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Why not be a passive FX trader?

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New and novice traders spend a lot of their time worrying about how they will recognise and spot trading opportunities as they occur, and what will be the best way to exploit them when they do. They can spend hours researching and reading, looking at charts and trying to apply technical or fundamental analysis to the current market setups.

 

That investment of time and effort on their part is commendable, but all too often it's time and effort wasted!

 

It may seem harsh to say that, but here at Fusion Markets, we believe in telling it like it is.

 

We say that it's time and effort wasted because, despite all the research, reading and studying of charts, many newbie traders will still put the wrong trade on and more to the point not realise they are doing so.

 

Driven by sentiment

Financial markets are primarily driven by sentiment and momentum, which itself is created by crowd behaviour. That's something that was identified and put into print as long ago as 1841 and though the technology of trading has changed considerably in the intervening 179 years, the psychology of trading hasn't. 


We could go as far as to argue that while there is no longer a physical crowd on a trading floor or exchange these days, there is, in fact, a much bigger crowd whose voice and actions are amplified by modern communications. Real-time information through social media, for example, can enable the instantaneous exchange of information, prices and views across the globe.

 

The transfer of information 

There have always been communication channels between markets and their end customers, of course. But it is the speed of modern networks that differentiates today's trading from what went before.

 

Flags and telescopes on high towers, carrier pigeons and messengers all played their part in the transfer of information. Those methods were superseded by the telegraph, which in turn was replaced, at least partly by the telephone. The internet, the world wide web and the rise of mobile telecoms have ushered in a new age of high-speed data that can reach almost any corner of the globe, at the same time.

 

The net effect of all this is that the trading crowd is much larger, better informed and able to act and react much quicker than ever before.

 

Weight of money 

In trading, the majority rules, in that markets move in the direction that has the most impetus. If most of the crowd is bullish, then demand outweighs supply and prices will rise until fresh supply (sellers) are attracted into the market. This is why people go on about what the “Smart money” is doing. While we don’t necessarily agree with them being “smarter”, they certainly have more capital!

 

Conversely, if supply outweighs demand, that is there are more sellers than buyers to satisfy them, then prices will fall as new buyers are drawn into the market.

 

If these price changes persist for any length of time, they form what is known as a trend which is nothing more than a series of continuous, repetitive movements in price.

 

It's not only modern communications that have amplified crowd behaviour and sentiment.


The rise of tracker funds, ETFs and other passive investment vehicles have also played a role. These types of investment don't try to beat the market. Instead, they aim to match it.

 

Trillions of dollars have flowed into these trackers over the last decade and a half, and indeed you could argue that they have become so successful and so large that ETFs are now capable of creating the market's trends rather than just following them.

 

In fact, the world's largest fund manager is also one of the world's biggest passive investors (Blackrock).

 

Passive FX trading  

The influence of tracker funds is not as prominent in FX, as it is in say, equities or bonds; however, the principles are the same. The crowd dictates the trends in the markets and those trends tend to stay in place until new information emerges and cause a change in sentiment, which in turn can cause a change in those market trends.

 

Now the big mistake on the part of newbie traders that we mentioned at the start of the article was putting on the wrong trade, typically by opposing the prevailing trends in the markets.


The more entrenched the trend, the more likely new traders, are to try and oppose it. Ever heard the saying “trying to catch a falling knife”?


How can we become passive traders?

The most obvious way to be a passive trader is to follow the existing trends in the FX market, which occur in even the most widely traded pairs. Nevertheless, here's a few ways you can become more passive. 

 

For example, EURUSD trended lower for almost two years between February 2018 and February 2020. You didn't have to stay short of the rate (that is, have sold the Euro and bought the Dollar) for two years to benefit from that move. As long as that downtrend was in place, it was pointing you in the direction of least resistance and with that being the case why would you oppose it?

 

1) Check your charts.

 

Sometimes you will be able to follow existing trends, but there will be other times when individual instruments or markets are ranging or moving sideways, checking your charts and knowing your levels can aid you here.

 

A chart can speak a thousand words. It contains loads of useful information that's conveyed visually to the viewer. Get to know where the key support and resistances (watch for breakouts too) are situated over daily or weekly timescales; shorter-term charts are too noisy (I’m looking at you, 5-minute chart!).

 

2) Know where key levels and moving averages are.

 

The way that price reacts when it meets moving averages, or support and resistance can dictate the direction of the next trend. Knowing when and where this can happen will put you on alert to "jump" in once a new trend is confirmed. Fusion puts out trade ideas and analysis on Telegram and Facebook.

 

3) Look for clues about trends in sentiment tools

 

Tools that track what traders are thinking and doing are incredibly useful.

 

Given what we said above about retail traders opposing market trends, the passive FX trader uses these sentiment reports as reverse indicators.

 

We quite like FX Blue’s sentiment indicators which you can find here

 

The rule of thumb is that the more biased retail trader sentiment is in an instrument, the more likely that the market will move in the opposite direction.

 

A passive trader wouldn't preempt that move, but they would be prepared for it when it happens, or join it if it's already begun. 

After all, one of the most famous quotes in the markets is "the trend is your friend"... So don't fight it.  

 

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Index CFD Dividends | Week 07/10/24

Read time: 3 minutes.


Please see the table below for any upcoming dividend adjustments on indices for the week starting October 7th, 2024.



Weekly Dividends

* 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.




01/10/2024
Trading and Brokerage
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The Real Cost of Forex Trading

Read time: 15 minutes.


Understanding the characteristics of the forex market is crucial for success. The concept is simple; forex trading involves buying and selling currencies with the aim of making a profit. However, many new traders dive into this market without fully grasping the real costs involved. In this guide, we'll explore the hidden expenses that can impact your trading profitability and provide tips to incorporate into your trading and avoid any unnecessary costs.

 




Understanding the Hidden Costs



Spread and Commissions


When trading forex, you'll encounter bid and ask prices. The bid price is what buyers are willing to pay, while the ask price is what sellers are asking for. The difference between these two prices is known as the spread. This spread represents the cost of trading and can vary depending on market conditions and the broker you're using. Additionally, account types such as Fusion Markets’ Zero account, don’t have a spread, but rather commissions on each trade. This can be beneficial to traders who are looking for a regular-cost solution.


Understanding the impact of spread on trading costs is essential. Even seemingly small spreads can add up over time, affecting your profitability. Different brokers offer various commission structures, including fixed or variable spreads and commission-based pricing. It's crucial to compare these structures and choose the one that aligns with your trading strategy.


Overnight Financing Fees


When holding positions overnight, you may incur overnight financing fees, also known as swap rates. These fees are charged for the privilege of keeping a position open beyond the trading day. Calculated based on the interest rate differential between the two currencies being traded, overnight financing fees can eat into your profits over time. Long-term traders should carefully consider these fees as they can significantly impact overall profitability if you’re holding a position with a negative swap for multiple days or weeks.


Slippage


Slippage occurs when the execution of a trade differs from the expected price. It can be caused by market volatility, liquidity issues, or delays in order execution. Slippage can lead to unexpected losses or reduced profits, especially during fast-moving markets or when trading large positions.


To minimise slippage, traders can use limit orders, advanced trading algorithms, or avoid trading during periods of high volatility, such as major news releases or the day rollover.




Tools for Transparent Financial Analysis


Fusion Markets Spreads Tool


Trading Journal


Keeping a detailed trading journal is essential for tracking your performance and identifying areas for improvement. Your journal should include details such as entry and exit points, trade duration, position size, and reasons for entering the trade. Analysing this data can help you identify patterns in your performance, enabling you to refine your strategy, and optimise your trading approach.


Performance Metrics


Key performance metrics such as win rate, risk-reward ratio, and drawdown are valuable tools for evaluating your trading performance. A high win rate alone does not necessarily indicate success if the risk-reward ratio is unfavourable or if drawdowns are excessive. By calculating and interpreting these metrics, you can gain insights into the effectiveness of your trading strategy and make adjustments accordingly.


For example, a trader might have a win rate of 70% but still not be profitable. By analysing their performance metrics, the trader can identify that they have an inadequate risk-reward ratio; meaning that their losing trades are, on average, larger in value than their winning trades.


Historical Data Analysis


By leveraging past market movements and trends, traders gain valuable insights for informed decision-making. Whether assessing the viability of a trading strategy or gauging potential risks, historical data provides a rich tapestry of information.


Using historical data, traders can back-test strategies. Back-testing involves testing a trading strategy using historical data to see how it would have performed under past market conditions.


By incorporating historical data into risk management practices, a trader can better anticipate potential risks and adjust their strategies accordingly.


In the ever-changing world of trading, historical data becomes like a guiding light, preparing us for what could happen, based on previous events. In turn, this knowledge allows traders to make more informed decisions. You can view Fusion’s Live and Historical spreads to stay informed.



Tips for Transparent Financial Analysis


Four Tips for Financial Analysis



Set Realistic Profit Expectations


It's essential to set realistic profit expectations based on your trading strategy and risk tolerance. Avoid overestimating potential profits and understand the relationship between risk and reward. Remember that trading involves inherent risks, and losses are inevitable.


Practice Risk Management


Implementing proper risk management techniques is crucial for preserving your capital and long-term success. This includes setting stop-loss orders to limit potential losses and employing position sizing strategies to manage risk exposure effectively.


Managing open trades by tightening your stop as the derivative moves in your intended direction can also boost your R-multiple and improve your return over the long-run.


Continuously Educate Yourself


The forex market is dynamic and constantly evolving, so staying up to date on market trends and developments is essential. Continuously educate yourself through books, online courses, and seminars to refine your skills and stay ahead of the curve.


Choosing Reputable Brokers with Transparent Fee Structures


Selecting a reputable broker with transparent fee structures is paramount. Before committing to a broker, thoroughly research their reputation, regulatory compliance, and fee structures. Don't hesitate to ask questions and seek clarification on costs to ensure transparency and avoid unexpected expenses. 



Conclusion


Navigating the hidden costs of forex trading requires a combination of knowledge, skill, and diligence. By understanding the various expenses involved, utilising tools for transparent financial analysis, and practising sound risk management, new traders can increase their chances of success in the forex market. Continuously educate yourself, choose reputable brokers, and always prioritise transparency in your trading endeavours.


If you want to know more about Fusion Markets, our products, fee structures and services, please contact a member of our friendly team or visit our live chat on our site. 

08/08/2024
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