Week of 8/1/16: Secrets to Trading Success
Here is what we talked about with our full members this week:
- The role of liquidity is perhaps the least understood yet most fundamentally important aspects of trading.
- Volatility exaggerates both risk and potential rewards, and is one of the defining characteristics of the Forex market.
- A clear understanding of liquidity and volatility in tandem, helps us understand much of what is happening in the market and why.
- We look at a real market example of liquidity and volatility working in tandem during a major news announcement which shows the pitfalls of trading during these unpredictable conditions.
FULL VIDEO TRANSCRIPTION:
Facilitator: Bryan Stickney
Webinar Length: 19:18
[slide] [Complete Currency Trader – OPENING SLIDES]
[slide] [How Big is the FOREX Marketplace?]
Hey, everyone! Thank you, very much, for being here. Today is our weekly recap video for Complete Currency Trader and this is the week ending August 6th. It’s been a couple of weeks since we’ve done a recap video and I apologize for that–at some level. We were out of the country, enjoying some beach time and sun down in Puerto Rico with the family. That’s one of the benefits of being able to work online and trade–it’s that you’re able to pick up and go when you want to and you don’t have employees to worry about; you’re still able to operate your business remotely (as long as you have a good Internet connection and a laptop). We can continue to trade, which is a very, very key thing for us, as traders.
We also did our regular classes over the last couple of weeks for our full members and just to bring you up to speed on what we’ve been doing, I thought I’d record this quick video to hit a couple of different points for you. We’ve gone through quite a bit of our foundation work with our new, full members and what we covered was–[incomplete statement] We talked about the marketplace, what it is, how it works. We began discussing liquidity, volatility and, then, we talked about different market mechanics that come together for the different types of participants in the market and how that impacts [them] in our abilit[ies] to trade. Then, at the very end of the video I want to show you a quick piece on news and one of the reasons we talk about not trading news. It also gives a good visual of how these market mechanics all come together quickly.
Today’s video will probably be a bit longer than the usual five to seven minutes simply because we have a lot to cover from not having recorded a recap for you in the last couple of weeks. So… let’s get to it!
To kick things off, we started with the FOREX marketplace, what it actually is–obviously, I can’t go through every piece of what everyone–every piece of every one of the trainings that we did for our full members, but I am going to hit the high parts to tie up all the pieces that I think are informative to the bulk of the people who are watching this video.
One of the things I really want to bring up to you is the FOREX marketplace. We often hear the number of five trillion dollar a day. The five-trillion-dollar-a-day number? We hear that kicked around quite a bit. ‘Challenge is, we don’t actually trade in that full, five-trillion-dollar-a-day market. FOREX is huge. It really is.
The thing is, we trade in the spot market, which is a fraction of that full, foreign exchange market. The spot market is where we exchange cash for cash. Right? We’re taking U. S. Dollars and exchanging them for Euros. We’re taking Dollars and exchanging them for Yen, and so on and so forth.
The FOREX market is a utilitarian market. That’s what it is: the spot market that we trade in–it’s the swap of currencies that happens between banks, it happens between corporations; it’s banks doing loans to other countries, it’s corporations making a transaction to make payroll in a different country than they’re operating in. That market–the stop market only accounts for one-and-a-half million trillion a day. Now, I say that kind of tongue-in-cheek because “only” one-and-a-half million trillion–it’s still a huge market and it’s still triple the size of the futures market which is the next largest market out there.
It’s still important to know that the number we hear bantered about with FOREX isn’t the market we’re actually trading in. Now, the other thing to understand about FOREX when we think about the market that we’re trading in and talking about–
[slide] [How Big is Speculative Trading?]
[cont.]… how big it actually is, is that we’re speculating within this and, as I mentioned, the FOREX market is utilitarian, so we’re trading within the spot market which is one-and-a-half million trillion of that five trillion today.
The speculative side within this stop market? That’s even smaller, as well! That’s only about twenty percent. Again, the remaining eighty percent of transactions have nothing to do with speculation. They’re there because they have to trade. They have to make payroll. They have to do loans; conduct business between governments, between banks, between businesses, between corporations that exist in other parts of the world.
It’s good to have that foundation because that helps us understand some of the randomness that occurs in the FOREX market. We often think that things should occur in a certain way because of what our expectations are from a speculative point of view.
However, overall, the market is not speculative. The lion’s share of the FOREX market exists for hedging and for inter-bank and inter-country, inter-business exchanges that are occurring there. Speculations are a very, very small portion of that. That, to start with, is very, very important to understand.
The next thing that we talked about in class–[incomplete statement] Obviously, there’s a lot more to the FOREX marketplace than just that, but I think this is a key point that can be brought up and shared with everyone. It’s something that needs to be understood very well in order to create that firm foundation we need so we can be consistent in our trading.
[slide] [Role of Liquidity – SUMMARY]
[cont.]… The next thing that I think that is important to share with you from the pieces of class that we’ve done over the past few weeks is the role of liquidity. Liquidity and volatility are words that we hear quite a bit, but we don’t always understand or really get the impact of what they are fully.
Liquidity can mean different things to different traders. It means different things depending on where we are. But, at the end of the day, liquidity impacts what we can trade, when we can trade it and at what cost the orders are executed. That’s a big piece to know.
When we’re trading–depending on the time of day we’re trading–we could have different levels of liquidity. Just think about it! Common sense tells us that we’re going to have a great level of liquidity at… let’s say, 8 A.M. U.S. Eastern time–or 9 A.M. U.S. Eastern time then we would at 6 P.M. U.S. Eastern time. At 9 A.M. U.S. Eastern time, we have the U.S. Market, the Canadian Market, all of the European Market, and the London Market all going at the same time. We have a lot more people wanting to do business and trying to do business with each other than we would at 6 P.M. U.S. Eastern when we only have the Sydney Market open.
Liquidity will vary by the time of day. That’s something we’ll have to understand when we’re trading. We’ll want to know who we’re trading with and what the opportunities are for us to be filled. Right? There’s the immediacy of our ability to be filled, how quickly do we want to be filled–depending on the order type that we’re using. What’s the depth of liquidity there, meaning how deep do those orders go that we can consume, depending on the time of day that we’re trading, which will impact our order size–the lot size that we can trade. And, so on and so forth.
Liquidity also impacts our cost of the trade because when there’s times of lower liquidity our spread’s going to be higher. That’s going to impact us, as well.
Liquidity is also linked to volatility and what volatility does is it exaggerates both our risk and rewards that we have in the FOREX market, so we’ve covered this in depth for our full members numbers so that they could really dig in and understand the roles of both liquidity and volatility to their trading.
Understanding that–[incomplete statement] Having that is part of our core knowledge and our foundation helps us to be in a position to make decisions that are in our best interests when we’re trading.
There’s always going to be emotions in trading, obviously, but understanding what we’re doing, why we’re doing it; why the markets are acting in a certain way simply helps us, if we had that understanding, to make a more education decision as opposed to making an emotional decision that’s based on instinct versus fact and what not.
The next couple of topics that we covered were around market mechanics.
[slide] [Review Point]
[cont.]… Again, these are very important pieces. We often say to our full members that, if there was any one thing that you really needed to dig into first and really understand and accept at a core level, it’s market mechanics; how the markets actually work.
Again, for a recap video like this, I don’t have time to get into the nitty-gritty of every piece of this. But some of the takeaways that I think are very important for you to begin understanding is that the markets can and do move significantly without any orders actually taking place and the exchange actually taking place. That’s because the FOREX market is an auction market, for lack of a better term. The prices that we’re seeing quoted on our dashboard are the prices we’re seeing quoted on our terminal are prices at which our market makers or dealers are willing to trade.
It’s not the prices of trades that happen; it’s the prices where people are willing to do business. Obviously, as we have periods of lower liquidity, as we have periods of uncertainty around news, we have changes in which the market makers and where the market makers are willing to trade. They’re going to change what they’re willing to do.
Maybe we have a news event coming up. They’re going to pull orders off because they don’t want to be overexposed to one side or the other. This, then, creates lower liquidity.
They might put orders on with certain expectations of where they need to be from their inventory objectives. Ultimately, the prices that we see are the prices that the dealers (the market makers) are willing to trade, so because of that, the prices can change without any trading actually taking place.
That’s important to understand. That, again, as we think that through and think about the fact that the FOREX market is a utilitarian market that helps us understand and, maybe, understand the randomness of the marketplace sometimes because, again, markets are moving, prices are moving; they’re changing, they’re rapidly changing. As we have news events coming up, the spreads are widening; things are changing again. It’s not because trading is actually occurring, it’s because the dealers (the market makers) are working to control their risk. As they’re doing that they’re changing where they’re willing to buy or sell which is just changing the prices that we see displayed on our trading terminals. That creates some of that randomness in the marketplace–
[slide] [More about this – Liquidity of Price]
[cont.]… that’s out there.
That randomness is what actually creates the ability for us to trade at some level because, ultimately, prices, when they move, they have that tendency to move in the direction of the least liquidity. Coming back to where we were talking about before with liquidity and volatility, you have market makers adjusting where they’re willing to trade, taking orders off–but the market is still utilitarian, so even though we might have news coming up, orders are still flowing in. Trading doesn’t simply cease because there’s a news event coming up. Trading is still going to occur, but where the market makers are willing to buy or sell might change, based on their expectation or risk comfort is with that upcoming event. They’ll change where they’re willing to trade–meaning they’ll take orders off, put orders on; so on and so forth. As we have liquidity lessening–[incomplete statement] Maybe there’s orders coming in and they’re assuming the amount of liquidity that’s there and that’s pushing price one direction or the other.
Let’s say we have a lot of buy orders coming in but we have limited liquidity of people who are willing to sell at certain levels. As the buy orders come in [they] consumes the liquidity at a certain level, pushing price to the next–pushing price to the next; so on and so forth, cascading in one direction or the other, which is the fundamental principle of how we trade–
[slide] [Fundamental Principle of CCT]
[cont.]… with Complete Currency Trader.
Price has already started to change due to an increase demand from buy-side traders and that tendency is causing prices to move, which, then, is causing dealers, maybe, to reduce their liquidity of offers, so they’re reducing their exposure. It, then, causes prices to move. You might compound that issue and, as prices are moving, we might hit stop-losses (placed by other traders) which simply are pending market orders, right? Those stop orders then begin consuming more liquidity (which are pending orders) further on and that’s what we’re looking to capitalize on is that factual piece of how price moves. We’re looking to capitalize on that with Complete Currency Trader.
In a nutshell, that’s the fundamental principle of how we trade, which is predicated on who’s participating in the market and the type of market that we have, as well as the order types we use, which have all been covered in the last few classes in the last couple of weeks.
Now, I mentioned that I had a quick screen shot for you just to talk about news. It kind of shows a bit more detail of what [I’m] talking about here.
[slide] [Cartesian graph – pale green lines, red dots on black]
[cont.]… What I’m going to show you now is just a quick screen shot I took yesterday during off our payroll. I feel like this is a good kind of teaching point for you because–
[slide] [blank black screen – wandering yellow pointer]
[cont.]… very often–[incomplete statement] I apologize for the darkness of this screen but, ultimately, it’ll give you the good idea.
Oftentimes, traders come in and they see these big bars [pointer moved vertically far right, up and down on blank screen] and they say, “Wow! Look at that momentum! Look at that volatility! Man! I could’ve made so many pips!” Yes, maybe you could’ve. What we’re missing out on, though, is what’s happening within here. What’s driving this move?
There’s a lot of things to consider. One, it is moving very rapidly. If it is moving very rapidly like that, it’s because there’s some liquidity all the way down. That liquidity’s being absorbed, causing it to move quite rapidly. That’s causing slippage and, maybe, the ability to be filled. You know, if you’re on the wrong direction on this–let’s say, maybe, you’re in a buy order and you have a self stop–you have a stop down here [pointer rests center right of blank screen] to get you out of that order, if price is moving very rapidly like this with the liquidity–even though you’re stop might be triggered at–I don’t know what that number is–seventy-seven fifty, you actually might be filled at seventy-seven forty, which could be detrimental to your account, depending on your level of risk and the lot sizing that you were using.
That’s one thing to consider. The other thing to consider when we’re talking about news training is this. (I’m going to back up a little bit.) [cursor drug left along bottom bar, at a tenth from right side–green tight vertical lines, red dots above, green dots below] I don’t know if you can see what’s happening, but coming in to the news event, this particular currency had about a two-pip–yes, about a two pip, two-and-a-half-pip spread. Pretty consistent there, just plugging along at two, two-and-a-half pips. What we’ll see is, as news begins to occur, this happens. You can see that spread went from two pips to about twelve pips. Another good thing to consider there when we don’t trade news, it is because–[incomplete statement]
Let’s say you had it again, you were in an order–maybe you had a tight stop-loss and, suddenly, you have your spread widen (like this). [points to far rt horizontal bars of red, white] This spread’s widening because there’s no liquidity between here. This isn’t a trick from your broker. It’s not anything that’s a trap or a trick or anything devious. What’s happening there is where the orders of the market makers or the dealers are willing to trade has been removed. They’re looking to control their risk so they’ve removed where they’re willing to trade that’s too close to the current price because they want to limit their current risk. Right? They don’t know what this announcement’s going to be. They don’t know what’s going to come from it. They’re limiting their risk. They’re changing where they’re willing to buy or sell in order to offset risk from one side to the other. As that occurs, spreads widen.
Now, let’s say, again, you might’ve had a stop-loss at seventy-seven sixty-four. Well, all of a sudden, spreads widen and you can’t be filled until seventy-seven seventy-two. Again, [this] could be detrimental to your account depending on what lot size you had and what level of risk you were using, but, you could’ve been stopped out at a much, much greater level than where you’d expected to be.
So… it looks like an exciting time to trade but because of the things that are happening, this [points far bottom right corner] is why we choose not to trade around news. We understand the fundamentals of the market, what’s occurring in the marketplace and, because we know what’s driving these–these exaggerated bars–these exaggerated moves. We would prefer to sit on the sidelines and not take the risk, then come back in when things normalize and we could take advantage of the real mechanics of the market and the balances that are occurring in today, that are causing prices to move in our favor versus trying to take advantage of a news-driven type announcement.
I know a lot of people trade news and that’s fine. I mean, there’s thousands and thousands of ways to make money! But this is ours and this is one of the reasons we don’t trade news. And we don’t teach it because we want to limit the risk. We’re going to trade things [in] the same manner that our institutional traders trade and, because we’re doing that, we always trade from the objective of protecting our account first and managing it effectively.
Anyway, that’s–that, in a nutshell, is what we’ve covered the last couple of weeks. Here, going forward, we’ll get back on a regular schedule to get these weekly summaries out to you. But, there it is for now. Hope you guys enjoyed it and, if you have any questions, obviously, let us know. Of course, our staff’s there Monday through Friday and we endeavor to get all of our tickets answered within twenty-four hours of it being delivered–unless it’s a weekend! If it’s a weekend, we can’t get back to you until Monday–Monday afternoon. It does take a little bit longer if you’re submitting something on Friday night, Saturday, Sunday. Those’ll be answered on Monday and Tuesday.
All right! So, there you have it! Have a great day and we’ll talk to you soon!
Share this article
Learn to Trade from Top Traders
Join the CCT community and get FREE, unlimited access to all of our trading resources from top hedge fund managers and pro Forex traders around the world.Join Now