How High frequency trading is changing Wall Street

Can you imagine that computers process new information in a matter of milliseconds and act accordingly. So whatever you do on a certain news you are alreday too late. They are run by algorithms and they are fast and accurate. Valuations dont matter anymore in Wall Street, it seems market as no day to day memories of price action.

Its all about the price action, just remeber the Flash crash. Because of one algorithm mistake we had significant dropdown in prices. Computers already exit positions when you even process information and make your move. Yes you can participate in the market on long term basis, but what about on intrading day basis.

 What is Wall Street changing to?

Lessons learned - part two

Here is the second part of lessons:

1. Training, training, training - nobody has become professional with a lot of training. This goes for trading as well. You can read hundreds of books but that still doesnt make you a professional trader not even a begginer. Yes books are important but practice is as well.

2. Pattern recognition - in time you will be able to recognize patterns and act in accordance to this patterns.

3. Markets evolve - markets change all the time. You have to learn all the time in order to stay in touch with the markets otherwise time and change will put you out of business.

4. Emotional stability - you be prepared for drawdowns and not become emotional instable. Every path has its ups and downs.

5. Finding your type of market - some markets are more volatile than others, as it goes for the stocks. You must find how much action suits you.

Lessons learned - part one

I want to write about some important lessons i learned recently. I hope it helps you as well.

1. Emotions affects trading - You woulnt believe how much emotion effect trading. If you are in a bad mood this will effect your trading wheater you like it or not. So first clear your head and put in order your emotions.

2. Consecutive losses - even the best traders have experienced a time of consecutive losses. They will impact your trading and your emotions. This will happen more often that you are prepared for. Be ready

3. Too much winnings - will disrupt your emotions. Trader often feel overconfident and cocky. This is the time they are not on the edge all the time and sooner or later mistakes occur. Dont become overconfident if you are have a winnin streak.

4. Position sizing - one way to hurst your trading is position sizing. Too large positions hurt your portfolio and hurt your emotions. This can trigger exaggerated emotional swings in either way.

Using stop losses

Did you know that almost 90 % of all trading is done by automatic trading which is done by computers using algorithms. Only 10 % of trading is manual. All the big firms like Goldman Sacks have algorithms that have an ability to learn when market changes. They are capable of moving stock or ETF in one direction if they wish, because of the funds that they have. Can you imagine all that power?

I noticed in recent moves in the market, that algorithms tend to push index or stock over resistance to trigger stop losses of short sellers. And this happens all the time. Conditions in market have really changed. Do you remember flash crash? Flash crash is obvious example of electronic trading combined with a lot of funds backing up this algorithms. They can do a lot of damage as you can see from flash crash example. There are also examples of resistance broken only to trigger stop loses and then comes back under resistance. This play back and forth is very frustrating for traders. Maybe the best answer is not to put stop loss just above resistance, because of the poped stops.

Transform emotion

Often traders are affected by certain emotion that dictates their decisions: anger, anxiety, fear, doubt...The goal is to let go these emotions but this is a long term process. Sometimes we think that we already got rid of these emotions but reality shows different.
Its true that we are all different and have different personalities and react strongly on some emotions. This doesnt mean that we cant change how we feel while trading. We should not talk ourselfs into feeling better, this doesnt work. A method for making progress in trading is writing a journal. When we write trading journal our thoughts and feelings are written and we can see them in different way. We can see from this diaries that we have been too hard on ourselfs and negative emotion is quicly gone, and we can focus back on the markets.

If we dont acknowledge emotions we loose this state of mind and dont learn from out mistakes, we are just left with all that negative emotion and continue trading and usually making more mistakes. We dont want to surpress this feelings, we want to experience them and learn from them.

You should know every second what is your emotional state. If you are not neutral you should not trade.

Changing market enviroments

Lets start by saying that market evolve and change through time. Its is enough to say that today almost 90 % of all transactions are made by artificial intelligence algorithms. Yes humans set the to operate in a certain way following rules but they are super fast and without emotions. They dont care if they are wrong in a certain trade, their pride isnt hurt. We also have algorithms that can adapt and learn from market conditions, they are called neuron algorithms. They learn from their own mistakes and they learn fast. So its its important to follow this changing market conditions in order to adapt and profit from market.

Humans adapt to certain enviroment, and they are comfortable in it. We enter our comfort zone, where everything goes by the rules and nothing surprises us. Thats the way we are. But if you want to learn and evolve you must step out of your comfort zone. Perfect example of stepping out of your comfort zone is backpaking. Backping takes you out of your comfort zone into unknown territory where you have to adapt to new places, new people and you can see how you react to these new conditions.

In trading routine is your enemy because if markets are changing so should you, if you dont want to loose money. Be ready to change. You should always be alert and thinking what is changing in the market and how to react to it. We had a couple of times this year that stock market suffer severe sell off and then in opposite of all rules of technical analysis market continue with its uptrend. This is an example of changing market conditions and if you are in your comfort zone you will not notice that and you wont adapt.

So how to step out of your comfort zone and test yourself? Try new trading style, trade different markets, try different time frames or reading material about different trading perspectives. If you are a short term trade look at the bigger picture and maybe you get some new ideas where markets should go. Sometimes it helps to take a break from trading and reasses your trading decisions and put things in order. If you are active all the time its hard to take a break and look at the market without any emotions.

Starting with practice account

The best way to start and learn trading without loosing to much money is with practice accounts. Every forex or stock broker enables you to trade with virtual money. With practice account you are instantly in the action. You can test your trading strategy, your technical analysis and following the trading plan. You start to trade without fear of loosing money. Practice accounts are great to get you started but they cant replace experience on trading with real money. When dealing with real money emotions come to play.

With practice accounts, you can learn about different terms like stop loss, market order, limit order, trailing stop-loss orders...You can see how the system is working and you can learn from brokers help library, almost every broker has one. So spend some time trading with practice account and learn about technical analysis in the process.

Remove emotion from trading

The key to success is a trading plan and sticking to it in all times. So why it is so hard for traders to stick to the plan? Answer can be complex, but to put matters in simple way is it the emotion that get over the traders. Emotions are number one distraction in terms of sticking to trading plan, so dont underestimate them.

Can you take emotions out of trading? You cant. As long the action is lasting your heart  is pumping and emotions are taking over. Emotional highs of trading is one of the reasons people are attracted to trading in the first place. You put the trade and you make money, you can imagine the rush flowing through you.

Focus on the price - focus on the price and what should you be doing with your trade around that price, not so much on how much you earned or lost.

Its not right vs wrong - market doesnt care if you were right or wrong, so dont get caught up in "i was right" and you still lost money. Dont take it personal if  your trade was wrong, you are going to make mistakes.  At the end its all about dollars.

Learn how to loose - you are going to lose, everybody loses. People who say they are right all the time are lying. Its about cutting the loses and letting profits run.Its all in money management.

Trading plan

No matter which trading style fits you best you should have trading plan or you will mostly likely start losing money immediatly. Trading plan is a set of rules you have set for specified trade based on the analysis you have made. Its is important to follow rules of your trading plan if you wish to succedd.

Components of a trading plan:

Position size - You must determine your position size. Each position should be too big to enable you to comeback if your prediciton of market direction is wrong. If you put all your money in one position consequences of wrong predicition are substantial.

Profit exit plan - technical analysis is  the best way to determine exit point or profit taking. Usually profit taking occurs at resistance zones, where sellers rush in to take their profits.

Stop loss  - Where to exit a losing position must be set before you enter trade and you should change your stop loss in almost no case. When you have a losing position emotions kick in and you are not thinking clearly and you will almost certainly make mistake. Depending on your trading style stop losses are set differently.

Those are the  simple rules that you must follow if you want to stay solvent in markets. It is amazing how many traders dont use rules. Rules help you eliminate emotions which forces you to do irrational moves and hurt capital. Developing a trading plan and sticking are two mains ingredients of trading discipline.

Choosing trading style

In technical analysis we have different trading style which all vary depending how much time you will spend for trading. There are a lot of different trading styles but we can form three main categories.

Short term


Short term trading in stock markets means that positions are usually held from one day to several days. Shorter time frames are used for technical analysis of stock or currency pairs. In forex markets it means holding position from a few seconds to maximum one hour. In stock market timeframes used for short term trading are usually five and ten minutes up to thirty minutes or one hour.

Medium term 


Medium term position in forex markets are held for duration from a few minutes to a few hours. In stock market it means holding a stock from one day up to a week. Time frames used for medium term trading are one, two hours and up to one day time frame.

Long term


Long term trading in forex markets means holding position for weeks or months. Its is based on macroeconomic events. There is a lot of volatility and price fluctuations. In stock market it means investing like Warren Buffet. If you are a long time investor you hold your stock for weeks and months. Time frames used for long term trading are weekly and monthly time frames.

Technical or fundemental analysis?

What is techincal analysis? If you look to wikipedia description goes something like: Technical analysis is a security analysis discipline for forecasting future price movments with past market data, especially price and volume.

What is fundemental analysis? Fundemental analysis is a analyisis based on analyzing company financial statements, management, competitors and market conditions. Fundemental analysis for curencies consists of:
country economic reports, interest rate policy, monetary policy, trade flows.

Techincal analysis is the key for making a well defined trading strategy. With technical analysis you can set your entry points, exits points in both direction (profit or loss) and you can avoid making emotional decisions during market time.

Forex traders usually follow technical analysis when they are making decisions what to buy and what to sell. People who use technical analysis usually say that all fundemental data is included in price of the stock or currency pair, so there is for spending time study fundemental data. People on both sides think their side is better. I think that combination of both works the best.

Trading style

Before you enter the world of stocks and currencies you must ask yourself what kind of trading style is for you. Do you want to be day trader, long time holder, swing trader....If you choose day trading style you must spend a lot of time in front of a computer analyzing graphs, making fundemental analysis, listening to the news,...If you have a full time job you can expect to devote all your afternoons to stock or forex markets. So you should realisticly think how much time do you have left each day.

The other part of the equation is the money  part. Dont risk your family savings with your first endeavours with the stock or forex markets. Learning takes time and it costs money. You will almost certainly loose money at the begging of you carrer so be prepare to take some loses. Dont use money that you require for living, and dont borrow money to make money in forex or stock market.

Most online trading platforms offer usage of leverage. Leverage can increase and also decrease your profits. Your mistakes will cost a lot more if you use leverage. Of course leverage looks tempting, you can earn more money quickly. Dont use leverage especially if you are a begginer. Your carrer in investing in either forex or stocks can be over very quickly.

Bids, offers and spreads

When you are in front of a real time feed of markets quotes you will see two prices for currency pair. There are two prices you see on your trading screen. Bid price is the price at which you can sell your currency pair. If the currency pair is liquid it means you can sell your currency pair without impacting the price. Otherwise big traders or trading algorithms can  move prices.

Offer price is the price at which you can buy currency pair. Spread is the difference between the bid price and offer price. If gap is bigger it  means that when you will want to sell or cover short position you profit will be lower for that gap, or your loss will be even bigger because of that gap. So be carefull which currencies you trade, that there is enough liqudity and small gaps.

Currency pairs

To simplify matters, forex markets means that currencies are

being traded in pairs. Symbol are combined of two currencies that are

traded against each other. Major currency pairs include most important

world currencies. Major currencies pairs are: EUR/USD, USD/JPY, GBP/USD,

USD/CHF, AUD/USD...

Majority of trading goes to american dollar pairs, although other currencies pairs

are also traded. Forex markets consist of a lot of different currency pairs,so news and

other factors affect every currency pair different. You can exploit some major news,

like FED meetings, economy news for each currency pair indepent of each other.

Forex

The foreign exchange market is most often called the forex

,or simply the FX market has the biggest financial turnover in the world.

Forex is the juncture for international capital, the intersection through

which global commercial and investment flows move.

Today, global financial and investment flows master

trade as the primary non-speculative source of forex market. Whether it’s an Austrian pension fund investing in U.S. Treasury bonds, or a German insurer allocating assets to the India equity market, or a French conglomerate purchasing

a Canadian manufacturing facility, each cross-border transaction

passes through the forex market.

Forex market is a trader’s market. It’s a market that’s open around the clock six days a week, enabling traders to trade.

It’s a market where billion dollar trades are executed in a matter of seconds and dont have much effect on the prices.

If you buy or sell billion dollars of a stock, prices would change dramaticly.

Long, Short, Cash

Forex markets use the same expressions and rules of selling

and buying as other financial markets. Currency trading involves

buying and selling, so being understanding these terms is

necessary.

Long

Long position means same in all the financial markets.

If you buy a stock or currencies you are hoping for prices to

move higher. In forex you bought currency piar. You are looking

to sell currency pair at a higher price. To get you money from

the market you have to sell stock or currency pair.

Short

A short position means that you sold stock or currency pair

that you havent owned. When you sell short a stock, it means

you have to borrow the stock from your broker. Of course you

have to pay fee to you broker. In forex market it means you sold

a curreny pair. When you sell currency pair, you are hoping

for currency pair to move lower in price to make money. If you add

short positions at different price leves you are adding to your

short position.

Cash

If you dont have any positions you are in cash. Sometimes this

is the best technique to avoid volatile markets or markets are in

trendless enviroment.

Liquidity

Liquidity refers to the market selling and buying activity. The more liquid market

is easier it is to sell or buy stock or currency. If market doesnt not offer

enough liquidity speculator with enough money can move markets in

either direction. High liquid market means that big amounts of money

does not affect prices so easily. So be carefull to invest or trade in

high liquid market or you might get burrned.

Forex and other markets

Forex isnt the only market of financial markets. Other markets are: gold, oil, stock and bond.

There is a lot of misinformation about connections between these markets.

You can always find some correlation between how currency markets move

in correlation with stock markets.

All in all, keep in mind that markets function according to their own supply

and demand, news and investor sentiment. Sometimes markets overlap

and it looks like they are running in some kind of correlation.

It is necessary to look each of these markets on its own, and trade them

seperately.

Speculation

Commercial and financial transactions in the currencymarkets represent huge sums, they are still light in comparisonto amounts placed on speculation.Must of currency trading is speculation based.Traders are changing their positions from long to short in a matter of minutes of seconds.

It is projected that 90 percent of daily turnovercomes from speculation.
The depth and breadth of the speculativemarket means that the liquidity of the overall forexmarket is unparalleled among international markets.

Activity in the forex market frequently workson a regional “currency bloc” basis, where the majority of tradingtakes place between the USD bloc, JPY bloc, and EUR bloc,representing three largest international economic areas.