Forex Education -

How to filter out market noise?

Looking at the ways one can take in order to look past the 'noise' When it's too noisy, you often can't make out what you want to hear. You may get confused and do something wrong. The same thing can happen when you trade currencies as technical analysis can be complicated by the so-called 'market noise'.

Before you make a trade ask yourself: Who is on the other side?

The question reveals whether or not you have an edge The best thing you can read right now is a report from Bluemountain Investment Research titled: Who is on the other side? They sumarize it like this: If you buy or sell a security and expect an excess return, you should have a good answer to the question "Who is on the other side?" In effect, you are specifying the source of your advantage, or edge. We categorize inefficiencies in four areas: behavioral, analytical, informational, and technical (BAIT). Put more simply, that would mean an advantage via: 1) less emotion and more objectivity 2) better research and preparation 3) having information others don't have 4) taking advantage of forced transactions. Generally, retail traders are at the mercy of larger operations but that shouldn't be a surprise to anyone given the stats on retail success. I'm not going to try to summarize any more than that because it's a 30-page report with 140 references. Scott Barlow from the Globe & Mail said it was "the best research report ever written for investors." It's geared toward stock markets but almost all of it equally applies to FX. One difference is that FX is more flow driven while virtually all stock buying/selling is via analysis. It also comes with a handy checklist and (as the video below shows), checklists are one of my favorite things.   ForexLive

InstaForex: How to stay ahead in quieter markets

The know hows on dealing with slower trading periods Lulls in trading can present just as much challenges as periods of great movement and volatility. During quieter intervals however, ranges can be smaller due to the reduced volatility with many institutional traders away from their desks - what is the overall impact of this on your trading? Firstly, markets are more susceptible to having patches of illiquidity with random moves taking out stops more readily on any lack of order flow. Consequently, these can result in some frustrating trading experiences. The below article delves into some useful tips to help you keep a level head during periods of stagnation or reduced volatility. Be on the lookout for surprise events Always stay on top of upcoming events, releases, or announcements. Just because the market may seem a sea of calm, does not mean that very large moves do not occur across currency markets. Whether it be some surprise political development in the US with the Trump administration or seismic changes in the Turkish Lira, stay on the lookout. While it is important to note that moves such as these are not to be counted on habitually and are quite rare, they are indeed possible at any time. As such, make sure to keep alert for any major market moving news. Take a break Forcing trades and moves can be potentially catastrophic for your trading. Instead, whether it's the dead of summer or the lull of winter, it may be fruitful to factor in a break during your day and make sure you don't trade when you are on holiday. Time spent away from markets is crucial to help adjust and recover from hours of hawkishly observing the same charts and feeds. The markets will still be there when you return, just make sure you are fresh and in the right state of mine when moves do start happening. Willingness to reduce intraday targets Some of the most consistent traders in the world preach smaller profits and trade sizes. In this way you may want to consider taking slightly smaller profits during slower periods and particularly consider taking profits when price pushes into key support and resistance levels which are less likely to break. For example, if you normally look for 60% of the average true range for your profit target, it may be worth taking even 50% of the average true range instead. Profit is still profit. The importance of wider intraday stops At first this can seem counter intuitive, if ranges are narrower shouldn't you use smaller stops too? This is not necessarily so black and white however. To fully understand this point look at the market when it opens each week on a Sunday evening.  What do you notice? You will see a market that seems slow, yet it can have very quick and strong short-term directional moves. Why is this and what is going in here? This is how an illiquid market moves. Now, if there is a lack of liquidity during normal market hours the same type of price action can occur. This can needlessly take out your stops, so consider reducing your position size and setting wider stops. Don't sleep on changing market dynamics Presently, automation has been impacting nearly every area of our lives and FX trading is no exception. Once institutions looked to 'the man', now more and more they look to 'the machine' - this trend is unlikely to stop anytime soon. Algorithmic trading has increased considerably over the last few years and this is resulting in a key change. The algorithmic trading model involves the 'algos' being switched on during the whole year; computers do not need a holiday.Their short-term, constant day to day profit profiles means that they are going to be left running during the summer or slower months. Why is this important? Even though the large investors may have key staff on holiday or be away from their desks, the age of automation means that the trading of assets in FX goes on.Technical levels are still in playNo matter what time of year it is technical levels are never forgotten. The key moving averages are always respected and that means you should do.  Key moving averages like the 50 MA, the 100 MA and the 200 MA will still be respected so these should always be in the back of your mind.By extension, Fibonacci retracement levels and horizontal support and resistance levels can still be relied upon.Ranges deserve your attentionMuch like technical levels, trading ranges are also of supreme importance throughout the year. For example, if there is a strong range in play, then it is more likely to hold during slower trading periods.Pay attention to tests of key levels and take a quick look at the news. Are there any key releases that are coming out? If there is not, then the chances of a well-established range holding are strong.It could be a great location to trade a quick bounce off a key level. Similarly, if a key level looks like breaking during the summer months, and there is little in the way of significant market news, then that break may well be a false break. So, be aware of these two phenomena; strong ranges holding and false breakouts of key levels.- This article was submitted by Instaforex.

Algorithmic trading: Do the masters of the old school have a future?

A glance into algos and how they compare with the human elements of trading ForexLive Man vs Machine Once upon a time in the financial world it was all about getting the right 'man' to do the trading. Now, you may be forgiven for thinking that it is all about getting the right machine.  The impact of our new age has been most keenly felt in the two spheres of globalization and automation and trading is no exception. The rewards can be large for those able to capitalize on the benefits that automation offer to us. For example, the Medallion hedge fund founded in 1988 has achieved an average annual return of around 30%. However, don't get your hopes up since the fund has been closed to the outside world since1993. It simply focuses on trading its own money now. In 2018 it had $84 billion assets under management with profits of around $25 billion. What is algorithmic trading? For those unfamiliar with algorithmic trading it is simply trading that takes place on an automated level. Computers are given specific instructions to follow (algorithms) for making trades at large volumes and high speeds.  The largest portion of today's algo-trading is High Frequency trading (HFT) which places large numbers of orders and helps to make liquid markets. The following are some of the most well-known algos. Volume Weighted Average Price (VWAP) This executes a buy order in a stock close to its historical trading volume in an attempt to reduce the trade's impact on the market. To explain, imagine that over a month 5% of a stock's trading volume typically occurs in the first hour of trading. Armed with that knowledge then a computer with a client's order will stop trading that order as soon as the 5% level is reached. The remainder of the order will be traded at a different time. The thinking behind this algo is to disguise heavier than normal trading activity, so other traders/machines don't see what is happening. If they did, and bid the price up, this would impact the price at which the order was filled. Trade Weighted Average Price (TWAP) This executes orders based on time. This is for the investor who wants to match the levels of volume that are going on at any particular time. If there is an increase in interest, then the algo will become more aggressive. Similarly, if there is less volume going on then the algo will become less aggressive. This is an algo used by momentum traders who want to trade small, illiquid markets where volume analysis make's less sense. Guerilla Developed by Credit Suisse it was developed to enter orders without signaling to the market place that a large order is being placed. It has a variety of techniques designed to cover its own tracks. The algorithmic trader operating at pockets of volume This is the algo trader who find pockets of volume in order to enter the market from the buy or sell side. This is type of trading is most likely to occur in the stock market where volume flows can be seen.  This type of trading is much harder to execute in the forex market especially for retail traders.  It is only those with the ability to see large pools of volume that could profit from this knowledge. This would be banks, large traders, and brokers with a good sight of the market volume.   There are supposed to be rules about front running these orders, but that is very hard to implement.So, the question you might be asking is, 'Is it possible to compete with algorithimic trading as outlined above?' The short answer is no, not on an algos own terms. If the algo you are trading against is a High Frequency Trader (HFT) scalping the markets with the aid of a computerized program and advanced technology in order to aid execution, then you can't compete with that. If speed is needed to enter after an economic deviation then you can't beat the algo for speed of execution. Furthermore, the HFT will have considerable resources and will be able to keep the algo running 24 hours a day and 5 days a week. No-one can keep awake for that amount of time, let alone function reliably. Some algo trading uses technical areas to enter and exit However, traders can still compete with algos by knowing when to take trades. This is where an edge can lie for the old school trader. For example, some algos will enter trades where pockets of large volume is likely to collect, such as around the 100 and 200 MA. When that happens, the man, can evaluate the fundamental and sentiment of the market to allow the trade to run a little further or even decide whether to enter or not. Take the GBPUSD currency pair for example through December 13 to the time of writing on December 17. In the GBPUSD chart below Theresa May had been struggling considerably in getting her Brexit deal through Parliament. As a result there was no appetite to buy the GBP and all the rallies were sold. Through December 13 and 14 Theresa May was trying to get assurance from European officials that the Irish Border issue would not be allowed to drag on indefinitely if the UK Parliament accepted May's Brexit proposals. Europe was not prepared to give legal assurance to Theresa May and the bearish GBP sentiment remained. In this instance the man has an advantage over the machine. The man can enter orders with the knowledge that there are strong sentiment factors to sell the GBP from the 100 and 200 moving averages on the 1hr chart. The machine can only enter orders at the technical level. The man can choose whether to enter to not and whether the market dynamics are suitable. There is still a future for the old school trader So, the masters of the old school still do have a future and it revolves around interpreting market dynamics. There is also the human element that people like in the finance world. A machine does not have a personality, whereas a trader does. Some people will choose a man above a machine just out of preference for the human factor that a computer can't meet. Not yet, anyway. - This article was submitted by Instaforex.

There is good volatility and there is bad volatility

Stanley Druckenmiller on how markets have changed When Stanley Druckenmiller complains, you know it's tough. He's a billionaire and undoubtedly one of the greatest traders of all time. He laments how algos and quants have changed the game. "I made 30 percent a year for 30 years. Now, we aren't even in the same zip code, much less the same state," he said. It might be easy to dismiss him as a has-been but he's not just complaining, he outlines how markets have changed. "You're getting noise that used to mean something, and now it doesn't mean anything," he says. Volatility used to be something that traders and active fund managers loved. It was seen as an opportunity but not any longer. "Volatility is only good if it's part of the trend and it's giving you entry points within a trend," he said. "When you're going up and down, but there's no real trend, that's a nightmare. You might think that a volatility move is the beginning of a trend and get yourself whipsawed." At the end of the day, that's the lay of the land now. People will always find ways to make money and today is no different. Druckenmiller highlights the things that will always be key, including curiosity, open-mindedness and courage. "I've never made a buy at a low that I didn't just feel terrible and scared to death making it," he said. ForexLive

Ray Dalio helps put recent economic & market moves in perspective

Ray Dalio is the founder one of the world's largest hedge funds, Bridgewater Associates. He is one of the 100 wealthiest people in the world. If you are unfamiliar with how Dalio understands the economy and markets (ie. his mental model of how these work) this article he shared over Christmas is a good read. To whet your appetite: At the biggest picture level, there are three big forces that interact to drive market and economic conditions over time.  They are  1) productivity growth,  2) the short-term debt cycle (which typically takes about 5-10 years), and  3) the long-term debt cycle (which typically takes about 50-75 years).   These factors also affect geopolitics both within and between countries, which also affects the market and economic conditions. Here is the link where you can read it all  ForexLive

Four trading rules from 330 years ago prove that some lessons never change

Joseph De La Vega understood the riddle of markets in 1688 Computers and the information age have changed nearly everything about how we trade but so many parts of the decision on whether to buy or sell are unchanged. The above scene is from the interior of the Amsterdam stock exchange where stocks began trading in 1611. Seventy-seven years later, Joseph De La Vega wrote perhaps the first detailed book on how to trade stocks in 1688. It's titled Confusion de Confusiones and much of it is as relevant today as it was 330 years ago. Originally written in Spanish, it was translated to English in 1957 and still remains little known. As the translated introduction reports, De La Vega compared the life on the exchange to a labyrinth and said participants moved in a world of darkness which nobody wholly understood. He said no pen was able really to describe in all its intricacies. The title describes how every rational action was tied to an irrational one. He calls it a 'gambling hell'. The book is written in an usual style where the voice of the author is given to a variety of characters but several passages stand out, including four principles on how to speculate: "The first principle [in speculation] : Never give anyone the advice to buy or sell shares, because, where perspicacity [keenness of understanding] is weakened, the most benevolent piece of advice can turn out badly. The second principle: Take every gain without showing remorse about missed profits, because an eel may escape sooner than you think. It is wise to enjoy that which is possible without hoping for the continuance of a favorable conjuncture and the persistence of good luck. The third principle: Profits on the exchange are the treasures of goblins. At one time they may be carbuncle stones, then coals, then diamonds, then flint-stones, then morning dew, then tears. The fourth principle: Whoever wishes to win in this game must have patience and money, since the values are so little constant and the rumors so little founded on truth. He who knows how to endure blows without being terrified by the misfortune resembles the lion who answers the thunder with a roar, and is unlike the hind who, stunned by the thunder, tries to flee. It is certain that he who does not give up hope will win, and will secure money adequate for the operations that he envisaged at the start. Owing to the vicissitudes [volatility], many people make themselves ridiculous because some speculators are guided by dreams, others by prophecies, these by illusions, those by moods, and innumerable men by chimeras." In a separate pass he describes bulls ("lovers") and bears ("contremine"). "The bulls are like the giraffe which is scared by nothing … They love everything, they praise everything, they exaggerate everything," he writes. "The bears, on the contrary, are completely ruled by fear, trepidation, and nervous ness. Rabbits become elephants, brawls in a tavern become rebellions, faint shadows appear to them as signs of chaos," De La Vega writes. Ultimately, he says it's best to drink from both cups but that the natural inclination in stocks is higher with the occasional fall. "Experience has shown that usually the bulls are victorious and the bears lose out," he wrote. His optimism was well-placed for time. The Dutch East India company's shares rose steadily for more than 200 years, albeit with plenty of volatility. By some measures, it was the largest company in history. Perhaps my favorite line from the book is this one, the idea that you can never quit once you're involved in markets. "It is a great error to assume that you can withdraw [temporarily] from the Exchange or that you can gain peace of mind when you cease to meet with the other speculators. If ill fate pursues you persistently, it can reach you just as well in the rocks and the forests, where lightning may strike you and wild beasts may attack you. . . . Moreover, it is foolish to think that you can withdraw from the Exchange after you have tasted [the sweetness of the honey]. . . . He who has [once] entered the [charmed] circle of the Exchange is in eternal agitation and sits in a prison, the key of which lies in the ocean and the bars of which are never opened. . . ." Here's an online version of Confusion de Confusiones.

Trading to me is the best game I've ever played, what is it to you?

How did you get into trading? Why do you continue to trade? Do you enjoy it? If you're reading this, you've definitely got some interest in financial markets and/or trading. I'd like to think trading is a branch from markets in general as it is a way to be involved in it. There are plenty of other ways you can follow or get involved in markets, such as journalism, reporting, reading, etc. So, why did you choose trading of all things? If you missed the content from my earlier post, I compared trading to constructing a building and I elaborated on how it continues to fill my passion for playing video games instead: ForexLive If you're somewhat competitive, you'd know that there's no other thing that can replace the feeling of winning. Especially when you're passionate about the matter, it creates that desire and hunger to win even more. And that's what trading is to me. I can't count the number of times I've lost money on trades in the past, but the feeling of wanting to "win" the next trade just never goes away. It's much like playing sports on a competitive level, really. You always want to win no matter want the circumstance may be. But if there is one unhealthy aspect of trading is that it is all a mental game. So, make sure you go outside every now and then. Breathe in the fresh air. Take a walk in the park. Go for a run. Play some sports. Keep yourself healthy. In order to stay mentally sharp, you also need to be physically and emotionally well. Therefore, make sure you're up to for the game before you step into the pitch and start playing. ;) So, what is trading to you? Why do you trade? Do you enjoy trading? If not, why do you continue to trade? Feel free to share your thoughts in the comments below.

This Game of Thrones speech is a perfect metaphor for markets

We're in the long summer Game of Thrones is likely the most-watched television show in history. It has a huge following right around the world and even if you don't watch it, the speech makes a great point about getting ahead. In this week's episode there is a reference to a speech that was made back in season 3. In it, Littlefinger and Varys have different views of chaos. For Varys, it's something that pulls everyone down into a chasm; for Littlefinger, chaos is a ladder and an opportunity to climb. "Chaos isn't a pit. Chaos is a ladder. Many who try to climb it fail and never get to try again. The fall breaks them. And some are given a chance to climb, but they refuse. They cling to the realm or the gods or love. Illusions. Only the ladder is real. The climb is all there is," he says. We're in a long bull market at the moment -- the long summer. But 10 years ago the chaos was starting and many were pulled into the pit but others -- like John Paulson -- embraced the opportunities in the madness and made billions. Times of disorder come all the time in markets -- elections, referendums, black swans. Most will run away from markets then but if you really want to get ahead, those are the times to get on the ladder.

By continuing to browse our site you agree to our use of cookies, revised Privacy Notice and Terms of Service. More information about cookiesClose