Trading Financial Market

>>>Intro

First things firsts lets not be coy trading financial markets is not glamorous nor easy; it’s a zero sum game where for every winner there’s a loser too. Around 90% of retail traders lose money long term. Before you start thinking what’s the point with stats like that, lets put this into context. In the UK 80% + of new start up businesses fail within the first couple of years! That’s a massive fail rate and on a par with trading, yet some will make it to go on to succeed and flourish. What makes them different to all the others ? many factors but determination and a hunger to win play a major role. The cliché 'self for filling prophecy' springs to mind...if you want something enough you can make it happen.

The only way to make an income trading is to treat it like a business. Mindset is key fear; greed and everything in between has a major influence on results. Unfortunately some are just not wired to do this... sub-conscience self sabotage, over inflated egos and addiction to over trading are common traits.. Patience and discipline are needed in spades along with good capital managment.

Now lets dissemble a few myths. ..you don’t need to be a maths genius, have a high IQ or even be in possession of an PHD in economics to make good money trading, in-fact academics can make terrible traders their analytical skills can be amazing but they often struggle to pull the trigger and some struggle with morality issues. This game is more of an art than a science I’ve tried using mechanical trading systems, expert advisors (trading robots) and signal services etc to no avail. These methods may work for a while but markets are dynamic and their behavior changes constantly. The only way I’ve found to produce consistent results is to combine a solid strategy that has an all-important 'edge' along with discretionary bias. It may sound kind of sad but you really need to be in tune with the market(s) you trade achieving this will improve results dramatically. As experience is gained you can rely more on intuition and gut feel.

Before we start delving further into this trading malarkey i should probably tell you about my background after all I could be talking bully crap like most of the websites out there. I've been trading on and off for the past two and half years, let me tell you I’ve sifted through a lot of trashy advice to get where I am now. I finally began to become consistently profitable around 6 months ago. (June 2011), I certainly didn’t have a traditional route into trading I was no child prodigy trading stocks at 10 years old. In-fact I first got into trading using Betfair anyone that has used the this betting exchange knows your can back and lay (bet against) bets and make money on the fluctuations in price on a number of different markets from football matches to potential x factor winners. This later lead me onto spread betting and where my journey learning to trade the financial markets began. I have recently left my full time job and trading is now my primary source of income, im in a privileged position at the moment where i don’t have a lot of overheads to pay and i feel confident that i can produce consistent results and build an account... risky? yes to an extent but nearly every thing in life involves risk to some degree and i haven’t walked into this with my eyes closed...we will see where i am in a years time. (i will update as and when)

Below is a run down of basic market information that you really should know before doing anything. Suffice to say when i first started i just jumped in head first thinking it was easy, hindsight is a wonderful thing.

>>>The Various Markets

Bonds

These are debt markets. The biggest is the government bond market, but companies also issue bonds too. They are essentially a loan with a fixed interest payment over the duration of the bond (anywhere from days to 30 years). Bondholders receive priority over shareholders in the event of a bankruptcy as they are creditors. A popular bond market to trade is the ‘Bunds’.

Currencies (Forex)

The term forex synonymous with snake oil salesmen across the internet and ads at the back of newspapers refers to the currency market. It is traded in currency pairs e.g. GBP/USD (cable), EUR/USD…etc. You can make bets on the fluctuations in the various exchange rates. With a broker you will make an exchange, but you can also trade them through derivatives and the spot (cash) market.

Commodities

Gold, oil, corn, sugar etc. These are physical commodities that can be traded in the futures market or as the current spot (cash) price.

Equities (stocks)

You can trade any public limited company listed on the exchanges. There are thousands of different stocks available to pick from popular stocks include ‘BP’ and ‘Apple’.

Indices

Compositions of the largest companies on a countries stock exchange. For example, the Dow Jones is made up of the 30 largest companies in the US. Popular indices that are widely traded include the S&P500 (spooz), DAX and FTSE.

Short term interest rate products

Interest rate products such as the EURIBOR. These markets are not of interest to most traders because they have a very low volatility and there is little opportunity for the speculator.

>>>Types of trade – cash, futures and options

Cash Market

The cash market provides the current price of an asset for immediate buying or selling For currencies or precious metals this is called the ‘spot’ price.

Futures

Futures are normally traded in contracts and are a legally binding agreement between a buyer and a seller. The seller must deliver the specific agreed upon asset at a future date but for the price agreed today. Futures markets allow companies and individuals to protect themselves against fluctuations in the price of an asset that they are interested in. This allows them to sell an asset in advance giving them the ability to make plans for the future in the knowledge that they have a fixed price.

Options

Options are more complicated instruments, which can be traded in many different ways. They are difficult to use to trade outrights sometimes so I personally do not trade them.

>>>Speculators - The Market players

Algorithmic traders

are computer programs that usually take very small bites out of the market. They have taken away most of the scalpers edge see below.

Scalpers

very quick in and out taking only a few ticks out of the market, they often have high win rates and low Rs. (R- refers to risk vs reward, eg 1R - the risk would be equel to the potential reward. Generally the higher the R the lower the strike rate of winning trades)

Positives

+ High frequency so greatest return on capital

Negatives

- Outdated strategy, many computer programs to compete with now

- Must be in front of the screen all day long and requires fast reactions/reflexes

Swing traders

short to medium term traders. Not as clear R and win rate strategy, and different trades require different strategies.

Positves

+ Decent return on capital

+ Normally technicals only

Negatives

- Can be confusing how long to run a trade as there are many possible R and win rate combinations that can provide an edge.

Position traders

often take long term views backed by fundamentals and usually have very high Rs, but low win rates:

Positives

+ Timing not as important

+ Lowest work load

Negatives

- Requires good economic knowledge as well as technical

- Poor return on capital over time compared to shorter timeframes

Value investors/buy and hold

Similar to position traders these guys will often hold for very long periods of time and sometimes do not get out of a losing trade for a long time.

>>>Technical Analysis

Technical analysis involves analysis of current and past market movements using the available data to aid in trading decisions. There a literally hundreds of different technical chart indicators and methodologies on which to base trading decisions however you will find everyone seems to have a different opinion about what works the best. The key is to find something that works for you.

Popular Charting tools include Pivot points, moving averages and Fibonacci retracements. Some argue that no indicators are needed on the chart and use purely ‘price action’ (the study of price movement) in conjunction with support and resistance levels to make decisions.

>>>Fundamental analysis

Fundamental analysis is just the interpretation of the day-to-day news events that circulate around the globe. Each day there are usually several scheduled news events that are released. These releases can move markets significantly if figures are above or below forecasts and expectations.

Unscheduled news events such as government intervention, terrorist attacks , natural disasters etc have the scope to send shock waves through the markets and cause massive volatility .

Trading fundamentals is notoriously difficult, having a contrarian view probably works best ... the markets often do the opposite of what is often seen as logical.

>>>Long term macroeconomics

The study of economics and long term observations/trends in businesses, sectors and asset classes or countries of the world.

This can span many factors such as central bank policy, government decisions, geopolitical events and changing world demographics (for example, an aging western population, or global overpopulation).

Trading these factors is better suited to long term position trading or investing. Timing major market moves like this is notoriously difficult, and so most successful short or medium term technical traders will avoid looking at long term fundamentals at all.

>>>Irrational markets

Markets are certainly not efficient, by the regular textbook definition. Some forms of trading are more efficient than they used to be perhaps (short term arbitrage for example, but this is not a general rule).

Most who talk about markets in these ways are economists/analysts who cannot make money trading. The point is the market is not just a system that exists to ‘perfectly price’ assets, it is a dynamic entity comprised to players trying to trade large positions and to make money doing so.

The really big players have to get in and out of the market. This is not an easy task if you are a multi-billion dollar fund manager as if people find out what you are doing you will be frontrun and so on, meaning you will get a worse execution price.

This often causes the markets to move in seemingly irrational ways as these professionals try to disguise what they are doing by pretending to buy when they want to sell etc. Many of the counterintuitive moves that we see are quite logical when we think in terms of game theory and psychology of the larger players.