Why are ETF’s one of the most popular trading instruments?

Why are ETF’s one of the most popular trading instruments

Why are ETF’s one of the most popular trading instruments

 We look under the hood of one the latest additions to the Trading 212 portfolio

Exchange traded funds (ETF’s for short) have become one of the rapidly expanding instruments in recent years and we duly obliged by updating our product lineup by including, what we feel, cover some of the more important and interesting funds.

But what are these funds and what makes them so appealing to both retail and institutional investors?

First lets go over what funds are – it’s people’s or organisation’s money, grouped together, investing in the same way, for a, hopefully, increased benefit and profit. Larger pools of money can purchase more expensive stocks, or make more long-term investment. Not to mention that they are better equipped to weather any negative volatility with their increased size. Think seven-storey ocean liners in a storm.

There is a multitude of funds operating on the global markets – mutual funds, hedge funds, pension funds, sovereign funds all of them with their different agendas, styles of investing, risk/reward targets, etc. Their structure generally follows some common principles, chief among them that they invest in The difference between all of these and ETF’s is that the latter are actually tradeable on the market. They look like a fund, but behave like a stock. This means they can be bought on margin and shorted when you think the components of the fund are in for a bad period.

There exist two main types of ETF’s – those that cover separate countries and the so-called “sector” ETF’s. Country ETF’s offer you the chance to invest by proxy in a country which you have a strong opinion about, be it positive or negative. The ETF for say China contains in itself a list of companies that are structural for the local economy and their well-being reflects that of the overall economy. You wouldn’t be able to invest there as a retail trader, as the local stock exchange still imposes restrictions of foreign investment and stock trading.

ETF’s are liquid, through the Trading 212 PRO Platform you can trade them at all times during the market session and this isn’t even among their most important advantages. One is that you don’t need to perform the trades with all the instruments included in the fund (if they’re available in the first place). Which results in less time needed to perform the trade.

Financially there is also an upside – effectively there is a smaller spread. If for example you had to make ten trades with the companies in the Banking Sector ETF, then for each of them there would be a spread, added up they are considerably higher than the one we have in place for our ETF’s.

Country ETF’s are very flexible instruments. Researching them is generally seen as easier than that for currencies or stocks, although it has some underwater currents of its own. But it definitely lets you invest in a certain country in a straightforward way. The companies usually included in a country index are either the largest, or the most (structurally) important ones. Or both of course. They are blue chip companies who are diversified and connected with multiple other companies in the respective country and they influence the supply and demand of many products in the local economy.

One bonus that has to be mentioned with country ETF’s is that you can trade something that may not be readily available to a retail trader. A Korean company may be included in an ETF, but not the local index KOSPI, . The BRIC countries are the one’s we deliberately added – we have ETF’s for Brazil, Russia, India and China, so you can now invest in the emerging markets of the world.

Sector ETF’s are the other variation that we now offer. They are focused on the different components of an economy and take companies with a similar line of work. These are usually competitors, so you can’t play off their weaknesses compared to each other, but you can actually trade on them compared to other sectors. As this is a quite a large subject and the trading style of many an investor, next week we will be dedicating a separate article to them.

With the ETF’s we have, we hope to provide access to something that larger traders and investors usually sink their teeth in, but by accessing them from our platform, anyone can do it a lower cost and in an easier way.

Do you have any other particular instrument that you’d like to trade with us? ETF’s were added due to client requests, we answer those.

How to Organise Your Trading Schedule

How to Organise Your Trading Schedule

How to Organise Your Trading Schedule

Making the most of your time trading

Building on our previous two articles on how much time you need to dedicate to trading, we’ll be going over how you can arrange your trading day, so that you can cover the most opportune moments.

A note on how we’ll go about this – for the purpose of being more useful we’ve chosen a full trading day – one that has eight hours. Your personal one may vary – some people trade full time, but others mix following the market during work or study. The advice we’ll give here will hopefully benefit you in organising the time you have in both of these scenarios.

When talking of a trading schedule we mean arranging your time and activities in relation to trading. These include what we outlined in the article for planning a trade. In it we covered steps such as checking on news that is related to your preferred instrument(s) and picking one or more of a group of instruments that you have some knowledge about or that are in focus that day.

Lets see how this looks like for tomorrow, 05.03.15:

8:00am GMT – UK stock market opens. Impacted instruments: FTSE, occasionally GBP.

12:00pm GMT – Bank Rate announcement from BoE. Impacted instruments: FTSE, GBP, bank stocks.

1:30pm GMT – ECB press conference. Impacted instruments: EUR, USD, DAX, CAC.

1:30pm GMT – Unemployment claims data from U.S. Impacted instruments: USD

2:30pm GMT – U.S. markets open. Impacted instruments: Dow Jones, S&P, USD

4:30pm GMT – UK market closes. Impacted instruments: FTSE

So if you were to trade from 8:00am to say 5-6pm, you’d have six planned news events to look forward to. If you were to trade only after, say 2:00pm GMT, then there would be two expected volatility periods. Obviously they don’t absolutely always offer a lot of action; sometimes events are already priced in and the markets don’t budge at all.

This example has four main instruments for trading (FTSE, GBP, EUR, USD), but if you’d like a bit more background on deciding how many you should trade, you can go to this article. Remember that instrument types and indeed individual currency pairs, commodities, stocks, etc. are like people – you need time to get to really know them (Blog T212 obviously doesn’t believe in love at first sight).

There are several things to watch out for when trading on a schedule with pre-planned instruments and events in mind. A more technical one is that switching between instruments rapidly and frequently can lead to one of the most underestimated mistakes that traders make – mixing up the numbers. It doesn’t happen often, but when it does it can be quite a pain.

If this happens to you there are two ways to go. The first thing is to see if it’s a total mistake and a huge loss seems certain – if so – exit immediately and cut your losses. If you were luckier and this wrongly entered position is on the plus side – ride it out and see where it takes you – but do not enter a new trade – the fact you made an error hasn’t changed and it’s best to sideline yourself before you make another unwanted mistake.

Another important thing, focused on those who trade simultaneously with university and work, is to create some “space” between your main activity and trading. Yes, you can trade on the go, but if your mind is still engaged with something else, especially when it’s emotionally charged, it’s best to give yourself a bit of time and clear your head.

Some might be able to multitask, or quickly move from another activity to trading, but we mustn’t forget the bigger picture – we are, more or less the first generation that has the technical infrastructure to multitask at such a high speed – even if we do have the opportunity to do so, it doesn’t always mean we should. Training yourself and building habits of performing all the steps before trading is crucial in limiting risk and making better decisions.

You can of course expand the schedule to a weekly or even longer one with highlights, but a monthly one would be the longest we’d go for. Just keep in mind the regularity of the most crucial events that affect your preferred instruments and that happen regularly. Knowing what happens next should provide a better platform to be rational and calm when things don’t seem to add up in the market.

Armed and Ready for When the Trading Action Happens (part 3)

Armed and Ready for When the Trading Action Happens (part 3)

Armed and Ready for When the Trading Action Happens (part 3)

The different times when forex, stocks, indices and commodities spring into life

In this final chapter of our three part review, we’ll break down the factors that influence the four instrument types that one can find in our platform.

Forex

Currency levels reflect those who use and trade them – the lion share of influence comes from the countries that issue them, as well as their respective central banks. So when economic data comes out, or the chairman/president of a central bank or occasionally a political leader speaks about the economy – markets move. As they reveal new information, or confirm a prediction, the currency’s crosses move in response to them.

These “forces of change” can be divided into two groups – planned and unexpected. The first come out on a regular basis and consist of numbers that reflect the economy – inflation, unemployment, payrolls and bank rates are perceived as the four most important components in this regard. (You can find them all in our calendar section and updates on their announcement appear in the platform’s newsfeed.)

The unexpected ones are a bit tricky, as the name implies. Some planned announcements can turn into something unexpected if the numbers are considerably above or below expectations, or if a press conference of a central banker gets interesting and they share their plans for action (you can check out our article on why the FOMC influences markets).

The other unexpected factors are the words of people in power, those who govern taxes, international trade, commodity supply and demand. And armies.

Stocks

Although stocks are confined to the trading sessions in the respective exchanges (with the exception of the so-called pre-market and after-hour trading sessions), they are the preferred trading instruments of many traders, especially those in the U.S.

The practice of stock picking and trying to outpace indices is popular and some see it as easier to understand, as you have to understand if a company has superior products, good management and a plan for the future. In reality it’s a bit more complex than that, as we discussed here.

The circumstances that prompt individual stocks to react have a wide range. New products or services (think Apple’s unveilings or BT competing with Sky for Premier League coverage), fines, job cuts, new client announcements can all push or drag the price. It’s also important to consider that companies don’t exist in isolation, as they have competitors whose performance might indicate growth or stagnation for an industry, or even directly affect them.

The equivalent of planned announcements here is earnings season, which happens four times per year. As public companies all have to divulge their financial and accounting records, providing insight into what is going on. Coupled with an “earnings call,” where management discusses the more important points and trends, this is the time that sees the largest fluctuations.

When there is no specific news, stocks are generally traded more heavily in the beginning and end of sessions and they can also see higher volumes when traders and investors are monitoring other economic data – for instance the strong dollar is blamed by some U.S. companies for a dent in their latest earnings.

Armed and Ready for When the Trading Action Happens (part 3) 2
Know when to jump and when to land in the markets

Indices

We’ll start with the simple definition of indices – they are comprised of stocks that cover certain requirements. So indices change when their components change.

A useful thing to keep in mind is the weight of companies in the most traded indices. Apple has a considerably larger influence on the NASDAQ index than, say eBay. This influence is dynamic and changes all the time (we’ll be covering this in one of our next articles.)

Turning back to part one of this series, we talked about how markets influence each other in a sequential fashion. Example: if the Chinese economy shows further signs of a slowdown, this might immediately impact the Australian indices, as their economies are connected. But even the European session and U.S. sessions can start on the downside if the numbers are bad and there is nothing else to pick them up. The opposite direction can also be seen.

Commodities

Trading commodities is perhaps the most volatile of all. Gold and oil are the prime examples here. Being two of the most traded instruments in the world they have a higher volatility and are heavily influenced by negative and positive events. Gold is considered a “safe haven” for uncertain times and demand from traders usually increases when there is economic and political risk. Hence the cues for trading – lower GDP from a leading country, deflation, bad employment numbers, war and general fear.

Oil is also susceptible to these risks, but also by supply and demand. The two groups of factors act simultaneously and influence each other. Increased production is usually a sign of a healthy (world) economy, but we are living in a unique time when the traditional oil producers, like OPEC, are keeping production levels high without demand picking up (for a bit more on oil in 2015 read here).

The times when the most movement happens usually coincides with the cross between the European and U.S. sessions, but pressures do rise and subside at other times, especially when some of the aforementioned situations are unfolding.

With all this active traders, none more so than day traders, try to construct a trading schedule for themselves, making maximum use of their capital with the highest possible number of trades. Taking into consideration how many instruments you have knowledge about and how many you can trade at the same time, this is the preferred way some tackle the markets.

 

 

Armed and Ready for When the Trading Action Happens (part 2)

Armed and Ready for When the Trading Action Happens (part 2)

Armed and Ready for When the Trading Action Happens (part 2)

Second part of our series on trading sessions and the best times to trade

In part one we went over the three main trading sessions, how they overlap and where more volatility can be expected. Here we’ll pick up things with the trading sessions for commodities and their specifics and continue with a detailed picture of the differences between the days of the working week.

As commodities are traded on different exchanges than stocks, like the LME and NYMEX they also have different trading hours. Gold and oil are the main attractions here, but they have some discerning features between them. Gold isn’t traded with futures, its price is more akin to that of currencies in the sense that it’s main trading volume is electronic and doesn’t necessarily involve any physical exchange of nuggets, jewellery or bars. So for gold you have markets that are open between 11pm GMT and 10:15pm GMT in the Trading 212 PRO platform.

For oil, the main energy source of the world economy, futures are the predominant way of trading. As the extraction, refinement and delivery need to be done before the actual consumption, real buyers and speculators have adopted this style of trading. There are two main types of oil contracts – Oil Brent and the more general one simply named “Oil” in our platform.

Brent Crude (or Oil Brent as it’s denoted in the platform) is comprised of oil types that come from the North Sea and is the benchmark for around two thirds of global oil trade. It can be traded between 1am GMT until 11pm GMT. The second contract is called “Oil’ and covers oil that comes mainly from the Gulf of Mexico. It’s traded between 11pm GMT and 10:15pm GMT.

You’ll also notice that the two have different expiry dates, so keep that in mind when trading. The trading hours for all instruments can be found on our main page in the “Trading Conditions” menu and in the “Trading Instruments” tab.

Switching to forex trading, especially if you trade on multiple currencies, has a specific rhythm that can be seen in the different days of the week. Mondays traditionally see the lowest volatility and price change, whereas Thursdays see the most action.

Here is a list of what currencies have their largest moves in the respective workday:

Monday: none

Tuesday: USD/CHF

Wednesday: none

Thursday: EUR/USD, USD/JPY, AUD/USD, NZD/USD, EUR/JPY, GBP/JPY and EUR/CHF

Friday: GBP/USD, USD/CAD, EUR/GBP

The explanation for this is that, although the first day of the week is usually hectic for most businesses in the real economy, financial markets act on news that has just happened, or that has accumulated in some way. With two days of inaction and a lengthy Friday afternoon and evening to digest all previous announcements, usually Monday is quite calm.

Thursdays on the other hand have a concentration of planned economic announcements and this is why they have the most movement. Unemployment, payrolls and inflation numbers are key indicators for any economy and for the U.S. they are announced on Wednesdays and Thursdays You might wonder why they have such a wide impact, even beyond the actual “reach” of U.S. companies and government?

The answer has two components – the first is that the dollar is the most popular currency in the world, both in commercial trading and as a reserve currency by central banks. The second is that the U.S. economy is the most connected. Sitting between Europe and Asia, the resource rich Canada and the dynamic economy of Mexico, it’s safe to say that they are at the crossroads of the main economic highways. For now.

Numbers from Japan, Germany, Britain, Australia and most recently China can on occasion have the same impact, but it’s less frequent and they would have to be considerably different from estimates and expectations.

In part three tomorrow, which will be online at 4:00pm GMT,  we will round off when trading action happens with a breakdown of volatility for each instrument type – currencies, stocks, indices and commodities.

Armed and Ready for When the Trading Action Happens (part 1)

When Does the Action Happen for Forex, Stocks, Indices and Commodities (part 1)

When Does the Action Happen for Forex, Stocks, Indices and Commodities (part 1)

A guide to trading sessions and making the most of your time

To make the most of trading you have to be ready not only with a decision on what instrument and direction you’ll trade. It’s also necessary to know when the best possible conditions will be on hand to make your trades. With a wide array of currencies, stocks and indices it can be a bit of a challenge to find your way and identify when the best times are.

So in this three part article we’ll be covering the active hours for all types of instruments and help you get some bearings on when there is more actionable volume. A quick note about the time we’ve selected to write the time in – we’ve picked GMT as this is the most commonly accepted time zone for multiple purposes, including trading. For a bit more information on what GMT click here.

Let’s kick it off with forex, the market that never sleeps, it often goes with the expressions “open 24 hours” in all workdays and being “the largest in the world.” Apart from several hours at the end of Friday, this is true and does dwarf the stocks markets in the world.

The trading day for currencies is determined by the beginning, end and overlaps of the three trading sessions – Asian, European and American. Some use the main financial centers to describe them (Tokyo for Asia and London for Europe), but we feel it’s accurate only for the U.S., where New York has an undisputed leadership when compared to Canadian, Mexican and South American trading sessions, so we’ll go with the former style.

The Asian session begins at 11pm GMT with New Zealand and Australian markets and adds Tokyo, Singapore and the Shanghai-Hong Kong combined exchange as time goes on. The general volume higher is lower than those in Europe and the U.S.

One thing to keep in mind when either trading in this session, or trying to analyse what happened in it, is that in four out of five of the weekdays it follows the U.S. session, so it can be influenced by what happened beforehand. This is especially valid for indices and broader groups of stocks and industries. However with the rise of Chinese economic power, more and more economic data that comes out from there, alongside the traditional ones from Japan and Australia, the more established economic powerhouses in the region. These announcements are increasing their effect on Europe and the U.S.

The Asian session ends at 8am GMT and in its last hour it overlaps with the Europeans. Markets in Frankfurt and Paris open an hour before London and you’d expect a bit of volatility, but currency markets are usually unmoved. Activity here is determined by data from the three main countries – Germany, France and England with their respective inflation, unemployment and bank rates under particular scrutiny. They influence the largest indices – the DAX 30, CAC 40 and FTSE 100.

In the last several hours of the European session we get the most important trading time, not only for currencies, but also indices, stocks and sometimes commodities. This is the overlap between Europe and the U.S. and this is still the main focus of traders around the globe. The important economic announcements for the U.S. usually come out at 1:30pm GMT and/or at, falling within the European session (intentionally so) at 3:00pm GMT, surrounding the open of the New York Stock Exchange (NYSE) at 2:30pm GMT.

Europe closes at 4:30pm GMT with markedly increased volatility as individual, professional investors alongside corporate traders close their intraday positions. This leaves the run-in to the close of trading in the U.S. at 9pm GMT.

The times that the stock markets open and close is based on local business hours. They vary during October and April during the shift to and from daylight saving. These change the exact open and close times of the markets and increase or decrease the respective time of overlaps so prepare in advance when it approaches as some trading habits might need adjusting.

Part two of our series will be online tomorrow at 4pm GMT and will cover when stocks and commodities are traded the most, as well as what days of the week are most suitable for trading currencies.