So You Want to be a Trader…
Ask anyone who has been holding stocks for many years what the previous two years has done to their portfolios; I’m sure you will get some nasty comments. For many years everyone from professional financial advisors to our parents told us that the “buy and hold” strategy was the only real way to make money in the long term. Well I’m sure those who have been doing just that are not very happy now that nearly 50% of their portfolio has evaporated.In the span of 9 years the U.S. markets have gone through two very ugly bear markets, and the current bear market is not yet over. So the ‘buy and hold’ people have taking a real beating in the past decade.If you told someone 10 years ago that you were a ‘stock trader’ you might have received a strange look or perhaps a lecture about how dangerous trading stocks would be. “Listen young man… the only way to save for your retirement is to put your money into stocks and ignore it… you will have a lot of money when you retire”. How many times have we heard something like that during our lifetime?Today if you told someone that you traded stocks you might get an evil look because the media has painted traders as a group of people who have contributed to the massive stock market declines experienced during the current bear market. There are numerous types of traders; currency traders, hedge fund traders, and commodities traders (recall last summer the media blamed traders for the rapid rise in oil prices) just to name a few.But actually individual traders who trade from their own homes are nothing at all like those portrayed by the mainstream media. We are market participants who look to capitalize on short term price movements, take our gains, and then move on to another trade when one presents itself.The ‘buy and hold’ strategy has been proven to be flawed for guaranteeing that you will have enough money to retire with. The nature of the markets now requires an active involvement on your part if you are to preserve and grow your capital. And how do you actively manage your holdings? You become a stock trader.As a stock trader you are simply managing your holdings actively. It does not mean you are buying and selling every day (that is for highly experienced day traders). It means that you use various charting tools, your understanding of chart reading, and by keeping track of trends to know what and when to buy. And by keeping a close watch on your holdings you know when the time comes to sell them and take your profits.This is referred to as “swing trading”, or sometimes referred to as “position trading”. It means you initiate a position in a certain stock based on your analysis of the charts using healthy risk management, and then when the charts communicate that the time to sell is upon you then you exit the position. That is ‘swing trading’.Swing trading can mean you hold a stock for a few days or a few months, regardless of the time frame the goal is the same; to capitalize on short term price movements and then get out before there is a significant change in the trend of the stock. This is an active involvement in your portfolio that helps you prevent the types of losses experienced by those who ‘buy and hold’ and walk away hoping their money will be there when they need it. And ‘hope’ is not an investment strategy; if a person relies on hope then they are prone to fail.So now your interest is peaked, and you want to get started right away at becoming an active manager of your stock holdings, a trader. Your next step is to learn how to read charts, understanding the fundamentals of technical analysis, and get setup with the electronic broker of your choice. Now you think you have everything ready and you take your first plunge into trading. You have studied the charts, you keep an eye on the broad market trends, and then you identify the best risk to reward entry price and you ‘hit the button’, now you’re in! So you begin to watch your trade by keeping a close watch on the performance of your trade, you know where your exit price is based on your understanding of the chart, and you have a ‘stop loss’ set to protect your capital in case the stock goes against your analysis.Things are humming along great and you spot another chart that is providing you with a great entry price and you want to take a position in that stock now. But now you have to decide if you should sell your first trade in order to move your money into the new one… STOP.If you ever find yourself needing to sell your stock in order to buy another then you have to stop right away. A smart trader never puts all of his or her capital into one trade at once. Placing all of your trading capital into one trade puts you on a direct course to failure.As a trader you have to manage your trading capital by dividing it up into pieces. And only one piece can be allocated to any one trade. In this manner you reduce the risk to your overall capital. But wait you say, how can I make any decent money if I don’t go ‘all in’. You do it slowly, that’s how. If you want to be a successful trader with growing funds that enables you to trade another day, then you must absolutely practice good trading capital management.For example, let’s say you have $20,000 set aside to begin your trading career with. You put all $20,000 into one trade and unfortunately the trade does not work as you expected and you end up taking a 4% loss on the trade. Now you are left with an $800 hole in your account. But, had you divided up your trading capital into 10 pieces now that same trade would result in a loss of only $80 because you only had $2,000 on the trade.But you say this will take forever for me to make any money. You say that I want it faster. If you become impatient then you will fall into the trap of letting greed dictate your trading system, and once you cross the line to greed then your trading plan will be prone to fail. Patience and self discipline are very important in trading; you must keep reminding yourself of that.Getting back to your statement that ‘it will take forever’ to make any money this way. It may appear to be slow at first but following healthy capital management techniques ensures you are able to stay in the game. Remember, your gains may be small at first but for every profitable trade you add that money back into your capital pool of funds. So your next trade instead of being $2,000 now you might be able to put $2,500 into each trade. It is only a matter of time before your portfolio begins to increase rapidly, so long as you always stick to your trading rules, your capital management techniques, and your discipline.As you expand your trading capital over time you can increase the number of slices you make in your trading capital pie. But, I never recommend anyone just starting out to try and keep track of more than 10 trades at any one time. For me I have made good money over the years using the 10% rule, occasionally I will go upwards to 20 trades at one time, but I always come back to my average of 10.Also keep in mind that you do not have to have all 10 slices of your trading capital in the market all the time. If you only have 3 or 4 trades that is fine, remember that the smart trader waits for the best trades to come to him or her, never go chasing trades for the sake of just being ‘in the market’.Trading can be a very rewarding endeavor, it can be fun, and it can also be dangerous if you don’t practice proper trading disciplines. And one of the most important disciplines is to manage your trading capital properly.There are two very important rules that traders must follow:1. Practice capital preservation2. Make moneyYou cannot perform rule #2 if you don’t learn how to do rule #1!Best ofluck,Charles Young
Wednesday, April 15, 2009
An Introduction to the Forex Market
Forex is an international system where you can buy and sell foreign currencies in wholesale quantities. It is generally acknowledged to be the largest market in terms of size, bigger than stocks and shares. There are people in the world who make money day in, day out, by using a Forex trading system.
Forex transactions take place 24 hours a day, except on weekends. The market itself is extremely liquid, which means that you can buy or sell on demand. The difference between the buying and selling price is known as the “spread”. Typically, the smaller your transaction size, the bigger the spread.
There is very little, if any, “insider information” in the Forex market. Exchange rates are influenced by a mixture of the flow of money, interest rates and inflation expectations.
Currencies on the Forex market are traded against each other and each market is separate. For instance, the market for the Dollar against the Euro is separate from the market for the Yen against the Pound. But the market for, say, the Dollar against the Pound will reflect what is happening in the other markets that these two currencies are operating in.
Sounds complicated? Well, yes and no. At its most basic, the prices are a reflection of supply and demand for individual currencies. If a currency is in short supply and high demand, the price of that currency will go up. If investors lose faith in a currency, maybe because of inflation or some other factor, then the price of that currency will drop.
Economic factors and political conditions will influence the price at which a currency is traded. Future expectations can also play a part: for instance, if it is expected that a country will implement an interest rate change this is likely to be factored in to the currency price.
Forex transactions take place 24 hours a day, except on weekends. The market itself is extremely liquid, which means that you can buy or sell on demand. The difference between the buying and selling price is known as the “spread”. Typically, the smaller your transaction size, the bigger the spread.
There is very little, if any, “insider information” in the Forex market. Exchange rates are influenced by a mixture of the flow of money, interest rates and inflation expectations.
Currencies on the Forex market are traded against each other and each market is separate. For instance, the market for the Dollar against the Euro is separate from the market for the Yen against the Pound. But the market for, say, the Dollar against the Pound will reflect what is happening in the other markets that these two currencies are operating in.
Sounds complicated? Well, yes and no. At its most basic, the prices are a reflection of supply and demand for individual currencies. If a currency is in short supply and high demand, the price of that currency will go up. If investors lose faith in a currency, maybe because of inflation or some other factor, then the price of that currency will drop.
Economic factors and political conditions will influence the price at which a currency is traded. Future expectations can also play a part: for instance, if it is expected that a country will implement an interest rate change this is likely to be factored in to the currency price.
Forex Trading Styles
There are two main Forex trading styles that are used by a majority of Forex traders:
Technical Trading
Fundamental Trading
Each of these has its differences, so let’s look into them in some more detail.
Technical Forex trading is primarily based on one of two tools. Charting tools are, as the name suggests, charts of past currency movements. As with any chart, you can add in trend lines to help smooth out the minor fluctuations and allow you to see the bigger picture. Of course, charting is a lot more complicated than mere trend lines but there are software programs out there that will help with your chart analysis. Once you get deeper into charts, the other main technical Forex trading method is the use of Quantitative Trading Models. These use math to analyze the markets and identify opportunites for trading. Technical trading uses past data to endeavor to predict future movements in the market.
Fundamental Forex trading involves the analysis of things such as key economic data. This includes reports from governments, current event news coverage and any other data that the fundamental analyst considers useful. Fundamentalists consider that currency movements are mainly affected by economic and political conditions and events. Whilst central banks have been known to get involved in the currency markets, this has become less common in recent years. Fundamentalist Forex trading looks at interest rates, inflation figures, balance of trade figures, Gross Domestic Product, retail price indexes, producer price indexes amongst other factors.
You need to decide which of these two trading styles fits best with your own personal style as well as the amount of time you have available for analysis and any help that you can get from computer programs.
Technical Trading
Fundamental Trading
Each of these has its differences, so let’s look into them in some more detail.
Technical Forex trading is primarily based on one of two tools. Charting tools are, as the name suggests, charts of past currency movements. As with any chart, you can add in trend lines to help smooth out the minor fluctuations and allow you to see the bigger picture. Of course, charting is a lot more complicated than mere trend lines but there are software programs out there that will help with your chart analysis. Once you get deeper into charts, the other main technical Forex trading method is the use of Quantitative Trading Models. These use math to analyze the markets and identify opportunites for trading. Technical trading uses past data to endeavor to predict future movements in the market.
Fundamental Forex trading involves the analysis of things such as key economic data. This includes reports from governments, current event news coverage and any other data that the fundamental analyst considers useful. Fundamentalists consider that currency movements are mainly affected by economic and political conditions and events. Whilst central banks have been known to get involved in the currency markets, this has become less common in recent years. Fundamentalist Forex trading looks at interest rates, inflation figures, balance of trade figures, Gross Domestic Product, retail price indexes, producer price indexes amongst other factors.
You need to decide which of these two trading styles fits best with your own personal style as well as the amount of time you have available for analysis and any help that you can get from computer programs.
LEARN FOREX TRADING
How To Choose A Forex Trading System
Choosing a Forex trading system should be a careful decision for you. Choose the wrong system and you’ll be out of pocket for both the cost of the system and the cost of the trades that went wrong when you follow the trading system you’ve just bought.
Make sure that you check out the various reviews and forums that are available online.
If you’re relying on a review, make sure that it comes from a site that you can trust. If the design of the site looks cheap and unprofessional and is littered with flashing adverts then it’s worth pressing the Back button fast!
Forums are probably a better bet as you’ll get lots of different opinions from the regular people who post. The better forums may even have a section devoted to systems, with a number of user reviews of each one.
Take the time to seek out this kind of advice. It will cost you time but almost certainly save you money.
Choosing a Forex trading system should be a careful decision for you. Choose the wrong system and you’ll be out of pocket for both the cost of the system and the cost of the trades that went wrong when you follow the trading system you’ve just bought.
Make sure that you check out the various reviews and forums that are available online.
If you’re relying on a review, make sure that it comes from a site that you can trust. If the design of the site looks cheap and unprofessional and is littered with flashing adverts then it’s worth pressing the Back button fast!
Forums are probably a better bet as you’ll get lots of different opinions from the regular people who post. The better forums may even have a section devoted to systems, with a number of user reviews of each one.
Take the time to seek out this kind of advice. It will cost you time but almost certainly save you money.
Electronic Trading - Financial Information Exchange (FIX)
The financial industry (particularly ECNs, traditional exchanges, buy/sell-side firms, money managers, and hedge funds) have become increasingly reliant on and accepting of the FIX (Financial Information Exchange) Protocol in recent years. Today, foreign exchange trades of derivatives and cash products, fixed income transactions, and equities are all reliant on the FIX protocol.
With this growth in the use of the FIX protocol, there has been growth and development of related software products and solutions for electronic trading. These are often called FIX Engines. They help traders communicate electronically with one another and exchange information without compromising the security and integrity of the data.
Benefits using FIX
Enables STP (Straight Through Processing)
Reduces costs and increases speed by removing the need for phone calls and faxing. Traders can do what they are best at; trading.
A mature and proven technology that gives you peace of mind with your investment. No risks from buying immature and untested technology.
FIX scales easily, and as your organization grows, FIX will handle your increasing trade volumes.
FIX grows with your needs, and allows you to do electronic trading of additional asset classes such as futures, options, fixed income, foreign exchange and more.
Do business with a vast number of clients and even with clients that is not fully FIX compliant.
Supports secure and reliable connections that protects you from system downtime, and lost revenue.
FIX Expertise
OSD offers many offshore software development services that can help corporations implement and integrate the FIX protocol. OSD has the software expertise, technical abilities, and industry-specific knowledge about finance and business to customize solutions for your corporation’s particular needs. The FIX protocol does not require that most corporations have in-house FIX experts. Hence, it is to most companies’ advantage to use the flexibility of OSD’s outsourcing services, so that they can access the technical skills and expertise whenever they’re needed, but without having a full-time on-site presence.
FIX is an open protocol that fully complies with the standards of the financial industry and allows traders to electronically communicate in real time. International trading has clearly benefited from the creation, maintenance, and encouraged use of the FIX protocol.
To be successful with STP (straight-through processing) and electronic trading, transactions must be highly secure and build around the FIX protocol. FIX protocol achieves this, and most of the major international firms that buy and sell in the electronic trading markets are already using FIX protocols and similar standards.
Why should my organization adopt FIX?
Here are just a few of the reasons that it would be wise for you to adopt electronic trading.
With electronic connectivity, you’ll have better access to liquidities, you can take advantage of the best IOIs almost instantly, and you can interact with ATS/ECN brokers at the same time.
You’ll have fewer failures in your trades, and you’ll be able to settle in less time. With fewer needs to intervene manually, you can find and correct errors earlier in the trading process, as well as get automatic matches for your trades.
You’ll have automated audit trails that are recorded electronically, orders that are quickly, easily, and accurate processed in the back end, less re-typing because FIX automatically confirms and transfers the data, and more timely information. All of this facilitates more efficient trades and better overall execution.
With fewer resources dedicated to retyping, quality control, and reporting, you’ll free up your staff resources, which you can then reallocate to more important tasks link analysis, critical thinking, managing exceptions, and decision-making.
A fully integrated OMS (order management system) will help you monitor all of the security trades in fixed income and equities, so that your disjoint processes and system will run smoothly.
With better computer intelligence, you’ll be able to make better decisions, finding bottlenecks whenever and wherever they occur, fully understanding your transaction costs and processes, and bale to analyze compliance and market data, as well as the order and execution of your trading flows.
A bit more technically, what is fix?
The FIX protocol that makes all of this possible is simply a string if ASCII characters that are sent back and forth between two traders. It consists of a session and application layer. Administrative messages ensure the delivery of messages and logging in and out, and are handled by the session layer. Messages at the business level, such as allocations, orders, reports of executions, and expressions of interest are processed by the application layer, and the messages are then sent by using the session layer.
FIX was made to facilitate communication between two systems running on the FIX protocol (point-to-point). FIX has the option of managing one system to represent more than one firm on a single FIX connection. Broadcast information can’t be managed by FIX at the present time.
Every message sent via FIX has three components. The first component, the header, includes information about the type of message, where it should be sent, and the message’s length. The second component, the body, consists of the message itself. The third and final component, the trailer, has a digital signature (optional) and the check sum, which is required for compliance. Each of these three components has four FIX fields: value, equal sign, tag, and delimiter (an ASCII character representing a value of 1).
The financial industry (particularly ECNs, traditional exchanges, buy/sell-side firms, money managers, and hedge funds) have become increasingly reliant on and accepting of the FIX (Financial Information Exchange) Protocol in recent years. Today, foreign exchange trades of derivatives and cash products, fixed income transactions, and equities are all reliant on the FIX protocol.
With this growth in the use of the FIX protocol, there has been growth and development of related software products and solutions for electronic trading. These are often called FIX Engines. They help traders communicate electronically with one another and exchange information without compromising the security and integrity of the data.
Benefits using FIX
Enables STP (Straight Through Processing)
Reduces costs and increases speed by removing the need for phone calls and faxing. Traders can do what they are best at; trading.
A mature and proven technology that gives you peace of mind with your investment. No risks from buying immature and untested technology.
FIX scales easily, and as your organization grows, FIX will handle your increasing trade volumes.
FIX grows with your needs, and allows you to do electronic trading of additional asset classes such as futures, options, fixed income, foreign exchange and more.
Do business with a vast number of clients and even with clients that is not fully FIX compliant.
Supports secure and reliable connections that protects you from system downtime, and lost revenue.
FIX Expertise
OSD offers many offshore software development services that can help corporations implement and integrate the FIX protocol. OSD has the software expertise, technical abilities, and industry-specific knowledge about finance and business to customize solutions for your corporation’s particular needs. The FIX protocol does not require that most corporations have in-house FIX experts. Hence, it is to most companies’ advantage to use the flexibility of OSD’s outsourcing services, so that they can access the technical skills and expertise whenever they’re needed, but without having a full-time on-site presence.
FIX is an open protocol that fully complies with the standards of the financial industry and allows traders to electronically communicate in real time. International trading has clearly benefited from the creation, maintenance, and encouraged use of the FIX protocol.
To be successful with STP (straight-through processing) and electronic trading, transactions must be highly secure and build around the FIX protocol. FIX protocol achieves this, and most of the major international firms that buy and sell in the electronic trading markets are already using FIX protocols and similar standards.
Why should my organization adopt FIX?
Here are just a few of the reasons that it would be wise for you to adopt electronic trading.
With electronic connectivity, you’ll have better access to liquidities, you can take advantage of the best IOIs almost instantly, and you can interact with ATS/ECN brokers at the same time.
You’ll have fewer failures in your trades, and you’ll be able to settle in less time. With fewer needs to intervene manually, you can find and correct errors earlier in the trading process, as well as get automatic matches for your trades.
You’ll have automated audit trails that are recorded electronically, orders that are quickly, easily, and accurate processed in the back end, less re-typing because FIX automatically confirms and transfers the data, and more timely information. All of this facilitates more efficient trades and better overall execution.
With fewer resources dedicated to retyping, quality control, and reporting, you’ll free up your staff resources, which you can then reallocate to more important tasks link analysis, critical thinking, managing exceptions, and decision-making.
A fully integrated OMS (order management system) will help you monitor all of the security trades in fixed income and equities, so that your disjoint processes and system will run smoothly.
With better computer intelligence, you’ll be able to make better decisions, finding bottlenecks whenever and wherever they occur, fully understanding your transaction costs and processes, and bale to analyze compliance and market data, as well as the order and execution of your trading flows.
A bit more technically, what is fix?
The FIX protocol that makes all of this possible is simply a string if ASCII characters that are sent back and forth between two traders. It consists of a session and application layer. Administrative messages ensure the delivery of messages and logging in and out, and are handled by the session layer. Messages at the business level, such as allocations, orders, reports of executions, and expressions of interest are processed by the application layer, and the messages are then sent by using the session layer.
FIX was made to facilitate communication between two systems running on the FIX protocol (point-to-point). FIX has the option of managing one system to represent more than one firm on a single FIX connection. Broadcast information can’t be managed by FIX at the present time.
Every message sent via FIX has three components. The first component, the header, includes information about the type of message, where it should be sent, and the message’s length. The second component, the body, consists of the message itself. The third and final component, the trailer, has a digital signature (optional) and the check sum, which is required for compliance. Each of these three components has four FIX fields: value, equal sign, tag, and delimiter (an ASCII character representing a value of 1).
Automated trading system in an electronic trading exchange
An electronic exchange system network includes a trader site having an automated trading system capable of submitting orders and/or quotes to an exchange site. The automated trading system determines whether an order or quote should be submitted based on, for example, the current market price of an option and theoretical buy and sell prices. The theoretical buy and sell prices are derived from, among other things, the current market price of the security underlying the option. The theoretical buy and sell prices are calculated when underlying factors that contribute to the theoretical prices change. Computation times of the theoretical prices may be reduced by using precalculated values and/or using interpolation and extrapolation. Other techniques may be used in addition or in the alternative to speed automatic decision-making. In addition, a system of checks may be conducted to ensure accurate and safe automated trading. The automated trading system may be capable of automatically submitting orders in connection with the underlying security in order to hedge part of the delta risk associated with the automated option trades.
TransMarket May Use CEP to Create Quick Custom Algos
TransMarket May Use CEP to Create Quick Custom AlgosComplex event processing enables new trading strategies to be developed, tested and delivered in a week.By Penny Crosman
-->#C*H(1 27, 2008
Related Feature: Wall Street Firms Using CEP to Measure and Manage Risk
This article was revised after the print edition went to press.
Miles Kumaresan, head of quantitative trading at proprietary trading firm TransMarket Group, is a proponent of complex event processing technology. Having tapped CEP for algorithmic trading at his previous firm, a large European investment bank, Kumaresan says he may be using it again at his new firm. At the European Investment Bank, Kumaresan's group had developed its algorithmic trading program from scratch for the equities and futures markets using Kx's CEP software. "One of the key things we do all the time in algo execution is estimating a whole range of probabilities for various market events," Kumaresan says. "If you were to extract large amount of data and then perform calculations using a conventional language it would be sub-optimal. So we wrote all our analytics in native q [Kx's proprietary language]."
"Q was critical to developing new trading algorithms," he adds. "It's a simple and elegant language; it closely reflects the low-level representations of the data, so powerful operations can be performed efficiently on large amount of data without explicit iterations." Kumaresan explains, noting that he spent a month learning q, "Not because I was going to actually code the analytics, but more to understand the power of the product and enable me to make informed decisions."
The group first built an execution harness, mostly in Kx but with some parts in Java, where Java handled the connectivity. This took several months. "But this was a complete execution order environement," Kumaresan says. "With the harness in place new algorithms were developed quickly. "
Although TransMarket group has been around for 28 years the quantitative trading unit was formed just seven months ago. Kumaresan says that he'll consider buying the Kx software again for this unit.
-->#C*H(1 27, 2008
Related Feature: Wall Street Firms Using CEP to Measure and Manage Risk
This article was revised after the print edition went to press.
Miles Kumaresan, head of quantitative trading at proprietary trading firm TransMarket Group, is a proponent of complex event processing technology. Having tapped CEP for algorithmic trading at his previous firm, a large European investment bank, Kumaresan says he may be using it again at his new firm. At the European Investment Bank, Kumaresan's group had developed its algorithmic trading program from scratch for the equities and futures markets using Kx's CEP software. "One of the key things we do all the time in algo execution is estimating a whole range of probabilities for various market events," Kumaresan says. "If you were to extract large amount of data and then perform calculations using a conventional language it would be sub-optimal. So we wrote all our analytics in native q [Kx's proprietary language]."
"Q was critical to developing new trading algorithms," he adds. "It's a simple and elegant language; it closely reflects the low-level representations of the data, so powerful operations can be performed efficiently on large amount of data without explicit iterations." Kumaresan explains, noting that he spent a month learning q, "Not because I was going to actually code the analytics, but more to understand the power of the product and enable me to make informed decisions."
The group first built an execution harness, mostly in Kx but with some parts in Java, where Java handled the connectivity. This took several months. "But this was a complete execution order environement," Kumaresan says. "With the harness in place new algorithms were developed quickly. "
Although TransMarket group has been around for 28 years the quantitative trading unit was formed just seven months ago. Kumaresan says that he'll consider buying the Kx software again for this unit.
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