Quality vs Quantity of Trades

Quality vs Quantity of Trades

Quality vs Quantity of Trades

How to balance between two styles of trading

One dilemma that traders face at one point or another of their trading lives is how many trades to make. This issue comes after different experiences – new traders might feel the need to either make fewer trades, so that they learn the ropes and focus on less variables. On the other hand, novices’ approach might be to make more trades in rapid succession, so that they gather the maximum amount of experience and information from quick developments and inevitable emotional ups and downs that come with such a style.

Similarly an experienced trader might need a change of style, either to see if his initial approach is wrong, or simply as a test of a more volatile instrument that offers more peaks and bottoms.

Let’s just clarify what we mean by “many” and “quality” trades. It’s not necessarily the exact number that differentiates the two, it has more to do with the amount of time needed for a trader to follow the trade from start to finish and see how it develops without missing the important points that either make it a winning or losing trade. More experience would definitely mean that you can discern important from unimportant information, so someone who made several trades per day at the beginning, can double or triple them without losing sight of the ball.

Quality trades are those that you follow without distraction, so that you review and analyse them as they happen and later on – a trading diary is how you can keep a log for them and compare and save comments and thoughts about them. Building up a detailed description of your actions, the markets behaviour and your resulting adjustments is what trading is all about. Some might do it in their heads and rely only on memory, but that’s not how the pro’s do it.

The amount you trade with has no direct importance, although larger sums would allow you to have longer trades that don’t get wiped out by sharper moves in the opposite direction where you might have a stop loss or decide to cut the losses.

So here are some tips on how to make more trades without sacrificing their quality:

– an obvious one, but we’ll still put it in here – select the smallest amounts for your trades.

– pick an instrument that needs less money to trade. Lower margins (you can find them here) indicate that you start with a smaller hurdle to pass, more time to monitor the trade and you can make more trades with the money you have.

Another thing that you should still keep an eye on is how much pips (or ultimately – money) is won or lost with the trades. It’s what it’s all about in the end, so if you’ve tried the patient approach at first and made a modest gain, or some wobbly results, then you might need to “think less”. Vice versa – if the fast approach proved to be too chaotic and disrupting to your decision making, then perhaps a slower pace might suit you.

Demo is handy in trying both approaches, not least for the actual physical experience of rapid selling and buying, but as we’ve discussed in one of our previous articles, there are some important differences between trading with real and virtual money. If your deposit allows it – try both out and see if you can cope with the challenges that they pose – a test of patience when you focus on quality and the risk of mistakes when you put the onus on quantity.

Why do Markets Often Fall Quickly and Rise Slowly?

Why do Markets Often Fall Quickly and Rise Slowly?

Why do Markets Often Fall Quickly and Rise Slowly?

Uncle Scrooge’s two most frequent emotions hold the answer – fear and greed

Some of you may have noticed that when prices start to fall, they seem to gather momentum and if the news they are reacting to is really bad – then it’s almost like a free fall. At the same time an upward movement is quite often done in increments or at a steadier pace. Although this doesn’t always happen, it does make an impression.

The explanation lies within two of the emotions traders experience (we covered their specifics in this article, as well as some of the others). First among them is fear. It is the driving force behind the selling of an asset and decreasing a position in it when there is bad news. Its increased amount among traders during certain periods can be explained with the nature of the emotion – it’s more primal and was developed in our brains in an earlier period than greed. Fear helped us survive by not taking unnecessary risks and attempting to evaluate all their potential sources.

Greed, on the other hand, can be attributed to what drives upward movement. As a secondary emotion it acts in a different manner – it accumulates and its representation is more delayed.

Keep in mind that this isn’t the evil and completely negative meaning of the word – it’s more like a component of wealth attribution, not necessarily being unfair.

In confirmation of this are the volumes of the traded instruments. Usually when the price is falling there are higher volumes. Fear is stronger and works in the moment, it grabs you and you feel like you have only one choice – this makes people exit entire positions. Buying an instrument and hoping it climbs up and brings profits is usually done in increments – some investors and traders add relatively small amounts to their positions over days, months and years.

We have to make several important notes here. Currency pairs are NOT an example of drops and climbs. As they are indeed pairs, the quick downward movement for the first currency in the way the pair is written, is at the same an upward movement for the second currency. As a recent example we can take the EUR/USD which has been dropping from last year’s high of 1.40 to around 1.13. If you search for the USD/EUR pair – it exists in unison with the more widely accepted representation – you can see that it has risen from 0.75 to 0.87 for the same period.

Second, but not of less importance, is that steep drops and steady climbs might not happen for certain commodities. As an instrument type they have their specifics – they are traded in futures and are ultimately used in the physical world. This makes the dynamics in their supply and demand different from those of currencies, indices and stocks. Not to say that the fear and greed dynamic is absent here – it just works differently.

Here are our tips on how to take advantage of your knowledge of emotions and their influence:

– don’t forget that you can profit from movement in both directions – keep an eye out for big turns both up and down. Even if you’ve performed an analysis or just made a judgement call for one direction, it might turn out to be completely wrong – instead of wallowing and accepting defeat, you can actually make a quick u-turn and jump on the opposite movement

– consider your emotions in advance of making a trade in either direction, don’t let too much fear or greed cloud your judgement

– use the stop loss and take profit functionalities

– exercise patience when buying, as it will take more time to reach a good level to exit

– be alert and keep a closer look on the market when you sell; things will most likely happen quicker than in the other direction

All this is, as usual, is easier said than done. Keeping your emotions in check, and at the same time, following the markets and their trends, breakouts and ranges is hard enough. These emotions will always be present as we are human, but if you do put them in perspective while trading then you’ll have an edge over other traders who are less aware of themselves.

Why are German Billionaires Different?

Why are German Billionaires Different 1

Why are German Billionaires Different 1

Is there something to be learned by traders from their low-key demeanor

Last time Forbes Magazine counted them, there were 1645 billionaires in the world. Although most headlines come from the U.S. and China when it comes to the people on that list. Warren Buffett and Bill Gates are frequently in the public eye and the meteoric rise in the number of billionaires in the Asian powerhouse has eclipsed even those from Russia.

Germany has 85 names on the list, but there is something interesting in how they behave and conduct themselves. Many see it as an example of how to treat money and the risks that come with its accumulation and preservation.

The companies owned by the country’s richest vary from discount supermarkets like Aldi and Lidl, to software giants SAP and BMW. Although the people running or owning them are different, there is a recurring theme among them – limited or no public appearances, no showboating of wealth and a strict work ethic.

This isn’t to say that billionaires elsewhere are inferior, or that respecting your own privacy is something reserved only for Germany, but it does make an impression when the late owners of Aldi, Karl and Theo Albrecht (whose $25 billion fortune has now been inherited by their many children), as well as Lidl owner Dieter Schwarz, literally have one or two photos in the public domain.

The Albrecht brothers fought in WW2 with Karl being wounded on the Russian front and Theo serving in the Africa Corps. After they returned home the crippled state in which Germany was, changed their perspective on life and money. After taking over their mother’s small grocery shop they employed an extremely frugal business system, ridding their growing number of stores of anything that brought expenses and focusing on products that were sold quickly. No decorations, no advertising budget and everything placed on the pallets it was brought in.

After becoming wealthy and famous Karl Albrecht was kidnapped in 1971, subsequently being released for a ransom paid by his brother. Their approach to life was evident when Theo offset the money against tax, effectively marking it as an expense.

Why are German Billionaires Different 2

This event is thought to be one of the reasons behind German billionaires fear of the spotlight. But it would miss a big part the reasons the lifestyle choice they’ve made. Point in case are the family who control the largest percentage of BMW.

Herbert Quandt is credited as the one who lifted the company to its present status, and after his death in 1982, his wife and two children who have appr. 46.7% of the company’s stock are nowhere to be seen in interviews, papers or magazines. Even more so, his daughter Susanne Klatten (who took her husbands name) started off as an apprentice in a BMW factory with a false identity, so that she could learn the business from the bottom up. It even crossed into her personal life, where her husband understood who she actually was right before they were married.

All this can be seen as relative to how traders share their success or mishaps with others. Most don’t realise it, but it’s actually a part of trading. The adrenaline rush of closing a successful trade, or a losing one, is highest when that last click or swipe happens, but there is another great (or bad) feeling that follows with some delay – when you tell someone about it.

In a time of increased social sharing the number of messages and communication channels has grown, but our mental approach hasn’t changed that much. Most people continue to overshare their success and keep their failures to themselves and in an emotionally charged activity like trading, this can erode your mental state, motivation and perception of market conditions.

Sharing what happens with your trades (both the winners and losers) is generally beneficial, it reduces stress in most people and if there is no negative feedback from the other side (be it family, friends, partner etc.) it can reassuring and provide a sort of constructive confidence. However if someone does have a bad opinion this can be quite damaging.

Perhaps there’s something to learn from the German billionaires. Not that someone will kidnap you if you share everything and flaunt your success, but rather that picking one way to handle it gives you the necessary peace of mind. Either keep it all to yourself, or share it in full – the highs and the lows. Everything in between will just mix up things and can affect your trading.

German stocks and the DAX are available for trading in the Trading 212 PRO platform.

Our next article will be online tomorrow at 11:00am GMT – “Stock of the Week: JP Morgan Chase before their earnings report”

Does the “Santa Claus rally” really exist for stock markets?

Does the Santa Claus rally really exist for stock markets

Does the Santa Claus rally really exist for stock markets

History suggests it’s real, most of the time

There are several things that inevitably find their way in stock market news come December. Annual performance, outperformers, stand-out companies are all mentioned and repeated ad nauseum. But one of the more curious ones is the so-called Santa Claus rally (it comes from the U.S. so no Father Christmas).

This curious description is used to describe the frequent rise in indexes and stocks, that comes at the end of the month, between Christmas and New Year. It’s one of the peculiarities of the market, as over longer periods of time many trends based solely on psychology and trader sentiment tend to even out. But statistics do show that it’s quite frequent (stats are for the U.S. index S&P, from 1930 to 2010, broken down per month and per week for December. You can easily fill them out to 2014 in the Trading 212 PRO platform).

Explanations for why this happens can be quite different. The most well-documented one is the anticipation of the January effect (we’ll get into more detail about it next week) – the practice of offloading stocks at the end of the year, so that no taxes are paid.. and then buying again into the market at the start of January.

Other reasons that fuel the rally are related to the traders and brokers that perform the trading itself. Bonuses on Wall Street are received before Christmas and are usually invested right away. Add that to the propping up of investment portfolios by fund managers, so that they look good at year end, and you have a strong foundation for an upturn.

Does the Santa Claus rally really exist for stock markets

The more unmeasurable explanation is that of increased optimism among traders. In a time for spending more time with family in sharing and giving (we know it doesn’t always happen like that, but let’s go along with it), some argue that it rubs off on market participants. This translates into a more bullish sentiment and actual stockholders prefer to keep it that way.

The phenomenon has also been observed in international stock markets, regardless of the popular religion of the country, or if they even have holidays at the end of December. Most analysts accept that U.S. indexes are the pacesetters most of the time and this pulls other countries upward.

There are still several things to remember about the rally:

  • It doesn’t happen every year and it can be quite small sometimes.

  • Some specific stocks can register serious losses while the wider markets are in the rally.

  • Indexes in different countries can perform differently due to economic and global events, and the last week of December isn’t devoid of geopolitical news and developments.

Still, the lone fact that this notion exists can be seen as an indicator of what market participants are expecting. Circumstances such as these can fuel a self-fulfilling prophecy, overriding fundamentals, news and technical indicators. In this case the power of the sentiment outweighs that of the usual predictors. It’s just like guessing what your Christmas stockings hold by weighing what’s inside.

How our Fight or Flight Instinct Works Against us in Trading

How our Fight or Flight Instinct Works Against us in Trading

How our Fight or Flight Instinct Works Against us in Trading

What preserved us for millennia can be a burden for trading

Depending on multiple factors, from fixed ones like age and gender, to more variable ones like social status and life experience, we tend to approach the concept and act of trading in different ways. Some have more patience, others are quick to get a temper. Some are more analytical and good with numbers, others rely on instinct to tackle the challenges of the market. But we all share the basic instinct to protect ourselves deep within our brain – a universal reaction that lies beneath the surface and shows itself only when there’s real pressure.

The problem, or maybe challenge, here is that this particular part of the brain is quite active when it comes to trading. Risk isn’t an everyday occurrence as it was for our species not long ago. Our everyday lives have changed in a small period (in evolutionary terms) from one where threats surround us and we have to carve out a niche between them just to survive, to one where almost everything that involves risk has been removed and some of us begin to crave risk as a sign of reality. It all boils down to the level of fear and uncertainty we have.

See how fear and uncertainty go together. But they shouldn’t. Not in trading. Fear is the strongest reaction we have for self-preservation. Our inner caveman is still within us when we enter positions and stop-losses and acts like he’s under physical threat when they turn red. This feeling can be quite overwhelming (whether we admit it or not) and affects the rational part of our brains – the one responsible for handling complex operations, such as entering and exiting a trade, its amount and duration.

We are influenced by our limbic system to revert back to a more simplistic mode, one that doesn’t have a preset trading plan and acts on impulse when managing risk should be done in a calculated fashion. If you do see some of this behaviour in yourself, don’t immediately take it as a mistake or something wrong. It’s how we’re hardwired and it takes training and conscious self-observation to overcome it.

This is actually no easy feat, as the dangers are two-pronged. Fear fuels uncertainty and anxiety, but the instinct to stand and fight, because there is nothing to lose, is also a risky behaviour. It’s best illustrated with all-or-nothing trades, where the whole available account is placed in a single trade whose owner is either looking to get his losses back, or is trying to win big with one big master stroke. We all know how that usually ends.

Coping with this requires experience and molding your mindset to what is best for trading. Hesitation and doubt will be things you’ll just have to take, especially compared to almost any other daily activity you are involved in. Feeling anxiety and having a fast pulse during the execution and duration of a trade will happen with a strong intensity, especially once you begin on the trading path. They are the signs of your primal instincts meddling in the process.

But your aim should be to see them decrease and even fade away. This can be achieved through your conscious expectation that they will happen at one point or another. Then comes their management. It’s how you look at trading – never can it be only about the instrument, the trend or the news. It’s about you under pressure and being able to quell fear and understand uncertainty.