How do I use this USDX in my trading arsenal?
We all know that most of the widely traded currency pairs include the US dollar. If you dont know, some that include the U.S. dollar are EUR/USD, GBP/USD, USD/CHF, USD/JPY, and USD/CAD.
USDX will give you an idea of the relative strength of the US dollar around the world. In fact, when the market outlook for the U.S. dollar is unclear, more often times than not, the USDX provides a better picture.
Because the USDX is comprised of more than 50% by the euro zone, EUR/USD is quite inversely related.
If the USDX makes significant movements, you can almost surely expect currency traders to react to the movement accordingly. Both the USDX and forex traders react to each other. Breakouts in spot USD pairs will almost certainly move the USDX in similar breakout fashion.
To sum it all up, forex traders use the USDX as a key indicator for the direction of the USD.
Always keep in mind the position of the USD in the pair you are trading. For example, if the USDX is strengthening and rising, and you are trading EUR/USD, a strong USD will show a downtrend on the EUR/USD chart. If you are trading a pair in which the USD is the based currency, such as the USD/CHF, a rise in the USDX will most likely show a rise in USD/CHF charts like the one shown below.
Trader Alen
Thursday, March 31, 2016
Wednesday, March 30, 2016
FX and Equity markets (lesson19)
Forex and Global Equity Markets Did you know that equity markets can also be used to help gauge currency movement? In a way, you can use the equity indices as some kind of a forex crystal ball. Based on what you see on the television, what you hear on the radio, and what you read in the
newspapper, it seems that the stock (equity) market is the most closely covered financial market.
One thing to remember is that in order to purchase stocks from a particular country, you must first have the local currency.
To invest in stocks in the Japan, a European investor must first exchange his euros (EUR) into Japanese yen (JPY).
This increased demand for JPY causes the value of the JPY to appreciate. On the other hand, selling
euros increases its supply which drives the euros value lower.
When the outlook for a certain stock market is looking good, international money flows in. On the other hand, when the stock market is struggling, international investors take their money out and look for a better place to park their funds.
Even though you may not trade stocks, as a forex trader, you should still pay attention to the stock markets in major countries.
If the stock market in one country starts performing better than the stock market in another country, you should be aware that money will probably be moving from the country with the weaker stock market to the country with the stronger stock market.
This could lead to a rise in value of the currency for the country with the stronger stock market, while the value of the currency could depreciate for the country with the weaker stock market.
The general idea is: strong stock market, strong currency; weak
stock market, weak currency.
Stock Index Description
Dow
The Dow Jones Industrial Average (or Dow for short), is considered to be one of the premier stock indexes in the U.S. It measures how well the top 30 publicly owned companies are trading. Despite the name, barely any of the companies have anything to do with industrial production and are instead representative of some of the biggest companies in America.
It is closely watched by investors around the world and is highly indicative of market sentiment, thus making it sensitive to both local and foreign economic and political events. The companies that are part of the Dow are so large that you probably deal with at least one of them every day. Imagine life without AT&T, McDonalds, Pfizer or Intel? Yes – these companies are all listed in the Dow!
S&P500
The Standard & Poor 500, more commonly known as the S&P 500, is a weighted index of the stock prices of the 500 largest American companies.
It is considered a bellwether for the American economy and is used to predict its direction.
After the Dow Jones Industrial Average, it is the most traded index in the U.S. Some mutual funds, exchange-traded funds, and other funds such as pension funds, are designed to track the performance of the S&P 500 index. Hundreds of billions of U.S. dollars have been invested in this fashion.
NASDAQ
NASDAQ stands for National Association of Securities Dealers Automated Quotations. It refers to the largest electronic screen-based equity securities trading market in the U.S., comprising of approximately 3,700 companies and corporations. It also boasts of having the largest trading volume aŵoŶg the ǁoƌld’s stoĐk ŵaƌkets.
Nikkei
The Nikkei, similar to the Dow Jones Industrial Average, is the most widely quoted average of the Japanese stock market.
It is a price-weighted average of the top 225 companies and is supposed to be reflective of the overall market.The Nikkei includes companies like Toyota, Japan Airlines, and Fuji film.
Dax
The DAX is short for theDeutscher Aktien Index.
It is the stock market index in Germany that consists of the top 30 blue chip companies that are traded on the Frankfurt Stock Exchange. With Germany being the largest economy in the euro zone, the DAX is normally the most closely watched index within the whole euro zone. Some companies that are part of the DAX are Adidas, BMW, and Deutsche Bank.
DJ EURO STOXX
The dow jones eurostoxx 50 index is the eurozone leading blue-chip index.
It comprises over 50 top-sector stocks from 12 euro zone countries. It was created by Stoxx Ltd., which is a joint venture of Deutsche Boerse AG, Dow Jones & Company and SIX Swiss Exchange.
FTSE
The FTSE (pronounced ͞footsie͟) index tracks the performance of the most highly capitalized UK companies listed on the London Stock Exchange. There are several versions of this index, such as the FTSE 100 or FTSE 250, depending on the number of companies included in the index.
Hang Seng
The Hang Seng index is a stock market index in Hong Kong. By recording and monitoring the daily price changes of the stocks included in the index, it tracks the overall performance of the Hong Kong stock market. This index is currently compiled by the HSI Services Limited, which is a subsidiary of Hang Seng Bank.
Trader Alen
newspapper, it seems that the stock (equity) market is the most closely covered financial market.
One thing to remember is that in order to purchase stocks from a particular country, you must first have the local currency.
To invest in stocks in the Japan, a European investor must first exchange his euros (EUR) into Japanese yen (JPY).
This increased demand for JPY causes the value of the JPY to appreciate. On the other hand, selling
euros increases its supply which drives the euros value lower.
When the outlook for a certain stock market is looking good, international money flows in. On the other hand, when the stock market is struggling, international investors take their money out and look for a better place to park their funds.
Even though you may not trade stocks, as a forex trader, you should still pay attention to the stock markets in major countries.
If the stock market in one country starts performing better than the stock market in another country, you should be aware that money will probably be moving from the country with the weaker stock market to the country with the stronger stock market.
This could lead to a rise in value of the currency for the country with the stronger stock market, while the value of the currency could depreciate for the country with the weaker stock market.
The general idea is: strong stock market, strong currency; weak
stock market, weak currency.
Stock Index Description
Dow
The Dow Jones Industrial Average (or Dow for short), is considered to be one of the premier stock indexes in the U.S. It measures how well the top 30 publicly owned companies are trading. Despite the name, barely any of the companies have anything to do with industrial production and are instead representative of some of the biggest companies in America.
It is closely watched by investors around the world and is highly indicative of market sentiment, thus making it sensitive to both local and foreign economic and political events. The companies that are part of the Dow are so large that you probably deal with at least one of them every day. Imagine life without AT&T, McDonalds, Pfizer or Intel? Yes – these companies are all listed in the Dow!
S&P500
The Standard & Poor 500, more commonly known as the S&P 500, is a weighted index of the stock prices of the 500 largest American companies.
It is considered a bellwether for the American economy and is used to predict its direction.
After the Dow Jones Industrial Average, it is the most traded index in the U.S. Some mutual funds, exchange-traded funds, and other funds such as pension funds, are designed to track the performance of the S&P 500 index. Hundreds of billions of U.S. dollars have been invested in this fashion.
NASDAQ
NASDAQ stands for National Association of Securities Dealers Automated Quotations. It refers to the largest electronic screen-based equity securities trading market in the U.S., comprising of approximately 3,700 companies and corporations. It also boasts of having the largest trading volume aŵoŶg the ǁoƌld’s stoĐk ŵaƌkets.
Nikkei
The Nikkei, similar to the Dow Jones Industrial Average, is the most widely quoted average of the Japanese stock market.
It is a price-weighted average of the top 225 companies and is supposed to be reflective of the overall market.The Nikkei includes companies like Toyota, Japan Airlines, and Fuji film.
Dax
The DAX is short for theDeutscher Aktien Index.
It is the stock market index in Germany that consists of the top 30 blue chip companies that are traded on the Frankfurt Stock Exchange. With Germany being the largest economy in the euro zone, the DAX is normally the most closely watched index within the whole euro zone. Some companies that are part of the DAX are Adidas, BMW, and Deutsche Bank.
DJ EURO STOXX
The dow jones eurostoxx 50 index is the eurozone leading blue-chip index.
It comprises over 50 top-sector stocks from 12 euro zone countries. It was created by Stoxx Ltd., which is a joint venture of Deutsche Boerse AG, Dow Jones & Company and SIX Swiss Exchange.
FTSE
The FTSE (pronounced ͞footsie͟) index tracks the performance of the most highly capitalized UK companies listed on the London Stock Exchange. There are several versions of this index, such as the FTSE 100 or FTSE 250, depending on the number of companies included in the index.
Hang Seng
The Hang Seng index is a stock market index in Hong Kong. By recording and monitoring the daily price changes of the stocks included in the index, it tracks the overall performance of the Hong Kong stock market. This index is currently compiled by the HSI Services Limited, which is a subsidiary of Hang Seng Bank.
Trader Alen
Tuesday, March 29, 2016
Order Flow (lesson20)
What Is Order Flow Trading and What It Is Not
Order Flow Trading is a term that can create a lot of confusion. Some people think it is trading directly from flow information from banks (info that only a small circle of people have access to and they surely won’t share it on the internet), some think it is tape reading and some that it is simply another form of price action.
There is no clear definition and in the end, all above mentioned methods are based on anticipation of future order flow in the markets. The way I view it is that OFT is a mindset. Instead of just looking for technical patterns, we go one step ahead and think about what other market participants might do. It’s all fear and greed in the markets and we can see this every day in the market.
It’s a big change for newbies, especially those that previously used only technical analysis.
But like any other activity, it becomes easier with time and you start to view the market with completely different eyes. You are aware how price is moving, in which manner it moves (not as good as bank flow info, but PA gives some good insights), your knowledge about other participants helps you avoid common mistakes and finally, your knowledge about market inefficiencies will help you combine all this and exploit those opportunities in live trading.
One could argue a lot about the term of OFT, but for me, it is a way of thinking – a different approach to the markets than the common ones, not something limited to a particular method. I don’t have any private bank flow information, but still, my knowledge about market microstructure and other market participants are giving me an edge in the markets.
Type of Orders and How Price Changes
In this section, I will cover the three main type of orders used in trading and how price changes.
We will take a look what really happens and what is moving price. First of all, there is the term liquidity. If you want to buy an asset, you need someone to sell it to you. You are therefore looking for liquidity. The same things apply if you are a seller, you are looking for a buyer to take the asset you wish to sell.
A bid is a limit order to buy an asset at a specific price (better than the current market rate) and an offer is a limit order to sell an asset at the determined price (better than the current market rate). Bids and offers make liquidity in a market, they provide it to participants which trade via market orders. Liquidity is a very important factor in trading, especially for large traders.
The more liquid a market is, the more it will attract other traders. Large traders cannot simply think about how much price will move, but also how they will get out of their trade when the time has come. This is not a problem for us retail trader, but definitely a key factor for those trading big amounts of money.
Type of Orders
Market orders
Market orders consume liquidity provided by limit orders. They are orders issued to buy/sell a specific asset at the current market price.
A buy market order will be filled against the best offer and a sell market order will be filled versus the best bid available. Market orders take away liquidity from the market as the participant that issues them wants to trade immediately and eats available liquidity via limit orders.
Limit orders
Limit orders provide liquidity because they give other traders the option to trade against them. If I issue a 1 million bid (buy limit order) at 1.31000 for EUR/USD, I provide liquidity to other participants looking to sell at the market at this price. They are called limit orders because they cannot be filled at a price worse than specified. This means my bid at 1.31000 can be filled AT or BELOW (positive slippage) the rate, but not above.
Order books or DOMs (Depth of Market) are mostly used in Futures trading, as the FX market has no aggregated volume data.
Stop Orders
Stop orders are orders to buy above the current market price/sell below the current market price. The term „stop order“ is used because the order is „stopped“ from being executed until it hits the determined price. It is being stopped because otherwise, if you create a bid at the price where offers already exist or above, it would become marketable order and would be executed immediately. Most of the time, a buy stop order will be executed when it’s price has hit the market „offer price“ and a sell stop order will be triggered when it’s price has hit the market „bid“ price. They will be converted into market orders and will consume liquidity. But there is something unique about stop orders. They can also provide liquidity. Let’s say I’m a large trader looking to sell an asset (please forget about the above order book for this example).
Market price is currently 44/46 (I can buy at 46 and sell at 44). I don’t want to sell at 44 because liquidity is not good enough for the amount of contracts I intend to sell. I’m aware that there are a lot of buy stops above the price of 50 from participants that are already short. Other participants are also aware of this and price will be attracted to those levels. I will therefore set my offers above 50 (let’s say 51 and 52) and gain advantage from the stops.
How? Chances are good there are not many buyers at those levels, as price will be perceived as high and liquidity is a bit thin. But there are forced buyers above 50 and they will have to take my liquidity. My shorts will be filled and price is likely to move quickly in my favor as most buying came from shorts that were stopped out. Price is not attractive for buyers and will likely drop quickly. Stop hunting is a common activity in ALL markets, not just the FX market. Retail traders are aware of this, but mostly in the wrong way. I’m not talking about your retail broker widening spreads to take some few more stops out, but stop hunting on a larger scale. Large traders need it for liquidity as above described and bank dealers will also use it also to control their book better. But let’s leave that for later…
Stop Hunting
Retail traders are generally aware of stop hunting but have a wrong idea what it really is. It is not your retail broker slipping you for a few pips to get your stop.
Those brokers do not have the size to move the market in such a way! As we covered in the previous article, large traders cannot simply accumulate or distribute a large position whenever they wish. They have to look for liquidity and stops are helping them in an indirect way, like I explained in the example above. That is why stop hunts tend to be quickly faded: The large bids or offers got filled and with the stops triggered, there are no buyers left in a buy stop-hunt scenario and no sellers in a sell stop-hunt scenario.
Those bids and offers tend to stabilize the market. If there were little of them available as the stops get triggered, it would result in an event called a stop cascade - there is insufficient liquidity for the stop loss orders and the price gets pushed into the next area of large stops until bids/offers in good size appear. There are also traders that anticipate such moves and look to take profit near the level where stops are rumored to be.
Those are mostly short-term speculators and model funds (which buy/sell on momentum). They will take advantage of the forced buyers/sellers and liquidate their position as price hits into the stops.
We will cover the topic of how to identify levels of concentrated stop loss orders later. Dealers also participate in this activity. While there are looking to make some profit from short-term trading, their main task is to provide clients with liquidity and get them filled with less as possible slippage.
Let's go through a scenario: EUR/USD is trading at 1.3050 and Dealer "A" sees many of his clients have buy stop orders from 1.3100 up to 1.3110. This means those clients want to get out of their position once price breaks above the determined rate. If he does nothing and waits for the price to break above 1.31, he will have trouble filling his clients without slippage. There will be stops from other market participants above 1.31 and other dealers will be acting similar, pushing the price higher fast. He would fill his clients at a bad rate, earns nothing from it and his reputation would be seriously hit if this would happen several times. So what can he do? He can gradually start to accumulate a long position and anticipate a break of 1.31 into the stops. Dealers tend to have a great feeling for short-term moves and are skilled for having "a feel for the market". If he gradually buys EUR/USD all the way up to 1.31, he will be able to fill his clients without slippage and will make a nice profit from it.
More detailed example:
DEALERS ORDER BOOK:
Buy Stops from 1.3100 - 1.3110 worth $100 million
DEALERS ACTION:
Buy 20 million @ 1.3060
Buy 20 million @ 1.3075
Buy 20 million @ 1.3080
Buy 20 million @ 1.3085
Buy 20 million @ 1.3090
Net position = Long 100 million @ 1.3079
So he will distribute his position as price breaks above 1.31 and fill his customers stop loss orders.
This can, of course, go wrong if price fails to maintain the upside momentum and turns lower. The dealer must then quickly get out of his position. But again, those traders are skilled at managing their positions and while they can't be right all the time like other traders cannot too, they have a good feel for the short-term moves.
How to Use Order Flow Information
Again, banks do not open their order books directly to just any outsider, one would need good connections. So people claiming they have some software that shows the order books for the FX market are scammers.
As volume is not concentrated and FX is an OTC market, there is no real 'Depth of Market' for the whole market. The one you maybe see in your trading platform is only the DOM of your broker and retail brokers have a small role in this huge market. However, discretionary flow information is something different. One needs to distinguish between discretionary information like shown below and people claiming to have DOM's for the FX market.
Flow information often looks like this:
Example:
EUR/USD Bids at 1.30, 1.2980, 1.2950
Offers at 1.3080, 1.31, 1.3120
Buy stops above 1.31
Sell stops below 1.30
So again, bids are limit orders to buy at a determined price. Bids mentioned in the flow info providers will be levels where good buying interest is noted. Offers are limit orders to sell at a determined price. The mentioned Offers will be where decent selling interest is noted. Market participants always look for the weaker side of the market, so both buy and sell stops will be targeted. Be aware that you shouldn't just enter a trade and "gun for the stops". You need to have other factors that support your trade idea. When using this, it is very important to keep in mind that this is additional information that may help you in your trading, but you should not trade off this information alone - that is, using them as trade signals.
A few reasons: Orders get canceled all the time. We cannot know the size of the mentioned orders. E.g. if there is a lot of demand for EUR/USD and rather small offers ahead, it will absorb those rather easy and continue to move up. If price stops after hitting the cluster of orders, it is not a sign that it will reverse immediately. Watch for additional signals.
What we learned in course comes first, order flow is only additional information wich can help you!
There are always bids and offers, smaller and large ones, but in the end, it depends on the power of the bulls or the bears. As I mentioned, if there is strong demand for EUR/USD, offers will do little on the way up until the accumulation has finished.
Trader Alen
Order Flow Trading is a term that can create a lot of confusion. Some people think it is trading directly from flow information from banks (info that only a small circle of people have access to and they surely won’t share it on the internet), some think it is tape reading and some that it is simply another form of price action.
There is no clear definition and in the end, all above mentioned methods are based on anticipation of future order flow in the markets. The way I view it is that OFT is a mindset. Instead of just looking for technical patterns, we go one step ahead and think about what other market participants might do. It’s all fear and greed in the markets and we can see this every day in the market.
It’s a big change for newbies, especially those that previously used only technical analysis.
But like any other activity, it becomes easier with time and you start to view the market with completely different eyes. You are aware how price is moving, in which manner it moves (not as good as bank flow info, but PA gives some good insights), your knowledge about other participants helps you avoid common mistakes and finally, your knowledge about market inefficiencies will help you combine all this and exploit those opportunities in live trading.
One could argue a lot about the term of OFT, but for me, it is a way of thinking – a different approach to the markets than the common ones, not something limited to a particular method. I don’t have any private bank flow information, but still, my knowledge about market microstructure and other market participants are giving me an edge in the markets.
Type of Orders and How Price Changes
In this section, I will cover the three main type of orders used in trading and how price changes.
We will take a look what really happens and what is moving price. First of all, there is the term liquidity. If you want to buy an asset, you need someone to sell it to you. You are therefore looking for liquidity. The same things apply if you are a seller, you are looking for a buyer to take the asset you wish to sell.
A bid is a limit order to buy an asset at a specific price (better than the current market rate) and an offer is a limit order to sell an asset at the determined price (better than the current market rate). Bids and offers make liquidity in a market, they provide it to participants which trade via market orders. Liquidity is a very important factor in trading, especially for large traders.
The more liquid a market is, the more it will attract other traders. Large traders cannot simply think about how much price will move, but also how they will get out of their trade when the time has come. This is not a problem for us retail trader, but definitely a key factor for those trading big amounts of money.
Type of Orders
Market orders
Market orders consume liquidity provided by limit orders. They are orders issued to buy/sell a specific asset at the current market price.
A buy market order will be filled against the best offer and a sell market order will be filled versus the best bid available. Market orders take away liquidity from the market as the participant that issues them wants to trade immediately and eats available liquidity via limit orders.
Limit orders
Limit orders provide liquidity because they give other traders the option to trade against them. If I issue a 1 million bid (buy limit order) at 1.31000 for EUR/USD, I provide liquidity to other participants looking to sell at the market at this price. They are called limit orders because they cannot be filled at a price worse than specified. This means my bid at 1.31000 can be filled AT or BELOW (positive slippage) the rate, but not above.
Order books or DOMs (Depth of Market) are mostly used in Futures trading, as the FX market has no aggregated volume data.
Stop Orders
Stop orders are orders to buy above the current market price/sell below the current market price. The term „stop order“ is used because the order is „stopped“ from being executed until it hits the determined price. It is being stopped because otherwise, if you create a bid at the price where offers already exist or above, it would become marketable order and would be executed immediately. Most of the time, a buy stop order will be executed when it’s price has hit the market „offer price“ and a sell stop order will be triggered when it’s price has hit the market „bid“ price. They will be converted into market orders and will consume liquidity. But there is something unique about stop orders. They can also provide liquidity. Let’s say I’m a large trader looking to sell an asset (please forget about the above order book for this example).
Market price is currently 44/46 (I can buy at 46 and sell at 44). I don’t want to sell at 44 because liquidity is not good enough for the amount of contracts I intend to sell. I’m aware that there are a lot of buy stops above the price of 50 from participants that are already short. Other participants are also aware of this and price will be attracted to those levels. I will therefore set my offers above 50 (let’s say 51 and 52) and gain advantage from the stops.
How? Chances are good there are not many buyers at those levels, as price will be perceived as high and liquidity is a bit thin. But there are forced buyers above 50 and they will have to take my liquidity. My shorts will be filled and price is likely to move quickly in my favor as most buying came from shorts that were stopped out. Price is not attractive for buyers and will likely drop quickly. Stop hunting is a common activity in ALL markets, not just the FX market. Retail traders are aware of this, but mostly in the wrong way. I’m not talking about your retail broker widening spreads to take some few more stops out, but stop hunting on a larger scale. Large traders need it for liquidity as above described and bank dealers will also use it also to control their book better. But let’s leave that for later…
Stop Hunting
Retail traders are generally aware of stop hunting but have a wrong idea what it really is. It is not your retail broker slipping you for a few pips to get your stop.
Those brokers do not have the size to move the market in such a way! As we covered in the previous article, large traders cannot simply accumulate or distribute a large position whenever they wish. They have to look for liquidity and stops are helping them in an indirect way, like I explained in the example above. That is why stop hunts tend to be quickly faded: The large bids or offers got filled and with the stops triggered, there are no buyers left in a buy stop-hunt scenario and no sellers in a sell stop-hunt scenario.
Those bids and offers tend to stabilize the market. If there were little of them available as the stops get triggered, it would result in an event called a stop cascade - there is insufficient liquidity for the stop loss orders and the price gets pushed into the next area of large stops until bids/offers in good size appear. There are also traders that anticipate such moves and look to take profit near the level where stops are rumored to be.
Those are mostly short-term speculators and model funds (which buy/sell on momentum). They will take advantage of the forced buyers/sellers and liquidate their position as price hits into the stops.
We will cover the topic of how to identify levels of concentrated stop loss orders later. Dealers also participate in this activity. While there are looking to make some profit from short-term trading, their main task is to provide clients with liquidity and get them filled with less as possible slippage.
Let's go through a scenario: EUR/USD is trading at 1.3050 and Dealer "A" sees many of his clients have buy stop orders from 1.3100 up to 1.3110. This means those clients want to get out of their position once price breaks above the determined rate. If he does nothing and waits for the price to break above 1.31, he will have trouble filling his clients without slippage. There will be stops from other market participants above 1.31 and other dealers will be acting similar, pushing the price higher fast. He would fill his clients at a bad rate, earns nothing from it and his reputation would be seriously hit if this would happen several times. So what can he do? He can gradually start to accumulate a long position and anticipate a break of 1.31 into the stops. Dealers tend to have a great feeling for short-term moves and are skilled for having "a feel for the market". If he gradually buys EUR/USD all the way up to 1.31, he will be able to fill his clients without slippage and will make a nice profit from it.
More detailed example:
DEALERS ORDER BOOK:
Buy Stops from 1.3100 - 1.3110 worth $100 million
DEALERS ACTION:
Buy 20 million @ 1.3060
Buy 20 million @ 1.3075
Buy 20 million @ 1.3080
Buy 20 million @ 1.3085
Buy 20 million @ 1.3090
Net position = Long 100 million @ 1.3079
So he will distribute his position as price breaks above 1.31 and fill his customers stop loss orders.
This can, of course, go wrong if price fails to maintain the upside momentum and turns lower. The dealer must then quickly get out of his position. But again, those traders are skilled at managing their positions and while they can't be right all the time like other traders cannot too, they have a good feel for the short-term moves.
How to Use Order Flow Information
Again, banks do not open their order books directly to just any outsider, one would need good connections. So people claiming they have some software that shows the order books for the FX market are scammers.
As volume is not concentrated and FX is an OTC market, there is no real 'Depth of Market' for the whole market. The one you maybe see in your trading platform is only the DOM of your broker and retail brokers have a small role in this huge market. However, discretionary flow information is something different. One needs to distinguish between discretionary information like shown below and people claiming to have DOM's for the FX market.
Flow information often looks like this:
Example:
EUR/USD Bids at 1.30, 1.2980, 1.2950
Offers at 1.3080, 1.31, 1.3120
Buy stops above 1.31
Sell stops below 1.30
So again, bids are limit orders to buy at a determined price. Bids mentioned in the flow info providers will be levels where good buying interest is noted. Offers are limit orders to sell at a determined price. The mentioned Offers will be where decent selling interest is noted. Market participants always look for the weaker side of the market, so both buy and sell stops will be targeted. Be aware that you shouldn't just enter a trade and "gun for the stops". You need to have other factors that support your trade idea. When using this, it is very important to keep in mind that this is additional information that may help you in your trading, but you should not trade off this information alone - that is, using them as trade signals.
A few reasons: Orders get canceled all the time. We cannot know the size of the mentioned orders. E.g. if there is a lot of demand for EUR/USD and rather small offers ahead, it will absorb those rather easy and continue to move up. If price stops after hitting the cluster of orders, it is not a sign that it will reverse immediately. Watch for additional signals.
What we learned in course comes first, order flow is only additional information wich can help you!
There are always bids and offers, smaller and large ones, but in the end, it depends on the power of the bulls or the bears. As I mentioned, if there is strong demand for EUR/USD, offers will do little on the way up until the accumulation has finished.
Trader Alen
Sunday, March 27, 2016
Order Flow (lesson21)
How to Use This Information
First, determine the current sentiment.
Example: The market bias for the Pound is currently very negative and GBP/USD is clearly trading in a downtrend. I therefore will only look for opportunities to sell the pair.
Second, note key price levels. These include bids and offers from the resources I will post below and key technical levels (standard support/resistance levels). Third, watch for price action to give you a high probability opportunity to enter short. I will cover later some of the various Order Flow techniques. For now, I just want to note that you should always use flow information like bids and offers with caution. You want the market bias to be in your favor and wait to see a reaction to those levels, not enter ahead.
I hope I have emphasized enough how important it is not to use them as trade signals, so I will post now the resources I use for the flow information (they are free):
ForexLive
Participants in the FX Market
Before we dive further into the world of Order Flow Trading, we must be aware who participates in the FX market. While not all groups have the same characteristics, there are some most have in common. I will split the groups up and explain them all in more detail.
Dealers Sovereign Names
Large Speculators
Real Money
Commercials
Retail Traders
Dealers
Dealers are the main market makers for the FX market as they operate on the "Tier 1" level - the interbank market. A dealer quotes his customers a bid and an ask price and the difference (the Spread) will be his profit. As a transaction with his customer takes place, he takes the other side of the trade and can either get rid of his exposure via the interbank market or he can hold the trade if he thinks it will benefit him. Dealers therefore can hold trades for speculation, but they usually close them in a short time period. They mostly finish their trading day without any open positions. Dealers are well-informed traders and have a good sense for short-term market movements, so it only makes sense for the banks to let them also do some discretionary trading beside handling customer trades. They participate in stop hunts, as I explained earlier in the thread, because they look to manage their book. The network of dealers working for the top FX market-making banks build the "Interbank Market", the highest tier in the FX market.
Sovereign Names
This group includes central banks and institutions like the Bank of International Settlements (BIS). Central banks operate in the FX market on a daily basis and when other participants become aware of their presence, they will pay a lot of attention to what they do. Asian Central Banks are one group within the Sovereigns that are often identified in the marketplace and news providers like Reuters are reporting about their business. Especially if things are rather quiet, they can have a strong influence, so keep that in mind! The "BIS" is an institution that handles transaction for other banks. The idea is basically that other CB's can operate in the market without being identified. Nevertheless, any mention of "BIS" or "Basel name" in the news feed is worth paying attention to.
Large Speculators
Those are hedge funds, model funds (algo & HFT trading) and large traders. They are in this game for the profit and are the group with the greatest variety amongst members. Some trade intraday, some exclusively long-term and some combine all of this together. Model funds mostly focus on automated trading and volatility is something they love. Most of the hedge funds however, will look for stable trends to ride, like the current GBP and JPY downtrends. As they are leveraged players, they can feel the pain sooner when a squeeze is happening in the market. It is certainly not just the retail traders getting stopped out, large specs can be caught with a vulnerable stop loss too.
Real Money
They are called that way because they do not use leverage. Included in this group are mutual funds, classical investment funds and sovereign wealth funds. They are conservative and will generally either look to manage their currency exposure or, if speculating, look for stable trends. Hedge funds do too look for trends, but they have the ability to leverage up and switch to short-term trading if they wish to. As you'll understand, real money funds that do not operate on leverage and cannot get aggressive, will not be able to operate that way. Real Money will be usually a bit late in a move, but their presence is still worth noting, as they look to accumulate positions.
Commercials
Commercials (or corporations/businesses) are looking to hedge their currency exposure they have through their business operations, mostly due international business. Managing their risk is the number 1 task for them and not profits from speculation. Their activities can have an impact on the markets if they are trading in a big size, but they are not participants one should follow, as they are not profit-motivated in the first place.
Retail Traders
The number of retail traders that lose is hard to guess, but it is definitely high. The popularity of Technical Analysis (TA) led them to place their stops at predictable places and this can be exploited by Order Flow Traders. Even as the number of proven trading strategies shared free has increased over time, most retail traders lack the consistency and discipline to make it in this business. I hope that gave you a good insight who's operating in this market and some of their common characteristics.
Reading Order Flow
There are several services that provide real-time flow information like the one's I mentioned above. Again, they have to be used with caution as orders can get cancelled or can have little or no impact. Also, we don't want to get too dependent on them. Imagine a service get's discontinued - you want to be able to do your own order flow analysis and not let yourself be distracted by this. Reading order flow is possible on charts and you don't need the flow info services necessary.
This is how the standard flow info looks like:
Bids at 1.3000, 1.2980, 1.2950
Offers at 1.3050, 1.3080, 1.3100
Most of the reported levels are one's that have cluster of orders at or near it. From the above mentioned info we could say that there is buying interest (demand) at 1.30, 1.2980 and 1.2950. The further the level, the more interest we can expect, as traders will feel comfortable buying "very low" or selling "very high". Remember that price action can influence sentiment too. If we see EUR/USD breaking below a key psychological and technical level, some traders will sell on the break (i.e. momentum funds) and with stops getting triggered on the way, this will drive price further lower.
Orders can either: Get "eaten" along with little or none impact (this is common during a stop cascade/squeeze)
Cause a slow down in momentum; price will consolidate
Cause a reversal (common during times of low liquidity)
When trading of reported orders, I recommend waiting for a reaction and not putting a limit order ahead. See how price reacts to the level and how it behaves it after it hits it. Let's say price trades down to 1.2950, where we have reported large bids from various participants. We see price stops at the level and retraces back up. Now, how does it behave on the way up? Does it seems that there is real momentum building to the upside or are rallies hitting quickly into fresh selling? Reading the order flow directly is a bit tough in the beginning and it is hard to explain it in words. You have to monitor price action as it happens and take notes. Combine this with sentiment and you have a real advantage.
Sentiment will give you the biggest advantage. Like I mentioned in my last post, you don't have to make it complicated. Note key factors that are driving price action currently, analyze price action itself and keep track of how they correlate. Let's take the Aussie Dollar as an example. Sentiment is positive as the RBA indicated it will not cut rates in the near future and on better economic data. Price action confirms this, so we want to look for reported bids and wait for a reaction. Nothing works all the time, but with sentiment on your side, you'll go with the side of least resistance.
What really turned my trading into a profitable business was focusing on the high probability trades. They don't require a huge stop and the reward is clearly worth the risk. Market profile is another factor. During times of low volatility, playing the range is the best strategy. Let's say we are trading in a 1.2950/1.3020 range in EUR/USD and there is no clear sentiment.
You can anticipate a reaction to the reported levels and fade any rally or drop back to the mid range level. When volatility is high, bids/offers can get consumed along the way quickly and that is an environment where you definitely don't want to pick a top/bottom. When there is real strength behind the move, look to join the momentum and not fade it. In combination with the reported levels, you can identify key supply/demand levels on the charts. Previous day high/low, previous week's high/low, previous week's close level and psychological levels (big figures - i.e. 1.30, 1.31).
Start to "read the flow" on the charts and you'll get better at it with time. Stops are also easily identified on the charts. Just think what the technical analysis guides taught you. They taught you to place your buy stop above the big figure (i.e. 1.30 -> stop at 1.3010) or your sell stop below the big figure (i.e. 1.30 -> stop at 1.2990). Or, above resistance/below support.
Barrier Options
Barrier options are exotic derivates and an option on the price of the underlying asset. The option writer (typically banks) sell options to the option buyers. FX Options are traded over-the-counter and not on exchanges. If the option expires worthless, the option writer has earned the premium (similar to a comission as you enter a trade) and the option buyer has lost. If the option is in-the-money, the option writer has to pay out the option buyer the specified amount.
There are:
Knock-In Options - the option is worthless until the underlying asset hits the specified barrier price in the set time period. Example: EUR/USD spot price is 1.28 and I buy a 1.30 knock-in option. The option is worthless until it breaks above the 1.30 level.
Knock-Out Options - the option becomes worthless if the specified barrier level is hit. Example: GBP/USD spot price is 1.51. I think the pair is heading higher, but do not expect much volatility. If I buy a G/U option with a barrier at 1.53 and it does not reach the price level in the specified time period, I get paid. However, if price breaks above 1.53, the option will become worthless.
Double No-Touch Options -Just like the knock-out option, but it has two specified barrier levels. Example: DNT option for 1.26 / 1.34 in EUR/USD. If price stays within the set range during the stated time period, the option writer has to pay me the specified amount. However, if price breaches any of these two barrier levels, the option will become worthless.
Double One-Touch Option - Knock-in option with two set barrier levels. Example: GBP/USD 1.46 / 1.54. I will get paid on the option if it reaches either of the two set barrier levels during the specified time period. If it does not, it expires worthless.
Why does it matter?
Barrier options can trade in decent size, there are sometimes ones in the value range of 500 million up to 1.5 billion. Let's use an example for the Knock-Out barrier option, as it the more common used one. Put yourself in the position of the option writer. You sold a 1.27 / 1.34 DNT barrier option to a customer with a 500 million $ payout. Price is approaching the 1.27 level and that is exactly what you want to see. Once it hits 1.27, you have pocketed the premium and will keep the half billion. This is why option desks will gun for these barriers and try to get them triggered. Similar to the FX spot dealer, you want establish a short position and increase downside momentum. As there are often stops located above/below barriers, this will help to attract the attention of Spot dealers and of predatory traders gunning for the stops
On the other side, there is the option buyer that has great interest to keep price away from the 1.27 level. Not everyone can buy a option in that size ($500m), so you can be sure he's got some firepower too. He will try to buy ahead of the level and hope there will be also other bids in decent size. A good example is the 1.28 barrier option in EUR/USD that got triggered today. The option buyer was lucky yesterday, as there was decent demand from Asian Sovereign names and corporates that kept the pair above the barrier level. However, EUR-negative sentiment led to fresh selling this morning and the pair broke below 1.28. When we talk about barrier options in decent size (at least, larger than $50M), they certainly can have an impact on markets. However, I don't want this to look like there is a battle whenever a barrier option appears. Just to mention one reason, there are participants that simply don't care about some barrier option, they are gonna execute their trade idea nevertheless.
Some things to keep in mind:
The "battle" will be more intense if the expiry is near. If the 1.27 barrier option in EUR/USD expires in two days and we are approaching the level, there will be very likely some effort from the option writer to get price down there and from the option buyer to keep price above for these two days. On the other side, if the option expires in two months, but it seems very likely we will break below 1.27, defence from the option buyer will be minimal. Sentiment & Market Profile! If we get bad news from Europe, there will be a lot of selling coming in and nobody's gonna care about some barrier option. The option buyer will most likely also see that it is not worth defending the barrier - why additionally waste money?
How to use this?
Note reported barrier options (ForexLive) and establish a position to push into the barrier level. Preferably, go with sentiment. Example: There were 1.28, 1.2775 and 1.2750 barrier options reported and sell stops reported below them. One could not have a more beautiful OF trade: Establish a short position and gun for the barrier and stops below. Given the average daily range of EUR/USD, 1.2750 would've been a realistic target. But a good approach would also be to establish a position and take partial profits as each of the barrier gets triggered to your final target. In general, it is more preferable to go with the option writer and attack the knock-out barrier, especially when sentiment favors such price action. However, in a market environment with little volatility and tight ranges, barrier protection can be stronger.
There a few key things you need to keep in mind about the accumulation of stop loss orders in the markets:
1) The higher the timeframe, the higher the number of market participants being aware of a certain technical pattern and placing orders based on it. Simply, more traders will notice a pattern on a 4-hour chart than one on the 15 minute chart. There is a lot of noise on the minutes charts and not many traders will bother with interpreting too much into it.
2) The larger the number of confluences, the larger the size of the orders If a key resistance level happens to be near the 200 simple moving average and the 50.00 % Fibonacci level from a key market swing (i.e. drawn from the monthly high to the monthly low), it will get even more attention and orders around it will be larger.
3) The longer a pattern exists, the larger the size of the orders Let's say we have an established range in EUR/USD between 1.30 and 1.32. Limit orders will start to cluster at both levels and stops will be placed below 1.30 and above 1.32. The longer the range exists, the larger the stops will grow until one side finally cracks and triggers the stops.
How to Mark Large Stop Clusters on your Charts
1) Open a blank chart - start with the Daily chart
2) Note key support and resistance levels on the Daily and note at which price level the 200 SMA is trading. If you wish, draw a Fibonacci retracement from the latest major swing low to the most recent major swing high.
3) Move down to the 4H chart and again note the key S/R levels. Mark them in a different color
4) Switch to the 1H chart and repeat the process, noting minor S/R levels. Again, draw them in a different color than the previous ones, so you can regonize them more easier. Here is an example (EUR/USD)
Market Squeezes
You have probably already heard the term "squeeze" in financial markets. It describes a market where traders are caught overly positioned to one side, which leaves them vulnerable to sentiment-changing events or large players taking advantage of their vulnerability by engineering a "technical" squeeze.
A squeeze can happen:
1) as a result of an event that has changed short-term sentiment. A very recent example is the USD/JPY squeeze we saw the last night in the Asian trading session. Traders expected that the Japanese Prime Minister Abe and his party will win the majority in the Upper House election - which they did. However, this was already priced in as many traders bought the USD/JPY on Friday on those expectations. This resulted in a squeeze of the traders who were positioned long. Those who where long, took profits, and some predatory traders joined the selling to profit from the move. Once the stops below 100 started to getting triggered, downside momentum picked up until we ran into good-sized bids around 99.60.
2) due to technical reasons. Large players can engineer a short squeeze without an event to gain more favorable conditions for themselves. This is most commonly seen as a stop hunt, as the stops from those short-term traders are usually triggered in this process. You have to keep in mind that it is the job of financial journalist to always find a reason why a certain price move has happened. So if you notice that there is really no reason why a certain pair moved, but you are aware of the fact that positioning is either overly long or short, you can imply that this was simply a stop hunt.
How to take advantage of a market squeeze:
1) If there is no reason for a certain price move and you are sure it was only stop loss-driven, you can fade the move and trade in the direction of the trend/sentiment. You could of course join the squeeze and try to hunt the stops, but you need to be quick.
2) The squeezes that happen due to an event that has changed short-term sentiment or even medium-term/long-term sentiment endure longer and you can take advantage of those trapped traders that are caught on the wrong side by joining the squeeze. For example: Let's say the RBA (Reserve Bank of Australia) does not cut interest rates in August. The majority of traders expected they would do so and positioning is extremely short. What will happen? We will see a larger short squeeze driven by position covering and stop loss triggering.
Trader Alen
First, determine the current sentiment.
Example: The market bias for the Pound is currently very negative and GBP/USD is clearly trading in a downtrend. I therefore will only look for opportunities to sell the pair.
Second, note key price levels. These include bids and offers from the resources I will post below and key technical levels (standard support/resistance levels). Third, watch for price action to give you a high probability opportunity to enter short. I will cover later some of the various Order Flow techniques. For now, I just want to note that you should always use flow information like bids and offers with caution. You want the market bias to be in your favor and wait to see a reaction to those levels, not enter ahead.
I hope I have emphasized enough how important it is not to use them as trade signals, so I will post now the resources I use for the flow information (they are free):
ForexLive
Participants in the FX Market
Before we dive further into the world of Order Flow Trading, we must be aware who participates in the FX market. While not all groups have the same characteristics, there are some most have in common. I will split the groups up and explain them all in more detail.
Dealers Sovereign Names
Large Speculators
Real Money
Commercials
Retail Traders
Dealers
Dealers are the main market makers for the FX market as they operate on the "Tier 1" level - the interbank market. A dealer quotes his customers a bid and an ask price and the difference (the Spread) will be his profit. As a transaction with his customer takes place, he takes the other side of the trade and can either get rid of his exposure via the interbank market or he can hold the trade if he thinks it will benefit him. Dealers therefore can hold trades for speculation, but they usually close them in a short time period. They mostly finish their trading day without any open positions. Dealers are well-informed traders and have a good sense for short-term market movements, so it only makes sense for the banks to let them also do some discretionary trading beside handling customer trades. They participate in stop hunts, as I explained earlier in the thread, because they look to manage their book. The network of dealers working for the top FX market-making banks build the "Interbank Market", the highest tier in the FX market.
Sovereign Names
This group includes central banks and institutions like the Bank of International Settlements (BIS). Central banks operate in the FX market on a daily basis and when other participants become aware of their presence, they will pay a lot of attention to what they do. Asian Central Banks are one group within the Sovereigns that are often identified in the marketplace and news providers like Reuters are reporting about their business. Especially if things are rather quiet, they can have a strong influence, so keep that in mind! The "BIS" is an institution that handles transaction for other banks. The idea is basically that other CB's can operate in the market without being identified. Nevertheless, any mention of "BIS" or "Basel name" in the news feed is worth paying attention to.
Large Speculators
Those are hedge funds, model funds (algo & HFT trading) and large traders. They are in this game for the profit and are the group with the greatest variety amongst members. Some trade intraday, some exclusively long-term and some combine all of this together. Model funds mostly focus on automated trading and volatility is something they love. Most of the hedge funds however, will look for stable trends to ride, like the current GBP and JPY downtrends. As they are leveraged players, they can feel the pain sooner when a squeeze is happening in the market. It is certainly not just the retail traders getting stopped out, large specs can be caught with a vulnerable stop loss too.
Real Money
They are called that way because they do not use leverage. Included in this group are mutual funds, classical investment funds and sovereign wealth funds. They are conservative and will generally either look to manage their currency exposure or, if speculating, look for stable trends. Hedge funds do too look for trends, but they have the ability to leverage up and switch to short-term trading if they wish to. As you'll understand, real money funds that do not operate on leverage and cannot get aggressive, will not be able to operate that way. Real Money will be usually a bit late in a move, but their presence is still worth noting, as they look to accumulate positions.
Commercials
Commercials (or corporations/businesses) are looking to hedge their currency exposure they have through their business operations, mostly due international business. Managing their risk is the number 1 task for them and not profits from speculation. Their activities can have an impact on the markets if they are trading in a big size, but they are not participants one should follow, as they are not profit-motivated in the first place.
Retail Traders
The number of retail traders that lose is hard to guess, but it is definitely high. The popularity of Technical Analysis (TA) led them to place their stops at predictable places and this can be exploited by Order Flow Traders. Even as the number of proven trading strategies shared free has increased over time, most retail traders lack the consistency and discipline to make it in this business. I hope that gave you a good insight who's operating in this market and some of their common characteristics.
Reading Order Flow
There are several services that provide real-time flow information like the one's I mentioned above. Again, they have to be used with caution as orders can get cancelled or can have little or no impact. Also, we don't want to get too dependent on them. Imagine a service get's discontinued - you want to be able to do your own order flow analysis and not let yourself be distracted by this. Reading order flow is possible on charts and you don't need the flow info services necessary.
This is how the standard flow info looks like:
Bids at 1.3000, 1.2980, 1.2950
Offers at 1.3050, 1.3080, 1.3100
Most of the reported levels are one's that have cluster of orders at or near it. From the above mentioned info we could say that there is buying interest (demand) at 1.30, 1.2980 and 1.2950. The further the level, the more interest we can expect, as traders will feel comfortable buying "very low" or selling "very high". Remember that price action can influence sentiment too. If we see EUR/USD breaking below a key psychological and technical level, some traders will sell on the break (i.e. momentum funds) and with stops getting triggered on the way, this will drive price further lower.
Orders can either: Get "eaten" along with little or none impact (this is common during a stop cascade/squeeze)
Cause a slow down in momentum; price will consolidate
Cause a reversal (common during times of low liquidity)
When trading of reported orders, I recommend waiting for a reaction and not putting a limit order ahead. See how price reacts to the level and how it behaves it after it hits it. Let's say price trades down to 1.2950, where we have reported large bids from various participants. We see price stops at the level and retraces back up. Now, how does it behave on the way up? Does it seems that there is real momentum building to the upside or are rallies hitting quickly into fresh selling? Reading the order flow directly is a bit tough in the beginning and it is hard to explain it in words. You have to monitor price action as it happens and take notes. Combine this with sentiment and you have a real advantage.
Sentiment will give you the biggest advantage. Like I mentioned in my last post, you don't have to make it complicated. Note key factors that are driving price action currently, analyze price action itself and keep track of how they correlate. Let's take the Aussie Dollar as an example. Sentiment is positive as the RBA indicated it will not cut rates in the near future and on better economic data. Price action confirms this, so we want to look for reported bids and wait for a reaction. Nothing works all the time, but with sentiment on your side, you'll go with the side of least resistance.
What really turned my trading into a profitable business was focusing on the high probability trades. They don't require a huge stop and the reward is clearly worth the risk. Market profile is another factor. During times of low volatility, playing the range is the best strategy. Let's say we are trading in a 1.2950/1.3020 range in EUR/USD and there is no clear sentiment.
You can anticipate a reaction to the reported levels and fade any rally or drop back to the mid range level. When volatility is high, bids/offers can get consumed along the way quickly and that is an environment where you definitely don't want to pick a top/bottom. When there is real strength behind the move, look to join the momentum and not fade it. In combination with the reported levels, you can identify key supply/demand levels on the charts. Previous day high/low, previous week's high/low, previous week's close level and psychological levels (big figures - i.e. 1.30, 1.31).
Start to "read the flow" on the charts and you'll get better at it with time. Stops are also easily identified on the charts. Just think what the technical analysis guides taught you. They taught you to place your buy stop above the big figure (i.e. 1.30 -> stop at 1.3010) or your sell stop below the big figure (i.e. 1.30 -> stop at 1.2990). Or, above resistance/below support.
Barrier Options
Barrier options are exotic derivates and an option on the price of the underlying asset. The option writer (typically banks) sell options to the option buyers. FX Options are traded over-the-counter and not on exchanges. If the option expires worthless, the option writer has earned the premium (similar to a comission as you enter a trade) and the option buyer has lost. If the option is in-the-money, the option writer has to pay out the option buyer the specified amount.
There are:
Knock-In Options - the option is worthless until the underlying asset hits the specified barrier price in the set time period. Example: EUR/USD spot price is 1.28 and I buy a 1.30 knock-in option. The option is worthless until it breaks above the 1.30 level.
Knock-Out Options - the option becomes worthless if the specified barrier level is hit. Example: GBP/USD spot price is 1.51. I think the pair is heading higher, but do not expect much volatility. If I buy a G/U option with a barrier at 1.53 and it does not reach the price level in the specified time period, I get paid. However, if price breaks above 1.53, the option will become worthless.
Double No-Touch Options -Just like the knock-out option, but it has two specified barrier levels. Example: DNT option for 1.26 / 1.34 in EUR/USD. If price stays within the set range during the stated time period, the option writer has to pay me the specified amount. However, if price breaches any of these two barrier levels, the option will become worthless.
Double One-Touch Option - Knock-in option with two set barrier levels. Example: GBP/USD 1.46 / 1.54. I will get paid on the option if it reaches either of the two set barrier levels during the specified time period. If it does not, it expires worthless.
Why does it matter?
Barrier options can trade in decent size, there are sometimes ones in the value range of 500 million up to 1.5 billion. Let's use an example for the Knock-Out barrier option, as it the more common used one. Put yourself in the position of the option writer. You sold a 1.27 / 1.34 DNT barrier option to a customer with a 500 million $ payout. Price is approaching the 1.27 level and that is exactly what you want to see. Once it hits 1.27, you have pocketed the premium and will keep the half billion. This is why option desks will gun for these barriers and try to get them triggered. Similar to the FX spot dealer, you want establish a short position and increase downside momentum. As there are often stops located above/below barriers, this will help to attract the attention of Spot dealers and of predatory traders gunning for the stops
On the other side, there is the option buyer that has great interest to keep price away from the 1.27 level. Not everyone can buy a option in that size ($500m), so you can be sure he's got some firepower too. He will try to buy ahead of the level and hope there will be also other bids in decent size. A good example is the 1.28 barrier option in EUR/USD that got triggered today. The option buyer was lucky yesterday, as there was decent demand from Asian Sovereign names and corporates that kept the pair above the barrier level. However, EUR-negative sentiment led to fresh selling this morning and the pair broke below 1.28. When we talk about barrier options in decent size (at least, larger than $50M), they certainly can have an impact on markets. However, I don't want this to look like there is a battle whenever a barrier option appears. Just to mention one reason, there are participants that simply don't care about some barrier option, they are gonna execute their trade idea nevertheless.
Some things to keep in mind:
The "battle" will be more intense if the expiry is near. If the 1.27 barrier option in EUR/USD expires in two days and we are approaching the level, there will be very likely some effort from the option writer to get price down there and from the option buyer to keep price above for these two days. On the other side, if the option expires in two months, but it seems very likely we will break below 1.27, defence from the option buyer will be minimal. Sentiment & Market Profile! If we get bad news from Europe, there will be a lot of selling coming in and nobody's gonna care about some barrier option. The option buyer will most likely also see that it is not worth defending the barrier - why additionally waste money?
How to use this?
Note reported barrier options (ForexLive) and establish a position to push into the barrier level. Preferably, go with sentiment. Example: There were 1.28, 1.2775 and 1.2750 barrier options reported and sell stops reported below them. One could not have a more beautiful OF trade: Establish a short position and gun for the barrier and stops below. Given the average daily range of EUR/USD, 1.2750 would've been a realistic target. But a good approach would also be to establish a position and take partial profits as each of the barrier gets triggered to your final target. In general, it is more preferable to go with the option writer and attack the knock-out barrier, especially when sentiment favors such price action. However, in a market environment with little volatility and tight ranges, barrier protection can be stronger.
There a few key things you need to keep in mind about the accumulation of stop loss orders in the markets:
1) The higher the timeframe, the higher the number of market participants being aware of a certain technical pattern and placing orders based on it. Simply, more traders will notice a pattern on a 4-hour chart than one on the 15 minute chart. There is a lot of noise on the minutes charts and not many traders will bother with interpreting too much into it.
2) The larger the number of confluences, the larger the size of the orders If a key resistance level happens to be near the 200 simple moving average and the 50.00 % Fibonacci level from a key market swing (i.e. drawn from the monthly high to the monthly low), it will get even more attention and orders around it will be larger.
3) The longer a pattern exists, the larger the size of the orders Let's say we have an established range in EUR/USD between 1.30 and 1.32. Limit orders will start to cluster at both levels and stops will be placed below 1.30 and above 1.32. The longer the range exists, the larger the stops will grow until one side finally cracks and triggers the stops.
How to Mark Large Stop Clusters on your Charts
1) Open a blank chart - start with the Daily chart
2) Note key support and resistance levels on the Daily and note at which price level the 200 SMA is trading. If you wish, draw a Fibonacci retracement from the latest major swing low to the most recent major swing high.
3) Move down to the 4H chart and again note the key S/R levels. Mark them in a different color
4) Switch to the 1H chart and repeat the process, noting minor S/R levels. Again, draw them in a different color than the previous ones, so you can regonize them more easier. Here is an example (EUR/USD)
Market Squeezes
You have probably already heard the term "squeeze" in financial markets. It describes a market where traders are caught overly positioned to one side, which leaves them vulnerable to sentiment-changing events or large players taking advantage of their vulnerability by engineering a "technical" squeeze.
A squeeze can happen:
1) as a result of an event that has changed short-term sentiment. A very recent example is the USD/JPY squeeze we saw the last night in the Asian trading session. Traders expected that the Japanese Prime Minister Abe and his party will win the majority in the Upper House election - which they did. However, this was already priced in as many traders bought the USD/JPY on Friday on those expectations. This resulted in a squeeze of the traders who were positioned long. Those who where long, took profits, and some predatory traders joined the selling to profit from the move. Once the stops below 100 started to getting triggered, downside momentum picked up until we ran into good-sized bids around 99.60.
2) due to technical reasons. Large players can engineer a short squeeze without an event to gain more favorable conditions for themselves. This is most commonly seen as a stop hunt, as the stops from those short-term traders are usually triggered in this process. You have to keep in mind that it is the job of financial journalist to always find a reason why a certain price move has happened. So if you notice that there is really no reason why a certain pair moved, but you are aware of the fact that positioning is either overly long or short, you can imply that this was simply a stop hunt.
How to take advantage of a market squeeze:
1) If there is no reason for a certain price move and you are sure it was only stop loss-driven, you can fade the move and trade in the direction of the trend/sentiment. You could of course join the squeeze and try to hunt the stops, but you need to be quick.
2) The squeezes that happen due to an event that has changed short-term sentiment or even medium-term/long-term sentiment endure longer and you can take advantage of those trapped traders that are caught on the wrong side by joining the squeeze. For example: Let's say the RBA (Reserve Bank of Australia) does not cut interest rates in August. The majority of traders expected they would do so and positioning is extremely short. What will happen? We will see a larger short squeeze driven by position covering and stop loss triggering.
Trader Alen
Thursday, March 24, 2016
Using Futures to trade FX (lesson22)
I incorporate intermarket analysis on a daily basis in order to guide our trading decisions. By looking at fixed income, equities and commodities prices we are better able to view the larger macro picture, and therefore make accurate calculations with regards to currencies.
One of the most crucial instruments used to gauge direction are futures contracts.
Futures markets can be used to provide reliable predictions about various spot markets; from the price of milk due to be delivered in three months to probabilities regarding the path of the Federal funds rate, futures tell a story. Insights from futures prices can aid evaluations about currency direction, but this will always depend upon the relationship between the underlying asset of the futures contract and the specific currency – as each currency has its own unique correlation to other asset classes.
History of Futures
Futures and forwards were originally designed for hedging risk. For example, a wheat farmer will not know ahead of time whether he will have a high yielding season, as it will be contingent on rainfall. If there is a drought, then the price of wheat will be high and supply will be low. Conversely, if there is a good year then supply will be high and prices will be low. In the first situation, the consumers of the wheat lose by paying more, in the second situation the producers lose because they have to reduce their prices to remain competitive. To eradicate this uncertainty, the farmer would agree with a wholesaler ahead of the season a fixed price that they will trade wheat for, regardless of the production quantity. This allows both the farmer and the wholesaler the ability to forecast their future income or outgoings with certainty and make better financial arrangements for their respective businesses. With the price locked in, they can concentrate on their core business rather than attempting to forecast future prices. Situations like this gave birth to forward contracts, which were the predecessor of futures contracts.
What are futures?
A futures contract is a standardised forward contract, both of which involve a party agreeing to buy or sell a specific quantity of an underlying asset for a specific price with delivery and payment due at a specific date in the future. A futures contract differs from a forward contract by having an intermediary as the central exchange and by having standardised contract sizes which serve to promote liquidity in the secondary market
A futures contract is a derivative product which is entered into through a futures exchanges. The futures exchange acts as a marketplace between buyers and sellers. The exchange assumes the counterparty risk of each trader by ensuring they hold sufficient amounts on margin in their margin account. For traders of the foreign exchange market, the central exchange is also useful because it records transactions and positioning. This feature is not present in the spot forex market, which is an over-the-counter market, rather than a centralised exchange. Traders at Jarratt Davis regularly use currency futures information as a proxy to gauge overall positioning the in the spot forex market.
Currency Futures to Determine Positioning Currency futures can be used by exporters and importers to remove the risk of fluctuations in the exchange rate. This allows the business to concentrate on its core operations rather than spend time and resources forecasting FX moves. Once a price is locked in for delivery or payment of foreign currency on a future date, the involved business can then account with certainty for its future inflows and outflows, regardless of currency moves. This allows the business to make better-informed financial decisions compared to if there was uncertainty about future inflows or outflows.
The US Commodities Futures Trading Commission publishes a weekly report called the Commitments of Traders which shows positioning in futures markets. By accessing the ‘Short Format’ report for ‘Futures Only’ in the Chicago Mercantile Exchange, FX traders can assess how the market is positioned in certain currencies. The report shows ‘Commercial’ and ‘Noncommercial’ interest. The commercial contracts refers to hedgers, such as multi-national exporters of commodities who have taken out futures contract to hedge their exchange rate risk. The non-commercial interest refers to speculative positions and this is the information which is valuable to professional forex traders. For example if non-commercial interest for EUR is 80,000 contracts long and 250,000 contracts short then it shows there are over three times as many short contacts than long contracts. This not only provides a snapshot of how the market is viewing the euro but can also be suggestive of reversals. Once a market gets saturated with either long or short positions then chances increase that eventually those positions will be liquidated, as there are less participants available to add to those positions. When such a liquidation occurs, the market direction reverses. This is why caution should be taken when entering positions in an already heavily long or short market; heavily one-sided positioning can eventually cause a squeeze on the currency. The COT table also shows the change from the prior week. If EUR short contracts changed -8,000 and long contracts changed 1,500 then it suggests traders are rebalancing the heavily short market. This is very useful to know if, as a FX trader, you are considering shorting an already short market – it may be best to wait for a reduction in extreme positioning first – this would manifest in the chart as a medium-term pullback.
Futures Pricing
When analysing or discussing futures, it is crucial to understand and appreciate the difference between three separate components: the delivery price, the futures price and the value of the futures contract. The delivery price is simply the price locked in for delivery at a specific future date, this price does not change. The futures price is the price today of the futures contract. When the futures contract is first entered into, the futures price equals the delivery price, which means the value of the contract is zero. However as time passes, the futures price changes due to fluctuations in the price of the underlying asset, causing the value of the futures contract to become negative or positive. The underlying spot price fluctuates due to factors of supply and demand. The value of a futures contract today is the difference between the delivery price and the futures price today. (after discounting the time value of money at the risk-free rate between now and the delivery date)
Changes in supply and demand factors influence the spot price of an asset today. And those same factors influence expectations about the future spot prices, which in turn causes market participants to either buy or sell certain futures contracts that have specified delivery prices. If the future spot price of an asset is expected to be below the delivery price of the futures contract, then traders will want to short those contracts in anticipation of profiting at or before the delivery date. Holders of short futures contracts will gain the difference in price between the underlying asset and the delivery price. If the asset’s price is below the delivery price then traders holding short contracts will profit. Net shorting contracts will put downwards pressure on the futures price causing it to move towards the expected future spot price, and upon delivery date converge. The two prices must converge all there will be an arbitrage opportunity. The value of a short futures position increases as the price of the underlying moves lower.
If on the other hand the future spot price is expected to be above the delivery price then traders will want to long those contracts so they can profit from buying at the lower delivery price and selling at the higher spot price on the delivery date, or simply closing out the position and profiting on the difference, as is the convenience of futures over individually-tailored forwards which often require physical delivery. Demand for long positions puts upwards pressure on the futures prices and moves it towards the expected future spot price where it will converge by delivery date. The value of a long futures position increases as the price of the underlying asset moves higher
As time approaches the delivery date, the delivery price and the sport price of the underlying asset must converge. This occurs by traders continually identifying any arbitrage opportunities and profiting from them. This serves to equalise any mispricing. It is this mechanism of arbitrage which keeps today’s futures price correctly aligned with the expected future spot price.
The determination of the futures price at the beginning of the contract’s life will vary depending on the type of underlying asset. Some examples are an investment asset paying no income, an investment asset paying known income, an investment asset paying known yield, an investment asset with storage costs, or a consumption asset such as oil or dairy products, which usually also includes storage costs.
Interest Rate Futures to Gauge Direction in FX
Interest rate futures provide insight about what bond traders are anticipating regarding changes in interest rates. If interest rate futures are pricing a high probability of an interest rate increase, then a currency will strengthen. If they are pricing a high probability of a cut then the currency will weaken
The ASX 30-Day Interbank Cash Rate Futures are used to calculate probabilities for changes in the Official Cash Rate set by the RBA. Similarly the 30-Day Federal Funds Rate Futures provides probabilities about future changes to the key interest rate set by the United States Federal Reserve Bank. Both these futures price are available as free indicators online and are crucial for assessing market expectations about interest rates for the respective economy.
Commodity Futures and the Commodity-linked Currencies
Other ways futures can be used to trade forex is with commodity futures. Certain currencies have strong correlations with specific commodities. The prime examples of this are the commodity currencies – the Australian, New Zealand and Canadian dollars.
For the Australian economy, the most relevant commodities are the industrial metals. Given Australia’s close trading links with China, the economy is highly sensitive to Chinese growth. Industrial development in large economies such as China requires immense quantities of minerals or base metals such as copper, aluminium, nickel and of course, Australia’s largest mineral export, iron ore, which is used to make steel. Iron ore futures can be monitored through CME Group Iron Ore 62% Fe, CFR China (TSI) Futures or Dalian Iron Ore Futures. Drops in the iron ore futures will put pressure on the AUD as lower expected future prices will reduce the country’s export income.
The Australian dollar’s strong positive correlation with minerals and metals means that futures
markets such as iron ore, copper, aluminium and nickel as well as the precious metals gold and
silver, should be closely monitored before and during trades on the AUD.
The New Zealand economy is most correlated with dairy prices, with diary making up seven per cent of the country’s gross domestic product. New Zealand Exchange (NZX) Global Dairy Futures market shows quotes for Whole Milk Powder, Skim Milk Powder, Butter, Anhydrous Milk Fat and Butter. By analysing the trend in prices for future delivery, an educated estimate can me made about the future spot price. This in turn can help inform a trade on the New Zealand dollar and help to predict the outcome of the fortnightly Global Dairy Trade price index and Milk Powder auction – which more often than not affects the Kiwi.
The Canadian dollar is highly correlated with the price of crude oil because crude is one the country’s main exports. There are two major blends which serve as benchmarks for crude prices; West Texas Intermediate which is mainly traded in North America and Brent crude from the North Sea. Due to proximity, movements in WTI are watched closely for effects on the Canadian economy; a fall in WTI will reduce Canada’s GDP. WTI futures contracts can provide insight about the market’s expectations regarding future price of the commodity and therefore export revenue for Canada, which in turn can provide a rough indication of whether the market is bullish or bearish on the CAD
Application
Each currency has its own specific characteristics and unique correlations with other asset classes. It is important to be familiar with these relationships and always monitor the relevant asset’s futures prices before entering a position in the currency markets. For example, it would be inadvisable to buy the Canadian dollar if West Texas Intermediate crude futures are sliding lower. For the risk currencies – EUR, JPY and CHF – equity index futures should be used to gauge sentiment. While for the commodity currencies, various commodity futures.
Trader Alen
One of the most crucial instruments used to gauge direction are futures contracts.
Futures markets can be used to provide reliable predictions about various spot markets; from the price of milk due to be delivered in three months to probabilities regarding the path of the Federal funds rate, futures tell a story. Insights from futures prices can aid evaluations about currency direction, but this will always depend upon the relationship between the underlying asset of the futures contract and the specific currency – as each currency has its own unique correlation to other asset classes.
History of Futures
Futures and forwards were originally designed for hedging risk. For example, a wheat farmer will not know ahead of time whether he will have a high yielding season, as it will be contingent on rainfall. If there is a drought, then the price of wheat will be high and supply will be low. Conversely, if there is a good year then supply will be high and prices will be low. In the first situation, the consumers of the wheat lose by paying more, in the second situation the producers lose because they have to reduce their prices to remain competitive. To eradicate this uncertainty, the farmer would agree with a wholesaler ahead of the season a fixed price that they will trade wheat for, regardless of the production quantity. This allows both the farmer and the wholesaler the ability to forecast their future income or outgoings with certainty and make better financial arrangements for their respective businesses. With the price locked in, they can concentrate on their core business rather than attempting to forecast future prices. Situations like this gave birth to forward contracts, which were the predecessor of futures contracts.
What are futures?
A futures contract is a standardised forward contract, both of which involve a party agreeing to buy or sell a specific quantity of an underlying asset for a specific price with delivery and payment due at a specific date in the future. A futures contract differs from a forward contract by having an intermediary as the central exchange and by having standardised contract sizes which serve to promote liquidity in the secondary market
A futures contract is a derivative product which is entered into through a futures exchanges. The futures exchange acts as a marketplace between buyers and sellers. The exchange assumes the counterparty risk of each trader by ensuring they hold sufficient amounts on margin in their margin account. For traders of the foreign exchange market, the central exchange is also useful because it records transactions and positioning. This feature is not present in the spot forex market, which is an over-the-counter market, rather than a centralised exchange. Traders at Jarratt Davis regularly use currency futures information as a proxy to gauge overall positioning the in the spot forex market.
Currency Futures to Determine Positioning Currency futures can be used by exporters and importers to remove the risk of fluctuations in the exchange rate. This allows the business to concentrate on its core operations rather than spend time and resources forecasting FX moves. Once a price is locked in for delivery or payment of foreign currency on a future date, the involved business can then account with certainty for its future inflows and outflows, regardless of currency moves. This allows the business to make better-informed financial decisions compared to if there was uncertainty about future inflows or outflows.
The US Commodities Futures Trading Commission publishes a weekly report called the Commitments of Traders which shows positioning in futures markets. By accessing the ‘Short Format’ report for ‘Futures Only’ in the Chicago Mercantile Exchange, FX traders can assess how the market is positioned in certain currencies. The report shows ‘Commercial’ and ‘Noncommercial’ interest. The commercial contracts refers to hedgers, such as multi-national exporters of commodities who have taken out futures contract to hedge their exchange rate risk. The non-commercial interest refers to speculative positions and this is the information which is valuable to professional forex traders. For example if non-commercial interest for EUR is 80,000 contracts long and 250,000 contracts short then it shows there are over three times as many short contacts than long contracts. This not only provides a snapshot of how the market is viewing the euro but can also be suggestive of reversals. Once a market gets saturated with either long or short positions then chances increase that eventually those positions will be liquidated, as there are less participants available to add to those positions. When such a liquidation occurs, the market direction reverses. This is why caution should be taken when entering positions in an already heavily long or short market; heavily one-sided positioning can eventually cause a squeeze on the currency. The COT table also shows the change from the prior week. If EUR short contracts changed -8,000 and long contracts changed 1,500 then it suggests traders are rebalancing the heavily short market. This is very useful to know if, as a FX trader, you are considering shorting an already short market – it may be best to wait for a reduction in extreme positioning first – this would manifest in the chart as a medium-term pullback.
Futures Pricing
When analysing or discussing futures, it is crucial to understand and appreciate the difference between three separate components: the delivery price, the futures price and the value of the futures contract. The delivery price is simply the price locked in for delivery at a specific future date, this price does not change. The futures price is the price today of the futures contract. When the futures contract is first entered into, the futures price equals the delivery price, which means the value of the contract is zero. However as time passes, the futures price changes due to fluctuations in the price of the underlying asset, causing the value of the futures contract to become negative or positive. The underlying spot price fluctuates due to factors of supply and demand. The value of a futures contract today is the difference between the delivery price and the futures price today. (after discounting the time value of money at the risk-free rate between now and the delivery date)
Changes in supply and demand factors influence the spot price of an asset today. And those same factors influence expectations about the future spot prices, which in turn causes market participants to either buy or sell certain futures contracts that have specified delivery prices. If the future spot price of an asset is expected to be below the delivery price of the futures contract, then traders will want to short those contracts in anticipation of profiting at or before the delivery date. Holders of short futures contracts will gain the difference in price between the underlying asset and the delivery price. If the asset’s price is below the delivery price then traders holding short contracts will profit. Net shorting contracts will put downwards pressure on the futures price causing it to move towards the expected future spot price, and upon delivery date converge. The two prices must converge all there will be an arbitrage opportunity. The value of a short futures position increases as the price of the underlying moves lower.
If on the other hand the future spot price is expected to be above the delivery price then traders will want to long those contracts so they can profit from buying at the lower delivery price and selling at the higher spot price on the delivery date, or simply closing out the position and profiting on the difference, as is the convenience of futures over individually-tailored forwards which often require physical delivery. Demand for long positions puts upwards pressure on the futures prices and moves it towards the expected future spot price where it will converge by delivery date. The value of a long futures position increases as the price of the underlying asset moves higher
As time approaches the delivery date, the delivery price and the sport price of the underlying asset must converge. This occurs by traders continually identifying any arbitrage opportunities and profiting from them. This serves to equalise any mispricing. It is this mechanism of arbitrage which keeps today’s futures price correctly aligned with the expected future spot price.
The determination of the futures price at the beginning of the contract’s life will vary depending on the type of underlying asset. Some examples are an investment asset paying no income, an investment asset paying known income, an investment asset paying known yield, an investment asset with storage costs, or a consumption asset such as oil or dairy products, which usually also includes storage costs.
Interest Rate Futures to Gauge Direction in FX
Interest rate futures provide insight about what bond traders are anticipating regarding changes in interest rates. If interest rate futures are pricing a high probability of an interest rate increase, then a currency will strengthen. If they are pricing a high probability of a cut then the currency will weaken
The ASX 30-Day Interbank Cash Rate Futures are used to calculate probabilities for changes in the Official Cash Rate set by the RBA. Similarly the 30-Day Federal Funds Rate Futures provides probabilities about future changes to the key interest rate set by the United States Federal Reserve Bank. Both these futures price are available as free indicators online and are crucial for assessing market expectations about interest rates for the respective economy.
Commodity Futures and the Commodity-linked Currencies
Other ways futures can be used to trade forex is with commodity futures. Certain currencies have strong correlations with specific commodities. The prime examples of this are the commodity currencies – the Australian, New Zealand and Canadian dollars.
For the Australian economy, the most relevant commodities are the industrial metals. Given Australia’s close trading links with China, the economy is highly sensitive to Chinese growth. Industrial development in large economies such as China requires immense quantities of minerals or base metals such as copper, aluminium, nickel and of course, Australia’s largest mineral export, iron ore, which is used to make steel. Iron ore futures can be monitored through CME Group Iron Ore 62% Fe, CFR China (TSI) Futures or Dalian Iron Ore Futures. Drops in the iron ore futures will put pressure on the AUD as lower expected future prices will reduce the country’s export income.
The Australian dollar’s strong positive correlation with minerals and metals means that futures
markets such as iron ore, copper, aluminium and nickel as well as the precious metals gold and
silver, should be closely monitored before and during trades on the AUD.
The New Zealand economy is most correlated with dairy prices, with diary making up seven per cent of the country’s gross domestic product. New Zealand Exchange (NZX) Global Dairy Futures market shows quotes for Whole Milk Powder, Skim Milk Powder, Butter, Anhydrous Milk Fat and Butter. By analysing the trend in prices for future delivery, an educated estimate can me made about the future spot price. This in turn can help inform a trade on the New Zealand dollar and help to predict the outcome of the fortnightly Global Dairy Trade price index and Milk Powder auction – which more often than not affects the Kiwi.
The Canadian dollar is highly correlated with the price of crude oil because crude is one the country’s main exports. There are two major blends which serve as benchmarks for crude prices; West Texas Intermediate which is mainly traded in North America and Brent crude from the North Sea. Due to proximity, movements in WTI are watched closely for effects on the Canadian economy; a fall in WTI will reduce Canada’s GDP. WTI futures contracts can provide insight about the market’s expectations regarding future price of the commodity and therefore export revenue for Canada, which in turn can provide a rough indication of whether the market is bullish or bearish on the CAD
Application
Each currency has its own specific characteristics and unique correlations with other asset classes. It is important to be familiar with these relationships and always monitor the relevant asset’s futures prices before entering a position in the currency markets. For example, it would be inadvisable to buy the Canadian dollar if West Texas Intermediate crude futures are sliding lower. For the risk currencies – EUR, JPY and CHF – equity index futures should be used to gauge sentiment. While for the commodity currencies, various commodity futures.
Trader Alen
Tuesday, March 22, 2016
Risk Management (lesson23)
Now we will talk about Risk Management.
Risk management is much more than how much money you risk on each trade, it's the big picture for you entire trading business.
For example: if you sit on your trading desk and you are ill or hungover or stressed about something it will impact your mental and emotional performance before you even turn screens on you have increased a risk of losing money.
Risk management also means your knowledge, skill, and experience because these things will help to make better decisions and you will become more consistent trader.ž
The more knowledge and skill you develop the better equipped you will be in the long run and the same thing goes the more attention you pay to every little area you are going to focus on in this section.
Risk management has to become the unconscious habit you have to apply in every single aspect in trading business.
If you ignore it then all skill you have learned will be irrelevant because you will not be protected from losses that can kill your account.
You need to learn when to trade and when not to trade.
You will be consistently profitable when you have mastered the art of conducting analysis and selecting trade in conjunction being tuned into a market and realizing when it's the best to stay out.
Profit protection is knowing when to trade and when not to trade.
We will break risk management into 4 sections that directly impact your business and look how we can improve them.
These sections are your shields.
Limiting money you can lose on a trade is a great shield to have up but there are other shields that will protect you.
When we have all shield up we have maximum protection, and your business is safe.
When you lower the shields your business becomes more exposed and you have the high risk of failure.
The biggest reason traders lose everything is when they lower risk management shields or fail to build them in the first place.
The first thing you need to have is a goal if you don't know why you want to be a trader you need to take some time and seriously consider this before going further.
If you have a goal we can work to those desires.
The first area of risk management is Money Management.
Managing your money is critical in your life, especially in trading.
The concept of money management is driven by the principle of never losing all of your money on 1 trade, and always be in the position to trade next day.
Never risk more money then you can afford to lose.
We will talk about leverage.
Leverage is simply trading with more money than you actually have in your account.
We also look at how professional trader don't just use leverage in the markets on every single trade without a lot of pre-planing and thought.
There are traders that make hundreds of thousands of dollars each day on trading floors by using leverage but I can guarantee trades they take are not just mindless ones and due to boredom.
They are very carefully planed and excecuted using leverage to maximise gains.
The more leverage you use the harder will be to maintain conviction and clear thought trying to implement trade management strategy.
You need to have very strick risk management plan to ensure you are never overleveraged on your account.
Most professionals rank each trade based on their conviction, any trade less then 7/10 conviction is low quality while over 8/10 is the high quality trade.
Only apply higher leverage to trade that has conviction above 8/10.
Next section is Trade Management.
Each trade needs to be executed according to a plan.
There are several strategies that traders including myself use to manage trades.
The first concept is using a stop loss.
A stop loss is ordering a market that you set where you want to get out of the trade in an event that it goes against you.
Hard stops should be placed on all trades that you enter.
When we say hard to stop that means fixed order that will automate get triggered if the price hit certain level against you.
You also need to give a trading room to breathe, my advice using the stop loss of 40 pips.
We use average range we learned in technical analysis for our stops.
We use around 50% of daily range.
Always use you stop loss.
If there is a strong trend in the market look to enter multiple positions, add to your profitable positions. Never add to losing positions.
Entries and exits are also vital, your entry will determine how much drawdown will you suffer and it will give you much clearer picture how your trade will play out.
If you trade from high probability level then you must expect an imidiate reaction to price much quicker if your analysis is correct.
Your exits are also important because if you are not taking profits it does matter how good your trade is you will lose money, same goes if you take profit too quickly.
For taking profits use strong technical levels where price already reacted in past.
I usually never have take profits because I run my positions for months, wich is tens of thousand of pips in profit, so I advise you to do the same.
Don't scalp the markets switch to higher timeframes weekly, daily, 4 hours.
40 pips stop loss - unlimited reward.
Next, we focus on Self-Management.
This is all about managing youself as a trader and a person so you can operate in maximum eficency
This section relates to trading pscichology, and it is very important.
Trading is not easy, it is a skill as any other and trading professsionaly is just like any other profession , you need quality, credible training that takes time and dedication, so read this course properly and dont jump from one section to another without reading all information with understanding.
Self mamangement is important because you need to be aware of your state and structured process for reachiing your best performace state.
You need to be trading in the zone (you will learn this in trading psychology).
Trading in the wrong state you are increasing odds of losing money, you need to be self-aware all time, knowing what you should be focusing on to improve your trading performance and finally implementing knowledge.
The final section is Trading Environment.
This will of corse have an impact on your overall performance wich, in turn, can increase a risk of losing money.
You need to be able to focus on the market and tune into whats going on.
This means your desk is always clear, your office or your room is always clean and there are no dictractions that make you lose focus.
I recommend you to have at least 2 screens for your trading station so you can keep up with everything.
To many monitors can make information overload so it isn't productive.
The standard desk is 3 screens - one for charts, second for live news feed and audio squaw and third for research.
This will increase your performance.
Risk management is much more than how much money you risk on each trade, it's the big picture for you entire trading business.
For example: if you sit on your trading desk and you are ill or hungover or stressed about something it will impact your mental and emotional performance before you even turn screens on you have increased a risk of losing money.
Risk management also means your knowledge, skill, and experience because these things will help to make better decisions and you will become more consistent trader.ž
The more knowledge and skill you develop the better equipped you will be in the long run and the same thing goes the more attention you pay to every little area you are going to focus on in this section.
Risk management has to become the unconscious habit you have to apply in every single aspect in trading business.
If you ignore it then all skill you have learned will be irrelevant because you will not be protected from losses that can kill your account.
You need to learn when to trade and when not to trade.
You will be consistently profitable when you have mastered the art of conducting analysis and selecting trade in conjunction being tuned into a market and realizing when it's the best to stay out.
Profit protection is knowing when to trade and when not to trade.
We will break risk management into 4 sections that directly impact your business and look how we can improve them.
These sections are your shields.
Limiting money you can lose on a trade is a great shield to have up but there are other shields that will protect you.
When we have all shield up we have maximum protection, and your business is safe.
When you lower the shields your business becomes more exposed and you have the high risk of failure.
The biggest reason traders lose everything is when they lower risk management shields or fail to build them in the first place.
The first thing you need to have is a goal if you don't know why you want to be a trader you need to take some time and seriously consider this before going further.
If you have a goal we can work to those desires.
The first area of risk management is Money Management.
Managing your money is critical in your life, especially in trading.
The concept of money management is driven by the principle of never losing all of your money on 1 trade, and always be in the position to trade next day.
Never risk more money then you can afford to lose.
We will talk about leverage.
Leverage is simply trading with more money than you actually have in your account.
We also look at how professional trader don't just use leverage in the markets on every single trade without a lot of pre-planing and thought.
There are traders that make hundreds of thousands of dollars each day on trading floors by using leverage but I can guarantee trades they take are not just mindless ones and due to boredom.
They are very carefully planed and excecuted using leverage to maximise gains.
The more leverage you use the harder will be to maintain conviction and clear thought trying to implement trade management strategy.
You need to have very strick risk management plan to ensure you are never overleveraged on your account.
Most professionals rank each trade based on their conviction, any trade less then 7/10 conviction is low quality while over 8/10 is the high quality trade.
Only apply higher leverage to trade that has conviction above 8/10.
Next section is Trade Management.
Each trade needs to be executed according to a plan.
There are several strategies that traders including myself use to manage trades.
The first concept is using a stop loss.
A stop loss is ordering a market that you set where you want to get out of the trade in an event that it goes against you.
Hard stops should be placed on all trades that you enter.
When we say hard to stop that means fixed order that will automate get triggered if the price hit certain level against you.
You also need to give a trading room to breathe, my advice using the stop loss of 40 pips.
We use average range we learned in technical analysis for our stops.
We use around 50% of daily range.
Always use you stop loss.
If there is a strong trend in the market look to enter multiple positions, add to your profitable positions. Never add to losing positions.
Entries and exits are also vital, your entry will determine how much drawdown will you suffer and it will give you much clearer picture how your trade will play out.
If you trade from high probability level then you must expect an imidiate reaction to price much quicker if your analysis is correct.
Your exits are also important because if you are not taking profits it does matter how good your trade is you will lose money, same goes if you take profit too quickly.
For taking profits use strong technical levels where price already reacted in past.
I usually never have take profits because I run my positions for months, wich is tens of thousand of pips in profit, so I advise you to do the same.
Don't scalp the markets switch to higher timeframes weekly, daily, 4 hours.
40 pips stop loss - unlimited reward.
Next, we focus on Self-Management.
This is all about managing youself as a trader and a person so you can operate in maximum eficency
This section relates to trading pscichology, and it is very important.
Trading is not easy, it is a skill as any other and trading professsionaly is just like any other profession , you need quality, credible training that takes time and dedication, so read this course properly and dont jump from one section to another without reading all information with understanding.
Self mamangement is important because you need to be aware of your state and structured process for reachiing your best performace state.
You need to be trading in the zone (you will learn this in trading psychology).
Trading in the wrong state you are increasing odds of losing money, you need to be self-aware all time, knowing what you should be focusing on to improve your trading performance and finally implementing knowledge.
The final section is Trading Environment.
This will of corse have an impact on your overall performance wich, in turn, can increase a risk of losing money.
You need to be able to focus on the market and tune into whats going on.
This means your desk is always clear, your office or your room is always clean and there are no dictractions that make you lose focus.
I recommend you to have at least 2 screens for your trading station so you can keep up with everything.
To many monitors can make information overload so it isn't productive.
The standard desk is 3 screens - one for charts, second for live news feed and audio squaw and third for research.
This will increase your performance.
Sunday, March 20, 2016
Trading Psychology (lesson 24)
Trading Psychology is one of the most important elements in trading, and most retail traders ignore it and that why they lose money.
By now you already learned all skills to trade effectively and now it's all about practising those skills in real time markets with real money and perfecting the psychological approach to trading.
Banks, trading firms, and hedge funds regularly incorporate into schedule even with most experienced traders.
So we will take you trought major psychological concepts that will be key to your trading sucess.
Remember professional traders that is performing badly doesnt need new strategy they simply need to look at their psychology to improve their overal performance.
You need to be trading in the zone.
Geting in the zone is the key to trading sucessfuly.
And banks, firms, hedge funds spend thousands of dollars coaching their traders in this manner.
You will have exact same training that top 10 investment banks use.
Welcome to the Applied Trading Psychology.
I really encourage you to immerse yourself into the program and get as much value as you can from the program, join in the activities and exercises that we do and implement what we will talk about in your trading.
The mission: to become best trading self
Think about what is best trading self, take a moment and imagine yourself in the future where you are trading at your best.
What would that be like?
What would you be trading?
How would you be trading?
Where would you be trading?
How are you fellin kinda thought to come trought your mind?
What perceptions you got, what are your motivations?
What do you notice about your behaviours and habits?
Just take a moment to get a sense of future you, trader that you need to become to achieve what you want to achieve, who will that person be?
Trader you want to become is a future projection of the trader you are now and that really nice way of looking at it.
Session 1
So today session topics are Traders, Decisions, and Discipline.
We will try to understand trading behaviour, understanding trading performance, start to think a little bit about how we make decisions.
The area we might make decisions, touch a bit topic on discipline and i will give you few practical strategies that you can start implement today to reduce the amount of energy you make in your decision making.
Let's start with understanding od trading performance.
We have 4S - the first test is skill, a second is a strategy, third state, a fourth is the situation.
When we look at trading performance and what makes you as a performer, we got that combination of your skills and knowledge, your strategy is really important, the situation can be in terms of your environment wether you are trading in a bank, in a fund or at home, and then state of psychology.
In milktary you can have great skill or great strategy but to get access to that we ahve to implement those skill to thing strategically in combat situations is very much dependent on a persons fizical, emotional state.
We see same thing in sport, penalties are classic examples where player with good skill and good strategy often dont perform well and its not lack of skill or strategy its their state, anxiety, stress, fear.
Trading really comes down to you, having an effective trading strategy is one thing but you also need then psychology to maximize the returs on that strategy.
And im sure many of you are here because you recognize in yourself that you gor fundamentaly an effective strategy, the challenge of yourself is geting the most out of that and that is what trading psychology makes important and that our focus of the program.
Interstly i did a quick survey and i asked 240 traders what to they think is the main factor that was stoping them for maximizing their returns in the market.
And themselves with 76% say its biggest factor.
So let's start to have a look at what is a good trading decision before we start to think about discipline and all these factors.
Its really important to think about what is a good trading decision and we have an exercise.
So we got the 50-year-old man and he has hearth condition and has to stop working de to that chest pain.
But he enjoyed his work and didn't want to stop and that pain also affected his life in general.
Now there is a type of bypass operation that will relieve his pain and increase his life expectancy from 65-70.
However, there is a risk 8% of people who have operation die.
His doctor decides to go ahead with the operation.
The operation is successful.
So just keep that information in mind.
Evaluate doctors decision on the following scale:
3- Clearly correct, and the opposite decision would be inexcusable
2- Correct , all thing considered
1- Correct, but the opposite would be resonable too
0- The decision and its opposite are equaly good
-1- Incorrect, but not unresonable
-2- Incorrect, all things considered
-3- Incorrect and excusable
Interestly we had bias toward 1s and 2s
Now imagine the task except that the operation was unsucessful and the patient died.
Would that change our answers?
When we look at decision what are we basing our decision on?
Are we basing on the process or we are basing on the outcome?
This is interesting when it comes to trading, what is a good decision, and how do we evaluate what good decision is?
win lose
Good process 1 2
Poor process 3 4
We got 4 possible outcomes, we ignore trades that could be flat scratches, but lets look at trades that could be winners or lossers and quite simply would define them in terms of two brackets good process wich would be really good discipline or if you had a plan or strategy you followed trought whole process will clasify that really is maybe knowingly breaking your rules so you are doing things really that were outside of your premises without good reason, to try to keep it relativly black and white.
So we can have a good process trade like wins likewise losses or we can have the poor process of wins and losses.
It gives us 4 possible outcomes.
Wich of those trades do you think is the best outcome, you can only choose one.
92% said 1, 4% said 2, 4% said 3, so most of you gone with good process and a win and I would agree.
But a far more interesting question is wich is the second best outcome?
89% go with 2 and 11% go with 3.
win lose
Good process Deserved success bad break
Poor process dumb luck poetic justice
My sugestion is to people is if you want to keep trading in the top row between deserved sucess and bad break, sticking to good process, good process evolves over time, good process wont be fixed.
Your process will need to evolve over time it evolves as you evolve.
Sticking at the top is key.
Staying away from poor process trades is important.
A lot of traders trade out of boredom, trades without a reason, that's what makes losses.
Start to monitor your trades in term of the outcome, in terms of 4 quadrants, and each trade outcome.
Its good exercise to do yourself, because it will improve your results.
Now when we start to look at proces we often think about discipline and i want to make a point here because its really important and its summed up best by this quote "No man ever steps in the same river twice , for its not the same river and hes not the same man"
Just like when we are trading the markets, when you are trading the market its never the same market because a moment to moment the dynamics are slightly diferent in term of who is in the market, why are they in the market, volume all this factors, and so there can be some similarities, it can be an uptrend, each uptrend has a uniquenes as well and every time you are trading from day to day you are actualy changing to because experience from today will shape your brain in term of how you then approached markets tommorow, you are not the same person tomorrow as you were today.
We have been consistenly shaped by our experiences, so thats realy important to remember beacuse a guess the old fashioned notion of discipline about having a plan, trading the plan.
And there is certanly good value in that but it's been researched in the US where they are looking at how do the best fund managers straight out, how they perform.
And one of the interesting things that are coming through is flexibility, what they call in military flexible responds, and that ability to have a plan but its knowing when to stick to a plan and know when not to stick to a plan.
Lots of time spent on planing and preparetion is really important but also at the moment to recognise the need to be flexible, and you can maximize your market returns, you need to develop you judment and that flexible response.
When I talk about discipline its not just about having a plan and following the plan, its really about having a plan and then knowing when to follow the plan and when not to, and that is about judment and that is developed trought experience and trought feedback loop and evaluations, not a short-term process and thats a goal.
That is part of becoming best trading self.
By now you already learned all skills to trade effectively and now it's all about practising those skills in real time markets with real money and perfecting the psychological approach to trading.
Banks, trading firms, and hedge funds regularly incorporate into schedule even with most experienced traders.
So we will take you trought major psychological concepts that will be key to your trading sucess.
Remember professional traders that is performing badly doesnt need new strategy they simply need to look at their psychology to improve their overal performance.
You need to be trading in the zone.
Geting in the zone is the key to trading sucessfuly.
And banks, firms, hedge funds spend thousands of dollars coaching their traders in this manner.
You will have exact same training that top 10 investment banks use.
Welcome to the Applied Trading Psychology.
I really encourage you to immerse yourself into the program and get as much value as you can from the program, join in the activities and exercises that we do and implement what we will talk about in your trading.
The mission: to become best trading self
Think about what is best trading self, take a moment and imagine yourself in the future where you are trading at your best.
What would that be like?
What would you be trading?
How would you be trading?
Where would you be trading?
How are you fellin kinda thought to come trought your mind?
What perceptions you got, what are your motivations?
What do you notice about your behaviours and habits?
Just take a moment to get a sense of future you, trader that you need to become to achieve what you want to achieve, who will that person be?
Trader you want to become is a future projection of the trader you are now and that really nice way of looking at it.
Session 1
So today session topics are Traders, Decisions, and Discipline.
We will try to understand trading behaviour, understanding trading performance, start to think a little bit about how we make decisions.
The area we might make decisions, touch a bit topic on discipline and i will give you few practical strategies that you can start implement today to reduce the amount of energy you make in your decision making.
Let's start with understanding od trading performance.
We have 4S - the first test is skill, a second is a strategy, third state, a fourth is the situation.
When we look at trading performance and what makes you as a performer, we got that combination of your skills and knowledge, your strategy is really important, the situation can be in terms of your environment wether you are trading in a bank, in a fund or at home, and then state of psychology.
In milktary you can have great skill or great strategy but to get access to that we ahve to implement those skill to thing strategically in combat situations is very much dependent on a persons fizical, emotional state.
We see same thing in sport, penalties are classic examples where player with good skill and good strategy often dont perform well and its not lack of skill or strategy its their state, anxiety, stress, fear.
Trading really comes down to you, having an effective trading strategy is one thing but you also need then psychology to maximize the returs on that strategy.
And im sure many of you are here because you recognize in yourself that you gor fundamentaly an effective strategy, the challenge of yourself is geting the most out of that and that is what trading psychology makes important and that our focus of the program.
Interstly i did a quick survey and i asked 240 traders what to they think is the main factor that was stoping them for maximizing their returns in the market.
And themselves with 76% say its biggest factor.
So let's start to have a look at what is a good trading decision before we start to think about discipline and all these factors.
Its really important to think about what is a good trading decision and we have an exercise.
So we got the 50-year-old man and he has hearth condition and has to stop working de to that chest pain.
But he enjoyed his work and didn't want to stop and that pain also affected his life in general.
Now there is a type of bypass operation that will relieve his pain and increase his life expectancy from 65-70.
However, there is a risk 8% of people who have operation die.
His doctor decides to go ahead with the operation.
The operation is successful.
So just keep that information in mind.
Evaluate doctors decision on the following scale:
3- Clearly correct, and the opposite decision would be inexcusable
2- Correct , all thing considered
1- Correct, but the opposite would be resonable too
0- The decision and its opposite are equaly good
-1- Incorrect, but not unresonable
-2- Incorrect, all things considered
-3- Incorrect and excusable
Interestly we had bias toward 1s and 2s
Now imagine the task except that the operation was unsucessful and the patient died.
Would that change our answers?
When we look at decision what are we basing our decision on?
Are we basing on the process or we are basing on the outcome?
This is interesting when it comes to trading, what is a good decision, and how do we evaluate what good decision is?
win lose
Good process 1 2
Poor process 3 4
We got 4 possible outcomes, we ignore trades that could be flat scratches, but lets look at trades that could be winners or lossers and quite simply would define them in terms of two brackets good process wich would be really good discipline or if you had a plan or strategy you followed trought whole process will clasify that really is maybe knowingly breaking your rules so you are doing things really that were outside of your premises without good reason, to try to keep it relativly black and white.
So we can have a good process trade like wins likewise losses or we can have the poor process of wins and losses.
It gives us 4 possible outcomes.
Wich of those trades do you think is the best outcome, you can only choose one.
92% said 1, 4% said 2, 4% said 3, so most of you gone with good process and a win and I would agree.
But a far more interesting question is wich is the second best outcome?
89% go with 2 and 11% go with 3.
win lose
Good process Deserved success bad break
Poor process dumb luck poetic justice
My sugestion is to people is if you want to keep trading in the top row between deserved sucess and bad break, sticking to good process, good process evolves over time, good process wont be fixed.
Your process will need to evolve over time it evolves as you evolve.
Sticking at the top is key.
Staying away from poor process trades is important.
A lot of traders trade out of boredom, trades without a reason, that's what makes losses.
Start to monitor your trades in term of the outcome, in terms of 4 quadrants, and each trade outcome.
Its good exercise to do yourself, because it will improve your results.
Now when we start to look at proces we often think about discipline and i want to make a point here because its really important and its summed up best by this quote "No man ever steps in the same river twice , for its not the same river and hes not the same man"
Just like when we are trading the markets, when you are trading the market its never the same market because a moment to moment the dynamics are slightly diferent in term of who is in the market, why are they in the market, volume all this factors, and so there can be some similarities, it can be an uptrend, each uptrend has a uniquenes as well and every time you are trading from day to day you are actualy changing to because experience from today will shape your brain in term of how you then approached markets tommorow, you are not the same person tomorrow as you were today.
We have been consistenly shaped by our experiences, so thats realy important to remember beacuse a guess the old fashioned notion of discipline about having a plan, trading the plan.
And there is certanly good value in that but it's been researched in the US where they are looking at how do the best fund managers straight out, how they perform.
And one of the interesting things that are coming through is flexibility, what they call in military flexible responds, and that ability to have a plan but its knowing when to stick to a plan and know when not to stick to a plan.
Lots of time spent on planing and preparetion is really important but also at the moment to recognise the need to be flexible, and you can maximize your market returns, you need to develop you judment and that flexible response.
When I talk about discipline its not just about having a plan and following the plan, its really about having a plan and then knowing when to follow the plan and when not to, and that is about judment and that is developed trought experience and trought feedback loop and evaluations, not a short-term process and thats a goal.
That is part of becoming best trading self.
Friday, March 18, 2016
Trading Psychology (lesson25)
What factors affect your decisions?
If we think about good decision really is about good process some will win some will lose, if we can keep that core idea of making the trades of good process, that's fundamental to all trading and i think many of your realised when you got interference in your trading maybe when you are not at your best is often when you got too focused on how much money you are making, how much you are losing.
We have traders with behaviours wich they now they should be doing but they find themselves doing it.
So for example
If we think about good decision really is about good process some will win some will lose, if we can keep that core idea of making the trades of good process, that's fundamental to all trading and i think many of your realised when you got interference in your trading maybe when you are not at your best is often when you got too focused on how much money you are making, how much you are losing.
We have traders with behaviours wich they now they should be doing but they find themselves doing it.
So for example
- Taking profit too early
- Running losses to far
- Chased a loss
- Not pulled the trigger
- Taken excessive risk
- Taken too little risk
- Traded trough boredom
- Overtraded
77% of people cut profits too early, 58% run losses to far, 35% chased a loss, 73% not pulled a trigger on good trading setup, 69% taken too much or too little risk so these are common trading behaviours and again because the market as a lot of uncertanty and because it has lot of uniqueness to the market, probably very difficult to stick to the plan all the time, there may be time when taking profit too early may be a good thing to do and times when not pulling the trigger might be the right thing to do.
But in general, we find that we find in my coaching these behaviours that traders want to do a lot less or get better at.
Interesting why is it?
The rules of trading are quite simple and clear yet the practice of trading against the art of trading is where the difficulty comes in.
And one way of thinking about this comes from this model of decision making.
Observing what's going around you, the orientation phase is making sense of what's happening,then deciding and then taking action.
So in trading terms you are sitting in front of your screens, you are observing market information, then we are orientating we are making sense of that it's like a big filtering system and don't think that's a slow process, it's very quick in microseconds, almost instant from wich we are making decision and taking action.
Orientational phase is fundamental, large of it will be outside conscious awareness and some of it in conscious awareness.
Think what might influence traders decision making, what kind of factors influence your decision?
Some say direction, news, previous losses, habits, risk-reward, boredom, fundamentals, patterns, stress, fear, greed, hope, overconfidence, good P&N.
Trader Tendencies
Trader tendencies Biases and heuristics Emotions/feelings/mood
cutting profits disposition effect Fear
running losses ambiguity aversion regret
taking excessive risk loss aversion shame
not pulling the trigger regret aversion anxiety
chasing losses endowment effect greed
anxiety aversion stress
External factors overconfidence Perception/mindset
results/performance short term/present Beliefs
environment-desk anchoring thoughts
floor,institution herding Energy levels/fatigue
life events physical
market conditions Biology decision
date/time Testosterone self-control
Dopamine
Gut feel
Our program is to reduce how this factors affect you and improve trading returns.
So let's start with whats really important wich is how we can make better decisions?
The whole program has been designed with that intention.
I will give you core approaches so you can make a difference.
This is model for making better decisions:
Understanding -------------------------------------------------------------------------------------------------->
what is the good decision? Awareness -------------------------------------------------------------->
discipline vs judbemt what are your strength and weaknesses? Action-------------->
how you make decisions? when are your crucial moments? Niche/style
the factors that affect what factors interfere with your decisions? process/focus
your decisions journaling
know your motivations
mindest, emotions,behaviour
So we look today the understanding part what is the good decision?
For me its the following the process.
We talked about discipline vs process, flexibility, that maybe always sticking to the plan won't give you maximum returns, knowing when to flex open up an opportunity.
We looked at how we make decisions if I make the decision and I know what I was looking at I can start to ask myself what happened in the orientation phase.
What influenced that decision, what were filters inside that?
And we looked at factors that effect our decisions, so understanding is really a key, having a better understanding can have a positive impact on your own decision making.
The next factor is Awareness and I will take you through effective strategies, exercises wich are great for rasing awareness.
Awareness is important, if you gonna control anything, you are going to manage anything then you need to have awareness first.
So building higher awareness is fundamental.
I will take you in front of 4 key strategies that you can implement that will have the significant impact on your decision making.
Let's start with Awareness.
Performance awareness
What factors affect your trading performance and decision making?
What helps you to trade and perform well?
What stops you trading well, what are the challenges?
Think of the time you are trading really well, what is it that's helping you trade well?
And that is interesting because a lot of people don't give a lot of thought to why are they trading well, and the reason for that is negativity bias in the brain.
The brain has bias towards negativity, weakness, lesses its far more interesting in those factors because they are more important to survive and the brain is the primary survival mechanism.
So winning, doing well is less important, brain pay less attention to it, hovewer there is lot of value in paying attention to creates sucess because if you want to make consistency and start to get more suceess you need to realise what are the factors that create sucess for you, how are you thinking, how are you feeling, how the market is trading, how are you trading.
Whats happening outside trading, what are you paying attention to?
Whole number of factors that will be helping you trade well and likewise when trading is not going so well what is it that stops you from trading well, what are the challenges?
What is your mood and emotions like, whats energy like, what are you paying attention to, what is outside of trading?
So great exercise is to start getting the contrast between your best and your worst.
The more detail you can get about those 2 the better.
But it also allows you to start to get a sense of whats going on in the middle.
Am I more towards my best?
Am I more towards to my worst?
If I'm shifting wich way am I shifting?
Making money and losing money is not enough, they don't reflect good performance.
You can trade really well and lose, you could trade really bad and win.
Give that some real time because it's very important, get it into your arsenal.
The more you understand about your best and your worst and what comes in the middle as we go through the program looking at emotions, perception, thinking, energy you will be able to start to relate to it much more effectively and there will be more meaning.
So this exercise is really important before we get to section 2.
You need to also think about Crucial moments.
All of us in trading have crucial moments , moments where we are at most risk, so one trader might be when they get into the market and it goes straight aways against them that may be crucial moments when feelings and thinking may have interference into their strategy.
The moments where you are most likely to do the things in trading you shouldn't be doing.
So think what are you crucial moments?
When is your decision risk highest?
There are factors that increase decision risk.
Its stress, uncertainty, short time, energy, high emotion, outcome focus, mindset, motivation, attention.
Through the program, we will reduce this.
So again its good exercise to do, think about your crucial moments,when is your risk highest, have that awareness, start using this technique.
Self Awareness is fundamental.
Now let's look at how you can improve decision making.
There are 3 dimensions
There is a trader, the strategies you trade, and the markets you trade.
All traders are unique and different, somewhere there is a perfect blend or the niche where you, your experience, your skills your knowledge, your personality matches the strategies in the markets and gets you the best results.
And one of the goals in trading is to find what that is.
Many people spend time looking for the winning strategy, but when you been trading for a while you realise there isn't a winning strategy.
It's about finding the right strategies for the trade (you) and the right markets for you and relationship between those 3 things, that is the winning strategy.
Its the approach of blending those 3 things.
We touched a point on your trading process and it is important to key.
The best example on this is: trader had such a big focus on pnl (pips/money), it was the only he cared about.
He ended up developing eye twitch, and that occurred at the start of the year when his pnl was back to 0, it was very stressful.
He started to measure how well he traded, and the way he chose that was he give himself mark out of 10, and he wrote why he gives himself 6 ,7, what is the reason.
Interesting over period of months the conversation was much more focused on process, but also he started to realise , he became much more aware what factors where effecting his outcome, he became much more aware what is key in that process, preperation was one of them, his general health and well being was another, so this insight came out by really geting into process.
What was also really important on one occasion he took significant loss, he was upset and disappointed, he felt he traded well and he stayed process focused he saved lot of money.
Secondly few months later he had a good start to the year that he was happy with but more importantly no eye twitch.
The stress level was lower as he focused more on the process.
So it's interesting when we focus on the process, if we focus too much on the outcome anxious and that anxiety reduces blood flow to the cortex and it impacts decision making.
People with strong outcome focus also have more loss and disposition effect is when people are fast to cut their winners and slow to cut their losses.
You really need to think about your trading process and how well you are trading, not how much money you are making or losing, get back into the process.
What was the quality of my decision process?
Good trading habit is keeping a journal.
24% say that they keep a journal, 40% sometimes, 12% I used to, 24% No never.
It is really important to keep a trading journal.
It will make you better at decision making, without that it's very hard to self-correct.
It's sometimes difficult to start but when you start it becomes more painful to stop.
The last thing I want to touch in the term of strategy is Motivations.
It is important to think about your motivations, its a big factor in decision making.
Why are you trading?
What do you want from trading?
What are your life/trading values?
What are your long term and short term goals?
You need to have the growth mindset, always try to be better, always try to develop, it's really important.
Develop a winning psychology
-----------------------------------------------------------------------------------------------------------------------
Cognition Affect
(motivation, attention,perception) (mood, emotions, feelings)
The Brain
Physical Sensation Behavioural
(heart, gut energy) (habits, actions)
-----------------------------------------------------------------------------------------------------------------------
This is the model that we are going to take foward with us from today, so we talked about few actions behaviours and aproaches, talked about decision making, awarness of decision making, finding a niche, focusing on a process, keeping a journal, motivations.
And then we will focus on cognition, affect, physical sensation, behaviours it all revolves around the brain.
We will look at this area and build a model wich help you with decision making and improve trading performance.
Here are a few things we looked at today:
Review and Action
Understanding trading performance and 4s
What is the good trading decision? using our 4 quadrants
What factors affect your trading decisions?
Developing Awareness
Actions- niche, process, journal, motivations
Let's start with Awareness.
Performance awareness
What factors affect your trading performance and decision making?
What helps you to trade and perform well?
What stops you trading well, what are the challenges?
Think of the time you are trading really well, what is it that's helping you trade well?
And that is interesting because a lot of people don't give a lot of thought to why are they trading well, and the reason for that is negativity bias in the brain.
The brain has bias towards negativity, weakness, lesses its far more interesting in those factors because they are more important to survive and the brain is the primary survival mechanism.
So winning, doing well is less important, brain pay less attention to it, hovewer there is lot of value in paying attention to creates sucess because if you want to make consistency and start to get more suceess you need to realise what are the factors that create sucess for you, how are you thinking, how are you feeling, how the market is trading, how are you trading.
Whats happening outside trading, what are you paying attention to?
Whole number of factors that will be helping you trade well and likewise when trading is not going so well what is it that stops you from trading well, what are the challenges?
What is your mood and emotions like, whats energy like, what are you paying attention to, what is outside of trading?
So great exercise is to start getting the contrast between your best and your worst.
The more detail you can get about those 2 the better.
But it also allows you to start to get a sense of whats going on in the middle.
Am I more towards my best?
Am I more towards to my worst?
If I'm shifting wich way am I shifting?
Making money and losing money is not enough, they don't reflect good performance.
You can trade really well and lose, you could trade really bad and win.
Give that some real time because it's very important, get it into your arsenal.
The more you understand about your best and your worst and what comes in the middle as we go through the program looking at emotions, perception, thinking, energy you will be able to start to relate to it much more effectively and there will be more meaning.
So this exercise is really important before we get to section 2.
You need to also think about Crucial moments.
All of us in trading have crucial moments , moments where we are at most risk, so one trader might be when they get into the market and it goes straight aways against them that may be crucial moments when feelings and thinking may have interference into their strategy.
The moments where you are most likely to do the things in trading you shouldn't be doing.
So think what are you crucial moments?
When is your decision risk highest?
There are factors that increase decision risk.
Its stress, uncertainty, short time, energy, high emotion, outcome focus, mindset, motivation, attention.
Through the program, we will reduce this.
So again its good exercise to do, think about your crucial moments,when is your risk highest, have that awareness, start using this technique.
Self Awareness is fundamental.
Now let's look at how you can improve decision making.
There are 3 dimensions
There is a trader, the strategies you trade, and the markets you trade.
All traders are unique and different, somewhere there is a perfect blend or the niche where you, your experience, your skills your knowledge, your personality matches the strategies in the markets and gets you the best results.
And one of the goals in trading is to find what that is.
Many people spend time looking for the winning strategy, but when you been trading for a while you realise there isn't a winning strategy.
It's about finding the right strategies for the trade (you) and the right markets for you and relationship between those 3 things, that is the winning strategy.
Its the approach of blending those 3 things.
We touched a point on your trading process and it is important to key.
The best example on this is: trader had such a big focus on pnl (pips/money), it was the only he cared about.
He ended up developing eye twitch, and that occurred at the start of the year when his pnl was back to 0, it was very stressful.
He started to measure how well he traded, and the way he chose that was he give himself mark out of 10, and he wrote why he gives himself 6 ,7, what is the reason.
Interesting over period of months the conversation was much more focused on process, but also he started to realise , he became much more aware what factors where effecting his outcome, he became much more aware what is key in that process, preperation was one of them, his general health and well being was another, so this insight came out by really geting into process.
What was also really important on one occasion he took significant loss, he was upset and disappointed, he felt he traded well and he stayed process focused he saved lot of money.
Secondly few months later he had a good start to the year that he was happy with but more importantly no eye twitch.
The stress level was lower as he focused more on the process.
So it's interesting when we focus on the process, if we focus too much on the outcome anxious and that anxiety reduces blood flow to the cortex and it impacts decision making.
People with strong outcome focus also have more loss and disposition effect is when people are fast to cut their winners and slow to cut their losses.
You really need to think about your trading process and how well you are trading, not how much money you are making or losing, get back into the process.
What was the quality of my decision process?
Good trading habit is keeping a journal.
24% say that they keep a journal, 40% sometimes, 12% I used to, 24% No never.
It is really important to keep a trading journal.
It will make you better at decision making, without that it's very hard to self-correct.
It's sometimes difficult to start but when you start it becomes more painful to stop.
The last thing I want to touch in the term of strategy is Motivations.
It is important to think about your motivations, its a big factor in decision making.
Why are you trading?
What do you want from trading?
What are your life/trading values?
What are your long term and short term goals?
You need to have the growth mindset, always try to be better, always try to develop, it's really important.
Develop a winning psychology
-----------------------------------------------------------------------------------------------------------------------
Cognition Affect
(motivation, attention,perception) (mood, emotions, feelings)
The Brain
Physical Sensation Behavioural
(heart, gut energy) (habits, actions)
-----------------------------------------------------------------------------------------------------------------------
This is the model that we are going to take foward with us from today, so we talked about few actions behaviours and aproaches, talked about decision making, awarness of decision making, finding a niche, focusing on a process, keeping a journal, motivations.
And then we will focus on cognition, affect, physical sensation, behaviours it all revolves around the brain.
We will look at this area and build a model wich help you with decision making and improve trading performance.
Here are a few things we looked at today:
Review and Action
Understanding trading performance and 4s
What is the good trading decision? using our 4 quadrants
What factors affect your trading decisions?
Developing Awareness
Actions- niche, process, journal, motivations
Wednesday, March 16, 2016
Trading Psychology (lesson26)
After reading all trading psychology from this course, read Trading in the Zone by Mark Douglas.
Don't place one trade in the market if you didn't read this course psychology and the book Trading in the Zone.
Welcome to session 2 of the Trading Psychology.
We will look at high-performance trading.
Remember in trading psychology is the most important part!!
Developing a high-performance approach, the performance funnel and trading success factors, and the performance cycle.
We will start by looking at trading as the high performance activity, high-performance mindset and building patterns of effective (high performance) behaviour.
You need to start thinking that trading is high-performance activity similar to a sport like chess, military ,art, high-performance activity with results-driven environment where there is pressure, skills, knowledge based.
Many people don't see trading in that same way.
When you are best trading self you are high-performance trader.
So if trading is high-performance activity we need to approach with high-performance approach.
The bias in trading is towards results, however if we look at trading in performance terms then yes we want to get good results and outcome to maximize our market returns but we need to really get into and get interested, fascinated with what are the factors of high performance that generate those results.
When we look at high-performance factors we get back into trading process.
The performance funnel.
On the left we have high-performance factors like planning, preparation, mindset, sleep, trading strategy, exercise, a number of factors wich when put in place increases your chances of success and the more we put this high-performance factors in place we get the smaller amount of interference from thought, emotions, feelings, and behaviour.
If a trader turns to market with no strategy with poor risk management, they are not well prepared, they don't have a trading plan, they didn't sleep well, their knowledge level is low, skill level is low then we can say trader has high amount of interference and thoughts, emotions, feelings and behaviour would affect their trading significantly.
If we have another trader - good skills, good knowledge, proven strategy, good risk management, good sleep, even if they are trading the same markets they get different experiences, so what we will do in the program is build the bigest funnel we can in a positive way.
A lot of traders don't put enough factors in place to increase their chances of success.
Just take a moment and think about your performance funnel, is it a positive funnel?
Do you have a lot of things in place?
Or you have the negative funnel?
When it comes to building a funnel and looking what can be done we can use high-performance cycle.
The are 3 key phases - Plan, Execution, Evaluation.
Plan- create conditions and opportunity for success then you implement your plan then execute your trading strategy, you get a feedback then there is the phase of evaluation- we look what happened, we learn from that and leverage that feedback gets into the momentum, and then we get back to plan and preparation.
Now if you give yourself number from 1 to 10 on each phase.
The phase that has a low number, work on it!
There is definitely room for improvement.
Let's start with mindset.
What is high-performance mindset?
Most important factor is Focus on becoming your best trading self.
And that is growth mindset, the growth mindset is getting better at developing.
Best traders in the world are also having coaches because they want to get better, they have the growth mindset, they always try to get better and you should do the same.
Mastery approach is trying to get better rather than good, being good is an enemy of being better so it's important to focus on growing.
Now we will look at preparation.
Why is preparation important?
Benefits Biases
confidence uncertainty
concentration anxiety aversion
consistency
Only small amount of traders are well prepared and have a plan.
Being prepared is an edge.
There are 2 key elements of preparation
Technical/Tactical
- visualise "best trading self"
- premortem
Execution ChallengesObserve->execution->results
It's not your strategy that gets results, it's your execution.
Dangers are - outcome focus, short term focus, rigidity
The mirror in trading is data that comes from trading.
What to evaluate?
Trade data Self data
market thoughts
long/short feelings-emotion-energy
position size
entry price
time in/out
management
exit/price
reasons for entry/exit
It is very important to have a journal so you can self-correct.
Its very important to focus on process not outcome.
Building habits of excellence
Excellence is an art won by training and habituation.
We do not act rightly because we have a virtue or excellence, but we rather have those because we acted rightly.
We are what we repeatedly do.
Excellence,then, is not an act but a habit.
Habits take to form around 65 days.
Performance lifestyle habits
Sleep, exercise, nutrition, family, travel, creative time, home
Don't place one trade in the market if you didn't read this course psychology and the book Trading in the Zone.
Welcome to session 2 of the Trading Psychology.
We will look at high-performance trading.
Remember in trading psychology is the most important part!!
Developing a high-performance approach, the performance funnel and trading success factors, and the performance cycle.
We will start by looking at trading as the high performance activity, high-performance mindset and building patterns of effective (high performance) behaviour.
You need to start thinking that trading is high-performance activity similar to a sport like chess, military ,art, high-performance activity with results-driven environment where there is pressure, skills, knowledge based.
Many people don't see trading in that same way.
When you are best trading self you are high-performance trader.
So if trading is high-performance activity we need to approach with high-performance approach.
The bias in trading is towards results, however if we look at trading in performance terms then yes we want to get good results and outcome to maximize our market returns but we need to really get into and get interested, fascinated with what are the factors of high performance that generate those results.
When we look at high-performance factors we get back into trading process.
The performance funnel.
On the left we have high-performance factors like planning, preparation, mindset, sleep, trading strategy, exercise, a number of factors wich when put in place increases your chances of success and the more we put this high-performance factors in place we get the smaller amount of interference from thought, emotions, feelings, and behaviour.
If a trader turns to market with no strategy with poor risk management, they are not well prepared, they don't have a trading plan, they didn't sleep well, their knowledge level is low, skill level is low then we can say trader has high amount of interference and thoughts, emotions, feelings and behaviour would affect their trading significantly.
If we have another trader - good skills, good knowledge, proven strategy, good risk management, good sleep, even if they are trading the same markets they get different experiences, so what we will do in the program is build the bigest funnel we can in a positive way.
A lot of traders don't put enough factors in place to increase their chances of success.
Just take a moment and think about your performance funnel, is it a positive funnel?
Do you have a lot of things in place?
Or you have the negative funnel?
When it comes to building a funnel and looking what can be done we can use high-performance cycle.
The are 3 key phases - Plan, Execution, Evaluation.
Plan- create conditions and opportunity for success then you implement your plan then execute your trading strategy, you get a feedback then there is the phase of evaluation- we look what happened, we learn from that and leverage that feedback gets into the momentum, and then we get back to plan and preparation.
Now if you give yourself number from 1 to 10 on each phase.
The phase that has a low number, work on it!
There is definitely room for improvement.
Let's start with mindset.
What is high-performance mindset?
Most important factor is Focus on becoming your best trading self.
And that is growth mindset, the growth mindset is getting better at developing.
Best traders in the world are also having coaches because they want to get better, they have the growth mindset, they always try to get better and you should do the same.
Mastery approach is trying to get better rather than good, being good is an enemy of being better so it's important to focus on growing.
Now we will look at preparation.
Why is preparation important?
Benefits Biases
confidence uncertainty
concentration anxiety aversion
consistency
Only small amount of traders are well prepared and have a plan.
Being prepared is an edge.
There are 2 key elements of preparation
Technical/Tactical
- research
- analysis
- market news
- data
- technical levels
from that, you are following your trading strategy for the trading session but there is also
Mental/Emotional/Physical
- sleep
- breakfast
- exercise
- meditation/mindfulness
- Mental rehearsal
- visualise "best trading self"
- premortem
- music
- write down thoughts, feelings
Stages of trade execution
observe->identify->enter->manage->exit
Thought and feelings are important in these stages, so closely monitor them.You need to identify your weakness, for example, my weakness was enter-execution, i had very good strategy and a plan but when i neded to enter the market execute my fear interfered and I didn't enter the markets and lose money overall, but when I accepted my risk and clear my mind I start to execute trades and become profitable trader.
Thought and feelings are important in these stages, so closely monitor them.You need to identify your weakness, for example, my weakness was enter-execution, i had very good strategy and a plan but when i neded to enter the market execute my fear interfered and I didn't enter the markets and lose money overall, but when I accepted my risk and clear my mind I start to execute trades and become profitable trader.
Execution ChallengesObserve->execution->results
It's not your strategy that gets results, it's your execution.
Dangers are - outcome focus, short term focus, rigidity
The mirror in trading is data that comes from trading.
What to evaluate?
Trade data Self data
market thoughts
long/short feelings-emotion-energy
position size
entry price
time in/out
management
exit/price
reasons for entry/exit
It is very important to have a journal so you can self-correct.
Its very important to focus on process not outcome.
Building habits of excellence
Excellence is an art won by training and habituation.
We do not act rightly because we have a virtue or excellence, but we rather have those because we acted rightly.
We are what we repeatedly do.
Excellence,then, is not an act but a habit.
Habits take to form around 65 days.
Performance lifestyle habits
Sleep, exercise, nutrition, family, travel, creative time, home
Subscribe to:
Comments (Atom)