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When the time comes to buy, you won't want to

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Much of what we write about in these articles is about the mindset and behaviour of traders and trading. The reason for this is quite straight forward; it's because it's the decisions that we make and take that will ultimately determine how we perform as traders.

 

Yes, of course, price changes in the markets will play their part but, in the end, it's our decision whether to get involved or not and that determines how much capital we commit to trade, how long we hold the position for, and what the ultimate outcome of the trade will be.


Hidden costs

When we examine the costs of trading, we tend to focus on commissions and spreads and our PnL, but there are other costs, costs that we don't consider when really, we should.

 

These are the costs of inactivity and indecision, the costs of listening to outside influences more than to your own inner feelings and intuition. They are the costs of missing out, what economists call "opportunity costs".

 

Self-doubt among traders is not unusual, and in truth, it's better to exercise a degree of caution than to be 100% confident about everything you do. Hubris has been the downfall of many traders, and we certainly advocate being prudent with your risk. That said, It's always worth testing your thinking and assumptions and checking that they are still valid before you trade.

 

The problem comes when you start to talk yourself out of the trade entirely. After all, trading is a risk and reward business. There can be no profit without the possibility of loss.

 

A trader's job is to try and ensure that the risk that they take is in proportion to the potential rewards they could make. Not taking that risk could be limiting your potential as a trader which in turn may be limiting your rewards or returns.

 

Moments of clarity


Sometimes as a trader or investor, you will enjoy a moment of clarity, a moment of pure thought and insight, in which you can see exactly how a market setup or situation will playout. Moments when you just know you are right

 

If that moment of clarity coincides with significant moves in the markets, then that can be a very valuable situation indeed. But only if you act on it.

 

Allow me to tell you a personal story. During the great 2020 downturn in oil (where a Saudi/Russia price war caused prices to go NEGATIVE), I found myself holding oil from $30 a barrel and riding it all the way down watching in sheer horror. I kept buying the dip. How much lower could it go, I thought? I ignored every rule and everything I've written in the past about this. I didn't put a stop loss on. I told myself it was a long-term trade that I would stay in forever. Prices surely couldn't go below $20. That's madness. Then… The unthinkable happened in the futures price – it went negative.

 

Thankfully, Fusion's price didn't go negative (we use Spot Crude oil) but with spot prices at $15, I was sitting watching Netflix on my couch, and my heart raced as I saw it go down like World War III just started. The news sites told me nothing new had happened (funny how we search for any narrative to make sense of it all). Here it went. $14. $12. $11. Back to $12. Back to $11. $10. $9. Thoughtful me knew these prices were unsustainable. I told myself I would hold until it hit $0 if it had to. My account was down 70%. I'd never suffered such steep losses. I felt sick. I then couldn't sleep. I woke up, and it was still down a lot but had recovered from $7.


Watch out for the narratives.

 

I started to read more about what others were saying. What the hell was going on? Would this happen again? Yes, there was nowhere to store the oil (so the narrative went) but surely rationality would prevail. Seriously, how could you have negative prices? It was impossible to find anyone bullish in the media or otherwise. People assume if something just happened, it will occur again Goldman came out and said to expect more negative pricing. But I just couldn't believe it was so cheap. I knew it was time to buy more!

 

But then I didn't buy it. I waited for another opportunity for when I knew "the worst was over" I was so sure things would bounce back, but I didn't have the guts to buy one more time, and the opportunity passed me by forever. I let the external narrative cloud my previous judgement. But I was just so worried I couldn't think properly. Within days, it had doubled back to $15 a barrel. Then it was $20 a week later. At the time of writing it is $40 a barrel. By the time you read this, it might be $60 a barrel. Who knows? All I knew was fear and too much outside influence completely warped my view, and I failed. I just wanted to survive the calamity. While I survived to write you this, I did not do as well as I could have.


Self-belief


People often talk about having the courage of their convictions, but in trading, it's not really about courage, it's about belief, belief in yourself and your ideas and be prepared to back them, rather than talking yourself out of them, or allowing yourself to be talked out of them by others.

 

We all like to take advice and read and hear the opinions of so-called experts. But the absolute truth is that nobody really knows what going to happen next in the markets.

 

For example, nobody was predicting that an 11-year bull market in equities was going to end and end so abruptly in Q1 2020. Or that US unemployment would spiral to +14.7% in a single month.

 

Do not get me started on the rebound from the lows in March. To be bullish on the markets in April and May of 2020 was to look like you had lost your mind given the narratives surrounding COVID.

 

So-called "market legends" like Druckenmiller and Buffett told everyone it was not the time to buy. Sadly, so many would have listened.

 

Let's not forget Yogi Berra's famous saying "It's hard to make predictions, especially about the future" which is why it's best to take these so-called forecasts with a grain of salt. The best that any expert can do is to make a prediction or forecast about the future. And the longer the time frame that the forecast is over, or the more unusual the circumstances under which it is made, then the more significant the room for error and the higher the chance that they are simply wrong.


Loss aversion

As humans, we are subject to subconscious emotional biases that can cloud our decision making. One such bias is loss aversion.

 

Loss aversion can hamper a trader in two distinct ways. It's most commonly associated with the practice of running losses, ignoring stops and breaking money management rules when a trader can't or won't accept that they were wrong and refused to close a losing position.

 

The other way that loss aversion can muddy the waters is in our initial decision making. You see as species we are poor judges of risk and reward; we don't calculate probabilities very well, and the upshot of this is that we do not like uncertainty.

 

To the extent that when we are faced with situations that have a series of potential outcomes, we tend to favour the outcome with the highest degree of certainty. Even if that outcome is the least beneficial to us financially. Which, of course, is the exact opposite of the risk versus reward culture that we spoke about earlier.


Fortune favours the bold.


Though we might not like to admit it, our subconscious is often trying to talk us out of taking risks. Outside influences from the media, fear, our aversion to loss and a preference for certainty may often be our worst enemy as traders.

 

As Howard Marks said, "If you're doing the same thing as everyone else, how do you expect to outperform them"?

 

There have been several once in a generation trading opportunities over the last six months. I wonder how many of us were bold enough to seize the day and take advantage?

 

 

 

 

 

 

 

 

 

 

 



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Index CFD Dividends | Week 02/12/24

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Indicative Dividend Adjustments for Indices: Week Starting December 2nd, 2024.


FM Dividends 2/12/24

* Please note these figures are quoted in the index point amount and are subject to change

 

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.




02/12/2024
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The Hidden Forces Driving Price Movements

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T
here are true complexities that drive price movements in the forex market. Beneath the surface of visible price changes lies the market’s microstructure; an intricate web of factors influencing how prices fluctuate.
 


Market microstructure focuses on the mechanics of trading, the behaviour of participants, and their involvement in the fluctuations of price. Understanding these hidden forces gives traders a clearer picture of market behaviour, equipping them to make more informed decisions in a competitive and chaotic environment.




Components of Forex Market Microstructure




Order Flow Trading


Order flow is the net volume of buy and sell orders in the market and plays a major role in shaping price movements. Increased buying pressure can push prices up, whilst selling pressure often leads to declines. By analysing order flow, traders can gauge momentum and anticipate short-term price shifts.



Bid-Ask Spreads


The difference between the bid (buy) and ask (sell) prices reflects market liquidity and can vary depending on trading volume and volatility. Wider spreads generally indicate lower liquidity or heightened risk, while narrower spreads signal a more stable and liquid market. Monitoring bid-ask spreads helps traders assess market conditions and transaction costs.



Market Depth and Forex Liquidity


Market depth refers to the volume of buy and sell orders at various price levels, offering insights into forex liquidity. High market depth indicates robust liquidity, making it easier to execute large trades without impacting prices. Shallow depth, however, can lead to higher volatility, as fewer orders can cause rapid price changes.



Market Participants


The forex market comprises of various participants, including;

  • Governments
  • Banks – Central & Commercial
  • Hedge funds & Investment portfolios
  • Corporations
  • Institutional Traders
  • Retail traders



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Large players such as banks and hedge funds have a significant influence on price movements due to their transaction volume. In contrast, retail traders have less influence individually but can impact markets in aggregate, particularly in lower liquidity situations.



Price Discovery Process


Price discovery is the process by which the forex market determines the price of a currency pair. This process is heavily influenced by information asymmetry, where certain participants have more information than others, often leading to advantages in trading. For instance, institutional traders may have access to economic forecasts before retail traders, potentially moving prices before the data reaches the wider market.


High-frequency trading (HFT) has also become a significant part of price discovery. HFT involves executing trades at extremely high speeds, often driven by algorithms designed to capitalise on minute price discrepancies. While HFT can add liquidity, it can also cause rapid price changes that impact the price discovery process.



Liquidity Providers and Market Makers


Liquidity providers, such as banks and large financial institutions, ensure the forex market operates smoothly by offering to buy or sell at quoted prices, maintaining liquidity.


Market makers are liquidity providers who actively facilitate trades by setting bid and ask prices. By adjusting these prices, market makers can influence short-term price movements, especially in low-liquidity situations.


Market makers operate through both electronic trading and voice trading channels.


  • Electronic trading, facilitated by platforms and algorithms, is known for its speed and efficiency.

  • Voice trading, on the other hand, is often reserved for complex or large orders requiring negotiation, allowing for nuanced price adjustments in response to changing market conditions.



Order Types and Their Impact


The type of order a trader places can affect market dynamics significantly:


  • Limit Orders: These are orders to buy or sell at a specified price or better. They contribute to market depth and can create temporary support and resistance levels, as these orders accumulate in the order book.

  • Market Orders: Executed immediately at the current price, market orders can trigger rapid price shifts, especially if large orders are placed in low-liquidity periods. Market orders are often used to enter or exit positions quickly but may lead to slippage.

  • Stop Orders: These orders, triggered when prices reach a specified level, can amplify market moves as clusters of stop orders trigger simultaneously. This is common in trending markets, where stop-loss orders cascade as prices rise or fall.

  • Hidden and Iceberg Orders: Hidden orders are not visible in the order book and are typically large institutional orders that aim to reduce market impact. Iceberg orders reveal only a portion of the total order, with the remainder hidden until the visible part is filled.


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Microstructure Anomalies and Opportunities


Understanding market microstructure can help traders identify unique trading opportunities:


  • Flash Crashes and Liquidity Holes: Flash crashes occur when liquidity temporarily dries up, causing sharp, rapid price declines. Such anomalies are often triggered by HFT algorithms or large, sudden orders in thin markets, such as the Asia session. Identifying potential liquidity holes can help traders avoid losses in volatile moments.

  • Arbitrage Opportunities: Discrepancies in currency prices across different platforms or regions can lead to arbitrage opportunities. While these are usually short-lived, microstructure knowledge can help traders identify and act on price inefficiencies quickly.

  • Leveraging Microstructure Knowledge: Advanced traders can use microstructure insights to make informed decisions, such as placing orders at levels where hidden liquidity or large stop orders might exist. This allows them to anticipate moves driven by institutional activity or market maker adjustments.



Conclusion


Forex market microstructure highlights the true forces that drive price movements, from order flow trading and market depth to the impact of different participants. For traders, understanding these components is crucial to being successful in the forex market. By analysing and having a thorough understanding of microstructure, you can gain a competitive edge, interpreting price action in real-time and making more strategic decisions.


As the forex market continues to evolve, staying updated on microstructure concepts and integrating them into trading strategies can lead to a deeper understanding of market behaviour. This knowledge can enable you to adapt and succeed over the long-term.


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12/11/2024
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