A wonderful client of ours named Jimmy from up north in Indonesia wanted to learn a little more information about the sentiment tools that we have on offer.  We love helping traders grow and your feedback so figured it deserved its own post.

Because the sentiment is based on advanced Natural Language Processing (NLP), an advanced form of Artificial Intelligence, we know it might seem daunting to look at on first glance, so hopefully, you find the below Q&A interesting.  

What is the sentiment chart telling me? Is there any significance to the “wave” itself?  

The wave line is the sentiment score. The wave effect was created to show that contrary to prices on the particular asset class, the sentiment is not a precise measure. It is more a proxy than anything else.  
 

What is the sentiment score? How is that calculated?  

The machine learning model creates a sentiment score by scouring all of the words in the sources selected (e.g. nouns, pronouns, adjectives) within the articles it scans each day. In a simplified way, it is the difference of the score of the positive words (e.g. good, very good, great) minus the score of the negative words (e.g. bad, very bad, awful) embedded within the article.  

The calculation is made on a 24h rolling window with a recalculation latency of 15 minutes.  

The usefulness of the current sentiment the score is relatively short term (1-3 weeks).  

What is the subjectivity score? How did it arrive at this number? What happens if it goes higher or lower?  

The subjectivity is calculated on the difference between the factual words and the emotional words embedded within an article. If there are a lot of words that fall into the “fear” lexicon for instance compared to factual observation, then the gauge will be more inclined towards subjectivity or irrationality. At 0% the gauge would tell you there is no irrationality from the crowd and any article published is based on factual elements. If the gauge is above 50% and close to 100%, it means the crowd is a bit irrational about the asset and the price of the asset is not a reflection of its fundamental value. This is a great tool to detect bubbles in asset classes like equities.  

What is the confidence index?  

The confidence index is a relative index. It looks at the history of the volume of news and will scan over a period of 24 hours. If the volume of news is greater than the average of news published over the last 7 days, it would give you an indication about the quality of the sentiment score and how much trust you should have on it. e.g. if the sentient score is very positive but the confidence is low, you should be sceptical of the sentiment. In summary, the more sources and the more information, the more accurate the AI will be in providing its level of confidence.  

Hi Traders,

By popular demand, we wanted to share our top five most used tools and features that are provided to you for free in our client area.

These are a bit like my Top Five Tools for Traders, but these are a little different as they're all internal rather than other websites or companies. 

Here are 5 of the most popular tools (in order) our clients are loving:

#1 - Analyst Views by Trading Central. This is my personal favourite. You can view it in the hub now, download it and use it as an indicator on MT4 desktop (in "Downloads on Hub) or visit your "News" tab in MT4 where it's constantly updated too.

#2 - The Economic Calendar is a must too. Are you using this already? If you're trading and don't know what announcements are coming up, you could easily be blown away by a big move and have no idea why. My favourite is that it will show you the historical price impact of previous announcements. You can even save the future events as a calendar invite!

#3 - News Tab - Knowledge is power. You know that already. You might already have your own news sources which are cool, but with Fusion's news tab, you can create a personalised feed (e.g. only show me EURUSD) or see what's most popular for others. Don't be an uninformed trader.

#4 - Sentiment - I love the idea of knowing what the crowd is bullish or bearish on. What are people talking about? Why are they talking about it? Check out our post on why this is important.

#5 - Technical insight is excellent if you'd like to go into a deeper dive on technical analysis on Forex and Indices. I prefer these charts over MT4 truth be told and want to know short, medium and long term outlook for each trade I'm considering.

That's it for now. We've built these for you and believe they'll truly help you excel as a trader.

#6 – Historical and Live Spreads Tool - with this tool, you can see how spreads have fluctuated over time, as well as the current live spreads. This information can be incredibly valuable in helping you make informed decisions about when to enter and exit trades. No more surprises, no more hidden fees – just transparent, competitive pricing. Read our blog post to learn how spreads actually affect your trading costs. 

Fusion Markets prides itself on its low-cost approach to trading, but have you ever wondered why access to low-cost execution is important and what part it might play in your long-term success as a trader?

You might not even link the two things together, and I can see why. After all, a few pips of spread, or dollars and cents of commission paid, is small potatoes when you are trading in tens of thousands of dollars worth of currencies and other instruments daily.

But not so fast because these costs make a difference in the long-term, and that is the timescale that Fusion wants to be your partner in the markets.

Let’s look at some numbers and imagine that you are a moderately active trader with a strategy that you deploy across five instruments daily. On average, you make 20 trades per day. Let’s call you Trader A. You have a friend who deals with another broker using a similar strategy, but they don’t offer Fusion Markets low commission rates. Let’s refer to them as Trader B.

You pay our low commission rate of USD 2.25 per trade whilst Trader B pays $5.00 per trade. You both trade 20 times a day, five days a week. That means that you, Trader A, pay $225 per week in commission while your friend, Trader B, pays $500 in commission per week. That’s $275 more than what you pay.

Now let’s scale that up...

Over a month, that’s a difference of around $1,100 commission, and over the course of the year, Trader B pays an additional $14,300 dollars more in commission than you for the same or similar trades.

That means that Trader B will pay away an astonishing $71,500 of additional commission over five years of this type of active trading.

Not only does Trader B pay those additional costs, he or she also “pays” the opportunity costs of not having that money available to them. Money that could have been saved or invested or that could have helped pay off the mortgage, the car loan or a nest egg for your kids that much quicker.

All that before we even consider the possibility of compound growth on that money over time.

Tighter spreads matter too.

Now not only do lower commissions benefit your trading and finances so do tighter spreads. After all, some brokers charge astronomical amounts in spreads.  

Spreads are the difference between the bid and ask prices in the market, the prices at which you can buy or sell a financial instrument like a currency pair or equity index.

Each time we buy or sell an instrument at the market price, we are said to be” crossing the spread” or if you prefer incurring the cost of spread in our trade.

The spread is seen as a cost because we have to make it back before our trade moves into profit.

Think of it like this: Instrument A is priced at 100-101. We can sell at 100 and buy at 101.

If we buy a unit of instrument A at 101, we incur an immediate running loss. That’s because our trade is valued at the price that we can sell the unit of instrument A for, and in this case, that’s 100.

In making the trade, we have incurred the spread as a cost. To make those costs back, we need to see the price of instrument A move up to 101-102 or higher. If it does that, it means that we now can sell our unit of instrument A at the price we paid for it. That is, we are now at breakeven on the trade.

And if the price of instrument A moves to 102-103, then we have a running profit on our trade because the bid price of Instrument A is now above our trade entry-level.

Spreads in FX trading may appear small but don’t forget that trade sizes are typically larger here.  Remember that a standard FX lot is US$100,000 of notional value.

What’s more, FX trading is leveraged, meaning that clients can gear up their account and at the maximum available leverage of 500:1 (30:1 if you're a retail client with ASIC), that means that a deposit of just US$ 2000 could control 10 FX lots or US$ 1,000,000 worth of a currency pair.

Even a small value like the spread in EURUSD grows pretty quickly when you multiply it by another 6 or 7 figure number. So, the difference between a 0.1-0.2 pip spread, that you typically find at Fusion Markets, in this most active of currency pairs, and a 1-2 pip price that you might well find elsewhere, quickly becomes material (in your head, you can do the math - 10-20x the figure is a LOT).  Our Historical and Live Spreads Tool is designed to allow you to see how spreads have changed historically, discover our average, minimum and maximum spreads and, consequently, make better informed trading decisions. 

Quite simply, the narrower or tighter that the spread you pay is, then the more chance you have of your trade moving into profit and doing so more quickly. Which, in turn, means more of your trades are potentially viable. Of course, you still have to do the leg work and get the direction of your trade right, but tighter spreads also mean that if you are wrong, and you cut or close the position. Then you are doing so at a more advantageous price, which can help keep your trading losses to a minimum.

Think of trading like an Olympic hurdle race. With a low-cost broker, you have a tiny hurdle to jump over in the form of lower costs. Your friend at Broker B has a giant hurdle he has to jump over every time he enters a trade. Who has the better chance of success here? Do you want to jump over a 1 ft hurdle or a 6 ft hurdle?

Successful trading is not a get rich quick scheme. It’s about finding and honing a style or system of trading that works for you and applying that to the markets over time. Successful traders often talk about slanting the odds of success in their favour, and they try to do this not just for the trade that’s in front of them now but for all of their trades during the months and years they are active in markets. Having a trading cost base that works in your favour can play a key part in this. It means the margin for error can be 10x lower than what your friend pays at Broker B.

So, isn't it time you stopped paying too much to trade?

When you start to learn about trading, you'll come across plenty of material about minimising risk and money management, because they're two of the most critical areas of the business. 

Learning to manage risk and preserve trading capital is fundamental to a successful trading journey. 

One area the literature focuses on is the use of stop losses. A stop loss is simply a price level beyond which you choose not to run an unprofitable or losing trade.

But for me, stop losses are one of the most misunderstood tools in a trader's arsenal, and I wanted to offer a different perspective than what is usually found in the research.  

I'll give you a hint; it's in the name!

Knowing your risk

It's important to know the risk you are taking on any given trade, this can be calculated by multiplying the distance of your stop loss, from the entry-level of your trade, by the notional size of your trade.  

In theory, this simple calculation determines the maximum risk or loss that you face on a given trade. I say in theory because that risk figure is not cast in stone.  

Firstly, if the stop loss you use on a trade is just a mental one, i.e. a figure that you have chosen, (but will watch rather than attach to an order), then it will be down to you to monitor price action and trade it. That's a sure recipe for looking like a maniac checking your platform or mobile app every second you get.

Systemise your process

Rather than rely on them being in front of the screen to close a trade (which in a 24/5 market is not that realistic), many traders will place a stop loss to an open position. This is essentially creating an instruction to close the position should the price of the underlying instrument reach a pre-set level.

In doing so, traders are systemising this part of their trading. On the face of it, that sounds like a good idea doesn't it? 

But what if that automated stop loss level was defining the loss you make on a trade and eating away at your trading capital, not protecting it?  

The use of a stop loss should be what its name suggests – the prevention of a loss, not the realisation of losses as 90% of traders currently use their SL for.  

Crowding together

Here's the thing. Traders of all sizes fall foul of "clustering" which means they place their stop losses in the same areas, at the same time.  

For example, at or around round numbers, (e.g. USDJPY 110) just above or just below a moving average or indeed close by the same support or resistance levels everyone else is keenly watching.  

The market is aware of this behaviour and is often on the lookout for these clusters of stop losses. When they are, it's known as a stop hunt.  

But what exactly does that mean? 

Well, a big bank (a price "Maker") might see on their books that they have a cluster of orders around 1.10 on EURUSD, and then be willing to commit large sums of capital to "hunting down" that stop loss level. They do this by moving the underlying price towards it, in a selfish way, to reward themselves, rather than because of natural order flow (and they wonder why they have bad reputations!).  

As an aside, a broker such as Fusion Markets, that typically services "retail" clients, e.g. mum and dad investors, often get accused of doing the same thing, despite the fact we are a price "Taker" not a price "Maker", and have no control over the prices coming through to you, as a client.  

Think about it if the market can find these groups of stop losses and trigger them, then that's easy money for the banks and traders who have the opposing view and positions.  

Remember that in FX trading there is a winner for every loser and vice versa. A successful trader endeavour's to be on the winning side of that relationship more often than not.

A different approach to stop losses

Are we saying then that you should trade without a stop loss? No, we are not! 

But what if we took a different approach to stop loss placement? Instead of lining up to provide a free lunch for the banks, what if we placed our stop losses above our entry price rather than below it?   

Of course, that means that we'd have to risk-manage our trades in a different way.

For example, employing less leverage and taking smaller positions relative to our account size. But that is really what we should be doing anyway. And of course, we would have to monitor performance closely in a trade's early stages, as we should.  

However, if the trade we have taken is the correct one, then our position will soon be on-side, and once we have a buffer between the current price and our entry-level. Then, our stop loss can be locking in profits rather than minimising (or realisation of) our losses.  

Trailing a stop-loss behind a profitable position is something of a holy grail in trading it's often talked about, but rarely seen in the markets. By not acting like the crowd, maybe we can turn the tables on the stop hunters.  

What are you waiting for? Why not stop your losses in the way they're supposed to be stopped? 

“That which does not kill us makes us stronger” – Friedrich Nietzsche.

It’s a cheesy quote to start with, I know. Bear with me here.  

It turns out it might be true when it comes to professional success as well.

In a recent paper published in the journal Nature, researchers found out that early-career setbacks can result in a stronger career in the long term – stronger even than people who never had a setback.

To sum up the paper in just a few lines, the experiment compared two groups of scientists: a group that scraped over the line in getting a grant from the US government and compared that to a group that had just missed out on a grant (one that just made it, one that just missed out).

Ten years later, the group that had not received the grant went onto have more successful careers than the team that had won the government grant.

So those who’d experienced some pain early on in their careers went onto come back stronger than those who didn’t fail.

I couldn’t help but think of how that pain would’ve fuelled their success in later years and how that so encapsulates what I’ve seen in over ten years of trading and watching hundreds of thousands of traders.

Why early successes in trading could hurt you

You may have seen my thoughts on Overconfidence bias before and it got me thinking how much this could spill over into early successes trading.

I’ve seen this far too many times in traders before.

It’s like the story of the tortoise and the hare. It’s the slow and steady trader that wins the race.

The traders I’ve seen who are new to trading will open their accounts, ignore basic risk management and trade gigantic positions on their account and make huge profits on their first few trades. While I love to see it, often they lull themselves into unbelievable amounts of overconfidence and a feeling of invincibility.

They’re the stories you read like “one man makes $1,000,000 trading options on first trade” or “this is how much you would’ve made investing $1 in Google shares since 2004” or “my friend just made $15k betting on AUDUSD” or other financial “junk food” as it should be labelled.  

Because it is too easy in their eyes, they’re always chasing the same early successes they had. 

What I took away from the Nature paper is that the easier we think something is, the more we can fool ourselves into believing something which isn’t true.

Taking the pain

Let me be clear. I’m absolutely not saying that you must lose big to win big. Nor am I saying making money early is bad.  

I’m saying that in my experience, my firm belief (now backed up by some solid research in a different field) is those that suffer early setbacks in their trading are like those who just missed out in their professional lives. In the same vein, if it’s too easy at the start, you can hurt yourself and trick yourself into thinking you’re better than you are.

It’s more like you need to hit some minor lows to hit the highs, but don’t ruin yourself. Call it a bloody nose.

Trading is not some easy game that can be won in the first week or month. Just like you wouldn’t expect to be a pilot after one week of flight training (though you can certainly have the goal!), the same is true for trading.

It’s hard. Very hard. There’s so much to take in and digest. The market is constantly evolving. That’s why you’ll hear statistics like 40% of traders don’t make it. Most people expect too much and give up too soon.

But real success in trading is more like a way of life.

It involves hard work, true grit, hours upon hours of learning and the ability to look and feel wrong many, many times (and often in painful ways both mentally, financially etc).

If you are just starting and you’re shooting the light outs, then maybe that’s not such a good thing. And if you’re struggling, know that you’re not alone.

Far better for you to see it as the challenge that it is. That a little pain is part of the journey and that if it were so easy, everyone would be doing it.

Part II – Hidden Biases in your trading

In Part One, we covered Confirmation bias, recency bias, the endowment effect, the groupthink bias and the gambler’s fallacy.

Today we’ll cover our final five, and I’ll provide you with a handy checklist so you can take 60 seconds and potentially stop yourself from rushing into something catastrophic.

6)    Hindsight bias

You could also call this one the “I knew it all along” effect. How many times have you heard someone say those words in life (not to mention in trading)?

I just knew Euro would fall after the ECB meeting.

Argh, I meant to go long on gold but didn’t get time. I knew it was going up.

We tend to believe that (of course much later than the event itself) that the onset of a past event was entirely predictable and obvious, whereas during the event we were not able to predict it.

Due to another bias (which we will not cover today) called “narrative bias” we tend to want to assign a narrative or a “story” to an event that allows us to believe that events are predictable and that we can somewhat predict or control the future. It allows us to try to make sense of the world around us.

How to overcome: Just stop pretending like you knew what was going to happen. If you didn’t put skin in the game, then you didn’t think it was going to happen!

7)    Overconfidence effect

Overconfidence as a trader allows us to believe that we are superior in our trading, which ultimately leads to hubris and poor decision making.

Whether it’s overconfidence on when to trade, what to trade (telling ourselves “sure I could normally trade AUDUSD, but why couldn’t I also be good at trading the South African rand?”) and how to trade a certain product.

We trade larger than we should, hold losers for longer than we should, relax our own risk management policy, become arrogant or complacent in our trading and this all leads to capital losses.

How to overcome: Ask yourself “What could I be wrong about” or “What makes me think I am far superior to all the others out there with this information”? The market will humble you eventually of course, but why not try to do it yourself before you shoot yourself in the foot?

8)    Anchoring

The first bit of information we hear is what we focus on.

If you ever need to negotiate with someone, you’ll be amazed at the power of anchoring with your first offer (Do try it sometime, just not with your friendly forex broker though ;-))

The same applies to trading. We hear a talking head on TV telling us about how the euro is overvalued and is heading for some drastic number that is streets away from today’s price. We can’t get that number out of our head even if we try.

Or let’s say we buy AUDUSD at .7100, close it at .7300 for a decent profit, happy days! The next week, it’s back at .7100 and we immediately are tempted to do the same again, because why not? It’s cheap again and we can repeat history. We rush into it, ignoring the technical break it’s just had or the negative sentiment on Australian Economic Data. We practically feel it’s a bargain at those levels.  

What do we do? The worst part is that we’re usually not even aware of how strong the influence is.

That’s the power of the anchor. We become attached to that information.  

How to overcome: This one is tough to overcome because studies show it can be so hidden in our subconscious without us knowing. Perhaps add to your trading checklist “Was this trade a result of an unknown anchor that I saw or heard?”

9) Consistency Bias

Like the sunk cost fallacy, we want to be consistent in our actions.

We’d hate for someone to say to us that we weren’t being fair or that last week we had said we’d do X and now had changed our minds.

Politicians do it all the time as they rigidly stick to a poor policy idea. They’d rather go down with the ship.

Traders are worse because our own desire to be consistent costs us money.

If I am known as a USD bear, and it’s rallying hard – I don’t want to look stupid or inconsistent. That’s why I keep staying bearish despite being 1000 pips from being right! It’ll come back we say. Everyone else is being stupid.

In 2009, 2010, 2011 and probably countless years since the financial crisis, people were always calling for the “double-dip” recession. I fell for it myself personally by believing them in 2009 and 2010 and staying too cautious when I should’ve thrown the house at buying stocks!

We want to feel in control. We want people to see our conviction, even if we’re wrong. Because this is a byproduct of confirmation bias, we’re not likely to seek disconfirming evidence of what we believe. We see what we want to see.

Why? Because sadly consistency is often associated with our intellectual and personal strength. Good traders should be seen as flexible. Open to the idea that they are probably wrong. Yet society thinks an inconsistent person is flaky, confused or a ‘flip-flopper’ on issues – even though we could all benefit from being open-minded to new ideas and opinions!

10) The Halo Effect

Last but not least - The halo effect is the final bias we’ll talk about today.

The halo effect means we let our overall impression of someone influence our thinking too greatly.

“But he’s so smart we say”

We idolise the opinions of the legendary hedge fund manager, Ray Dalio or the great investor of our time, Warren Buffet.

We see them on TV or in a Bloomberg article saying now is a buying opportunity or that it’s risk-off and we need to sell.

“If Buffet/Dalio/ is buying/selling now, I’ve gotta too,” we say in our head.

But how smart is that a strategy, really? What might he know that I don’t? What are his investment objectives versus mine? More important – how many times has he said this and actually been wrong?

We don’t know and we shouldn’t try to know. The halo effect blinds to sticking to our own plan and staying in our lane. The more we’re influenced by others, the harder trading becomes.

How to overcome: We must take the opinions of the so-called “Masters of the universe” with a grain of salt. They have different plans than we do. Information that we do or don’t have and so much more. Just because they’ve said this doesn’t make it come true. If only trading were that easy!

What do I do now?

OK, so I might have scared you. You are now jumping at shadows and questioning your own trading decisions, believing you have all these secret, hidden disadvantages that you didn’t have until 10 minutes ago.

Do not worry, biases can never be completely avoided. But we can work hard on challenging our opinions in order to make us more successful. Sometimes it’s just taking the time to stop and think.

To help you along the way, we’ve created a possible checklist for making better decisions in your trading.

So, stop, take a breath and ask yourself these 7 questions before you place your next trade.

What’s the rationale for taking this trade? List 3 for and 3 against.

How strong is the evidence behind my decision to trade?

What are the possible unknown unknowns?

Has the recency of information I’ve learned influenced my decision? If so, how much?

 Is this trade following the consensus of the crowd? If so, is that a good thing?

Did I hear this from a famous market commentator/investor? Why is that important?

 If none of questions 1-6 apply, then could any of the other biases above be at work?