Please see the table below for any upcoming dividend adjustments on indices for the week starting May 13th.

* Please note these figures are quoted in the index point amount

What is a dividend?

Dividends are a portion of company earnings given to shareholders. As indices are often composed of individual shares, an index dividend pays out based on individual shares proportional to the index’s weighting.

Trading on a CFD Index does not create any ownership of the underlying stocks, or an entitlement to receive the actual dividends from these companies.

What is an ex-dividend date?

An ex-dividend date is the cut-off date a share must be owned in order to receive a dividend. If an investor buys a share after the ex-dividend date, then they will not be entitled to earn or pay the next round of dividends. This is usually one business day before the dividend.

Do dividends affect my position?

Share prices should theoretically fall by the amount of the dividend. If the company has paid the dividend with cash, then there is less cash on the balance sheet, so in theory, the company should be valued lower (by the amount of the dividend).

Due to the corresponding price movement of the stock index when the ex-dividend date is reached, Fusion must provide a 'dividend' adjustment to ensure that no trader is positively or negatively impacted by the ex-dividend event.

How will the dividend appear on my account?

The dividend will appear as a cash adjustment on your account. If your base currency is different from the currency the dividend is paid out in, then it will be converted at the live FX rate to your base currency.

Why was I charged a dividend?

Depending on your position, given you are holding your position before the ex-dividend date, you will either be paid or charged the amount based on the dividend. Traders shorting an index will pay the dividend, whereas traders who are long the index will be paid the dividend.

Why didn’t I receive my dividend?

You may not have received a dividend for a number of reasons:

- You entered your position after the ex-dividend date

- You are trading an index without dividend payments

- You are short an index

If you believe the reasons above do not apply to your position, please reach out to our support team at [email protected] and we’ll investigate further for you.

Contents

What_Is_PineScript

Getting Started

PineScript Syntax

Conditional Statements and Loops

Developing Strategies

Backtesting Your Strategy

Common Pitfalls to Avoid

Conclusion

What Is PineScript

Getting Started

PineScript Syntax

Developing Strategies

Backtesting Your Strategy

Once you've written your Pine Script, it's time to test its performance in various market conditions. TradingView makes this process seamless. You can choose the time frame and historical data you want to test your strategy against. The platform will then run your script against that data, showing you how your strategy would have performed. It helps identify any flaws or weaknesses in the strategy and allows for adjustments before risking real capital. This can significantly increase the chances of success in live trading. 

Common Pitfalls to Avoid

Conclusion

In the dynamic world of forex trading, understanding and effectively utilising currency pair correlations can significantly enhance trading strategies. For intermediate to advanced traders seeking to deepen their understanding and optimise their approach, delving into the nuances of currency pair correlations is essential. This comprehensive guide will explore the intricacies of currency pair correlations, their relevance in forex trading, and advanced techniques for leveraging correlations to enhance trading strategies.

Contents

Introduction to Currency Pair Correlations

Types of Correlations

Factors Influencing Correlations

Understanding Correlation Coefficients 

Utilising Correlations in Trading Strategies

Identifying Trading Opportunities

Monitoring Correlation Changes

Practical Examples and Case Studies

Conclusion

Introduction to Currency Pair Correlations

Currency pair correlations are a fundamental aspect of forex trading, providing valuable insights into the relationships between different currency pairs. By analysing these correlations, traders can diversify their portfolios, manage risk more effectively, and identify potential trading opportunities.

Currency pair correlations measure the statistical relationship between two currency pairs, indicating how closely their price movements are associated. These correlations can be positive, negative, or neutral, providing valuable information about the interplay between different currencies in the forex market.

Each currency is driven by its own fundamental factors. For example, both New Zealand and Canada are commodity-driven currencies. New Zealand is driven by a strong export of agricultural and dairy product exports, and Canada is heavily involved in oil production and exports and thus is often positively correlated with the price of crude oil. A trader looking for correlations would be smart to analyse the data and price movements of both types of commodities in order to determine if there will be a correlation between the two currencies.

Understanding currency pair correlations is crucial for forex traders seeking to optimize their trading strategies and maximise profitability. By incorporating correlations into their analysis, traders can gain a deeper understanding of market dynamics and make more informed trading decisions.

Types of Correlations

Positive Correlations

Positive correlations occur when the price movements of two currency pairs are positively related, meaning they tend to move in the same direction. For example, the EUR/USD and GBP/USD pairs often exhibit positive correlations, as both currencies are positively correlated with the US dollar. Similarly, AUD/USD and NZD/USD are also closely correlated give that both their currency values are directly impacted by the US Dollar and China trade.

Positive correlations can be leveraged by traders to identify trends and capitalise on momentum in the market. By trading currency pairs with positive correlations, traders can amplify their returns and exploit opportunities for profit.

Negative Correlations

Negative correlations occur when the price movements of two currency pairs are inversely related, meaning they tend to move in opposite directions. For instance, the USD/JPY and EUR/USD pairs may display negative correlations, as the US dollar and Japanese yen often move in opposite directions. Another example of a negatively correlated pair is USD/CNY (US Dollar / Chinese Yuan) .

Negative correlations can be utilised by traders for hedging purposes and risk management. By trading currency pairs with negative correlations, traders can offset potential losses and diversify their portfolios to mitigate risk.

Neutral Correlations

Neutral correlations occur when there is no significant relationship between the price movements of two currency pairs. In this case, the correlation coefficient is close to zero, indicating that the price movements of the two currency pairs are independent of each other.

While neutral correlations may not provide immediate trading opportunities, they are still valuable for advanced traders seeking to analyse market trends and anticipate potential shifts in market sentiment.

Factors Influencing Correlations

Numerous factors can influence currency pair correlations, ranging from economic indicators to geopolitical events. Understanding these factors is essential for traders seeking to anticipate market movements and adapt their strategies accordingly.

Economic Indicators

Economic indicators, such as GDP growth, inflation rates, and interest rate decisions, can have a significant impact on currency pair correlations. For example, positive economic data from the US may strengthen the US dollar and lead to positive correlations between USD pairs.

Advanced traders should closely monitor key economic indicators and assess their potential impact on currency pair correlations. By staying informed about economic developments, traders can anticipate market trends and position themselves accordingly.

Geopolitical Events

Geopolitical events, such as elections, geopolitical tensions, and trade disputes, can also influence currency pair correlations. For instance, uncertainty surrounding Brexit negotiations may lead to increased volatility and negative correlations between GBP pairs.

Advanced traders should be vigilant about geopolitical developments and their potential impact on currency pair correlations. By analysing geopolitical risks and their implications for the forex market, traders can make more informed trading decisions and mitigate potential risks.

Market Sentiment

Market sentiment, including investor risk appetite and market volatility, can affect currency pair correlations. During periods of heightened risk aversion, safe-haven currencies like the US dollar and Japanese yen may strengthen, leading to negative correlations with riskier currencies such as the Australian dollar and New Zealand dollar.

Traders should monitor market sentiment indicators and assess their impact on currency pair correlations. By gauging investor sentiment and market dynamics, traders can identify trading opportunities and adjust their strategies accordingly.

Understanding Correlation Coefficients

Correlation coefficients provide a quantitative measure of the strength and direction of the relationship between two currency pairs. Advanced traders should understand how to interpret correlation coefficients and leverage this information to optimise their trading strategies.

Calculation and Interpretation

Correlation coefficients are calculated using historical price data for the currency pairs under consideration. A correlation coefficient close to +1 or -1 indicates a strong correlation, while a coefficient close to 0 suggests no significant relationship.

Traders should interpret correlation coefficients in the context of their trading strategies and market analysis. By analysing correlation coefficients, traders can identify pairs with strong correlations and capitalise on trading opportunities.

Visualisation with Correlation Matrices

Correlation matrices or charts provide visual representations of correlations between multiple currency pairs. These matrices allow advanced traders to quickly identify correlated and uncorrelated pairs and assess the diversification potential of their portfolios.

Advanced traders should utilise correlation matrices to visualise relationships between currency pairs and identify patterns or trends. By analysing correlation matrices, traders can make more informed decisions about portfolio diversification and risk management.

Utilising Correlations in Trading Strategies

Traders can incorporate currency pair correlations into their trading strategies to optimise performance and maximise profitability. By leveraging correlations effectively, traders can identify trading opportunities and mitigate potential risks.

Diversification and Hedging

Positive correlations between currency pairs can be utilised for diversification purposes, allowing traders to spread risk across correlated assets. Additionally, negative correlations can be used for hedging purposes, where positions in one currency pair are offset by positions in a negatively correlated pair to mitigate risk.

Advanced traders should assess the correlations between currency pairs and adjust their portfolios accordingly. By diversifying their holdings and hedging against adverse movements, traders can protect their capital and optimise their risk-return profile.

Correlation-Based Trading Strategies

Correlation-based trading strategies involve identifying and trading currency pairs with strong correlations. Pair trading strategies involve simultaneously buying one currency pair while selling another negatively correlated pair. Portfolio optimisation strategies aim to create diversified portfolios with uncorrelated assets to minimise risk and maximise returns.

Traders should develop robust trading strategies based on their analysis of currency pair correlations. By incorporating correlation-based strategies into their trading plans, traders can enhance their performance and achieve their financial goals.

Identifying Trading Opportunities

Traders can use correlations to identify trading opportunities based on the strength and direction of correlations between currency pairs. For example, if two positively correlated pairs temporarily diverge in price, traders may consider trading the pair that lags behind in anticipation of convergence.

Advanced traders should conduct thorough analysis of currency pair correlations and market trends to identify trading opportunities. By staying informed about market developments and leveraging correlations effectively, traders can capitalise on profitable trading opportunities.

Risk Management Techniques

While currency pair correlations can be beneficial for enhancing trading strategies, traders should implement proper risk management techniques to mitigate potential losses.

Position Sizing

Adjusting position sizes based on the correlation between currency pairs can help traders manage risk effectively. Traders may choose to reduce position sizes or avoid trading highly correlated pairs to minimise exposure to correlated market movements.

Advanced traders should carefully consider their risk tolerance and adjust their position sizes accordingly. By implementing appropriate position sizing techniques, traders can protect their capital and preserve their profitability.

Stop-Loss Orders

Using stop-loss orders can help limit losses and protect trading capital in the event of adverse price movements. Traders should place stop-loss orders based on the volatility and correlation of currency pairs to ensure adequate risk protection.

Advanced traders should set stop-loss orders based on their analysis of currency pair correlations and market conditions. By using stop-loss orders effectively, traders can minimise potential losses and preserve their trading capital.

Monitoring Correlation Changes

Currency pair correlations can fluctuate over time and in response to evolving market conditions. Advanced traders must consistently track correlation coefficients and modify their trading strategies to align with shifting market dynamics. By remaining attentive to changes in currency pair correlations and adeptly adjusting their trading approaches, traders can optimise their performance and effectively pursue their trading objectives.

Practical Examples and Case Studies

To illustrate the application of currency pair correlations in forex trading, let's consider some practical examples and case studies.

 Example 1: Diversification

A trader with a long position in EUR/USD may consider diversifying their portfolio by adding a short position in GBP/USD, which has a positive correlation with EUR/USD. This allows the trader to spread risk across multiple currency pairs and reduce exposure to adverse movements in the euro-dollar exchange rate.

 Example 2: Hedging

During periods of heightened market volatility, a trader holding a long position in AUD/USD may hedge their exposure by taking a short position in USD/JPY, which has a negative correlation with AUD/USD. This helps mitigate potential losses resulting from adverse movements in the Australian dollar-US dollar exchange rate.

Case Study: Correlation-Based Trading

A trader identifies a strong positive correlation between USD/CAD and crude oil prices due to Canada's significant oil exports. The trader takes a long position in USD/CAD and a short position in crude oil futures, anticipating that an increase in oil prices will lead to a corresponding appreciation of the Canadian dollar against the US dollar. This correlation-based trading strategy allows the trader to profit from the relationship between the two assets.

Conclusion

Currency pair correlations are a powerful tool for intermediate to advanced forex traders seeking to optimise their trading strategies and maximise profitability. By understanding the different types of correlations, analysing the factors influencing correlations, and leveraging correlation coefficients effectively, traders can enhance their performance and achieve their financial goals. Implementing proper risk management techniques is essential to mitigate potential losses and ensure long-term success in forex trading. By incorporating currency pair correlations into their trading plans and adapting to changing market conditions, traders can navigate the complexities of the forex market and achieve consistent profitability.

Embarking on your forex trading journey might seem daunting at first, but fret not! We’ve put together all the information you need to get started. 

This guide is your friendly companion, packed with real-world examples, easy-to-grasp basics, newbie-friendly strategies, handy tips, and a step-by-step roadmap to kickstart your forex adventures.

Contents 

Introduction to Forex Trading

How the Forex Market Works

Getting started in Forex Trading

Developing a Strategy 

Practical Tips for Beginners

Resources for Further Learning

Introduction to Forex Trading

Foreign exchange trading, or forex trading, is the process of buying and selling currencies in the global financial markets. It is one of the largest and most liquid markets in the world, with an average daily trading volume estimated to exceed USD$7 trillion. Unlike traditional stock markets, forex trading operates 24 hours a day, five days a week, allowing traders to participate in the market at any time.

Forex trading involves the exchange of one currency for another at an agreed-upon price. This is done with the aim of profiting from fluctuations in exchange rates. Currencies are traded in pairs, where one currency is bought while the other is sold. The most commonly traded currency pairs, or ‘the majors’ as they’re more commonly referred to, include EUR/USD (Euro/US Dollar), GBP/USD (British Pound/US Dollar), AUD/USD (Australian Dollar/US Dollar), NZD/USD (New Zealand Dollar/US Dollar), USD/JPY (US Dollar/Japanese Yen), USD/CAD (US Dollar/Canadian Dollar), and USD/CHF (US Dollar/Swiss Franc).

Examples of other currency pairs, most often referred to as “crosses”, are AUD/JPY (Australian Dollar/Japanese Yen), GBP/NZD (British Pound/New Zealand Dollar), EUR/CAD (Euro/Canadian Dollar) and so forth.

And finally, less-traded currency pairs are referred to as “exotics”. Examples of these include USD/TRY (US Dollar/Turkish Lira), USD/HUF (US Dollar/Hungarian Forint). It’s important to note that exotic pairs tend to have wider spreads and higher volatility compared to major and minor pairs.

Uses of the forex market

The forex market is used by many players, for many different reasons. Retail traders aim at buying or selling a currency to take advantage of short-term fluctuations in price, whereas corporates who conduct regular international trade often use the forex market to hedge against their local currency weakening.

Large-scale players such as hedge funds or investment firms, will use the foreign exchange market to take advantage of divergences in interest rates between two nations in the form of a carry trade.

For more information on the types of forex trading, head to Part Four.

Reading Currency Pair Quotes

Currency pair quotes consist of two prices: the bid price and the ask price. The bid price represents the price at which you can sell the base currency, while the ask price represents the price at which you can buy the base currency. The difference between the bid and ask prices is known as the spread, which represents the broker's profit margin.

In forex trading, currency pairs are quoted in pips, short for "price interest point," representing the smallest possible price movement. For most major currency pairs, prices are quoted with four decimal points, indicating a change of 1/100 of one percent or 1 basis point. However, the Japanese Yen is an exception, trading with only two decimal points.

For instance, if the bid price for the EUR/USD pair is quoted as 1.19040, this breakdown refers to the five decimal places displayed on the market watch.

How the Forex Market Works

In order to trade the foreign exchange market effectively, you need to understand the nuts and bolts of how it works.

The forex market is decentralised, meaning that there is no central exchange where all transactions take place. Instead, trading occurs over-the-counter (OTC) through a global network of banks, financial institutions, and individual traders. Some of the larger players in the forex market are Deutsche Bank, UBS, Citi Bank, RBS and more.

Prices are determined by supply and demand dynamics, with exchange rates fluctuating based on economic indicators, geopolitical events, and market sentiment.

How the system works

Market makers are key players in the forex world. They establish both the buying (bid) and selling (ask) prices, which are visible to everyone on their platforms. Their role extends to facilitating transactions with a diverse clientele, including banks and individual traders. By consistently quoting prices, they inject liquidity into the market. As counterparties, market makers engage in every trade, ensuring a seamless flow: when you sell, they buy, and vice versa.

Electronic Communications Networks (ECNs) play a crucial role in forex trading by aggregating prices from various market participants like banks, market makers, and fellow traders. They showcase the most competitive bid and ask quotes on their platforms, drawing from this pool of prices. While ECN brokers also act as counterparts in trades, they differ from market makers in their settlement approach rather than fixed pricing. Unlike fixed spreads, ECN spreads fluctuate based on market activity, sometimes even hitting zero during peak trading times, especially with highly liquid currency pairs like the majors.

Direct Market Access (DMA) empowers buy-side firms to directly access liquidity for securities they aim to buy or sell through electronic platforms offered by third-party providers. These firms, clients of sell-side entities like brokerages and banks, maintain control over trade execution while leveraging the infrastructure of sell-side firms, which may also function as market makers.

Straight Through Processing (STP) represents a significant leap in trading efficiency, transitioning from the traditional T+3 settlement to same-day settlement. One of its notable advantages is the reduction of settlement risk. By expediting transaction processing, STP enhances the likelihood of timely contract settlement. Its core objective is to streamline transaction processing by electronically transmitting information, eliminating redundant data entry and enabling simultaneous dissemination to multiple parties when necessary.

Getting Started in Forex Trading

Choosing a Broker

When selecting a forex broker, it's essential to not only consider the fees, but also regulatory compliance, trading platform, and customer support. Look for brokers regulated by reputable authorities such as the Financial Conduct Authority (FCA) in the UK or the Commodity Futures Trading Commission (CFTC) in the US.

Here at Fusion Markets we’re dedicated to offering a quality service with an affordable fee structure. You can learn more about trading forex or view our licences. 

Setting Up Your Trading Account

Once you've chosen a broker, the next step is to open a trading account. This typically involves completing an online application, submitting identification documents, and funding your account. Forex brokers offer various account types to suit different trading preferences, including standard accounts, mini accounts, and demo accounts for practice trading.

Developing a Strategy

Identify Your Trading Style

Before developing a trading strategy, it's essential to identify your trading style, whether it's day trading, swing trading, or position trading. Your trading style will dictate the timeframe you trade on and the types of setups you look for in the market.

Below are the types of pros and cons of each trading style:

Types of Analysis

Fundamental Analysis

Unlike technical analysis, which primarily relies on historical price data, fundamental analysis examines economic indicators, monetary policies, geopolitical events, and other macroeconomic factors to gauge the strength and direction of a currency's movement.

Central to fundamental analysis is the understanding that currency prices are ultimately driven by supply and demand dynamics, which in turn are influenced by broader economic conditions. For example, factors such as interest rates, inflation rates, GDP growth, unemployment levels, and trade balances can all impact a currency's value.

One of the key concepts in fundamental analysis is interest rate differentials. Central banks use interest rates as a tool to control inflation and stimulate economic growth. Currencies with higher interest rates tend to attract more investors seeking higher returns on their investments, leading to an appreciation in their value relative to currencies with lower interest rates. Traders closely monitor central bank announcements and economic reports to anticipate changes in interest rates and adjust their trading strategies accordingly.

Another important aspect of fundamental analysis is the assessment of economic indicators. These indicators provide insights into the health of an economy and can influence currency prices. For example, strong GDP growth and low unemployment rates are typically associated with a robust economy and may lead to appreciation in the currency. Conversely, high inflation or rising unemployment may weaken a currency.

Geopolitical events can also have a significant impact on currency prices. Political instability, conflicts, trade tensions, and other geopolitical factors can create uncertainty in the market and cause fluctuations in currency prices. Traders must stay informed about geopolitical developments and assess their potential impact on currency markets.

While fundamental analysis provides valuable insights into the long-term trends and direction of currency markets, it is important to note that currency prices can also be influenced by short-term factors and market sentiment. Therefore, traders often use a combination of fundamental and technical analysis to make informed trading decisions.

Technical Analysis

Technical analysis involves studying historical price data and using various charting tools and indicators to identify patterns and trends. Common technical analysis tools include moving averages, trendlines, and oscillators like the Relative Strength Index (RSI) and Moving Average Convergence Divergence (MACD). Traders use technical analysis to make short-term trading decisions based on price action and market momentum.

Technical analysis is a cornerstone of forex trading, offering traders a systematic approach to interpreting market dynamics and making informed trading decisions based on historical price movements and market statistics. Unlike fundamental analysis, which focuses on economic indicators and macroeconomic factors, technical analysis relies solely on price data and trading volume to forecast future price movements.

At its core, technical analysis is based on the efficient market hypothesis, which posits that all relevant information is already reflected in an asset's price. Therefore, by analysing past price movements, traders believe they can identify recurring patterns and trends that may indicate potential future price directions.

One of the fundamental concepts in technical analysis is that of support and resistance levels. Support represents a price level where buying interest is sufficiently strong to prevent the price from falling further, while resistance is a level where selling pressure is sufficient to halt an upward price movement. Traders use these levels to identify potential entry and exit points for their trades.

Example of support and resistance areas on EURUSD Daily chart

Another key tool in technical analysis is chart patterns, which are formed by the recurring movements of prices over time. Common chart patterns include triangles, flags, and head and shoulders formations. By recognising these patterns, traders attempt to predict future price movements and adjust their trading strategies accordingly.

In addition to chart patterns, technical analysts also utilise technical indicators to aid in their analysis. These indicators are mathematical calculations based on price and volume data and are used to identify trends, momentum, volatility, and other aspects of market behavior. Popular technical indicators include moving averages, oscillators like the Relative Strength Index (RSI) and the Moving Average Convergence Divergence (MACD), and trend-following indicators such as the Average Directional Index (ADX).

While technical analysis is a powerful tool for forex traders, it is not without its limitations. Critics argue that technical analysis is subjective and prone to interpretation bias, as different analysts may draw different conclusions from the same set of data. Moreover, technical analysis does not account for fundamental factors such as economic news and geopolitical events, which can have a significant impact on currency prices.

Despite these limitations, technical analysis remains an indispensable tool for forex traders worldwide. By understanding and applying technical analysis principles, traders can gain valuable insights into market trends and dynamics, allowing them to make more informed trading decisions and improve their overall trading performance.

Risk Management

Setting Stop-Loss and Take-Profit Orders

Stop-loss orders are used to limit losses by automatically closing a trade at a predetermined price level. Take-profit orders, on the other hand, are used to lock in profits by closing a trade when the price reaches a specified target. By using stop-loss and take-profit orders, traders can manage risk and control their downside exposure.

Position Sizing

Position sizing involves determining the appropriate amount of capital to risk on each trade based on factors such as account size, risk tolerance, and the probability of success. A common rule of thumb is to risk no more than 1-2% of your trading capital on any single trade to preserve capital and avoid significant drawdowns.

Your Strategy

Once you’ve determine what style of trading would suit you best, you now need to develop a strategy. There are thousands of different strategies out there so you have the choice of learning one from someone else, or developing your own.

Regardless, some common strategies include:

Trend Following Strategies

Trend following strategies in forex trading involve identifying and capitalising on established market trends. Traders employing this approach aim to enter positions in the direction of the prevailing trend, whether it's upward (bullish) or downward (bearish), and ride the momentum for as long as possible. These strategies typically utilise technical indicators, such as moving averages and trendlines, to confirm the direction of the trend and determine optimal entry and exit points. The goal of trend following strategies is to capture significant portions of a trend's movement while minimising losses during market reversals.

NZDUSD Daily Chart showing optimal entry points to go short during a bearish trend.

Range-bound strategies

Range-bound strategies in forex trading focus on exploiting price movements within defined ranges or boundaries. Traders employing this approach identify periods when a currency pair is trading within a relatively narrow price range, bounded by support and resistance levels. Instead of following a trend, range-bound traders seek to buy near support and sell near resistance, aiming to profit from the price being restricted to the range highs and lows.

USDJPY 15min chart with optimal buy and sell signals for a range-bound strategy

Breakout Strategies

Breakout trading strategies in forex involve capitalising on significant price movements that occur when an asset's price breaks through predefined support or resistance levels. Traders employing this approach wait for a clear breakout from the established range and then enter positions in the direction of the breakout, anticipating continued momentum in that direction. Breakout traders typically use technical indicators, such as trendlines, moving averages, and volatility measures, to identify potential breakout opportunities and confirm the strength of the breakout. The goal of breakout trading strategies is to capture rapid price movements and profit from the subsequent price trend.

Example of an opportune entry for a bullish breakout trade on EURUSD 4-hour chart

The key to developing a strategy that works for you is by studying the charts and thinking about what makes sense to you. If you think patterns make sense as they identify areas of consolidation which can lead to a breakout, then pattern trading could be a good fit for you.

It’s important for any trader to stick with their chosen strategy and not switch strategies every time they encounter a losing streak.

Practical Tips for Beginners

Maintain a Trading Journal

Keeping a trading journal allows traders to track their performance, analyse their trades, and identify areas for improvement. A trading journal should include details such as entry and exit points, trade rationale, risk-reward ratio, and emotional state. By reviewing past trades, traders can learn from their mistakes and refine their trading strategies over time.

Avoid Overleveraging

While leverage can amplify profits, it also increases the risk of significant losses. Avoid overleveraging by using leverage cautiously and only trading with capital you can afford to lose. A general rule is to keep leverage levels below 10:1 to mitigate risk effectively. The best position is cash. You should ensure you’re only taking the most high-probability set-ups that are in-line with your strategy.

Stay Disciplined

Maintain discipline in your trading approach by sticking to your trading plan and avoiding emotional decision-making. Avoid chasing losses or deviating from your strategy based on fear or greed. Consistency and discipline are key to long-term success in forex trading. Sometimes it’s best to walk away from the charts and come back the next day with a clearer head.

Manage Emotions Effectively

Trading can be emotionally challenging, with the potential for both euphoria and despair. Learn to manage your emotions effectively by practicing mindfulness techniques, maintaining a positive mindset, and taking regular breaks from the market. Remember that losses are a natural part of trading, and it's essential to stay resilient and focused on your long-term goals.

Be realistic with your expectations

Trading can be very lucrative, but it can also be very costly. Traders should be realistic in their expectations – what % will you aim for each month? How much are you going to risk? Risking 20% of your equity per trade will be great on winning trades, but it won’t take long for you to eradicate your entire balance on a handful of losses. Whereas risking 1% equity per trade will allow you to conserve as much capital as possible, whilst still gaining 1%+ per winning trade.

Resources for Further Learning

To continue your forex trading education, consider exploring the following resources:

• Books: "Currency Trading for Dummies" by Brian Dolan, "Japanese Candlestick Charting Techniques" by Steve Nison, and "Market Wizards" by Jack D. Schwager.
• Online Courses: Investopedia Academy, Udemy, and Coursera offer a variety of forex trading courses for beginners and advanced traders.
• Forums and Communities: Join online forums and communities such as Forex Factory, BabyPips and TradingView to connect with other traders, share ideas, and learn from experienced professionals.

Ready to get started?

The forex symbol GBP/USD indicates how much the British Pound (abbreviated as GBP) is worth in relation to the US Dollar (abbreviated as USD). This article provides traders information on how much USD is needed to buy one GBP. Forex traders call an exchange of this pair as “trading the cable,” a nod to how New York and London used to transmit trading information.

The GBP/USD pair is among the oldest currency pairs traded in the world. It is also among the most popular pairs to trade and is considered a major forex pair.

If you’re considering trading this pair, read on for a quick dive into the history of these currencies, their dynamics, and how you can trade this pair.

If you want to read more articles about our pairs, check out our posts on: USD/JPY and EUR/CHF.

Currency background

The British Pound (GBP)

GBP is the official currency of the United Kingdom and its territories. Its history can be traced back to continental Europe. With over 1,000 years of history, it is one of the oldest, if not the oldest, currency still in use. In 1694, the Bank of England was established, and banknotes entered circulation shortly after.

The GBP’s importance goes beyond the UK and its territories. It used to be the dominant international currency before USD took over in the 20th century. However, it is still among the most widely used currencies for financial transactions worldwide, along with the USD and the Euro (EUR). Further, as of 2021, the GBP comprised 5% of official foreign reserves (i.e., share of currency reserves held by central banks).

The US Dollar (USD)

USD is the official currency of the United States, dating back to the 18th century. In 1785, the US adopted the dollar sign, which is now, perhaps, the most recognizable currency symbol in the world.

The USD plays a major role in the global economy, dominating international finance. It is the most active currency for international payments. It has also been the top international reserve currency since World War II, with an over 50% share of global reserves. In forex markets, almost 90% of all transactions involve USD.

The Plaza Accord

No background of these two currencies would be complete without mentioning the historic Plaza Accord.

In 1985, the US, UK, France, Germany, and Japan—then known as the G-5—agreed to jointly intervene in the currency markets to correct trade imbalances. The devaluation of USD was meant to reduce the increasing US trade deficits.

In a couple of years that followed the agreement, the USD declined in value by about 50%, while GBP and the other currencies appreciated by about 50%.

Factors you need to consider in trading GBP/USD

The GBP/USD pair is among the most liquid in the forex market, with smooth price movements as there’s enough volume of trade in the market.

Various factors move the prices of currency pairs in the forex market. For most currency pairs, prices are affected by economic trends and geopolitical circumstances, both locally and globally.

Here are some factors that drive the GBP/USD dynamics:

Economy

Both the US and the UK are among the largest economies in the world.

Due to its size and role in the global economy, the economic situation and policies in the US affect many economies and markets worldwide. In general, the GBP/USD rises when the UK economy grows more than US economy.

If you’re trading US-based pairs, you can keep up to date with US economy updates through government data releases and economic reports or Fusion's economic calendar, which includes data such as GDP growth, interest rate decisions and balance of trade.

Trade balance

The US is one of the three largest players in global trade, along with the European Union and China. The US is among UK’s major trading partners, accounting for about 10% of UK imports and receiving over 15% of UK goods exports.

The trade balance situation generates some volatility for GBP/USD. GBP/USD rises when current account balance (i.e., the balance of trade between the two countries) increases for the UK.

Central Bank policies

The Federal Reserve (Fed) sets the monetary policy in the US, a key determinant of currency strength, with the aim of stabilizing US prices and maximizing employment. In the UK, the Bank of England (BoE) sets the interest rate to maintain low and stable inflation. It reviews rates every 6 weeks.

A rule of thumb here is that the pair rises when the BoE interest rates rise more than the Fed rates.

As the USD plays an important role in international markets, movements in interest rates set by the Fed have a critical impact on the movement of many currencies worldwide, including GBP. In 2022, steep rate increases have strengthened the US dollar, causing other currencies to dive as investors rush to USD.

Geopolitical conditions and global risks

Like other currency pairs, the GBP/USD is also driven by political uncertainties and global risks.

The GBP took a hit following the global recession in the late 2000s. In 2016, after the announcement of Brexit, the GBP dived to its lowest against the USD, as UK’s decision created uncertainties to how its trade prospects would pan out.

GBP/USD and GBP/EUR - 2014-2021

As USD is a global reserve currency, it serves as a haven at times of global uncertainties. During the height of the COVID-19 pandemic in 2020, the GBP/USD rate dropped by 12% as investors sold the GBP and rushed to the safer USD.

GBP/USD and GBP/EUR - 2007-2010

Conclusion

Is the GBP/USD pair worth going into?

The US and the UK are among the largest economies in the world, with both USD and GBP playing important roles in international finance. The two countries share strong economic relations.

In forex markets, almost 90% of all transactions involve the USD. Post-1980, the pair has been less volatile, with extreme movements stemming from major global and regional events such as the Brexit and the COVID-19 global situation. The pair is one of the most liquid in the market.

If you’re new to the forex market, trading with highly liquid currencies such as GBP/USD could benefit you. This is because many strategists recommend trading in these currency pairs while you’re still improving your grasp of forex trading. You're also in luck, in that, Fusion Markets is the lowest cost regulated broker on the market. Start trading today!  

The forex symbol EUR/CHF indicates how much the Euro (abbreviated as EUR) is worth in relation to the Swiss Franc (abbreviated as CHF), and how many Swiss Francs you need to buy one Euro. The pair is nicknamed “Euro-swissie” in the FX market.

As a cross-currency pair, EUR and CHF are traded directly, without the need to convert to a base currency first. This is also commonly known as currency pairs that do not involve the US Dollar (USD). The EUR/CHF currency pair is among the most popular cross-currencies in the forex market.

In this article we breakdown the history of these currencies, their dynamics, and how you can trade this pair. 

For more currency pair breakdowns, check out our USD/JPY Overview.

Currency background

The Euro (EUR)

As of 2022, 19 out of the 27 member countries of the European Union (EU) use EUR as their official currency.

Since its debut in 1999 and entry into circulation in 2002, EUR has become one of the most widely used currencies for financial transactions worldwide, often second only (or at times at par with) USD.

Owing to its credibility, EUR has also, until recently, been a relatively stable currency. This stability has allowed it to extend its importance well beyond the EU. Over 50 other countries and territories globally have adopted the EUR as currency or have pegged their currencies to EUR. Furthermore, it accounts for over 20% of global foreign exchange reserves, second only to USD.

The Swiss Franc (CHF)

CHF is the official currency of Switzerland, as well as of Liechtenstein. In contrast to EUR, CHF traces its origin over a century back to 1850.

CHF is among the top ten most traded currencies globally. It has long been considered a safe-haven currency, owing to the stability of the Swiss economy and its political neutrality. However, unlike EUR, no other country uses CHF as a peg for their own currency.

What to consider in trading EUR/CHF

Compared to most currency pairs in the market, EUR/CHF experiences fewer price movements. The trends are typically slower and more stable.

Several factors affect the prices of currency pairs in the forex market. For most currency pairs, price movements are mostly tied to economic and geopolitical circumstances, both locally and globally.

Here are some factors that drive EUR/CHF movements:

Economy

The EU, as a single market, is one of the largest economies in the world and one of the three most prominent players in global trade. It is Switzerland’s primary trading partner, with the EU accounting for over 60% of Swiss imports and receiving over 40% of Swiss exports. The economic situation in the Eurozone has a history of affecting the Swiss economy, such as in the 2010s.

If you’re trading EUR-based pairs, you can keep up to date with happenings in the EU economy through European Commission economic reports, including economic forecasts and reviews, as well as Fusion's Economic Calendar. The European Central Bank also publishes economic bulletins that provide insights on monetary policy, a key determinant of currency strength.

Swiss policies

The Swiss National Bank, which issues CHF, has traditionally been non-interventionist. Several of its moves, however, have impacted currency markets. In 2011, it pegged the CHF to EUR, in a move to help Swiss businesses to increase their profitability. A few years later, in 2015, it abandoned the peg, stunning investors, causing market turmoil, and leaving a profound impact on the EUR.

EUR/CHF 2011-2015 Weekly Time Frame

Global risks

Investors on the move to mitigate global economic risks are drawn to CHF due to its solid reputation for financial stability. In the aftermath of the global financial crisis in the late 2000s, widespread buying of CHF saw a 20% depreciation of EUR to CHF.

Geopolitical conditions

Investors also turn to CHF in times of political uncertainty in the EU, such as during the Greek sovereign debt crisis following the 2008 financial crisis. Demand for CHF had also soared during the Brexit negotiations, with investors using it as a hedge for protection against Brexit.

Movements in USD

A distinct advantage of EUR/CHF is its independence from USD. As they can be directly traded with each other, the pair isolates traders from USD-related volatilities. 

Conclusion 

The EU is one of the largest economies in the world, with EUR used in a majority of global transactions. The EU and Switzerland are not only geographically close, but also share strong economic ties, such as trade relations.

The EUR/CHF as a cross-currency pair experiences fewer price movements, with less volatile trends compared to other forex pairs. Both currencies are credible, with CHF long considered a safe-haven currency. Even during the COVID-19 global pandemic, investors have trusted CHF.

If you're looking to trade EUR/CHF, you'll be able to get ultra-tight spreads and $2.25 commissions per lot with Fusion Markets. Don't wait on the sidelines, be part of the action.

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.

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?

Your first reaction as you read the subject was thinking: “Yeah, but I’m not biased”

Of course, that’s what you would say!

The biggest problem with biases is that we never think we have any.

Biases are what everyone else has.

What are they and why are they important?

Biases are like shortcuts for your brain. They can have an unusually large impact on how you make decisions in your everyday life, but particularly when it comes to your trading.

To put it simply, your brain has a way of conserving energy by making fast decisions or mental shortcuts in what is known as ‘heuristics’.

The problem is, we often don’t even know that we have them. Even if we know about them, when it comes to trading, we must work hard to challenge our reasoning behind making our decisions.

As common as these biases are, we specifically want to focus on what is called “cognitive” and “emotional” biases.

Because these are so crucial to your trading, we’ve split this guide in two. This is part one.
Biases have been studied across psychology, economics and now into the mainstream of what is called “behavioural” finance. In fact, Richard Thaler, a notable behavioural economist recently won the Nobel prize for his work on the topic!

The sad part is that I know more about this topic because of my own mistakes in trading and so I try to be hyper-aware of rushing into trading decisions without considering the biases below.

The million-dollar question becomes, how many of these have you been a victim of and what can you do to try to prevent them yourself?
 
1)     Confirmation bias

This one is a doozy and for me, the most important of all of them.

If you take nothing else from today, it should be an awareness of confirmation bias.

Confirmation bias means we tend to seek out information only that we agree with.

Ask yourself this question: How many times have you placed a trade then sat there and watched it go against you? Sure, this happens almost every time, but then how often have you then gone out and sought information, headlines or “expert” advice about that currency pair which tells you why you were right and to just stick with it?

I remember many years ago, when I first started trading, I placed a fairly large trade on oil (don’t ask why I made this trade. I had no idea what I was doing and it was too big for my account... Forgive me, I was just a beginner!) but as soon as it went against me I frantically typed “Oil” into Google, and just like that I was looking for any reason to support my original opinion on why oil was due to go through the roof.

To my joy, there was some analyst from ABC Fund manager comforting me with a view that supported my own opinion or perspective. They talked about an undersupply in the market and that oil was sure to go higher. It was 2 am and I was sitting in my lounge room by this stage as I watched my whole account go into jeopardy. This valuable advice that I sought helped to nurse me back to sleep.

I, of course, deviously chose not to click on any article that might tell me I was wrong – I only sought out the information I wanted to hear or see.

Let’s just say that the oil trade I placed went as well as a parachute made of concrete! (Oh and my account was completely wiped out!).

How to overcome it: Stop, ask yourself a question – What information could you be missing about the rationale for this trade? What do the opposing arguments and research say?

2)    Recency bias aka availability heuristic

The “recency bias” or “recency effect” essentially tells us that our recent experience can become the baseline for what is going to happen in the future.

This might mean our recent trade performance such as a recent win or loss impacting us heavily. It might also mean a certain piece of news or information that we recently heard forming the basis for our decision making.

This can have seriously dangerous consequences for us as traders as it undermines our ability to form an objective decision on a trade. Why? Because of our lazy brain only recalling recent information. Whether that’s on our most recent trade or information we found as a barometer for how the next trade will go.

Let’s say you had a losing trade whereby you promised you’d never risk such a great amount of your capital again. You might be a little shy and dial back the risk a bit too much, or you could be the opposite and think you’re George Soros, betting the whole house on the next trade since you just went so poorly on the last. Your thinking is this would get you back to where you were prior to your last trade.

The other way it can creep into your trading is through recent information impacting your decision on why to take a new trade. It might be that you see a brief news headline stating ABC bank’s research on “why the dollar is going to dive this week” earlier in the day and tend to argue with yourself later that night why you think it’s a good idea to follow that trade. I know what you might be thinking: “It’s just a headline… I’d never let this happen to me”. However, our brain likes to take shortcuts to conserve energy. It will do its best to take what it knows and ignores the rest (as we have learned above).

We also have a tendency of the fear of missing out (FOMO as it’s popularly known today) and with this new information, we feel we must put something into action!

How to overcome the bias: As difficult as it may be, you must stop, count to three and ask yourself a few questions.

These could be “why am I making this trade?”, “Does it fit in with what I know?”, “What am I missing here?”, “Have I read something recently about this?”. Better yet, build yourself a checklist with these questions on it!

3)     The Endowment effect / Sunk cost fallacy

The endowment effect means we tend to value something more after we’ve owned it for a while.
In a now-classic study featuring Richard Thaler and Daniel Kahneman (both Nobel prize winners), students were given a mug and were asked how much they would sell it for an equally valued pen as an alternative. The experimenters found that the median price for which they would sell was TWICE as much as they were willing to pay to acquire the mug.

Because of our aversion to losses (also known as prospect theory – another big bias which I’ll cover later), this can have a drastic effect on our trading success. We place a trade on AUDUSD, with a target profit or loss of only 50 pips. Yet when the trade starts to go against us, what’s the first thing we often do? Move our stop loss further out because we “just know it’s going to turn around.” We tell ourselves stories like “The euro is cheap here, it’ll definitely turn around.”

Because we are committed to this trade (and this is somewhat related to the confirmation bias) we value it more just because we own it and because we have already invested in it, it becomes a “sunk cost”.

How to overcome: Fairly obvious advice to start; keep your stop losses and targets where they are. Be more mindful about why you’ve put them at these levels. If it helps you, write down the reasons why you’ve placed your stop and profit there and you can take comfort in understanding your own reasoning.

4) “The Gambler’s fallacy”

The gambler’s fallacy is where we believe that future probabilities are altered by previous events, when in fact, they’re unchanged.

It is called the “gamblers fallacy” due to the often-watched scene of any table game at the casino (e.g. roulette) as it continues landing on black over and over. People see this and think ‘it couldn’t possibly do that again’ and try to bet against it.

Being contrarian is great, don’t get me wrong.

However, as traders and human beings, we tend to believe that if something happens multiple times, it couldn’t happen again. We ignore simple probability.

Let’s say the S&P500 has rallied five days in a row. We place a trade in the belief that “it must be due for a correction” only to watch it rally and stop us out of our position.

How to overcome: It is important to look at the original thinking that led you to this trade. Just because something has moved up or down in a continuous fashion, it does not mean the market will immediately reverse its behaviour and go the other way. Just try catching a falling knife and you’ll know why.

5)     The Groupthink Bias

The “groupthink bias” is our inclination to do or believe things just because others do the same. Also known as the “bandwagon” or “herd behaviour”, it can lead to having a serious trading hangover; ask yourself an odd question like “why on earth did I go long the EURCHF last night?”

After all, you can’t do the same things others do and expect to win.

A recent example was after the US Presidential election. Everyone thought if The Donald got in, it would be a huge negative for the markets and the economy. Stocks fell initially and hard.

If you cashed out then and there because you thought it was going to lead to Armageddon, you made a very expensive mistake!

How to overcome: Sometimes it pays to be contrarian. If everyone is saying it’s going up, consider if going the same way will lead to riches. If everyone is saying it’s going down the toilet, consider if they could be wrong.

Be careful of those bandwagons!

So, which of the above are you most guilty of?

One of the questions I'm frequently asked is "How do you follow the markets? So, I thought it was time to compile a list of tools I use nearly daily that help me become a better trader.

These are for various experience levels. Oh, and they also happen to be completely free.

Here they are:

1. Babypips.com – Depending on your trading experience, their free forex school is second to none. It covers from beginners to advanced. In fact, these resources are so comprehensive that most brokers I’ve worked for make any new employees do the course from front to back!

2. Forexlive.com – handy website that I personally use and love! It has the most important (and live) news in the currency markets (hence the name). I remember during the Brexit vote that we were glued to their analysis of the markets.

3. Tradingview.com – If you love your charts and technical analysis (fun fact- something like 70% of traders do!) – then TradingView is for you. They have over 4,000,000 users, and the users are all very passionate! It’s not just for currencies either - you can pull up currencies, commodities, indices are more. While I’m personally not TOO much of a tech analysis guy, all my clients rave about TradingView.

4. John Authers' Commentary – To understand the forex markets, you need to understand the bigger macro picture. John is a must-read each day for me. I look forward to his email every day around the EU open. It covers stocks, bonds and what's catching his eye. If you read no other newsletter each day, make it this one.

5. Fusion Markets Economic Calendar– This is the only time we plug ourselves in our post. We used to have Myfxbook in there but we worked hard on finding a really slick calendar for you. Why a calendar? Knowing what big events are happening in the markets is critical. You don’t want to wake up and see the USD has made a 200 pip move and not known there’s been a US interest rate (FOMC) meeting. The Fusion economic calendar will be your friend. You can save the event to your calendar, view the results in real-time and can even see historical price movement and more. 

That’s it for now.

Why so short? The last thing you want is the “analysis paralysis” which comes from digesting 20+ resources. You will get overwhelmed and give up.

Believe me, it was hard for me to get it down to five, but these are my go-to resources, even if you asked me what the best paid subscription-based services are.

There is so much value in these resources, so please use them! Just because they’re free doesn’t mean it’s not great content. As I said, I use this every day myself (except Babypips – I like to think I’ve got the basics down pat) and I hope you do too.