors influence their decision making and in what manner. They recognise the instances when their own faulty thinking has impacted the financial returns. Contrary to common belief, investing is not guesswork or gambling, it is based on economic theories and investor psychology. Through behavioural finance, it is possible to define good investing behaviour and pave the way for stable markets. It can also be a good foundation to trading success.
If you’re involved in forex trading, you probably have at least some familiarity with the MetaTrader 4 and MetaTrader 5 platforms. These software solutions rank among the most popular trading platforms for a wide range of traders and advisors, thanks in large part to the value of their tools and resources when it comes to evaluating positions and taking action. Although their names might suggest that MT5 is just an updated version of MT4, the reality is that these two solutions offer different functions and features that serve distinct trading audiences. Choosing whether to use MT4 versus MT5 can depend on your background and your trading goals, among other factors. Here’s a look at how these platforms differ, and how to choose the right one for you. What Types of Assets Do You Want to Trade? The biggest overall difference between MT4 and MT5 is the types of traders the platforms tend to attract. MT4 was designed specifically for forex traders, and its features and functionality reflect this. For this reason, MT4 is the preferred software platform for traders primarily focused on the forex market. MT5 has broader applications in contract-for-difference (CFD), stock, and futures trading. As a result, it has a broader range of features that may not be relevant to every trader—but if you trade multiple types of assets, it could provide better value for your trading goals. Keep in mind that although you can still use MT5 to trade forex, the features and tools used to analyze forex charts aren’t as robust, so you will likely sacrifice performance when using MT5 for this type of trading. Do You Want Access to the FIX API? The Financial Information eXchange (FIX) API is an important tool for traders seeking real-time information related to financial securities. The FIX API is used by both market regulators and traders to share important information before and after trades, as well as information that confirms new orders and executed trades. A FIX API integration offers a number of benefits to traders. Most importantly, traders have greater access to financial information when trading on a platform that offers FIX API integration—and the formatting of this information is standardized to streamline communications across any language barriers. The FIX API also makes it easy to build black-box strategies or private algorithms to assist in forex trade analysis. If you want to use the FIX API, you’ll need to use the MT4 trading platform. FIX API integration is not offered through MT5. Chart Time Frame Offerings MT4 was built for simplicity. Casual and beginner traders likely don’t need access to complex and granular time frame data, which makes MT4 the simpler option, providing the resources you need and none of the complicated features you don’t. With MT4, traders can choose from nine different time frames when conducting chart analysis. MT5, by contrast, offers 21 different time frames, representing a massive expansion on MT4’s offerings. For many traders, these customizable options are unnecessary. But some traders—as well as certain types of trades, such as CFDs—benefit greatly from access to these less commonly used time frames. More experienced or diverse traders might consider this information crucial to executing well-informed trades. Number of Order Types MT4 offers four basic order types: buy stop, buy limit, sell stop, and sell limit. For most traders, these order types are enough to execute your trading strategy while minimizing your exposure to risk and asserting greater control over how you enter and exit your positions. MT5 offers these along with two others: buy stop-limit and sell stop-limit orders. This gives traders greater flexibility in how price movement can trigger buys and sells. Experienced traders may frequently use these order types, but they’re likely to be utilized less often by beginners and casual traders. Programming Language MT4 and MT5 each use their own custom programming language, which provides different trading capabilities and customizations depending on your trading needs. On MT4, though, there’s a greater assumption that traders will be seeking a platform that can be quickly installed and launched, requiring minimal steps to set up functionality or develop a trading program. This makes MT4 ideal for beginning or amateur traders, or for traders who aren’t interested in creating their own scripts or algorithms to support their trading strategy. MT5, by contrast, has a more complex programming language, but it also offers the ability to write or alter scripts. On MT5, trades can also be executed with a single function, unlike the user experience offered on MT4. Less Commonly Used Features As you consider the better fit when it comes to MT4 versus MT5, pay attention to smaller criteria that may affect your trading experience. For example, both platforms offer hedging in certain trades, but only MT5 offers netting, which some traders lean on heavily to control their relative risk exposure. MT5 also offers slightly more technical indicators than MT4, as well as tools such as an economic calendar that helps you track relevant news from various foreign markets. But again, these expanded offerings also result in a more complicated platform, and a greater learning curve. MT5 also offers features such as a multithreaded strategy tester, fund transfers between accounts, and an embedded community chat—features that MT4 doesn’t offer. These features won’t matter to every trader, but you’ll want to evaluate your needs to determine if this functionality offers any value. Conclusion Ultimately, when it comes to MT4 versus MT5, the choice is a matter of personal preference. To determine the best solution, look at your trading habits and preferences and consider which solution offers a better fit for your needs. Many beginning traders prefer the simplicity and stripped-down features of MT4, whereas MT5 tends to attract more experienced traders who are seeking expanded resources and platform versatility. Keep in mind, too, that you might start out benefiting most from MT4, only to realize later on that you’re ready to switch over to MT5. Wherever you’re at in your trading career, make sure your platform of choice is going to serve your trading goals.
According to the triennial report of 2016, released by the Bank for International Settlements, the average forex market size is $5.1 trillion per day. This makes forex the most liquid and the largest market in the world. High liquidity allows traders to enter and exit positions easily, which is one of the key attractions of this market. For a trade to occur, we need both buyers and sellers. There needs to be an exchange that ensures fair trade, guarantees trade execution and regulates trading operations. Buyers and sellers cannot execute trades directly on an exchange, so they need a broker to do it for them. Brokers are registered members of an exchange, who can add customers and intermediaries. Brokers are also responsible for trade execution on the exchange. Difference between an Exchange and a Broker Since brokers and exchanges both provide means to trade the financial markets, it can be easy to get confused between the two. Let’s take a look at the key differences between them. Broker With a broker, the brokerage firm fixes the price and the fee it is willing to sell for. They either hold the assets or collaborate with a network of other brokers to keep the supply of that asset intact. Brokers are most likely to maintain similar prices in the market to attract customers and sustain demand for their services in a competitive market. Exchange A number of buyers and sellers are present on an exchange, placing orders to buy and sell financial securities. Buyers can choose to buy at any price, but the trade will not be completed until a seller agrees to sell at that price. Brokers and centralised exchanges have always existed in the traditional financial markets. A centralised exchange works like a governing authority, creating the exchange and set of rules to be followed by participants on the exchange. The rules dictate the information participants are allowed to share, securities to be traded and withdrawal limits on the exchange. But with technological advancements and the rise of digital currency, decentralised exchanges have emerged. The rules and procedures for operations on these exchanges are set via smart contracts, instead of a governing authority. Exchange vs Broker: Which is Better for Forex Trading? The forex market is the most liquid market in the world and fluctuations in the market provide opportunities even for first time traders. However, success depends not only on the trader’s skill but also their choice of broker or exchange. Here’s a look at some things to consider in forex trading. Regulation Ensure that your forex broker is fully regulated and their track record is good. Forex brokers will be responsible for keeping and managing your funds in different accounts. Exchanges, on the other hand, are also regulated and have house brokers to execute trades. You cannot directly trade on an exchange, unless you are trading significant volumes. There are minimal chances of exchanges shutting down. Simplicity Ease of use plays an important role in trading. A forex broker facilitates processes, such as setting up your trading account, means to deposit funds in the account and a trading platform that can be used on the go for executing trades. If you are new to forex trading, a forex broker can offer just the right support to help you learn and hone your skills. They can provide you the means to connect with the banking network and purchase currency pairs of your choice. Before there were forex brokers, a person willing to trade forex needed large sums to invest and special contacts and relationships to buy foreign currencies. Advantage of Using Forex Brokers over Currency Exchange for Crypto Trading Cryptocurrencies are also traded on exchanges, with the last couple of years seeing the mushrooming of crypto exchanges all across the world. On a crypto exchange, traders work to generate gains from the fluctuating prices of cryptocurrencies. Forex brokers offer crypto CFDs (contracts for difference), which offer similar potential to trade on price fluctuations. The basic difference between trading digital currencies themselves and trading CFDs is that the exchange provides ownership rights on the cryptocurrency, which can be transferred anytime to your crypto wallet, whereas CFDs are derivative instruments, which use cryptocurrencies as the underlying asset. Here’s a look at why forex brokers should be used for crypto trading over currency exchanges. Security Despite the number of services and options offered by cryptocurrency exchanges, they are vulnerable to scams and hacking, and are unstable. For instance, Bitfinex, a well-known crypto exchange was hacked in 2016 and 120,000 Bitcoins were stolen, worth $72 million, from this exchange. Forex brokers, on the other hand, are highly regulated by governing bodies. They have to fulfill a number of criteria to get legal and regulatory approval, ensuring safety and security. In addition, with CFDs, since the trader does not actually own the underlying asset, the fear of theft and loss due to hacking is avoided. Leverage Leverage provides traders the flexibility to enter positions larger than the capital in their trading account. A currency exchange provides maximum leverage of up to 1:2 or 1:3, solely depending on the other market participants. Forex brokers offer leverage of up to 1:20. They do so because they have highly developed risk management tools that can be used for crypto trading as well. Leverage fees charged by forex brokers is minimal, while the leverage fees charged by currency exchanges completely depend on the other participants providing extra currency, while considering the associated risks and compensation they need to be paid. Transaction Costs A forex broker includes all the costs associated with trading in their spread. An average spread might vary between 10 and 14, depending on the volatility of the market. Currency exchanges provide tighter spreads but charge a commission on the volume of cryptocurrencies being traded. Generally, the trading cost is similar in both cases. Variety There is no doubt that cryptocurrency exchanges provide more crypto coins to trade, in comparison to brokers. Make sure that the broker you choose provides multiple crypto trading options. Brokers also offer traders the choice to trade in commodities, like oils and metals, helping you diversify your portfolio. In conclusion, while the choice between exchange and broker will depend on individual preferences, brokers offer robust online trading platforms, efficient customer services and educational material to help traders make the most of their trading decisions.
Active traders in the financial markets around the world are increasingly suffering from cardio-vascular ailments and poor psychological health. We have seen frequent instances of high-income, successful traders suffering heart attacks and strokes at a young age of 35-40 years. Traders tend to lead sedentary lifestyles and work long hours; both of which are significant causes of a wide range of ailments. So, is trading as a profession hazardous to health? It is as dangerous as any other demanding profession, like doctors, lawyers or bankers. Fitness is essential for success in every walk of life. Let’s take a look at the potential health risks that traders tend to face and how to tackle them. Heart Diseases Financial market volatility is a major cause of significant emotional and physical stress for traders and investors. Forex trading offers leverage opportunities, which work both ways – it can multiply your profits as well as wipe away entire accounts. Constantly dealing with market fluctuations and facing monetary losses can shock the body and put stress on the cardio-vascular system. Traders often fall prey to bad habits like smoking and drinking, which are harmful to health. A sedentary life also leads to obesity and diabetes. These are all well-established facts that increase chances of coronary heart diseases. A study of the Shanghai Stock Exchange (SSE) Composite Index in 2006 led to conclusive proof that stock volatility had been a major trigger for coronary heart diseases in participants of the Chinese stock markets. Long working hours also contribute to heart ailments, particularly for people who have a history of cholesterol and high blood pressure, and this has been a leading cause of death in the US, ABC News quoted the American Heart Association as saying. Psychological Health Stress affects the body in many ways. It can also create psychological health issues like depression, anxiety and Post-Traumatic Stress Disorder (PTSD). Correct decision making and quick trade executions are not possible if the mind and body are disturbed. Lack of sleep increases the levels of the primary stress-hormone, Cortisol, in our bodies, which leads to decreased immunity, kidney impairment and a suppressed digestive system. Studies have proven that gut health is intrinsically linked to mental health. The result is depression, memory issues, concentration problems and headaches. Constantly being on the edge can lead to suicidal tendencies in some people. If you are always thinking about market conditions and feeling overstimulated, it means your body and mind are overwhelmed. Many traders feel exhausted quite often. It is necessary to take breaks every now and then to refresh the brain. Excessive Trading or Gambling Disorders Trading is not a type of gambling, but there is a thin line between sound, high-frequency trading and addictive behaviour. Day traders are usually associated with sensation-seeking motives rather than instrumental ones. Increased automotive trading can often lead to increased risk-taking behaviour. This has become a psychological phenomenon, where traders face cognitive distortions like selective memory, impaired rationalisation and gambler fallacy, according to a study published on Science Direct. Eye Health and Associated Disorders With the advent of electronic trade systems, traders across the world can be in-tune with global market developments and execute trades in seconds, with just a click. However, constantly analysing charts and looking for price reversals takes a toll on the eyes. Blue light, emanating from computer screens and mobile devices, can affect eyesight and lead to problems like migraine and nausea. It leads to age-related macular degeneration in the long-run. Dry eyes, fatigue, sore eyes and irritation are other symptoms of declining eye-health. Cataracts are also becoming highly prevalent among younger people. Sedentary Habits Sitting in one place for long periods of time has proven to be a significant health concern in recent years. For starters, lower back pain and muscle strain occur frequently. It also paves the way for increased weight gain. Obesity singlehandedly attracts various diseases. Researchers have found a significant relationship between a sedentary lifestyle and certain types of cancer, such as lung, endometrial and colon cancer, according to a study published in the Journal of the National Cancer Institute. An alarming fact that came across from the report is that even people who are otherwise involved in intense physical workouts are still at risk if they spend long hours sitting. How to Stay Fit for Successful Trading? The trading profession is stressful, and that stress alone can cause irreparable damage to the body and brain. The importance of stress-busting activities cannot be overemphasised here. Traders should engage in a 30-minute exercise routine every day to stay fit. This can include anything from a brisk walk to jogging or even strength training. Regular exercise keep our weight under control, releases endorphins in the body that help fight the negative effects of cortisol and increases blood circulation. Stress-relieving activities like meditation and yoga are also good for managing anxiety issues. Alongside a good fitness regime, it is important to ensure a healthy diet and not skip on meals. No matter how tight the schedule is, a well-balanced diet is necessary to staying in top form. All traders should make it a habit to take breaks on weekends, when the markets are closed. It is important to unwind and keep mental stability intact. Hobbies, and anything that falls outside the domain of the financial world, are a great way to de-stress. Weekends should be devoted to friends and families and other leisure activities. Regular check-ups become necessary after the age of 45. This should be considered a crucial exercise, especially for those with a genetic pre-disposition towards certain illnesses. Proactive healthcare can save many lives and expensive treatments. Even on the most hectic days, it is vital to take short breaks at regular intervals. This lowers eye-strain and gives the muscles a chance to stretch and get adequate blood supply. It is always wise to listen to the body. Optimal performance in trading won’t mean anything if major illnesses gain control of you in the long-run.
Liquidity providers in the financial markets are generally “market makers” or underwriters, who hold a substantial amount of a financial asset. Ideally, they bring price stability to the markets, by ensuring proper distribution of these assets to both retail and institutional investors. The foreign exchange market sees daily transaction volumes of over US$5 trillion. Its liquidity is unmatched by other capital markets around the world. So, what is forex liquidity? The Concept of Forex Liquidity Forex market liquidity can be defined as the ability of a valued financial instrument to be converted into currencies within a specific time period. The availability of liquidity providers in the form of big banks, foreign investment managers, multinational corporations, high net-worth individuals and hedge funds, makes the market deep and smooth. Traders are able to get in and out of positions quickly because there is high availability of currency reserves. This is desirable for every player in the market, since greater liquidity means lower spreads and costs of trading. As a result, price stability is ensured. The forex markets can usually absorb large orders, without affecting the price of any currency. An illiquid market would be volatile and have price gaps. Various events, such as unexpected news releases, economic reports, wars and political instability, can lead to liquidity issues in the forex markets too. This makes the role of liquidity providers very important, since they provide liquidity under all market conditions. They take on a substantial amount of risk and use the valuable information available to them to offer competitive spreads. “Tier-1” Liquidity Providers When a liquidity provider acts as a market maker, they are acting as both buyer and seller of an exchange rate or a given asset class. They literally try to “make a market” for currencies and other financial assets, while offering up their holdings for sale and actively buying simultaneously. In the currency markets, they take positions in currency pairs that can be offset by another market maker, or simply be adding to their books to be liquidated at a later point. Functionally, this bridges the gap between market players in a market that can support higher trading volumes. Long-term traders can buy and sell currencies, without having to wait for another similar investor to do to the same. Many forex market makers keep an eye on call levels and orders for clients, and execute market orders on their behalf. Large investment banks with big forex departments and commercial banking giants fall under the “Tier-1” level of liquidity providers in the forex market. They are considered the core liquidity providers, who can send orders to the markets at prices that best reflect the available information, along with the risks associated with transactions of holding a currency pair. Big commercial banks are hugely involved in big corporations that require extensive foreign exchange transactions on a regular basis. This makes them one of the largest liquidity providers in the forex markets. They have different business models, which makes them capable of servicing the market in a variety of ways. For example, banks can facilitate large transactions, while Proprietary Trading Firms (PTFs) optimise price discovery for clients. Examples of Tier 1 liquidity providers, who still remain highly active in the forex industry are Deutsche Bank, Morgan Stanley, UBS, Barclays, Societe Generale and Credit Suisse. Some of the clients of these providers include high net-worth individuals (HNWIs), smaller banks, large companies and hedge funds. “Tier-2” Liquidity Providers This is the second level of liquidity providers, who operate at the over-the-counter, inter-bank level. They are primarily market makers, who service clients from dealing desks. Most of these institutions are prominent forex brokers and commercial banking names, who serve retail clients. Almost 50% of all transactions in the financial markets are serviced by inter-bank liquidity providers, but small traders and companies cannot send their transactions directly to the banks, due to limited availability of technology and capital. Tier-2 providers quote buy and sell prices on currency pairs to both professional counterparties and non-professional counterparties who demand quotations through their company’s dealing desk. Through such transactions, they ensure proper architecture in the forex market, where there is always a buyer or seller present to fulfill the trade orders of retail clients. How do Liquidity Providers Make Money? Liquidity providers make the market smoother and robust to handle high trade volumes. But, what do they get in return? They receive compensation in the form of a differential between the bid and ask price of a currency pair. This is known as the dealing spread, and a provider charges it as a reward against providing liquidity as a service. Individual traders, unless extremely wealthy, will mostly likely use services from Tier-2 liquidity providers. The STP/ECN DMA broker will create the lowest possible spread, on the basis of quotations from Tier 1 providers, and add their own commission to the inter-bank spread data. These commissions are reflected on trading platforms. Alternatively, a broker can also provide the raw inter-bank rates to retail clients, which does happen in a few instances. Tier 1 liquidity providers are so big that their profits do not affect retail traders. Why is it Important to Choose the Right Liquidity Provider? Market depth is a term used to denote the amount of trade volumes that can be carried out at a given price level. Lower volumes are associated with prices close to the current rates, while the farther we move from these rates, the greater is the volume increase. Brokers who are connected to a large number of liquidity providers will have a suitable “market depth.” This means less slippage for traders. Slippage is a term used to quantify the difference in price of trade execution to that of entering a transaction. The amount of slippage ultimately adds to the cost of trade. The speed of a trading platform is also a factor in avoiding slippage. Thus, brokers who have partnered with high quality liquidity providers and robust trading terminals are usually preferred by retail clients.
There are many elements that come together to make for a successful trader. One is understanding the markets, and another is having access to excellent technology that supports fast execution and market research. A good balance of both factors is essential for success in the field. Thankfully, technology has seen significant advancements in the past few years, giving traders extensive security and flexibility to perform their job. An important part of the technology setup is the trading screen, where thousands of data points call for attention. For those who are involved in full-time trading, greater detailed access to on-screen information is necessary, since they are taking a lot of risk. It is also important for both good fundamental and technical analysis. Requirements for Effective Trade Monitor Set-up Trading monitors provide greater exposure to information, in contrast to smartphones and tablet screens. If one is using it full-time, they might as well take advantage of these features. For multiple-display systems, a strong graphics card is essential. Computer graphics card like Nvidia and Gigabyte, are powerful enough to support additional screens. You might also need adapters and good quality HDMI cables, DP to VGA cable and mini DP to DP cable. These will come in handy if your monitor is not compatible with your computer system. Another factor to consider is the refresh rate of the monitor. A higher refresh rate will ensure faster loading times. This is beneficial for traders to capture price changes at the right time. The number of monitors that you intend to connect depends on your trading style and research requirements, as well as the hardware support. High screen resolution is definitely an essential point to consider. Resolution higher than 1080p, such as a monitor with 4K HD features, will require a powerful graphics card. So, invest accordingly. But do remember that having multiple monitors is not a pre-requisite for successful trading; it could even create confusion. Next, you need a desk mount for the trade monitor set-up. It is important to be comfortable while you watch the screens for long periods of time. So, get something that helps achieve the right posture. Experts recommend monitor stands that are VESA compatible. These come with frames that have standard holes directly drilled into them. For a more unobstructed desk space, a wall mount could be ideal, although this is suitable for more advanced traders with their own office. There are USB monitors, which can be connected to laptops and serve as additional screens during travel. What is Needed on the Screen? Now, comes the vital aspect of making the screen useful for the actual job. The job includes comprehensive chart analysis, position monitoring, news alerts, market observation and incubator. It is wise to not overcrowd the screens with unnecessary charts and data tickers. An in-complete view could lead to loss of valuable trade opportunities. Trade terminals like MT4 or MT5 come equipped with highly customisable charts, with options to see even eight or more charts at the same time. It all depends on your trading style. For scalpers, 5-minute, 15-minute and hourly charts would be useful. Market timers, on the other hand, might prefer daily, weekly or monthly charts. The top panel on the screen might include important benchmarks, showing data regarding the Dow Industrial Average or Nasdaq indices. Bloomberg Anywhere is considered an industry standard for information, instantaneous executions and robust security features. Forex scanners, such as Finviz Elite and The TradeXchange, are known for quick news alerts and live audio features. The left side of the screen may contain market movers; the currency pairs that are surging or stocks that have been the greatest winners or losers for the day. The centre space should always be reserved for the primary timeframe of trading. The right side of the monitor can be used for the next timeframe chosen for trading. The centre right panel could also contain the summarised portfolio view of long-term positions. All these features are customisable and change from one terminal to other. On the whole, the trading screens should be well-organised, keeping in mind certain factors: - Intraday market actions should be visible easily, so that decisions can be made quickly. - Conditions that can lead to sudden price reversals, sell-offs or rallies should be highlighted. - In case of multiple charts, alarms should be added to notify in case the price crosses a certain level. - Having a chat room where you can gain quick inputs from colleagues or fellow traders. - Presence of widgets is good, since multiple tools can be organised on one chart in a clean and effective manner. Good Trading Monitors in the Market The market is full of powerful monitors with great contrast levels and crisp resolution. Here are some good options for forex traders: 1. LG 29UM68-P 29″ UltraWide IPS Monitor A wide 29-inch screen makes it easier to get a detailed view of charts and other functionalities at the same time. This IPS monitor, known for great colours and picture depth. The monitor also supports power conservation and can be connected to various systems. 2. Dell UltraSharp U2412M Known for its ergonomic features, this lightweight screen is suitable for traders on-the-go. It has good screen resolution and is wide enough to serve all purposes. Many connectivity options are included to provide flexibility to traders. 3. Dell UltraSharp 2709W This is a VA monitor, which accounts for a spectacular contrast ratio. This is a desirable feature for day-traders, who can monitor their positions even in natural daylight. It has wide-screen features, which is great for forex trading. 4. Acer Predator 34″ Curved Monitor This screen is curved and visible from multiple angles, combined with a great lighting system. It is a robust platform to monitor forex positions effectively and has multiple connectivity options and great colours. 5. ASUS 32” PA328Q Professional Monitor Unique eye-care technology, combined with TUV certified Flicker free features, reduce eye-fatigue and headaches for full-time traders. With a refresh rate of 76Hz and screen resolution of 3840×2160 pixels, it is one of the best trade screens in the market.
Proprietary or institutional traders have different needs to retail traders. Institutional traders work at the behest of big financial institutions, such as big banks, insurance companies, hedge funds or big corporates, making large investments that are often pooled into numerous portfolios. They have sophisticated technologies at their disposal and greater access to market information; innovative applications that connect them with price feeds from Tier-1 liquidity providers. They not only deal with large trade sizes, but also manage complex financial instruments. In order to deal with such financial instruments, they gain access to numerous high-function tools. With the advent of multiple online trading platforms, like MT4 and MT5, such tools are now available for retail traders as well. Economic Calendar This is a free tool that comes with platforms like MT4 and MT5 and allows traders to apply robust fundamental analysis to make informed trading decisions. The forex market is greatly impacted by news releases; the relative value of currencies is governed by country-specific economic conditions, interest rate differentials and market expectations. The tool shows the list of upcoming economic releases, along with their previous values and forecasted figures. For example, the release of the US non-farm payroll or the minutes of Federal Reserve meetings. With the ongoing Brexit negotiations, currencies like the euro and pound sterling are expected to see volatility ahead of March 2019. With the help of this tool, traders can set alerts around news releases and study the market parametres in the aftermath. Automated Trading Tools Specialised MT4 and MT5 applications, also called “trading robots,” are widely used by traders with institutional access. These tools can comprehensively analyse forex quotes as well as make suitable trades using them on behalf of the user. MetaTrader 5, especially, has thousands of applications that can be rented, downloaded or purchased from its marketplace. The MQL5 language, integrated in these tools, allows them to be used without any need for programming expertise. These trading robots, also known as Expert Advisors (EAs), can operate 24/7, based on rules and instructions set by the trader. This makes them highly desirable in volatile market conditions, like that of cryptocurrencies, where prices fluctuate heavily. They can perform instantaneous calculations and generate real-time signals on entry and exit points. Overall, they negate the aspect of human error and human emotions while trading. With the help of the MQL5 wizard, traders can develop their own EAs. Traders can also offer their programmes in return for a fee. Autochartist This is one of the most advanced technical analysis tools that can monitor thousands of forex instruments 24/7 to signal opportunities. These signals can be categorised according to the probability of their success. The good thing about this tool is that traders can try it for free for a specific period of time, before making a decision to purchase it. Autochartist contains many useful features, such as: - Autochartist PowerStats: Checks the expected price levels of the chosen currency pairs down to the hour. Forex traders can set stop-loss and take-profit levels after careful market assessment of volatility and risks. - Forecast Zones: Provides visual representations of market trends and changes in direction. It scans the market comprehensively and notifies traders regarding emerging trends or breakouts, if any. - Integration with MT4: The tool can be easily dragged and dropped down to the current trading platform, with no requirement of signing-in each time. - Identifying Chart Patterns: The tool can cleverly interpret various key levels and chart patterns, such as Fibonacci lines and harmonic patterns, and provide visual and audio alerts for them. Fibonacci Tools Analysing price charts of forex instruments forms an important part of technical analysis. Platforms like MT4 and MT5 have over 35-40 technical indicators and graphical objects, which can be put to use for this. They can also be customised according to the trader’s specific trading style or strategy. The MetaTrader “code base” contains source-codes of many applications that can be downloaded for free. In addition, the “market” also contains thousands of ready-to-use applications. One such tool is the Fibonacci indicator. Fibonacci Retracement levels are where currency support/resistance levels can often be identified. These levels are prime zones where reversals might take place. The tool connects trend lines between two extreme price levels, troughs or peaks. After that, nine horizontal lines intersect the trend line at the Fibonacci points, 0.0, 23.6, 38.2, 50, 61.8, 100, 161.8, 261.8, and 423.6. The tool shows the price level at each of these points. The Fibonacci levels and other parametres, such as date and value, can be customised in the “Settings” option of the tool. Other tools, like Fibonacci Channels, are used to identify ascending and descending trends in the market. Fibonacci Time Zones show places on the chart where significant price changes can take place. Strategy Tester Customised institutional grade trading platforms come with strategy testers that allow traders to evaluate the efficiency of their EAs. It can also identify the best input parametres for an automated trading tool, before using it on the live markets. Multiple currency pairs are studied, including their historical price levels, correlation tendencies and price trends, in order to gain insight into how well a trading strategy will pan out in the near future. There are modes that can even detect and take into account network latency issues, to see how fast trading requests can get fulfilled under live market conditions. Strategy testers usually provide graphical interpretations of their results, in the form of expected payoff ratios, profit/loss percentage ratios or risk/reward ratios. With such a huge amount of statistical data, a trader can plan out moves in advance. Traders can also connect to additional computers in the vicinity to accelerate the strategy optimisation process. MT4 Accelerator Pack This package offers advanced institutional grade tools for decision assistance, customised alarms, message broadcasting facilities and market data. Some of its appealing features include: - Sentiment Monitor: Shows the number of traders who have long or short positions. Basically, shows market sentiment, based on real-time open positions. - Session Map: Quick analysis of economic conditions in different global markets. It also provides markers for future news events. - Correlation Trader: Compares correlations between different currency pairs to identify emerging trends and price reversals. - Excel RTD: With simple formulae, real-time account, ticker and price data can be integrated into excel. Traders with basic Excel knowledge can use this tool. - Market Manager: Offers an overview of all account and trading activities from a single window, saving time and energy. With evolving technology and trading tools, the markets are becoming increasingly transparent and secure. Traders need to carefully evaluate the tools before using them in real-market conditions. Demo accounts are ideal for this.
We often come across news of mergers and acquisitions, where one company acquires a significant equity stake in another. Equity stake represent the percentage of the business owned by an individual or a company, through the purchase of shares of that business. Shareholders owning a significant equity stake often have a say in the organization’s policy making and some level of control in the financial decisions too. This concept is often used by start-ups to incentivise their employees, giving out equity stakes in their companies to employees rather than higher salaries. Creditors can also acquire equity stakes in organizations, in lieu of debt. In trading, equities are one of the principal asset classes in the global financial markets. Before we move on to equities trading, let us understand the concept in detail. Difference between Equity Stake, Shares and Stocks In most cases, these three terms usually are synonymous with each other, but there are some specific differences. Shares Each unit of a stock issued by a company is called a share. This represents one unit of ownership in the organisation. Shares can also represent other forms of investments, such as mutual funds. Shareholders are always stakeholders in a publicly traded company, but stakeholders need not always be shareholders. Stakeholders do not necessarily own the company’s stock. Two types of shares exist – common stock and preferred stock. - Common Stock: These are shares usually traded on major exchanges, with their price and dividend pay-outs varying over time. The values of these shares are tied to a company’s profitability. - Preferred Stock: Owners of preferred stock are entitled to receive a fixed dividend amount at regular intervals. The value of such shares is tied to the dividend amount and the company’s credit rating. Stocks Broadly, there are two types of investments that a company can opt for in order to raise capital –debt financing and equity financing. In the latter case, companies issue stock, which are basically securities representing ownership in the firm. Stockholders have a claim on the company’s assets and earnings when they purchase such stock. They are also rewarded with quarterly or annual dividends in return. Traders speculate on stock prices, wherein if a company’s stock price goes up, the trader can make a profit by selling at the increased price. Stakes As we said earlier, stockholders or shareholders are always stakeholders, and that stake represents the percentage of the company that they own. You may be a bond holder, which means you will have much to gain if the company performs well. A bond holder is also a stakeholder. These terms often overlap and are used interchangeably. In short, all shareholders are equity holders, but not all equity holders are shareholders. Not all businesses issue shares of their stock, but it is possible to have ownership interest in them. What Exactly is a Stockholder’s Equity Stake? This can be explained with the help of a simple accounting equation: Assets – Liabilities = Equity So, if a company uses up all its assets to meet its debt liabilities and other payment obligations, the amount that is left over is a shareholder’s equity. Assets here can include land, buildings, machinery, capital goods and inventory, and earnings. One can calculate the equity of an organisation after assessing the value of these assets at market price. The stockholder’s equity comes from two sources: 1. Money invested in a company initially, along with added investments. Companies issue shares in the primary market to raise money. 2. Retained earnings reserves, which a company builds up over time. This is the net income from business activities. In successful companies, this retained earnings figure often surpasses the initial investment made. Equity Trading in the Primary Markets These are places where shares are issued by companies and traded on exchanges or Over-The-Counter (OTC). A vital part of the global economy, these markets strengthen companies by allowing them access to investors, in order to raise money for business activities. In return, the investors gain a portion of ownership in the organisation and are able to benefit from dividends, based on the company’s yearly performance. Most equity trading takes place on stock exchanges around the world, such as the NYSE and NASDAQ, where the former is a physical stock exchange, while the latter is a virtual trading market. How Do Traders Pick the Right Stock? Traders try to ascertain the fundamentals of the share value before investing in a company’s stock. This depends on the trading style and investment goals to a great extent. Investors who are interested in capital preservation tend to look for low-growth companies in the utilities sector. Those who do not have much appetite for risk-taking tend to invest in stable blue-chip companies. Investors looking for appreciation of their capital reserves usually look at stocks with ranging market caps. There are quite a few factors to consider while choosing a stock to invest in: 1. Invest in an industry that you know about. This means that the company’s and the stock’s performance will be easier to understand for you. 2. Choose companies with established branding or ones that have strong emerging brands. Branding differs according to industry. For example, a company engaged in diamond mining will not follow the branding process used in the retail industry. Overall choose a trusted name, which carries weight. 3. Strong past performance, even in the most volatile market conditions. It is vital to stay updated with current market news and opinions on the company that you are looking to invest in. Searching for stock analysis articles and financial media stories is a great way to go about it. ETFs also tend to a good way to track the performance of a particular sector, which in turn can help stock picking. Here are some things to evaluate in a company’s balance sheet: - P/E Ratio - Debt to Equity Ratio - Inventory Turnover Ratio 4. Focusing on companies that pay out regular dividends. This indicates a stable financial structure, stable internal management and stable performance. But, not every company pays out a dividend, so this factor doesn’t hold true for all stocks. Also, extremely high yields often signal future instabilities.
Trading can be a very risky venture, especially if you are just getting started. Traders are always looking for ways to lower their risk in the market. One way traders manage risk is simply by choosing the right trading system or method for their personal level of risk tolerance. A trader might use a day trading strategy, some scalp trading methods, swing trading techniques, or investment strategies. Each of these trading methods carry a different level of risk and required skill. For instance, day trading systems can carry less risk than swing trading or investing strategies. The reason being that day traders rarely carry an active trade overnight. Day traders limit risk by limiting the time in which their investment capital is exposed to the market. That being said, is day trading less risky than swing trading or investing? Not necessarily. Trading on shorter time frames always adds noise to your technical analysis; the shorter the time frame, the more likely the market will show changes in price due to small investors getting in or out of positions. Therefore, the shorter time frames inherently have more noise than the longer time frames (4 hour, daily, weekly, etc…), and it takes a more experienced trader to be consistently profitable in those conditions. In other words, each trading methodology has its own strengths and weaknesses. None are really superior to any other, and some methodologies are better for beginners than others. This concept is important in understanding the strengths and weaknesses of scalping techniques. Are Scalp Trading Methods Less Risky? Is scalping really any safer than day trading or any other trading method? The whole appeal of scalping methods is that traders can limit their time in the market (risk) as much as possible with such techniques, however, these techniques generally require a more experienced trader in order to become profitable. When scalping, traders are generally not concerned about which direction the market is heading, because they are only concerned with taking very small profits many times. A scalper might use the crossover of two moving averages as an entry and get into a position, only to close the position after gaining a few pips. In fact, scalpers often exit positions after gaining as little as 1 pip. To be profitable with a scalp trading method, a trader must take many trades, “scalping” a few pips at a time. This increased trading frequency comes with its own problems. Overcoming Your Broker’s Spread Scalpers have to overcome the spread over and over again, whereas day traders might only have to overcome the spread a few times each day. Therefore, the spread becomes a major expense to a scalper. Example: Let’s say you only take 10 scalping trades per day on average, and your average spread is 2.5 pips. In one trading year (if you traded every day), you would have to overcome 6,500 pips just to cover your broker’s spread. In that same scenario, a day trader that takes 3 trades per day on average would only have to earn 1,950 pips to cover the broker’s spread during that same time period. As you can clearly see, there is a huge difference in spread cost (or business expense) between these two trading methods. In the above example, our scalper only took an average of 10 trades per day. The reality is that most scalpers take more than 10 trades per day; many take hundreds of trades each day. Risk to Reward Ratio When using scalp trading methods, a trader is not concerned with the typical risk to reward scenarios. For instance, scalpers don’t shoot for 1:2 risk/reward targets. As mentioned earlier, scalpers close trades with as little as 1 pip profit. What this generally amounts to is losses that are bigger than average wins. The key to scalp trading methods is to win often, and this point alone is why inexperience traders often fail to make scalping profitable. Conclusion: Scalping can provide the best, lowest-risk trading scenarios for an experience trader, however, amature traders will find it difficult to remain profitable using scalp trading methods. Also, choosing a broker with low average spreads will greatly benefit a scalper, which is why ECN’s are so popular with experience scalpers.