Setting Targets in Trading

Setting Targets in Trading 1

Setting Targets in Trading 1

How to arrange your trading experience and get the most out of your efforts

Why do people trade? To make a profit? To learn something new? To compete against others? All can be true with making a profit the one present among them, but reaching that goal is actually more of a process than a final goal. Just like the cliche, it’s the journey that matters, not the destination.

To make this journey more sensible and worthwhile, a small number of objectives need to be set. The first part of the process is to identify what other targets beside profits make sense and are realistic. These are the building blocks of trading and no trader can mount a serious challenge on the markets without them.

It starts with something easy and straightforward – understanding what you are seeing and doing. The first part of this consists of the terminology involved in trading. This should be the initial target you set your sights on – understanding the most frequently used terms and concepts involved in trading. Without this you are at a disadvantage, even if you do manage to achieve a good win ratio by guessing price directions. By not knowing things like stop loss, take profit and margins, you’re limiting yourself in terms of what you can do. Our advice is to go through the tutorial and stop and look up anything new that you come across, this way placing it in context.

Next are the tools you have at your disposal. Price alerts, trailing stops, sentiment indicators, technical analysis tools – all of them have a role to play and its up to you to choose how much emphasis they get. Their mix forms your trading behaviour and style, but making choices about them can only be done by understanding what they do.

One example of such a tool would be the news feed in the Trading 212 PRO platform – it provides information on what is happening in terms of planned and unplanned news events that influence the markets. A purely technical trader wouldn’t bother with that as s/he relies only on indicators to determine entry and exit points, but for anyone trading shorter timeframes, they would definitely add something to the picture. It’s up to you to test both and find the exact predictability you feel they provide.

Setting Targets in Trading 2

A more direct example of a target has to do with something many traders overlook – the size of their deposit. Although trading on margin gives you the chance to trade volumes larger than what you’ve put into your account, that doesn’t mean you should expect to double it every day with genius trades. Just for comparison – until several years ago, banks offered interest rates on deposits of around 3-4% annually and that was considered a nice return, as long as inflation was lower than that level. Successful hedge funds bang the drum if they manage anything above 20-30%.

Of course an individual investor can turn over their deposit many more times and make “sell” positions far more freely than these institutions, respectively the potential for profits is far greater, but so is the risk. So this should be one of the first things you do – set a target for yourself and risk according to your deposit. Compounding profits and increasing the room for error is what trading is all about, not a constant 100% win ratio.

The next target you should try and formulate is the number of trades you’ll be making. This is an important component and one that is closely connected with your trading system if you choose to use one. Depending on the time and effort you can devote to trading, you should predetermine either a number or range of trades you’ll be making per day, week or month. The reason for this is that overtrading is a risk, especially if you start winning or losing more than expected. If the conditions that seem suitable come around more often, then maybe something was wrong with your initial calculations.

Another target is to monitor your time and efforts. Trading is much more like a profession than many people think. Although powerful mobile apps and online tools let you perform analysis that previously took hours of pouring over data, in our fast-paced society time has turned into a scarce commodity. For someone who has a job or other main activity beside trading, a reasonable plan of how much time you’ll spend is something to prepare in advance so that you don’t start putting pressure on yourself while trading (and while resting). Pressure leads to stress, stress leads to mistakes on and off the trading charts.

By making choices about these targets you will, in the end, form your own trading style. It will be adjusted for your own risk tolerance, the time you have available, your deposit, etc. If at some point you have more time or you’ve found a better system or instrument, you can rinse and repeat with every change you try out. In any case you should always lay the wide foundations of knowledge before thinking of the towers of success.

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Book of the Month – “Trading in the Zone” by Mark Douglas

Book of the Month - “Trading in the Zone” by Mark Douglas

Book of the Month - “Trading in the Zone” by Mark Douglas

Mind over matter, or how mental analysis is as important as technical

Our selection for March is another book we consider among the must-haves for any trader. Mark Douglas’ “Trading in the Zone” is a work rooted in the inner structure of the brain when it comes to trading. Well written and constructed, it is one of our favourite reads and aside from the overall even spread of valuable content, it also has those bits that manage to stick in the reader’s head, hopefully for when they need them.

This isn’t a book with strategies to take on the market, or with advice on situations that prompt specific actions. It’s an exploration of the mental side of the trading experience. Many traders initially get caught up in the action and excitement of the actual buying and selling, following how the prices change, how news events stir them up. They start to learn about the specifics of these factors, start to put their finger on what makes the market tick, but even down the road of experience some tend to forget one crucial ingredient – themselves.

Having said that, the book doesn’t make the same mistake in reverse – it doesn’t forget that the psychological aspect to trading exists within a framework made up of many different things – fundamental and technical analyses, the strength of the market and the folly of going against it, as well as some mathematics and probabilities.

One of the more pleasant features of the book is it’s rhythm and arrangement. Starting with a clear-cut comparison between the widely popular technical plus fundamental analyses and the mental analysis, the text sets off on a journey of the different aspects of trading. Chapters on responsibility, consistency, perception and beliefs slowly but surely deliver the two main things we feel are the book’s aims. The first is that in all of these “areas,” if we can call them that, there is the possibility of error and flaws. The second is that any trader should consider these areas and build them from the ground up, along with his knowledge and trading style.

Apart from the slight missteps in the beginning of the book, that have to do with some poorer examples and perhaps too strong an emphasis on the psychological without explaining it to the necessary extent, this remains an excellent piece of writing and it’s teachings will remain relevant in the changing world of online trading. Some parts may need re-reading, perhaps too laden with terminology, but we don’t see it as a negative, on the contrary – if the book was too simple it wouldn’t add anything of value to traders.

Drop us a line in the comments with any questions and suggestions about the platform, the blog or any general trading issue that concerns you. One of the commenters will get the book as a gift from us in return.

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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.

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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.

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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.

 

 

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