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The Difference Between True and False ECN/STP Brokers
What is an ECN broker? Are they really non-dealing desk broker? Discuss the Advantages and Disadvantages
ECN vs. STP vs. Market maker – Brokers explained
Trading The Martingale and Anti Martingale Strategies
In today's lesson we are going to look at the two categories that most position sizing strategies fall into which are known as martingale strategies and anti martingale strategies.
A position sizing strategy which incorporates the martingale technique is basically any strategy which increases the trade size as a trade moves against the trader or after a losing trade. On the flip side a position sizing strategy which incorporates the anti martingale technique is basically any strategy which increases the trade size as the trade moves in the traders favor or after a winning trade.
The most basic martingale strategy is one in which the trader trades a set position size at the beginning of his trading strategy and then double's the size of his trades after each unprofitable trade, returning back to the original position size only after a profitable trade. Using this strategy no matter how large the string of losing trades a trader faces, on the next winning trade they will make up all their losses plus a profit equal to the profit on their original trade size.
As an example lets say that a trader is using a strategy on the full size EUR/USD Forex contract that takes profits and losses both at the 200 point level (I like using the EUR/USD Forex contract because it has a fixed point value of $1 per contract for mini forex contracts and $10 per contract for full sized contracts but the example is the same for any instrument)
The trader starts with $100,000 in his account and decides that his starting position size will be 3 contracts (300,000) and that he will use the basic martingale strategy to place his trades. Using the below 10 trades here is how it would work.
As you can see from the example although the trader was down significantly going into the 10th trade, as the 10th trade was profitable he made up all the his losses plus a brought the account profitable by the equity high of the account plus original profit target of $6000.
At first glance the above method can seem very sound and people often point to their perception that the chances of having a winning trade increase after a string of loosing trades. Mathematically however the large majority of strategies work like flipping a coin, in that the chances of having a profitable trade on the next trade is completely independent of how many profitable or unprofitable trades one has leading up to that trade. As when flipping a coin no matter how many times you flip heads the chances of flipping tails on the next flip of the coin are still 50/50.
The second problem with this method is that it requires an unlimited amount of money to ensure success. Looking at our trade example again but replacing the last trade with another loosing trade instead of a winner, you can see that the trader is now in a position where, at the normal $1000 per contract margin level required, he does not have enough money in his account to put up the necessary margin which is required to initiate the next 48 contract position
So while the pure martingale strategy and variations of it can produce successful results for extended periods of time, as I hope the above shows, odds are that it will eventually end up in blowing ones account completely.
With this in mind the large majority of successful traders that I have seen follow anti martingale strategies which increase size when trades are profitable, never when unprofitable.
Forum on trading, automated trading systems and testing trading strategies
Trading: What is Martingale and Is It Reasonable to Use It?
Proximus, 2013.08.24 03:00
It works if the net profit factor is above 1 and the win rate is higher than 50%, martingale is a double or nothing either doubles your money or doubles your losses, so if you have a 60% win rate with 1:1 RR ratio you can use it safely, if not then dont.
Whats funny about forex that you dont start from 50% win rate from the start because the market is changing not a fix probability set like a roulette or blackjack game.So if you start it like a betting system you will have like 40% win rate with 1:1 RR if you take trades random, maybe on the 9999999999999999999999th trade you hit 49.9% but thats still not enough.So it is better to filter out crappy trades first and then increase your win rate to be martingale compatible! And this is the advantage of investing vs gambling, you can filter out bad trades, on the roulette or blackjack you cant filter out bad hands or spins unless you cheat, but surely not the statistical way!!
This is how my 60% win rate, real martingale system looks like, and how it should suppose to look like, on LEVEL 7 settings (2^7)
Here are my martingale type systems:
1) CLASSICAL MARTINGALE AFTER 567 TRADES (60% WR, 1:1 RR)
As you can see after 500 trades it barely hit LEVEL 7 and even if we would lost that we would lose only half of the profit and continue from there to grow it back!
Of course you need a big account for this like one that can support like 10 lot size trades to be only 1% account risk, but statistically its very improbable to blow your account since its only 1% risk versus huge potential gains...The martingale presented in this article is BS with like 40-45% win rate which is sadly not enough, not even 50% is, must be 51 or higher...
2) PROGRESSIVE DYNAMIC GROWTH MARTINGALE (60% WR, 1:1 RR)
3) PROGRESSIVE STATIC GROWTH MARTINGALE (60% WR, 1:1 RR)
4) ANTI MARTINGALE or INVERSE MARTINGALE (60% WR, 1:1 RR)
enjoy and good programming ;)
This module is about Volume and Open Interest. When we're trading we look at the price action but we also look at the volume of trading and the open interest which is something we come across in futures and options.
Forbes Asia Investment Briefing: Credit Suisse (based on the article)
This week's Forbes Asia Investment Briefing comes from John Woods, who is the chief investment officer for APAC at Credit Suisse. He told us that the trade dispute between China and the U.S. is an ongoing concern for the markets, but he also believes the budget negotiations between the EU and Italy are likely to have a further impact on sentiment throughout next week, as a game of brinksmanship plays out. Eurozone ministers have already warned Italy's coalition government to follow the rules, after it proposed increasing the deficit to 2.4% of GDP next year.
Behind central banks in terms of size and ability to move the foreign exchange market are the banks which we learned about in our previous lessons which make up the Interbank market. It is important to understand here that in addition to executing trades on behalf of their clients, the bank's traders often times try to earn additional profits by taking speculative positions in the market as well.
While most of the other players we are going to discuss in this lesson do not have the size and clout to move the market in their favor, many of these bank traders are an exception to this rule and can leverage their huge buying power and inside knowledge of client order flow to move the market in their favor. This is why you hear about quick market jumps in the foreign exchange market being attributed to the clearing out the stops in the market or protecting an option level, things which we will learn more about in later lessons.
The next level of participants is the large hedge funds who trade in the foreign exchange market for speculative purposes to try and generate alpha, or a return for their investors that is over and above the average market return. Most forex hedge funds are trend following, meaning they tend to build into longer term positions over time to try and profit from a longer term uptrend or downtrend in the market. These funds are one of the reasons that currencies often times develop nice longer term trends, something that can be of benefit to the individual position trader.
Although not the typical way that Hedge funds profit from the market, probably the most famous example of a hedge fund trading foreign exchange is the example of George Soros' Quantum fund who made a very large amount of money betting against the Bank of England.
In short, the Bank of England had tried to fix the exchange rate of the British Pound at a particular level buy buying British Pounds, even though market forces were trying to push the value of the Pound Down. Soros felt that this was a losing battle and essentially bet the entire value of his $1 Billion hedge fund that the value of the pound would decrease. The market forces which were already at play, combined with Soro's huge position against the Bank of England, caused so much selling pressure on the pound that the Bank of England had to give up trying to prop up the currency and it preceded to fall over 5% in one day. This is a gigantic move for a major currency, and a move which netted Soros' Quantum Fund over $1 Billion in profits in one day.
Next in line are multinational corporations who are forced to be participants in the forex market because of their overseas earnings which are often converted back into US Dollars or other currencies depending on where the company is headquartered. As the value of the currency in which the overseas revenue was earned can rise or fall before that conversion, the company is exposed to potential losses and/or gains in revenue which have nothing to do with their business. To remove this exchange rate uncertainty many multinational corporations will hedge this risk by taking positions in the forex market which negate any exchange rate fluctuation on their overseas revenues.
Secondly these corporations also buy other corporations overseas, something which is known as cross boarder mergers and acquisitions. As the transaction for the company being bought or sold is done in that company's home country and currency, this can drive the value of a currency up as demand is created for the currency to buy the company or down as supply is created when the company is sold.
Lastly are individuals such as you and I who participate in the forex market in three main areas.
1. As Investors Seeking Yield: Although not very popular in the United States, overseas and particularly in Japan where interest rates have been close to zero for many years, individuals will buy the currencies or other assets of a country with a higher interest rate in order to earn a higher rate of return on their money. This is also referred to as a carry trade, something that we will learn more about in later lessons.
2. As Travelers: Obviously when traveling to a country which has a different currency individual travelers must exchange their home currency for the currency of the country where they are traveling.
3. Individual speculators who actively trade currencies trying to profit from the fluctuation of one currency against another. This is as we discussed in our last lesson a relatively new phenomenon but most likely the reason why you are watching this video and therefore a growing one.
Two Trading Mistakes Which Will Destroy Your Account
A lesson on two of the most common mistakes that traders make when trading the stock, futures and forex markets.
One of the most common mistakes is sticking in a trade where you know you are right in your analysis, but the market continues to move against you. As the famous economist John Maynard Keynes once said:
"The markets can remain irrational longer than you can remain solvent"
Perhaps one of the best examples of this are those who shorted the NASDAQ into the runup in 1999 and early 2000. At the time it was pretty obvious that from a value standpoint NASDAQ stocks were way overvalued and that people's expectations for growth that they were buying on were way out of line with reality. There were many great traders at the time who recognized this and began shorting the NASDAQ starting in late 99. As you can see from the below chart and the huge sell off that ensued after the peak in 2000, these traders were right in their analysis. Unfortunately for many of them however stocks continued to run up dramatically from already overvalued points in late 99 wiping out many of these traders who would eventually be proved correct.
So as we learned about in last lesson, people's strong desire to be right will often times keep them in trades that they should have moved on from even though the market may eventually prove them correct.
For those traders who are able to initially move on from trades where they feel they are correct but the market moves against them, another common theme which arises is for a trader to initially stick to his plan, but after being proved correct and missing out on gains he becomes frustrated and deviates from his plan so that he will not miss out on another profitable opportunity.
One place of many where I have seen this time and time again is when watching traders who trade reversals at support or resistance levels. Many times when the market touches a support or resistance level it will have a brief spike upwards or downwards which hits the stops of a trader looking to profit from the reversal, taking him out of the market just as it turns in his favor. Because many traders think a like, often times the level at which the trader is taken out of the market is right at his stop level as well.
After this happens once or twice to a trader he will then stop placing hard stops in the market and instead convince himself that he will manage the trade if it moves against him. This may work a few times for the trader giving him more confidence in the strategy until the market does finally break. As we have learned about in previous lessons often times when the market breaks significant support or resistance levels it will break violently to the point where the trader in the above situation is quickly down a large amount on his trade. Typically what will happen at this point is instead of taking the big loss, learning his lesson, and moving on the trader will remain in the position or worse add to it with the hopes that the market will turn back in his favor. If the trader gets lucky and the market does turn back in his favor this only goes to support this bad habit which will eventually knock him out of the market.
Successful traders realize that situations such as the above occur constantly in the market and that one of the main things that separates successful traders from unsuccessful ones is their ability to accept this, stick to their strategy, accept that loosing trades are a part of trading, and move onto the next trade when the market does not move in their favor.
Dow Theory - An Introduction
Most consider the father of technical analysis to be Charles Dow, the founder of Dow Jones and Company which publishes the Wall Street Journal. Around 1900 he wrote a series of papers which looked at the way prices of the Dow Jones Industrial Average and the Dow Jones Transportation Index moved. After analyzing the Indexes he outlined his belief that markets tend to move in similar ways over time. These papers, which were expanded on by other traders in the years that followed, became known as "Dow Theory". Although Dow Theory was written over 100 years ago most of its points are still relevant today. Dow focused on stock indexes in his writings but the basic principles are relevant to any market. Dow Theory is broken down into 6 basic tenets. In this lesson we are going to take a look at the first 3 and then finish up our conversation of Dow Theory in the next lesson by looking at the last three.
The first tenet of Dow Theory is that The Markets Have 3 Trends.
The second tenet of Dow Theory is that Trends Have 3 Phases:
Second 3 Tenets of Dow Theory
We gave an introduction of Dow Theory and looked at the first three tenets which are: markets have three trends, trends have three phases, and the markets discount all news. In today's lesson we are going to take a look at the second 3 tenets which will finish up our discussion of Dow Theory and give us a strong basis which we can then use to analyze trends and eventually place some trades.
Tenet four of Dow Theory is that The Averages Must Confirm Each Other. The averages must confirm each other. Here Dow was referring to the Dow Jones Transportation Index and the Dow Jones Industrial Average. To understand this point it is important to remember that in Dow's time the growth in the US was coming mainly from the Industrial sector. These two indexes were made up of manufacturing companies and the rail companies which were the primary method used to ship the manufacturers goods to market. What Dow was basically saying here is that you could not have a true rally in one of the averages without a confirmation from the other because if manufacturer's profits were rising they would have to ship more goods. This meant that the profits of the transportation companies and therefore the transportation average should rise too. Dow stated that when these two averages moved in opposite directions it was a sign that the market was going to change direction.
Tenet five is Trends Are Confirmed by Volume. What Dow was saying here was that there are many reasons why price may move on low volume, but when prices move on high volume there is a greater chance that the move is representative of the overall market's view. Dow believed that if many traders were participating in a particular price move and the price moves significantly in one direction, then this was an indication of a trend developing as this was the direction the market was anticipated to continue to move.
Tenet six is that Trends Exist Until Definitive Signals Prove That They Have Ended. What Dow was saying here is that there will be market moves which are against the primary trend but this does not mean that the trend is over and the market will normally resume its prior trend.
Characteristics of the Main Currencies
Although there has been much press recently about the US Dollar loosing its status, there is no doubt that as of this lesson and most likely for the foreseeable future, the US Dollar still reigns supreme over all other currencies of the world. The price for the majority of traded commodities such as oil is quoted in US Dollars and the US Dollar represents over 60% of the worlds currency reserves (the currency held by central banks to back their liabilities). These facts combined with the fact that the US Economy is by far the largest economy in the world has resulted in a market where over 80% of all currency transactions involve the US Dollar. As you can probably imagine after hearing this, currency traders pay heavy attention to what is happening with the US Economy, as this has a very direct affect not only on the US Dollar but on every other currency in the world as well.
The rising power of the currency world is the Euro which was introduced in 1999 as part of an overall plan to unify Europe into something known as the European Union. In short the differing laws and currencies of the different European countries were making them less competitive in the global market place. To try and fix this problem and create one entity with a common set of laws and a common currency, 15 countries joined what is now referred to as the European Union and 12 of those countries adopted the Euro as their common currency. While the economies of the individual countries that make up the Euro Zone don’t come anywhere close to the size of the US Economy, when combined into one Euro Zone economy they do, and therefore some say the Euro will eventually rival or even replace the Dollar as the main currency of the world.
Japan, which is the second largest individual economy in the world, has the third most actively traded currency, the Japanese Yen. After experiencing impressive growth in the 60’s, 70’s and early 80’s Japan’s economy began to stagnate in the late 1980’s and has yet to fully recover. To try and stimulate economic growth, the central bank of Japan has kept interest rates close to zero making the Japanese Yen the funding currency for many carry trades, something which we will learn more about in later lessons. It is also important to understand at this stage that Japan is a country with few natural energy resources and an export oriented economy, so it relies heavily on energy imports and international trade. This makes the economy and currency especially susceptible to moves in the price of oil, and rising or slowing growth in the major economies in which it trades with.
While the United Kingdom is a member of the European Union it was one of the three countries that opted out of joining the European Monetary Union which is made up of the 12 countries that did adopt the Euro. The UK’s currency is known as the Pound Sterling and is a well respected currency of the world because of the Central Bank’s reputation for sound monetary policy.
Next in line is Switzerland’s currency the Swiss franc. While Switzerland is not one of the major economies of the world, the country is known for its sound banking system and Swiss bank accounts, which are basically famous for banking confidentiality. This, combined with the country’s history of remaining neutral in times of war, makes the Swiss Franc a safe haven currency, or one which attracts capital flows during times of uncertainty.
Also known as “The Aussie” the Australian Dollar is heavily dependant upon the price of gold as the Australian economy is the world’s 3rd largest producer of gold. As of this lesson interest rates in Australia are also among the highest in the Industrialized world creating significant demand for Australian Dollars from speculators looking to profit from the high yield the currency and other Australian Dollar denominated assets offer.
Like the Australian Dollar the New Zealand Dollar which is also known as “The Kiwi” is heavily dependant on commodity prices, with commodities representing over 40% of the countries total exports. The economy is also heavily dependant on Australia who is its largest trading partner. Like Australia, as of this lesson New Zealand also has one of the highest interest rates in the industrialized world, creating significant demand from speculators in this case as well.
Last but not least is the Canadian Dollar or otherwise affectionately known as “The Loony”. Like its commodity currency brothers, the Canadian Economy, and therefore the currency, is also heavily linked to what happens with commodity prices. Canada is the 5th largest producer of gold and while only the 14th largest producer of oil, unbeknownst to most; it is also the largest foreign supplier of oil to the United States. Its relationship with the US does not end here either as the country exports over 80% of its goods to the United States, making the economy and currency very susceptible to what happens not only with commodity prices, but to the overall health of the US Economy as well.