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Slippery Slope: What is Slippage? With the unfortunate demise of the prop firm My Forex Funds, the issue of slippage has recently become a hot topic. This educational post takes a look at the slippery issue of slippage, beginning with the basics all the way to addressing popular theories and speculations about slippage. Something to remember is that every trader, regardless of expertise, will encounter slippage during their trading activity. What exactly is slippage? Slippage is the term used in the forex market to describe the difference between the requested price at which you expect to fill your order and the actual price that you end up paying. Slippage most often occurs during periods of high market volatility, when market conditions are very thin due to low volumes traded or when the market gaps; all of these scenarios then lead to market conditions being such that orders cannot be executed at the price quoted. Therefore, when this happens, your order will be filled at the next available price, which may be either higher or lower than you had anticipated. Understanding how forex slippage occurs can enable a trader to minimise negative slippage while potentially maximising positive slippage. Market Gap High Market Volatility Slippage is part of trading and cannot be avoided. This is due to forex market volatility and execution speeds. When a market experiences high volatility, it generally means there’s low liquidity. The reason for this is that during this time, market prices fluctuate very quickly. Where this affects forex traders is when there’s not enough FX liquidity to fill an order at the requested price. When this happens, the liquidity provider will complete the trade at the next best available price. Another cause of slippage is execution speed. This is how fast your Electronic Communication Network (ECN) can complete a trade at your requested price. With market prices changing in fractions of a second, having faster execution times can make a difference, especially on large trades. What is the difference between positive slippage, no slippage, and negative slippage? When slippage occurs, it is usually negative, meaning you paid more for the asset than you wanted to, though at some times it can also be positive. When slippage is positive, it means you paid less for the trade than you expected and therefore got a better price. To get a better understanding of this, let's see the image below. How do you calculate slippage? Let's assume that the price of the EUR/USD is 1.05000. After doing your research and analysing the market, you speculate that it’s on an upward trend and long a one-standard lot trade at the current price of EUR/USD 1.05100, expecting to execute at the same price of 1.05100. The market follows the trend; however, it goes past your execution price and up to 1.05105 very quickly—quicker than a second. Because your expected price of 1.05100 is not available in the market, you’re offered the next best available price. For the sake of the example, let's assume that the best next price is 1.05105. In this case, you would experience negative slippage (positive for the broker), as you got in at a worse price than you wanted: 1.05100 – 1.05105 = -0.00005, or -0.5 pips. On the other hand, let’s say your trade was executed at 1.05095. You would then experience positive slippage (negative for the broker), as you got in at a cheaper price than you wanted: 1.05100 – 1.05095 = +0.00005, or +0.5 pips. Negative Slippage Example Is slippage a technical glitch in a broker’s software, or is it built and designed to bring in extra revenue? There are popular beliefs that slippage is a software glitch or that it is made just to give brokers and liquidity providers extra revenue. This is not true, as slippage is something that is unavoidable. There are times when the markets are extremely volatile and price movements are too quick due to a lack of liquidity. Slippage does bring in extra revenue for brokers and liquidity providers, but you need to remember that slippage goes both ways; while brokers and liquidity providers will generate profits from negative slippage, they will also generate losses from positive slippage. Though there are times when brokers (very rare) use price manipulation on their clients to generate additional revenue (more on this later).  How can a trader avoid or minimise slippage? While slippage is impossible to fully avoid, there are a few things you can do to minimise the impact of slippage and protect yourself as much as possible in the markets, including using stop-loss orders to limit their exposure and placing orders during less volatile times. Stop-loss orders are instructions to your broker to immediately exit a trade if it reaches a certain price. By using stop-loss orders, you can limit your losses if the market moves against you. High liquid markets such as Forex enable you to take advantage of market swings to enter and exit trades rapidly, limiting your exposure to the market but also increasing the risk that your stop-loss order may not be executed at the price you expect if the market moves quickly against you. Additionally, there are some brokers that offer traders guaranteed stop-loss orders called 'Guaranteed Stop Orders' (GSOs), meaning that the stop-loss price is guaranteed, which makes the trader unaffected by slippage when getting stopped out. Another way to reduce the impact of slippage is to trade during less volatile times. The forex market is open 24 hours a day, but not all hours are equal. There are times when there are hardly any trading volumes being generated, and you want to avoid trading during this time at all costs as trading spreads will be wider and you will most likely get slipped due to the lack of liquidity in the markets. The best times to trade are usually when the market is most active, which is typically during specific trading sessions such as the Eurpoean or US trading sessions. To summarise, to minimise slippage, you should: What is slippage tolerance, and how should you factor that into account with regard to your stop-loss and risk-to-reward calculations? Some brokers will enable a feature called the 'Market Order Deviation Range' where the trader can adjust the slippage's maximum deviation. This is done so a trader can estimate his or her tolerance to slippage. For example, if you set the maximum deviation to 3 pips, the order will be filled as long as the slippage equals 3 or below. If the price slips beyond the set maximum, the order won't be filled. This is an effective way of managing your risk-to-reward calculations because if you have a strict risk-to-reward set-up and do not have much leeway to give in terms of slippage, you can adjust the slippage tolerance setting so that if the trade comes with more slippage than your trade can afford, it will not enter you in the trade. How can a trader tell if his or her broker is being predatory with regard to slippage? Although rare and illegal now that regulators are prevalent in the industry, in some cases, brokers may manipulate prices to cause slippage. This usually happens during times of high volatility when there are a lot of market orders. By creating a large amount of slippage, brokers can increase their profits. Forex brokers that are not regulated by the major governing bodies are more likely to do this. For a broker to gain the regulation of a major governing body, they must adhere to very strict guidelines set out by the regulating authority. Firstly, if you suspect that your broker is manipulating prices, you should immediately look for another broker. If you have evidence of your broker manipulating prices, you should report that broker to the financial authorities. A good way to gauge if a broker is potentially manipulating prices is by requesting a trade journal from them. A good and reputable broker usually offers trade journals to their clients. Trade journals show execution times of trades and will have a comment on the journal if the trade was slipped. On a standard trade journal, slippage comments should not appear there often (unless you are trading at times when the market is volatile, thin, or trading outside liquid hours). A broker that manipulates prices to their clients is usually hesitant to offer trade journals to their clients because it shows this on the trade journals. So if your broker is not willing to share the trade journals with you, you might want to think twice about continuing to trade with them. To add to that, you can also check if your broker is either a market maker or directly connected to the interbank market, as they will handle slippage differently. To recap, slippage is a part of forex, and no trader is immune to getting it. It occurs most often during periods of high market volatility. Though slippage is almost impossible to avoid and can impact your profit and losses, there are a few things you can do to minimise slippage and its impact. This includes the use of limit and stop-loss orders, placing orders outside of volatile market times, avoiding major economic and news events, and only using brokers that are regulated by the major governing bodies. BluetonaFX
Education
by BluetonaFX
14
The Power of Risk ManagementRisk management is one of the key topics in forex trading that is not emphasised enough. Instead, there is too much emphasis on solely focusing on being on the right side of the market to consistently make money while ignoring proper risk management in the process. This post will completely debunk this, so after you have finished reading, you will hopefully have a completely new mindset on how to actually succeed long-term in forex. Absolute Uncertainty The forex market is a place where the majority of people struggle to find consistency. This is due to the nature of the market, where uncertainty is constant. What I mean by this is that the market is completely irrational and neutral; when you want to buy, there is somebody else on the other side that wants to sell, and vice versa. The market is filled with millions of other participants with their own goals, beliefs, and motivations; therefore, the market will go where it wants to go. Unfortunately, not enough people really grasp what this means and are obsessed with how many trades they can get right to make money. The main purpose of risk management in forex is to reduce your trading risk and grow your trading capital safely. It is great to have good skills in determining the market's direction, but more importantly, you need to have good risk management skills too. Two different traders, Same Trades, Two different outcomes Let's put this into practice. Let us assume that two different traders both took the exact same ten trades and both won five of the ten trades taken. Let's call these traders 'Trader A' and 'Trader B. Trader A is just obsessed with being right in the market. The trader is quite skilled in understanding the market, but the trader is just focused on how many trades are closed at profit. Trader A risks about 2% per trade; however, trades are usually cut short, and thus ends up taking profit at about half of the initial risk (2% risk per trade and 0.5:1 risk-reward). Trader B understands that the market is completely irrational, where anything can happen at any time, and to trade the market succesfully, must treat trading like a business, causing the trader to have strict risk management rules (2% risk per trade and 2:1 risk-reward) that are stuck to at all times. As you can see from the above image, Trader A ended up with a 5% decrease to the account and Trader B ended up with a 9.98% increase to the account after both traders taking the same ten trades, why did this happen? The answer is simple Trader A cut the profits short and ran the losses whereas Trader B ran the profits and cut the losses. It does not matter if you are right or wrong in trading what matters is how much you make from your right trades and how much you give back to the market on your wrong trades. Forex Journey Ends Before Getting Started Due to many people not understanding the power of risk management, their journey in forex ends before it even gets started. To explain further, a lot of traders either do not calculate their risk before they trade the markets or they are aware of their risk but decide not to place high importance on it (a fatal mistake). This is one of the biggest killers of forex traders, and all it takes is one bad trade before the market takes all your hard-earned money and you are out. The market is an unforgivable place that will not care if you are blown out; it will continue to go on with or without you participating, and you must give it respect. The higher your risk, the lower your long-term survivability probabilities are. Remember, if you don't have funds to trade, you can't participate! It is as simple as that, so you must treat trading as a business and not as a casual hobby if you aim to consistently make money over the long term. Let's see how your survivability chance decreases the more you risk. Position Sizing Now that you understand how crucial it is not to risk too much of your account in a trade but do not know exactly how to calculate how much you should be risking per trade, how do we calculate this? In forex, a pip movement on a one-lot contract is approximately $10, so if you enter a trade on a forex pair and it moves 20 pips against you, you will be approximately $200 down. It is very important to understand this because if you do not, you will not know how much you should be risking per trade, and you may end up overexposed in the market with a high chance of blowing your account. For example, if you have a $10,000 account balance and want to risk 2% ($200) of your account per trade on a one-lot contract, that is 20 pips; therefore, your stop loss should be around 20 pips. However, on the same account balance, if your stop loss is 100 pips, let's say, and you are not aware of pip calculations, you are potentially risking 10% of your account in that trade alone, which is extremely dangerous, and as seen in the above example, it only takes 10 trades in a row to blow your account on 10% risk per trade. But what if your strategy requires a 100-pip stop loss, as that is where your stop loss level is, and you really want to enter the trade? You just have to trade a smaller position size! 2% of $10,000 is $200, and we know that 1 pip is equal to around $10, so $200 is equal to 20 pips. Now how do we trade this with good risk management if we want a 100-pip stop? Let's see the image below: So as you can see in the above image, if you are on a 2% rule, which is good risk management, all you need to do is reduce the position size if your strategy requires a larger stop. There is nothing stopping you from entering the position. In the forex market, safety must come first at all times. To add, it is not worth having a smaller stop loss just to be able to trade a bigger position size, as this can be very detrimental to your trading due to the fact that in forex, there is a lot of market noise due to so many participants, and it is very easy to get whipsawed on a small stop loss and get taken out of your position. The next time you are about to enter a position, ask yourself if it would be better to have a larger stop to protect yourself from getting squeezed out of the position. If so, just reduce your position size accordingly and have a larger stop. Always remember that the market does not limit you from trading your opportunities if you have a larger stop but do not want to risk a large percent of your account in the trade; you just have to trade smaller. Plan, Analyse, Assess, Review 1. Plan Before you take a trade, always have a plan for your risk management. The 2% risk per trade rule is always a safe rule, and the best traders tend to use this rule. Always know what your account balance is, what your risk amount should be, and exactly where your stop-loss needs to be. Always remember that if your stop is too tight, try trading a lower position size to give you more leeway. 2. Analyse When you get a trade setup, before you pull the trigger and enter the trade, ask yourself, "Is there enough reward in this trade setup that it is worth entering the trade?" If the answer is no, do not take the trade! Remember, trading is not just about being right or wrong; it is also about how much you take or give to the market when you are right or wrong. The reward must always be worth the risk, and you must constantly analyse this before entering the market. 3. Assess Make sure you often assess your current risk management, especially when you are in a trading position. For example, if your position is about to reach your take-profit target but the market looks like it wants to keep going past your target, instead of coming out of the position completely, why don't you instead take some of the position out and keep the rest of the position in? You can trail your profit to your original target and potentially make extra profits this way with nothing to lose. The same goes on the other side: if you enter a trade and at some point are no longer comfortable with the position, do not be scared to cut the position short and exit the position. Always listen to your gut instinct, as it may be telling you something for a reason. 4. Review Always review your risk management. Take a look at your past trades and try to learn from them. Was your stop-loss too tight in a lot of your trades? Was your stop not tight enough in a lot of your trades? Are you cutting yourself short, and could you have a higher risk-to-reward ratio in a lot of your trades? There is always room for improvement, and the only way to improve your risk management is to review your previous trading history to see what possible adjustments you could make to your risk management. Remember, you should treat trading as a business if you want to succeed long-term, and most, if not all, successful businesses constantly review their risk management. The power of risk management is absolute. If this post has not done enough to convince you of this, always remember that you are always one bad trade away from being put out of business. The majority of beginner traders blow their accounts in the first three months of trading; this is not due to them not understanding the markets but due to poor risk management and not treating trading as a business. Always remember to maximise your profits and cut your losses. All trading involves risk, and there is no 'holy grail' strategy that can eliminate risk entirely. However, by managing your risks effectively, you can reduce the impact of risk on your trading and increase your chances of long-term success. BluetonaFX
Education
by BluetonaFX
4
80/20 - The Pareto Principle Created by an economist in the 19th century, the Pareto Principle has found its way into all different areas of life and is still used to this day. The basic idea is that for many systems, 80% of the effects come from 20% of the causes. In other words, a small number of factors have a large impact on the results. This post will go into further depth on this principle and will also explain how this concept can be applied to trading in a number of ways, making for more efficient and effective use of your productivity, time, and energy. What is the Pareto Principle? This was developed during the 19th century by an Italian economist named Vilfredo Pareto. He noted during the course of his studies that 80% of the land in Italy belonged to about 20% of the population. The 80/20 ratio even became prevalent in his life, and he also noticed that around 20% of the pea pods in his garden yielded around 80% of the peas. This has been found to be true in key aspects of life and is even famously known as the '80/20 rule'. Other examples of this are that 80% of a company's sales are produced by 20% of their products or services, and 80% of news coverage is based on 20% of world events, etc. So how can this idea be applied in the trading world? 80/20: The Pareto Principle In Trading In trading, the Pareto Principle can be applied in several ways. There is a general understanding that in the markets, on average, around 80% of our profits come from around 20% of trades. Therefore, it is important to focus on making a small number of high-quality trades rather than a large number of low-quality trades. By doing this, you can achieve better results with less effort. It is very easy to get caught up in the day-to-day grind of monitoring the markets, placing trades, and managing positions. However, this can quickly consume more time than needed if you let it. Using an effective trading method that is also very easy to understand and implement will give you the mental clarity and time to focus 80% on money management and discipline (we will get to these points later) while only needing about 20% of your mental energy for analysing the markets and finding trades. A lot of traders never even get to this point because they are constantly trying to figure out how to make sense of their trading system due to their current system being unnecessarily complicated. Time Management The 80/20 rule can also be applied to time management in trading. One way to do this as a trader is to spend the most time optimising the 20% of activities that generate 80% of your results. For example, if you spend a lot of time analysing data and know that it has a big impact on your results, you may want to focus on making sure that you spend enough time doing this activity. On the other hand, if you find that you spend a lot of time on activities that don’t have a big impact on your results, you may want to cut back on these activities and focus on the ones that do. To apply the 80/20 rule in this way, it can be helpful to track how you spend your time and the results that you achieve from each activity. This will allow you to identify which 20% of your activities are the most productive and focus your efforts on these activities. By optimising your time management processes, you can use your time more effectively and free up more time to focus on the most important aspects of your trading, which will ultimately achieve better results. A popular misconception, especially among beginner traders, is that trading more and having high activity in the markets is good, which is in fact the opposite. Having high activity in the markets is not only potentially costly due to the transaction costs you need to pay your broker or exchange provider, but high activity in the markets can also cause the trader to overtrade, which leads to the trader taking many trade setups to the extent that he or she loses their market edge. That's due to the trader doing less research on each position and getting clouded judgement as a result of too much screen time. While there is no exact number for how much time you should spend trading, the 80/20 rule can be a helpful guide. For example, if you want to cut back on your trading work-life balance, you may want to focus on only trading during the 20% of the day that is most active. This approach can help you effectively manage your time and focus your efforts on the most important part of the trading process. By only trading for a few hours each day, you can free up more time to focus on other aspects of your life. Less is More, More is Less Another way to apply the Pareto Principle to trading, for example, in Forex trading, is to focus on the 20% of currency pairs that generate 80% of the results. This means that you would only trade a few select currency pairs rather than trying to trade all of them. There are many forex pairs to choose from, and unfortunately, traders make the mistake of trying to trade too many pairs instead of choosing a handful of pairs at most to learn and really get familiar with those pairs as much as possible. Consistency in trading comes from consistent trial and error with the same few products over and over again, and this is very difficult to do if you decide to trade random pairs constantly. Another example of applying the 80/20 rule when choosing your assets is to focus on the 20% of assets that are most correlated with your trading strategy. For example, if you have a long-term trend-following strategy, you may want to focus on pairs that have a strong historical correlation with long-term trends. The Pareto Principle is helpful for many traders who want to improve their trading performance. There are many other ways to apply it to trading. The important thing is to find the trading method that works best for you and your own trading style. Here are some simple examples of how you can use the Pareto Rule in trading: Trending Markets Occur Roughly Only 20% of the Time Strong market trends tend to occur slightly more than 20% of the time, leaving the markets moving sideways nearly 80% of the time. If you are a trend trader, it is very important to know and understand this, as you will adjust your strategy and manage your risks to mitigate that 80%, capitalising on the 20% trend period where (hopefully) you can generate more profits than losses from fewer trades. Knowing and understanding this will also help you not force trades that aren't there. One of the main reasons why traders (especially trend traders) lose money is that they lose patience and trade looking for a big move to happen while the market is just consolidating sideways and not doing anything. 80% Losses 20% Wins That's right. What if I told you that you can be profitable by winning only 20% of your trades and going through times where you can experience at least five losing trades in a row? You are probably reading this, and when I say it is possible, you do not believe me (especially if you are new to trading), and I completely understand (don't worry, there will be proof of this). Another area where the 80/20 rule can be applied in trading is risk and money management. Unfortunately, not enough traders understand how important risk and money management are in trading and that you must have a strict and disciplined approach to them. Trading is not about just being right or wrong; it is about how much money you take from the market when you are right and how much money you give back to the market when you are wrong. As mentioned previously above, around 80% of our profits come from around 20% of trades, so when you really think about it, this should not sound so surprising to you. Still don't believe me? No worries! Let's see together that you can be right only 20% of the time and still make money. As you can see above, there was still a 4.83% increase in account balance after only two trades were won out of ten. The art of trading is to run your profits and cut your losses, hence why the 80/20 rule works if you use it to your advantage. 80% Psychology 20% Trading Method This is another example of the 80/20 principle. You should spend 80% of your time and energy on learning psychological control and capital management skills. For the remaining 20%, you can spend it on chart analysis and trading. If you trust and persevere with this, you will see significant changes in the way you trade. You will feel more comfortable, more confident, and safer, and ultimately see more consistency in your trading. Many traders, unfortunately, never realise this. The reason is that they go all in trying to find a 'holy grail' strategy that will help them earn riches quickly and easily. And if the current method does not help them earn money, they will find another method, and the never-ending circle just keeps repeating until the trader quits for good. The Pareto Principle is a powerful tool that can be used in many different areas of trading. Focus your energy and mind on the things that earn you money (the 20%, not the other 80%). It is great to work hard, but you must also work smart. What you need is a simple trading strategy and method. This is to eliminate the emotional effects as much as possible by not spending too much time in front of your screen. By applying the 80/20 rule to your trading skills, strategy, risk management, asset selection, and time management, you can drastically improve your trading performance and achieve better results. BluetonaFX
Education
by BluetonaFX
2
The Contrarian Trader - Going Against The Crowd Have you ever noticed that when you speak to other traders about the market, your view tends to be the opposite view a lot of the time? You think the market is going down when they think it is going up, and vice versa. Going against the crowd can be looked down upon by traders, as the majority of them will question your motives or reasoning and tell you that "the trend is your friend." However, it is possible to profit in the markets by trading against the crowd, as the markets rarely go up and down in a straight line. You might just have a contrarian style and way of thinking when it comes to trading the markets, which is perfectly fine as there is more than one way to be consistently profitable trading the markets. In this post, we will delve further into this trading style. Contrarian traders base their trading strategies on the underlying principle that the market tends to overreact at both extreme highs and lows (supply and demand). These traders see these extremes as opportunities to profit from sharp reversals that can occur when the market corrects from a recent overreaction. All markets are looking for areas of fair value; in other words, buyers and sellers are constantly vying for balance in the markets. If the price of a product has gone up too high (overbought), the demand for that product will come down, so as the demand comes down, the price comes down with it. On the other side, if the price of a product has gone down too low (oversold), the demand for that product will increase, so as the demand goes up, the price goes up with it. In both cases, the price will eventually go to an area that buyers and sellers are satisfied with (fair value), and after some time, the market will look to trend again, either to the upside or downside, and the cycle continues. A trader taking a contrarian approach will constantly look to determine when the market has reached a level that cannot be sustained with either more buying or more selling. This is why contrarian traders are usually seen as going against the crowd, as this style goes against the current market trend. Taking a contrarian view to trade the markets requires a very disciplined approach and precise analysis of the market to determine optimal entry and exit points for trades due to the trader trading against the current trend. Contrarians' analysis methods can come in the form of technical, fundamental, or market sentiment. Technical Contrarian Trading Technical contrarians typically specialise in going against current trends, not following them. Therefore, when used by a contrarian, their technical analysis tends to be employed to look for situations that are primed for a significant market reversal. These can be in the form of chart price action or technical indicators. Price action reversal trading Reversal traders strive to pinpoint the moments when the market will change direction; these are mostly known as 'market tops and bottoms'. These traders anticipate a reversal at these market extremes, as they tend to take the other side of the crowd's market view. Contrarian traders will often look for reversal patterns that tend to take place near market tops and bottoms; candlestick patterns such as 'morning/evening stars' and reversal chart patterns such as 'double tops/bottoms' are very popular price action confirmation signals for contrarian traders. A key benefit of these setups is that they provide great risk-to-reward opportunities for contrarians due to the fact that the trader can place their stop loss just above or below the market high or low to potentially earn multiple amounts of their risk if the trade does not get stopped out. Double Top Morning Star Indicators Contrarians might use oscillators that can help them identify overbought or oversold market situations that are due for a reversal. Oscillators operate by plotting the output of that specific indicator between two extreme values. These two extreme values are used by the trader to help predict the overbought and oversold points in the market. The Relative Strength Index (RSI) or the Stochastic Oscillator can both be used for this purpose. Moving averages and their crossovers, or a related technical indicator like the MACD, can also be used in this manner. These also provide traders with great risk-reward opportunities, as oscillators usually (but not all the time) provide overbought and oversold signals near market tops and bottoms. RSI and Stochastic Oscillator Fundamental Contrarian Trading A contrarian trader that uses fundamental data in their trade analysis might use the release of major economic data to enter or exit a position. This can be a country's central bank interest rate decision or a country's gross domestic product (GDP) reading as a contrarian indicator. An example of this would be that instead of entering a long position in a product after an interest rate hike, the contrarian might wait for the release of the data and then sell the product once it has reached a certain overbought level in response to the favourable news. They would do this in anticipation of the market buyers exiting their long positions to profit-take as the upside momentum starts to fade and the profit-taking activity sets in. The same goes with a negative data reading; instead of entering a short position with the crowd after the negative reading, a contrarian trader might wait for the release of the data and then enter a buy position once the product has reached a certain oversold level in response to the unfavourable news. They would do this in anticipation of the market sellers exiting their short positions to profit-take as the downside momentum starts to fade and the profit-taking activity sets in. US Dollar Index: US Pending Home Sales for June 2023 Market Sentiment: Contrarian Trading Contrarians use this to assess the overall mood or sentiment of market participants. This is particularly crucial to contrarian traders when it is overwhelmingly positive or negative, as these could indicate an impending market reversal. Famous contrarian trader and investor Warren Buffet has a saying: "Be fearful when others are greedy, and greedy when others are fearful." When you hear this quote, you can't help but question if he has a point, as on average, around 75–80% of traders are unprofitable. Monitoring the crowd’s mood or sentiment gives the contrarian the insight and resolve needed to determine an ideal entry point for initiating a trading position. The psychology behind the crowd’s position is also very important, since excessive optimism in a rising market or constant pessimism in a falling market are well-recognised signs of incoming market reversals that a contrarian trader looks for. Psychology plays a key role in all markets because supply and demand factors reflect the different opinions of participants in the market. In practice, applying the contrarian theory means looking for situations characterised by very one-sided or "crowded" market psychology. This allows smart money to call market reversals ahead of the actual countertrend market movement occurring, and contrarians typically set up their trading plans to reflect this understanding. Risks and Challenges of Contrarian Trading Contrarian trading carries significant risk. A market that continues trending in one direction longer than a contrarian trader anticipates, potentially leading to severe losses. Effective risk management is paramount in contrarian trading. Traders should use strict stop-loss orders to limit potential losses and take-profit orders to secure profits when the price moves in the desired direction. This makes accurately predicting market reversals quite challenging, and contrarians can get severely burned trying to pick tops and bottoms, especially in aggressive bull or bear market runs. While technical analysis tools can offer valuable insights, they are imperfect and should be used with other forms of analysis. Additionally, contrarian trading often requires a great deal of patience, as the market may take time to correct and profitable opportunities may not present themselves immediately. Bitcoin's Bull Market Run 2021 Contrarian trading may not be suitable for all traders. It requires a high level of expertise and very quick thinking under stressful conditions, along with the fortitude not to get influenced or pressured by other traders. A trader that is limited by these requirements and trades this way will have very inconsistent results that will leave the trader feeling guilty about losing money due to trading against the market and will most likely quit due to the frustration from these losses. Contrarian trading is a strategy that can be highly profitable if used correctly. However, it is important for traders to approach this strategy with caution and a clear understanding of its risks and limitations, and most importantly, to understand that the market must be respected; otherwise, it will humble you very quickly. Correctly identifying potential opportunities to take contrarian positions takes dedicated planning in setting entry and exit points and managing risk correctly. If all this is done consistently, traders can increase their chances of being profitable by trading this way. BluetonaFX  
Education
by BluetonaFX
4
Trade Discipline - Improving Your Entries How many times have you been stopped out of a great trading idea you noticed just because you missed your original entry and decided to enter at a worse price? This was most likely due to the fear of missing out (FOMO) and lack of discipline that got you into the trade. You were right on the market direction, but due to FOMO and your lack of discipline, the trade entry was bad, and you ended up being stopped out, only to then painfully watch the market go your way. Do not feel bad, as this has happened to the best of us, so this post will discuss methods on how to improve your entries and discipline to ensure that you do not get stopped out again because of a bad entry. Never chase missed entries. Let’s say the market is in a nice healthy trend, making a series of higher highs and higher lows. And when you overlay the 20-day moving average over it, you notice the market bounce off the moving average quite a few times. You then get a buy signal near the moving average, but unfortunately, you missed the entry and are just watching the market go up without making any money from it. Now, when you look at the chart, the market is very far away from the 20-day moving average. So even though the market is currently in an uptrend, ideally you don’t want to be buying now because, from looking at your analysis, the market tends to pull back to the 20-day moving average. If you impulsively buy when the price is very far away from the 20-day moving average, when the price is overstretched and the market has been overbought, there’s a high probability the market will reverse or pullback, and you will most likely get stopped out. We all miss entries and opportunities; it is completely normal to do so, and sometimes the market can give you a second chance to enter by coming back to your original level. If it does not and you completely miss the move, do not dwell on it; dust it off and move on. The markets are not going anywhere, and plenty more opportunities will come your way. You can see in the above image why it is a bad idea to chase missed entries. When the impulsive move has happened and you missed the initial move, leave the market alone at that current time. Either wait for a pullback to trade the continuation, or if your analysis is suggesting a possible market reversal, then wait for a confirmation signal and trade the reversal at a good entry price. Be Proactive. Many traders, especially beginners, do not place enough importance on entries when trying to get consistent profits in the markets. The reason why entries are important is due to market noise and the limited funds that traders have. Let me explain further: Traders are buying and selling constantly; therefore, all markets have ups and downs (market noise). This means that markets rarely go up and down in a straight line, so when you put your hard-earned capital at risk in a trade, due to the up and down ticks, your capital will float up and down as the market moves up and down. So if your entry is bad, then you are more likely to get stopped out due to market noise. If you want to see consistency in your trading, it is crucial to work on your timing and discipline. The best thing you can do to improve the entries in your trades is to be proactive, not reactive. Being proactive means planning ahead for your trade entry. You must do your homework to anticipate and predict the key levels in the markets to help you get the best entries. Setting up trades after the market closes or during quiet hours is one effective way to be proactive and help improve your entry. You will not second-guess yourself as compared to being a reactive trader because you are prepared. The reactive trader, as the name suggests, reacts to the constant ebb and flow of market prices, always working in "the now." More often than not, reactive traders will end up jumping into momentum plays that will reverse on them, leaving this type of trader frustrated and confused. Use Limit Orders to improve trade entry. When using a limit order, you place a limit on how much you're willing to pay to buy or sell a specific product. Limit orders allow traders to enter the market at the best possible price. For example, if you have a specific setup with a good entry level that the market may reach, you can place a limit order at that specific price to buy or sell. Limit orders are very helpful in giving traders the patience and discipline to wait for their entry prices instead of spontaneously entering the market at random levels that will most likely stop them out. The main disadvantage of a limit order is that there are no guarantees that the order will actually go through. The product price must meet the limit order specifications to execute properly; however, even with this disadvantage, it is still better to have better control by entering at a price you want instead of entering at a price you are not comfortable with. Support and Resistance levels. Support and Resistance levels are in the markets for a reason, and you should use them to help with your entries. One of the worst things you could do is think the market is going up and end up buying it at a resistance level before it heads down to stop you out, only for it to go back up again. Always look at your charts, and get into the habit of looking to the left. Why? Because looking to the left will give you information on historical price movements, and with those movements, you will see consistent areas where the market bounced off (Support) and consistent areas where the market pulled back (Resistance). When you really understand this and grasp how support and resistance levels work, you will instinctively understand these levels and will actually notice the market moving towards them to test them. So the next time you think the market is going up, try to enter near or at a support level, and if you think the market is going down, try to enter near or at a resistance level. The image above shows support and resistance levels in the market. Can you notice how the market is always drawn to these levels? You can see the numerous times the market has traded around these areas. These areas are often good entry points for your trades, and you should always take the time to look at your charts for these levels. Use additional timeframes. Using one or more additional timeframes to double-check a trend can help improve your entries. For example, if you’re using a four-hour chart as your main timeframe to look for opportunities on a specific product and you spot a pullback from a bull run that has the potential of a big reversal, you could confirm the broader move by taking a look at a daily chart to confirm how long the trend has lasted or identify some support and resistance levels in its wider trend. Alternatively, you could hop over to an hourly chart or 30-minute chart and see what is happening on a smaller timeframe. By doing this, you can also check whether buyers or sellers are in charge during the current trading period. What you want to avoid doing, though, is adding too many different charts to your analysis and moving between them at random to find opportunities. Instead, stick to a ‘base chart’ that you use to trade, with one or two others for confirming moves. As you can see in the image above, there are three charts. On the main time frame, a potential reversal signal was spotted, and there may be a possible pullback to the bull run. By looking at both the longer time frame and the shorter time frame to help support the analysis, this will help improve your entry because, for example, if all timeframes clash with each other or show conflicting signals, this may help the trader second guess their original analysis and may decide to wait for clearer confirmation signs on all time frames before deciding to enter the market. The goal of every trader is to be successful in achieving consistent profits, and entries play a big part in this. You can correctly call the market and still lose money due to bad entries. The more you understand key market levels and have the discipline to wait and trade around them, the more probability you will have of trades going your way. Though it is still possible to lose trades on good entries, trading is a probabilistic outcome with no guarantees, so why would you want to enter at a bad entry price to give yourself a disadvantage in the markets before the trade has even started? Trade safely and responsibly. BluetonaFX     
Education
by BluetonaFX
75
Convergence & DivergenceOne of the important concepts that traders should understand is the difference between divergence and convergence, two terms that are often used interchangeably but have distinct meanings and implications for trading. Convergence refers to a situation where both the price of an asset and a technical indicator are moving in the same direction. For example, in a situation in which both the price of an asset and an indicator show an uptrend, there is a high probability that the trend will continue. So, here, the price and indicator CONVERGE (follow the same direction), and the trader may hesitate to trade in the opposite direction, as this is often seen as confirmation that the price movement is strong and likely to continue. Divergence refers to a situation where the price of an asset is moving in one direction while a technical indicator is moving in the opposite direction. For example, if we again consider the situation when the price of an asset shows an uptrend and, this time, the trend of a technical indicator is falling, there is a high probability of a trend reversal. So, here, the price and indicator DIVERGE (go in opposite directions). This is often seen as a warning sign that the price movement may not be sustainable and could soon reverse. To further understand the difference between convergence and divergence, let's look at some of the most commonly used technical indicators in trading: Relative Strength Index (RSI) RSI measures the strength of an asset by comparing the average gains and losses over a specified period of time. When the RSI value is above 70, it is considered overbought and is seen as likely to reverse soon. When the RSI value is below 30, it is considered oversold and is seen as likely to rebound. RSI Convergence RSI Divergence Moving Average Convergence Divergence (MACD) MACD measures the difference between two moving averages of an asset's price movements. Traders use the MACD to identify when bullish or bearish momentum is high. There is usually one short-term moving average and one long-term moving average. When the short-term moving average crosses above the long-term moving average, it is seen as a bullish signal, while a cross below the long-term moving average is seen as a bearish signal. MACD Convergence MACD Divergence Commodity Channel Index (CCI) CCI measures the difference between an asset's price change and its average price change. High positive readings indicate that the asset's price is above its average, which is seen as a bullish signal. Low negative readings indicate the asset's price is below its average, which is seen as a bearish signal. If the CCI value is above +100, this is seen as a signal of the start of an uptrend. If the CCI value is below -100, this is seen as a signal of the start of a downtrend. CCI Convergence CCI Divergence It is crucial to note that convergence and divergence are not guaranteed indicators of future price movements. Traders should use them in conjunction with other technical and fundamental analyses to aid their trading decisions. Traders should also be cautious of the fact that all indicators are lagging behind the current price action, and therefore they must be prepared to adjust their strategies accordingly. Trade safely and responsibly. BluetonaFX
Education
by BluetonaFX
4
Demo vs Live TradingWhen most new traders finally switch over from demo to live trading, they usually believe that their demo trading results can easily be replicated on a live account. Because of this misconception, many are left frustrated and demoralised when they finally realise that this is far from the case. Here are a few reasons why: Real money and real emotions Demo is risk-free Chasing losses on a live account Cutting profits short We have discussed the main differences between demo and live trading, but will delve further into the psychological barriers when live trading and how to overcome them in a future post. Stay tuned! BluetonaFX
Education
by BluetonaFX
4
CORRELATION IN TRADINGHave you ever noticed a time when a certain product went up and another similar product went down at around the same time? Or when that product went down and another product also went down at the same time? If the answer is yes, then what you noticed was 'product correlation' in action. What exactly is product correlation? In the financial markets, correlation is a statistical measure of how two products move in relation to each other. Product correlation tells us whether two products tend to move in the same or opposite direction or whether they move completely independently of each other without any discernible pairing pattern over a specific period of time. Let us look at an example from a Forex (currency pair) trade (visual chart examples further below): If EURUSD goes up and USDJPY goes down, this is called a NEGATIVE correlation and if GBPUSD goes down and AUDUSD also goes down, this is called a POSITIVE correlation. When trading forex in particular, it is vital to remember that since currencies are traded in pairs, no one currency pair is ever totally isolated. Therefore, if you plan on trading more than one currency pair at a time, it is very important to understand how different currency pairs move in relation to each other. Correlation also applies to other types of products such as gold, silver, stocks and indices. Let us take a more detailed look at how correlation is worked out. Correlation is computed into a number known as the "correlation coefficient". This number ranges between -1 and +1: •Perfect negative correlation (an exact correlation coefficient of -1) means that the two respective products will move in the opposite direction 100% of the time. •Perfect positive correlation (an exact correlation coefficient of +1) implies that the two respective products will move in the same direction 100% of the time. •If the correlation is 0, the movements between the two respective products are said to have no correlation and their movements are completely independent from each other. In other words, there is no way to predict how one product will move in relation to the other. POSITIVE CORRELATION NEGATIVE CORRELATION PLEASE NOTE!!! Although correlation exists in the financial markets, it is NOT set in stone as a guarantee. Firstly, the correlation coefficient between products in the financial markets is rarely, if ever, at +1 and -1. Secondly and more importantly, every individual product has its own UNIQUE supply and demand measures and also has buyers and sellers that have their own UNIQUE motivations and goals in relation to that specific product. When a product goes up or down, this does NOT necessarily mean that it will always follow in line or go the opposite way to another product. Trade safely and responsibly! BluetonaFX
Education
by BluetonaFX
5
GBPUSD Plan as Strong support zoneFor more detailed daily analysis, go ahead and click the follow button. Here we have our GBPUSD chart. After hitting our previous targets, we are now looking to take the GBPUSD long again. If you are wondering why, there is several reasons which are key factors and which you should use in future trading strategy. We are at a point of previous price rejection. This means there is buying power at this area. We are also at a low price from the previous drop and far off our MA's. We are looking long with our first exit noted by the directional arrow upwards.
Long
by WillSebastian