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Your New Secret Trading Weapon: Sleep

Sleepless nights are a common predicament for most traders. It is the only time you are not consciously screening the markets. As stressful as it can be to sleep with volatile open positions, it is extremely important that you beat the urge to make impulsive moves and that you give your brain some rest.


Since the forex markets run 24/5, most people barely get enough sleep while the markets are open. But this kind of lifestyle will ultimately lead you to make sub-optimal biased trading decisions.


Depending on which part of the world you’re in, the markets might move the most while you should be asleep. For those here in Australia, we are sleeping while the US is in their trading day, which, when you have large open positions active in the market, can make it even more difficult to get a good sleep.


But here’s the thing most traders are not thinking about. Getting a good night’s sleep every day is just as crucial as your fundamental and technical knowledge. Still, many of us tend to overlook a good rest, thinking we can survive on far less than we need. Let’s look at why sleep is essential for forex trading and how to cultivate a good sleep routine.

 

Why is sleep important for traders?

Sleep plays a big part in our mental wellness, which then affects our decision-making for the day.When you’re placing trades that involve vast amounts of money along with prices that change every second, you want the part of your brain that makes decisions (the pre-frontal cortex, if we’re being precise) to be in tiptop shape.


Ask any elite athlete what one of the most essential tools they have for recovery is, and it’s often sleep. Lebron James, for example, reportedly sleeps as much as 10 hours a night. Now I know what you’re thinking, “Well, I’m not an elite athlete and I’m certainly not Lebron”. But you are trying to obtain peak (trading) performance, right?


Trading involves competent risk management. Before you execute those trades, you want to have a clear picture of the risks and benefits so that you can make calculated and well-informed decisions. When you don’t allow your body and mind to rest well, your practical decision-making is overshadowed by restless behavior patterns.


Basically, good sleep keeps you sharp and productive. On the other hand, studies show that lack of sleep tends to impair decision-making involving complex factors and unexpected occurrences, which occurs quite a lot when the markets are open. By having good sleep regularly, you allow your brain to make unimpaired decisions compared to when you are sleep-deprived.


And speaking of the brain…  

What’s the science behind it?


First, let’s look at what goes on in your brain when you sleep.

Throughout the day, when you’re awake, the brain accumulates metabolic waste. You don’t even have to exercise or move around to accumulate it. Your body already expends energy by just keeping your basic functions running, like breathing and pumping blood.


In using energy, metabolic waste builds up in various parts of your body, your brain included. In time, the buildup can interfere with the peak functions of your brain. When you sleep, your brain sees the perfect opportunity to do some house cleaning. The brain has a built-in waste removal system which is called the glymphatic system.

Sure, the glymphatic system also works while you’re awake, but the cleanup process is at least twice as fast when you’re asleep. This is because your brain knows that there’s not much going on in your body, which allows it to focus on clearing up.


This is why you always feel refreshed and focused when you wake up after a good night’s sleep. And since mental wellness plays a huge part in your trading psychology and your trading mindset, you always want to be in this “clear” state whenever you’re trading. When you’re sleep-deprived, the part of your brain in charge of your fight or flight reactions — the amygdala — is far more stimulated than it would be when you’ve had a normal amount of sleep.


What does this mean for you as a trader?


Well, try to go back to the last time your fight or flight reaction (or amygdala hijack) got triggered. Maybe you were in a disagreement with a colleague or a friend, or you were in an emergency. Wasn’t it hard to stay focused because you felt like a thousand things were going on at once? Now think about how you feel when you’re sleep-deprived and a trade isn’t going your way and a new announcement means you need to think about the implications and what’s next for the market. Are you at your best cognitively at this point? Probably not.


A stimulated amygdala makes it hard to make logical decisions. It also cuts off access to your pre-frontal cortex, which is in charge of making logical decisions. And as forex traders, our trading mindset should always be governed by logical, not emotional, decisions.


Unfortunately, your brain is more likely to go into fight or flight mode with a lack of sleep. You aren’t thinking or seeing the market clearly. Maybe you’re paranoid about your trade, or you see things that aren’t there, or maybe you enter or exit the trade too early.
  

How does a good night’s sleep benefit your trading?

A good night’s sleep gives you good preparation for the trades you’ll be making the next day. Your brain is clearer, and your mind is sharper. When you look at the charts, you’ll be less likely to be influenced by sudden price fluctuations, which we know are all too common in financial markets, particularly in forex trading.


By consistently making good forex trading decisions, you’re more likely to see bigger gains in your trades.


In fact, one study  suggested that sleep-deprived forex traders had relatively lower returns because their decision-making skills were affected.


A good night’s sleep also promotes a healthy work-life balance. You may be a forex trader, but it’s also important to look into your personal health outside the financial markets. You feel more energized and alert when you are awake, allowing you to see new opportunities in the market that an otherwise tired trader might not. This could be your edge.  


Tips for sleeping better

Now that we’ve talked about why sleep is important, let’s talk about developing good sleeping habits.

First, reduce your screen exposure before bedtime. Blue light keeps our brains alert, and this is the kind of light that you usually see from your phones and your living room lights.


Put the phone down and shut off your computer. As hard as it is, that will mean trying to keep your eyes off the charts. Try having herbal tea (Peppermint, chamomile is best for relaxing), reading a physical book (to avoid more screentime), or doing something that relaxes you to get your brain ready for bed. If you really must check your phone or computer late at night, try using apps that make the screen appear “warmer,” giving it an orange tint or via “dark mode” starting from a couple of hours before your bedtime.


Orange lighting is less harsh compared to blue light, which makes it easier to eventually fall asleep.

Second, if you can afford it, separate your workspace from your bedroom. You want your brain to associate your bedroom with rest and relaxation so that as soon as you walk into the bedroom, your brain “gets” it and starts powering down. Playing on your phone or laptop in bed is likely confusing your brain.


Third, keep your room to a cool temperature. Ideally, between 18-20 degrees Celsius.


Finally, one of the worst things you can do is get up and check your phone or computer for what’s happening in the market. The screentime on your eyes, the adrenaline rush, and more will only cause you to make an emotional decision.


If it makes you feel better, a stop-loss or a take profit takes a lot of the unknowns out of the equation. Your trade will either have one of three things happen: It’s still open, it’s been closed with profit, or closed with a loss. By leaving the outcome to the market, you are more likely to think too heavily about it all through the night.


Forex trading is not all about the technical and analytical aspects. A sound body complements a sound mind. You should take care of both aspects to make sure you are at your best. In our view, a well-rested trader will likely exceed a sleep-deprived trader that’s not at peak cognitive performance.

26/08/2021
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Why is MetaTrader 4 so popular?

Anyone who’s into forex trading will undoubtedly have heard of MT4, which stands for MetaTrader 4. It’s the most popular forex trading platform out there, and for good reason. 


Unusually for a technology platform, it is 16 years old and continues to stand the test of time with users around the world and with all sorts of different experience levels. In today’s article, we wanted to provide our thoughts on the reason it’s still so popular 


MT4 was developed and released by MetaQuotes Software in 2005. Throughout its years of existence, it has since grown and made a name for itself as the leading platform in retail forex trading. Nowadays, millions of forex traders around the world use it regularly. 

Foreign exchange brokers like Fusion Markets are also licensed to provide MT4 for their clients. 


While primarily used for forex trading, it also lets a broker easily plug-in the ability to trade indices, cryptocurrency, and other asset classes such as commodities. Brokers like Fusion are offering over 120+ products on MT4.  It’s more than just your everyday exchange platform, though. It’s got excellent built-in charts for those who use technical analysis and its secret weapon, expert advisors are the most popular feature.

Expert Advisors are 3rd party automated trading systems. Something close to 70% of trades executed on MT4 are automated trades and their popularity continues to grow. Add in mobile apps for all platforms, in-built news (or trade ideas like Fusion offers), trading signals and much more, all of this works together to give you a more holistic look into the market to make well-informed trading decisions.

 Here are just a few reasons MT4 continues to remain as popular as ever.


1. It has robots and automated trading

When people think of trading in the financial markets, most people tend to picture sitting around and watching the screen all day.  

Forex is different in that it runs 24/5.  If there is one thing that keeps traders from switching to other trading platforms, it’s the availability of self-developed or 3rd party robots and expert advisors, essentially algorithms that run trading strategies around the clock. This means that forex traders can use programming to automatically execute deals for them when certain conditions are present. Let’s explain a little bit.


Technical analysis of forex trading is a deep topic. There are many methods of analyzing whether a particular currency is worth buying or selling. Among these include moving averages, convergences, and chart patterns. We won’t go into technical analysis in this article but suffice to say that there’s a lot to consider if we want to confirm if a trade should be taken or not. Monitoring different currencies using multiple methods can be exhausting in the forex market, where global currencies are traded 24/5.


Manually monitoring multiple charts is also slow and cumbersome because humans have a limit on how fast they can read and analyze data. That’s where MT4’s automated trading comes in. Using predefined lines of code, the trading robots can scan thousands, of forex markets and check to see if the forex trader’s predefined buy or sell conditions are met. Bridgewater, one of the world’s largest hedge funds uses over 100 million data points. Good luck trying to beat that with just your brain alone. With automated systems like EAs, while those off the shelf are unlikely to have as many data points as Bridgewater, these will still be faster than any human could be.


In forex trading, prices can change in the blink of an eye. Thus, the traders who can execute a deal as fast as possible protect themselves from market fluctuations. Those who prefer to just rely on the wisdom and experience of the more seasoned forex traders can use MT4’s signal trading feature, which basically lets them copy all or some of someone else’s trading moves on the platform. It does this automatically.


Alternatively, you can utilise Fusion’s own copy trading platform, Fusion+. By using MT4’s trading robots, forex traders can just input their commands and let the algorithms/EAs do the heavy lifting.  


2. It capitalizes on the network effect.

Humans are innately social creatures. We want to do what others do, and we want what others have. It’s a convenient way to make ourselves feel secure and validated. If everyone uses a particular forex trading software, others will soon hop in. Network effects refer to technology platforms and refer to the concept that the more users that are on the platform, the stronger the platform becomes. Think about it. No one wants to use Facebook if there are no friends you know on there. Therefore, the more people that use MT4, the more trading groups, videos and resources there will be, the more robots that developers will build for the platform and so on.


According to MetaQuotes, the developer of MT4, the platform now has millions of users and continues to grow. A large part of this is thanks to existing network effects which can be difficult for other platforms to overcome. There are thousands of brokers out there offering MT4 to their clients. Again, the more brokers that offer it, the more newly established forex brokers feel like they have to. For any new broker looking to come into the business, MT4 is the first service they think of because the rest of the business uses it too. Even ‘legacy’ brokers from the 1970’s such as IG have launched a version of MT4. Basically, if a forex trader is not using MT4, they will at least have heard of it. This increases the chances that they will eventually use the platform themselves if speaking to other traders they know.


The whole platform ecosystem becomes like a flywheel and makes it hard for other platforms serving the same market to compete with. 

 
3. It’s easy, fast, and reliable.
 

Despite being a forex trading platform, MT4 does a splendid job at making things simple and easy to learn for its users. Remember the trading robots we talked about? They can all be purchased in MT4’s own Market. Users don’t have to scour the Internet looking for the best trading robot because MT4 has thousands of available ones in their selection.

 

MT4 also offers many trading tools, like market orders, pending orders, and stop orders, which any trader can appreciate. The platform offers 23 analytical objects and 30 technical indicators, along with interactive charts and timeframes to give forex traders all the information that they’ll need right at their fingertips. There’s also mobile trading with MT4. By now, we already know that the forex market runs 24/5, but not all of us are in front of our computers all the time. When we’re out doing something else, the only “computer” we really have is our phone.


Finally, MT4 also gives users relevant alerts and financial news to prepare for unexpected price movements.
 Developing a platform can take years of hard work, mistakes along the way and more. With MT4 you get reliability more than anything else. The bugs have been ironed out and while

we know it’s not the best-looking platform on the market, it is rock-solid and runs on almost every device such as Windows, Mac, iOS, Androids and tablets.  


4. It’s a blank canvas
 

It’s important to note that while many brokers offer this platform to clients, it initially comes as an empty shell. It is what the broker puts into it that makes it so exciting. You can put the equivalent of a Ferrari engine into it or a
Hyundai.  

With Fusion, we have always tried to use the best from day one.  

We are obsessed with making your trading experience better than any other MT4 broker out there.  
 
We launched with strong liquidity providers to undercut our competition and provide a lower cost of trade than other brokers before us. We built tools to help manage your account easily and with a simple interface. For example, we spend a lot of our resources on building tools to make your trading life easier and provide a unique trading experience. Things like the ‘my performance’ feature, Fusion+ copy trading and more.   

 

Summing it up 

In essence, MT4 is like an all-in-one platform for accessing the world’s largest markets. Those interested in the markets can choose a low-cost broker with no minimum deposit like Fusion and be up and running within five minutes. Not sure how, what or when to trade? You can trade with robots and EAs, follow other successful traders via Fusion+, or if you’re keen to learn yourself, then gain access to more resources like videos and trading communities than any other platform available today.  

It’s no wonder that MT4 has reached the level of popularity it currently has. Fast, reliable, filled and filled with something for everyone, it’s no surprise so many people around the world are using it. It’s also hard to see when it might be knocked off the top spot.  


13/08/2021
Beginners
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A Beginner’s Guide to Automated Trading

Read Time: 8 Minutes

If you are a regular trader and you’ve realized that trading is taking up way too much of your time, you might want to look into automated trading.


For the uninitiated, automated trading involves inputting a set of commands that will automatically execute when certain conditions are met.


You can set your buying price and selling price in advance. When the stock or currency price meets the price you’ve set beforehand, trading software (like MetaTrader) will automatically execute your trade. For the more seasoned traders, you can also base the buying and selling points on conditions like moving averages or convergences. You can even go more complex with algorithmic trading, using complicated algorithms you write yourself to execute trades. This is where trading robots come in, and they can be pretty good at what they do.


The best thing about automated trading is that you don’t have to spend hours upon hours monitoring graphs and charts, waiting for the best time to trade. This is wonderful for forex trading, where the markets are open 24/5.


Additionally, automated trading gives you (or at least, your trading robot) the power to scan millions of different charts at a speed that no human ever could.


There are even features like Fusion+ copy trading, where you can set the program to automatically copy a trader’s actions. If there’s a forex trader you really trust, for example, then you can save yourself the hassle and just set the software to copy all their trades.


Of course, automated trading takes a little learning to get into, which is why we are providing this beginner’s guide to automated trading.

 

1)     Buy off the shelf to start


There are a number of platforms that offer automated trading software. There’s no need to build a trading robot from scratch, especially if you’re just starting out.


Trading platforms like MetaTrader4 — the most popular forex trading platform — have tools that allow you to get into automated forex trading. You can check out the “Market” tab in your trade terminal section within the platform and have a browse of a wide range of EAs/robots to purchase to get started.


Their platform lets you use trading robots built by others (there are paid and free versions) and if you want to start off with a small amount of capital just to see how it feels, this is the place to do it.


2)     Know the difference between a good robot and a bad robot


As with any software you plan to download and use, you should know if the robot you’re planning to use is a good one. After all, real money is involved here.


In forex trading, where markets run 24/7, you don’t want to waste your money on a trading robot that gives you losses.


First, you can consider the track record of the trading robot. This can be as easy as looking at the robot’s reviews on the website itself or looking it up on forex trading forums where you’re bound to find forex traders who regularly use robots.


Second, just look at the website itself. If it looks unprofessional or promises unrealistic returns, you’ll want to stay away. One of the primary rules in forex trading is that if a deal is too good to be true, it probably is.


Third, look at the price itself. Trading robots are complicated software that took a lot of work to make. You’ll be hard-pressed to find good robots that are cheap or even free. If you see a trading robot that’s a little too cheap for you, keep looking.


Finally, you can find plenty of third-party websites such as Myfxbook.com, Forex Peace Army, or the MetaTrader Market that let you find the most popular robots, reviews from real traders that have used the EAs. We recommend doing a lot of research on the sites above before you dive straight in.

 

3)     If building your own, know what’s involved.


As we said, trading robots are complicated software that run on immense lines of code. If you want to build your own, you’ll need the necessary coding and programming skills.


It can take months to build a successful trading robot, and it will take a lot of trial and error, along with plenty of frustration.


If you have an idea for what you want but want someone else to build your automated trading robot without getting into too many complications, you can look at possible vendors like TradingCoders or Robotmaker that can build them for you.


Automatic trading robot builders give you a clean interface where you can build and edit your trading robot without learning complicated programming from scratch.


Regardless of how you choose to build your robot, you’ll still need a lot of market and technical analysis skills to succeed, especially if you are entrusting others to build something for you. Study well beforehand and know exactly what you’re getting into.

 

4)     You’re going to need a virtual private server.


Again, the markets in forex trading are open 24/5. Good trading opportunities come and go in the blink of an eye. The last thing you want to happen is missing a good trade because you suddenly had connectivity issues.


By using a virtual private server like the vendors from Fusion Markets Sponsored VPS (Virtual Private Server), your trading terminal can be connected 24/7 on a virtual machine. You’re basically using a constantly connected server to give you more reliable connectivity so that you are always online and not missing out on trades.


A good VPS will give you not only consistent connectivity but also low latency and fast executions. In forex trading and algorithmic trading, every millisecond counts, so you might as well use the best available tools out there.


Automated trading can be a lot of work at first. Still, it can also be very rewarding once you’ve established your own system. Hopefully, we’ve given you enough information to get you started on your very own automated forex trading journey.



06/08/2021
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Nine Simple Trading Rules You Need to Know


If you want to cross the line between being an investor and being a trader, there are some things you should keep in mind. The rewards are higher, but there is much more at stake. You could lose hundreds, if not thousands of dollars in a day. I have been trading on MetaTrader for years. I have watched people gain and lose fortunes multiple times. Throughout those years, I have come up with essential truths to always keep in mind when trading:  





1.   Trading is both easy and difficult.  


There is a misleading simplicity when it comes to trading. As long as you diversify, stick to your strategy, never go all in, and always secure your profits, you can stick around for very long. 

However, trading becomes difficult because of the human aspect and our hidden biases. We tend to get greedy and blinded by small gains or by big losses. We tend to abandon our long-term strategies because of what we see in the short term, and this is where Rule Number 2 comes in… 

 

2.   Psychology is everything   


Trading is not all about watching the charts and the news 24/7. There is a more significant, underrated aspect of trading: your mindset. How sure are you that you can stick to your strategy even though you just lost $4,000.00 yesterday? 

Forex trading will expose you to the highest highs and the lowest lows. Throughout all these, you have to keep a stable mentality and not let impulsive decisions take control. You can have the best strategy in the world, but if you can’t learn to handle your emotional state, you won’t go far.   

The better you are at controlling your emotional impulses, the more successful you will be in trading and finance in general.  


3.   Everything in moderation, including moderation   


The money you are trading should never comprise all your assets. As they say, only trade as much as you are willing to lose. In the world of trading, you will come across individuals with stories of overnight riches because they went all-in. But that can only last for so long.  

Try to resist the temptation of being greedy and remember that wealth is not built overnight. It requires consistency and time. 

Of course, there will be exceptions when you have to break this rule, especially if you see huge opportunities present themselves in the market. However, the general rule still stands; practice moderation in most things, including trading.  


4.   Risk and reward  


Trading is a high-risk, high-reward game. While you might get caught up in the rewards, it's also important to be grounded by the risks. 

The fact that you can make $10,000.00 in two hours also means that you can lose $20,000.00 in the same two hours. If you are a beginner, you might want to stick to low-cost trading for now so that you also risk less money. 

Once you begin gaining experience, you can then start moving to larger trade sizes or expanding into different asset classes.  


5.   Leverage is your best friend and your worst enemy  


To leverage means to trade using borrowed money. It can be your best friend because you can earn more than you ordinarily could if you get a good trade. However, it can also be your worst enemy because if you are on the wrong end of a losing trade, you end up losing more than you might be capable of paying. 


As a general rule, avoid leveraging yourself too hard (think 1:500 leverage), especially if you are a new trader. Most traders getting started should think between 1:30 and 1:100 to get the hang of it. 


6.   Understand what game you are playing  


By now, we’ve already established that trading has risks. Forex trading, while playing by slightly different rules, is no exception. No matter what kind of trader you are, you should always understand and mentally prepare.  

Before you even make your first trade, even if you are trading with low-cost brokers like Fusion, you have to accept that while you can make money, you can also lose money. 


Too many think that trading is a get-rich-quick scheme, and all they must do is sign up on MetaTrader or any Australian forex broker, make a few clicks, and watch the money roll in. These are the kinds of people who end up losing money in their first week. 

The truth is, trading may be quite lucrative for some, but it requires hours and hours of studying, just like if you’re training to be a pilot, you aren’t expected to fly the fastest fighter jet before getting some practice.  


There are complicated analytical methods like technical analysis and fundamental analysis that professionals use to determine the value of a stock or a foreign currency. This way, they know exactly when to buy or when to sell. 

If you really want to get into trading, be it stock trading or forex trading, you have to put in the work and start learning. Remember, real money is at stake here.  


7.   Be responsible for your own trading.  


You might come across plenty of gurus and recommendations online, but at the end of the day, the only person gaining or losing money, is you? 

Remember that whatever happens to your trades will only affect you. It will not affect anyone else's portfolio, so there is no use blaming others if you lose money. 

Similar to #6, remember that different players in the market play different games. Your friend Michael who introduced you to forex might be a scalper taking short-term trades, whereas you might feel more comfortable as a long-term trader, which doesn’t make one better than the other. You do need to know what game YOU are playing, though.  

If you take responsibility for your trades, it is more likely that you will treat your failures as learning experiences to do better next time. Failure is the best teacher, and that leads us right to Rule Number 8….  


8.   The best investment: Your own learning   


Indeed, the best investment you can make is in yourself. If you are beginning to dip your toes into the world of finance, you might want to stay away from the markets (for now) and start investing in books and learning materials to give you an edge. Or practice slowly with a demo forex account or a small live account to test.  

The gains you can make from trading and investing may last you a week or a month, but the gains you make from investing in your own education will last you a lifetime. 

The more knowledge and information you have when you trade, the more likely you will be making successful trades in the future.   


9.   Don't be crazy  


Trading will give you plenty of temptations. You might think that you can buy low now and sell at a really high price tomorrow, so you want to pour in your life's savings all in one go. 

Stop. 

Trading requires discipline, and there's no reason to go crazy all in one go because of speculation. There is much to learn in the world of trading. 

You will be in here for a long time, so take it slow and enjoy the ride.  

29/07/2021
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Leverage: the 9th wonder of the world?

Albert Einstein was once asked what the most powerful force in the universe was. After a thoughtful pause and not without a sense of humour, he replied that it was compound interest, which he would later describe as being the world's eighth wonder.


If we were looking for a candidate to fill the number nine spot on that list, we could easily pick another innovation from the world of finance; leverage.


If we look at a dictionary definition for the term, we find the following.


"The use of credit to enhance one's speculative capacity"


The concept of financial leverage is probably most familiar to us in a mortgage loan, a loan secured against a property.


To secure a mortgage, it’s normal for the buyer or buyers of the property to put down a deposit that acts as their “skin in the game”.


A bank or other lender finances the purchase price balance through a loan that runs over a fixed term, usually measured in 25-30 years.


This is made at a known or referenced rate of interest, which may be fixed or variable over the loan term. For example, the rate may be set at central bank base rates +X%.


The buyer of the property finances the loan through the payment of interest, which compounds over time to make the lender a healthy return on their loan, assuming all goes well.


The ever-present longevity of a mortgage and the nature of its commitment can be summed up through a literal translation of the word mortgage from the French, where it means “death pledge”.


Of course, that rather sombre definition only looks at the liability side of the transaction. It doesn’t take into account the opposite side of the coin, and that is the asset that the mortgage is taken out over.


All things being equal, the asset will have appreciated over the lifetime of the loan. And in modern times, it will have often done so to such an extent that its value now exceeds the loan's original value.


Under those circumstances, the death grip is loosened and may even be released completely if the property’s owners choose to sell it and repay the outstanding mortgage balance.


That’s all very interesting, but what has any of this got to do with trading and investing?


Well, just over 20 years ago, traders in London had the great idea to introduce leverage into OTC financial instruments such as CFDs and rolling spot FX.


This effectively democratised the availability of leverage in trading by providing it to the man in the street who could now gear up their trading account and speculate on the markets in a way that wasn’t possible before this point.


The availability of leverage in margin FX and CFD trading was a marketing team's dream. A whole new industry sprung up to offer these products (which had previously been the preserve of hedge funds) to retail traders.  


Eventually, competition for that business was such that brokers began to raise the levels of leverage that they offered to their customer base.


Put simply, that meant that traders could control an ever-larger parcel of stock, an equity index or FX pairs with a smaller and smaller deposit, which brings us to today.


It all sounds great. Because, of course, if your position was leveraged 500 times, then so was your P&L. A dollar profit became 500 dollars.


Well, not so fast because leverage is a two-way street that magnifies profits and losses.


And whilst leveraged positions in profits create equity in your account, leveraged positions that are in loss eat away at your account balance and ultimately undermine it completely.


Events in the spring of 2021 highlighted exactly why traders need to respect and control their use of leverage, and the consequences of not doing so could not be clearer.


Bill Hwang of Archegos Capital Management, a hedge fund turned family office with $20 billion in assets, effectively evaporated overnight thanks to a combination of risk concentration and excessive leverage.  


Put simply, the fund had too much money chasing too few positions.


You might have thought that having $20 billion to invest would mean that you wouldn’t need access to leverage, but Archegos Capitals strategy was to leverage that vast sum by as much as 7x times through a network of banks and brokers. The trick was that none of these banks knew just how much leverage the other parties had offered Archegos.


But no one, not even a hedge fund of that scale, is bigger than the markets, and when some of these positions fell in price and value, the fund’s brokers asked for additional margin to shore up its trading accounts.



By this stage, the banks were concerned about their own liabilities and whilst they were talking to each other about they should proceed, one or two of the banks started to try and close out the positions they held for the hedge fund.


Once word got out that this was happening, it became a free-for-all, and the stocks that Archegos held plummeted. And that, of course, created even larger margin calls that the fund had no hope of meeting.


Below is Archegos' biggest positions in their fund and how quickly things folded within a couple of days after the music stopped. ViacomCBS, a respected US media company, fell by over 50% in 2 trading sessions.




These events reinforced another lesson for traders - the one that says the end of the party is never pretty if everyone heads for the exit simultaneously.


It also reminded us of how an imbalance between supply and demand can influence prices (Gamestop or AMC, anyone?)


You probably haven’t got $20 billion, but you do have your nest egg and trading capital that you worked hard to build up. Please don’t blow it by leveraging and concentrating your risk in one or two big positions.


A disciplined approach to money management and risk is the key to successful trading and investing. When you don’t use that disciplined approach, it often goes horribly wrong, as the former Hedge Fund Archegos Capital found out.


17/06/2021
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Why are we so terrible at selling?

That’s a question that has dogged professional investors for years.

Picking investments or trades to buy is one thing but when it comes to selling and in particular timing a sale its a whole different ball game.


In retail trading circles, this can cause us to snatch at profits and to run losing positions beyond the point where our money management rules tell us we should have closed the trade, with predictable results. It's a clear form of loss aversion (a cognitive bias that we should all be aware of) that stops us from making the rational call to close the trade.

 

Success in trading comes from running profits and cutting losses to grow our capital base and the ability to do this repeatedly, over as long a period as we can manage.

 

Having trouble selling isn’t confined to private investors, however. It’s a real issue among professional traders and money managers, unlike the science of buying or investing, which has been scrutinised to death by academics, analysts, traders and other financial markets participants. The science (or should that be the art of selling or divesting) has had precious little coverage in comparison.

 

The widely respected Barons magazine recently highlighted the asymmetry in professional money managers' selling ability and why professional can vastly underperform the market benchmark.

 

A research paper written by a mixture of US academics and specialists who measure investment performance or “skill “ as they like to call it, looked at 4 million trades made by money managers between 2000 and 2016 across 800 portfolios that on average contained more than USD 570 million of assets (aka "smart money").

 

The researchers found clear evidence of skill when entering trades or positions on the money managers' part, but it was a completely different story when it came to exiting trades.

 

In fact, the research found that the money managers were frankly shockingly poor when it came to timing sales, selecting what to sell and when to sell it. The researchers estimated that this lack of selling ability cost the managers returns of 2% per annum. Whilst that might not sound like much in insolation, if we consider the effects of compounding over decades that underperformance becomes hugely significant.]


That point is further reinforced by research by asset managers at JP Morgan Chase in 2014.


The fund managers looked at the lifecycle of 3000 US stocks dating back to 1980 what they found was striking as the quotes below show.

 

Risk of permanent impairment

 

“Using a universe of Russell 3000 companies since 1980, roughly 40% of all stocks have suffered a permanent 70%+ decline from their peak value.”

 

Negative lifetime returns vs the broad market.

 

“The return on the median stock since its inception vs an investment in the Russell 3000 Index was -54%. Two-thirds of all stocks underperformed the Russell 3000 Index, and for 40% of all stocks, their absolute returns were negative.”

 

Trades have a finite life cycle, and for the vast majority of stocks (or choose your asset class), they will often have their moment in the sun, get too close to it, and then fall away, never to return to those levels again. Identifying trades at their peak or going past their “sell-by dates" couldn’t be more important to an investment portfolio's performance.

 

In light of this knowledge, what can we do?


As with all the biases and psychological blackspots in trading that we discuss in our articles knowing and acknowledging that they exist half of the battle because we can modify behaviour accordingly once we have done that.

 

As traders in cash-settled margin products, we have an advantage over the money managers and asset owners described above. Simply because we are used to going both directions, e.g. shorting, on asset classes such as currencies and metals.

 

We take a 360 degree or holistic approach to the markets and the skills we use to decide to short USDJPY or the US 500 index can also be used to determine when a long position has run its course. Conversely, the skill set we use to identify a trading opportunity on the long side should also tell us when a short position is running out of steam.


Most traders we know of at Fusion do not hold their trades for more than a couple of days. Due to the power of leverage, they often don't need to since the gains can be enormous (but so can the losses we leave to run far longer than any positive P&L).


At the same time, why not make use of take profits or trailing stops to make sure you can squeeze that little bit extra out of the profit on the trade or set your levels and stick to them, without checking your phone or platform every minute of the day as we all do.

 

By adapting our mindset and the trading skills that we developed around opening trades, we can become better sellers or closers of positions and that will help us get the most out of the trades we make and the positions we take.


You don't have to suffer the same fate as the rest of the market - don't be a bad seller!   

05/01/2021
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