Nine

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.  

July

July Holidays 2021

We want to make you aware of the upcoming holidays in July 2021: on the 1st and 2nd Hong Kong will be celebrating their Establishment Day, followed by Independence Day in the United States affecting market hours on the 5th. Due to these holidays, there are some changes to our standard market hours. Please take the following changes into account.

Please note the following changes are based on MT4 server time (GMT+3)

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What does this mean for you?

If you don't trade these particular markets where the hours are being changed, you can continue trading as per normal. However, please note that due to this holiday period, there will be reduced liquidity available, and spreads may widen on some products.

If you do trade these markets, please take note of the session changes so you can manage your position accordingly.


Do I need to do anything?
As mentioned above, there may be wider than usual spreads due to the reduced liquidity so please make sure that your account has been funded sufficiently. Log into your hub here to fund your account.

Questions?
Don’t worry; we’ll still be working around the clock to answer any questions you may have.
Thanks for choosing to trade with us.


Leverage:

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.


June

June 2021 Holiday Hours

Due to a number of holidays coming up in the Australian and Hong Kong markets throughout the month, we thought we would let you know there will be some changes to our standard market hours during June. Some symbols that you trade may be closed for a period of time or open and close at unusual times, so please make sure you take the following changes into account.

Please note the following changes are based on MT4 server time (GMT+3)


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What does this mean for you?

If you don't trade these particular markets where the hours are being changed, you can continue trading as per normal. However, please note that due to this holiday period, there will be reduced liquidity available, and spreads may widen on some products.

If you do trade these markets, please take note of the session changes so you can manage your position accordingly.


Do I need to do anything?
As mentioned above, there may be wider than usual spreads due to the reduced liquidity so please make sure that your account has been funded sufficiently. Log into your hub here to fund your account.

Questions?
Don’t worry; we’ll still be working around the clock to answer any questions you may have.
Thanks for choosing to trade with us.


Why

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!

Anchors

Anchors Away!

Or why we tend to rely heavily upon the first piece of information we receive.

 

Our minds can have an enormous impact on our trading and the returns that we generate from it. The way we think, act and behave when we trade or invest is at least as necessary if not more so than our trade selection, particularly in the kind of one-way markets that we have seen post the covid crash.  

 

A rising tide lifts all ships they say, and, in this case, the rising tide of the markets was provided by the printing presses of the major central banks along with the stimulus packages from national governments.

 

However, Central banks won't always be there to rescue us and we need to be aware of the kind of tricks that our brains can play on us if we are to avoid making the wrong trading decisions.

 

One of these tricks has a nautical moniker, anchoring, in which our brain subconsciously latches on to an idea, an assumption or a set of figures and uses that information in decision making, regardless of whether it's accurate or even relevant to the matter at hand.  

 

What's more, as humans, we tend to carry these impaired decision-making processes forward so that we end up using an inherently flawed system and often without realising it.

 

Behavioural psychologists have highlighted these tendencies in their experiments.  

 

In the case of anchoring American academic Professor Jay Edward Russo performed tests on 500 graduate students in which he asked them pairs of questions on history and general knowledge, but, unknown to the students, he had "salted "the questions with erroneous dates and figures.

 

The student's answers invariably reflected the incorrect numbers, which were varied across different groups of students within the experiment, highlighting a clear bias.

 

Professor Russo was effectively projecting those values into the student's subconscious, creating an anchor point.


When we become anchored to figures or a plan of action, we filter new information through that framework, which distorts our perception and decision making.  

 

This can even make us reluctant to change our plan or framework even if the situation calls for it.

 

There are few consequences if any when this happens in an experiment inside a university psychology department. Still, if it happens in the real world like in trading or investing, then there most certainly can be consequences.

 

Anchoring Bias has been described as one of the most robust effects in psychology, the fact that our decisions can be swayed by values not even relevant to the task (or trade) at hand.


Let's say we are negotiating the purchase of a house and I tell you it's worth $1,000,000, and I wouldn't sell it for less. You, as the willing buyer might have only had a price of $800,000 in your head. But all of a sudden, you now are anchored on my price. Not yours. The worst part is that the person who goes first in the negotiation tends to anchor the other party (remember this for the next salary negotiation you need to do with your boss!)

 

The studies even show that if you rolled a pair of two dice, gave the numbers (e.g. 10 and 19) to the study participant, that subconsciously, you would anchor them on these two numbers. Ask them what they would pay for a house, bottle of wine, or in one notorious study, the judges sentencing a criminal, these numbers are in and heavily influencing the participant's decisions whether they like it or not.

 

Anchoring always occurs in making our trading decisions, especially as it might help to explain our fixation with round numbers. E.g. EURUSD at 1.20. Gold at $2000/ounce. DJ30 - 30,000. Once we get hooked on the number, we always use it as a reference point in future, probably because it "feels right".  


Let's say in the past you might have successfully gone long EURUSD at 1.20 earlier in the year, and now whenever it comes back to that number, you will buy it again (the same thing happened to EURUSD at 1.10). You can't explain it, but you had past success with that number and you will gravitate towards it without understanding why.

 

Take a moment to consider some key support and resistance levels on your favourite instruments. Are they round numbers too? Why might that be? Could it be because people are anchored at Gold at $1900? And that every man and his dog has placed their buy orders at that level because it's "good value" or has spent time around that level in the past? Remember that the market is driven by sentiment and agreed upon narratives. Think what else could the crowd be anchored on that might be to your advantage knowing what you know now.


How do we avoid being anchored? 


Given that we don't completely understand the processes that cause anchoring to happen in the first place, we are unlikely to avoid it entirely.  

 

However, by being aware of its existence, we can revisit and retest our assumptions when making important decisions, to ensure that we are acting rationally and basing our decision on the situation at hand, not irrelevant inputs.

 

Perhaps the best way to avoid anchoring in trading is to treat every trade as an individual event and to judge a trading opportunity on its current merits. By doing this, you have a better chance to ignore any reference or prior interactions you have had with the instrument you are trading. It won't be easy to do at first, but it could prove to be a valuable discipline over time. As mentioned, this is crucial to comprehend for putting your stops and limits around key support and resistance levels.


Think about a time you have been fixated on a number. Was it buying a house? A pair of shoes? Trading? Now think whether that number could have been influenced by someone else, e.g. the seller, the shoe store etc.

 

Anchoring can certainly also play a part in other hidden biases and behaviours such as loss aversion (e.g. not wanting to close your open losing trade).

 

The next time that you are about to trade, take time to think about why you are fixated with that number for entering and exiting the trade, and how you reached the decision to pull the trigger. A few moments of reflection might make all the difference.


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