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Trading and Brokerage
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The Real Cost of Forex Trading

Read time: 14 minutes.


Understanding the characteristics of the forex market is crucial for success. The concept is simple; forex trading involves buying and selling currencies with the aim of making a profit. However, many new traders dive into this market without fully grasping the real costs involved. In this guide, we'll explore the hidden expenses that can impact your trading profitability and provide tips to incorporate into your trading and avoid any unnecessary costs.

 




Understanding the Hidden Costs



Spread and Commissions


When trading forex, you'll encounter bid and ask prices. The bid price is what buyers are willing to pay, while the ask price is what sellers are asking for. The difference between these two prices is known as the spread. This spread represents the cost of trading and can vary depending on market conditions and the broker you're using. Additionally, account types such as Fusion Markets’ Zero account, don’t have a spread, but rather commissions on each trade. This can be beneficial to traders who are looking for a regular-cost solution.


Understanding the impact of spread on trading costs is essential. Even seemingly small spreads can add up over time, affecting your profitability. Different brokers offer various commission structures, including fixed or variable spreads and commission-based pricing. It's crucial to compare these structures and choose the one that aligns with your trading strategy.


Overnight Financing Fees


When holding positions overnight, you may incur overnight financing fees, also known as swap rates. These fees are charged for the privilege of keeping a position open beyond the trading day. Calculated based on the interest rate differential between the two currencies being traded, overnight financing fees can eat into your profits over time. Long-term traders should carefully consider these fees as they can significantly impact overall profitability if you’re holding a position with a negative swap for multiple days or weeks.


Slippage


Slippage occurs when the execution of a trade differs from the expected price. It can be caused by market volatility, liquidity issues, or delays in order execution. Slippage can lead to unexpected losses or reduced profits, especially during fast-moving markets or when trading large positions.


To minimise slippage, traders can use limit orders, advanced trading algorithms, or avoid trading during periods of high volatility, such as major news releases or the day rollover.




Tools for Transparent Financial Analysis


Fusion Markets Spreads Tool


Trading Journal


Keeping a detailed trading journal is essential for tracking your performance and identifying areas for improvement. Your journal should include details such as entry and exit points, trade duration, position size, and reasons for entering the trade. Analysing this data can help you identify patterns in your performance, enabling you to refine your strategy, and optimise your trading approach.


Performance Metrics


Key performance metrics such as win rate, risk-reward ratio, and drawdown are valuable tools for evaluating your trading performance. A high win rate alone does not necessarily indicate success if the risk-reward ratio is unfavourable or if drawdowns are excessive. By calculating and interpreting these metrics, you can gain insights into the effectiveness of your trading strategy and make adjustments accordingly.


For example, a trader might have a win rate of 70% but still not be profitable. By analysing their performance metrics, the trader can identify that they have an inadequate risk-reward ratio; meaning that their losing trades are, on average, larger in value than their winning trades.


Historical Data Analysis


By leveraging past market movements and trends, traders gain valuable insights for informed decision-making. Whether assessing the viability of a trading strategy or gauging potential risks, historical data provides a rich tapestry of information.


Using historical data, traders can back-test strategies. Back-testing involves testing a trading strategy using historical data to see how it would have performed under past market conditions.


By incorporating historical data into risk management practices, a trader can better anticipate potential risks and adjust their strategies accordingly.


In the ever-changing world of trading, historical data becomes like a guiding light, preparing us for what could happen, based on previous events. In turn, this knowledge allows traders to make more informed decisions. You can view Fusion’s Live and Historical spreads to stay informed.



Tips for Transparent Financial Analysis


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Set Realistic Profit Expectations


It's essential to set realistic profit expectations based on your trading strategy and risk tolerance. Avoid overestimating potential profits and understand the relationship between risk and reward. Remember that trading involves inherent risks, and losses are inevitable.


Practice Risk Management


Implementing proper risk management techniques is crucial for preserving your capital and long-term success. This includes setting stop-loss orders to limit potential losses and employing position sizing strategies to manage risk exposure effectively.


Managing open trades by tightening your stop as the derivative moves in your intended direction can also boost your R-multiple and improve your return over the long-run.


Continuously Educate Yourself


The forex market is dynamic and constantly evolving, so staying up to date on market trends and developments is essential. Continuously educate yourself through books, online courses, and seminars to refine your skills and stay ahead of the curve.


Choosing Reputable Brokers with Transparent Fee Structures


Selecting a reputable broker with transparent fee structures is paramount. Before committing to a broker, thoroughly research their reputation, regulatory compliance, and fee structures. Don't hesitate to ask questions and seek clarification on costs to ensure transparency and avoid unexpected expenses. 



Conclusion


Navigating the hidden costs of forex trading requires a combination of knowledge, skill, and diligence. By understanding the various expenses involved, utilising tools for transparent financial analysis, and practising sound risk management, new traders can increase their chances of success in the forex market. Continuously educate yourself, choose reputable brokers, and always prioritise transparency in your trading endeavours.


If you want to know more about Fusion Markets, our products, fee structures and services, please contact a member of our friendly team or visit our live chat on our site. 

08/08/2024
General
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Power of Identity-based habits for a trader

Read Time: 10 Minutes

“It takes 21 days to form a habit and 90 days to form a lifestyle”. 


Most of us have probably heard of that quote already. It sounds simple, right? Who would have thought that you only needed three weeks to build a habit? 

Imagine how much better our lives could be after a year with plenty of good habits that we want to adopt.  


Whether you want to improve your physical health or performance in the financial markets, adopting good habits is the way to achieve it. 

Unfortunately, we’ve all heard the not-so-successful stories. A New Year’s Resolution falls off after three days, leading to an initially motivated person being the same as he was a year ago. 


There are 52 weeks in a year. If it takes three weeks to build a habit, you should have formed 17 good habits by then. If only it was that easy! 

 

Why is it important to build habits? 


Your habits are your small, everyday actions and decisions, and the sum of your habits defines your life. 


Good habits form the foundation for a good lifestyle. For example, exercising regularly and getting enough sleep are good habits examples. Conversely, bad habits build up to form a bad lifestyle. Eating junk food every day is an example. 


Who you are and where you are right now is simply the outcome of all your habits. Your overall health is the result of your eating and exercise habits.  

Your trading mindset and your performance in the financial markets are the results of your trading habits. 


You’ll notice that the most successful traders don’t just make good trading decisions; they have good trading habits that form the foundation for their decisions.  
 
But when you’re starting out, we think one simple habit to instill in yourself is one associated with your identity.  

 

What are identity-based habits? 


Identity-based habits are habits that are based on who we are or who we want to be.  

Imagine a circle with two other circles inside it, like an onion with layers. In this case, we have three layers. 


The outermost circle are outcome-based habits. In this circle, we focus on the what. What do I want to do? What do I want to happen? For example, an outcome-based habit could be, “I want to lose 5kg this month.” 


The middle circle is performance-based habits. Here, we focus on the how. So in the same weight loss example, a performance-based habit could be changing your gym routine, your diet, or how often your workout.  


The inner circle, the most important circle, is where identity-based habits are. Here, we focus on the who. Who am I as a forex trader? Who do I want to be? These are purely intrinsically based.  


A person who wants to lose weight would adopt an identity of, “I am a person who moves more,” or “I am a person with a healthy weight and a healthy lifestyle. This is what a healthy person does, so I will do this, too.” 

Identity-based habits go deeper than outcomes and involve your worldview, beliefs, and perception about yourself. 

All three kinds of habits are connected with one another. Your identity influences how you do things. This, in turn, affects what you achieve. 


The problem is, most of us are too concerned with outcomes. As a result, our habits fall off pretty quickly because we didn’t have the foundation. 

Remember the New Year’s resolution example? Those people don’t usually achieve their resolutions because they focus too much on the results when they should be focusing on their identity first. 

Identity goes far beyond just one’s lifestyle. Even politicians revolve their discussions around people’s identities (identity politics). 

Who you identify as affects not just what you do but what you believe in and how you see the world around you. 

 

How does having an identity benefit your trading? 


Having an identity forms a solid foundation for your actions and your habits. 

Imagine two forex traders with a fair amount of trading experience. For September, they set a target profit: $5,000. 

The first trader does not have an identity; he just cares about the outcome. He looks at the $5,000 profit goal and focuses only on that. He analyzes each trade carefully, but there is no real consistency to it.  


He gets frustrated every time forex trading results in a loss because it makes it harder to achieve his desired outcome. 

On the other hand, the second trader has an identity. He identifies as a good forex trader. The $5,000 goal profit is not the real goal because he knows that it’s something that good forex traders have. 


Instead, he focuses on being a good forex trader. He asks himself, “I am a good forex trader, and what does a good forex trader practice?” 

From here, he studies not just the financial markets but also the best traders. He adopts a good trading mindset and trading psychology and starts to build trading habits. He does this not because he wants to earn a $5,000 profit but because he wants to identify with what a ‘good’ forex trader does, he thinks more in terms of systems than outcomes.  


Who do you think will be more likely to reach their target? 


Of course, it’s trader #2. He goes beyond focusing on the outcomes. He actually lays the foundation by building good habits and adopting the proper trading mindset. He does all this because he has an identity, something which trader #1 does not have. 

 

Building identity-based habits for traders 


To build identity-based habits, the first thing you should do is look inward. Don’t worry about outcomes just yet. 

Instead of asking yourself, “What do I want?” You should ask yourself, “Who am I?” or “Who do I want to be?” 

Instead of focusing on a target profit, start with your identity. 


Do you want to be a successful forex trader? What do these people do that you can? 

Successful forex traders usually keep a journal to track their successes and failures. They also keep a balanced lifestyle, are aware of their biases, get enough sleep, and adapt to change. There are plenty of other habits, but these examples are good for a start. 


The best thing you could do if you’re starting out as a forex trader and reading this is to constantly ask yourself “What would a good forex trader do right now”? Would they be learning more about the markets or practicing on a demo or would they be watching Netflix? Simple questions to ask but the power of your life is determined by the power of the questions you ask yourself.  


It would be good to adapt all these too, but remember you’re not adopting these habits because of what you want. You’re adapting these habits because of who you are. 


Identity-based habits last longer and lead to more success because they involve a deeper part of you.  


When you inevitably encounter setbacks and make mistakes, you won’t get too frustrated with yourself and make emotional, impulsive decisions because you know that your habits are in the right place. 



10/09/2021
General
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Anchors Away!

Read Time: 7 Minutes.

Or why we tend to rely heavily upon the first piece of information we receive.

 

Our minds can have an enormous impact on our trading and the returns that we generate from it. The way we think, act and behave when we trade or invest is at least as necessary if not more so than our trade selection, particularly in the kind of one-way markets that we have seen post the covid crash.  

 

A rising tide lifts all ships they say, and, in this case, the rising tide of the markets was provided by the printing presses of the major central banks along with the stimulus packages from national governments.

 

However, Central banks won't always be there to rescue us and we need to be aware of the kind of tricks that our brains can play on us if we are to avoid making the wrong trading decisions.

 

One of these tricks has a nautical moniker, anchoring, in which our brain subconsciously latches on to an idea, an assumption or a set of figures and uses that information in decision making, regardless of whether it's accurate or even relevant to the matter at hand.  

 

What's more, as humans, we tend to carry these impaired decision-making processes forward so that we end up using an inherently flawed system and often without realising it.

 

Behavioural psychologists have highlighted these tendencies in their experiments.  

 

In the case of anchoring American academic Professor Jay Edward Russo performed tests on 500 graduate students in which he asked them pairs of questions on history and general knowledge, but, unknown to the students, he had "salted "the questions with erroneous dates and figures.

 

The student's answers invariably reflected the incorrect numbers, which were varied across different groups of students within the experiment, highlighting a clear bias.

 

Professor Russo was effectively projecting those values into the student's subconscious, creating an anchor point.


When we become anchored to figures or a plan of action, we filter new information through that framework, which distorts our perception and decision making.  

 

This can even make us reluctant to change our plan or framework even if the situation calls for it.

 

There are few consequences if any when this happens in an experiment inside a university psychology department. Still, if it happens in the real world like in trading or investing, then there most certainly can be consequences.

 

Anchoring Bias has been described as one of the most robust effects in psychology, the fact that our decisions can be swayed by values not even relevant to the task (or trade) at hand.


Let's say we are negotiating the purchase of a house and I tell you it's worth $1,000,000, and I wouldn't sell it for less. You, as the willing buyer might have only had a price of $800,000 in your head. But all of a sudden, you now are anchored on my price. Not yours. The worst part is that the person who goes first in the negotiation tends to anchor the other party (remember this for the next salary negotiation you need to do with your boss!)

 

The studies even show that if you rolled a pair of two dice, gave the numbers (e.g. 10 and 19) to the study participant, that subconsciously, you would anchor them on these two numbers. Ask them what they would pay for a house, bottle of wine, or in one notorious study, the judges sentencing a criminal, these numbers are in and heavily influencing the participant's decisions whether they like it or not.

 

Anchoring always occurs in making our trading decisions, especially as it might help to explain our fixation with round numbers. E.g. EURUSD at 1.20. Gold at $2000/ounce. DJ30 - 30,000. Once we get hooked on the number, we always use it as a reference point in future, probably because it "feels right".  


Let's say in the past you might have successfully gone long EURUSD at 1.20 earlier in the year, and now whenever it comes back to that number, you will buy it again (the same thing happened to EURUSD at 1.10). You can't explain it, but you had past success with that number and you will gravitate towards it without understanding why.

 

Take a moment to consider some key support and resistance levels on your favourite instruments. Are they round numbers too? Why might that be? Could it be because people are anchored at Gold at $1900? And that every man and his dog has placed their buy orders at that level because it's "good value" or has spent time around that level in the past? Remember that the market is driven by sentiment and agreed upon narratives. Think what else could the crowd be anchored on that might be to your advantage knowing what you know now.


How do we avoid being anchored? 


Given that we don't completely understand the processes that cause anchoring to happen in the first place, we are unlikely to avoid it entirely.  

 

However, by being aware of its existence, we can revisit and retest our assumptions when making important decisions, to ensure that we are acting rationally and basing our decision on the situation at hand, not irrelevant inputs.

 

Perhaps the best way to avoid anchoring in trading is to treat every trade as an individual event and to judge a trading opportunity on its current merits. By doing this, you have a better chance to ignore any reference or prior interactions you have had with the instrument you are trading. It won't be easy to do at first, but it could prove to be a valuable discipline over time. As mentioned, this is crucial to comprehend for putting your stops and limits around key support and resistance levels.


Think about a time you have been fixated on a number. Was it buying a house? A pair of shoes? Trading? Now think whether that number could have been influenced by someone else, e.g. the seller, the shoe store etc.

 

Anchoring can certainly also play a part in other hidden biases and behaviours such as loss aversion (e.g. not wanting to close your open losing trade).

 

The next time that you are about to trade, take time to think about why you are fixated with that number for entering and exiting the trade, and how you reached the decision to pull the trigger. A few moments of reflection might make all the difference.


29/12/2020
Market Analysis
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Should trading be boring?

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.


26/08/2020
Trading and Brokerage
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When the time comes to buy, you won't want to

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?

 

 

 

 

 

 

 

 

 

 

 



16/06/2020
Trading and Brokerage
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Why you don't want to be lucky

On Why making money on your first few trades may not be the best outcome

 


“The potential for temporary success by pure luck beguiles people into thinking that trading is a lot easier than it is. The potential for even temporary success doesn’t exist in any other profession.

 

 If you have never trained as a surgeon, the probability of your performing successful brain surgery is zero.

 

 If you have never picked up a violin, your chances of playing successful solo violin in front of the New York Philharmonic is zero.

 

It is just that trading has this quirk that allows some people to be successful temporarily without true skill or an edge—and that fools people into mistaking luck for skill”

 

- Quote from "What I Learned Losing a Million Dollars" by Jim Paul and Brendan Moynihan

 


Luck or skill?

The quote above, which is from the true story of the rise and fall of Jim Paul, sums up trading. It’s an occupation that you don’t need any specific qualifications to pursue.

 

However, unlike most “unskilled“ roles, the potential rewards in trading are substantial. In fact, they are open-ended or without limit if you prefer.

 

Of course, the key word in that sentence is potential because until they are realised those rewards will remain out of reach, tantalisingly close but just beyond our grasp.

 

Realising those rewards and doing so regularly will usually require hours of dedicated study and application, combined with the ability to follow a set of rules and the discipline to apply them every time you trade.

 

There is an old saying among traders and gamblers that they “would rather be lucky than good”, but this is wrong because as Messrs. Paul and Moynihan point out, people are very quick to mistake luck for skill.

Falling into a trap


To do that is to fall into the trap of outcome bias that is judging the success of an event or action purely on the results generated, rather than the journey taken to get to that endpoint.

 

Annie Duke, the famed poker player and author of “Thinking in Bets” calls this “Resulting”.

 

Yes, trading is about making money, but more importantly, it’s about making money without taking on excessive risk. It's all well and good picking up nickels and dimes you find in the street, but you wouldn't (or shouldn't) want to do this in front of a steamroller.

 

The ability to recognise, measure and quantify risk is a key skill for any would-be trader. Unfortunately, it’s a skill that must be learned the hard way, which in trading means losing money.

 

Harsh lessons

Losses are a fact of life in trading. They are part and parcel of the job description, and the trader must come to terms with that, and the sooner the better.

 

Here's the thing. In an ideal world, those new to trading should experience several consecutive losing trades. They should feel the pain and disappointment of seeing their money disappear and their ideas going up in smoke, however, by learning from their experiences, they should go on to be a better trader.

 

This may sound harsh, but there is no substitute for having skin in the game and losing money. It focuses the mind like very little else.

 

If we have correctly approached the markets from the outset (that is, conservatively), we should be risking only a small portion of our capital on any one trade, and only having a limited number of trades open any one time. Then these losses will be akin to scratches and scrapes and not mortal wounds.

 

 

A biased picture

 

Therein lies the crux of the dilemma we face as traders. If you are lucky and you make money straight away from your first few trades, you can develop a false sense of security.

 

You will overestimate your own abilities and fall victim to another bias, that of anchoring.

 

When our mind tricks us into anchoring, we carry an incorrect assumption or set of assumptions forward into future decision making. In turn, this can lead to availability bias where you make decisions and form opinions, based solely on the information in front of you, rather than considering the bigger picture.

 

To put this into context, let's imagine that you start trading in the live markets and you are fortunate to have US$ 10,000 in your account.

 

For your first trade, you take a “flyer” by going long two lots of an FX pair (that's US$200,000 of underlying notional value) You trade without a stop loss and then you head off for nine holes on the golf course.

 

By the time you return to your desk, the markets have shifted after a key central bank announcement.

 

By complete chance, because that's what it is, the markets have moved in your favour and you close out your position for a tidy profit.

 

That might sound like a good day's work, but it’s a disaster or at least a disaster in the making simply because you broke so many rules around money and risk management.

 

You didn't consider the leverage involved in the trade, the relative size of the position to your account balance and by not having a stop loss on the trade, you put all your trading capital at risk.

 

Finally, you didn’t check the calendar to see if any key data was due out and you left your position unattended while you played golf.

 

Make money but in the right way

We are not saying that we want you to lose money, on the contrary as your broker we would like your account to grow and for you to recommend us to your friends and family.


Ideally, as your partner in the markets, we want you to make money in a sustainable, systematic and thoughtful fashion, one that rewards best practice and encourages good habits, not bad. A trader placing small trades across ten years is worth far more than an easy-come easy-go trader who treats it like a visit to a casino.

 

A little discomfort in your first few trades can go a long way to achieving just that.

 

25/03/2020
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