Forex Education -


Central bank speakers... how to prepare for them?

A tip in managing expectations to improve your trading efficiency I often come across many new traders basing off their trading day on key central bank speakers like ECB president Mario Draghi or BOE governor Mark Carney, thinking that their speeches will contain something to heavily influence the respective currencies involved. But a less common talked about topic is how to prepare and manage your expectations ahead of such speeches. On most economic calendars, you'd find that these speeches tend to have a so-called "High Impact" rating attached to it because of the nature of the person speaking. However, it is important to also know the context of their speech because it plays a big role in determining what they will be speaking about. There's plenty of ways to find out information on what central bank speakers will be talking about beforehand and that's the best way for you to prepare and manage your expectations surrounding the event. For example, the ECB lays it all out for you in their weekly schedule which can be found here. ForexLive Here's an example of how two recent events involving ECB president Mario Draghi where he was scheduled to speak during the European trading session. The first being on 22 February and the second being on 27 March. Without any context, most traders will just go about their trading day expecting a key risk event to take place as Draghi will be due to speak. And that will affect the way they trade and their view/position on the euro. However, if you know about what he will speak of or what the event he is attending is related to, you will get a better gauge on how to manage your trading expectations and adjust your view/position accordingly. The phrase information is power would be most appropriate in instances like these. I provided previews on what his speeches will be about at the time and this was what his 22 February speech covered: Meanwhile, this was what his 27 March covered: And sure enough, he didn't touch on anything too important related to monetary policy on 22 February but made some commentary related to that and the economy on 27 March here, which gave the euro a bit of a nudge higher. TLDR: It's important to understand and know what central bank speakers will be speaking about as it is knowing who will be speaking on the trading day. However, much like trading economic news releases, there is no guarantee that you won't get rare days - although these are indeed very rare - where central bank speakers surprise with their comments on events not related to monetary policy. But you can learn to take control and minimise those risks and apply that to your trading arsenal rather than be lazy and ignore what they are about.

He is on pace to become the highest earner in Jeopardy! history. Who is James Holzhauer.

Jeopardy! winners and winning traders have lots of things in common Jeopardy! is a  game show where three contestents compete in providing the question to answers under topic headings.   Since you need to answer with a question, you need to form your response in the form of a question like "Who is Alex Trebek?"  That would be in response to "He hosts the long running game show where contestants answer in the form of a question". Another response, "Who is James Holzhauer?", would be the response to the answer "He is on pace to becoming the highest earner in Jeopardy! history" The last 10 days on the show has seen a professional sports gambler named James Holzhauer race through the games without much competition.  His 10 day total winnings are $697,787 or $69,778.70 per day. That pace is more than double the all-time record holders average.   That record holder won 74 consecutive days and amassed $2.52M over that period.  That comes to $32,054 per day If Holzhauer were to go 74 days without losing, he would win $5.16M.   Judging from his results to date, it may become his full time job for the entire year.  He is without competition.  No one is close.  The Game. In Jeopardy!, the subject categories are broad in topic like "Shakespearean Plays".  They could also have clever/fun topics.   For examples, the category heading might by "All my Ex-es" and the contestants will be told that the answer all start with letters "Ex".  There are categories that suit the contestants skill, and other that don't. There are two rounds with round 1 having values for correct answers from $200 to $1000 or $15,000 in total on the board.  Round 2 has values from $400 to $2000 or $24,000.  If a contestant were to answer every question correctly, he would win $39,000.  So how can Holzhauer haul in $69,778.70 per show so far? Leverage.   The cumulative totals can be leveraged higher as there is one Double Jeopardy question in game one and two Double Jeopardy questions in game 2 (three in total). Those questions allow the contestant - who is in charge of the board (i.e. answered the last question correctly) - to wager up to his current winnings.  So if the contestant has $5000, he/she can in effect wager $5000 (and double his/her total). The game ends with Final Jeopardy question - another leverage opportunity -  where the contestants can wager all or part of their total winnings (again on a determined topic).  The winner is the one with the most money after Final Jeopardy.  The winning process To  win the game, you need to have broad knowledge on many topics.  You also need  to be ready to press a button with your thumb, on a hand held devise as soon as Alex Trebek finishes  reading the question, and do that ahead of the competition (i.e, you need to anticipate and react).  In effect the game process involves Anticipating responses from the topic chosen, Reading the question,  Listening to the question audibly, Processing the information quickly, and Anticipating with an action (press the button at the right time).  Before game requires: A plan on how to  play the game Immense knowledge Practice. Practice. Practice.  Oh, you also have to hope you are right as a correct answer is rewarded with a dollar value, but a wrong answer leads to a negative value. The higher the value, the higher the dollar risk.  Finally, it does help to utilize leverage opportunities.    Since getting hooked on the show this last week, I started to think if traders/trading relates to contestants/the Jeopardy! game? The answer is a resounding "YES!"  Let's go through some key similariities from the two. Hopefully it will help you up your trading game. 1.  The Game Plan  In my book, Attacking Currency Trends, I outline a game plan for traders. That game plan is to trade trends and keep fear to a minimum.   Trends are where the most money is made and lost. It is essential that you stay on the right side of a trend.  Don't do it, and you lose money...fast.  Look back on your biggest losses and I guarantee it was because you traded against the trend.   In Jeopardy!, the trend is "knocking it out of the park" in category topics that you know.  I am not great in "Famous baroque composers" but "The Masters" (as in the golf tournament) or "Technical Analysis", would be topics I would ride the trend with lots of confidence.    What about fear? In trading you define your risk, and limit your risk using technical tools.   A trend line or 100 day MA are implicit "lines in the sand" that say bullish above, and bearish below.  If you know that line is your risk line, and you look to limit your risk by trading near it, then do the final step of accepting the risk in your mind. Once you accept the risk,  your fear should disappear. Because you are doing that process, and your risk is limited, you have a greater chance to "make more than your risk".  All of which, should lower your fear. In Jeopardy!, the most successful players, like James, are defining, and limiting risk on each question read ("Do I answer it or not?"), and also accepting that risk every time the button is pressed (i.e. I am 80% sure but I accept that risk of loss).  A statistical fact from James Holzhauer's performance to date (CLICK HERE for interesting game facts and comparison to another super contestant), shows he has answered 341 questions correctly with 13 incorrect responses.  That is incredible win/loss percentage, and it does come with outright knowledge, but you can understand why he is so fearless. He has defined and limited his risk, and accepts the risk by pressing the button.2.  KnowledgeYou can't be successful in trading without knowledge, nor the desire to learn.   One of the more frustrating things I hear from traders is how they lost money buying some signal provider.  A signal provider is NOT knowledge. They tend to be the opposite of knowledge.  You need to learn to fish for yourself.   At Forexlive, we all try to teach, coach, and mentor, with not only timely information but trading knowledge. I could tell you to sell the EURUSD on a break of the 1.1282-84 area, but I also show you the chart that has the 200 hour MA and a swing area converged at that area.  Hence a break would shift the bias to the downside.   The price should go lower.  I post everyday using the same tools and trading decisions. I wrote about the "yellow area" and the 200 hour MA many times.   One of the things that James Holzhauer said when asked how he prepared, was that he "studied topics that he was most uncomfortable with".  He is already incredibly smart, but he had a desire to make himself better in things he was not good at.  He also said that there is a "limit to knowledge". You can't learn it all.  There is information that borders on the absurd in knowing.  For example, knowing all the Canadian birds in existence would be a waste of time, but knowing the Loon reside in every province and territory and is on the dollar coin, would be something too know, and a potential question (or answer).  In trading, if you know too much, you can lose track of the obvious.  You need to know enough to win the game but not too much to border on the absurd.   Know what you need to know in trading to win the game, and know it well.  3.  Practice. Practice. Practice. In trading, the longer you do it, the better you become.  For example, through practice,  You learn that Friday's can be the worst of the times to trade, while Tuesday's to Thursday's can be great times. You learn to understand non-trending markets and how to trade them. You learn how to recognize and trade trending markets. You understand how to target and what reaching a target, allows you to do with your stop. You learn to respect failures.  You learn when to trade bigger (leverage up) or when to trade smaller (or not at all).  As you start to trade, you haven't done enough practice. You have not been punched in the gut, made all the mistakes, learned from your mistakes.  There is an apprentiseship in trading (one can argue you never get to the finish line as well).   Reading about winners on Jeopardy!, one of the consistent tips the best contestants shared is to go over the same things over and over and over again.  By doing this, in the heat of the games battle, it will allow your brain to read or hear the question, and go right to the possible answer(s).    It is not good enough to read Romeo and Juliet, it is good enough to know by repetition the families are the Montagues and the Capulets.  It is not good enough to read Hamlet. It is better to know that Hamlet caused the deaths of Polonius, Laertes, Claudius, and two acquaintances of his from the University of Wittenberg, Rosencrantz and Guildenstern.  In trading, if you look at enough charts and are consistent in your approach, you can see things more clearly.  In Jeopardy!, if you know Presidents and State Capitals and Shakespeare, and the most famous movie lines, you see things more clearly as well. Practice. Practice. Practice. 4.  Anticipation.In trading you need to anticipate.  In the hourly chart from above, it is easy to show - after the fact - what happened.  However, the most successful traders were already anticipating the potential break before it happened in that chart, and were "buzzing in" with a trade as it is breaking the 200 hour MA, or looking to lean against the level on a bounceIn trading, if you don't have an idea what the future looks like before it happens, you will be reacting too late.  You need to anticipate by being prepared on what to do.  Below is the minute chart of the price action from the EURUSD with the overlay of the 200 hour MA at 1.1282.  The price fell below the 1.1282 level on the weaker PMI releases to 1.1271 and then bounced to 1.1279 before moving lower again. Why do we see that specific price action?Traders, who anticipated, were waiting to sell below the 1.1282 and/or willing to sell on the correction against the 1.1282 (i.e. at 1.1279).  They were anticipating what might happen next after the break (with defined/limited risk too).  If the price moved back above the 1.1282 (say to 1.1288 oor 1.1289), they would likely bail.  The price never got there, and they rode the trade to the downside.  On Jeopardy!, the most succcessful contestants are already anticipating the answers under a topic. If it is Shakespeare, "Who is Rosencrantz and Guildenstern?" are right there in their brain.  If they are Masters golf experts, they are anticipating Jack Nicklaus, Butler's Cabin, Pimento Cheese sandwiches, Bobby Jones, Magnolia Drive, Amen Corner, Verne Lundquist, bikini wax (if you know the Masters, you can understand each of those).  Moreover, the best contestants are anticipating when to press the button.   Traders pressed the button to sell at 1.1277 to 1.1279 today.You need to anticipate.  5. Reading. Listening. Processing. Reacting. In trading, you need to read (both fundamental information and charts). You need to listen to "the market" through the price action.  You need to process, and finally you need to react.  Admittedly, most traders out there don't have the real-time headline news, but all do have the ability to read about other news that potential could move the market (Brexit, US China trade relations, etc). I read Forexlive, the first thing every morning. I read the WSJ and other news sites.  I don't want to overload, but I need to read.   Being aware is part of being a successful trader. You need to read and understand.  If you don't have a real time feed for news (seconds and minutes do matter a lot of times but so does anticipation of price action), you always have the charts in real-time. Charts do tell a story that may be influenced by something fundamental that you don't even know about yet - or quite frankly don't even need to know.   The price action will always fit the story in tomorrows paper (or on the internet).  Believe me.   Successful traders read stuff.  That can be fundamental or simply charts. Successful traders also listen to 'the market' through the price action and tools. The price action - and tools applied to the price action - do not lie.  If the price in the USDCHF is making new highs since March 2017, don't ask me "Is the USDCHF a sell?.  You are not listening to "the market", but are instead listening to the devil in your mind saying "sell because it is high". LISTEN to what is happening. If the story changes, the price action and tools will tell you. I promise.   Succcessful trader also process and react. Processing and reacting are what you need to do to trade.  If you can't process and react, you are not going to trade.  The same is true for contestants on Jeopardy!.  They need to read and listen to the question, process the answer and react, by pressing the button and answering in the form of a question.Read. Listen. Process. React. 6.  LeverageThe final thing I want to talk about is leverage.  I am a little hesitant to list this as most of you are not at the point where "leveraging up" is a good idea.   However, more experienced traders who have mastered all of the above, can successfully leverage positions.  In order to leverage a position, it should ONLY be with the trend. Occur when you already have great trade location (in profit) on an existing positionBe accompanied by fundamental bias in the same directionBe relatively early in the trend (you don't want to leverage up after 800 pips)Be entered on a retracement against a KEY, KEY level, or on the break of a KEY, KEY  level in the direction of the trend, Have risk that is well defined, and at such a key level that you are sure if breached, would send the price the other way.Be accepted firmly by you (no wishy washy).In Jeopardy!, the biggest differentiating factor with James that has allowed him to break all the 10 day records, is he has mastered 1 to 5 above.  James Holzhauer has a: Game PlanIncredible knowledgeHe has practicedHe anticipatesHe reads, listens, processes. and reacts.  He has all the skills. So that allows him to leverage up.Below are his statistics from the Daily Doubles over the first 10 days:A total of $218,199 of his $697,000 has come on Daily Doubles alone. That is leverage.  Those earnings have allowed him to have an average score at the end of the 2nd round $48,020 (remember there is only $39,000 on both Game 1 and Game 2 combined), and an average lead of $35,780.  His average wager on the Final Jeopardy question has been $22,361.  By that time, he has locked up a win on 9 out the 10 shows he has been on.  Excessive leverage is earned on Jeopardy! and it is earned in trading too.  ----------------------------------------------------------Success in trading, and lots of other things in life - even Jeopardy! - have a lot of similarities in common.   As you progress as a trader, a good exercise is to read about experts in things other than trading, and try a see the similarities in each.   You will find that you learn from them. That in turn will allow you to take the next step in your trading journey.Wishing all a Happy Easter and Happy Pesach.    ForexLive

The roadmap to doing the "impossible" in your forex trading

Sometimes you can do what seems to be "impossible", but you need to know how Saint Francis of Assisi once said: "Start by doing what's necessary, then do what's possible; and suddenly you are doing the impossible".   Those words speak to me for trading as well.  Many traders think the impossible, and skip the necessary and possible in their trading. That is a fatal flaw. It is important to think, "necessary" and "possible" first.  If you do, great things - once impossible things - can start to happen in your trading.   If you like the video, please give it a thumbs up. If you don't, feel free to give it a thumbs down.   PS. If you missed my last video, you can view it here: ForexLive

Finding forex trading signals services that are very profitable

A look at how to search for something that works for you Some Forex traders dream about finding great set and forget forex trading signal services which are easy to follow, profitable and convenient. They would then just copy the daily currency recommendations into their Forex broker dealing station and watch their trading account grow and grow. A short while ago over 250 online Currency trading alert services were reviewed and alert services like the one described above do exist! The big challenge to the average Forex Trader is firstly, finding forex trading signal services that fit the success mold and then secondly, making sure that the service is credible. This article will address the first question of how to find possible currency trading alert services to consider. ForexLive Trading alert services to consider The technique mostly used by many forex traders is to search the Web using a good search engine and then to slowly search through the results to find say 20 alert services to consider for evaluation. This is a good starting point but remember to use appropriate search terms. For instance, currency trading signals, currency trading alerts and currency alert service bring up different results. This may seem like hard work but always use your trading dreams as a motivator. When on the search engine results pages do not neglect the paid adverts to further increase your chances of finding great currency trading signal services. You can find some unexpected gems by clicking on these. An alternative good place to search for great forex trading signal services are Forex service review sites. Some of these sites give objective and paid reviews of many forex trading signal services on the market and allow users to post comments on their own personal experiences. Some of them list over a 100 forex trading signal services so your job can be reduced considerably. These are likely the best source of good forex trading alert services, as you get direct user feedback as well. We have also found these to be one of the best guides to the creditability of alert services. Use search engines to firstly find the review sites. Most of the review sites offer direct links to alert services providers. Utilizing forex blogs Forex blogs are again a good source of alert service information. Going into discussion forums is a lot more time consuming and your return on effort will be less than the techniques already mentioned. We use this method to check on the credibility of a service rather than finding a service. An often-overlooked method is word of mouth. Use your network of other forex traders to enquire whether they have had any good experiences with forex trading alert services. Using the methods above, alert services producing 27 000 pips a year and returns of between 200% and 1000% on capital used, have been found. Not a bad investment of time and effort but 250 alert services had to be researched to get there. You too can benefit from following the process described in this article and well as the articles to follow. It is well worth the effort. The activities above should provide you with a list of between 20 and 50 Forex trading alert services to consider. How you then water these down to the few that will make you money is the subject of the next article to be published in the article directory. Make sure to watch out for them. This article was submitted by UBCFX.

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'. This term refers to random fluctuations of the price - those that don't have any logic or volume behind them. The negative effects of price noise include false entry signals, drawdowns, and errant triggering of stop loss orders. As a result, it's only natural for traders to be in the constant search of ways if not to remove the market noise entirely, then to make its detrimental impact as small as possible. Let's review the most popular methods of avoiding market noise. First of all, if we go with trend trading as the basis of our strategy, we can actually consider movements inside a trade channel as market noise. The natural course of action is entering a trade at the trendline in the direction of a trend. The market noise is in the inverse relation to the degree of the timeframe: the bigger the time period of the chart, the calmer is the price. For example, the daily chart is purer and can provide a better understanding of the overall market situation than 1-hour timeframe. In other words, the right choice of a timeframe at least partially helps to remove the market noise. The rest is up to the trader himself/herself and his/her skills. Next, we switch to technical tools that may give us a hand dealing with market noise. These tools will help to focus on the trend and track it for a longer period of time. The first tool that comes to mind is also the simplest one - a Moving Average. Price swings around this line can be interpreted as noise. The bigger the MA's period, the bigger the range of fluctuations. The MA allows focusing on the important thing - the direction of the trend - and disregarding minor moves in expectations that the price will return to the mean and progress in the direction of the main tendency. A trader has to decide, whether he/she will consider these smaller countertrend moves for his/her positions. Another indicator is ZigZag. Its function is to mark the significant price swings on the chart. A trader can set a level of ZigZag's sensitivity through a number of parameters. Price fluctuations which are below the indicator's sensitivity threshold won't be highlighted on the chart. Thus it's possible to ignore them in the analysis. In addition, ZigZag helps to locate support and resistance levels, identify trends and chart patterns, and find good locations for stop loss orders. It can be used together with other tools and indicators such as Bollinger Bands, fractals, Fibonacci, and Elliott waves. The main drawbacks of ZigZag are that it marks the latest extreme point of the chart with a lag and that its last stretch may get redrawn as the current price changes. ForexLive The combination of Japanese candlesticks and moving averages gave birth to an indicator called "Heiken Ashi". Its formula readjusts traditional candlestick chart using averages. The resulting chart doesn't include smaller price fluctuations and allows judging the trend's strength. It's wise to combine Heiken Ashi with other indicators, for example, ADX or Stochastics. Renko is another alternative to the ordinary Japanese candlestick chart. The most peculiar thing about it is that it doesn't consider such parameter as 'time'. A 'brick' appears at the Renko chart only when the price covers a certain distance up or down. This lets a trader concentrate solely on the price's direction. By choosing which brick size to set, he/she decides which movements of the price to consider significant. If the brick size is small, it's easier to spot price reversals. However, there's a chance that a miniature brick size will filter out too few of the false moves. Renko charts work well on intraday timeframes and are especially popular among scalpers. Notice that Renko isn't included in MT4 by default, so you will need to download a custom indicator or an expert adviser from the Internet. Conclusion On the one hand, fighting market noise does seem a bit like tilting at windmills. The fact is that such movements of the price represent an inherent feature of the market, and if you are a trader you won't like having the market as your enemy. On the other hand, measures to diminish the influence of random price fluctuations are aimed at bringing some order and harmony to market analysis so that it would be easier to generate clear and profitable trade ideas. In that sense, the techniques and indicators described above are quite useful and may form a solid foundation of a good trading strategy.This article was submitted by FBS.

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


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