Trading always comes down to timing. To truly appreciate this, we simply need to note that one of the biggest gains in stock market history occurred on October 19, 1987, during the day of its greatest crash. On that day, stocks had declined a mind-harrowing 23% by the end of the day, but at around 1:30 p.m., they staged a massive rally that saw the Dow Jones and S&P indexes verticalize off the bottom, rising more than 10% before running out of steam and turning down to end the day on the lows.
While most traders that day lost money, those who bought that bottom at 1:30 p.m. and sold their positions an hour later were rewarded with some of the best short-term gains in stock market history. Conversely, traders unfortunate enough to have shorted at 1:30 p.m. only to cover in panic an hour later held the dubious distinction of losing money on their shorts during the day of stock market's greatest decline.
If nothing else, the stock market crash of 1987 proved that trading is all about timing. Timing is hard to master, but you can still capture significant gains on an ill-timed trade if you follow a few simple rules.
The Advantage of Avoiding Margin
What happens to traders who are terrible timers? Can traders who are poor timers ever succeed - especially in the currency market where ultra-high leverage and stop driven price action often forces margin calls?
The answer is yes.
Some of the world's best traders, including market wizard Jim Rogers, are still able to succeed. Rogers - and his famous short trade in gold - is well worth examining in more detail. In 1980, when gold spiked to record highs on the back of double-digit inflation and geopolitical unrest, Rogers became convinced that market for the yellow metal was becoming manic. He knew that like all parabolic markets, the rise in gold could not continue indefinitely. Unfortunately, as is so often the case with Rogers, he was early to the trade. He shorted gold at around $675 an ounce while the precious metal continued to rise all the way to $800. Most traders would not have been able to withstand such adverse price movement in their position, but Rogers - an astute student of the markets - knew that history was on his side and managed not only to hold on, but also to profit, eventuallycovering the short near $400 an ounce.
Aside from his keen analytics and a steely resolve, what was the key to Rogers' success? He used no leverage in his trade. By not employing margin, Rogers never put himself at the mercy of the market and could therefore liquidate his position when he chose to do so rather than when a margin call forced him out of the trade. By not employing leverage on his position, Rogers was not only able to stay in the trade but he was also able to add to it at higher levels, creating a better overall blended price.
Slow and Low is the Way to Go
For currency traders, the Rogers trade in gold holds many lessons. Experienced traders are familiar with being stopped out or margin called from a position that was going their way. What makes trading such a difficult vocation is that timing is very hard to master. By using little or no leverage, Rogers provided himself with a much larger margin for error and, therefore, did not need to be correct to the penny in order to capture massive gains. Currency traders who are unable to accurately time the market would be well advised to follow his strategy and deleverage themselves. Just like the common cooking saying, success in FX trading is based on the idea that 'slow and low is the way to go'. Namely, traders should enter into their positions slowly, with very small chunks of capital and use only the smallest leverage to initiate a trade.
To better illustrate this point, let's look at two traders. Both traders start with $10,000 of speculative capital and both feel that the EUR/USD is overvalued and decide to short it at 1.3000. Trader A employs 50:1 leverage, selling $500,000 worth of EUR/USD pair short against the $10,000 of equity in his speculative account. On a standard 1% margin account, Trader A allows himself only 100 points of leeway before he is margin called and forced out of the market. If EUR/USD rallies to 1.3100 Trader A is out with a massive loss. Trader B, on the other hand, uses much more conservative leverage of 5:1 only selling $50,000 EUR/USD short at the 1.3000 level. When the pair rallies to 1.3100 Trader B comes out relatively unscathed, suffering only a minor floating loss of $500. Furthermore, as the pair rallies to 1.3300 he is able to add to his short position and achieve a better blended price of 1.3100. If the pair then finally turns down and simply trades back down to his original entry level, trader B already becomes profitable. Both traders made the same trade. Both were completely wrong on timing, yet the results could not have been more different.
No Stops? Big Problem!
Jim Rogers' slow and low approach to trading, while clearly successful, suffers from one glaring flaw: it does not use stops. While Rogers' method of buying value and selling hysteria has worked well over the years, it can very be vulnerable to a catastrophic event that can take prices to unimagined extremes and wipe out even the most conservative trading strategy. That is why currency traders may want to examine the methods of another market wizard, Gary Bielfeldt. This plain-spoken Midwesterner made a fortune trading Treasury bonds in the 1980s when interest rates rose to record yields of 14%.
Gary Bielfeldt went long Treasury bond futures once rates hit those levels, believing that such high rates of interest were economically unsustainable and would not persist. However, much like Jimmy Rogers, Gary Bielfeldt was not a great timer. He initiated his trade with bonds trading at the 63 level but they kept falling, eventually trading all the way down to 56. However, Bielfeldt did not allow his losses to get out of control. He simply took stops every time the position moved a half or one point against him. He was stopped out several times as bonds slowly and painfully carved out a bottom. However, he never wavered in his analysis and continued to execute the same trade despite losing money repeatedly. When bonds prices finally turned, his approach paid off as his longs soared in value and he was able to collect profits far in excess of his accumulated losses.
Gary Bielfeldt's method of trading holds many lessons for currency traders. Much like Jim Rogers, Bielfeldt is a successful trader who had difficulty timing the market. Instead of nursing losses, however, he would methodically stop himself out. What made him unique was his unwavering confidence in his analysis, which allowed him to enter the same trade over and over again, while many lesser traders quit and walked away from the profit opportunity. Bielfeldt's probative approach served him well by allowing him to participate in the trade while limiting his losses. This strong combination of discipline and persistence is a great example to currency traders who wish to succeed in trading but are unable to properly time their trades.
A Little Technical Help
While both Rogers and Bielfeldt used fundamental analysis as the basis behind their trades, there are also technical indicators that currency traders can use to help them trade more effectively. One such tool is the relative strength index (RSI). The RSI compares the magnitude of the currency pair's recent gains to the magnitude of its recent losses and turns that information into a number that ranges from 0 to 100. A value of 70 or more is considered to be overbought and a value of 30 or less is seen as oversold. A trader who has a strong opinion on the direction of a particular currency pair would do well to wait until his thesis was confirmed by RSI readings. For example, in the following chart, a trader who wanted to short the EUR/USD on the premise that the pair was overvalued would have been much more accurate if he or she waited until the RSI readings dropped below 70, indicating that most of the buying momentum was gone from the pair.
Figure 1
Conclusion
Timing is a vital ingredient to successful trading, but traders can still achieve profitability even if they are poor timers. In the currency market, the key to success lies with taking small positions using low leverage so that ill-timed trades can have plenty of room to absorb any adverse price action. However, trading without stops is never a wise strategy. That is why even poor timers should adopt a probative approach that methodically keeps trading losses to a minimum while allowing the trader to continuously re-establish the position. Finally, using even a simple technical indicator such as RSI can make fundamental strategies much more efficient by improving trade entries. Some of the greatest traders in the world have proven that one does not need to be a great timer to make money in the markets, but by using the techniques discussed above, the chances of success improve dramatically.
The key to becoming a good Forex software trader often lies with putting in the necessary commitment to acquire the knowledge which would allow you to turn your investments into a success. After all, success in the Forex market would depend on your ability to make sound judgments - something which would only come about with experience and knowledge. In this respect, the route to becoming a good Forex trader would require you to take into consideration the paths taken by successful individuals who have managed to profit greatly from trading in the Forex market.
Becoming A Good Forex Trader #1- Manage Yourself
For one, it is extremely important to manage your investment psyche. This involves cutting your losses while managing your greed when your portfolio is booming. This is extremely tough for most people considering the inherent levels of risk intolerance and greed of human nature. While cutting losses might seem to most people as an ego deflator, it is necessary in order to bail you out when you make a wrong decision.
After all, it is better to lose $1,000 when things start to go awry, than to eventually lose a whole $10,000. Similarly, it is also important to know when to take your profits and exit the market. Remember, prices do not keep moving in one direction forever. Use Forex software functions such as the stop loss order and limit orders to help you with that. Being able to do this on a consistent basis will enable you to go far in the business of Forex trading.
Becoming A Good Forex Trader #2- Know Your Reality
In addition, it is important to know where you stand and not commit large amounts of money that you cannot afford to lose. Most people dream of becoming rich overnight when they first enter into any investment. However, in reality, the rich make their fortune over a period of years, some, even decades. It is important to keep this in mind before making a trade in Forex.
Recognize that what you are doing would accumulate great wealth only over a period of many years. Be patient and do not let short term goals obstruct you from worthy long term objectives. The key is to focus and grow your current position. Success in the Forex market, like all things in life requires hard work and experience before it can be achieved.
Becoming A Good Forex Trader #3- Keep Learning
Lastly, it is important for you to learn from your mistakes while repeating the successful strategies which had enabled you to make a profit in the past. Most people have a tendency to repeat their past follies and not repeat strategies which had led them to success in the past. In this respect, honest evaluation and feedback is important. Critically evaluate and write down what you have done right and what you have done wrong for your past few trades. Make sure what you have written down is easily accessible to you when you make a trade. Remind yourself not to commit the various mistakes which you have committed in the past. At the same time, examine how you can adopt past success strategies in the current context. Doing so will allow you to go far in the business of Forex trading.
To round up, it is important to adopt the right habits for success in Forex trading. Adopting the right habits and building up your level of financial literacy will definitely serve to bring you great rewards on your investments in the long run.
The meanings of "big cap" and "small cap" are generally understood by their names: big-cap stocks are shares of larger companies and small-cap stocks are shares of smaller companies. Labels like these, however, are often misleading. If you don't realize how big "small-cap" stocks have become, you'll miss some good investment opportunities.
Scaling Up
Small-cap stocks are often cited as good investments due to their low valuations and potential to grow into big-cap stocks, but the definition of small cap has changed over time. What was considered a big-cap stock in 1980 is a small-cap stock today. This article will define the "caps" and provide additional information that will help investors understand terms that are often taken for granted.
First, we need to define "cap," which refers to market capitalization and is calculated by multiplying the price of a stock by the number of shares outstanding. Generally speaking, this represents the market's estimate of the "value" of the company; however, it should be noted that while this is the common conception of market capitalization, to calculate the total market value of a company, you actually need to add the market value of any of the company's publicly traded bonds.
The Big Boys
Big-cap stocks refer to the largest publicly traded companies like General Electric and Walmart; these are also called blue chip stocks. "Big" has also been believed to have less risk while "small" has implied more risk, but, as evidenced by Enron, this is not a good assumption to make. It is true, however, that the bigger they are, the harder they fall.
Ranking Caps
The definition of big/large cap and small cap differ slightly between the brokerage houses and have changed over time. The differences between the brokerage definitions are relatively superficial and only matter for the companies that lie on the edges. The classification is important for borderline companies because mutual funds use it to determine which stocks to buy.
The current approximate definitions are as follows:
Mega Cap - Market cap of $200 billion and greater
Big Cap - $10 billion and greater
Mid Cap - $2 billion to $10 billion
Small Cap - $300 million to $2 billion
Micro Cap - $50 million to $300 million
Nano Cap - Under $50 million
These categories have increased over time along with the market indexes. In the early 1980s, a big-cap stock had a market cap of $1 billion. Today that size is viewed as small. It remains to be seen if these definitions also deflate when the market does.
Shifting Numbers
The big-cap stocks get most of Wall Street's attention because that is where the lucrative investment banking business is. These, however, represent a very small minority of publicly traded stocks. The majority of stocks are found in the smaller classifications, and this is where the values are. Below is a breakdown of the percentage of stocks in each cap category. This the actual number changes, but the percentages stay more or less the same. There were 17 mega cap stocks in 2007, but that number shrunk to less than five by 2010 due to the 2008 mortgage meltdown and the Great Recession.
The big and small labels are also attached to the major stock exchanges and indexes, which also leads to confusion. The Dow Jones Industrial Index is viewed as consisting of only big-cap stocks while the Nasdaq is often viewed as being comprised of small-cap stocks. These perceptions were generally true prior to 1990, but have since changed. Since the tech boom, the market caps of the stock exchanges and indexes vary and overlap. The average market cap for the Dow, however, remains much larger than the average market cap for the Nasdaq 100.
The Bottom Line
Labels such as big and small are subjective, relative and change over time. Big does not always mean less risky, but the big caps are the stocks most closely followed by Wall Street analysts. This attention, however, generally means that there are no value plays in the big-cap arena.
Most financial professions over look the simple and straight forward answer. They often focus on why, because they feeling knowing why will help them predict the future activity in both bond and the stock markets. Beyond why, it is more important to know what is falling and what is rising. By knowing both of those this things you can take action and avoid severe financial lost.
Bond markets also do not have safety features which help avoid large sell offs in the marker. This is because the action of the bond market is extremely sharp and far more volatile than the the stock market. There is nothing worse then being a bond holder in a decreasing market. Bond statements can make your stomach turn when you realize, in text, that you are loosing money by the second.
If your first sign of a decreasing bond market is your statement you are probably working with a financial advisor that is inexperienced. When rates rise it is the utility companies, electric and gas, that get effected first. This type of stock will offer a similar pay out to bond yields. When these yields increase the pay off yields can no compete with rising rates, and wave of selling begins. When there is even a rumor of inflation bonds prices get smashed. Due to the recent new coverage of the price of gold and oil the perfect bond market continues to grow.
Individual bonds are influenced by two main components. These components are credit risk and interest rate risk. Bonds are held by company's and governments. When their credit rating is lowered their bond prices will significantly decrease. This is because there is more risk to the company that issued the bond will default. Usually this does not influence the whole bond market. However, when this situation is happening often and to a number of companies it would cause the current decline in bonds.
There are also other reasons that bond prices decrease. The price per share of the stock and mutual fund companies do fall. This is because a great deal of their profits from from the trading of bonds. Many insurances companies invest a good bit of their capital in bonds which is also affects as the prices for bonds decreases.
Most businesses and lending companies depend on interest rates and can be affected by the dips in bond prices. The important questions here are how will lending companies, and mortgage business continue to be successful as interest rates continue to sore? How will high rates affect the repayment of loans already made?
Most investors do not realize that bond markets are not like the stock market. Bonds in most countries are decentralized and there are absolutely no common exchanges. These is because bond issues are always different, and offer a variety of securities for a longer period of time. It is usually the bank in America which make the markets but remember they have no rules which govern if and when they buy, sell, or stop they participation in the bond market.
Keep in mind that futures prices are more volatile than stock prices. An established company that has enjoyed a long history of solid earnings will probably continue to do so. But a commodity that has trended up during one year, may turn around in the opposite direction the next year - and very quickly, too. For this reason, the commodity trader cannot sit back and relax knowing that his futures contract will bring in smooth returns. He must do his homework. In the futures market that means forecasting using fundamental analysis, technical analysis (charting), or both.
Information Sources for Fundamental Analysis
The fundamental approach to forecasting futures prices involves monitoring demand and supply. Traders gather this information from a number of sources trade organizations, private news gathering and research firms, and the press. The most complete source of information is the U.S. government through the Departments of Agriculture, Treasury and Commerce and the Federal Reserve Banks.
Several brokerage firms issue market letters, which are usually in the form of digests of market information with opinions on future price trends.
Also, a few private advisory services provide commodity market information. They analyze available information from government and other sources, and make their own market and price forecasts.
Technical Analysis - the Philosophy of Charting
The cornerstone of technical trading is the belief that fundamental information, political events, natural disasters and psychological factors will quickly show up in some form of price movement. The chartist, therefore, searches for certain formations or patterns which indicate bullish or bearish shifts in fundamentals. If his analysis is correct, he can quickly profit from the changes without necessarily knowing the specific reasons for them.
Fundamental traders can also use charting information. Since the market price itself may react before the fundamental information comes to light, chart action can alert the fundamental analyst that something is happening and encourage closer market analysis.
How Charting Works
Bar charts, one of the more popular tools of traders, include information on a particular futures market's price movements, volume and open interest. Such charts are produced daily, weekly and monthly. Studying historical patterns can help to provide a long-term perspective on the market.
In addition to studying chart patterns, traders also look at moving averages, oscillators and other devices in ascertaining how bullish or bearish a market may be growing. Computer models are also used to check trend direction.
Charting is not an exact science. Allowances must be made for errors, and unexpected events can disrupt forecasts made on chart patterns. Even so, many market participants - both fundamental and technical traders - find that charting helps them stay on the right side of the market as well as pin down entry and exit points.
Fundamental analysis, when referring to forex, involves studying the economy of a country to determine the effect this has on the value of its currency. Understanding the relationship between an economy and its currency value can allow a trader to determine, to a degree, the demand and a likely increase/decrease in value for a particular currency.
This can give a trader an advantage, because they can determine whether a currency pair is likely to rise or fall. We explain this in more detail throughout this blog.
Economic indicators can be used to evaluate an economy
There are certain economic indicators, or reports, that forex traders can observe in order to determine the strength of an economy. These reports are released by governments and independent bodies who collect and analyse the data prior to publishing it. They are released at set times and can be released weekly, monthly, quarterly or annually, depending on the report.
Traders will generally look at the latest result of each report, as well as any changes to the results from the last published report.
Economic reports and news will affect the currency value
A strong economy is more likely to present opportunities for business, such as returns on real estate, the stock market or other business ventures.
If an economic report therefore shows that an economy is strong, then domestic and foreign investors – private or corporate – may seek investment opportunities in that country.
In order to invest capital into a country, an investor will need to do this in the local currency. So if it is perceived that an economy will produce great returns for investment, then the local currency will be more in demand and hence the currency value is likely to appreciate.
Exporting goods and services affects a currency value
If an economy is strong in a particular sector, for example in manufacturing or financial services, then they are likely to export those manufactured goods or financial services abroad.
Customers that are purchasing these goods and services will have to convert their domestic currency to the local currency of the producer. The more demand there is for these goods and services, the higher the demand for the local currency and so the value of it appreciates.
Financial markets react to news
When economic reports are released, there is a certain amount of speculation on what the results may be. Forex traders buy or sell currencies in anticipation of this. For example, if the results of an economic report are expected to be negative, then traders tend to sell the currency in question ahead of the report's release, causing the price to fall.
When this happens, the markets are referred to as being ‘priced in’ – meaning that by the time the event has taken place, the price has already changed as expected.
When the data is released and is in line with the expected result, there is generally a minimum impact on the price movement. However, if the reported result is significantly different to the expected value, volatile price movement may occur as traders try to price in these new and unexpected results.
Publishing times are usually released in advance
You can use an economic calendar to keep up-to-date on various news releases. The date and times of such news releases are published in advance and so you can keep track of them. The financial markets frequently get disturbed by unexpected events. This can cause rapid price volatility and may even change the direction of a trend.
Rapid price movement can occur during a news release
The initial reaction in the currency markets after a news release can be volatile. This is because institutional traders will generally stay out of entering new positions during the release and close short term positions just prior to it. This results in decreased liquidity of the currency pair or asset. After a news release, such as the US non-farm Payroll, a currency pair can quickly whipsaw in both directions, making trading conditions difficult.
