In this article we will discuss the relationship between market cycles and forex through a dialogue between a beginner and a successful trader. The successful trader is ST, while the beginner is B:
B: What is the business cycle and how can I use it trade forex?
ST: Business cycle is the name given to the growth and contraction phases of economic life. It is one of the most important determinants of economic trends; no trader can be called a trader without understanding the inevitable nature of cycles. Since it is one of the major drivers of all trends and economic events on global scale, it plays a very important role in determining currency prices and their trends.
B: How does the cycle determine forex trends?
ST: On the most basic level, the cycle is the most important driver of money supply growth. Since money supply is closely related to currency values (the more there is of a currency, the less its value will be) forex trends also respond to cyclical developments. But this is just a tiny portion of the power of the business cycle. The nature of the cycle also defines such variables as unemployment, consumer demand, industrial production, availability of credit, and these variables in turn lead international capital to shun or favor a currency.
B: And how does that happen?
ST: When a nation is going through the boom phase of the cycle, international capital will flow there in search of better returns on investment, through channels like foreign direct investment, or international loans. Those will create inflows of capital, and cause the nation’s currency to appreciate. Conversely, when a nation is going through the bust phase of the cycle, international capital will shun it, dry up forex flows, and cause the currency to depreciate. As with Newton’s First Law, these developments will keep going on until they’re exhausted through market developments, or are contradicted by government action.
B: How can I benefit from this knowledge?
ST: You can short the currencies of nations that are going through the bust period, and long the currencies of those that are just entering the boom period, with the caveat that those nations that are net-creditors (external assets are more than liabilities) will see their currencies appreciate, regardless of the their domestic economies.
B: Is there a way to anticipate the beginning of these periods?
ST: The boom and bust phase of the cycle can be initiated by any sector of the economy. When the problems begin among financial sector firms, these will contract credit to overcome their own problems. When the troubles arise in another sector of the economy, the banking sector will contract credit in anticipation of defaults and bankruptcies. In either case, the result is contracting credit, and this can be observed, usually before the crisis begins, in Central Bank statistics, corporate loan rates, and news reports that speak about layoffs and bankruptcies. Of course if the phase is a boom, the developments will be in the opposite direction, with expansion replacing contraction, but the process is similar. The boom and bust both develop through contagion; as the dynamism, or rot in one sector spreads to others, general economic activity is buoyed or suppressed, and the boom or bust is underway.
B: All that theory is good, but where do I actually look to see the beginning or end of these phases?
ST: There are two types of indicators for that purpose, lagging, and leading. Unemployment numbers, central bank policy actions, bankruptcies are all lagging indicators for a bust, and cannot be used to predict anything. The best leading indicator is supplied by careful analysis of the economy and identification of the areas where the greatest imbalances accumulate. I know that this will be difficult for you, so you’re invited to seek your leading indicators in the loan surverys of the central banks, as we had discussed before, and delinquency statistics. These are not exactly leading indicators (since they also respond to some already existing malaise in the economy) but they are close to being such, because banks are one of the earliest actors in any economy in feeling the pain of impending recessions. They are the first to hear of loan delinquencies, and loan delinquencies lead to credit contraction, which leads to contagion, as we discussed, and a deepening crisis.
Another important indicator for anticipating a recession is the status of inventories. GDP growth that is mostly created through inventory accumulation is one of the safest signs of an impending recession. Firms have to liquidate inventories, and if they find out that they cannot do so through patience, they will simply begin to reduce capacity and eventually eliminate jobs.
For predicting the boom phase, most of the above data can be useful, but for a healthy and long lasting boom all of them must eventually be pointing in the same direction. For instance, first the central bank rates must come down, then unemployment growth must level off, industrial production must begin to strengthen, and so forth. Usually, central bank rate reductions, followed by easier credit conditions, are some of the more reliable indicators for predicting a boom, but a financial crisis may make these indicators irrelevant. In such a case, the trader must focus on the real economy, and unemployment, to get an idea on the stage of the economical development.
B: So you say that I keep my eyes on the financial sector always, and on inventory statistics for detecting a bust, and for a boom I wait for a number of areas of the economy to find vigor and strength.
ST: Yes. This is not the best way of anticipating the circles, but at least you will never be in denial when a recession strikes.
B: How does globalization impact the nature of cycles, and what is the implications of this for currency trading?
ST: Globalization causes the booms and busts to be synchronized across economies which results in the phases of the cycle both being stronger and deeper than it was in the past. Before the end of the cold war, for example, a large part of the world would be relatively immune to the effects of speculative bubbles in the western world due the nature of socialist economies. Before that era, regional and national economic activity was always somewhat isolated from the world at large as national authorities sought to maintain a degree of economic independence. As globalization brought all these phenomena to an end, we now have global booms and busts. What this means for the forex market is that while volatility dissipates to extremely low levels during the boom phase, it rapidly skyrockets during the bust, and makes leverage an even more sharper sword than it usually is. So in that sense, in a globalized economy the currency trader can increase leverage during the boom phase, while lowering it significantly during the bust.
B: So if booms and busts are correlated on a global scale, how can I find abnormalities in the market to exploit?
ST: This is not difficult, because the cycle is driven through the accumulation of imbalances at the micro-level, such as that between a bank and a mortgage borrower, right up to those at the macro-level where some nations run forex surpluses, while others suffer from deficits. Thus, at the end of a bust phase nations with sound and conservative economic policies will have absorbed too much capital, which then flows to risky assets in the boom phase. Conversely, towards the end of a boom phase, too much risk taking will have caused nations with weaker fundamentals to possess either a swollen real sector, or an artificially expensive currency, which are then normalized in the bust. The cycle readjusts these imbalances, and the trade opportunity lies in the exploitation of this correction.
B: You mean that during the bust you sell the currencies with high deficits and non-conservative policies, and during the boom you sell the sounder ones which cannot create enough activity to satisfy the risk appetite of investors and speculators.
ST: Booms and busts are correlated across the globe, but that doesn’t mean that all currencies behave in the same way. Currencies of capital importers behave in the opposite direction to those of capital exporters during both the boom and the bust phases of the cycle. The trader can exploit this divergence for profits, for example by selling the Euro (current account balance, prudent fiscal policies), and buying the Turkish Lira (real estate bubble, external dependency, large deficits )during a boom, and doing the opposite during the bust.
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Saturday, June 20, 2009
6. Compare the results, execute the trade
After examining the various scenarios presented by the charts, and determining on which of them are actionable, the trader will compare them in terms of credibility and profit potential (for example, how extreme are the indicator values, how much profit or loss will be generated in case a take- profit or stop-loss order is realized?) Once that is done, he will pick the trade that offers the highest returns with the lowest risk on the basis of the technical scenario that is the most contrarian.
What the above implies is that, when a trend follower trades, he will wait for the corrections, acting on a contrarian basis to the short term movement, while conforming to the main trend. When he desires to bet against the trend, he will await the most extreme valuations generated by the trend, and when the momentum is highest, he will make a contrarian bet at the first credible reversal.
A forex trading strategy is created by using many different types of price phenomena that are manifested on many different kinds of indicators. We will examine strategies later, but at this stage let us examine the signal types that are used to create them.
What the above implies is that, when a trend follower trades, he will wait for the corrections, acting on a contrarian basis to the short term movement, while conforming to the main trend. When he desires to bet against the trend, he will await the most extreme valuations generated by the trend, and when the momentum is highest, he will make a contrarian bet at the first credible reversal.
A forex trading strategy is created by using many different types of price phenomena that are manifested on many different kinds of indicators. We will examine strategies later, but at this stage let us examine the signal types that are used to create them.
5. Perform the analysis
After deciding on the signals and their meaning, we will perform our analysis by identifying actionable signals, and deciding on capital allocation in light of proper money management techniques. When analyzing the data we must make our utmost exertion to ensure that we focus on signals relevant to our selected period and trading plan. This stage of analysis will involve the separation of wheat from chaff, and data from noise.
4. Seek the signals
Once the technical tools are setup, we must now seek the signals that will show us the trade opportunities created by investor sentiment and temporary imbalances in the supply and demand for a currency pair. The signals that we seek are the ones created by the interaction between a number of indicators, such as that between moving averages, various oscillators, or between the price and the indicator. Our purpose is to confirm our ideas with various aspects of technical analysis. If there’s an oversold or overbough level, we will confirm it with a divergence/convergence. If there’s a breakout, we will seek to ascertain it with studies of crossovers.
We will examine the signals in greater detail a bit later, but in summary they are channels, crossovers, divergence or convergences, breakouts, consolidation patterns, the various price patterns like triangles, flags, and head and shoulders. We will keep our indicators simple, but we will make sure that the signals generated by them are examined and exploited to the full, allowing us to draw a complete picture of the price action.
We will examine the signals in greater detail a bit later, but in summary they are channels, crossovers, divergence or convergences, breakouts, consolidation patterns, the various price patterns like triangles, flags, and head and shoulders. We will keep our indicators simple, but we will make sure that the signals generated by them are examined and exploited to the full, allowing us to draw a complete picture of the price action.
3. Refine the periods, and other inputs
Upon deciding on the technical tools, the analyst must decide on the periods, and ranges for which values must be supplied to the software. Today’s traders have many advantages over those in the past, but diligence and patience may not be one of those. As we’re so used to having everything automated and performed by the computer with no questions asked, many don’t even bother to tinker with the minutiae that can in fact be all the difference between success and failure for the trader’s analysis.
Thus, before going any further, the trader must check which periods, which values provide the pattern that is most fitting for the price action on the chart. For example, for the RSI, will we pick a period of 14, 10, or 7 for the chart we examine? Or what will be the periods of the moving averages that constitute the MACD indicator? These can only be answered through trial and error, and for each price pattern, a different value may be necessary.
Thus, before going any further, the trader must check which periods, which values provide the pattern that is most fitting for the price action on the chart. For example, for the RSI, will we pick a period of 14, 10, or 7 for the chart we examine? Or what will be the periods of the moving averages that constitute the MACD indicator? These can only be answered through trial and error, and for each price pattern, a different value may be necessary.
2. Picking the technical tools
On the basis of the criteria discussed in the previous item, we must pick the appropriate technical tools for the chart we examine. If the market is trending, there’s little point to using the RSI. If it’s ranging, the moving averages are unlikely to be of much use. If the underlying currency pair is strongly cyclical (for example, if the currency is issued by a commodity exporting nation) the commodity channel index could be a good choice. If it is highly volatile, smoothing out the fluctuations with moving average crossovers could be very beneficial for identifying the trend.
Of course the list can be extended. The trader must refine his approach to trade over time by deciding on the kind of indicators which he understands best, and then combining them later to form a simple and concise method.
Of course the list can be extended. The trader must refine his approach to trade over time by deciding on the kind of indicators which he understands best, and then combining them later to form a simple and concise method.
1. Identify the type of the market and the type of the trade..
Needless to say, the first step in technical analysis must be the identification of the market with which the trader is interacting. After that he must determine the time period of the trade he will enter. What kind of charts will the trader use for his trade? Will it be a monthly trade, or an hourly one? If it’s a monthly trade, there’s no need to worry about the hourly changes in the price, provided that the strategy regards the present value as an acceptable monthly entry or exit point. Conversely, if the trade is for the short term, the trader may desire to examine charts of longer periods to gain an understanding of the bigger picture which may guide him with respect to his stop loss or take profit orders.
The trader will use trend lines, oscillators, and visual identification to determine the type of market that the price action is presenting. Strategies in a flat, ranging, or trending market are bound to contrast strongly with each other, and it is not possible to identify a useful strategy without first filtering the tools on the basis of the market’s character. Once this is done, and the time frame of the trade is determined, the second stage is -
The trader will use trend lines, oscillators, and visual identification to determine the type of market that the price action is presenting. Strategies in a flat, ranging, or trending market are bound to contrast strongly with each other, and it is not possible to identify a useful strategy without first filtering the tools on the basis of the market’s character. Once this is done, and the time frame of the trade is determined, the second stage is -
How to create a forex strategy based on technical analysis?
Technical strategies aim to predict future prices on the basis of past developments. All that the technical analyst is interested in is the price, and news, or data have no bearing on his decisions. In this article we will examine some of the basic concepts behind technical strategies, and will attempt to summarize the main tools used by technical traders in braking down price patterns.
As we noted technical analysis chooses to ignore everything except the price in its decisions. A technical strategy will usually involve several phases, each clarifying some aspect of the price action, until a credible entry or exit point is determined. The phases for this are.
As we noted technical analysis chooses to ignore everything except the price in its decisions. A technical strategy will usually involve several phases, each clarifying some aspect of the price action, until a credible entry or exit point is determined. The phases for this are.
Conclusion
The best choice for the beginner is the equity stop. During the learning process, the trader can concentrate on bettering his understanding of the markets without worrying about excessive losses. Once the trader gains a good understanding of market dynamics, and is able to form and implement his trading plans, the equity stop will quickly lose its attractiveness.
The best method for using the non-price stop orders is combining them with a wide equity stop which will serve as a final safety precaution in case the price action becomes too dangerous. For instance, a trader can long the EUR/JPY pair and hold it indefinitely until the VIX registers a value above 35, where a v9olatility stop would be placed. At the same time he will protect himself from extreme, and unexpected swings by placing an equity stop at 5-7 percent of total equity. Thus, unless a very large price swing completely overruns the main criterion for the stop loss order, and triggers the equity stop, the trade would be maintained indefinitely.
Needless to say, every trader will have his own choices on stop loss orders. And we would like to conclude this section by noting that the key to a successful stop-loss order is a disciplined risk management strategy, and everything else is just detail.
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The best method for using the non-price stop orders is combining them with a wide equity stop which will serve as a final safety precaution in case the price action becomes too dangerous. For instance, a trader can long the EUR/JPY pair and hold it indefinitely until the VIX registers a value above 35, where a v9olatility stop would be placed. At the same time he will protect himself from extreme, and unexpected swings by placing an equity stop at 5-7 percent of total equity. Thus, unless a very large price swing completely overruns the main criterion for the stop loss order, and triggers the equity stop, the trade would be maintained indefinitely.
Needless to say, every trader will have his own choices on stop loss orders. And we would like to conclude this section by noting that the key to a successful stop-loss order is a disciplined risk management strategy, and everything else is just detail.
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Event Stop
Fundamental analysts do make use of technical tools, if only for determining the trigger points for a trade. Take profit, and stop loss orders are used by almost every trader in the world, and its is unthinkable that a serious analyst will not have a condition, at least in mind, for closing an open position, however convinced he may be of its ultimate validity.
But fundamental analysts are not limited to technical tools and the price action for determining when to exit a trade. The event stop that we would like to discuss here is a tool that the trader can use to determine a trade’s exit point.
When using the event stop, the trader will ignore the price action for the most part (and will use low leverage), and will only close a position in the red when the scenario he had pictured in his mind becomes contradicted by events. For instance, a trader is anticipating that Bank A will be nationalized by the authorities of Nation X, and he expects that this will lead to X’s currency depreciating against its counterparts. In consequence, he shorts it. He will refuse to close the position until authorities confirm and clarify, in a solid and unmistakable fashion, that they will refuse to nationalize Bank A. In the meantime, he will be willing to put up with all the rumors, extreme swings, and short term fluctuations in the market without worrying about the unrealized profit or loss in his account.
As we mentioned at the beginning, the event stop is for those traders who know what they do, and who possess the track record, the intellectual background, and the confidence to use it. But do not take our word in order to evaluate your own skills; you should know yourself better than anybody else, and if you believe that you understand the economic dynamics of the era, and can defend your claim in your trading activities, you will be perfectly capable of using the event stop
But fundamental analysts are not limited to technical tools and the price action for determining when to exit a trade. The event stop that we would like to discuss here is a tool that the trader can use to determine a trade’s exit point.
When using the event stop, the trader will ignore the price action for the most part (and will use low leverage), and will only close a position in the red when the scenario he had pictured in his mind becomes contradicted by events. For instance, a trader is anticipating that Bank A will be nationalized by the authorities of Nation X, and he expects that this will lead to X’s currency depreciating against its counterparts. In consequence, he shorts it. He will refuse to close the position until authorities confirm and clarify, in a solid and unmistakable fashion, that they will refuse to nationalize Bank A. In the meantime, he will be willing to put up with all the rumors, extreme swings, and short term fluctuations in the market without worrying about the unrealized profit or loss in his account.
As we mentioned at the beginning, the event stop is for those traders who know what they do, and who possess the track record, the intellectual background, and the confidence to use it. But do not take our word in order to evaluate your own skills; you should know yourself better than anybody else, and if you believe that you understand the economic dynamics of the era, and can defend your claim in your trading activities, you will be perfectly capable of using the event stop
Margin Stop
The margin stop is not really a stop loss order, but the absence of it. In this case the trader will let his account absorb the unrealized losses until a margin call is triggered, and a large part of the account is gone. The margin stop is a sign of indiscipline and lack of insight, because a diligent trader will always predetermine the conditions that will lead to the closing and liquidation of a position. Since not even the brightest analyst is capable of predicting the future with any certainty, lack of a stop loss order is an indefensible practice.
Notwithstanding the previous, the margin stop is a popular choice among many traders who are unable to remain calm in the face of the great emotional pressures of trading. It is only viable under really low leverage such as 2:1, and even then a margin stop would not be the best choice. At much higher leverage, the margin stop is completely indefensible, and should be avoided altogether
Notwithstanding the previous, the margin stop is a popular choice among many traders who are unable to remain calm in the face of the great emotional pressures of trading. It is only viable under really low leverage such as 2:1, and even then a margin stop would not be the best choice. At much higher leverage, the margin stop is completely indefensible, and should be avoided altogether
Volume Stop
When the trader expects an ongoing trend to be reversed or invalidated subsequent to a change in volume, a volume stop maybe appropriate. While volume statistics are not available for the forex market, positioning as depicted by the COT report can be used for establishing this type of stop. For utilizing the order, the trader determines a percentage value on futures positioning above or below which the position must be liquidated, depending on market conditions and the nature of the order. In the same context, other types of data can also be used to generate a stop loss trigger point. A particular put/call ratio, or option risk reversal value may all be chosen to provide the equivalent of a volume stop in the stock market.
In example, let’s consider a trader who opens a short position in a carry trader pair, confirming his trade by developments in the stock market. His expectation is that the recent rise in the stock market indexes (and the corresponding rise in the carry pairs) occurred on low volume, and will soon be reversed in the absence of new money flows. Consequently, he places his stop-loss at a volume level which, if reached in a rising market, will invalidate the starting premise, and cause the position to be liquidated. When this occurs, and volume rises above the preconceived level, the trader will close his short position in the carry trade pair
In example, let’s consider a trader who opens a short position in a carry trader pair, confirming his trade by developments in the stock market. His expectation is that the recent rise in the stock market indexes (and the corresponding rise in the carry pairs) occurred on low volume, and will soon be reversed in the absence of new money flows. Consequently, he places his stop-loss at a volume level which, if reached in a rising market, will invalidate the starting premise, and cause the position to be liquidated. When this occurs, and volume rises above the preconceived level, the trader will close his short position in the carry trade pair
Volatility Stop
A volatility stop depends on volatility indicators, such as the VIX for determining the exit point for the trade. As such, market panics and shocks will cause the order to be executed, but mere price fluctuations in the currency market which lack their counterpart in other asset classes will be ignored for the most part. The trader who utilizes a volatility stop expresses the opinion that unless a major, unexpected shock hits the market, his position should be held regardless of the behavior of the markets. This is a more risky strategy than the equity stop, but can be profitable and valid depending on market conditions and the economic environment. In general, it is doubtful that a volatility stop can be very useful in a very nervous and volatile market. But it could be very helpful in maintaining a long-term position where risk perception is low.
The volatility stop is sensitive to prices, but only in an indirect manner, and its nature is similar to the chart stop. It is useful for eliminating very short term distortions from our analysis, and allows us greater resilience in the face of noise in the data.
Volatility may fail to react to market swings. Sometimes a large fall in the market has no equivalent rise in the various volatility gauges. Similarly, volatility can at times rise without any obvious corresponding price action. Consequently, a volatility stop (and similar stops based on non-price data) can be triggered even before a trade is in the red. All these must be kept in mind if the trader decides to use this type of stop order. a
The volatility stop is sensitive to prices, but only in an indirect manner, and its nature is similar to the chart stop. It is useful for eliminating very short term distortions from our analysis, and allows us greater resilience in the face of noise in the data.
Volatility may fail to react to market swings. Sometimes a large fall in the market has no equivalent rise in the various volatility gauges. Similarly, volatility can at times rise without any obvious corresponding price action. Consequently, a volatility stop (and similar stops based on non-price data) can be triggered even before a trade is in the red. All these must be kept in mind if the trader decides to use this type of stop order. a
Chart Stop
In a chart stop, the trader will place the stop loss order not at a price point, but at a chart point which may be static or dynamic. For instance, a stop loss order may be placed at a fibonacci level, which would be a static value. On the other hand, the trader may use an API (an automated trading system), or mentally prepare himself to close the position if a technical event, such as a crossover, a breakout, or divergence occurs, which would constitute a dynamic stop-loss point. In all these cases, technical analysis generates the triggers and determines the price where the position must be closed.
The chart stop is more flexible and reliable than a direct equity stop, because it adjusts to price action and volatility, and is therefore somewhat independent of the random movements of the price. The problem with the chart stop is twofold. First, the technical indicator used to generate the signals may fail to capture the change of the market trend, resulting in large losses. The other, and obvious problem is related to the indirect character of the stop-loss mechanism. Because the order is independent of the price, it may not be able to cut losses as effectively as a direct equity stop, and larger than expected losses may materialize as a result
The chart stop is more flexible and reliable than a direct equity stop, because it adjusts to price action and volatility, and is therefore somewhat independent of the random movements of the price. The problem with the chart stop is twofold. First, the technical indicator used to generate the signals may fail to capture the change of the market trend, resulting in large losses. The other, and obvious problem is related to the indirect character of the stop-loss mechanism. Because the order is independent of the price, it may not be able to cut losses as effectively as a direct equity stop, and larger than expected losses may materialize as a result
Equity Stop
An equity stop is one where the position will be closed in case the total equity in an account falls below a certain value. A stop loss at 2 percent of total equity is generally regarded as a conservative strategy, while the maximum is 5 percent for most money management methods. Thus, to give an example, a 1000 USD account would have the stop loss for an open position at the point where to the total equity would fall below 980 USD.
Both the disadvantage, and the advantage of the equity stop is its inflexibility. The equity stop provides a very solid criterion for deciding on the success or failure of a single trade, as there’s no way of being mistaken about an account in the red. On the other hand, the same inflexibility may prevent the trade from functioning as expected. The markets are volatile, and a trade that has a perfectly valid cause behind it may yet be invalidated by the random fluctuations that are not predictable.
Another important problem with the equity stop is its inability to prevent a string of losses. For instance, when the trader closes a position at a two percent loss, there’s nothing that will prevent him from opening another position in the same direction (buy or sell) a short while later, if the causes that justified the first trade are still in place. For instance, if the trader enters a sell order when the RSI is above 80, and consequently the stop loss is triggered, and the position closed, there’s little that will prevent the same events from being repeated if the price action repeats the same movements. In order to avoid this pitfall, the trader can tie the stop loss point to a non-price factor, and the rest of this article discusses such scenarios.
Both the disadvantage, and the advantage of the equity stop is its inflexibility. The equity stop provides a very solid criterion for deciding on the success or failure of a single trade, as there’s no way of being mistaken about an account in the red. On the other hand, the same inflexibility may prevent the trade from functioning as expected. The markets are volatile, and a trade that has a perfectly valid cause behind it may yet be invalidated by the random fluctuations that are not predictable.
Another important problem with the equity stop is its inability to prevent a string of losses. For instance, when the trader closes a position at a two percent loss, there’s nothing that will prevent him from opening another position in the same direction (buy or sell) a short while later, if the causes that justified the first trade are still in place. For instance, if the trader enters a sell order when the RSI is above 80, and consequently the stop loss is triggered, and the position closed, there’s little that will prevent the same events from being repeated if the price action repeats the same movements. In order to avoid this pitfall, the trader can tie the stop loss point to a non-price factor, and the rest of this article discusses such scenarios.
What kind of stop-loss order should a trader use?
In this article we will discuss the various ways to implement a stop loss order. Every trader who has had dealings in any of the financial markets is familiar with placing and executing a stop loss order, but many are mistaken that a stop loss order is always numerical. On the contrary, there are many traders (even professional hedge fund managers) who use what is colloquially termed a “mental stop” which stop is a stop loss point determined by factors other than the price, such as events, volatility, volume, option positioning, or any other comparable data. Such a stop is no less valid than a numerical one, and certainly no less effective, but one does need a lot more discipline to execute it successfully.
The great advantage of a non-numerical stop-loss order is its partial immunity to price swings. If the trader has confidence in his analysis, and is satisfied that standing firm in the face of market volatility is sensible and acceptable given the major dynamics and currents in the market, maintaining positions with non-numerical stop loss orders can be advisable and lucrative. In order to manage the inevitable large swings in account value, professional managers will implement hedging strategies in addition to money management methods, to control and minimize the volatility of the portfolio. Thus, even if the mental stop triggers a large drawndown in our position, we can minimize the effect on the portfolio through diversifying and distributing the risk among various currency pairs.
Let us examine the various ways of implementing a stop-loss order now.
The great advantage of a non-numerical stop-loss order is its partial immunity to price swings. If the trader has confidence in his analysis, and is satisfied that standing firm in the face of market volatility is sensible and acceptable given the major dynamics and currents in the market, maintaining positions with non-numerical stop loss orders can be advisable and lucrative. In order to manage the inevitable large swings in account value, professional managers will implement hedging strategies in addition to money management methods, to control and minimize the volatility of the portfolio. Thus, even if the mental stop triggers a large drawndown in our position, we can minimize the effect on the portfolio through diversifying and distributing the risk among various currency pairs.
Let us examine the various ways of implementing a stop-loss order now.
Gambler’s conceit
That high leverage is dangerous is well-known to most people, but it is not unusual to make spectacular profits with a highly leveraged account, just as it is not unusual throw three heads in a row during a coin-tossing competition. The sad fact is that even those spectacular profits are highly likely to be wiped out if the trader continues to make bets utilizing high leverage, as we examined in the previous articles on gambling strategies in forex. The inability of the trader to get rid of high leverage after a bout of successful trades is related to a concept called the “gambler’s conceit”. The gambler’s conceit is not caused by high leverage only, but we will limit our discussion of this subject to high leverage since it’s so common among traders.
Many of us have that genie beside our ears who whispers to us all the time that risking too much is not a problem because we are wise enough to exit a risky bet while still running profits. High leverage may be wrong, undercapitalization may be dangerous, but our trades have so far been profitable, and as soon as the profits diminish or losses are being registered, we will close our positions, and exit the game, be it gambling with cards or gambling with forex.
It's very convincing. After all, why would one want to risk losing the profits of such a risky practice as high leverage? What is the point of continuing to practice a losing strategy even after your profits have been halved by a string of losses?
Many beginning traders who make a lot of money randomly in the forex market in a short period of time are convinced that it is their method, style, attitude that makes those large profits possible. On the other hand, the experience and knowledge possessed by a trader at the start of his career is insufficient for practicing self-control or employing money management methods successfully. Thus, in many cases (but not always), the doubling, or tripling of the account of a new trader is just a chance event, regardless of the rationalizations which the trader uses to explain his situation. What is more, even in the case of a highly successful, highly disciplined trader, the occasional very large profits are not at all a sign of increased efficiency or better understanding: There’s nothing extraordinary about the occasional extremes in a trader’s career. Instead of emphasizing them too much, and thinking about what he did right or wrong to deserve such large profits or losses, the seasoned trader will evaluate them for what they are: statistical anomalies on which neither a career, nor a trading strategy can be based.
The Gambler’s conceit prevents such a rational explanation. Instead of understanding the gains after highly-leveraged bets as random developments, the trader ties these results to his own exceptional luck, skill, or insight in evaluating the market action, or to his superior trading strategy, and convinces himself that he will be able to terminate his trading activity due to his controlling power over his trading results. With such false confidence, when the inevitable large losses occur he will ponder on what went wrong with his trade, which indicator, which scheme he needs to revise and refine, instead of accepting and understanding that gains on highly leveraged bets are illusory, and unlikely to remain with him permanently. When a peer confronts him about the unusually high leverage of his trades, and his irrational expectation that he can keep profiting with such high risks, he will protest by mentioning his past successes.
In fact, gains on a highly leveraged account have the potential to be even more destructive than losses. Losses will teach the trader to be humble, and will lead him to revise his methods. Gains, on the other hand, will addict him to his errors. Sadly, such an addiction can only be broken by the pain of a totally wiped-out account sometimes. Fortunately for you, we’re here to warn you about the dangers associated with this risky practice.
The best remedy of the gambler’s conceit is avoidance of the addiction entirely. Instead of consoling yourself that you will give up the practice once the profits are gone, convince yourself to never begin the unhealthy game. Do not aim at exceptional results; aim at consistency. But if you find that you’re already deep into the game of high leverage and risky practices, our advise to you is to cut it off right now, without waiting for the losses to show up. Just close the chapter, quit trading for a while, and a few weeks later, or maybe a month, restart your career by practicing sane and sensible strategies this time. Not only will you find intellectual satisfaction at having overcome a dangerous addiction, you will also have a profitable path before yourself as you improve your skills, recognize your errors.
To repeat, brief periods of enormous profits is never the purpose of a successful trader. Such periods are always temporary, and the false confidence that becomes instilled your psyche is often destructive to your career as a trader: aim at consistent profits, do not aim at high very high profits.
Many of us have that genie beside our ears who whispers to us all the time that risking too much is not a problem because we are wise enough to exit a risky bet while still running profits. High leverage may be wrong, undercapitalization may be dangerous, but our trades have so far been profitable, and as soon as the profits diminish or losses are being registered, we will close our positions, and exit the game, be it gambling with cards or gambling with forex.
It's very convincing. After all, why would one want to risk losing the profits of such a risky practice as high leverage? What is the point of continuing to practice a losing strategy even after your profits have been halved by a string of losses?
Many beginning traders who make a lot of money randomly in the forex market in a short period of time are convinced that it is their method, style, attitude that makes those large profits possible. On the other hand, the experience and knowledge possessed by a trader at the start of his career is insufficient for practicing self-control or employing money management methods successfully. Thus, in many cases (but not always), the doubling, or tripling of the account of a new trader is just a chance event, regardless of the rationalizations which the trader uses to explain his situation. What is more, even in the case of a highly successful, highly disciplined trader, the occasional very large profits are not at all a sign of increased efficiency or better understanding: There’s nothing extraordinary about the occasional extremes in a trader’s career. Instead of emphasizing them too much, and thinking about what he did right or wrong to deserve such large profits or losses, the seasoned trader will evaluate them for what they are: statistical anomalies on which neither a career, nor a trading strategy can be based.
The Gambler’s conceit prevents such a rational explanation. Instead of understanding the gains after highly-leveraged bets as random developments, the trader ties these results to his own exceptional luck, skill, or insight in evaluating the market action, or to his superior trading strategy, and convinces himself that he will be able to terminate his trading activity due to his controlling power over his trading results. With such false confidence, when the inevitable large losses occur he will ponder on what went wrong with his trade, which indicator, which scheme he needs to revise and refine, instead of accepting and understanding that gains on highly leveraged bets are illusory, and unlikely to remain with him permanently. When a peer confronts him about the unusually high leverage of his trades, and his irrational expectation that he can keep profiting with such high risks, he will protest by mentioning his past successes.
In fact, gains on a highly leveraged account have the potential to be even more destructive than losses. Losses will teach the trader to be humble, and will lead him to revise his methods. Gains, on the other hand, will addict him to his errors. Sadly, such an addiction can only be broken by the pain of a totally wiped-out account sometimes. Fortunately for you, we’re here to warn you about the dangers associated with this risky practice.
The best remedy of the gambler’s conceit is avoidance of the addiction entirely. Instead of consoling yourself that you will give up the practice once the profits are gone, convince yourself to never begin the unhealthy game. Do not aim at exceptional results; aim at consistency. But if you find that you’re already deep into the game of high leverage and risky practices, our advise to you is to cut it off right now, without waiting for the losses to show up. Just close the chapter, quit trading for a while, and a few weeks later, or maybe a month, restart your career by practicing sane and sensible strategies this time. Not only will you find intellectual satisfaction at having overcome a dangerous addiction, you will also have a profitable path before yourself as you improve your skills, recognize your errors.
To repeat, brief periods of enormous profits is never the purpose of a successful trader. Such periods are always temporary, and the false confidence that becomes instilled your psyche is often destructive to your career as a trader: aim at consistent profits, do not aim at high very high profits.
Moving Average Crossovers
Moving average crossovers occur when a faster moving average rises above or false below a slower one. For example, when a 13-day SMA (simple moving average) rises above a 100-day SMA, or when an 14-day EMA falls below a 50-day SMA, we will be studying a moving average crossover. In this type of crossover, the signal line is not static, and must be provided by the trader manually. This flexibility makes MA crossovers much more adaptable to changing market conditions, and in trending markets, MA’s can be greatly useful for our trading choices.
MA crossovers can be useful for both range trading, and trend following, but since moving averages generate smoother and more reliable signals in trending markets with relatively low volatility, the most successful use of the MA crossover is also in a trending market. Many traders choose to use a simple moving average for the slower MA, and an exponential moving average for the fast component. But this is not a necessity. Depending on the preference of the trader with regard to indicator sensitivity to price action, an EMA can be used or discarded altogether.
In this section we will examine five different strategies based on MA crossovers.
Moving Average crossovers with a breakout scenario
In this hourly chart of the GBP/CHF pair, we see an approximately three-day long range pattern developing between 1.5851 and 1.6041 price levels, with the 13 hour MA depicted in red remaining consistently below the yellow 100-hour MA for the entire duration of this period. The price fluctuates between the temporary support and resistance lines (shown as red lines on the graph), and the faster 13-hour moving average settles to a very quiet consolidating pattern in the same period. Neither the MA not the price action gives any meaningful signal with respect to the future, until the eventual breakout occurs.
At around 5 am on the 12th March, we see a sudden spike in the price action, which quickly causes the more sensitive 13-hour simple moving average to spike up also and eventually to rise above the yellow 100-hour simple moving average, and a crossover occurs, and after the price keeps rallying powerfully, reaching riught up to 1.68 eventually. In this scenario, the significance of the crossover is amplified by the long duration of the preceding consolidation pattern, and the quiet and subdued price action. Since markets rarely remain so quiet for a protracted period of time, the eventual crossover creates a very reliable signal for the violent upswing of the price.
MA crossovers can be useful for both range trading, and trend following, but since moving averages generate smoother and more reliable signals in trending markets with relatively low volatility, the most successful use of the MA crossover is also in a trending market. Many traders choose to use a simple moving average for the slower MA, and an exponential moving average for the fast component. But this is not a necessity. Depending on the preference of the trader with regard to indicator sensitivity to price action, an EMA can be used or discarded altogether.
In this section we will examine five different strategies based on MA crossovers.
Moving Average crossovers with a breakout scenario
In this hourly chart of the GBP/CHF pair, we see an approximately three-day long range pattern developing between 1.5851 and 1.6041 price levels, with the 13 hour MA depicted in red remaining consistently below the yellow 100-hour MA for the entire duration of this period. The price fluctuates between the temporary support and resistance lines (shown as red lines on the graph), and the faster 13-hour moving average settles to a very quiet consolidating pattern in the same period. Neither the MA not the price action gives any meaningful signal with respect to the future, until the eventual breakout occurs.
At around 5 am on the 12th March, we see a sudden spike in the price action, which quickly causes the more sensitive 13-hour simple moving average to spike up also and eventually to rise above the yellow 100-hour simple moving average, and a crossover occurs, and after the price keeps rallying powerfully, reaching riught up to 1.68 eventually. In this scenario, the significance of the crossover is amplified by the long duration of the preceding consolidation pattern, and the quiet and subdued price action. Since markets rarely remain so quiet for a protracted period of time, the eventual crossover creates a very reliable signal for the violent upswing of the price.
Technical strategies based on crossovers
n this article we will study the various kinds of crossovers and how to exploit, interpret and confirm them based on the interaction of indicators with the price and each other. The crossover strategy is popular and easy to use and identify, but it can also be troublesome because of its tendency to generate conflicting and false signals unless it is confirmed by other types of data.
Crossovers are thought to signal momentum change in the markets. When the main indicator crosses a predefined signal line, the trader will interpret this as a warning sign that something is changing with respect to either momentum of the price action, or its direction. But as we mentioned, crossovers are relatively common, and a strategy based on them alone is unlikely to work well in the absence of confirmation from other sources.
The signals generated by a crossover can be useful in a ranging or trending market, but in a trending market, a crossover is a less significant development than in a ranging market.
Let us examine the various basic crossover strategies
Crossovers are thought to signal momentum change in the markets. When the main indicator crosses a predefined signal line, the trader will interpret this as a warning sign that something is changing with respect to either momentum of the price action, or its direction. But as we mentioned, crossovers are relatively common, and a strategy based on them alone is unlikely to work well in the absence of confirmation from other sources.
The signals generated by a crossover can be useful in a ranging or trending market, but in a trending market, a crossover is a less significant development than in a ranging market.
Let us examine the various basic crossover strategies
The bond market and currency prices
Currencies are the basic building blocks of all economic activity. A grocery, a military contractor, a mortgage borrower, and even gangsters evaluate their economic plans in terms of currencies. Consequently, the forex universe encompasses all the other fields of financial activity including the bond, commodity and stock markets.
Most traders possess at least a basic conception of the relationship between forex and the stock markets. As large amounts of money is injected into the stock market, the resulting currency flows cause the value of currency pairs to fluctuate simultaneously. Similarly, commodity market trends have an easily demonstrable impact on the short term fluctuations of commodity currencies, and a slightly less clear impact on those of others. The same dynamics that cause these markets to influence currency quotes also ensure that fluctuations in the bond market affect the short and long term dynamics of the forex market powerfully, but there are also certain aspects peculiar to the bond market which we’ll try to examine in this article.
The bond market is very large, with the US treasury market reaching a size of about 10.7 trillion dollars as of December 2008. Needless to say, bonds are not issued by government entities alone, as townships, corporates, and many other types of institutions regularly issue their own papers to benefit from this vast and liquid market. Actors in the US treasury and corporate bond markets range from small individual savers to foreign governments with gigantic amounts to spend, and the impact of all kinds of economic developments is felt in the bond market on a daily basis.
What is the use of the bond market? For buyers of corporate bonds, the purpose is benefiting from the various yield options available while controlling risk exposure through bond ratings, and the maturity term of the paper bought. As bond investors are always higher in the payment structure in case of default or bankruptcy, many investors and traders choose to purchase bonds in place of stocks in order to achieve a favorable balance between risk and yield. Purchasing the bond of a corporation allows us to benefit from the growth of the firm while taking minimal risk, but at the same time minimizes our control over the capital lent, since bond investors have no say in how the management of a firm uses the borrowed funds. The significance of the corporate bond market is more limited for the retail forex trader than that of the treasury market. On the other hand, as corporate bond rates are powerful indicators of risk perception in the markets in general, the forex trader is well-advised to adjust his leverage in response to spikes in the rates of speculative, or low level investment grade corporate bonds. If sustained, such spikes would have long-lasting and deeper consequences for the economy at large, and recessions are often preceded by turmoil in the corporate bond market.
The role of the government bond market is different in a number of ways. First of all, we must keep in mind that, as long as a government possesses the legal right to create money, it is in no danger of defaulting on its obligations. Consequently, if there is anywhere a risk-free investment, it is clear that a government bond is the most credible candidate. Secondly, since government bonds are almost certain to be paid in time, they serve as a general benchmark against which all other kinds investments are measured. The success or failure of a professional money manager, for instance, is not measured in the absolute value of dollar gains or losses, but in comparison to the yield on the treasury bond of a comparable term. This method is useful because it allows us to evaluate the risk/reward ratio of an investment in a much more constructive way: if by holding a three-month government bond we can achieve greater returns than that offered by our forex manager, what is the point of investing anyway? Thirdly, the government bond market finances the spending of governments. Thus, fluctuations in this market have far greater significance for the value of a currency, since the changes directly influence the credibility of the government’s policies, and the sustainability of its deficits. And finally, since bond yields are strongly dependent on inflation, and inflation is closely related to growth, the term-yield structure of the government bond market provides a very powerful early warning system for predicting periods of boom and bust.
Forex traders with some experience will be quick to recognize the intra-day relationship between treasury bond yield, stock prices, and currency values. This is not surprising, since in many cases, the fluctuations in the value of a currency represents the movements of foreign investors between bonds and stocks as the events of the day progress. In addition, the strong relationship between inflation expectations and bond yields makes government bond yields a very useful indicator for evaluating the financial world’s opinion on the success or failure of US Federal Reserve in controlling inflation. As inflation is a significant component of the equation that decides currency values, the importance of the data provided by the treasury market is evident. But beyond all the short term sound and fury, developments in the bond market have important long term implication for currency trends too. As an important component of the financial account, external flows into bonds have a direct role in establishing long-term currency trends. The fact that the US dollar still has not collapsed in spite of the massive spending and borrowing of the US government is in part explained by the continued health, at least on surface, of the US Treasury market. We hope to return back to this subject in future articles, and examine the bond market in greater detail.
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Most traders possess at least a basic conception of the relationship between forex and the stock markets. As large amounts of money is injected into the stock market, the resulting currency flows cause the value of currency pairs to fluctuate simultaneously. Similarly, commodity market trends have an easily demonstrable impact on the short term fluctuations of commodity currencies, and a slightly less clear impact on those of others. The same dynamics that cause these markets to influence currency quotes also ensure that fluctuations in the bond market affect the short and long term dynamics of the forex market powerfully, but there are also certain aspects peculiar to the bond market which we’ll try to examine in this article.
The bond market is very large, with the US treasury market reaching a size of about 10.7 trillion dollars as of December 2008. Needless to say, bonds are not issued by government entities alone, as townships, corporates, and many other types of institutions regularly issue their own papers to benefit from this vast and liquid market. Actors in the US treasury and corporate bond markets range from small individual savers to foreign governments with gigantic amounts to spend, and the impact of all kinds of economic developments is felt in the bond market on a daily basis.
What is the use of the bond market? For buyers of corporate bonds, the purpose is benefiting from the various yield options available while controlling risk exposure through bond ratings, and the maturity term of the paper bought. As bond investors are always higher in the payment structure in case of default or bankruptcy, many investors and traders choose to purchase bonds in place of stocks in order to achieve a favorable balance between risk and yield. Purchasing the bond of a corporation allows us to benefit from the growth of the firm while taking minimal risk, but at the same time minimizes our control over the capital lent, since bond investors have no say in how the management of a firm uses the borrowed funds. The significance of the corporate bond market is more limited for the retail forex trader than that of the treasury market. On the other hand, as corporate bond rates are powerful indicators of risk perception in the markets in general, the forex trader is well-advised to adjust his leverage in response to spikes in the rates of speculative, or low level investment grade corporate bonds. If sustained, such spikes would have long-lasting and deeper consequences for the economy at large, and recessions are often preceded by turmoil in the corporate bond market.
The role of the government bond market is different in a number of ways. First of all, we must keep in mind that, as long as a government possesses the legal right to create money, it is in no danger of defaulting on its obligations. Consequently, if there is anywhere a risk-free investment, it is clear that a government bond is the most credible candidate. Secondly, since government bonds are almost certain to be paid in time, they serve as a general benchmark against which all other kinds investments are measured. The success or failure of a professional money manager, for instance, is not measured in the absolute value of dollar gains or losses, but in comparison to the yield on the treasury bond of a comparable term. This method is useful because it allows us to evaluate the risk/reward ratio of an investment in a much more constructive way: if by holding a three-month government bond we can achieve greater returns than that offered by our forex manager, what is the point of investing anyway? Thirdly, the government bond market finances the spending of governments. Thus, fluctuations in this market have far greater significance for the value of a currency, since the changes directly influence the credibility of the government’s policies, and the sustainability of its deficits. And finally, since bond yields are strongly dependent on inflation, and inflation is closely related to growth, the term-yield structure of the government bond market provides a very powerful early warning system for predicting periods of boom and bust.
Forex traders with some experience will be quick to recognize the intra-day relationship between treasury bond yield, stock prices, and currency values. This is not surprising, since in many cases, the fluctuations in the value of a currency represents the movements of foreign investors between bonds and stocks as the events of the day progress. In addition, the strong relationship between inflation expectations and bond yields makes government bond yields a very useful indicator for evaluating the financial world’s opinion on the success or failure of US Federal Reserve in controlling inflation. As inflation is a significant component of the equation that decides currency values, the importance of the data provided by the treasury market is evident. But beyond all the short term sound and fury, developments in the bond market have important long term implication for currency trends too. As an important component of the financial account, external flows into bonds have a direct role in establishing long-term currency trends. The fact that the US dollar still has not collapsed in spite of the massive spending and borrowing of the US government is in part explained by the continued health, at least on surface, of the US Treasury market. We hope to return back to this subject in future articles, and examine the bond market in greater detail.
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The bond market and currency prices
Currencies are the basic building blocks of all economic activity. A grocery, a military contractor, a mortgage borrower, and even gangsters evaluate their economic plans in terms of currencies. Consequently, the forex universe encompasses all the other fields of financial activity including the bond, commodity and stock markets.
Most traders possess at least a basic conception of the relationship between forex and the stock markets. As large amounts of money is injected into the stock market, the resulting currency flows cause the value of currency pairs to fluctuate simultaneously. Similarly, commodity market trends have an easily demonstrable impact on the short term fluctuations of commodity currencies, and a slightly less clear impact on those of others. The same dynamics that cause these markets to influence currency quotes also ensure that fluctuations in the bond market affect the short and long term dynamics of the forex market powerfully, but there are also certain aspects peculiar to the bond market which we’ll try to examine in this article.
The bond market is very large, with the US treasury market reaching a size of about 10.7 trillion dollars as of December 2008. Needless to say, bonds are not issued by government entities alone, as townships, corporates, and many other types of institutions regularly issue their own papers to benefit from this vast and liquid market. Actors in the US treasury and corporate bond markets range from small individual savers to foreign governments with gigantic amounts to spend, and the impact of all kinds of economic developments is felt in the bond market on a daily basis.
What is the use of the bond market? For buyers of corporate bonds, the purpose is benefiting from the various yield options available while controlling risk exposure through bond ratings, and the maturity term of the paper bought. As bond investors are always higher in the payment structure in case of default or bankruptcy, many investors and traders choose to purchase bonds in place of stocks in order to achieve a favorable balance between risk and yield. Purchasing the bond of a corporation allows us to benefit from the growth of the firm while taking minimal risk, but at the same time minimizes our control over the capital lent, since bond investors have no say in how the management of a firm uses the borrowed funds. The significance of the corporate bond market is more limited for the retail forex trader than that of the treasury market. On the other hand, as corporate bond rates are powerful indicators of risk perception in the markets in general, the forex trader is well-advised to adjust his leverage in response to spikes in the rates of speculative, or low level investment grade corporate bonds. If sustained, such spikes would have long-lasting and deeper consequences for the economy at large, and recessions are often preceded by turmoil in the corporate bond market.
The role of the government bond market is different in a number of ways. First of all, we must keep in mind that, as long as a government possesses the legal right to create money, it is in no danger of defaulting on its obligations. Consequently, if there is anywhere a risk-free investment, it is clear that a government bond is the most credible candidate. Secondly, since government bonds are almost certain to be paid in time, they serve as a general benchmark against which all other kinds investments are measured. The success or failure of a professional money manager, for instance, is not measured in the absolute value of dollar gains or losses, but in comparison to the yield on the treasury bond of a comparable term. This method is useful because it allows us to evaluate the risk/reward ratio of an investment in a much more constructive way: if by holding a three-month government bond we can achieve greater returns than that offered by our forex manager, what is the point of investing anyway? Thirdly, the government bond market finances the spending of governments. Thus, fluctuations in this market have far greater significance for the value of a currency, since the changes directly influence the credibility of the government’s policies, and the sustainability of its deficits. And finally, since bond yields are strongly dependent on inflation, and inflation is closely related to growth, the term-yield structure of the government bond market provides a very powerful early warning system for predicting periods of boom and bust.
Forex traders with some experience will be quick to recognize the intra-day relationship between treasury bond yield, stock prices, and currency values. This is not surprising, since in many cases, the fluctuations in the value of a currency represents the movements of foreign investors between bonds and stocks as the events of the day progress. In addition, the strong relationship between inflation expectations and bond yields makes government bond yields a very useful indicator for evaluating the financial world’s opinion on the success or failure of US Federal Reserve in controlling inflation. As inflation is a significant component of the equation that decides currency values, the importance of the data provided by the treasury market is evident. But beyond all the short term sound and fury, developments in the bond market have important long term implication for currency trends too. As an important component of the financial account, external flows into bonds have a direct role in establishing long-term currency trends. The fact that the US dollar still has not collapsed in spite of the massive spending and borrowing of the US government is in part explained by the continued health, at least on surface, of the US Treasury market. We hope to return back to this subject in future articles, and examine the bond market in greater detail.
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Most traders possess at least a basic conception of the relationship between forex and the stock markets. As large amounts of money is injected into the stock market, the resulting currency flows cause the value of currency pairs to fluctuate simultaneously. Similarly, commodity market trends have an easily demonstrable impact on the short term fluctuations of commodity currencies, and a slightly less clear impact on those of others. The same dynamics that cause these markets to influence currency quotes also ensure that fluctuations in the bond market affect the short and long term dynamics of the forex market powerfully, but there are also certain aspects peculiar to the bond market which we’ll try to examine in this article.
The bond market is very large, with the US treasury market reaching a size of about 10.7 trillion dollars as of December 2008. Needless to say, bonds are not issued by government entities alone, as townships, corporates, and many other types of institutions regularly issue their own papers to benefit from this vast and liquid market. Actors in the US treasury and corporate bond markets range from small individual savers to foreign governments with gigantic amounts to spend, and the impact of all kinds of economic developments is felt in the bond market on a daily basis.
What is the use of the bond market? For buyers of corporate bonds, the purpose is benefiting from the various yield options available while controlling risk exposure through bond ratings, and the maturity term of the paper bought. As bond investors are always higher in the payment structure in case of default or bankruptcy, many investors and traders choose to purchase bonds in place of stocks in order to achieve a favorable balance between risk and yield. Purchasing the bond of a corporation allows us to benefit from the growth of the firm while taking minimal risk, but at the same time minimizes our control over the capital lent, since bond investors have no say in how the management of a firm uses the borrowed funds. The significance of the corporate bond market is more limited for the retail forex trader than that of the treasury market. On the other hand, as corporate bond rates are powerful indicators of risk perception in the markets in general, the forex trader is well-advised to adjust his leverage in response to spikes in the rates of speculative, or low level investment grade corporate bonds. If sustained, such spikes would have long-lasting and deeper consequences for the economy at large, and recessions are often preceded by turmoil in the corporate bond market.
The role of the government bond market is different in a number of ways. First of all, we must keep in mind that, as long as a government possesses the legal right to create money, it is in no danger of defaulting on its obligations. Consequently, if there is anywhere a risk-free investment, it is clear that a government bond is the most credible candidate. Secondly, since government bonds are almost certain to be paid in time, they serve as a general benchmark against which all other kinds investments are measured. The success or failure of a professional money manager, for instance, is not measured in the absolute value of dollar gains or losses, but in comparison to the yield on the treasury bond of a comparable term. This method is useful because it allows us to evaluate the risk/reward ratio of an investment in a much more constructive way: if by holding a three-month government bond we can achieve greater returns than that offered by our forex manager, what is the point of investing anyway? Thirdly, the government bond market finances the spending of governments. Thus, fluctuations in this market have far greater significance for the value of a currency, since the changes directly influence the credibility of the government’s policies, and the sustainability of its deficits. And finally, since bond yields are strongly dependent on inflation, and inflation is closely related to growth, the term-yield structure of the government bond market provides a very powerful early warning system for predicting periods of boom and bust.
Forex traders with some experience will be quick to recognize the intra-day relationship between treasury bond yield, stock prices, and currency values. This is not surprising, since in many cases, the fluctuations in the value of a currency represents the movements of foreign investors between bonds and stocks as the events of the day progress. In addition, the strong relationship between inflation expectations and bond yields makes government bond yields a very useful indicator for evaluating the financial world’s opinion on the success or failure of US Federal Reserve in controlling inflation. As inflation is a significant component of the equation that decides currency values, the importance of the data provided by the treasury market is evident. But beyond all the short term sound and fury, developments in the bond market have important long term implication for currency trends too. As an important component of the financial account, external flows into bonds have a direct role in establishing long-term currency trends. The fact that the US dollar still has not collapsed in spite of the massive spending and borrowing of the US government is in part explained by the continued health, at least on surface, of the US Treasury market. We hope to return back to this subject in future articles, and examine the bond market in greater detail.
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Interest Rates and Volatility — correlation between interest rate gaps and volatility
Volatility in the currency markets is influenced by a number of factors foremost among which is the risk perception of financial actors. Risk, of course, can be defined in terms of many different variables including politics, natural disasters, in addition to the usual economic factors that always go into the calculation. But among those factors, arguably nothing is as important as interest rates in determining the level of long–term volatility in the forex market. Of course, this is not a one way relationship. Interest rates are themselves influenced by volatility, since the fluctuations caused by ongoing and long-term volatility strongly influence the decisions of central banks. Here we will take a look at the causes of the relationship between interest rates and volatility, and will attempt to determine its role in our choice of leverage and margin.
Volatility is a reflection of uncertainty. In a market where there’s no new information, volatility itself would be low or non-existent, but it is clear that the mere existence of a large number of market participants by itself creates volatility. Thus, there probably exists a state of minimal volatility below which no market activity would be possible. In other words, ordinary transactions necessary for the conduct of business and minimal economic activity would itself necessitate a minimal level of volatility in even the calmest markets. The question that we want to discuss here is about the impact of interest rates on the trade decisions of speculative actors and the bearing of their decisions on market volatility.
Volatility is a reflection of uncertainty. In a market where there’s no new information, volatility itself would be low or non-existent, but it is clear that the mere existence of a large number of market participants by itself creates volatility. Thus, there probably exists a state of minimal volatility below which no market activity would be possible. In other words, ordinary transactions necessary for the conduct of business and minimal economic activity would itself necessitate a minimal level of volatility in even the calmest markets. The question that we want to discuss here is about the impact of interest rates on the trade decisions of speculative actors and the bearing of their decisions on market volatility.
A brief look at recent history
At first sight, it is clear that interest rate differentials increase the number of transactions in the market. Clearly, gaps between the interest rates of different central banks create opportunities which are exploited vigorously by speculative actors of all kinds. But at the same time, we know from experience that the widening gap between emerging market and developed market interest rates was coupled with a decrease in forex volatility, as part of the so-called and by now disproven Great Moderation discussed by some economists. This is partly due to the fact that rising liquidity causes lower volatility. But the relationship between increasing liquidity, and a widening gap between interest rates is not that well understood. First of all, since interest rates and risk perception are closely related to each other, it is counter-intuitive that a rising interest rate gap between nations would result in lower volatility, and lower risk perception among market participants. We can illustrate this better by making an analogy with the interest rate gap between bonds of investment grade firms and speculative grade junk bonds. When this spread widens, it is coupled to increasing volatility in the bond market. During the same period when the widening gaps in interest rates among nations led to reduced forex volatility, reduced volatility in the corporate bond market was coupled with a contracting gap between the bonds of speculative and investment grade firms. Clearly, there is some discrepancy here.
A way of explaining this is by separating the period between 2000 and 2007 into two phases. The first phase was dominated by falling interest rates around the world, initiated by Alan Greenspan’s choice to bring the rates down to 1 percent and keeping them there until they were raised by Ben Bernanke four years later. During this period, volatility came down from higher levels as dormant money found its way to stock markets and other kinds of investments around the world. During the second part of this era, again initiated by the US Fed, interest rate gaps actually widened, but there was no corresponding rise in longer term forex volatility, apart from a few blips that occurred, for example, in February 2007. Was it then a sign of the coming turmoil in 2008 that these widening gaps between emerging markets and developed economies were not reflected in the forex market? We would argue that it was. For one, the rise of inflation has almost always been coupled to a subsequent cooldown period, or even recessions in all economies. No economy can afford to run at full speed in an inflationary environment. And since many emerging markets were raising rates to fight inflation in this period, historical experience strongly suggested that a period of slowdown was likely which would have necessitated a rise in volatility, as it often happens. But market participants refused to adjust themselves in accordance with this fact, driving the currencies of emerging markets higher, being content with lower risk premiums, until volatility returned with a vengeance in a series of events that all of us are familiar today culminating with the Lehman bankruptcy, and its aftermath.
A way of explaining this is by separating the period between 2000 and 2007 into two phases. The first phase was dominated by falling interest rates around the world, initiated by Alan Greenspan’s choice to bring the rates down to 1 percent and keeping them there until they were raised by Ben Bernanke four years later. During this period, volatility came down from higher levels as dormant money found its way to stock markets and other kinds of investments around the world. During the second part of this era, again initiated by the US Fed, interest rate gaps actually widened, but there was no corresponding rise in longer term forex volatility, apart from a few blips that occurred, for example, in February 2007. Was it then a sign of the coming turmoil in 2008 that these widening gaps between emerging markets and developed economies were not reflected in the forex market? We would argue that it was. For one, the rise of inflation has almost always been coupled to a subsequent cooldown period, or even recessions in all economies. No economy can afford to run at full speed in an inflationary environment. And since many emerging markets were raising rates to fight inflation in this period, historical experience strongly suggested that a period of slowdown was likely which would have necessitated a rise in volatility, as it often happens. But market participants refused to adjust themselves in accordance with this fact, driving the currencies of emerging markets higher, being content with lower risk premiums, until volatility returned with a vengeance in a series of events that all of us are familiar today culminating with the Lehman bankruptcy, and its aftermath.
Forex Strategy
The common paradigm suggests that widening gaps in interest rates should be coupled to rising volatility. However, as with all fundamental changes, it may take a long time before market participants recognize the changing risk profile, adjust their positioning in accordance, reconsider their leverage ratios and margin arrangements, which all lead to a contraction in liquidity and the consequent rise in volatility. Sometimes there’s no gradual arrangement at all. Instead, market shocks and related events create dynamics which force traders to reconsider everything in panic, creating massive volatility in a very short term, followed by periods of calm. Eventually, the pattern of rising and falling volatility creates the familiar zigzagging pattern we’re used to seeing in shallow markets where swings are sharp and deep.
The relationship between the interest rate gap and volatility is not very difficult to explain. Of course, the gap that we here speak about is a general measure of the gap between the weighted average of developed nations’ central bank interest rates, and that of developing nations. Low interest rates in a single group of nations is not enough to draw down volatility, for the simple reason that low risk in developed countries, that is, low risk in financing, does not translate into low volatility in forex unless it is coupled to low investment risk, as measured by developing nation rates. To illustrate this further, we can consider the example of the investor who borrows at very cheap rates in Japan, and invests the funds in a commodity project in Russia, where interest rates are high due to many possible reasons. Although the risk perception in Japan is low due to the (past) fundamental strength of the economy, and consequently, the risk on the financing side is small, the high rates in Russia would suggest that the investment in Russia has an unfavorable risk profile. Since these relationships are bilateral, the gap among interest rates, rather than the rates one nation, or a group of them is what determines risk perception and volatility.
Another aspect of wide interest gaps that causes volatility to rise in the long term is the carry trade. While carry trades are most active towards the end of a low volatility environment where the gaps are widening, by definition, the highest amount of activity in this field is coupled to the greatest risk. In other words, the low volatility environment under which the carry trade thrives is irreconcilable with the widening of the interest rates, which also means that the higher the profitability of this trade, the higher its risk, and the greater the imbalances created by it. Indeed, the carry trade itself is perhaps the greatest driver of all economic activity in a low interest rate gap, low volatility environment wher money flows easily. When it is considered as the sum of all investments that are made in search of high yield (and not just high yield in the form of interest rates, but including FDI, cross-border acquisitions, and everything that is driven by a low perception of investment risk), the carry trade is clearly the major driver of activity in a low volatility environment. The paradox created by the irrationality of those taking part in it is one of the most important causes of the eventual spike in currency market volatility and similar sharp changes in market trends and dynamics that announce the end of interest rate rises.
Interest rates and traders: how to anticipate volatility
All of the above discussion would lead its logical consequence that ties volatility to gaps in interest rates. It is rare to have high volatility in a situation where interest rate gaps are closing. Conversely, it is infrequent that a widening interest gap among nations results in a low volatility environment. But it must be born in mind that markets can remain irrational, and refuse to recognize facts for periods longer than what would be required by analysis. Thus, although volatility and interest rates are closely related, the momentum of trading and economic activity can distort this picture greatly, creating periods where the relationship seems to break down. This was clearly the case, for instance, during most of the 2005-2007 period. As of the writing of this text, it seems that we’re going through a similar phase where decreasing interest rate gaps are coupled to higher volatility. It is unlikely that this situation will be long-lasting.
How should traders use this information for trading choices? First, for long term traders, here lies another indicator that can be utilized to identify imbalances in the market which can then be used for profit. Small positions opened against the market as soon as the disparity between the actual rise or fall in volatility and what would be demanded by theory can be maintained until the eventual realignment occurs, and the market moves in the direction anticipated. After that, increased leverage, and greater positions may allow the exploitation of the new situation. For short term traders, the alignment between fundamental analysis(theory) and market conditions can be used as a gauge for determining the best trade. In short, the trader would open a position that would be suitable to a low volatility environment (such as the carry trade) when interest rate gaps are closing (which often happens in an environment of falling rates), and vice versa.
Conclusion
Of course, in this discussion we are neglecting the impact of velocity of money on the dynamics created by interest rates. The impact of the interest rate gap is greatly influenced by the velocity of money, but the factor is even more important when interest rates are falling. The impact of the falling gap can be negated if falling velocity of money results in reduced liquidity finding its way into the markets. In that case, volatility may not fall much, as the availability of credit doesn’t become reflected in an increasing number of transactions which could fuel increased activity in the forex market. Our discussion in this text presupposes only a moderate fall in the velocity of money, that is, banks reduce lending, but only moderately during the period that leads to the lowering of gaps between central bank interest rates. If the reduction in velocity were severe, the outcome would be serious enough to invalidate our scenario.
The relationship between higher volatility and money management is evident. High leverage and high volatility is an explosive cocktail that can easily wipe out a large number of accounts in a short time, but increasing leverage in an environment of lower volatility is not an extreme decision. Understanding the relationship between interest rates and currency market volatility can be helpful in adjusting our portfolio accordingly.
The relationship between the interest rate gap and volatility is not very difficult to explain. Of course, the gap that we here speak about is a general measure of the gap between the weighted average of developed nations’ central bank interest rates, and that of developing nations. Low interest rates in a single group of nations is not enough to draw down volatility, for the simple reason that low risk in developed countries, that is, low risk in financing, does not translate into low volatility in forex unless it is coupled to low investment risk, as measured by developing nation rates. To illustrate this further, we can consider the example of the investor who borrows at very cheap rates in Japan, and invests the funds in a commodity project in Russia, where interest rates are high due to many possible reasons. Although the risk perception in Japan is low due to the (past) fundamental strength of the economy, and consequently, the risk on the financing side is small, the high rates in Russia would suggest that the investment in Russia has an unfavorable risk profile. Since these relationships are bilateral, the gap among interest rates, rather than the rates one nation, or a group of them is what determines risk perception and volatility.
Another aspect of wide interest gaps that causes volatility to rise in the long term is the carry trade. While carry trades are most active towards the end of a low volatility environment where the gaps are widening, by definition, the highest amount of activity in this field is coupled to the greatest risk. In other words, the low volatility environment under which the carry trade thrives is irreconcilable with the widening of the interest rates, which also means that the higher the profitability of this trade, the higher its risk, and the greater the imbalances created by it. Indeed, the carry trade itself is perhaps the greatest driver of all economic activity in a low interest rate gap, low volatility environment wher money flows easily. When it is considered as the sum of all investments that are made in search of high yield (and not just high yield in the form of interest rates, but including FDI, cross-border acquisitions, and everything that is driven by a low perception of investment risk), the carry trade is clearly the major driver of activity in a low volatility environment. The paradox created by the irrationality of those taking part in it is one of the most important causes of the eventual spike in currency market volatility and similar sharp changes in market trends and dynamics that announce the end of interest rate rises.
Interest rates and traders: how to anticipate volatility
All of the above discussion would lead its logical consequence that ties volatility to gaps in interest rates. It is rare to have high volatility in a situation where interest rate gaps are closing. Conversely, it is infrequent that a widening interest gap among nations results in a low volatility environment. But it must be born in mind that markets can remain irrational, and refuse to recognize facts for periods longer than what would be required by analysis. Thus, although volatility and interest rates are closely related, the momentum of trading and economic activity can distort this picture greatly, creating periods where the relationship seems to break down. This was clearly the case, for instance, during most of the 2005-2007 period. As of the writing of this text, it seems that we’re going through a similar phase where decreasing interest rate gaps are coupled to higher volatility. It is unlikely that this situation will be long-lasting.
How should traders use this information for trading choices? First, for long term traders, here lies another indicator that can be utilized to identify imbalances in the market which can then be used for profit. Small positions opened against the market as soon as the disparity between the actual rise or fall in volatility and what would be demanded by theory can be maintained until the eventual realignment occurs, and the market moves in the direction anticipated. After that, increased leverage, and greater positions may allow the exploitation of the new situation. For short term traders, the alignment between fundamental analysis(theory) and market conditions can be used as a gauge for determining the best trade. In short, the trader would open a position that would be suitable to a low volatility environment (such as the carry trade) when interest rate gaps are closing (which often happens in an environment of falling rates), and vice versa.
Conclusion
Of course, in this discussion we are neglecting the impact of velocity of money on the dynamics created by interest rates. The impact of the interest rate gap is greatly influenced by the velocity of money, but the factor is even more important when interest rates are falling. The impact of the falling gap can be negated if falling velocity of money results in reduced liquidity finding its way into the markets. In that case, volatility may not fall much, as the availability of credit doesn’t become reflected in an increasing number of transactions which could fuel increased activity in the forex market. Our discussion in this text presupposes only a moderate fall in the velocity of money, that is, banks reduce lending, but only moderately during the period that leads to the lowering of gaps between central bank interest rates. If the reduction in velocity were severe, the outcome would be serious enough to invalidate our scenario.
The relationship between higher volatility and money management is evident. High leverage and high volatility is an explosive cocktail that can easily wipe out a large number of accounts in a short time, but increasing leverage in an environment of lower volatility is not an extreme decision. Understanding the relationship between interest rates and currency market volatility can be helpful in adjusting our portfolio accordingly.
Tuesday, June 9, 2009
Trading Robot - Is it a Scam?
Many people when being told that they are able to earn over a $1000 dollars in a day or as much as $10,000 or more in a week would automatically scream scam (unless of course they knew what day trading was all about). I know I would. So, obviously upon running into the website for Trading robot, this was the very thing that ran through my mind. Then something happened. I watched the video on the homepage and learned exactly how it worked and how it made people this type of money.
What exactly is the Day trading robot?
Well, actually it is a piece of software that costs over $112,000 for a 1 year license. Now before you go screaming, yeah right, I am here to tell you that you are not being offered this software, so don't worry, you don't have to come up with that large sum of money to benefit from the Trading robot. Instead, you are being offered a Newsletter that provides you with penny stock picks selected from this piece of software that costs so much at a much affordable price which is less than $100.
If you go on the website and watch the video on the performance of this software, you will understand why you would want this robot picking your day trading stocks for you. That's because this robot has repeatedly picked stocks that have gone up 300% in a single day. If this seems unreal to you, well that's understandable, but that is exactly what you see happening in the video.
Now is this to say that everyday is going to be a 300% day? Probably not, but it really doesn't take too many of these days to become wealthy now does it? Some other benefits the Trading robot newsletter offers people in day trading is it saves you a great deal of research time so you do less work and make more money. Also, it has a very high success rate so you know you will be making money and lots of it.
There is also no risk to using this newsletter either because it comes with a 100% satisfaction guarantee. You have a full 8 weeks to try it and see the amazing results for yourself and for any reason you are not happy with it, you get a full no questions asked refund of your money.
What does this mean? This means you get to try out these Trading robot stock picks for 8 weeks to see how effective this newsletter is. If you are afraid of losing money, then simply test the picks out without investing any of your money to see how accurate the picks are. Now, any person who is experienced in day trading will tell you that this is quite the deal.
Trading Robot - Does it Work?
If you are asking yourself this question, why not ask yourself another question. How does earning thousands daily with the Trading Robot sound to you? No doubt there is a bit of skepticism running through you right now, but you are urged to read on.
If you have heard of this software, I'm sure you have heard of the big price tag that goes with it. ($112,000 for a 1-year license). Don't let this get you down, because in reality, you don't need this. What you need is the newsletter, which right now is a big hit. Why is it? Because it is making a lot of people a lot of money.
So exactly what does this newsletter cover anyway? Basically, the Trading Robot newsletter is all about stock trading. The author of this newsletter is Jason Kelly, a computer programmer who worked with James Holt (one of the most successful day traders to date).
This newsletter provides penny stock picks selected by the computer robot that are about to go up within 24 hours. James created videos of 23 techniques that he uses everyday to make thousands per day. These videos are created from the actual "Trading Robot" that only 7 people have access to (due to its price obviously), however, this is where the picks come from that are included in this newsletter which is far less expensive than the software running less than $100 for a lifetime subscription). In reality, why bother with the software anyway, it's the picks that you are looking for, and these are what you get in the newsletter.
What are the other benefits of Trading Robot newsletter?
Well seeing how the picks are generated from this $112,000 piece of software, the picks are usually right on the money. This newsletter also saves you research time saving you hours and hours. It also has a high success rate and offers less work to make more money.
So, does the Trading Robot work to help people make big money in stock trading? You bet it does. If you have seen the amazing video of this piece of software at work, and how precise the picks coming from it are, you would have no doubt in your mind. This is not to say that every pick you get is going to make you thousands. It also is determined on how good of a stock trader you are, although this software takes the need for advanced skills right away.
You Never Know What You Will Benefit from in Forex Forecasts
Possible risks and profits to be made can always be predicted if traders would only have more accurate forex forecast to base their trade and decisions upon. Forex forecasts are only one way of keeping up with the volatile forex market. Success will depend the most in knowing what and who will affect the rate changes.
The forex market has already been through a lot of ups and downs that even fortune tellers would have difficulty guessing what will be its next movement. Making a forex forecast can be helpful but can also be too risky. Besides, doing it is not that easy also.
In forex forecasts, nothing specific is given. The traders are not made to hope high and expect more. If you have seen or heard a forex forecast, be sure to check on some projected rate fluctuations whenever and wherever possible so you would have an idea it the forex forecast shows a likely possibility to be true or not.
Staying in touch and up-to-date with the latest news and happenings around the globe and information about the forex currency can help traders determine when is the best time to buy, sell and stay away from a particular market. All these things are important in the performance of your trade. Take note of some forex forecasts if only to serve as guide whenever you are in a situation that you find hard to make a decision upon.
How can one benefit from forex forecasts?
There are some companies that are offering forex forecast information as a subscription that traders can avail of. For those who do not have enough patience and browse for information in the internet, this forex forecast information would be their alternative.
No one said that there is a 100% accuracy in these forex forecasts. And no one told traders that they should also believe them 100%. If you want to have more degree of accuracy in the forex forecast, you could always find one with the most accurate percentage rate.
You could look for something or someone that offers free information or a trail period for you to test the degree of their ability to give accurate forecast about the forex market. There are also some sites that send out forex forecast to emails that you may want to try out just so you will choice to choose from if you decide to avail the services of some of them.
Relying only on one forex forecast is not the thing to do. You should at least have some more choices in the process of making an investment decision. Try to get more forex forecast from sources that are rampant online and offline so you would not stick to just one.
The thing to remember is that your investments are your future and you have already worked too hard to just let it all down the drain. Do not put the future of your forex trade into the hands of only person. Try to get several forex forecast and choose the best one that you think has great ounces of accuracy up their sleeves.
Before putting the future of your investments into the hands of those offering forex forecasts, make it a point to check out the latest that is happening in the forex trading and see if the trend is likely to go with what the predictions are telling about.
If you think more about it, people doing forex forecasts would not be out there giving bad forecasts because their reputation is the one at stake there. They surely would not want to ruin the image they have by giving false predictions about things that they know people will listen to, would they?
Like they say, traders should not believe all that is written in forex forecasts. Some but not all. There are still decisions to be made that will be based upon the trader itself and no amount or accuracy of forex forecasts can make that decision for them.
Just to be on the right side of things, always make sure and do your own research that will back up the forex forecast you actually think is going to work. You never know what it will lead to…
Why You Should Be Using a Day Trading Future System to Double Your Investments
A day trading future system is a great weapon to have on your side if you're interested in stock trading. This is a stock picker which makes use of algorithms and past market data to piece together upcoming trends, enabling you to get in and out at peaks in the market, easily maximizing your investments, even if you don't know the first thing about this market. Here is what you should know.
I briefly talked about how a day trading future system works, but here is a quick, more specific explanation. This is a system which makes use of algorithms to build and maintain databases made up of the trends and factors which led to those trends of the distant and recent past.
These algorithms then apply this information to current, real time market data to look for similarities to further investigate. Eventually, once the program has found what it deems as being a high probability trading opportunity, it notifies you so that you can trade in accordance with its projections.
Critics and experts alike laud the use of a day trading future system because of the emphasis placed on clear headed, algorithmically crunched market data rather than allowing emotions, guesswork, or anything of the like the play into your trades on any level. Every bit of the hard work of milling over tons and tons of market data has since been done for you, so all you've got to do is enact the recommended trade simply using an online trading account. Consequently new and casual traders can still make a good living for themselves in the market without having to know much about that market or have the time to devote to it which they'd need otherwise.
To learn more about this technology as well as find an in depth review on the leading system option today to get a better idea of what this is all about, click on this link for day trading future system to see how easy it is to realize your financial independence immediately.
Make Money - Day Trading As a Full Time Job?
What would you do if you can make money from home? A lot of home based businesses are based on simple activities that keep the owners active, progressive, and engaged in opportunities available. Day trading as a full time job is more than an opportunity; it's a possibility to extend your earning potential beyond any career available today. Although this career is based on risks, it's an active approach to mastering one's financial stability by the click of a button.
Make a Plan for the Job
If you consider day trading a full time job, you must create a job description to remain focused for 40-hours a day. This may sound like a piece of cake right now, but you must established discipline in order to make money while remaining home and active. Some full-time day traders earn a pretty good income for their lifestyles while exploring the markets until close. If you have a plan, you can make the best decisions regarding the opportunities available in day trading as a full-time adventure.
Create a Work Schedule
Work schedules are important for full-time day traders just like any other professional. A lot of people consider working from home as an excuse to slack in administrative duties, research, and other well-known factors that contribute to a successful career. You have to use a work schedule to keep a distance between family, work, and social time available as you work from home. With a work schedule, you can open the doors to make money in day trading without sacrificing the lifestyle you currently have.
Get Ready for Risks
s:Day trading can give you a headache, break your heart, give you a heartache (because of the profits), and make your day the best that ever happened. Consider implementing a software to make your work day a bit flexible and promising instead of waking up unsure of what the day will bring.
Day trading can give you a headache, break your heart, give you a heartache (because of the profits), and make your day the best that ever happened. Consider implementing a software to make your work day a bit flexible and promising instead of waking up unsure of what the day will bring. A smart, innovative day trading robot software can manage the first penny picks of the day while you search for more mature stocks. As an active trader, the thrill lies in finding the next best opportunity and winning the edge over the competition.
If you're looking for a way to supplement your income, why not try your hand in the stock market? Get the most accurate stock picking robot in history: Day Trading Robot. It is completely risk free for 60 days.
Forex Day Trading Tips You Need to Know
The popularity of forex currency trading system continues to grow as more and more people have realized the potential income that they can earn from forex trading.
With a massive daily profit of $1.5 trillion, forex trading has definitely surpassed the combined profits of bond market and global stock market. This is probably the main reason why many people were enticed to try forex trading.
Along with the massive growth of forex trading comes the forex day trading. As its name implies, forex day trading mainly refers to the actual selling and buying of various foreign exchange currencies all throughout the day. Its main purpose is to come up with no net variation in place at the last part of the day. In other words, for every forex currency bought, there should be one currency sold.
In order to see the profit or the deficit, one must look into the discrepancy between the current values of the currency being sold to the purchase amount. The main incentive of this method of trading is to lessen the burden of maintaining a position during the night.
Normally, the “open price” may have considerably altered from the earlier day’s final currency value. Hence, forex trading that involves traders who are dependent on the currency’s performance during the day is known as forex day trading.
In essence, forex day trading is not as dangerous as the other types of forex trading activities. But then again, the usual employment of margin purchases such as utilizing funds on loan increases the deficits and profits. So to speak, the potential shortfall and returns may happen in very little time.
For this reason, experts say that it is normal to expect that nearly 90% of forex day traders will lose profit. Hence, it would be more enjoyable on the part of forex day traders to gamble their money that is not important to them.
The main point here is that even if forex day trading aims to provide you with the right amount of money that you need to gain, it should still be separated from the psychosomatic point of examination and trading activities.
To know more about forex day trading, here are some tips that you need to know, or you can read about forex futures trading.
1. You should know that forex day trading is course oriented
This means that forex day trading is focused more on the development. Forex day traders are expected to identify what comprises the “winning trade.” By the time you have already identified the outline, you will have more confidence in taking the trade.
This means that you will easily make good decisions without feeling regretful. In addition, at the end of each transaction, you will be able to feel good about your decision.
2. You are bound to lose before you can gain something
Forex experts say that every successful forex traders has definitely lost some hefty amount of money before they were able to achieve something. In fact, they say that this is the primary factor needed in order to gain success in forex day trading.
However, it does not necessarily mean that because you are bound to lose money at one point or another, you should expect loses all throughout. It is still important to remember that as a forex day trader, you must do everything just to win the game.
This can be done by speculating positively at all cost, taking risks without uncertainties. Of course, losing is part of the game. But remember that losing is not a major issue in one’s success.
Fail if you must; that is, if you will think that losing is inevitable. Yet, one should also keep in mind that these loses are relatively small and will only take few minutes of your time to make those errors.
And lastly, it is important that you know what you are doing. Do your homework and find out more about forex day trading. In this way, you will learn the basic safety measures of forex day trading. You will also learn the important steps you have to make if ever the unforeseen circumstances take place.
So the next time you want to start a career in forex day trading, it is important that you start on the insides first. Know what the client wants. From there you can already make a fresh start in trading.
Forex in One, Two, Three and Four Easy Steps
Number 1. CONCEPT. Forex traders should know by now that the forex trading market is about trying to make big out of something small. This is in terms of earning big profits through smaller risks. Nobody is forex can control how this giant market is moving. Besides they would not start to understand it in the first place because the forex market is really really complicated and ever-changing.
People remain in the forex trading industry because they thought that the probability of making profit is bigger than the probability of getting losses. This thinking would have proven effective if the trader is aware that they need to execute stop lost in this concept. Really understanding this point in the course of the transaction and relying on the forex traders’ own initiative rules and discipline will surely prevent losses from happening.
Number 2. STOP LOSS AND TAKE PROFIT POINT. Many of the forex traders not using these two factors effectively and efficiently does not really make any money in forex trading. the traders usually buy a currency they think will rise, but eventually fell. In the anticipation that it will begin rising soon, the forex trader do not use stop loss. The loss then becomes larger and larger and the trader still waiting and hoping.
The common result when the foreign currency starts rising is there are more losses acquired to make up for the profits. Another result would be getting the currency out of the market so fast that the best opportunities are missed in the process. Forex traders often makes these mistakes over and over again especially if they do not consider these two important points.
Number 3. MARGIN ALLOCATION AND PROPORTIONAL DISTRIBUTION LAW. Combined forex orders are allowed only at a specific margin. But it cannot be used all in one shot. So if forex traders buy up but the trend fall out of the expectation, the trader will find himself in a passive condition.
It is still best to stop loss after buying a position once there is a sudden shift in the forex market. For markets with consistent movement, there will be more profits to utilize to supplement the margin. The profit has a tendency to continue to rise too.
Number 4. CHOOSING THE PROPER TIME TO BEST EXECUTE THE ORDER. Fundamental analysis of the forex market is the key. Even technical analysts prefer this method. Forex traders must use fundamental analysis to determine when is the best time to enter the forex market and trading.
Forex traders must also use their own preferred forex views and charts to be able to execute an order. It is important to note that every forex trader has to formulate their own regulations and source of information that they can check upon whenever the need for it arise. It is also important to note that these things may affect how the trade will result to.
Another way is to try and analyze the market by looking at the movement of the forex currency. Analyze the rising and falling of the currency and see, even guess the probability of things that might happen next. When there are forecasts of good things to come, the forex trader should grab that opportunity to choose the right currency to invest on.
These are the four forex strategy that is used by many traders nowadays. These four important points have been proven to bring in more positive results in forex trading. There have already been lots of other advices that are also effective but these are the newly developed ones that can cater to the changes that the forex market is going through.
It is important to note that these forex points and strategies should not be the only ones a forex trader can use in their trade. there are still many of the old and the new ones that forex trades can use in their trading. All in all, the final decision would still depend upon the say of the trader.
There is also these other factors called luck and fortune. Sometimes they do tend to play some joke in the forex trading community and can bring down even the best of the best traders to their knees.
Kevin Anderson is the owner and operator of http://www.forextradingcenter.info a site developed to give users the most updated information on how to trade Forex properly to make a profit.
Reasons Why Currency Forex Trading Remains A Secret
Forex currency trading can easily be found nowadays over the internet. If you search the net, there are numerous web sites offering hundreds of investment programs like currency forex trading, real estate, stock trading and many others.
If you ask some of the currency forex traders why they choose this trade from among the many options, the likely answer they would give is that currency forex trading is an easy way to earn money. Very safe too if done on the internet.
Currency forex trading is the most profitable internet income opportunity because you can do it at home, in the office and from any country in the world.
In currency forex trading online, you do not need to do any marketing, selling or promotion to succeed. You do not have to have hundreds of dollars to be able to open an account. And you would not be spending much also in the course of your currency trading career.
All that is needed to be done is open an account from any of the brokers with as little as $300-$2000. then all you have to do is follow the instructions given on how to go about buying and selling your currency forex trade.
When the price of the forex currency is low, start buying. If the price suddenly goes up, sell your currency and make instant and easy money. All this is done in a day. You can easily go from buying to selling your currency forex within the span of those short hours.
After having done your trade for the day, you can log off the internet and just come back on to check on what is happening to your currency forex trade and the forex market itself. No harm in checking once in a while and seeing if you need to have some actions done.
The good part about doing currency forex trading online is that you can already enter all the buy trades and their specified prices. Whenever the value of the currency forex rose and reached your desired selling price, the currency will be automatically sold for you. You just made some money and you do not know it yet. The nest time you log on to your account, you will see that you are some cash richer.
Another good thing about currency forex trading online is that you can have a permanent job and still do your currency forex work in your spare time or whenever you are available to see what has been happening.
Currency forex trading is trading the easy way. This is how the system works.
Before putting real money to open your own currency forex trade, you first have to avail of the free trial account and practice there for some time. The main purpose is to better understand how the currency forex works and to acquire the proper skills needed.
In currency forex trading, you can choose how much money you wish to invest, how much money to make and when to make it. Your computer would be your “ATM” machine that tells you the amount of money you now have available. You are the boss in the currency forex trading. You can do as you please and decide what steps to take in your every action.
Currency forex trading is the fastest and easiest way to make money online compared to other investment programs. The forex market is a daily business worth billions of dollars that is much larger than all the stock in the world combined together.
There are only some of the reasons why people choose currency forex trading over other trading and businesses that are rampant everywhere nowadays especially on the internet.
Maybe this is also why many people are not aware of currency forex trading yet. By reading more about this kind of trading, people would get to know the secret behind one of the greatest wealth on earth. Perhaps they would also know why currency forex is little known to many people and why it is kept hidden until now.
Not everybody is given the opportunity to try and enter into the currency forex trading and avail of its advantages. So currency forex traders should be glad and take the best care of their currency forex accounts.
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