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MadMarketScientist
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Everything posted by MadMarketScientist
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Market speculation is a risky venture. Speculators do not hold positions for the long term. They aim to enter and exit positions as fast as possible. Speculators aim to make the maximum gain from the smallest of price movements. They do this by leveraging positions so as to maximize the profits they can make from price fluctuations. To explain this better, rather than wait for 20 trading days to gain $1000 from 100 pips in the market, a speculator will aim to make the same amount of money, using a lower number of pips but with a high leverage in a shorter time frame.
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Slippage occurs in al financial markets when there is increased volatility or when there are so many orders that a broker/dealer can handle at a time. This is a phenomenon associated with dealing desks. Slippage is associated with a change in spread. For instance, a trader may want to BUY the EURUSD at 1.3209/1.3212, with an expected spread of 3 pips. Slippage may cause him to be filled at 11.3252, in which case, the trader’s position opens at a spread of – 40 pips. As seen in this example, slippage is associated with increased transaction costs. Slippage is an undesirable phenomenon and the only way to avoid it is by using brokers who offer direct market access.
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Short selling is a practice that is carried out in all financial markets, but carries a significant amount of risk when it is done outside the forex market. Indeed, short selling outside forex is a controversial practice. In forex, short selling simply means selling one currency against another in order to profit from the anticipated fall in value. Outside forex, short selling involves borrowing an asset from a broker and offering it for sale, and if the price falls, the trader can buy that security back and return to the broker, profiting from the price differential. The controversy in this practice was typified in 2008 as the collapse of Lehman Brothers hit stock markets. Unscrupulous traders circulated rumours of further collapses, triggering massive sell-offs. Many of these traders, who already had short-sale positions on these assets, profited from the steep price falls, forcing the Securities and Exchange Commission to place a ban on naked short-selling As such, short-selling is only allowed when the market is on an uptick or is in a neutral mode.
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Sometimes, a forex trader may see that his position in the forex market has the potential to make more money if allowed to run. This may warrant leaving the position overnight, or even for several days or weeks at a stretch. This is a forex rollover, as the position is allowed to remain open and be “rolled over” to the next trading day. Normally, a rollover incurs a charge. The interest rates of the countries whose currencies are represented in that trade are used to calculate the charge. So if a trader has a “Buy” position in a currency such as the AUDJPY (where the interest rate differential is 4.25 – 0.1 = 4.15%), the trader’s position will be credited with the corresponding interest calculation. If he held a “Sell” position, he would instead be debited based on the interest rate differential of 4.15%.
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Re-quotes usually occur when prices have moved away from the levels displayed on the trader’s platform screen. Re-quotes can occur for a number of reasons. Sometimes, there may be a delay in data transmission as a result of poor internet network. At other times, fast-paced market action can be so rapid that even when data transmission is ok, the price of the asset would have moved at the time of execution. The only way to avoid re-quotes is by using a broker with direct market access, such as ECN brokers. These offer prices from several liquidity providers with greater market depth so you can be sure your orders are always executed.
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Range trading is based on the fact that prices form channels independent of whether prices are trending upwards or downwards or sideways. It assumes that 80% of the time, the candlesticks will bounce up from lower channel trendlines and retreat from upper channel trend lines. By selling at resistance and buying at support levels, a trader may be able to profit from these moves in the market. Pivot points also form a basis of horizontal range trading, as opposed to use of ascending channels for uptrend range trading and descending channels for downtrend range trading.
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The PIP is the smallest movement of a financial asset to the last decimal point of the price quote. For example, if the price of the EURUSD moves from 1.3290 to 1.3297, we say the currency pair has moved 0.0007 points or 7 pips (1.3297 – 1.3290 = 0.0007). The value of the pip depends on the lot size used to execute the trade. The value of a pip for a Standard Lot is $10, while the value for a mini-lot is $1.
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Pending orders are used when appropriate conditions for a favourable trade do not exist at present market levels, but are likely to do so at a future time. In these conditions, a trader can decide to set a pending order which will be automatically executed if the market gets to that level. For instance, a trader may be looking to sell a currency at a resistance level, but the price of the asset is still some distance away from his preferred point, and presently heading upwards. If he uses a market order, the trade may keep advancing against his position and leave his account in jeopardy of a large draw-down or being stopped out entirely. But by using a pending order such as a Sell Limit order set to the resistance level, his trade is executed at a point where the trade is more likely to succeed.
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The Non-Farm Payrolls (NFP) report is a part of the employment data released by the US Bureau of Labour Statistics on the first Friday of every month. It is a highly-watched economic indicator as it provides very strong information about the state of a nation’s economy. If more people are employed in the private sector, it shows that the economy of the nation is strong. Bad employment figures are a direct consequence of a weak economy. When the global financial crisis hit as a result of the collapse of the US sub-prime mortgage market in the US, the multiplier effect hit home and caused many businesses to lay off workers and reduce wages, resulting in poor NFP figures for many months at a stretch. The NFP represents about 80% of workers whose output brings about the total GDP of the US, and it helps policy makers evaluate the state of the nation’s economy and decide on economic policy.
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Traders can only trade when the markets are open for business. These times are referred to as market hours. Market hours differ from market to market. The stock market is only open for about 6 hours a day, 5 days a week. The forex market is a 24 hour market, with the market hours divided into 3 main zones; Tokyo, London and New York time zones.
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Hedging is used if the outcome of a trade is not assured, or if a transaction becomes too costly as a result of exchange rate differentials. In such an instance, a trader may decide to take a contrary position in another market or employ another kind of trade in reverse of the original one in order to cover up any losses incurred on the first trade. Hedge trades are done in such a way that if the original trade is a winner, the payout is higher than the second trade used as the hedge, and if the first trade is a loser, the hedge trade will cover the losses.
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Fundamental analysis is the primary driver of the forex markets. This is because the figures released for the economic indicators will affect the investment climate and appetite of traders for the affected country’s currency. Millions of individual and institutional traders watch these economic indicators and when the figures are released, they produce an immediate market bias for the affected nation’s currency. This bias can be positive, (sending the currency value upwards) or negative, crashing the value of the currency. Traders usually develop a bias because fundamental analysis answers the following questions: is the economy of the country in question expanding or contracting? What parts will the country’s policy makers be looking at, and what actions will they possibly take? What parts of the economy is doing well or in bad shape? These questions help traders determine if that country’s currency is worth holding, and they respond accordingly after conducting the fundamental analysis.
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Certain economic parameters are used by economics and politicians alike to determine the state of a nation’s economy. Some of these parameters include employment reports, retail sales, consumer and producer inflation figures, the Gross Domestic Product (GDP), interest rate decisions and manufacturing data. Economists look at the economic indicators and make prediction of what the figures will be every month. The extent of conformity or deviation of the actual figures from the consensus reached by economists in their predictions, affects the sentiment that traders have for the currency of the affected country, leading to either an increased demand for the currency or reduced demand. The extent of demand will ultimately affect the value of the currency vis-à-vis other currencies. A calendar of these indicators is released every month for the benefit of everyone concerned, including forex traders. Economic indicators are known colloquially as forex news.
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In the financial markets, traders can buy or sell securities in two ways: directly from the liquidity providers (banks) through the dealing desk of brokers When buying directly from the liquidity providers, traders get access to pricing and deals directly. When buying through the dealing desks, traders buy indirectly, as the brokers operating dealing desks buy from the liquidity providers and resell to the traders. In this instance, the dealing desk broker is not operating as a broker but as a dealer. Dealing desks have implications for traders as traders are offered pricing at slightly marked up rates. Dealing desks have also been implicated in some pricing abnormalities such as stop hunting, slippages and re-quotes.
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Day trading is often seen in the light of normal employment hours, where workers clock-in in the morning and clock-out at the end of the trading day. Day trading is the hallmark of speculators, who use leverage in order to maximize the relatively small market price fluctuations that occur during the trading day. The volatility of markets such as the forex markets allows traders to open and close positions in a matter of hours. Day trading is done by the majority of individual traders in the market, hence contributing to the great market liquidity that the forex market boasts of.
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Channels can be used in technical analysis to predict the range at which prices will peak before retreating, and the range at which prices will fall before bouncing up. Channels can form in an uptrend (ascending channels), in a downtrend (descending channels) or in a consolidation (horizontal channels). The pivot points of S1, S2, S3, central pivot, R1, R2, R3 all form horizontal channels which can be used to range trade at various price levels. A break of a channel on the upside is a buy signal, and a break of a channel to the downside is a sell signal. A channel tool exists as a technical indicator: the Donchian Channel.
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Candlesticks are simply a way of representing price data in a way that traders can easily interpret. Individual candlesticks only give an indication of what is happening in the market in the present time, but candlestick patterns (two or more candlesticks) can be used as determinants of future price action and are a great tool of technical analysis.
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The Bretton-Woods agreement of 1944 which fixed the currencies of the world to the US Dollar, which itself was pegged to gold at a price of $35 an ounce, was essentially a fixed exchange rate regime. This system collapsed in 1971 when the US withdrew from it unilaterally. However, countries like China operate a fixed exchange rate regime for the Chinese Yuan Renminbi against the US Dollar.
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In export-oriented economies like Japan and Switzerland, the central banks hold an official policy of devaluation so as to make the country’s exports cheaper and attract more patronage abroad, as a means of increasing revenue. Whenever market conditions cause strengthening of the currencies in question, the central banks intervene by flooding the forex markets with massive amounts of the local currency, using it to purchase currencies like the US Dollar or other majors. Supply of the currency now outstrips the demand leading to a fall in the exchange rate of the currency. The Bank of Japan intervened three times in 2011 to curtail the strengthening Yen, while the Swiss National Bank introduced a minimum exchange rate peg of 1.2000 for the EURCHF pair, promising to defend that peg “at all costs”. In order to defend the peg, the SNB would have to sell lots of the Swiss Franc to make it cheaper and keep the exchange rate above 1.2000.
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Depreciation should be differentiated from devaluation, which is a deliberate government policy of the local country to drop the value of its currency’s value. Depreciation is usually a product of market forces, and is usually as a result of a negative attitude of traders to a currency, leading them
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Brokers are also dealers in their own right. A dealer is an individual or firm that acts as a principal or counterparty to a transaction. As dealers offering securities to other traders, they take one side of a position, and hope to earn a profit by closing out the position in a counter-trade with another party. In the forex market, many “brokers” operate dealing desks that take contrary positions to that of traders. By selling a currency a trader buys, or by buying a currency when a trader sells, the brokers are actually acting as dealers. In this situation, they are also known as market makers.
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The bid price is the opposite of the ask price. In a price quote, the bid price is the price quoted on the left hand side. For example, if the EURUSD is quoted at 1.3201/1.3203, the bid price here is 1.3201. If a trader has purchased the EURUSD earlier in the market and made some money, he will only be able to sell the base currency at the bid price and not the ask price. In this case, he will sell the EUR position in the EURUSD at 1.3201.
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The Ask price is the opposite of the bid price. The Ask or Offer price is the price at which a trader buys a financial asset such as a currency from the dealer/broker. In the online spot forex market, the Ask is the price at which the trader buys the base currency in a currency pair. In a price quote, the ask price is the price quoted on the right hand side, and it is always higher than the bid price. For example, if the EURUSD is quoted at 1.3201/1.3203, the ask price is 1.3203. If a trader wants to trade the EURUSD in the forex market and he places a Buy Order for this pair, his entry price will be 1.3203. The real-time application of the ask price differs from market to market. In some markets like the commodities market or mutual fund market, the ask price will include the offer price of the instrument being traded plus any commissions or sales charges. In forex, it is simply the price offered by the broker/dealer to the buyer for an instrument.
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By request, we are moving Predictor's running commentary into its own thread. MMS -
Mathematics of Stops: Choose Your Desired Win Rate
MadMarketScientist replied to Predictor's topic in Trading
Thanks for the heads up ... user tagged appropriately as a vendor now. regards, MMS