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Stock Option Trading To Increase Returns

There has been a steady rise in the use of stock options by investors to maximize their leverage and returns over the past twelve months. Chicago Board Options Exchange confirms this observation when they recently reported that the month of March was their busiest on record with volume up 55% over the same month last year. In fact all previous stock option trading records were broken when over 5.6 million stock option contracts were traded in a single day.

Stock option trading enables investors to increase their leverage and thus their rate of return over simple stock trading. If an investor has a solid approach to picking stocks that go up in the short term, the returns can be increased by 10 to 15 times using stock options. The trade off for this increased return is that the investor has to also judge the time period over which the increase will occur.

Being able to pick the stock, direction, and time period are all critical for successful stock option trading. A recent statistical analysis of over 30 years of stock data has revealed certain reoccurring patterns that can yield high returns in stock option trading. The analysis was done with custom developed software and then the strategy was applied to all stocks for the last five years. Stock trading resulted in an average return per trade of 3.2%, but with stock option trading the average return per trade was over 55% for 2005.

Investors have already begun to exploit the patterns found in this research and are reporting highly profitable trades. Whenever investors find inefficiencies in the market, there is a rush to take advantage of those inefficiencies.

Although stock options are not available on all stocks, about half of the stocks found in the analysis did have tradable options. If the trend of increasing use of stock options by investors continues, we should see even more stocks add options for investors. It is easy to see that 60 to 70 percent of actively traded stocks will have option contracts available in the coming year if this trend continues.

Investors are advised to look carefully at the open interest and volume when considering which option contract to buy. A low volumeopen interest will generally result in large spreads between the bidask prices and thus reduce profits, plus it may make it difficult to sell the option contract.

Another consideration in selecting the option contract is volatility. Stocks with high swings in prices will translate to more expensive options since the options will have a greater likelihood of being in the money. If you have a reliable method of forecasting stock movement, this higher price may not be a consideration.

No Comments by admin on August 31, 2010
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So You Want To Become A Futures Day Trader

You wake up one morning with a really BAD idea you have decided to start making your living by becoming a futures day trader. BUT how can this be such a bad idea, dont people get rich day trading futures? Where did that idea come from? Did you see one of those work for 10 minutes a day and make 4200, get rich quick never lose hype system ads? Or did you visit a chatroom, and the resident guru made it all sound so easy? Maybe, the title of this article should have been How To Die A Painful Death Chasing A Carrot.

Get real. IF systems like that really were available, or if day trading really was that easy, wouldnt everyone be a rich day trader instead of being a statistic in the 90 percent of all day traders fail club? IF you cant be truly realistic regarding this, truly believing and understanding the odds against you THEN you do not have a chance. You would really be best off giving up on this idea about day trading, and save yourself a lot of pain and money.

Over the last nine years, I have known and worked with many traders, and over this time have seen the unrealistic expectations, and problems with their approach towards trading, where people who possibly had a chance to be successful were actually done before they started. I have thought about writing a book about this. The book would not be about how to day trade, but instead, it would be about how to learn how to day trade the key word being learning NOT trade.

It Cant Just Be About The Money

How can learning any new skill start with a total focus on the end result, instead of how you plan to achieve that result. That would be no different than trying to put the roof on a house before you built the walls, or expecting to receive your college degree the day that you begin classes. Talk about unrealistic expectations these are impossibilities as are any get rich quick trading schemes. Yet many come into day trading as what I refer to as a job replacement trader, this is a trader who tells me the following: I know I need to spend the time making a trading plan and properly paper trading it before I start trading real money, but I cant, I just got laid off from my job and need to trade now to make some money. There is another statistic for the 90 percent club.

When I meet a new trader who has some interest in what I am doing, this is probably the most frequently asked question: how long is it going to take me to be profitable with your method? This trader has never traded real money yet, or has been losing at whatever trading that they have done, yet what they want to know is how long will take to be profitable with a new method. My answer to questions like these is to first ask my own question: what are you planning to do to learn this method, how can you possibly become profitable with any method before you learn it? I can remember one specific trader that I talked to 2-3 times before joining our group. In the conversations this trader told me how many thousands of pounds he had spent on trading systems, methods, and trading groups it was almost like he was bragging about it? He never learned how to trade, and he had never traded profitably. BUT once again the same question came up how long is it going to take? I told the trader my thoughts regarding this, while also saying that if this was the major concern that they would probably never learn it, and they really shouldnt join the group. The trader assured me that this time it would be different BUT it wasnt they never studied the training materials, but I would get an email every couple of days asking me when I thought they should start trading real money. And there is another statistic for the 90 percent club.

Trading just cant be about the money, especially from the beginning, but really at any point in your trading career. Trading is about the process; that process being learning a method and the related trade setups, the creation of what I refer to as a base setup plan. Does it seem logical, that you actually need something to trade before you get rich trading it? After this is done, start paper trading this plan in order to gain enough screen time and repetition that you can make adjustments learning your mistakes and misreads that you make in real time execution. Accomplish this, and then begin to keep profitability records of your paper trading, first trading for profitability, and then trading for proficiency where you concern yourself with the percentage of profit potential you are gaining, not simply whether you make a profit.

How long is this going to take to do? Who knows, but there sure arent any shortcuts. Actually, it probably wont ever happen. Paper trading to a proficient level really is a very difficult thing to accomplish, as traders arent willing to work hard enough, and with the necessary commitment, as there is no financial reward from paper trading. Furthermore, since there is also no financial risk, paper trading is quite often turned into a game and becomes of a waste of time, and creation of bad habits that become to hard to change. But skip the process altogether, because you want to start making all of that money that caused you to decide to become a day trader to begin with AND another statistic for the 90 percent club.

Introduction To Trading Psychology

I would guess that most everyone has had experience with some kind of real time performance stress before. Maybe it was a college final, or maybe it was related to athletics, maybe you had to give a speech, or maybe you were in a theatrical performance. Whatever the case may be, for myself, as well as anyone else I remember talking to, nothing was even similar to the feelings that were brought on by day trading real money real time. My background included athletics, and I can remember pitching in a state final baseball game, and I can remember last second free-throws in tournament basketball games it was a piece of cake when compared to starting to trade real money. Nothing can prepare you for risking your money on an unknown outcome, of which you have no physical control, while watching price bars that all of a sudden have seemed to start ticking at the speed of light with your heart racing and the inability to sit still and the dry mouth and the sweaty palms and the feeling like you are going to puke etc etc etc. Doesnt that sound like fun I will bet that get rich trading scheme didnt mention any of this?

IF you are going to get through these emotions known as trading psychology, and all the different fears and forms that it can take on, it is going to be involved with your preparation, repetition, and understanding of that base setup plan, along with the knowledge that you have been able to paper trade it proficiently. No, its not the same as real money, and you will still have to become used to executing real time BUT at least you do have the confidence in knowing that what you are going to trade does work, and on a level in excess of simple profitability. It will take time for these emotions to leave you, and maybe some never will, but that is all right. It is not necessary to eliminate all emotion to be able to profitably trade, it is necessary to control them, and being able to have the self trust that although you cant know what is going to happen, you can know what you are doing and that you will act as closely as possible to the intended plan. Does going through a learning process that includes paper trading still sound like a waste of time? No problem there is still plenty of room in the 90 percent club.

Work Ethic And The Fear Of Failure

Again I am thinking about that question how long is it going to take to profitably trade your method? I dont know, are you really going to work your hardest? The fear of failure can take on many manifestations. What I have seen quite frequently, is how this fear is related to the traders sense of self esteem and self worth that failing at this, failing at anything, will make them less of a person, and they cant risk allowing this to happen. Consequently, they never work their hardest at learning to trade. They wont put it all on the line, they always hold something back. Why? Because by doing this there will always be a built in excuse for failing IF I had really tried my hardest THEN I am sure that I could have done it. The result is obviously the same, but at least they dont have to blame themselves or take a hit on that precious ego. Is failing at learning to do something, and being a failure really the same thing? In my way of thinking, trying your very hardest and not being able to do something is just the way it goes some times. We arent going to be able to do everything we try, no matter how hard we work at it. Failure on the other hand is what I described failing because you didnt step up and try your hardest, instead you held back trying to protect yourself. You want to learn to day trade, check your ego at the door before you start or you too can join the 90 percent club.

Do You Still Want To Make Your Living Day Trading?

Have I talked you out of becoming a day trader do you still think this is a great get rich quick way of making your living? Although it wasnt my intentions to change anyones mind, if this is what has happened, then I am glad. Yes, trading can be lucrative, and yes, you can get rich trading, but you have such a long road to travel before this can occur. Many people say they know this, but they dont really believe it. They think that they will be different, they think that they will be the one that bucks these odds BUT then they wont go about it differently. If nothing else, it should be very clear, that if 90% of all day traders lose, then to have a chance at being successful, you obviously are going to have to approach this differently than the vast majority does. Go for it BUT focus on the process, have reasonable expectations of what is really involved, and then do what is necessary to learn how to trade that 90% club is far too big.

No Comments by admin on August 24, 2010
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Should You Use a Pareto Chart

What? you don’t know what it is

Unless you are familiar with manufacturing management principles, you probably have not heard of a pareto chart. It is a very effective tool managers use, to manage and effect outcomes in manufacturing environments. You’re saying, How in the heck will this help my trading? Well it can, if you use it right.

Another name for using pareto charts is, managing by exception. It brings focus on the problem areas, you then try to change these areas to produce different results in the future. With this chart you will quickly see the weakest areas in your trading. On the other hand you also identify your strongest. This allows you to put maximum effort in areas where you need the most improvement.

To build a pareto chart for trading you should start with 3 columns and 12 rows. Place the words; System, Psychology, and Emotion across the top. (one in each column) Down the side you will track each trade. This chart will be used with your trading log. You should all keep a trading log, you can enter information from prior log entries also.

There are three things that directly affect your trading, they are now listed at the top of your pareto chart. After you have listed trades in the side rows. Put a check in the column that corresponds to the main reason you think that the trade was a success or a failure. Once you have completed your list, take a look at the failed trades. You will probably see a pattern of the same reason again and again.

With this simple chart you have quickly identified your main weakness. With this knowledge you can analyze the problem and form solutions to change that outcome. A valuable tool for this is called a root cause analysis.

No Comments by admin on August 17, 2010
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Recognise The Force and Trade the Trend

You may have heard the saying A Trend is your Friend until it Bends. Technical Analysis helps us to identify a trend so we can jump on and ride it until it changes. Since the Forex market has very strong trends, technical analysis is a very effective technique.

Some traders still persist on trading against the trend, they argue with it even though price movements are obviously in a trend. Buying when the currency is in a basic downtrend or selling when its in an uptrend, instead of buying.

Our primary purpose is to identify the major trend, intermediate trend and the short term trends and place trades in that direction. We then hold position until our calculations suggest otherwise.

Heres a quote from Jesse Livermore, a tenacious, flamboyant and profitable Forex trader,

“We know that prices move up and down. They always have and they always will. My theory is that behind these major movements is an irresistible force. That is all one needs to know. It is not well to be too curious about all the reasons behind price movements.
You risk the danger of clouding your mind with non-essentials. Just recognize that the movement is there and take advantage of it by steering your speculative ship along with the tide. Do not argue with the condition, and most of all, do not try to combat it.”

Theres gold in these words. If the market action shows your analysis to be correct, the successful traders stay with the market and maximize profit according to his or her equity management rules.

If the market turns, the smart trader will get out and collect profits.

Watch the market and listen to what it tells you about upcoming trends and most importantly dont ask for reasons for what it does, focus on the essentials.

There are often repeating patterns in price changes. Once established. They become the most probable way to predict price changes.

These can be categorized into two types of markets, trending and trend-less. Trending markets have up and down trends; these are typically less than 45 and are steady movers with occasional pauses or profit-taking periods.

Trend-less markets have very steep movement of more than 45 that most often cant be sustained. Although price movements can shift a considerable number of pips in a short time period they often dont produce much net profit.

Choppy markets often produce stop outs and the sideways market, with minimal price movements makes it very difficult to predict which way the price will move.

For these reasons, our objective is to get into a trending market and meet our trading objectives.

The underlying message here is, Be a good friend to the trend, a simple concept but powerful indeed.

No Comments by admin on August 10, 2010
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Psychology Of The Winning Trader

It is said that nine out of every ten traders loose money. It is also said that day trading is seventy five percent psychology and the other twenty five percent divided up between your trading system and proper money management. Now I do not know if those facts are true or false. I have never seen a survey published on the topic, maybe someone can help me with that information, but let us assume that if its not absolutely true then it is nearly true. This would mean that most traders are lacking the proper psychology for trading.

Therefore we need to look very carefully at this business of our thought patterns, what we are thinking while we are trading. All our actions are governed by either pleasure or pain. Whatever we do, we do it to either to experience pleasure or escape pain. We have a need to avoid pain and a desire to gain pleasure. We need to do some introspection and decide what is it that drives us while we are trading, pleasure or pain. Do you jump into every trade even when the setups are not quite right because you just cannot stand missing the next big move, not having the pleasure of the winning trade. Fear will probably cause you to not enter trades when everything looks perfect because the chance of loosing money is just too much for you. So you sit there paralyzed, or you enter the trade but your stops are so tight you hardly ever make any money. Most traders I believe associate trading with pain. They are ruled by fear. The fact is that every trader looses money. It is part of the game. Its how you deal with it that matters.

If we associate pleasure with every winning trade and pain with every loosing trade then our trading career will be an emotion roller coaster ride of up and down feelings. This is the very heart of the problem. Most of us are emotional traders. Our psychology has associated winning with pleasure and loosing with pain. The problem with this is that in day trading we will experience a number of winners and losers everyday. If you start the day with a couple of losers you will begin to hurt, which causes fear and when the next setup comes along your fear level is too high and prevents you from entering the trade, That trade just happened to be a winner and you missed it. Now you are really going to pieces. What can we do to overcome our emotions?

We have to change or psychology, change the associations we have formed of pleasure equals winners and pain equals losers. The first thing is to set goals for our trading and our goal should be consistent profitability. What are our monthly and our yearly goals? Use points or pips instead of money. Secondly, we need to know what is preventing us from achieving our goals. Is it fear of loses, incorrect position sizing etc. Look at what you are doing and why it is not working. We now need to break that pattern of behavior and install a new pattern. How do we do that?

No Comments by admin on August 3, 2010
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Pros and Cons of Fundamental Analysis

There are two groups of traders: fundamentalists and technicians. Fundamentalists are traders who use fundamental analysis to predict price action, and technicians are traders who use technical analysis to predict price action. Of course a lot of traders use both types of analysis.

Lets talk today about fundamental analysis, which is based on economic factors.

Fundamentalists assume that the supply and demand for currencies is a result of economic processes that can be observed. So, they observe economic, social, and political forces that drive supply and demand. They believe that by observing all kinds of indicators they can predict price actions.

Because currency prices are a reflection of the balance between supply and demand for currencies, by analyzing different data, such as interest rates, balance of trade, foreign investment, GDP and many others, traders can predict price actions. The problem is that there is huge amount of data to analyze. Fundamentalists can study any criteria except price action. Different fundamental analysts look at different economic indicators, but the most important are economic growth rates, inflation, unemployment and interest rates. Especially data that is related to interest rates and international trade is analyzed very closely.

Fundamentalists know when different economic indicators will be released. They usually have calendars where they note the date and time when different important statistics will be made public.

By learning and observing different fundamentals of the markets we can increase our knowledge and understanding of the global market. By doing fundamental analysis we can predict economic conditions very well. We can also have a clear picture of general health of the economy. We will know what is going on. Those are the reasons why we should not completely ignore fundamental analysis.

But there are some problems with fundamental analysis. Fundamental analysis usually does not give us specific entry and exit points, so the trades can be pretty risky. It is very difficult to find a method of translating all of the different information into specific entry and exit points for a particular trading strategy. There is so much information that it is easy to be confused.

That is why many traders use some fundamental analysis to understand unexpected movements of the prices and to know the forces which move them, but they use technical analysis to decide when to enter and exit the trades.

To learn more about currency trading go to: http:www.currencytradingmethod.com

No Comments by admin on July 27, 2010
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Paper Trading And The Transition To Real Money Trading

Paper trading is widely discussed regarding its merits, and whether it is of value to a trader as they try to make the transition to real money trader. One viewpoint is that since paper trading is not real, the profits are meaningless, and are no indication of real money profitability. An opposite viewpoint would state that paper trading is an important step in the traders learning progression, and regardless of whether it is real, if the trader cannot properly paper trade, then they will not be able to real money trade.

I began trading in early 1995, with the intentions of becoming an options trader; my first trading education was through an oex options teaching service. Besides options training, the service included tape reading, trade management AND sp500 index futures trading also included in the service was the prevalent attitude that paper trading was for sissies.

So I was a new trader, trying to learn and understand completely new concepts and ideas – what was called a trading method AND I was practicing with real money because paper trading was for sissies. What did I accomplish, besides a big draw down in my account? I quickly introduced to trading psychology and the related implications something else I also knew nothing about. Losing money and a trading psychology wreck, both from the losses and thoughts like I was too stupid to ever learn how to trade, became a combination which took me out of futures trading, and then unfortunately carried over into my options trading which I had previously been doing well with. I just couldnt take it any more I had to somehow start all over, or just quit for good.

Paper Trading Viewpoints

Consider: simulator fill prices are not real and wont be attainable with real money. Even if this is correct, is it really an issue unless the trader intends to be a scalper, trading for very small profits, and thus each tick is critical? Granted, but shouldnt a beginning trader be very selective, focusing on learning their method and the best setups that method provides? This would be my viewpoint, and in this capacity paper trading fill prices are not an issue.

Consider: the trades are being done with no risk. No, there isnt any financial risk in paper trading, but I actually havent met nearly as many profitable paper traders as one might expect. Why would this be the case if being able to trade without risk was such an easy thing to do? As well, what about self-esteem risk, and an attitude like – how can I be so bad that I cant even paper trade? The risk feelings like these are probably greater than that of financial risk, and if they are going to surface, you would want to encounter them before trading real money. As well, even if the issue was only one of financial risk wouldnt you want to begin with the confidence of knowing that you were paper trading profitable? It would be hard to imagine a losing paper trading being able to profitably trade real money.

Consider: there is no emotion involved with paper trading. I was in our chat room watching a paper trader post their trades in order for me to give them feedback, and I noticed that one of their specific plan setups wasnt done. When I asked why, the trader told me that they were ahead for the day and didnt want to risk those profits. But the profits arent real how can you not take a base method setup when paper trading isnt that the point? Would you be in agreement, that if paper trading profits could be viewed in this fashion, that it has the ability to become very real and thus emotional to the trader? I would suggest that this is related to paper trading really not being so easy, and as mentioned above, self-esteem risk can be very emotional.

Besides examples like this, emotions can be added to the paper trading process. Throw away your simulator, and then go into a chat room and post all of your trades no youknowwhating around where you wait to see if the trade was profitable before you post it, like a number of traders that I have seen. Whats the point, and when you consider the underlying implications of needing to do this the issue certainly isnt about whether paper trading is of value or not, but certainly best to find out before trading real money. You must post immediately and without lag, giving your direction and entry price, along with subsequent posts of any partial profits, and of course your exit, which ultimately is the determinant of whether the trade was profitable. There is no need to make any comments, or answer any questions regarding your trades simply post the particulars as fast and real time as possible AND see if you feel any emotions doing this in front of the rest of the room while you go through a series of losses. Do you want to add even more emotions? Go through the same posting process, but do so where the rest of the room actually knows the method that you are trading, and what the trades should be. You will quickly find out just how emotional paper trading can be actually a very valuable exercise for the paper trader to do.

Paper Trading And Making It Further Beneficial

I have two predominant problems with paper trading, but this is with the traders approach, and not with paper trading by definition: (1) the trader does things paper trading that they would-could not do with real money (2) the trader views paper trading profitability, instead of paper trading proficiency, as the guideline of whether they are ready to begin trading real money.

I have seen too many paper traders, continuously and knowingly, over trade non-plan trades, with trading size that is greater than they could afford the margin for in a real account let alone accept the risk of loss, while also holding trades for risk amounts that they would not accept with real money. Viewing paper trading as a step in the learning progression and transition to real money trading, it is critical that the paper trader only trades exactly what, and how they would trade with real money. Dont allow yourself to turn paper trading into a game, supposedly because there is no risk the risk of making bad habits that you cant correct is tremendous, and will circumvent any attempt to trade real money. This is the time to learn YOUR basic trading setups, and make necessary adjustments to them and your entry-exit timing, in order to then make money trading them this is NOT the time to turn your simulator into a pinball machine flipping at any ball that comes near you.

There is a problem with focusing on trading profitability -vs- trading proficiency. To begin with, profitability places the focus on money instead of on plan. And what is profitability if you take 10 trades and make 75 are you profitable? Technically, if you are net ahead you are profitable, but what if those same 10 trades had a potential of 1,500, and you only made 75 are you really profitable? This is what I am referring to when I think of trading proficiency. Instead of focusing on the common metrics, such as win:loss or win size:loss size ratios, I am most concerned with the win size:potential win size ratio, and want to maximize this percentage to the extent that is possible. For instance, when a trader asks about adding trading size, taking the attitude that if they can make 100 trading 3 contracts, then they can make 1,000 by trading 30 contracts, the first thing I ask them is what is their proficiency ratio why increase contract size and the corresponding trading risk, if you should be able to make more money from smaller size? This is especially important for the paper trader, where they should not regard simple profitability as an indication of readiness to trade real money, but consider proficiency for instance, begin trading real money when you are 60-70 percent proficient with your paper trades.

So What Is Your Viewpoint Regarding Paper Trading?

I never thought that I would ever make a dime trading, let alone be able to trade for a living or become involved with trying to teach others to trade was this simply a function of starting over and paper trading? Granted that is too simplistic, however, I do know that it would have certainly changed the beginnings that I had, while very much shortening my learning curve, and reducing a lot of pain.

Clearly, I am on the side that believes that paper trading is not only beneficial, but that paper trading is also necessary however the value received will be dependant upon the traders approach and attitude. Needless to say, paper trading as described is something that I have always strongly recommended.

No Comments by admin on July 20, 2010
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New Instrument for Futures and Options Traders

Oil dominated volume on HedgeStreet last week as crude prices dropped 5.01% to close at 59.76. Investors doubt an OPEC production cut. Wholesale gas and currencies were active too. The pound was up 0.68% against the euro, closing at 1.2595, and up 0.75% against the yen, closing at 119.01. The yens weakness continues to surprise, especially given the end of the easy money policy by the Bank of Japan earlier this year. Stocks rallied to record levels. The Dow closed at 11850.21. Bonds sold off sharply on Friday with the 10-year yield up 12bp to 4.70%. Gold plummeted 4.38% to close at 572.40. All these changes are good news for the U.S. economy. Energy is getting cheaper which offsets housing weakness and boosts corporate earnings. Lower gold prices may augur tamer inflation next year. Investment is coming back into U.S. stocks, boosting the pound. Long term rates remain low. Freddie Mac releases 30-year mortgage composite on Thursday; HedgeStreet binaries stop trading on Wednesday. CHF and CAD now trade intra-day.

This week: Virgin threatens to cancel Airbus380 orders; earnings from GE, Pepsi, Costco and McDonalds; FCC votes on telecom mergers; and U.S. customs stops seizing cheaper Canadian drugs on the border even though imports remain illegal.

ECONOMIC RELEASES THIS WEEK

Tuesday: Wholesale inventories expected at +0.7%, with sales racing ahead this the inventory-to-sales ratio at low 1.15 months. Treasury budget expected at a 45-55bn surplus with receipts running 12% year-on-year, expenditures at 8%.
Wednesday: Crude inventories and FOMC minutes.
Thursday: Initial Claims expected at 311K. Trade balance expected at -66.5bn, off the July record of -68bn; a solid rebound in exports expected.

Friday: Retail sales expected at 0.2%, ex-auto at 0.0%, lower due to lower gas prices. Autos have a potential to surprise to the downside.

STARBUCKS 40,000 … PETSMARTS HOTELS … CHICAGO TO EAT MORE MEAT

Starbucks announced a goal of 40,000 coffee shops, up from 12,000 now. I am on three lattes a day; I don’t think I can handle five… PetSmart will operate in its stores 850 animal hotels catering to 110m U.S. households with pets (63%). For 36 a night, pups can enjoy TV, lambskin blankets and day care activities. Five billion people on the planet wish they had it as good as U.S. pets. That fence will sure stop immigration … The CME and Deutsche Brse talked about a potential tie-up. The Germans were impressed with Ferris Buhlers lederhosen and his rendition of Danke Schn, Auf Wiedersehen? The merger makes no sense, and God knows Chicago doesnt need more German food …

No Comments by admin on July 13, 2010
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Nature Of The Foreign Exchange Market

The Foreign Exchange Market is an over-the-counter (OTC) market, which means that there is no central exchange and clearing house where orders are matched. With different levels of access, currencies are traded in different market makers:

The Inter-bank Market – Large commercial banks trade with each other through the Electronic Brokerage System (EBS). Banks will make their quotes available in this market only to those banks with which they trade. This market is not directly accessible to retail traders.

The Online Market Maker – Retail traders can access the FX market through online market makers that trade primarily out of the US and the UK. These market makers typically have a relationship with several banks on EBS; the larger the trading volume of the market maker, the more relationships it likely has.

Market Hours

Forex is a market that trades actively as long as there are banks open in one of the major financial centers of the world. This is effectively from the beginning of Monday morning in Tokyo until the afternoon of Friday in New York. In terms of GMT, the trading week occurs from Sunday night until Friday night, or roughly 5 days, 24 hours per day.

Price Reporting Trading Volume

Unlike many other markets, there is no consolidated tape in Forex, and trading prices and volume are not reported. It is, indeed, possible for trades to occur simultaneously at different prices between different parties in the market. Good pricing through a market maker depends on that market maker being closely tied to the larger market. Pricing is usually relatively close between market makers, however, and the main difference between Forex and other markets is that there is no data on the volume that has been traded in any given time frame or at any given price. Open interest and even volume on currency futures can be used as a proxy, but they are by no means perfect.

No Comments by admin on July 6, 2010
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Market Risk Not To Be Ignored or Overlooked

The first of a two part article.
Fund managers, whether they be equity or bond traders, know all too well that returns are not simply a result of their asset selection prowess. Many external factors come into play. But what are the issues facing the professional money manager.

Commodity Trading Advisor, Genuine Trading Solutions of Toronto, find not all fund managers analyze their market risk. The company explains this is often due to a lack of education and a failure to understand the mitigating solutions for off-setting risk.

Genuine Trading Solutions President, Dwayne Strocen explains market risk as the unexpected financial loss following a market decline due to events out of your control. He goes on to explain that stock or bond market volatility or market reversals can be the result of global events happening in far flung corners of the globe. Top analysts and fund managers simply do not have the resources to crystal ball gaze and predict those events.

Examples of several major unexpected events that sent shock waves throughout the financial community have been:

-1982 Mexican Peso devaluation;
-1987 stock market crash knows as Black Monday;
-1989 USA Savings and Loan Crisis;
-1998 Russian Ruble devaluation;
-1998 125 billion collapse of Hedge Fund Long Term Capital Management;
-2006 collapse of Hedge Fund Amaranth with losses of 5.85 billion.

In 1994 Bank J.P. Morgan developed a risk metrics model known as Value-At-Risk or VaR. While VaR is considered the industry standard of risk measurement, it has its drawbacks. VaR can measure total pound value of a funds risk exposure within a certain level of confidence, usually 95% or 99%. What it cannot do, is predict when a triggering event will occur or the magnitude of the subsequent fallout. For some companys and funds, a steep decline or protracted recession can be devastating. Even forcing some un-hedged firms into bankruptcy. A triggering event can have a ripple effect forcing people out of work and economies into recession effectively putting more people out of work. No person and no economy is immune.

If you own a mutual fund, chances are your fund is un-hedged. Until recently, mutual fund legislation prevented mutual funds from hedging. Many jurisdictions have repealed this rule however mutual fund managers have been slow or decided to continue with business as usual. The reason is that most investors of mutual funds are unsophisticated and do not understand the hedging process and may re-deem their money from an investment strategy they do not understand.

Hedge funds on the other hand do not have these restraints. Investors are more sophisticated and are more open to the nature of hedge fund strategies. Some of which are not disclosed due to a fear of piracy by competing hedge fund managers.

Risk reduction solutions are not complicated but do require the services of a professional who understands the process. This is the role of Commodity Trading Advisor firms such as Genuine Trading Solutions, also known as a CTA. President, Dwayne Strocen states that while most CTAs are hedge fund managers, few specialize in risk management analytics. Our focus is on the analysis of solutions to reduce or eliminate market and or operational risk. No matter the role, all Commodity Trading Advisors are specialists in the derivatives market.

The first step is the value at risk calculation to determine a funds risk liability. A risk mitigation strategy known as a hedge is then implemented. After all, identification of ones risk is only beneficial if a solution to off-set that risk is put into place. Hedging requires the use of derivatives, either exchange traded or over-the-counter. They can take many forms. The most commonly used hedging instruments are index futures, interest rate futures, foreign exchange, exchange traded commodities such as Crude Oil, options and SWAPS.

A more detailed explanation of derivatives and hedging will be discussed in our next article. Now that weve identified an easy solution for your market risk worries, the implementation of the right strategy can be as easy as a call to a qualified and registered Commodity Trading Advisor.

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