That’s a good question and is one that was posed by a man with many years of experience in the markets, Charley Ellis. Ellis, after a stint on Wall Street, founded Greenwich Associates in 1972 which grew into one of the world's most respected research houses. He said:

“Go to a continuous-process factory sometime — a chemical plant, a cookie manufacturer, a place that makes toothpaste. Everything is perfectly repetitive, automated, exactly in place. If you find anything interesting, you’ve found something wrong.

Investing is a continuous process, too; it isn’t supposed to be interesting. It’s a responsibility. If you go to the stock market because you want excitement, then sooner or later you will lose. Everyone who thinks the stock market is a game loses — everyone, to the last man, woman and child.

So, the purpose of an investment policy is simply to ensure that your continuous process never breaks down...

Benign neglect is the secret to long-term investing success. If you change your investment policy, you are likely to be wrong; if you change it with a sense of urgency, you’re guaranteed to be wrong.”

There is a lot of sense in those comments after all the key to successful trading is finding a system, trading style or approach that works for you, and does so consistently.

Developing or creating that approach gives you your edge, which is something that every trader needs if they are to succeed and grow their capital long term. Creating a viable trading strategy or trading edge is the exact opposite to the random and emotional trading that sees many new and aspiring traders come to grief early on their career.

When we read about great traders, we often wonder what makes them different to you and me and what it would take to follow in their footsteps. Let’s be honest we probably aren’t going to be the next George Soros, Ray Dalio or Jim Simons. However, what we can do is to emulate their systematic approach to the markets.

Systemising your trading is about creating a set of rules which describe your trading approach, the opportunities you look for, and the risk management ratios you apply.

Once you have written these down, you have effectively created your trading plan, and what’s more, you have laid the groundwork for creating an algorithmic strategy.

An algorithm or algo is just a set of rules that a computer can follow and execute. Of course, nearly all trading today is conducted electronically. Yet, as much as 70% of that business employs algorithms to improve trading efficiency, execution quality and anonymity. The latter can be beneficial in retaining your trading edge and not seeing it arbitraged away.

A report by Business Wire predicts that Algorithmic trading will experience a compounded annual growth rate or CAGR of 10% per anum between 2018-2026. Two years into that period, and there is no suggestion that the analysis is wrong.

Using a rules-based system to decide when you should buy and sell is the key to maximising your profitability. And perhaps just as importantly, minimising your losses. Leaving those decisions to our emotional selves is not a viable option for long term trading success.

As we have discussed before, our psyche contains biases, emotional responses and short cuts that are not suited to trading and they can actually hinder the process. It’s far better to use a systematic rules-based approach that can help us run winners and cut losses rather than the other way around.

To take your trading to the next level, you need to ask yourself a question, and that is...

Have you developed a system, or are you just having a punt?

Do you follow a set of trading rules and stick to them each time you trade? Think about your trade sizes, risk-reward ratios, the use and placement of stop losses. Consider the average profitability of your trades and how often and by how much do the results deviate from that average?

Much of this data will, of course, be available to your in trade history and statements that’s one of the great benefits of electronic trading. It should be possible to identify the products you trade well and the time of day (your peak). Not to mention those times you switch gears and try to trade something you’ve never done before. E.g. an FX Trader dabbling into commodities because it’s “hot”.

A very effective way to systemise your trading and improve its efficiency is not to trade in the instruments, and at the times of day that you do poorly on. And instead, focus on the most profitable areas of your trading. You will be amazed at just how much difference that simple change could make.

Finally, ask yourself, are you getting too excited about your trading and the individual positions that you take? Do you wake up in the middle of the night dreaming about your positions or checking them? If you are, then you are probably taking too much risk.

You see a trader should largely ambivalent about individual positions, because if he or she has systemised their process, then trades will be a bit like riding the tube in London, that is, another one will be along in a minute.

What will or should be of concern to them, however, is whether they are making the most out of every trade that comes by. Better to be focused on the process and the system and not the individual trade outcomes. Transitioning from one way of thinking and approach to the other will very much put on the right route for trading success.

That's just the way it is
Things will never be the same
That's just the way it is
...Some things will never change

2pac - Changes

In modern life, our focus is often on change. We quickly assess something as either Good changes or bad changes.

Change is also the lifeblood of the financial markets which would, of course, be pretty dull if everything remained static and prices never moved.

However, the opposite is true in these days of computerised and algorithmic trading.

Prices are rarely static and fluctuate throughout the trading day, which blends seamlessly into the next business day across the working week, which may eventually extend into the weekend as well, but I digress.

As much as our lives are driven by or focused on changes, they are underpinned by many constants, things that don’t change over time no matter how much the world and our everyday lives do.

Information

One of the constants today is information, inside thirty years, the internet and world wide web have become an integral part of our lives. To the extent that we can overload ourselves with information on almost any subject imaginable in seconds.

However, there is a big difference between having that information at our fingertips and understanding a subject or topic thoroughly, and it's very easy to conflate one with the other.

You can feel like an expert when in fact you may have missed the point entirely. Reading between the lines is often what's most important, and we need to recognise that we don't know as much we think we do and be comfortable with reconciling ourselves to that.

In trading, even in the information age, we can only ever hope to see a fraction of the big picture. The only comfort is it's exactly the same for almost everybody else.

If you think you really can understand the exact reason the market has gone up or down, think again. The financial media will say the market went up or down for the same reason. Could they ever admin something like: “There’s no story we could slap on this for why the market went up today. It just did”. No.

Greed and fear

Another constant in trading is the role of Greed and Fear these are the two primary drivers of investor behaviour, particularly when we are looking at that in aggregate.

That is, when we consider the trading crowd. The crowd has always been with us, journalist Charles Mackay wrote about them in his 1841 work Extraordinary Popular Delusions and the Madness of Crowds.

In the book, Mackay looked back to events in 1720, the South Sea bubble, and the Dutch Tulip mania of 1637, to highlight just how crowd behaviour, driven initially by greed and subsequently by fear, leads to the creation and bursting of investment/trading bubbles. If those bubbles become big enough then they can not only affect the markets but also the real economy too.

Speculation is as old as the hills and financial crises are nothing new. In fact, in modern times they have become cyclical, occurring around once every 10 years or so, for example, we had the 1987 crash, the Russian default and Asian currency crisis of 1998 and the subsequent dot com crash. That was followed in turn by the Credit Crunch and Global Financial Crisis of 2007/8 and more recently the COVID crash.

A decade is enough time for a new generation of traders to enter a market and each new generation believes that “this time it’s different” a phrase which is often described as being the four most dangerous words in trading.

Traders make the same mistakes and fall foul of the same biases and behaviour as their forebears did. It’s just that now there are scientific labels for it (we do love to put a label on something).

If you read trading books like the Reminiscences of a Stock Operator by Edwin Lefevre (first published in 1923) you instantly recognise patterns of behaviour regularly seen among market participants today.

Too much risk

One of those behaviors is taking too much risk or over-trading, relative to your capital base. That's often brought about because markets move in one direction for an extended period. People climb on board the trend, and the longer it goes on the more they believe it won't end and the greedier they get.

They don't deliberately mean to do this but one of the characteristics of bubble behaviour, because that's what this is, is the participants inability to tell that they are in a bubble. The narrative simply changes. When you’re inside the bubble you will cut off contact with or ignore those on the outside looking in or who have a different viewpoint or opinion.

Market aphorisms or sayings are grounded in the truth and experience of history they may sound quaint, but they are there to teach us a lesson, and none more so than

 “It's only when the tide goes out that you see who’s swimming naked”

In this case, the tide going out is the market changing direction and those swimming naked are the overleveraged and overlong bulls in the bubble. Markets crash because the trading crowd wakes up to the existence of the bubble simultaneously, and everyone heads for the exit at the same time, as greed turns into fear.

A good trader knows not to outstay their welcome, and that it is always better to leave the party before the end.

We’re not saying that markets don’t change and evolve over time and that a strategy you use will work forever, but the same fundamental principles like we’ve tried to highlight such as greed and fear never will.  Some things will never change.

Hi Traders,

By popular demand, we wanted to share our top five most used tools and features that are provided to you for free in our client area.

These are a bit like my Top Five Tools for Traders, but these are a little different as they're all internal rather than other websites or companies. 

Here are 5 of the most popular tools (in order) our clients are loving:

#1 - Analyst Views by Trading Central. This is my personal favourite. You can view it in the hub now, download it and use it as an indicator on MT4 desktop (in "Downloads on Hub) or visit your "News" tab in MT4 where it's constantly updated too.

#2 - The Economic Calendar is a must too. Are you using this already? If you're trading and don't know what announcements are coming up, you could easily be blown away by a big move and have no idea why. My favourite is that it will show you the historical price impact of previous announcements. You can even save the future events as a calendar invite!

#3 - News Tab - Knowledge is power. You know that already. You might already have your own news sources which are cool, but with Fusion's news tab, you can create a personalised feed (e.g. only show me EURUSD) or see what's most popular for others. Don't be an uninformed trader.

#4 - Sentiment - I love the idea of knowing what the crowd is bullish or bearish on. What are people talking about? Why are they talking about it? Check out our post on why this is important.

#5 - Technical insight is excellent if you'd like to go into a deeper dive on technical analysis on Forex and Indices. I prefer these charts over MT4 truth be told and want to know short, medium and long term outlook for each trade I'm considering.

That's it for now. We've built these for you and believe they'll truly help you excel as a trader.

#6 – Historical and Live Spreads Tool - with this tool, you can see how spreads have fluctuated over time, as well as the current live spreads. This information can be incredibly valuable in helping you make informed decisions about when to enter and exit trades. No more surprises, no more hidden fees – just transparent, competitive pricing. Read our blog post to learn how spreads actually affect your trading costs. 

Much of what we write about in these articles is about the mindset and behaviour of traders and trading. The reason for this is quite straight forward; it's because it's the decisions that we make and take that will ultimately determine how we perform as traders.

Yes, of course, price changes in the markets will play their part but, in the end, it's our decision whether to get involved or not and that determines how much capital we commit to trade, how long we hold the position for, and what the ultimate outcome of the trade will be.

Hidden costs

When we examine the costs of trading, we tend to focus on commissions and spreads and our PnL, but there are other costs, costs that we don't consider when really, we should.

These are the costs of inactivity and indecision, the costs of listening to outside influences more than to your own inner feelings and intuition. They are the costs of missing out, what economists call "opportunity costs".

Self-doubt among traders is not unusual, and in truth, it's better to exercise a degree of caution than to be 100% confident about everything you do. Hubris has been the downfall of many traders, and we certainly advocate being prudent with your risk. That said, It's always worth testing your thinking and assumptions and checking that they are still valid before you trade.

The problem comes when you start to talk yourself out of the trade entirely. After all, trading is a risk and reward business. There can be no profit without the possibility of loss.

A trader's job is to try and ensure that the risk that they take is in proportion to the potential rewards they could make. Not taking that risk could be limiting your potential as a trader which in turn may be limiting your rewards or returns.

Moments of clarity

Sometimes as a trader or investor, you will enjoy a moment of clarity, a moment of pure thought and insight, in which you can see exactly how a market setup or situation will playout. Moments when you just know you are right

If that moment of clarity coincides with significant moves in the markets, then that can be a very valuable situation indeed. But only if you act on it.

Allow me to tell you a personal story. During the great 2020 downturn in oil (where a Saudi/Russia price war caused prices to go NEGATIVE), I found myself holding oil from $30 a barrel and riding it all the way down watching in sheer horror. I kept buying the dip. How much lower could it go, I thought? I ignored every rule and everything I've written in the past about this. I didn't put a stop loss on. I told myself it was a long-term trade that I would stay in forever. Prices surely couldn't go below $20. That's madness. Then… The unthinkable happened in the futures price – it went negative.

Thankfully, Fusion's price didn't go negative (we use Spot Crude oil) but with spot prices at $15, I was sitting watching Netflix on my couch, and my heart raced as I saw it go down like World War III just started. The news sites told me nothing new had happened (funny how we search for any narrative to make sense of it all). Here it went. $14. $12. $11. Back to $12. Back to $11. $10. $9. Thoughtful me knew these prices were unsustainable. I told myself I would hold until it hit $0 if it had to. My account was down 70%. I'd never suffered such steep losses. I felt sick. I then couldn't sleep. I woke up, and it was still down a lot but had recovered from $7.

Watch out for the narratives.

I started to read more about what others were saying. What the hell was going on? Would this happen again? Yes, there was nowhere to store the oil (so the narrative went) but surely rationality would prevail. Seriously, how could you have negative prices? It was impossible to find anyone bullish in the media or otherwise. People assume if something just happened, it will occur again Goldman came out and said to expect more negative pricing. But I just couldn't believe it was so cheap. I knew it was time to buy more!

But then I didn't buy it. I waited for another opportunity for when I knew "the worst was over" I was so sure things would bounce back, but I didn't have the guts to buy one more time, and the opportunity passed me by forever. I let the external narrative cloud my previous judgement. But I was just so worried I couldn't think properly. Within days, it had doubled back to $15 a barrel. Then it was $20 a week later. At the time of writing it is $40 a barrel. By the time you read this, it might be $60 a barrel. Who knows? All I knew was fear and too much outside influence completely warped my view, and I failed. I just wanted to survive the calamity. While I survived to write you this, I did not do as well as I could have.

Self-belief

People often talk about having the courage of their convictions, but in trading, it's not really about courage, it's about belief, belief in yourself and your ideas and be prepared to back them, rather than talking yourself out of them, or allowing yourself to be talked out of them by others.

We all like to take advice and read and hear the opinions of so-called experts. But the absolute truth is that nobody really knows what going to happen next in the markets.

For example, nobody was predicting that an 11-year bull market in equities was going to end and end so abruptly in Q1 2020. Or that US unemployment would spiral to +14.7% in a single month.

Do not get me started on the rebound from the lows in March. To be bullish on the markets in April and May of 2020 was to look like you had lost your mind given the narratives surrounding COVID.

So-called "market legends" like Druckenmiller and Buffett told everyone it was not the time to buy. Sadly, so many would have listened.

Let's not forget Yogi Berra's famous saying "It's hard to make predictions, especially about the future" which is why it's best to take these so-called forecasts with a grain of salt. The best that any expert can do is to make a prediction or forecast about the future. And the longer the time frame that the forecast is over, or the more unusual the circumstances under which it is made, then the more significant the room for error and the higher the chance that they are simply wrong.

Loss aversion

As humans, we are subject to subconscious emotional biases that can cloud our decision making. One such bias is loss aversion.

Loss aversion can hamper a trader in two distinct ways. It's most commonly associated with the practice of running losses, ignoring stops and breaking money management rules when a trader can't or won't accept that they were wrong and refused to close a losing position.

The other way that loss aversion can muddy the waters is in our initial decision making. You see as species we are poor judges of risk and reward; we don't calculate probabilities very well, and the upshot of this is that we do not like uncertainty.

To the extent that when we are faced with situations that have a series of potential outcomes, we tend to favour the outcome with the highest degree of certainty. Even if that outcome is the least beneficial to us financially. Which, of course, is the exact opposite of the risk versus reward culture that we spoke about earlier.

Fortune favours the bold.

Though we might not like to admit it, our subconscious is often trying to talk us out of taking risks. Outside influences from the media, fear, our aversion to loss and a preference for certainty may often be our worst enemy as traders.

As Howard Marks said, "If you're doing the same thing as everyone else, how do you expect to outperform them"?

There have been several once in a generation trading opportunities over the last six months. I wonder how many of us were bold enough to seize the day and take advantage?

We believe that wherever possible, we should remove emotions from our trading psychology and try to act logically and systematically when making trading decisions. That’s because there are facets of our emotional selves that are just no good when it comes to making money. Impulses that encourage us to snatch at profits, make rash trades and run losses can be detrimental to our wealth in the same way that running out into a stream of moving traffic could be very detrimental to our health. We could go so far as to say that there is no room for sentiment at all in trading, but if we said that we wouldn’t be entirely correct. Because while it’s true that we want to remove sentiment and emotion from our own trading, we should be quite happy to take advantage of other people’s sentiments.

Picking the right wave

Trading is effectively a three-way competition. First, you compete with yourself and your psyche, of course, you also compete with the market in the same way that a surfer competes with the ocean. That is reading the changes in the swell and the wind in order to pick to the right waves. However, you are also competing with other traders, because in forex for every winner there is a loser, and to make money, you need to try to ensure that other traders and not you are on the losing side, more often than not. To succeed, we need to follow a rules-based trading strategy that helps us back only the best trading opportunities that the market presents to us. We also need to try and develop an edge over our competition, that is other traders.

Of course, we don’t and can’t know who these other traders are, and even if we did it wouldn’t do us much good, because there are millions of them spread out across the globe trading away at any one time. However, the fact that there are so many competitors out there can work in our favour. Why? Because a crowd that big leaves a trail that we can follow and that can provide us with an edge.

Tracking the markets thinking

One of the methods that we can use to gauge what the rest of the market is thinking and doing is to look at what they are buying, selling and saying. That is measuring the sentiment towards the markets, and doing that in aggregate.

There are several ways in which we can do this. For example, we could study the weekly Commitment of Traders reports that are produced by the US CFTC which track changes in positioning in listed futures contracts (including FX majors) among key investor and trading groups. However, these reports are released three days in arrears, late on Friday afternoon in the USA. What’s more, they are not exactly user friendly in terms of their layout or the way that the data is presented or in the ease of interpretation (the CFTC is not known for its beautiful charts!).

Perhaps a more simplistic way to track trader sentiment is to look at what’s happening to the prices of safe-haven assets such as gold, the Japanese yen and Swiss franc and government bonds. If these instruments are rising in price, then that’s a sign of Risk-Off sentiment among traders.

If those safe-haven assets are strengthening when risk assets such as equities and Emerging Market currencies like the South African rand, Brazilian real and Turkish lira etc. are weakening, then you will know it’s risk-off. Of course, if we see risk assets appreciating while safe-havens are falling in price, that’s an indicator of Risk-On sentiment among market participants.

However, there are quite a few items to monitor the strategy outlined above. Since we are trying to gauge the aggregate sentiment of the crowd, it would be good if we had an indicator to gauge sentiment across a wide range of assets as well.

True we could try to use the VIX and other volatility indices, volatility is a measure of the rate and severity of price changes within an instrument or market. It tends to rise sharply as markets become fearful and trend lower when fear subsides and greed re-asserts itself. But once again, this would mean monitoring multiple items from different sources, to which we may have varying degrees of access.

A single gauge of sentiment?

Instead, what if we had one indicator that could tell us what others in the markets were thinking?

Fusion Markets has partnered up with some very talented engineers to simplify this even further.

Using cutting-edge artificial intelligence techniques known as Natural Language Processing (NLP), we can use machines to take in hundreds of thousands of data points across the web to gauge sentiment.

Are people talking about the Aussie dollar? What are they saying exactly? Are they positive or negative?

What about Gold? Is the crowd bullish or bearish?

To do this, yourself (e.g. scour hundreds of thousands of sources across the web) would be impossible. That’s why we always say there’s never been a more exciting time to be a trader (at least with Fusion anyway) and have these tools available that were previously only available to the world’s best hedge funds and asset managers.

We’ll leave it to you as to whether or not the crowd thinking it is highly bullish is a good signal to trade or a bad one and the strategy here (if you’ve read our views previously, you will know the answer!). Still, while it is not the holy grail as a single strategy, we believe this is a handy weapon to add to your arsenal to get an edge over others.

Fusion Markets prides itself on its low-cost approach to trading, but have you ever wondered why access to low-cost execution is important and what part it might play in your long-term success as a trader?

You might not even link the two things together, and I can see why. After all, a few pips of spread, or dollars and cents of commission paid, is small potatoes when you are trading in tens of thousands of dollars worth of currencies and other instruments daily.

But not so fast because these costs make a difference in the long-term, and that is the timescale that Fusion wants to be your partner in the markets.

Let’s look at some numbers and imagine that you are a moderately active trader with a strategy that you deploy across five instruments daily. On average, you make 20 trades per day. Let’s call you Trader A. You have a friend who deals with another broker using a similar strategy, but they don’t offer Fusion Markets low commission rates. Let’s refer to them as Trader B.

You pay our low commission rate of USD 2.25 per trade whilst Trader B pays $5.00 per trade. You both trade 20 times a day, five days a week. That means that you, Trader A, pay $225 per week in commission while your friend, Trader B, pays $500 in commission per week. That’s $275 more than what you pay.

Now let’s scale that up...

Over a month, that’s a difference of around $1,100 commission, and over the course of the year, Trader B pays an additional $14,300 dollars more in commission than you for the same or similar trades.

That means that Trader B will pay away an astonishing $71,500 of additional commission over five years of this type of active trading.

Not only does Trader B pay those additional costs, he or she also “pays” the opportunity costs of not having that money available to them. Money that could have been saved or invested or that could have helped pay off the mortgage, the car loan or a nest egg for your kids that much quicker.

All that before we even consider the possibility of compound growth on that money over time.

Tighter spreads matter too.

Now not only do lower commissions benefit your trading and finances so do tighter spreads. After all, some brokers charge astronomical amounts in spreads.  

Spreads are the difference between the bid and ask prices in the market, the prices at which you can buy or sell a financial instrument like a currency pair or equity index.

Each time we buy or sell an instrument at the market price, we are said to be” crossing the spread” or if you prefer incurring the cost of spread in our trade.

The spread is seen as a cost because we have to make it back before our trade moves into profit.

Think of it like this: Instrument A is priced at 100-101. We can sell at 100 and buy at 101.

If we buy a unit of instrument A at 101, we incur an immediate running loss. That’s because our trade is valued at the price that we can sell the unit of instrument A for, and in this case, that’s 100.

In making the trade, we have incurred the spread as a cost. To make those costs back, we need to see the price of instrument A move up to 101-102 or higher. If it does that, it means that we now can sell our unit of instrument A at the price we paid for it. That is, we are now at breakeven on the trade.

And if the price of instrument A moves to 102-103, then we have a running profit on our trade because the bid price of Instrument A is now above our trade entry-level.

Spreads in FX trading may appear small but don’t forget that trade sizes are typically larger here.  Remember that a standard FX lot is US$100,000 of notional value.

What’s more, FX trading is leveraged, meaning that clients can gear up their account and at the maximum available leverage of 500:1 (30:1 if you're a retail client with ASIC), that means that a deposit of just US$ 2000 could control 10 FX lots or US$ 1,000,000 worth of a currency pair.

Even a small value like the spread in EURUSD grows pretty quickly when you multiply it by another 6 or 7 figure number. So, the difference between a 0.1-0.2 pip spread, that you typically find at Fusion Markets, in this most active of currency pairs, and a 1-2 pip price that you might well find elsewhere, quickly becomes material (in your head, you can do the math - 10-20x the figure is a LOT).  Our Historical and Live Spreads Tool is designed to allow you to see how spreads have changed historically, discover our average, minimum and maximum spreads and, consequently, make better informed trading decisions. 

Quite simply, the narrower or tighter that the spread you pay is, then the more chance you have of your trade moving into profit and doing so more quickly. Which, in turn, means more of your trades are potentially viable. Of course, you still have to do the leg work and get the direction of your trade right, but tighter spreads also mean that if you are wrong, and you cut or close the position. Then you are doing so at a more advantageous price, which can help keep your trading losses to a minimum.

Think of trading like an Olympic hurdle race. With a low-cost broker, you have a tiny hurdle to jump over in the form of lower costs. Your friend at Broker B has a giant hurdle he has to jump over every time he enters a trade. Who has the better chance of success here? Do you want to jump over a 1 ft hurdle or a 6 ft hurdle?

Successful trading is not a get rich quick scheme. It’s about finding and honing a style or system of trading that works for you and applying that to the markets over time. Successful traders often talk about slanting the odds of success in their favour, and they try to do this not just for the trade that’s in front of them now but for all of their trades during the months and years they are active in markets. Having a trading cost base that works in your favour can play a key part in this. It means the margin for error can be 10x lower than what your friend pays at Broker B.

So, isn't it time you stopped paying too much to trade?