Category Archives: General Forex

General Forex

Trading System Position Sizing

Position sizing is determining HOW MANY contracts to trade when a trading system gets a signal. It is one of the most powerful and least understood concepts with many traders. Its purpose is to manage risk, enhance returns and improve robustness through market normalization. Position sizing can end up being more significant than where a trader buys or sells! Most trading systems and testing platforms either ignore position sizing, or use it illogically.

A big problem with many trading systems is that they risk too much of a traders equity on any given trade. Most professionals agree that traders should never risk more than 1% to 3% of their equity on any given trade. This also applies to the risk for each sector. For example, if a trader is risking 2% a trade in highly correlated markets like 2yr bonds, 5yr bonds, 10yr bonds and 30yr bonds, this is essentially like risking 8% in the same trade. Overtrading this way can produce incredible looking results with returns of 100% or more, but this is usually just a case of using too much leverage and taking too large a percentage risk on each trade (or sector) and or “cherry picking” the best starting date (like right before a series of winning trades).

When running a “Worse Case Analysis” at those high-risk levels, it becomes clear that the risk of ruin climbs dangerously high. A series of losing trades or starting on the wrong day could cause an investor to lose it all (or have an enormous drawdown).

The bottom line is that when putting on a trade, traders should know what percentage of their equity they will lose if they are wrong. This should only be a small portion of their available trading capital. This also means they need to know their risk when entering a trade. Some trading systems like moving average systems do not know how much risk they are taking. This is because the trading system does not know how far the market needs to move to trigger an exit. We think it is dangerous to trade this way and do not recommend it.

Another large problem is the lack of market normalization (such as a single contract based result). For example, we do not think it is logical to trade one contract of natural gas with an average daily volatility of around $2,000 for every one Eurodollar contract with an average daily volatility of around $150. Doing this would mean that natural gas is a more significant market than the Eurodollar. If Eurodollars trend, we want to give them just as much weight as natural gas (or any other market). In the previous example, traders could just simply remove the Eurodollar from the equation and get nearly the same performance. In essence, the results are unintentionally biased (curve fit) to natural gas. An average $150 winning trade in the Eurodollar is not going to offset an average $2000 losing trade in natural gas!

We recommend trading a basket of commodities for diversification, however, if traders do not normalize the data and most of the profits and losses arise from a few of the markets in the portfolio then that is not diversification. The problem is that going forward; traders are going to be dependent on those few markets to perform. It is far better knowing that any market has the potential to perform at an equal level rather than being dependent on markets in that portfolio.

It is likely that most trading systems ignore position sizing, or use it illogically because the design of most software packages is to work with a single contract based test. Of the numerous back testing products available for sale, we are only aware of two software packages that can properly do position sizing and money management testing. There are many products that claim to do it, but we have found that almost all these products do not do position sizing & money management correctly (there are many reasons for this, contact us for details). We use Bob Spears state-of-the-art testing software Mechanica (which sells for $25,000 a copy) for most position sizing based research and testing.

Other problems include vendors that only report the smaller drawdown numbers like “closed trade” drawdowns or “average annual” drawdowns. There are also problems with position sizing concepts such as “Optimal F” or “Fixed Ratio”. We feel both of these are just a dangerous form of hindsight biased curve fitting.

Another common fallacy says that traders should find their “best” single contract based trading system FIRST and THEN apply position sizing to it. This is not the correct approach; position sizing can change the risk-to-reward profiles of a single contract based trading system. A trading system that looked terrific, with a smooth equity curve on one contract basis, can look far less attractive when all markets are equally weighted for robustness.

For all the reason cited above, we develop trading systems with proper position sizing logic. We believe this raises the robustness and significance of the testing results. This also helps avoid the inadvertent optimizing that can occur with other types of position sizing / money management based testing software.

General Forex

CFD Trading: Going Short On Shares Can Help Earn Big

CFDs are trading instruments that give you leveraged trading power and greater flexibility than any other financial instrument. These are the fastest growing financial products and enable people to make more money than other investments. But, CFD trading can be extremely risky if you are not aware of the current market trend. The market is extremely volatile and changes every now and then. It can rise or fall within seconds. In such a scenario, going short on shares can help you earn big money.

Basically, a CFD means contract for difference, which is an agreement to exchange the difference in the value of a financial product between the opening and closing of the contract. CFD Trading can be highly effective in making use of your investment capital, but a little carelessness can land you in a big trouble.

When you buy a share or open a contract at a certain value and close it at some other value, you earn the difference of amount between its closing and opening value. If the closing amount is higher than the opening amount, you make a profit and if it is vice versa, you are at loss. To minimize your loss, going short on shares or buying fewer shares can help, because chances of loss increase with an increase in the number of shares. To play safe and make profit, buying fewer shares is preferable.

Although you can go long or short on shares according to your wish and understanding of the market, make sure that you have complete knowledge about CFD Trading. You can also apply online for trading CFDs. PureDeal offers you a full range of tools and charting packages that help you stay update and get the latest news about the market condition, so that you can effectively deal in buying and selling of CFDs.

PureDeal is a browser-based platform used for trading CFDs. The trading software is extremely easy to use and has a customized interface that offers quick one-click dealing. Even if you are new to CFD trading, you will not find it difficult to trade through this platform.

Charting CFDs can be very helpful in keeping a track of your orders and analyzing the net loss or profit in each order. It gives you an idea about how to effectively deal with CFDs, so that you are not at loss in your next transaction.

Many software are available, but choosing the right one can be a problem. Make sure that your trading software provides a personalized interface, so that you can easily use it even if you are a beginner. Try to avoid making even the smallest mistake, as dealing with financial instruments is extremely risky. Make sure that you have full understanding of the market, CFD dealing, and the software that you are using for CFD Trading. PureDeal offers you quick assistance and helps in choosing the right platform to enable profitable trading.

CFD Trading carries a high risk for your capital. Invest only that much you can afford to lose. Choosing the right CFD Software and going short on shares can help you earn more profit.

General Forex

CFD Trading Techniques

CFD trading stands for “contracts for difference”. As the name suggests, this type of trading allows an investor to participate in the price difference of the financial derivatives. However, unlike shares, the trader does not physically own the financial derivatives of a company. The trader simply agrees to exchange the difference between the opening and closing price of a position.

This type of trading is preferred over share trading, since it requires a lower amount of capital. Besides, an investor can reap high profits with a low investment amount. The investor can trade on rising prices by going long, and trade on falling prices by choosing to go short. The change in price of these financial derivatives is a profit for the trader or the investor. There are different techniques of CFD trading, and you must know when to call the shots. In this article, we share some of the important techniques that a trader must know.

Techniques

Hedging: This technique is often used by traders to protect long-term holdings against variable market conditions. It helps in minimizing risk and can be profitable in the long-term. Hedging is a process of holding a cheaper stock for long, and going short on an expensive stock. It reduces large losses in the long term.

Leveraging: A leverage effect can be expected, since the investment amount is relatively lower than the total value of the transaction. You can trade with a marginal amount, and this type of CFD trading is known as margin position. The ratio is usually 10:1, and helps in leveraging your investment.

Stop Loss Position: You can place an order for automatic stop loss. This means that you can exit a trade on the same day of transaction, that is, intraday. With this technique, you can set the automatic stop loss trigger and decide the price at which you intend to stop the losses. Using stop loss and limits is the key to successful trading. Progressive stop strategies, limit orders, and stop limit orders are some effective techniques in contracts for differences.

Apart from using these techniques, as an investor or trader, you must remember some of the golden rules of CFD trading. First, trading is different from investing. When you trade online, do not hold the derivatives for too long without evaluating the market conditions. These are fast moving financial instruments and require thorough evaluation. Second, it is important to book profits. Do not let greed empower your decision taking ability. Take rational decisions and book profits. Remember, the market will not move as per your expectations, it is volatile and you may end up with huge losses.

When you trade online, you must have the entire plan clear in the mind. Moreover, it is important to stick to the plan. Discipline is important. You must know when to enter, when to exit, when to place a stop loss trigger, when to book profits, and when to limit the order.

CFD trading, when executed with these techniques and rules in mind, certainly helps you make big money. Do not succumb to the emotions of greed; be professional with your transactions and book profits on time.

General Forex

Best Commodities Trading Strategies

Commodities trading strategies help you to decide when to sell or buy commodities. It is desirable to know about some strategies that are deployed by successful traders of commodities trading. While reading financial newsletters you may come across tips that will keep you updated. A well thought out strategy lets you know when to sell or buy to maximize profit and limit losses. Market fundamentals and technical analysis form the basis of strategies for commodities trading. Depending on personal objectives and requirements a trader may select appropriate strategy for commodities trading.

Commodities trading strategies are primarily two types:

Range Trading

  • Trading within a range means buying a commodity near the bottom of a range and selling it at the high point of range.

  • Bottom point is called “support” and the high point is called “resistance”.

  • Whenever any commodity has experienced a lot of selling in the market it hovers around the bottom of the support range. In such situations the commodity is said to be ‘oversold’.

  • On the contrary, a commodity may be experiencing frenzied buying to reach near the resistance level. At this point the commodity is said to be ‘overbought’.

  • Commodities trading strategy recommends you to “sell” a commodity that has reached the resistance and “buy” a commodity when it is around the “support”.

  • Support and resistance level of various ranges of a commodity are determined by various tools of technical analysis. There are different indicators that help to measure at what level a commodity is overbought or oversold. These indicators are Rate of Change, RSI, Stochastics and so on.

  • However, such strategy works well when there is no major trend in the market. In case the market gets oversold or overbought and a major downturn or uptrend is formed, this strategy should be employed with utmost caution.

Trading Breakouts

  • When a commodity breaks a particular resistance level and makes a new high, the commodities trading strategy recommends buying it.

  • Similarly when a commodity breaks the support level and hits a low then selling is advised.

  • New low and high of a commodity can be easily spotted from the technical charts. The peak of the curve denotes high and the low point indicates new low.

  • The commodities trading strategies follow a simple logic – market always forms new highs and lows. However, this is ideal when the commodity has a strong trend. When there is no definite trend this strategy is not very effective.

Other than these two types there is one strategy for experienced traders:

Trading on Fundamentals

Buying or selling of a commodity within a range or after positive or negative breakouts is supported by various technical parameters. Commodities trading is based on market fundamentals which are easily understood by experienced traders who have developed an instinct for trading. An experienced commodity trader may buy sugar futures on knowing that the production of sugarcane at Brazil has been low. In anticipation of the Gulf War an experienced trader may buy futures of crude oil. A new trader of commodities trading may be baffled with nuances of such strategy as there is no defined zone to buy or sell.

General Forex

Know The Different Types of Forex Software

There are numerous forex software types available in the market that differs in terms of security, features, and prices amongst others. There are forex trading software that can enable you to virtually do anything from automatically placing your trades to customizing your own trading system. Therefore, when shopping for the perfect forex trading software, there are several factors which you need to take into consideration other than the cost.

Discussed herein, are different types of forex trading applications accessible in the market and what they are utilized for:

  • Forex Trading Platform

In a layman’s term, the forex trading platform is basically the interface between the client and the trader (i.e. broker). The forex trading platform program is generally, what makes online forex exchange a reality. You can download and install a forex trading platform application from the website of a forex broker you are using to trade. After you have setup an account and uploaded funds to it, you will be in a position to buy and sell currencies directly from your desktop or laptop PC. This is one of the main advantages of forex trading since it provides you with the ability to trade from virtually anywhere in the globe so long as you have internet connectivity.

  • Forex System Development Program

System development programs are utilized by brokers that desire to create their own customized forex trading systems. This type of software enables a broker to try their trading concepts by making use of collected data. The procedure is referred to as “back testing.” It is handy, especially when you want to see how a certain trading concept has performed in the recent past.

  • Forex Robots

Unlike other types of forex trading applications, forex robots have been incorporated with programmed forex trading systems. It is referred to as a robot since it automatically produces forex signals on behalf of the broker without his or her intervention. When connected using matching forex trading platform, they can request orders automatically. However, prior to allowing a forex robot to trade automatically on your behalf, you need to thoroughly test and observe the results by making use of a demo account. By doing so, you won’t be putting your investment at a risk.

  • Forex System Software

Forex system software is comparable to forex robots since they produce forex signals on behalf of the trader. The program can be used in an offline PC and produce signals that the broker can manually request by making use of the forex trading platform installed in the computer.