Gaps are areas on a chart where the price of a financial instrument has moved either up or down with no trading in between. As a result of this, the chart shows a "gap" in price. Gaps most often appear between the close of a market and the next session’s open. However, they can also – albeit less frequently - appear intra-day. Gaps can occur as a result of a variety of technical and fundamental reasons. For example, a gap on a Daily chart may be seen if a company announces strong earnings after the market close and its stock then gaps up on the open of the next day. An intra-day gap may appear when, for example, the bid/ask spread widens and market participants may need to pay up or down to enter or exit the market causing price to "jump" from the last traded price to the next that the trader can get filled at. This can often be seen around the release of key market news.

Some quick research on gaps shows that there are several different types of gap including breakaway gaps, exhaustion gaps and common gaps. Each one is said to signify a different outcome for price. Today we are focusing on gaps in the FX markets which are, more often than not, common gaps. In Foreign Exchange markets - which trade 24 hours a day, five days a week - you tend to see gaps occur most regularly on the Sunday open when New Zealand enters the markets first. In actual fact, gaps in Foreign Exchange are relatively common - over the last 18 months there has been a gap in the EUR/USD spot price approximately 65% of the time on the Sunday open. It is these daily gaps that we pay most attention to. One reason that gaps are of interest to traders is because of their tendency to fill. That is to say that price will often trade counter to the direction it gapped in and return to the price at which it last closed on the time frame you see the gap occur. In fact, again, over the last 18 months in the EUR/USD 98% of the gaps recorded have filled at some point. This statistic however, masks the fact that traders can suffer unsustainable draw downs when trying to execute gap-fill type trades on this basis.

However, armed with these statistics, we can get a clear idea that a gap is a “potential setup” that a trader can exploit for profit. One way that these gaps can be traded is by waiting for the market to open and then to see if there is any follow-through in the direction that the market gapped in. If the follow-through is insignificant, we can fade the gap - take a position against the direction the price gapped in - by entering at the first significant support or resistance level that the price reaches and hold the position until the price reaches the Sunday close and the gap technically "fills".
So, gaps are another example of price behaviour that the astute trader should be aware of. A gap can provide a frame of reference for the trader and those who aspire to be profitable will look at what happens after price creates one in order to spot potential patterns that they can profit from. By back testing the phenomenon, traders will likely be able to work out consistent, controlled ways to exploit these for profit.

As traders we have all heard the old saying "cut your losses and run your profits" countless times. It is one of those pieces of advice that is both simple and logical, and yet frustratingly hard to implement for the majority of those actually trading.

Today, we want to look at this problem from a psychological perspective. We know by its very nature that the market moves up and down - or to be more mathematical, reverts to the mean - much of the time. As a result of this, when new traders find themselves on the wrong side of the market and losing, they hope at some point that it will come back. The flipside of this, of course, is that if they are on the right side and winning, they worry that it may turn and that they may give some, or worse, all of their profits back. The reason it is so hard to overcome this mindset is because it has been programmed into us. As one trading psychologist wrote, this problem is due to the fact that we are "taught" from an early age that:

a) If we lose something it will eventually come back (e.g. If you lose your car keys, do not worry, they will eventually turn up)
b) If you see something, take it or you might lose the chance (e.g. If you see money lying in the street, pick it up quickly because it may not be there for long)

And so these attitudes translate into our trading. However, to be a good trader requires going against what we have had ingrained in us. It often requires going against what both our heads and our hearts tell us. The real reason trading is so hard is that we need to reverse how we think: when trades are going against us we should be fearful not hopeful; when trades are moving in our favour we should be hopeful rather than fearful.

So how do we manage to do this?

One of the ways to remain disciplined in taking your losses is simply to pick a point before you place a trade that, if the market hits it, proves you are wrong in your analysis. Once this is chosen, you should never, ever, move your stop further away. Many novice traders choose a stop and then as the market moves towards it they manage to convince themselves that the market will turn after their stop is hit and therefore justify moving it further away. It is important to remember that the market has a way of frustrating every trader, but the greatest traders are flexible. If you are wrong in the short term, close your position and wait on the sidelines where you can see clearly until the market moves in the direction you thought it would. Timing is everything when you are trying to make a living do this. If your timing is wrong, then you need to take action and prevent losses. Sometimes the market may give you another chance but you can bet the time you need it to most, is the time you will not be given it!

So, that's how you should cut losses. How about letting profits run?

If you are in a situation where the position you have taken is significantly in profit, take a minute to sit quietly and think rationally. You need to focus on the fundamental thing that your position is now telling you i.e. you have called the market correctly. A key thing to remember in winning trades is that being up should not be a justification for getting out. This means that you should not look at your P&L and then begin to look for reasons to exit your trade. It all comes back to having a trading plan. A trader that wants to succeed needs to constantly remind themselves why they took the trade in the first place, where they originally thought the market was going to go and as a result, whether the reasons for still being in it are valid.

Successful traders are able to accept they are wrong and make the situation right by getting out but at the same time they are able to see when they are right and can fully maximise their opportunities by holding on with the strength of their convictions.

The central role played by US monetary policy, including Q.E., and the $ in global financial market correlations; the implications of Jean Claude Trichet omitting the phrase “strong vigilance” from yesterday’s E.C.B. introductory statement; the significance of a potential uptick in the US unemployment rate in today’s Employment Situation report. All of these are key fundamental issues that professional Proprietary Traders must understand and whose evolution they must be able to track and interpret in the blink of an eye. However, the most capable fundamental analysts do not necessarily make the most capable traders.
Much time is dedicated during our 12 week training programme to developing trainees’ ability to understand the fundamental backdrop to the global financial markets. Also, beyond the 12 week process, traders enjoy the benefit of both weekly strategy sessions to plan for the key events of the coming week, as well as ongoing informal discussions with senior traders on the trading floor. However, the vital question often overlooked by novice traders is “how do I translate this fundamental information into my trading?”
There are no prizes in an environment such as Futex for being able to out-analyze either your peers or any other market participants. Rather, it is the ability to effectively translate such understanding into your trading, and thus your end of day/week/month P&L, that really counts. It takes both time and deliberate practice to develop the skills required to interpret fundamental information, and yet more time to be able to effectively translate this understanding into trade ideas. However, the process is much quicker if individuals are acutely aware of the need to make this end-to-end link from the outset. For example, from day 1 of the 12 week training programme, trainees are involved on a daily basis in up to 2 hours of reviewing market fundamentals. At every step, a direct link is made between what is read in either the Financial Times or in an analyst’s report and trading. The clear rule of thumb is – unless you can take a fundamental piece of information and translate it into a specific trade idea or it directly supports/enhances your trading decisions, it is superfluous.
Proprietary Traders have to interpret a huge amount of information on a daily basis. A key skill is being able to sift through this abundant information and hone in on that which is most important. As a novice trader, it is all too easy to get bogged down in excess information at the expense of effective trading and paralysis by analysis is a common outcome if this is left unchecked. Making consistent profits is the outcome goal for all of our traders and nothing should distract them from the relentless pursuit of this.

Over the last year and a half, Inbox Education has focused upon many different elements of technical analysis. We have discussed Market Profile, support and resistance, the simple trend line and Eliott Wave amongst other techniques. All of these techniques allow you to interpret both the market price and the day structure, and to identify buying and selling opportunities. However, one advantage that our professional Proprietary Traders have when using the Market Depth is an ability to identify those buying and selling opportunities that are not manifested on any chart.
Many of the intra-day levels that provide profit opportunities for Futex’s traders are borne out of the interaction between market participants – buyers and sellers – at any one price, or over a series of prices. However, these interactions may only last for a few seconds and would register only as “noise” on a higher timeframe bar or candlestick chart. An example may be the repeated rapid-fire failure of a large participant(s) to breach a particular price. No matter how much is bought at the price in question, and no matter how big the individual clip (transaction), the price just will not break i.e. serious resistance has been formed. But if this activity takes place slap bang in the middle of a 5 minute range, the relevant candlestick or bar just will not highlight it.
Now, just because such “levels” are visible to intra-day Market Depth traders doesn’t mean that they can always trade them and profit accordingly. Of course you have to be in front of your screen to stand a chance but even so the Price Action can be lightning quick and sometimes too quick to exploit. But here’s the key… If you can observe and then commit to memory not only the price level in question but the precise price action that caused it, then whilst it may not pay dividends right there and then, there’s a strong chance that it will later in the trading session or maybe even tomorrow. For example, if the market trades away from this price level, establishes value elsewhere and then returns, the first retest of the same level tends to have a significant and potentially highly profitable reaction.
The most successful Proprietary Traders have an enviable ability to recall every last detail of the market(s) they trade, the trades that they execute – and there may be upwards of 100 each day for some – and the price levels that attract significant participant interaction. Armed with this information they are then able to execute highly effective, high probability trades that the majority of other participants that do not have the same market access and skill simply cannot. Proprietary Trading is a tough career to pursue and gaining an edge over the market wherever possible is vital. Investing in technical analysis that few other participants can see or are even aware of is just one way in which our traders are coached to establish their own edge.

Like many of the other best trading novels, Market Wizards leaves you with a sense of inspiration; you now know what it takes to improve your all-round trading! It is a comprehensive guide on how to prepare for what lies ahead, using the experience of some of the best traders as your foundation. By leaning on their experience, you can learn vital lessons from the information the market will throw at you on a daily basis. The book is neatly constructed in a question and answer format making it literally “full of answers”. Each clearly labeled chapter covers the traits or style of each trader meaning you can delve into those sections most relevant to you. 

The overriding theme of the book is that despite the differing trading approaches of the traders, each one has similar underlying principles. These are easy to grasp as each trader makes repeated reference to what they feel made them into the traders they are today. The book is written by active traders which gives a real credibility to the content you are reading. It is also riddled with trading psychology and ‘the trader’s mindset’ which means the reader with the ability to spot weaknesses in their own psychological makeup will be able to replace these with the strengths described by these successful traders.

I recommend this book as it provides a well rounded guide to what is required to become a successful trader. It obviously focuses on discipline and familiarity with the markets, but also provides an analysis and evaluation of a range of trading approaches and underlines a series of essential psychological rules.

This week we would like to set the record straight on a form of technical analysis some of you may have encountered known as Elliot Wave.  Although a very common tool used by technical analysts, Elliott Wave is unfortunately also commonly misused as many analysts fail to adhere to all of the rules set out by both its creator and it's most prominent experts. 

Elliott Wave

On any given trading day, the emotional highs and lows experienced by a trader are more extreme than the average person’s over the course of a month. But hey, isn't that part of the enjoyment? Feeling alive? If you answered yes to this question, you need to take a long hard look at yourself and your motivations for being a trader. You need to realise that we don't trade to experience this feeling, WE TRADE TO MAKE MONEY.

A master trader does not trade for a buzz; he is robot-like, executing his trades devoid of emotion. He cuts his losses when he is wrong and he feels little anxiety about running trades further than he originally anticipated when it is appropriate to do so. He is a master trader because he can make the hard decisions which most people aren't willing to make and therefore profits from those situations when the average trader fails So how does a trader become so cold and calculated?

The answer, like any other performance discipline, is practice. To be the best you have to be willing to go further than anyone else to achieve your goals. You must train yourself emotionally to be able to handle challenging situations so that when the real thing happens, you have already gained the experience of how to deal with it - your response is instinctive:

So, you need to rehearse the situation in your mind; visualise the market changing in front of you and you cutting your position without hesitation having realised your mistake; visualise a move in your favour and actively running the trade further than you originally anticipated; visualise how you will react when being almost stopped out for the day and how to trade when trying to bring yourself back from the brink.

The true champion takes this approach to the extreme. An excellent example of an elite performer who trained their mind in order to win is seven-time Mr. Olympia, Arnold Schwarzenegger;

“To be a champion you cannot have any outside negative forces coming in and affecting you. Let’s say before a contest I get emotionally attached to a girl, that can have a negative effect on my mind and destroy my performance. Therefore, I have to cut my emotions off and be kind of cold before a competition. So that’s what you do with the rest of things. Right now, if someone steals my car from outside my door I don’t care, I can’t be bothered with that, the only thing I would do is call the insurance company and have a laugh about it. I trained myself for that, to be totally cold and not to have anything go into my mind. It was a sad story a few years ago when two months before a competition my mother called me and told me my father had died. She asked if I would come home for the funeral and I said no, it’s too late, he is already dead and there is nothing that can be done. I’m sorry.”

Arnold Schwarzenegger, Pumping Iron

Futex Investment & Trading Academy

"The Ultimate Trading Career" ]]> http://www.futex.co.uk/inbox-education/emotions-in-trading/feed/ 0 http://www.futex.co.uk/inbox-education/futex-strategy-session/ http://www.futex.co.uk/inbox-education/futex-strategy-session/#comments Fri, 26 Nov 2010 09:13:09 +0000 John http://www.futex.co.uk/?p=3622 This focus of our strategy session this week was the market impact of Sunday’s confirmation that an EU bailout of Ireland was taking place and the continued, growing concern regarding other Eurozone peripheral countries.

Financial markets look for and thrive upon certainty and confidence

The markets had a very interesting response to the Irish bailout. Initially, markets reacted positively with a rally in Equities. This was followed by a significant sell-off as even though the bailout reduces the risk of Irish default, this is not necessarily to be regarded as good news as it will pose a strain upon the Eurozone - Ireland being the second country to require a bailout in 6 months. The concern now is of a domino effect occurring within the Eurozone with the market focus turning towards Portugal and their ever widening yields which are fast approaching the 7% figure. A continued rise in Portuguese yields, as well as those of Spain, will lead to a further decline in Equity markets. By contrast, stability in these yields and a return of investor confidence will lead to a turnaround and an increase in Equity prices. 

This focus of our strategy session this week was the market impact of Sunday’s confirmation that an EU bailout of Ireland was taking place and the continued, growing concern regarding other Eurozone peripheral countries.

Financial markets look for and thrive upon certainty and confidence

The markets had a very interesting response to the Irish bailout. Initially, markets reacted positively with a rally in Equities. This was followed by a significant sell-off as even though the bailout reduces the risk of Irish default, this is not necessarily to be regarded as good news as it will pose a strain upon the Eurozone - Ireland being the second country to require a bailout in 6 months. The concern now is of a domino effect occurring within the Eurozone with the market focus turning towards Portugal and their ever widening yields which are fast approaching the 7% figure. A continued rise in Portuguese yields, as well as those of Spain, will lead to a further decline in Equity markets. By contrast, stability in these yields and a return of investor confidence will lead to a turnaround and an increase in Equity prices.

The absence of certainty and confidence is bearish for general market sentiment, so the market is currently looking to the Eurozone peripherals to provide this confidence which will allow Equity prices to rise once more. The market is also currently focusing on short-term news so traders must be aware of this and also when this tendency comes to an end. When reacting to news the market is making it very difficult for traders to profit from their fundamental view. Often the market will move in a contrarian direction until such time as the herd begins to dismiss the validity of the original news and begins to reverse both their opinion and trades. Only once these “weaker” participants are out of their initial positions does the market subsequently resume its correct, fundamentally-driven direction. As a result, we are firmly of the opinion that such price movements on the back of fundamental news are fading opportunities. It is important when the market is trading in a nervous state to be patient. Currently, markets have a tendency to drive up and stop out weak shorts only to then drive down and squeeze out weak longs. Only after this do the markets make a more concerted move to new price areas. At the moment, the original price movement is often followed by a larger move in the opposite direction within any one trading day; referred to as an open – rejection - reversal. Referring back to the situation in Ireland, over the near future it is important to look at the conditions of the bailout deal and bear in mind that even though there is a reduced chance of Ireland defaulting on their debt, the current situation in Ireland is negative for the markets. Ireland’s troubles have raised a big question mark over the strength of the Eurozone and whether there is a threat of an imminent break-up. On Monday this was reflected in an 11% increase in Portuguese Credit Default Swaps meaning the market is very aware of the likelihood of a domino effect occurring in the Eurozone. The market will now focus on Portugal and, as it did with Greece, forget about Ireland and its issues once the bailout package has been released until such time as the next stage unfolds which would be default. This means that due to the current state of the Eurozone, the Euro currency is still a sell and a risk-on/risk-off type trade. Note of caution - bear in mind the current economic backdrop which is that upon dips in Equity markets, the buyers step-in. However, this will come to an end and once the dips are no longer being met with aggressive buying by the market, we expect a significant drive lower in Equities to establish new lows. Trading Tip of the Week: When the market isn’t acting in line with your scenario you must let the market to do as it wishes and leave it well alone or be prepared to jump-in on the other side – either way, you mustn’t fight it. Futex Investment & Trading Academy "The Ultimate Futures Trading Education"

 

	Common statistics provide a very good explanation of why this practice cannot succeed in the long run. Statisticians suggest that trading is a 50/50 “bet” on whether a price goes up or down. In reality, many markets will only trend 20% of the time and actually go sideways for the remainder. If we were to execute 100 trades then statistically we would have 80 small winners or losers cancelling each other out. We would also have 10 big winners and 10 big losers. So, if a trader cuts all of his winners short by taking profit and yet runs all of his losers through fear, then we now have 10 big losers and 90 small winners/small losers making it impossible to make consistent profits, no matter how good a trader you are. Futex Investment & Trading Academy not only teaches traders about the fundamentals and technicals of the market but also provides ongoing support and mentoring both during and after training to help traders work through psychological weaknesses just like this one. Futex Investment & Trading Academy "The Ultimate Futures Trading Education"

]]> http://www.futex.co.uk/inbox-education/simple-statistics/feed/ 0