Making money, trading money by Darren Winters
One of the most frequent questions we get is, ‘what stocks are we trading at them moment?’ With the odd exception our list is quite boring as we normally day-trade. We just trade the same group of stocks, which have high volatility and high liquidity. We have covered one of them (Caterpillar) in this month’s featured stocks, as it may be set up for a bigger move. Our criterion is that it must move the equivalent of around 100 points during any day. That equates to a move of about a dollar on a US stock.
There is of course another market that has the high volatility and liquidity, this being the foreign exchange market. In terms of liquidity, over US$1 trillion worth of currency is traded daily. The market is open 24 hours a day, for 5 and a bit days a week. Only 5% of the amount traded is made up of companies or countries converting money back into their own currencies, the other 95% is traded by speculators.
Before we go any further, a public wealth warning, trading currencies can seriously dent your wealth. As with any highly volatile asset, you need to ensure that you manage your stops and positions carefully.
TRADING ACCOUNTS
Trading in currencies is very easy; there are a number of different methods. Most common are margin accounts, options, futures and spread betting. We currently favour the latter as it is tax free and very easy to use although you can choose what you prefer.
Most brokers allow you to trade currencies free, you just pay the spread (the difference between the bid and ask price). As the liquidity is extremely good, the spreads are generally just three points at most (0.0003).
The reason for my earlier public wealth warning, is that on all types of accounts you get a significant amount of leverage. Thus if you were trading a standard margin account you would normally get 100% leverage, i.e. for every £1 of your money it is controlling £100. It is great when you are right, but not good when you’re wrong!
WHAT TO TRADE
Approximately 85% of the daily forex transactions take place between the most liquid (highly traded) currencies. These are referred to as the ‘majors’ and include the US dollar, Japanese yen, euro, British pound, Swiss franc, Canadian dollar and Australian dollar. These are all traded in pairs with the euro, pound and dollar being the three core majors, i.e. each of other currencies are traded against these.
The other majors are traded against each other but are often classed as minor pairings by brokers. To keep things simple we would suggest to start with, you find one or two pairings and study those first.
Some pairings are much more volatile then others. For the pound dollar the daily range may run anywhere from 0.0050 to 0.0300 points, in spread betting terms that relates to 50 to 300 points, or on a £1 stake £50 to £300.
ANALYSIS
A friend of mine was a currency trader in the city; he told me that the majority of his colleagues used Elliott waves. He did quite well; he retired at the grand old age of 26! (Albeit rather burnt out!). We find that a reasonable understanding of Elliot waves and Fibonacci certainly helps.
As there are no volume indicators, most other analysis is based purely on price. For example moving averages, stochastics etc.
Economic news certainly moves this market. It is essential that you are aware of the time of the key news releases, as whilst you may have the direction right for the day, the intraday whips can be very ferocious resulting in your stops being taken out. Interest rate rises do not always strengthen the currency when announced as they may have been priced in well before, or the currency may be in such bad state nobody wants it anyway.
PLACING A TRADE
As I have already said, the trading bit is easy. If you think the pound is going to rise against the dollar, you would buy the pound, which simultaneously sells the dollar. This is known as going long.
When you want to close the position, you sell the pound which will simultaneously buy back the dollar. In this example to place a stop you would also set a sell order up but at a level you are comfortable with.
Conversely, if you believe the pound is going to get weaker against the dollar, you would want to short the pound. Here you would sell the pound to open the position and buy it to close the position.
We should caution you that since currencies tend to be more volatile than normal stocks you may want to consider a slightly bigger stop than normal to avoid getting stopped out too early.
Another point of caution is to start small. I have spoken to a number of people that place £5 or £10 a point bet and have lost a small fortune all in one day. Whilst I do not really like paper trading too much, as it lacks the emotion of trading with real money, this may be an exception.
Trading currencies can be extremely profitable and good fun. It saves looking for stocks that may only move a small amount and you can trade them when you get home what ever shift you work. However you must go in with your eyes wide open.
You can see on this 5 min chart how choppy it can be when news is released. 120 points range in 15 minutes, thank you!
Regards Darren Winters
There is of course another market that has the high volatility and liquidity, this being the foreign exchange market. In terms of liquidity, over US$1 trillion worth of currency is traded daily. The market is open 24 hours a day, for 5 and a bit days a week. Only 5% of the amount traded is made up of companies or countries converting money back into their own currencies, the other 95% is traded by speculators.
Before we go any further, a public wealth warning, trading currencies can seriously dent your wealth. As with any highly volatile asset, you need to ensure that you manage your stops and positions carefully.
TRADING ACCOUNTS
Trading in currencies is very easy; there are a number of different methods. Most common are margin accounts, options, futures and spread betting. We currently favour the latter as it is tax free and very easy to use although you can choose what you prefer.
Most brokers allow you to trade currencies free, you just pay the spread (the difference between the bid and ask price). As the liquidity is extremely good, the spreads are generally just three points at most (0.0003).
The reason for my earlier public wealth warning, is that on all types of accounts you get a significant amount of leverage. Thus if you were trading a standard margin account you would normally get 100% leverage, i.e. for every £1 of your money it is controlling £100. It is great when you are right, but not good when you’re wrong!
WHAT TO TRADE
Approximately 85% of the daily forex transactions take place between the most liquid (highly traded) currencies. These are referred to as the ‘majors’ and include the US dollar, Japanese yen, euro, British pound, Swiss franc, Canadian dollar and Australian dollar. These are all traded in pairs with the euro, pound and dollar being the three core majors, i.e. each of other currencies are traded against these.
The other majors are traded against each other but are often classed as minor pairings by brokers. To keep things simple we would suggest to start with, you find one or two pairings and study those first.
Some pairings are much more volatile then others. For the pound dollar the daily range may run anywhere from 0.0050 to 0.0300 points, in spread betting terms that relates to 50 to 300 points, or on a £1 stake £50 to £300.
ANALYSIS
A friend of mine was a currency trader in the city; he told me that the majority of his colleagues used Elliott waves. He did quite well; he retired at the grand old age of 26! (Albeit rather burnt out!). We find that a reasonable understanding of Elliot waves and Fibonacci certainly helps.
As there are no volume indicators, most other analysis is based purely on price. For example moving averages, stochastics etc.
Economic news certainly moves this market. It is essential that you are aware of the time of the key news releases, as whilst you may have the direction right for the day, the intraday whips can be very ferocious resulting in your stops being taken out. Interest rate rises do not always strengthen the currency when announced as they may have been priced in well before, or the currency may be in such bad state nobody wants it anyway.
PLACING A TRADE
As I have already said, the trading bit is easy. If you think the pound is going to rise against the dollar, you would buy the pound, which simultaneously sells the dollar. This is known as going long.
When you want to close the position, you sell the pound which will simultaneously buy back the dollar. In this example to place a stop you would also set a sell order up but at a level you are comfortable with.
Conversely, if you believe the pound is going to get weaker against the dollar, you would want to short the pound. Here you would sell the pound to open the position and buy it to close the position.
We should caution you that since currencies tend to be more volatile than normal stocks you may want to consider a slightly bigger stop than normal to avoid getting stopped out too early.
Another point of caution is to start small. I have spoken to a number of people that place £5 or £10 a point bet and have lost a small fortune all in one day. Whilst I do not really like paper trading too much, as it lacks the emotion of trading with real money, this may be an exception.
Trading currencies can be extremely profitable and good fun. It saves looking for stocks that may only move a small amount and you can trade them when you get home what ever shift you work. However you must go in with your eyes wide open.
You can see on this 5 min chart how choppy it can be when news is released. 120 points range in 15 minutes, thank you!
Regards Darren Winters
posted by Darren Winters at 12:30 PM
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