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Trading the Markets

Trading the markets for speculation purposes is a challenging task that numerous amounts of people have embarked on. Do you know anyone who successfully makes money trading? The answer is most likely no. If you do I recommend you become as friendly as possible with the person and learn everything you can from him, unless he is charging for his services. That usually means he is not a successful trader.

With the type of leverage that is offered in the futures, options and forex markets, I personally find it hard to believe that anyone who has a successful system that is right for them will be too eager to teach it. Why should they teach if they can be trading the daylights out of it and be making millions with the 400:1 leverage that some forex platforms offer.

On the other hand numerous people have made millions trading. Look at the list of CTA?s on IASG.com, look at John W. Henry, Max Ansbacher, Warren Buffet, Peter Lynch and all the Market Wizards. I recommend reading the market wizards book for some Read more…

Trading the FOREX market is considered one of the riskiest forms of investment. As volatility is the name of the game, and because margins are huge (up to 200x), the only way to protect your trading capital is to employ a coherent Risk Management strategy.

While the trading desks of hedge funds and investment banks have to take into account several portfolio optimization procedures, as an individual operator, trading just one currency pair is often the best approach.

Thanks to strong correlation between different currency pairs, be it positive or negative, it only makes sense to focus both attention and resources on just one pair. Among other important advantages, the trader can become familiar with certain habits of a currency pair, as daily range, best time of day to trade it, or main actors.

As the primary objective of a professional FOREX operator is the protection of his or her trading capital, and not the profit, each trading decision must be accompanied by a comprehensive plan to protect this capital.

You have to deal with this term, protection, from a trader?s perspective, as opposed to the general understanding. In trading terms, by protecting your capital means offering you as many chances as possible to stay in the game, to live to fight another day, without being forced to close down the business. This means that you are going to lose money, as cost of business, but you have to do it in a way to continue it as long as possible.

The following example is eloquent.

We will consider an initial trading capital of 10,000 USD. As each trade has an intrinsic risk, we will use two levels here, the first at 50% and the second at 1% out of the total trading capital of 10,000 USD. This means that in the first case the operator risks to lose 5,000 USD, while in the second case, his or her risk is limited to 100 USD.

Simply put, you will never lose more than a certain percentage of your trading capital in just one trade. Be aware that even if you trade heavily margined, the percentage must refer to your trading capital and not to the position. If you open a Read more…

As hundreds and thousands of articles have been written on the subject of trading the markets, and with the emergence of new financial instruments every day, I feel compelled to put together a dissertation on the most important element of trading, the emotional effect.

Before detailing the key elements, I will offer to you the thoughts of two prominent individuals. They do not need any introduction, as their work is known and appreciated all over the world. I am sure you will love their insight into the human psyche.

“When dealing with people, remember you are not dealing with creatures of logic but creatures of emotion”. Dale Carnegie (1888-1955)

?Let’s not forget that the little emotions are the great captains of our lives and we obey them without realizing it”. Vincent Van Gogh (1853-1890)

In a world apparently dominated by logic, it is very interesting to find such ?heretic? ideas. There is nothing more debilitating than the thought of us acting not on our heavily trained conscious, but rather on the unknown subconscious impulses.

I would like to add just one more fact to my presentation, in order for you to fully grasp the importance of this new approach to trading and in general to any business activity.

The Institute for Health and Human Potential, with offices in U.S.A., Canada and Australia is a research and learning organization that uses Emotional Intelligence to leverage performance and leadership. Fortune 500 companies, the world’s top business schools, professional athletes and Olympic medallists seek their expertise.

According to their studies, “Research tracking over 160 high performing individuals in a variety of industries and job levels revealed that emotional quotient was two times more important in contributing to excellence than intellect and expertise alone” Shocking? Not at all. It is our way to act on impulse, without questioning the triggers.

It is well known already that the two emotions dominating trading are GREED and FEAR. What is less grasped is the extent to which these emotions influence our decisions.

While amateur traders are greedy when they lose and fearful when they win, professional operators have an exactly opposite attitude, being fearful when losing and greedy when winning.

While simple psychological training could help you discipline your impulse reactions, it is the experience you get ?in the ring? that makes you understand how to play with these primal emotions.

We all hate to lose, not necessarily money. The sentiment is very powerful. ALL professional operators are well versed in dealing with it day in and day out. Although they have been through tense moments due to financial losses, they have learned the most important rule in trading the markets: losses are the COST OF DOING BUSINESS.

They have a high emotional management procedure and are trained to implement it no matter how hard their ?ego? may suffer.

This is easier said than done, as emotions kick in and all theory crash and burn together with any trading plan.

Here you have some easy steps to help you start taming your emotional horses.

- What you see is NOT what you get, as opposed to what you have been taught all your life. The way you act is just a consequence of years and years of education and interaction with others and not your genuine attitude. You are the product of an outside education, not necessarily positive.

- In the long run, your FOREX business is just PART of your whole life, together with your family, friends, hobbies, long-term projects and various other activities. I personally use a very powerful ?mantra? when in pain following a loss. LIVE TO FIGHT ANOTHER DAY! – Never lose sight of the general picture. Read more…

What are the advantages of Forex over other types of investments?

LOW RISK – HIGH YIELD is the first thing that comes to mind.
Forex Trading can be risky and the general rule for investing is: When the return is high the risk is high, but with correct planning and strategy combined with a certain amount of self discipline you can bring the risk factor down to a level that is quite low. It is even possible to strategically plan your market entry and exit levels and control exactly how much you profit or lose.
This can be done in a way that allows the investor to still profit even when they misjudge the market 50% of the time! Compare that to other types of investments.

GEARING, is another area that stands out as a major advantage; this also substantially reduces the risk to you the investor. When you trade 1 forex ?Mini lot? you will be trading a parcel of money valued at $10,000 USD
And you only need $100 USD of your own money!
If you trade a regular ?Lot? you only need $1,000 USD to trade $100,000 USD.
How?s that for gearing? Try and do that with other kinds of investments!

LOW CAPITAL REQUIRED, many investments require a substantial amount of capital before you can take advantage of a particular investment opportunity, with Forex You only need $300 USD to ?get into the market?, and only need to have $100 USD in order to trade your $10,000 ?Mini Lot?.

CONVIENIENCE, if you have a laptop and an internet connection you can make a trade in 5- 10 minutes! Depending on how long your computer takes to start up, and the speed of your connection.

LIQUIDITY, many other forms of investing require tying your money up for long periods Read more…

Options provide great position management and risk control potential when
using them to trade the market directionally. This goes beyond the simple
fact that a long position in a call or put option has an absolute maximum risk
equal to the cost of the option (plus commissions, of course). That, in
and of itself, is a very useful thing. What this article discusses,
however, are a couple of handy little things one can do while holding an option
position to maximize the return and keep the risk well constrained.

Roll Up/Down
Most traders are familiar with the concept of a trailing stop whereby one
moves their protective exit as the market moves in favor of the trade.
This is used to lock in profits. The same thing can be accomplished when
one is trading options rather than the underlying. This is done by rolling
one’s position up or down strike prices depending on whether the trade is a long
using calls or short employing put options.

Here’s a recent example from the author’s own trading.

A long position in Seagate Technology (STX) was initiated when the stock was
trading at around 21.50 using the March 22.50 call options. They were
purchased for $0.80. The market rallied over the next few weeks,
eventually moving up above $24. At that point, a roll-up was executed by
selling the March 22.50 calls at $2.60 and purchasing the March 25 calls at
$1.40. This action served two purposes. The first is that it took
$1.20 off the table, reducing the portfolio exposure and freeing up cash for use
elsewhere. It also locked in a profit of $0.40 ($2.60 sales price minus
the $0.80 purchase price for the 22.50 calls minus the $1.40 purchase price for
the new 25 calls). At the same time, it had no effect on the remaining
upside potential for the trade. The two strikes would probably profit
about the same from any further appreciation in the price of STX shares.

If the portfolio exposure was deemed acceptable at $2.60, an alternate course
of action would have been to sell the March 22.50 calls and not take any money
out, but rather roll it all in to the March 25 calls. For example, if the
position was 10 options, selling the 22.50s would net $2600. That cash
could have been used to purchase 18 of the 25 calls ($2600/$140 = 18.57).
By doing so, one actually increases the upside potential for the trade
substantially. Of course, the full position is at risk, meaning one could
theoretically lose the whole $2600 invested, which is more than could have been
lost when the trade was first initiated.

Roll Forward
One of the issues with options is the limited duration they provide for
holding trades. If one is an intermediate to longer-term trader, this can
be an important hurdle. That said, however, Read more…

There are some common mistakes I?ve seen traders make in the area of money management. First, let?s understand what money management is all about.

Money management overlaps with risk, trade, business, and personal management, yet it has many aspects that make it unique, distinctly different from all of the other areas of management. In this chapter we want to examine some areas of money management that seem to involve mental quirks leading to costly mistakes.

LISTENING TO OPINION

Kim has entered a short position in crude oil after carefully studying as many factors as she could reasonably include while making her decision to trade. She has entered the trade because her study of the underlying fundamentals has her convinced that crude oil prices must soon begin to fall. Then Kim turns on her television set and begins to watch one of the financial news stations. An ?expert? in crude oil is being interviewed. He begins to talk about how crude oil inventories are almost certain to drop this year because oil companies are not doing as much exploration as they have in previous years. Kim listens intently to what he has to say and then begins to doubt her decision about the trade she has entered. The more she thinks about it, the more panicky she becomes. She considers abandoning her position even though she will end up with a loss. The fact that an ?expert? has decided something else completely shakes her confidence. She exits the trade intraday and takes a $400 loss. Prices have not come near her protective stop, which was $700 away from her entry. The market never moves sufficiently far to have taken out her stop. By the end of the day, her crude oil futures have made a new high, and in the following days explodes into a genuine bull market. Instead of a magnificent win, Kim has a loss. The loss is more than money, she has lost confidence in herself.

What should be done?

You should set your own trading guidelines and trade what you see. Forget about opinion, your own and especially that of others. Unless you are one of a very rare breed whose opinions are sufficiently good for trading, do not trade on them.

Make an evaluation based on the facts you have and then go with the trade. Just be sure you have a strategy for extricating yourself before losses become big. Had Kim stayed with her original strategy and stop placement, she would have ended up a happy winner instead of a regretful loser.

TAKING TOO BIG A BITE

Biting off more than can be chewed is a weakness of many traders. This form of over trading derives from greed and failing to have clearly defined trading objectives. Trading only to ?make money? is not sufficient.

Pete has sold short T-Bonds and is now ahead by a full point. He notes that he is making money on his trade. Feeling very confident and thinking it would be smart to be diversified, he enters a long position in silver futures, and also sells short Call options of wheat which he is sure is headed down. Almost as soon he is in the market, wheat prices explode upward and his Calls are in trouble. Pete buys back the losing short Calls and sells additional Calls on a two-for-one basis at a higher strike price. At the end of the day he looks at other positions. Silver had an intraday reversal leaving a spiked bottom as they close at the high of the day. The T-Bonds have made an inside day, but to Pete they suddenly look weak, he is down a few ticks. At the end of the day, he finds that most of the money he had made on his short T-Bonds was used to buy back the short wheat Call options. He covered those and now has additional premium in his account, but he also has additional risk, and is short Calls in a rising market ? not an enviable position. Moreover, he is now worried about his long silver futures based on the fact that silver closed at its lows on what seems to be a genuine reversal. To further aggravate the situation, he has lost confidence in himself. What was once a happy, simple, winning silver long, has now become an ugly, confusing mess, and Pete has a good chance of ending up a loser on all three trades. If Pete keeps over-trading in this fashion, he could end up like the poor fellow in the picture.

What should be done?

Break every trade into definitive goals. Make sure you achieve those goals before adding other positions. Even with a single short sale of the T-Bonds, Pete could have set himself a goal for the trade. One or two full points might have been all he needed to satisfactorily retire that trade as a winner. Then he could have made his trading decision for an additional position. There are very few traders who can successfully manage multiple positions in a variety of markets.

OVERCONFIDENCE

Overconfidence is a particular kind of trap that springs shut when people have or think they have special information or personal experience, no matter how limited. That’s why small traders get hurt trading on no more information than ?hot-tips.?

Tim is a farmer. He raises hogs and purchases huge amounts of feed to provide for his hogs. Tim has a large farming operation which is quite profitable. He takes 250 hogs a week to market. Because of a steady flow of hogs from his operation to the market, Tim has no need to hedge his hog business because he is able to dollar average the prices he gets for them. But Tim does want to indirectly reduce the cost of the feed he has to buy, so he purchases soy meal futures. Tim listens to weather and farm reports all day long. He attends meetings of other farmers, and tries to gather all the information he can that might help him be more profitable. But Tim has a major problem, called tunnel vision. When he looks out at the grain fields in the area where he lives, whatever he sees there he extrapolates to the whole world.

In other words, if Tim sees that the surrounding fields are dry, he suspects that all fields everywhere must also be dry. One year Tim witnessed a local drought. He checked with all the local farmers and they said they were truly experiencing drought conditions. He looked at the news on his data feed, and sure enough it said that there was a drought in his area. In fact, the entire state where Tim raises his hogs was undergoing drought.

Tim wasn?t too concerned about his own feed bins. He had plenty of it in his silos from previous bumper crop years. Tim decided to be piggish and speculate on what he considered to be inside information. Read more…

Do you think adaptation to the realities of the market is the most important thing?

Many times in the past I?ve written about the need to adapt, the need to be able to change your behavior relative to the market because the markets are ever changing.
I?ve stated that mechanical systems may be workable, but for only a short time relative to the life of markets. You must learn to trade what you see and to understand what you see on a chart.

When I first began trading there was no such things as futures contracts for foreign currencies. Why didn?t they exist? Because there was no need for them! In the 1970?s all that changed when the US dollar went off the gold standard and began to float against other currencies. Following that, the Chicago Mercantile Exchange began to create currency futures to provide a place where currency traders could hedge the risks associated with dealing in foreign currencies. Some of these risks are direct and some are indirect. Direct risk is involved for those who deal directly in foreign exchange. Indirect risk involves companies who export or import and receive payments or make payments in the currency of another country.
Ever since currency futures were created, they have been in a state of flux. More recently, for purposes of futures trading, currency gyrations have centered on a massive move away from currency futures to more direct trading in the forex markets. Currency futures, while maintaining their volume and open interest figures, are actually less liquid than they had been previously. Volume and open interest do not reveal the picture of what is happening in the currency futures pits. Volume and open interest levels are being maintained by fewer and fewer futures traders.

In the period from 1992 to the present, we?ve witnessed currency futures moving from ?red-hot? to ?cool? and now hot again insofar as speculators are concerned. Foreign exchange, which in 1992 was one of the hottest plays, first turned dull and then back again to exciting.
That this has happened can be seen in areas of which most futures traders are ignorant. Five years ago foreign currency traders were being paid huge salaries and anyone with a track record could virtually name his price. Following that, currency traders were no longer in great demand. Now, again, there is a huge demand for successful currency traders.
Currency futures are but a small representation of the $1.5 trillion dollar foreign exchange market. Professional currency traders use forex, forwarding contracts, derivatives of all kinds, and the futures pits, to deploy their various trading and hedging strategies. Looking at only the futures is like the blind man trying to tell what an elephant is like by feeling only the tusks.

In past years, foreign exchange desks at banks, insurance companies, brokers, and other institutions were seen closing down and firing hundreds of employees. Today, they are again looking for currency traders.
In the 1990s, Midland Bank closed its foreign New York office laying off dozens of people. Frankfurt Bank had pulled out of New York and Tokyo closed down its foreign exchange desk. At that time, the world?s largest foreign exchange trader was Citicorp. In the D-Mark alone, they shrank from 39 traders working at 17 different locations around the world to 4 D-Mark traders all working in one room. Keep in mind that these were traders who had been to a greater or lesser extent using the currency futures. The result at that time was that there were fewer big fluctuations in the currency futures than there once were and therefore much less profit.

However, today, just the opposite is happening. Central banks are presently making much greater interventions in the currency markets. They have stopped publishing targeted exchange rates. Such action by the central banks leaves currency speculators at a loss for what to do, and the result has been a huge surge in forex trading.
Because today forex brokers Read more…

FEARING LOSSES

There is a huge difference between being risk averse and fearing losses. You must hate to lose. In fact, you can program your brain to find ways to not lose. But not losing is a logical thought-out process, rather than an emotion-based reaction.

Two human-based tendencies come into play. The first is the sunk-cost fallacy and the second is the exaggerated-loss syndrome.

Sunk-cost fallacy: You are in a trade that begins to go against you. You reason that you have already spent a commission, so you have costs to make up for. Moreover, you have spent time and effort researching and planning this trade. You reckon that time and effort as cost. You have waited for just such an opportunity and you are afraid that now that it has come you will have to miss this trade. The time spent waiting for opportunity is something you also count as cost. You don’t want to waste all these costs, so you decide to give the trade a little more room. By the time you realize what you?ve done, the pain is almost overwhelming. Finally, you have to take your loss which is now much larger than it might have been. The size of the loss adds to your fear of ever losing again. The end result is brain lock and inability to pull the trigger on a trade.

Exaggerated-loss syndrome: You give the importance of losing on a trade two to three times the weight of winning on a trade. In your mind, losses have greater significance than wins. In reality, neither is more or less important than the other. In fact, wins do not have to be as numerous as losses as long as the wins are significantly larger in size than the losses. Of course, best is to have more wins than losses with the wins greater in size than the losses.
What should be done?

Evaluate your trades solely on their potential for future loss or gain. Ask yourself, ?what do I stand to gain from this trade, and what do I stand to lose from this trade?? Think the matter through. ?What is the worst thing that can happen to me if I take this trade, and do I have a plan and a strategy for extricating myself long before it happens?? ?If I begin to lose, is there a way I can turn things around and come out a winner?? Learn to look at the costs of a trade as part of your business overhead. Try to have a mind set that you will not throw good money after bad. When you give a trade more room, you are doing just that ? often throwing away money.

VALUING INVESTED MONEY MORE THAN WON MONEY

Traders have a tendency to be more careless with money they?ve won than with money they?ve invested. Just because you won money on good trades doesn?t mean you should gamble with that money. People are more willing to take chances with money they perceive as winnings as though it were found money. They forget that money is money. Valuing money depending on where it comes from can lead to unfortunate consequences for a trader. The tendency to take greater risk with money made from trades than with money invested as capital makes no sense. Yet traders will take risks with money won in the markets that they would never dream about with money from their savings account.

What should be done?

Wait awhile before placing at risk money won on trades. Keep your trading account at a constant level. Strip your winnings from your account and put them in a safe conservative place. The longer you hold on to money, the more likely you are to consider it your own.

FORGETTING ABOUT MARGIN INFLATION

Before the crash of 1987, S

Did you know that you or your home may be responsible for you paying higher rates on homeowners insurance. Sometimes being labeled as high risk can be avoided, but other times it cannot. Below are some of the most common reasons why you may be labeled as high risk.

#1. Specific Dog Breeds

Did you know that just by owning a certain dog, you can be labeled as high risk and may not be able to acquire homeowners insurance if it poses too high a risk? If you do not own a dog but are thinking about purchasing one in the future, it is in the best of your interest to talk to your insurance company to make sure that this breed is not labeled as high risk.

#2. Owning An Older Home

If you own a much older home, then you may be labeled as high risk. There are a number of reasons why this is true, it may be because of the electrical wiring in your home may not be up to today’s standards, and they see it as a fire hazard. To avoid this, be sure that your home is always up to standards when it comes to electrical wiring and safety.

#3. House Location

Your house may even be located in a high risk area. There is really nothing that you can do about this. This might be because the area Read more…

Car insurance, much like any other insurance product, always seems to be really expensive unless you actually have to use it, when suddenly it?s the best purchase you ever made. Even so, there?s no need to pay too much for this piece of mind so to help get the level of cover you need at the cheapest possible price there are several things you can do to try and convince potential insurers that you are a low risk.

When car insurers provide you with a quote they run through a model that assesses what the potential risk is to decide how much to charge you for your insurance. The lower risk you are, the less you?re going to have to pay.

Here are a few of the things they consider when they?re deciding how high the risk is so the more of these you can reassure them with, the lower your quote is likely to be:

- They?ll ask you if your car is garaged overnight. This is because statistically cars left on the street at night run a much higher risk of theft or damage than if it?s safely tucked away in a garage. Even having the car on a driveway can help.

- They?ll ask you how many miles you drive. This one is obvious, the more miles you drive, the more chance you have of an accident. Try and be as accurate as possible with this one because an overestimate will cost you more.

- They?ll ask you if you?re married. Statistically people who are married have fewer accidents than single people and this is reflected in your premiums, particularly if you?re under 30. It?s a bit extreme popping the question to lower your car insurance, but if you?re thinking about it anyway, why not?

- They?ll ask you what your job is. Professional footballers crash cars much more often than accountants. If your job doesn?t fall into one of their categories directly, make it sound very dull and safe.

- They?ll ask you about additional drivers. If you?re young, it can be a benefit having an older driver on your policy so it could be Read more…