High Trading Cost and Risk as your Worst Enemies

These two factors are responsible for traders who lose money in the long-run and they will be analyzed below.

The Trading Cost and Trading Risk Becomes Greater in Short Periods of Time

The Trading Cost when trading common stocks or other non-leveraged financial assets is limited. But when comes to derivatives, the trading cost can be really significant.

An Example on EUR/USD

Measuring the Cost in terms of the Spread Charged

The cost of derivative trading includes mainly the spread between the Ask/Bid and trading commissions based on volume. In our following analysis, we will assume the trading cost includes only the spread and no trading commissions.

When trading the most popular Forex pair, EUR/USD, the trading spread is between 0.5 and 4.0 pips maximum. You may find even narrower spreads but remember that we assumed no-trading commissions.

In other words, the spread on EUR/USD is from 0.00005 to 0.0004 of the actual value of the trade.

■ The spread counts about 0.00005 to 0.0004 of the value of the Trade

To show up our case we will assume an average spread of 1.5 pip on EURUSD without commissions or other fees charged.

A trader opens a Forex / CFD account by depositing $1,000.

Now if this trader opens a position of one micro lot ($1,000), he will pay:

■ $1,000 X 0.00015 = 15 cents USD

But no derivative trader opens an account worth $1,000 to open positions worth $1,000. So if we assume a deposit of $1,000 and that an average trader uses leverage 100:1 he will open an average position of 1 standard lot ($100,000) then the trading cost in a EURUSD trade of 1 lot will be:

■ $100,000 X 0.00015 = 15 USD

It seems like a reasonable cost given the profit potential. But the thing is that this is the cost of a single trade. Usually, day-traders and especially beginners are executing tens of trades each day. Let's assume 5 EURUSD trades per day.

■ 5 trades X 15 USD = 75 USD

In just a trading week (5 days) this trader will have pay:

■ 5 days X 75 USD = 375 USD

In overall, the trading cost for a trading week will count of 37.5% of the total value of this trader’s account.

It is obvious that even in the most competitive trading asset (EURUSD) the trading cost can be disastrous when executing a lot of trades. We assume no profits and no losses. Why? Because in the short-term you are exposed to what is called the “Market Noise”. Market noise cannot be forecasted and thus cannot be traded profitable, especially as concerns non-professional traders.

Read more: Market Noise and Earthquake Comparison

Intraday Forex Strategy -Forex Price Action

Price Action refers to a simple trading practice that allows traders to analyze any financial market without using indicators.

Introduction to Forex Price Action

Understanding price action is a key issue when trading Forex Intraday. There is a great variety of methods and tools available for traders seeking to interpret the daily price action. These tools include Elliott Waves, candlesticks, Chart Patterns, major support/resistance, etc.

Definition -What is Forex Price Action?

Price Action is a trading method that reflects the flow of executed orders within a specific time frame. You may evaluate Price Action via empirical methods but the most reliable way is the use of technical analysis. What really distinguishes trading using Price Action compared to other intraday strategies is the use of naked charts with candlesticks and without any indicators or oscillators.

Price Action and The Simple Use of Candlesticks

A candle is formed by (i) a closing price, (ii) an opening price, and (iii) two price wicks.

• The two price wicks reflect high and low prices within the selected time frame (for example 1 minute chart).
• The body of its candle is determined by the distance between the closing and opening prices and therefore a candle may be bullish or bearish.

Price action should be interpreted according to the current trading conditions of each Forex market. 

Read more: Forex Price Action

TOP STOCK-MARKET RULES

These are some rules for equity traders.

1^st Stock-Market Rule

“The Market is Unpredictable”

You can never predict the future, if you ever can, don’t waste your time investing in stocks and other financials. 

• Don't try to outsmart the market, instead, build several scenarios based on probabilities.

2^nd Stock-Market Rule

"Portfolio Diversification is Crucial"

Always diversify your portfolio, risk diversification is the only rule that applies in every single asset class.

• Diversify your holdings in terms of different asset classes, different assets, different countries, and different currencies.

3^rd Stock-Market Rule

"Smart-Money is Stronger in the Short-Term"

When you trade the market in short time periods (i.e. intraday), you compete with skilled professional traders and other market specialists (hedge funds, dealing rooms, etc). These professionals are called 'Smart Money'.

• Smart money is almost invisible and cannot be beaten by retail traders.

4^th Stock-Market Rule

“Buy The Rumor, Sell the Fact”

Buy the rumor and sell the fact is a tactic widely used by professional traders.

• Stock-market prices incorporate all rumors at early-stages.

Read more: Stock Market Rules

ONLINE TRADING ORDERS

The selection and placement of a trading order must be compatible not only to individual strategies but also to the current market conditions.

Market conditions matter when selecting trading orders, for example:

• volatile market conditions require the use of wide trailing-stops
• ranging market conditions require the use of fixed-stops (below/above major support and resistance levels)

These are some key factors to consider during the selection of trading orders:

◙ General Market Conditions (Volatile, Trending, and Ranging Markets)

◙ Risk Acceptance

◙ Technical Analysis (Price Channels, Support/Resistance, Chart Patterns, Pivots, etc.)

◙ Profit/Loss Ratio

◙ Available Margin

Major Types of Trading Order

Trading orders include market and pending orders:

(1) Market Orders

Market orders are filled at the best current market price available. This order type can prove very risky when trading in volatile markets with high execution-delays.

■ Buy rate (best current available market offer price)

■ Sell rate (best current available market bid price)

Forex traders should prefer ECN Forex Brokers offering minimal latency.

Read more: Trading Order Types

A FEW BUT IMPORTANT TRADING TIPS FOR STARTERS

1. Avoid become emotional with your trades. Emotions are important for understanding and making connections with other humans, but when trading in the global financial markets, emotional trading is simply catastrophic.

2. Learn to lose. Before you can earn from trading, you must learn to lose. Recognize your mistakes and don't repeat them.

3. Avoid high capital leverage. Professional traders don't allocate more than 2% on any trade, they know something.

4. Learn what you can from experienced traders (forums, books, seminars, etc).

5. Be patient, learning how to trade wisely doesn't happen in one-day. Focus on optimizing your trading process, it's all about the process at the end.

6. Technical analysis is the king in the short-term and fundamental analysis is the king in the long-term. When technical and fundamental analysis point n the same direction, a good swing trade is born. When these two powers 'agree', don't hesitate to run your profits.

7. Analyze charts and try to identify similarities and price patterns over the past. Human behavior repeats itself, so does a chart pattern.

8. Timing is the key to successful trading. It is much better to lose a trade than risking to trade the wrong timing.

9. Keep an eye on volume and volatility. Sudden changes in volume and volatility can signify a price reversal.

10. The Options Put-Call ratio can be a reliable market indicator in identifying major changes in the market's trend. Forex Traders can use the COT analysis to spot potential upcoming turnarounds.

Read more: Trading Tips for Starters

THE TRADING CENTER SIMPLE LEVERAGE FORMULA

“Building a simple Money Management system to trade derivatives”

Money management (MM) is everything when trading in modern financial markets. The trading strategy we apply must be in accordance with our individual risk profile and long-term goals. The way we manage our funds should always be oriented towards our current capabilities and our future needs.

The Dilemma when Using Trading Leverage

When a potentially profitable trade has been identified, a trader must decide the portion of his funds that he is willing to risk upon that trade. A critical decision, as large trade sizes can lead to great profits but also to great losses. As it has been mentioned in the past, trading leverage can be your best friend or your worst enemy.

The Leverage Formula

The following leverage formula aims to provide a simple framework of understanding the attractiveness of each trade, and therefore, choose respectively the ideal leverage ratio.

Here is the formula (it is briefly explained below):

◘ Optimal Leverage Formula= [ (P/L) * (1/Spread) * (R/2) ] %

Where: (P/L) = Profit to Loss Ratio

Spread the difference in pips between the bid/ask, and

(R) = Risk Tolerance (values 1-100)

Read more: The Trading Leverage Formula