Ransquawk

Run them, but protect your profits

It has become a feature of the market recently that currencies not only seem to run out of steam very quickly but also retrace and correct significantly. To counter this recent phenomenon, it is useful to put in pace a trailing order to ensure that a quick reversal doesn’t wipe out a profitable trade.

Nothing is more frustrating than having the correct idea/position and not benefitting because something happens in the market that we are not in control of. There is a function on the MT4 platform that allows a trailing stop to be placed to ensure that any reversal doesn’t cause too much damage.

We can become a bit too trusting of the volume of liquidity we see in the market nowadays particularly in the common currency. Most liquidity providers are using algorithmic methods of making prices now which allow their platforms to perform almost without intervention. This means that occasionally a gap can occur in the programme where orders disappear, so it is doubly important to protect our positions.

It will also pay to understand how market making works in banks nowadays. It has changed out of all recognition now and banks are relying less and less on the skill of their traders and more on liquidity to make money.

They don’t care which side of the price get dealt upon as long as the deal gets done. This has led tote narrowing of spreads which is a double-edged sword for traders.

Spread is misleading

Most brokers use spread as a marketing tool. This is very misleading as the spread on a trade is immaterial if the price on the side you wish to trade upon is right. Of course, an exceptionally wide spread is a real “turn-off” but if looked a sensible, it is an illustration of liquidity and risk.

When I trade I rarely look at the width of the spread, particularly when I am entering a position. It doesn’t overly concern me. I am far more exercised by the execution of my stop losses. Brokers are very mechanical when it comes to stop losses and they are missing a trick especially when trying to attract larger accounts by not offering some kind of “liquidity” guard when executing stops. It would be a far more effective marketing tool than simply quoting spreads even of zero pips. Particularly since we all now know that such spreads are rarely available and almost never when we need them.

As the market becomes more and more saturated with brokers and what I would call sub-brokers as several introducing brokers see themselves stepping up it is useful remember that relationship and trust are the only two factors that should determine our choice of broker. Technology has created an environment where differentiation is almost impossible so a more ruthless, “you are my broker “for now”” attitude is the most effective. Remember that all a broker is, is your conduit to the market.

Is there a right time to look at Crypto?

If you have a trader’s mentality, then you will naturally always be looking at the next trade and possibly beyond that to the next asset. Most brokers offer five asset classes; FX, metals, oil indices and bonds. Others offer a wider selection of commodities. If your trading style is purely driven by technical analysis, then it lends itself to a switch to other asset classes always provided you understand the difference in liquidity you may find.

So, what about an entirely different way of trading? When will you be ready for that. Before considering your answer, think a moment and study why you would change? Is it because what you do now isn’t working. If that’s the case, then go back to the drawing board and perfect your craft before “throwing the baby out with the bathwater”.

It may seem counter-intuitive, but I would only recommend a switch to looking at trading cryptocurrencies for successful traders in the fiat market. Why? Because they have a very good idea about the “market”. Or for that matter any market. Its dynamics, what to look for, what drives it and why.

Then, of course CFD or physical? CFD should make more sense unless you want to buy and hold. To be honest I still believe that buy and hold is the way to go but only if you have deep pockets. Crypto is and remains a long-term hold play for now and for the foreseeable future.

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Alan is a highly experienced banker with an in depth knowledge of Corporate Banking, Treasury and Trade Finance. He has had a varied career in Global markets, Risk management, FX Trading and Sales & Interest Rate Management. He has managed sales teams mentoring his team in both markets and marketing.He has been published in a number of journals and has appeared daily on radio to discuss market movements and events. His first novel was recently published.