Market Order An order to buy or sell at the current market price. Limit Order An order to buy or sell at a specified price or better. Stop-Loss Order An order to close a position if the market price hits a certain level. Note however, that this type of order means that after the stop price is hit the order becomes a market order and you may suffer slippage. You use this type of entry order if you feel that the currency pair will reverse direction from that price.
Stop-Entry Order An order to buy above the market or sell below the market at a specified price. You use this type of entry order if you feel that the currency pair will continue in the same direction.
Just like with a stop order, you may suffer slippage when using this type of order. Stop-Limit Order An order to buy above the market or sell below the market at a specified price only. When your price is hit your order becomes a limit order which prevents slippage. This is commonly used to set both a profit-taking limit order and a stop-loss order as soon as an entry order is filled. There are two types of forex brokers: market makers and ECNs. But in practice things are not so clear-cut — there are market makers out there who falsely market themselves as not having dealing desks, while there are also some brokers who claim to be true ECNs when they are not.
The choice of broker must be an individual decision, because everyone has different needs and preferences. Both new and existing traders should carefully examine the practices and policy contracts of brokers, and be up-to-date with new information on brokers.
Below are some points that you might want to consider when selecting a broker. You can use it as a rough guide to narrow down some candidates that match your own needs. Can you trade from the charts? This will be useful when scalping. This will be especially crucial if you are scalping. If so, check if it has a mobile or web- based version that you can use for trading.
Or, if it is an ECN, how easy is it to fill big orders? Depending on the policy, it is possible to end up with closing prices that are worse than expected. Are you willing to accept that? If spreads are variable, how wide do they get during important news releases?
The lower the margin required, the greater the amount of leverage. Once you have narrowed the broker list down to a few candidates, be sure to read the terms and conditions of the respective contracts, and understand what you are in for before you sign anything. Later on when you have graduated to an intermediate or advanced phase in trading forex, you may then choose to spread your money among a few brokers so as to reduce exposure to a single broker.
If you approach trading as a means of getting your dose of adrenaline, do yourself a favour by staying away from it — you will do less harm to your pockets by going to the latest Louis Vuitton sale or by bidding on that vintage car on eBay for the adrenaline shot. Serious money demands serious work.
Both serious and casual traders, of course, dream of making it big in the forex market, but it is not the goal that counts, it is the preparation and dedication that is important. Forex trading should be considered and treated as a serious business, just like other types of businesses. Approaching trading from the perspective of a shrewd business person can greatly tilt your chances of success to your side.
Jolted from sleep, I drag my feet — with eyes half-open — into my trading room. The time is am and the FOMC minutes have just been released. I click on the headline which summarises what the minutes say. This statement is very similar to the previous one; hence there is not much reaction in the forex market.
Morning Too soon, morning comes. I quickly scroll through the news headlines that are displayed in the news feeds, and select those which relate directly to forex. The market seems pretty boring at this time. The lull in market activity gives me some time to write a bit more of this book, and to work on some trading articles.
To make sure the trade is still sound, I quickly check the news feeds to see if any news or rumours might have triggered this move. The market is moving up and closer to my position; it is now only one pip away.
I make sure all my charts are up, and I prepare to monitor this trade. It is now 12 pips away from my opening price, a bit too late for me to get in. And just as suddenly as the price has gone down, it is now moving up again and my order is now filled. The pair keeps moving up, 5 pips then I guess others must be going short too. After what seems like an eternity, but is probably no more than five minutes, my position is back at break-even, which means I have neither made nor lost money at this point.
This bounce trade seems to be taking a while, so I call my friend to let her know we will have to postpone our lunch meeting. Lunch will have to arrive in the form of junk food from my favorite food delivery outlet. Sometimes I watch my open trade like a hawk; other times, I simply continue with other activities.
I set some price alarms and get back to writing my book while waiting for my lunch. After all, it is usually better to do something else while waiting on the market. After lunch, the alarms ring. Looks like I am close to reaching my profit target. Institutional traders must be back from lunch and are taking profits on their long positions. End of the day With this trade out of the way, I look for upcoming trading opportunities.
Trading blogs, especially those that have fresh and relevant material, can be a valuable source of useful and targeted information for busy traders who hold day jobs. This blogging habit, which constitutes part of my market homework, has helped me in my own trading. I also take the time to interact with the online community of traders by participating in forums such as that as ForexVibes www. This means that sometimes I will end past midnight, and other times I will be done well before lunch time.
This is unlike, say, stocks or futures which traded through the exchanges such the London Stock Exchange or Chicago Mercantile Exchange. Trading of currencies is done OTC over-the-counter , in the sense that currency buyers and sellers from all over the world make a binding contract with each other after agreeing on a price — and this is not carried out through an exchange.
This aspect of spot forex trading is different from forex futures trading which is carried out through an exchange. Forex traders carry out their activities by dealing directly with one another or through brokers via telephone and internet connections. In this centrally cleared system, the CME will act as the central counterparty and guarantee the performance of all contracts for both buyers and sellers.
Unfortunately, FXMarketSpace is an institutional trading platform and is not open to retail market players. According to the website www. Therefore, as a central exchange for forex retail players is still not a reality, I shall focus on the OTC structure of the forex market in this chapter. Players of the forex market range from those who trade billions of dollars a day, to those who trade just tens of thousands of dollars. This club is known as the interbank market.
Down the hierarchy are the smaller banks, big multinational companies, hedge funds and other institutional investors or speculators, and retail forex brokers. These large speculators may also conduct currency transactions directly in the interbank market, if they deal in large amounts and have credit standings with the large banks. Next in line are the independent retail traders who lie at the bottom of the market structure.
These individual traders mainly trade through forex brokers as they generally trade in much smaller lot sizes. Central banks of countries are also market players, although they are not always involved in the market. See Figure 2. Figure 2. Hedge funds and companies are not included in this illustration as the retail trader Small Small will usually not deal directly with Banks Banks any of them.
Without a central exchange, currency exchange rates are made, or set, by market makers — they make the bid and the ask prices based on the currency movements that they anticipate will take place. The largest banks are the major market makers, and they handle very large forex transactions — often in the billions of dollars — on behalf of their clients, such as other institutions or companies, and also for themselves.
Many banks have traders dedicated to trading speculatively for the bank. The resulting massive flows of money handled by these large banks are what primarily drive currency prices. This big money-laden network forms the interbank market where large banks deal with one another, and is where most of the trading activity takes place.
The transactions carried out by these major banks amount to the greatest bulk of the total daily forex volume. These brokering systems get the best available exchange rates for the various currency pairs, and match buying and selling requests from bank dealers. Between these two competitors, they connect at least banks together.
Smaller banks that trade smaller amounts also get access to these brokering platforms. Large companies Companies and businesses are involved in the forex market because of their need to pay for products and services which are denominated in other currencies. Since these commercial entities deal in smaller quantities, compared to that of large banks, they usually trade through banks instead of directly accessing the interbank market themselves.
Large overall trade flows can have a significant impact on the forex market, as they play a role in the supply and demand of currencies. Sometimes companies may also be involved in currency speculation for the purpose of generating additional revenue. Central banks Central banks hold the key to controlling the supply and demand of national currencies; hence they play a very important role in the forex markets.
Issues that are of most concern to central banks are those relating to: inflation price stability , economic growth and the unemployment rate. One of the ways that central banks control these factors is through the setting and adjustment of interest rates, which will affect the valuation of many currencies. Sometimes central banks intervene directly in the forex market when they are not satisfied with the current exchange rates of their currencies. That is, they may find that the current exchange rate is either too high or too low for the overall benefit of the economy.
The Bank of Japan is well-known for its intervention in the market. Hence, when the BOJ deems that the Yen is getting much stronger against, say, the US dollar or the Euro, it may step into the open market to deliberately depress its currency by selling Yen against US dollars and Euros. This act of central bank intervention may cause other institutional players to follow suit, and further drive the currency exchange rate towards the rate that is favoured by the intervening central bank. Most of these institutional speculators have international portfolios that consist of both domestic and international assets like stock or bonds to diversify their holdings.
They tend to be very aggressive participants of the spot forex market as they often facilitate currency transactions when purchasing or selling foreign assets. For example, an investment manager who is in charge of an international stock portfolio will be required to buy and sell foreign currencies so as to pay for any purchase of overseas stocks.
Hedge funds, being largely unregulated, often practise very different styles of wealth generation from investment management companies; they tend to adopt more aggressive forms of trading with the aim of generating a high return on investment. Sometimes, a portion of their assets under management may be allocated specifically for currency speculations, with the objective of maximising their overall profits.
Large hedge funds and investment management companies are capable of moving the forex market in their transactions. Forex brokers The emergence of sophisticated online forex brokers made forex trading feasible for private individuals.
In the past, only wealthy individuals could speculate in the forex market, but now things are very different. Anyone can simply open a trading account with a retail forex broker and trade currencies online with little money upfront, as forex brokers tend to offer highly leveraged margin accounts for individuals. There are basically two types of forex brokers: 1.
Electronic Communication Networks ECNs : consolidate various bid and ask prices from market makers and other participants connected to their platform, and display the best available prices. These are explained in some detail below. Market Makers Market-making is a lucrative business for banks and brokers, and forms the backbone of market liquidity. By quoting the bid and the ask prices on the screens of electronic brokering platforms, or through telephone calls, they are essentially providing liquidity and inviting other qualified parties other banks, hedge funds, corporations or retail customers like individual traders to deal with them.
In doing so, market makers must be prepared to buy or sell from other market participants. Some market makers may have established credit links with banks that trade on the interbank market, or they access electronic brokering platforms like EBS or Reuters for pricing.
During periods of high liquidity in which there is a great deal of trading activity, spreads of the actively traded currency pairs are usually kept quite narrow, between pips. When the market is very quiet with little trading action going on for a particular currency pair, for example just prior to the New York close on Fridays or during news releases, dealing spreads tend to widen, sometimes by a huge margin, as a way for market makers to protect themselves when they feel that they may have to carry additional risks.
Market makers usually operate a dealing desk, which refers to the market maker trading with the customer, and the presence of dealing desks means that the market maker may potentially trade against the customer. They may move their currency quotes pips away from the interbank rates. Independent traders should always be sceptical of claims by some market makers when they say they do not operate a dealing desk. Traders tend to be more aware of their existence in stocks or futures markets.
An ECN broker gets its currency pricing from several liquidity providers such as banks, market makers or other traders who are connected to the system. When an order is placed, it is routed to the best available bid or ask price in its system. Unlike the case of some market makers, spreads on ECNs are variable rather than fixed. Although ECN-type brokers typically charge a small commission, you can usually get tighter spreads on many currency pairs due to the large liquidity pool available.
Risks of trade manipulation are also minimised when using genuine ECN brokers as compared to brokers that operate dealing desks. This aspect of OTC shifts the odds of success against individual traders, especially if the forex broker acts as a market maker. Since traders have to deal directly with their brokers, the latter will usually hold the opposite side of the transactions.
Because of the inherent conflict of interest that exists, this arrangement does not sit well with many individual traders as they fear that the market maker will trade against them, and that is not an uncommon practice in the market making industry. No information on volume Since buy and sell transactions are not cleared by a central system, there is no way of knowing the total volume of trade. Lack of volume data can pose a challenge to stocks or futures traders who have made the switch to currencies as they may have become used to checking volume.
No singular exchange rate at any one time Exchange rates do differ from place to place, screen to screen, depending on which parties are offering what. Cash transactions take place between countless parties at any one time, and there is no exchange which records all these transactions.
Some independent traders are not even aware of this peculiar aspect of OTC dealings. Since there can be a few different prices for a currency pair at any one time, you may not be able to see what is the best available price if you trade through only one market maker.
Generally, though, the rates provided by market makers to retail traders are quite close to the pricing quoted in the interbank market. No standard data Exchange rates differ from one market maker to another because there is no consensus specified by a centralised market. Different market makers have different rates at the same time although usually not differing by more than a few pips. A trader would have to accept what is being quoted by his broker unless he compares prices with other brokers.
Price charts from different price feed vendors will also look slightly different as they each have their own data source. Although, in general, the currency prices are quite similar. The forex trading day Also, being a hour market, boundaries of a trading day are blurred. Traders from around the world are in various time zones. While the trading arena has had a boost from the CME-Reuters joint venture of a central forex exchange, it remains to be seen if that can benefit independent traders.
Trade manipulation by some market-making brokers is something that is difficult for traders to prove, and something that is easy for the culprits to dismiss. However, despite the limitations that come with the OTC territory, spot forex trading can be extremely financially rewarding for those who are aware of the limitations and know how to deal with them.
And trading forex is not one of the easiest ways — despite what many new traders believe. Many traders fail, and they empty their trading accounts before they learn how to exploit the forex market to their advantage. Although there are also traders who are successful in forex trading, their numbers are small compared to the majority of losers. Many times, traders are not aware that they have the power and might to shift the odds to their favour, that they can dramatically increase their chances of success if they want to.
The main reason why many traders get defeated by the market can be attributed to their lack of knowledge. In this 21st century, where the buzzword is knowledge, it is not just a matter of working hard, but also a matter of working smart. Knowledge is the key that can open many doors — if you have an intimate knowledge of how something works, you can then come up with ways to exploit what you know to your advantage. This applies to forex trading as well. You need to know how to identify high probability trade setups and how to manage your money wisely.
For every transaction in the forex market, there are winners and losers. Your goal is to make more overall profits than losses over a period of time, and to emerge an overall winner. My approach to consistent trading success lies in three main pillars, or the 3Ms: Mind, Money and Method. It is often said that we are our own worst enemy. Human beings are emotional creatures, and most of our decisions are guided more by emotions than logical thinking.
Our mind is capable of playing tricks on us; we can get seduced into unfavourable situations by our emotions. Emotions can work for us or against us. Sometimes they can save us from landing in a pile of sticky mess, but sometimes they can land us in it. We can also turn the tables around by playing tricks on our mind, making it believe whatever we want it to believe.
Do you have the mental strength? Whether you are new to trading currencies or a forex trader who has some experience, here are some questions to ask yourself: Do you really have a strong desire to succeed in forex trading? Sure, every one wants to succeed in something, but do you have the desire to want to succeed in forex trading? First of all, this field is not for every one, for you must have the passion for it. If you just want to try your luck, or dabble, in trading, you will just end up among the majority who lose their money.
You must have the deep desire to want to accomplish your goals, because without this desire, your thoughts will not materialise into action, and it is action that could transform your goals to reality. To be a successful trader, you must be highly self-motivated, have a concrete plan of action, and not be afraid of failure.
Are you prepared to devote a lot of time and effort into picking up trading skills and knowledge? To be really good at anything, you need skills and knowledge in that field. A huge amount of time, effort and money is required for a trader to attain consistent success in forex trading. Despite the availability of forex trading-related resources on the internet, and in the bookstores, traders can find it quite daunting to learn about trading on their own as they do not know what there is to be known.
I recommend that you check out those which are offered by skilled and practising instructors. Note: Be wary of signing up for courses or seminars that are full of hype, for they can be very misleading. Avoid those that give you the impression that you can attain consistent profits after two days of intensive learning, or those that require you to purchase expensive software.
While there are some shortcuts to gaining knowledge via courses or seminars, there is no substitute for honing your trading skills in the market. Are you willing to accept losses as part of trading? Every one makes mistakes, and mistakes are inevitable. Got a trading loss? Then whip out your trading log to record what your mistakes are and what you have learnt from that losing trade.
Always have something positive to take away from your losses, and treat it as a learning experience. Know that there will be other trades coming your way. Are you willing to take sole responsibility for your trading decisions? You read some market analysis, and then trade according to what the analyst is saying. That trade turns out to be a loser, and you turn around to blame it on that market report. It is dangerous to blame losses on other people, the forex market, or the stars, for you are the only person responsible for pulling the trigger.
And if you blame others you will never be able to find out how you can improve. Fear and greed Fear and greed are the two dominant emotions that affect not just the state of our mind, but also the currency market. In fact, the fluctuations of these two emotions are the main drivers of the currency market.
There are, of course, other emotions that exist in the market such as disappointment, regret and so on, but fear and greed are the principal forces that tilt the scales of supply and demand of currencies. When traders feel overly optimistic about a country or its currency, they become consumed by the great hope that the currency would appreciate in value against another currency.
They are then guided by this hope and greed to buy the currency pair now so that they could hopefully sell it at a higher price in the future. Greed then grows into euphoria, as traders continue to buy and buy, thus taking currency prices to newer highs. When people are buying a currency with great hope, they are also selling the other currency in the pair with great fear.
On the other hand, when currency prices go down, fear and greed are also the main drivers of the move. All in all, fear and greed are behind the steering wheel of the currency market. So, while you must learn to recognise these emotions in the market, the problem comes when you allow them to distort your logic when it comes to making trading decisions, as most of these decisions will turn out bad, and are likely to cause you to regret your actions later.
Since there is no way of banishing these emotions for good, the best thing to do is to control these emotions, instead of letting them control the way you think and act. Face and control your fears Since greed can be categorised as a kind of fear, which is the fear of missing out, I will discuss the primary types of fears relating to trading, and how they can be overcome. The first step to preventing fears from ruining your trading performance is to recognise the various forms of fear that is connected to trading.
And once you recognise the type of fear you are experiencing, the easier it is for you to handle that emotional obstacle so that you can trade better. That is the key to emotion-free trading. It is not about pretending that those fears do not exist, but how you handle them that matters.
Here are some common trading-related fears. Fear of missing out Why do so many people rush to departmental store sales, or rushed to buy technology stocks during the dot-com boom? Any kind of buying mania stems from a very strong emotion that is commonly invoked in people, and that is the fear of missing out.
In trading, this fear manifests itself especially during a sharp rally or decline of a currency pair. Your heart begins to pound really fast, and you have a million thoughts zipping through your brain, with most of the thoughts urging you to buy now, now, now. I am losing out! Traders suffering from this type of fear are usually the ones who get onto a trend too late. Be disciplined and hold off that mouse whenever you sense that this type of fear is creeping up on you.
Think instead of all those traders who are pouring dumb money into the market, and be glad that you know better than them not to join in the craze. Fear of losses Trading is a game — there will be winners, and there will be losers. Sometimes you win some, sometimes you lose some. Losses are bound to happen, no matter how accurate a trading system may be. The fear of losing is most prominent in new traders as they do not yet have adequate trading skills and knowledge to help assess and evaluate trading opportunities with a high level of confidence.
This can lead to trading paralysis, whereby traders become afraid of pulling the trigger when it comes to entering or exiting trades as they fear losing money or a big portion of their trading capital. However, if you have a reasonable stop-loss order in place, that is in accordance to your money management rules, you should have no reason of being fearful of damaging the trading account based on just one trade.
That is what stop-loss orders are for — to guard against huge losses. When you do encounter hesitancy in pulling the trigger, evaluate if you have valid reasons for doing so or if you are simply held back by fear. Traders just have to get used to the reality that losses are inevitable.
The trick is to ensure that your losses are kept small so that you do not harm both your trading account and your state of mind. A trader does not have to be right. It does not matter at all whether he or she is right or wrong; what counts is whether he or she is profitable in the long run. Traders should not be hung up on the outcome of single trades, or even a few trades, as trading performance has to be assessed over a period of time.
What matters is that you end up profitable over a period of time. Once you place less emphasis on being correct on a current trade, your fear of making wrong decisions should abate, thus enabling you to make better trading decisions without feeling burdened by the overwhelming pressure to be correct in that trade.
Remember that there will be times of losses and times of profits, which is why it is so important to enter only trades that have a high probability of success. Focus on the big picture Do not get caught up in feeling invincible or pessimistic after a win or a loss. As trading is a very highly charged and emotional activity, it is very easy for traders to oscillate between emotional highs and lows. The outcome of just one trade should not affect your overall performance, unless you have violated proper risk management guidelines by betting the farm on a single trade or by over-leveraging.
A trade is just one of many trades. When you are wrong on one trade or several trades, try not to beat yourself up or feel regret. Instead, analyze to see where and how you could have done better in those trades or what mistakes you may have made, and record what you have learnt from them. If there was really nothing that could have been preventable, just accept that the market is unpredictable. The outcome of one or a few winning or losing trades should not be magnified.
Other trades will surely come. I strongly believe that once a trader has honed his or her trading skills, the ultimate factor that will affect his or her overall profitability is money management skills. Money management is all about managing the possible risks, and it is the defining factor that separates winners and losers in forex trading. Novice traders think of how much they can harvest from the market; experienced traders think of how much they can lose to the market.
Many traders are so eager to trade to make big money that they completely overlook money management. Poor money management also explains why so many traders get wiped out by the market. Money management is about fully optimising your trading capital. It allows you to be proactive in managing risks, and to cope with trading losses — which are part and parcel of the game.
It is an essential tool to ensure that you will have more than enough to last another day in the trading game. No matter how good a trading system may be, there will be times when you will experience a series of losses. Success comes to those who have set down rules for money management, and have the discipline to follow them through their trading. Preserve your capital The shining light that attracts all traders to the forex market is the prospect of being able to grow their money by tapping into the online trading platform as their own in-house money tree.
In almost any field, it is true that most people are drawn to short-term benefits, but are myopic when it comes to long-term planning. Trading is no exception. When risk capital is put aside for trading, you are hoping that this amount of money could be transformed into a much bigger amount; otherwise, what would be the point of risking it?
But if this capital runs out, what can you bank on to make your desired profits? After all, money begets money. To drive home the importance of capital preservation, I will discuss the concept of drawdown, and how that is relevant to money management. In other words, it is the amount of money that you lose — it is usually expressed as a percentage of your total trading equity at any given time. Drawdown is not an indication of your overall trading performance, as it is calculated when you have a losing trade against your new equity high or your original equity, depending on which is higher.
Recovering from drawdown As drawdown gets bigger and bigger, it becomes increasingly difficult to recover the equity. Many people are not aware that in order to recoup the percentage of equity that they lose, they will need to gain a bigger percentage just to break even. The answer is no. It will require an Let me show you with numbers. OK, that is not scary yet, but if you start losing more and more of your capital bigger and bigger drawdowns , the faster you will go down the rabbit hole.
While many traders hope for that One Big Win that will magically transform them into millionaires overnight, they are more likely to be confronted with the One Big Loss that will threaten their survival in the forex market if they do not exercise careful money management. If a trader has a big loss, he or she will have to spend more time to get back to where he or she was before, instead of using the time to make profits.
Traders who burn out quickly in the market are those who do not show respect for risk. On the other hand, traders who have flourished are those who fully understand the importance of stringent money management and incorporate that into their trading approach. There is no way around to recouping slowly, unless you want to drive yourself to total destruction by risking more and more of your equity to try to make back your losses.
Holding on to a losing trade for too long is the biggest cause of a big drawdown. Be well-capitalised Most new traders run out of money even before they see any profits in their trading account. Indeed, those who are new to trading most likely do not have a good understanding of the risks and dangers that are lurking in the market, and few even know what drawdown means or have even heard of this word.
Many of them do know that trading can be very risky if they do not know what they are doing or how things work in the currency market and, to them, one of the obvious but incorrect ways to limit this risk is by allocating just a small amount of money to their trading account. There are also many new traders who begin their trading business with little initial capital as they simply do not have enough money.
Whatever their reasons may be, being under-capitalised will be more than just a mistake; it is often the prelude to trading failure. Forex traders who want to set themselves up for success must be well-capitalised. Never mind that some retail brokers are offering a minimum account deposit of just a few hundred dollars — a paltry amount that almost every one can afford.
Sufficient initial capital must be available to cushion the impact of a string of consecutive losses, so that you do not wipe out your trading account. A series of losses is really not that uncommon in trading, and all traders must be financially prepared for it. Those with insufficient trading capital tend to set really tight stops, which will naturally then lead to a higher probability of being stopped out.
They also tend to have a good chunk of their account eaten away by unreasonably large losses in relation to their trading account, if they do not set tight stops. So it seems that whichever way they turn, they are setting themselves up for failure, unless they are willing to trade smaller lot sizes. Looking outside of trading, many other businesses fail because the owners often do not have enough capital to tide them over the initial starting phase.
For example, a new restaurant owner must set aside enough money to pay the rent of the restaurant for at least a few months to a few years, assuming that the restaurant would not make any net profits in that period of time. If the owner only has enough to pay for two months rent from his or her own pocket, and the restaurant is still not making enough to cover the rent and other expenses in the third month, how do you think the business is going to sustain itself?
The entire business could fail, not because of the business model, but because of the lack of sufficient capital to keep the business running while the customer base builds up. Trading, as I have mentioned before, must be treated just like any other business, not a frivolous casual pursuit.
The point is this: by starting off sufficiently capitalised, you are more likely to adhere to your money management rules and, by doing so, you are really giving yourself a good fighting chance in the market. Losses are really just part of the trading game. If trading losses are kept manageable and reasonable, they should not dent your trading account too much, provided that you are well-capitalised. Knowing when to get out of a losing position in the currency market is a very important tool of risk management.
Stop-loss orders allow traders to set an exit point for a losing trade, and are the best weapon against emotional trading. While I recommend that traders place a stop-loss order at the time of placing their entry order, mental stops may also be used — but preferably by traders who are more disciplined. From experience, it is much wiser to have a wider but reasonable stop than to have an unreasonably tight stop.
Generally, a stop-loss order should not be shifted in the losing direction while a position is opened. A good trader should know beforehand when to cut his or her losses, and also when to get out of the market with profits. It is indeed the elusive factor that courts the relentless determination of its seekers. Want to know where it lies? It only exists in the creative part of the mind — together with fairies and gnomes. There is no perfect formula or strategy that can achieve that unrealistic goal because people who are involved in the financial markets evolve with changing market circumstances, even though certain old habits die hard.
Despite the non- existence of the magic formula, there are certainly high probability ways of trading the forex market. While the bulk of this book is focused on the Method part, you need to combine Method with both Money and Mind in order to attain success in the trading business. The old question: technicals or fundamentals? There are generally three broad categories of forex traders pertaining to what they base their trading decisions on: 1. Each type of trader has a distinctively different way of interpreting the currency market based on his or her own opinions.
Technical trading A technical trader believes that historical data has a big role in the forecasting of future price action, and is thus devoted to currency price chart analysis, making use of various charting tools such as support and resistance levels, trendlines and a myriad of chart indicators to understand past price behaviour so as to predict what the market will do next. Most forex traders employ some kind of technical analysis to help them make trading decisions. Technical traders assume that everything that is to be known about the market has already been factored into the current price.
Fundamental traders believe that the exchange rate of currencies are largely driven by economic and geopolitical conditions, aside from central bank interventions, and will keep track of economic data such as trade balances, inflation, Gross Domestic Product GDP , unemployment rates, interest rates and so on. They are also concerned about what policymakers have to say regarding the monetary policy of the country, and will keep on top of these when speeches are scheduled. Combing technicals and fundamentals Since there are advantages of analyzing the forex market from these two different fields, it would be too restrictive to just side with one area and ignore the other.
The most effective traders tend to make trading decisions based on a combination of both technical and fundamental factors in order to get a feel of the overall market sentiment, and then decide to either trade that sentiment or to trade against it taking a contrarian approach. The strategies taught in this book must always be combined with the prevailing market sentiment, which is influenced mainly by fundamentals.
Some strategies may work well for some traders, but may not have the same results for others over a period of time. This may seem puzzling for some people who are wondering that if something works for someone, then it should work for other people as well. In trading, there are so many other factors specific to each trader that can influence the overall trading performance — his or her emotions, psychology, trading time frame, money management rules, lifestyle, trading capital and so on.
The strategies included in this book are open to customisation according to your own personal preference. Many traders do not give themselves the fighting chance and time to stay in the game as they are prone to getting wiped out very quickly. Dos 1. When trying out a new trading strategy, always test it in a demo account, or with a small amount of money, before you commit more money to it. Always keep a record of each of your trades, with details of: why you got in, how you got out and why it turned out the way it did.
Have a personalised trading plan and update it as you learn from the market. If you are unsure of a trade, stay out. It is better to miss an opportunity than to have a loss. When trading, keep up-to-date with both the fundamentals and technicals affecting the market. A trader in the dark is a trader in the red. It will affect you emotionally, and you will most likely lose it to irrational trading. Always know why you are getting into a trade, and how you are going to get out of it.
Just be concerned about being profitable. Chances are that your account will be decimated before you can recoup your losses and go into profit. Vent your frustrations elsewhere after a loss. Do you see it as a big mechanical matrix which is devoid of emotions?
Or do you think of it in mathematical and probability terms? Perhaps, you may even view it as just a vast network of computers which are designed to cheat the trader sitting in front of his or her computer and trading electronically. Most traders I know have a love-hate relationship with the forex market, thinking that the market is, in turn, either against them or for them.
To me, the forex market is nothing more than the compressed display of emotions at any one time emanating from currency speculators around the world. It is similar to a big living organism, like a human being, which is made up of numerous cells, with each cell carrying out its own function and interacting with other cells of the body, working to keep the body alive with round-the-clock chemical and biological processes. The forex market is alive as a macro living organism, which comprises a vast number of market participants acting out their perceptions and emotions, thus driving the blood around the invisible entity.
The participation of each player, whether the player is an institutional dealer or an independent trader, is akin to the individual functioning of a cell, which collectively will constitute the whole organism — the forex market in this case. Knowing what the market thinks and how it thinks is crucial to trading success because, ultimately, the trader is dealing with other traders out there, and needs to know what they are thinking.
Even if you see the market as an enemy, what could be better than knowing the weak points and being able to read the mind of your adversary? In this chapter, I shall focus on how you can better understand the market, and use that knowledge as one of your trading weapons. Market sentiment is simply what the majority of the market is perceived to be thinking or feeling about the market — it is the most important factor that drives the currency market. This is so because traders tend to act based on what they feel and think of certain currencies, regarding their strength or weakness relative to other currencies.
Market sentiment sums up the overall dominating emotion of the majority of the market participants, and explains the current actions of the market, as well as the future course of actions of the market. The trend adopted by the forex market is actually a reflection of the current market sentiment, which in turn guides the trading decisions of other traders, whether they should long or short a currency pair.
In the process of making educated trading decisions, traders have to weigh a multitude of factors which could influence the bias of a currency, before making up their minds about the current and future state of certain currencies. There are three main types of sentiment when it comes to forming opinions in the forex market: 1. If the majority of the market wants to sell that currency, the market sentiment is deemed to be bearish; if the majority wants to buy that currency, the market sentiment is bullish; and when most market participants are unsure of what to do at the moment, the sentiment ends up being mixed.
Market sentiment acts like a fickle lover, capable of changing its mind based on certain incoming new information which can upset the existing sentiment. One moment everyone could be buying the US dollar in anticipation of a stronger dollar; the next second they could all be dumping it as they fear the dollar would start to weaken due to the impact of some new piece of information, which is almost always some fundamental news.
Interest rates Trends in interest rates are one of the most significant factors influencing market sentiment, as interest rates play a huge role affecting the supply and demand of currencies. Every currency in the world has interest rates attached to them, and these rates are decided by central banks. Some currencies have higher interest rates than others, and these are usually the currencies that attract the most attention from savvy international investors who are always looking across the global landscape in the continual search for a better interest rate yield on fixed-income investments.
This, of course, also depends on the geopolitical or economic risks of that particular currency. Just like when a bank lends money to a higher-risk borrower, high-risk currencies require a significantly higher interest rate for investors to consider keeping money in those currencies.
What causes fluctuations in interest rates? The value of money can and does decrease when there is an upward revision of prices of most goods and services in a country. The nice word for this erosion in value is, of course, inflation. Controlling inflation Central banks are responsible for ensuring price stability in their own country, and one of the ways they employ to fight inflationary pressures is through the setting of interest rates. If inflation risks are seen to be edging upward in, say, the US, the Fed would raise the federal funds rate, which is the rate at which banks charge each other for overnight loans.
When the overnight rate is changed, retail banks will change their prime lending rates accordingly, hence affecting businesses and individuals. An increase in interest rates is an attempt to make money more expensive to borrow so that there will be a gradual decrease in demand for that currency, thus slowing down an overheated economy. Interest rates and currencies The most important way in which interest rates can influence currency prices is through the widespread practice of the carry trade.
A carry trade involves the borrowing and subsequent selling of a certain currency with a relatively low interest rate, then using the funds to buy a currency which gives a higher interest rate, in an attempt to gain the difference between these two rates — which is known as the interest rate differential. The trader is paid interest on the currency he or she is long in, and must pay interest on the currency he or she is shorting. This difference is the cost of carry. Therefore, a currency with a higher interest rate tends to be highly sought after by investors looking for a higher return on their investments.
The increased demand for that particular currency will thus push up the currency price against other currencies. For instance, in there was a strong interest among Japanese investors to invest in New Zealand dollar-denominated assets due to rising interest rates in New Zealand. The then near-zero interest rates in Japan forced a lot of Japanese investors to look outside of their country for better yields on cash deposits or fixed- income instruments.
See Figure 5. When forex traders anticipate this kind of situation, they become more inclined to buy that high-interest-rate currency as well, knowing that there is likely to be massive buying interest for that currency. So, in general, rising interest rates in a country should boost the market sentiment regarding the currency of that country.
The opposite is true too: when interest rates are cut in a country, that would result in quite a bearish sentiment regarding the currency of that country, and traders would be more willing to sell than buy that particular currency. Economic growth Besides interest rates, economic growth of countries can also have a big impact on the overall currency market sentiment. Since the United States has the largest economy in the world, the US economy is a key factor in determining the overall market sentiment, especially of currency pairs that have the USD component.
A robust economic expansion, coupled with a healthy labour market, tends to boost consumer spending in that country, and this helps companies and businesses to flourish. A country with a strong economy is in a better position to attract more overseas investments into the country, as investors generally prefer to invest in a solid economy that is growing at a steady pace. Forex traders, expecting this consequence, will put on their bullish cap to buy that currency before the investors do.
These are explained below. Unemployment rate The unemployment data reports the state of the labour market of a country. Trade balance data Another widely watched economic indicator is the trade balance data. Trade balance measures the difference between the value of imports and exports of goods and services of a country.
Brokers are the individuals who sell and buy stocks on behalf of the investors clients. To help your understanding of the difference between Brokers and Market Makers easier, we have put below the main points of differentiation:.
With a thorough read of this article you must have got a fair understanding of Market Making. Moving on to the conclusion, let us briefly see what all we have covered so far. With Market Making Strategy, the market makers perform from both the sides i. This way they not only create the market, but also earn profit by selling at a slightly higher price than the market price.
After that we found out the role of automation in making Market Makers stronger, the relevance of Market Making, and the difference between a Broker and a Market Maker. If you wish to learn to identify trading opportunities based on Mean Reversion theory, and create different mean reversion strategies, the Mean Reversion Strategies In Python course by Quantra is a must for quant traders, offered by Dr.
Ernest P Chan. Be sure to check it out. Disclaimer: All data and information provided in this article are for informational purposes only. All information is provided on an as-is basis. Who are Market Makers? What is Market Making? How do the Market Makers Earn? How much do Market Makers make? Can Market Makers Lose Money? Why is Market Making Important? Key takeaways about Market Making from Economic Times : Market Makers are member firms appointed by the stock exchange to inject liquidity and trade volume into stocks.
Each Market Maker displays buy and sell quotations for a guaranteed number of shares. Once an order is received from a buyer, the Market Maker immediately sells from its own holdings or inventory of those shares to complete the order. The Market Maker is compensated for the risk by being allowed to offer two-way quotes in the market, consisting of the buy and sell prices quoted together, the difference being the profit.
The framework of Market Makers reduces the time required to execute a trade and the cost of transacting in that stock, allowing a large number of shares to be traded. Let us find out ahead in the article if Market Makers end up losing any money or not. Let us now see ahead how market makers help with Price Volatility and Impact Cost: Market Making and Price Volatility Coming back to the topic of discussion, Market makers also help reduce price volatility which leads to fair pricing of the assets.
Market Making and Impact Cost Since the market makers function with programmatic execution which integrate with exchange APIs, including market making algorithm, it increases their efficiency. Algorithmic Market Making and its benefits The overall positive impact of algorithmic Market Making can be summed up as mentioned below: Benefits of Making Markets with Algorithms Making markets using algorithms has therefore provided the following benefits: Reduced indirect costs paid as bid-ask spreads Made markets less Volatile Introduced liquidity in hedging derivatives Efficiently Priced Markets by interaction with arbitrageurs Reduced impact cost While trading big sizes Increased liquidity across the board Let us now move ahead and learn about the role of automated trading in Market Making.
For instance, these are the two of those events: Changes in the prices of financial instruments, and Trading positions accumulated by the market maker Since automated systems can handle their risks much more accurately than humans, they offer better quotes for the Market Makers. While using automated systems for Market Making, you get: Faster response time for Market Making Scalability in Market Making 24x7 Availability for Market Making Faster response time for Market Making Pricing of derivatives that enable investors to hedge often involves time-consuming mathematical calculations.
Scalability in Market Making Speaking of scalability, while human traders can only track activities in a few instruments, automated systems can do the work in thousands of them simultaneously. Moving ahead, let us see how Brokers and Market Makers are different from each other. Difference between a Broker and a Market Maker It is a well-known fact that there are many market participants who play important roles in their own ways in financial markets.
To help your understanding of the difference between Brokers and Market Makers easier, we have put below the main points of differentiation: Broker Market Maker Brokers sell and buy stocks on behalf of investors. Market Makers provide liquidity in the market by buying and selling stocks. Brokers provide their clients with profitable offers for buying or selling securities, stocks, mutual funds, etc.
Market Makers quote the stock prices based on the bid-ask spread in the markets. Brokers can be individuals or firms. Market Makers are usually large banks or financial institutions. Brokers are intermediaries for their clients and financial markets. Market Makers act like wholesalers in the financial markets by buying and selling securities. Brokers do not reflect market demand and supply as they do not set prices. Based on the prices they set, Market Makers reflect market demand and supply.
They provide various services like consulting, research, investment advice and so on. Market Makers do not provide services to the clients and instead, they create the market for investors. We will call it a perfect start to your endeavour in Market Making. Share Article:. Mar 02, Introduction to Quantitative Finance. Want to join EPAT? First Name. Last Name. Email please enter a valid email. Phone Numer Please enter valid number. I'm Interested!
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Play the forex markets to win with this invaluable guide to strategy and analysis Day Trading and Swing Trading the Curr. In trading currencies, market makers function as intermediaries in sales and This includes strategies to trade against retails traders. This book serves to explain how the markets are manipulated by market makers in order to beat the retail traders. The good news is that this market manipulation.