Identifying the top 5 mistakes that traders make

Identifying the top 5 mistakes that traders make

A look at the common mistakes that most traders tend to encounter


Everyone
makes mistakes, that’s why they put erasers on pencils. That being said, the
potential to make mistakes in your trading is manifold, and it’s important to
familiarize oneself with the most common different issues faced by individuals.

There is a fallacy of the daytime trader sitting
casually at home with nothing to lose. This couldn’t be further from the truth
as there is tremendous difficulty in trading as well as selecting the right
instruments. Without further delay these are the top five mistakes that traders
routinely make that you can be mindful of.

1) Absence of a trading plan

You
have your trading account and there’s a world of options or instruments to
choose from so why not jump right in? This could be one of the most common
pitfalls for traders as the lack of a clear trading plan for traders at the
beginning of their path is due to inexperience.

As
such, its crucial to construct a trading plan whether you are a novice or even
veteran trader. This mistake is all too common, resulting in hasty or
ill-conceived decision-making as a lack of research or familiarity with
instruments can lead to losses.

Instead,
a fruitful exercise is todetermine the solid
parameters for entering and exiting the trade and follow them as closely as
possible. Depart from the plan is permissible except in periods of increased
market volatility to close the position and reduce trade risks. In the long-run,
this tactic is generally more apt to yield positive results, although at the
first glance it may look overcautious.

2) Problems with recognizing mistakes

Did
you get unlucky, not your trade? Or did you truly recognize that you made an
error. Often times people are likely to blame anything or anyone before
themselves, which is why this mistake ranks so highly on this list with regards
to trading.

Not
recognizing your mistakes is a common error that can be related to
overconfidence in traders’ assessments of the situation. The market is always changing,
and consequently a new important circumstance could appear. However, for
newcomers it seems that they need only a little bit to stay calm and wait while
loss disappeared and then there will be a reward.

Ultimately,

your technique and forecasts could be relevant, though traders should not
use these as a surefire predictor for future. Even the largest investment banks
and international organizations are changing their expectations and forecasts.
There is nothing wrong with it: nowadays the world is difficult to predict.
Probably it was always like this, but now it is more often told.

3) Emotions

Nothing
is ever as good or as bad as it seems. Still, it is worth noting that emotions
are an integral part of trading for
most individuals. The prospect or payoff of some nice trades often brings a
healthy excitement and a competitive spirit to those for that are trading.

However,
the reverse side yields an inverse effect on traders that can trigger deep
sorrow with loses or outright depression. Greed and fear lead to mistakes and
these emotions should be dispelled for any longer-term trader.

Instead, make your goals
for the day and tune your trading strategy on a shorter-term basis. In doing
so, this technique allows a trader to reduce a level of emotion and better
control or minimize the number of spontaneous decisions.

4) Always buy low and sell high

It’s
so easy when you look at a chart in hindsight to identify the highs and lows.
In real time however, this practice is slightly more complex or unpredictable. What
seems like a good moment for reversal at first glance can very often turn out
to be a small stop in the midst of the trend.

Don’t be lulled into
knee-jerk moves as a result of this narrow line of thought. Instead utilize a
range of tools such as oscillators (technical indicators) that are helpful to
determine entry/exit moments. Moreover, by estimating the strength of the
current price trend, you can be better informed to execute your strategy.

5) Overconfidence in your trading strategy/performance

You
are on a roll and can’t be stopped. Maybe it’s time to rethink your career
after the stellar month you have just had trading…then the wheels come off. On
the opposite side of the spectrum from having no trading strategy is being
overconfident in it.

After
the trader has tested it on very long historical data and if it has
successfully had worked out for several months before, it is rather difficult
to take a critical look at its shortcomings. A series of losses at first glance
seems only a black stripe, which is about to end.

It
is paramount that a trader always needs to keep an open mind to the notion that
the market can change dramatically and unexpectedly. The economy can enter next
macroeconomic cycle phase, the policy or other economic conditions could have
changed, or seemingly any different scenario could be a game changer.

Strategies should be time
to time subjected by a critical review for relevance, sometimes by your
colleagues or another set of eyes. Critical thinking is one of the best lines
of defense against a seemingly bulletproof strategy.

– This article was submitted by LegacyFX
Useful tips to identify support and resistance levels

Useful tips to identify support and resistance levels

A couple of pointers on the basics of technical analysis


Trading
requires a wide range of skills, which sometimes can range from simple
techniques to complex patterns. Being able to identify both support and
resistance prices trends more towards the former, though this is no less
important for any respective trading strategy.

At first glance, even
novice traders can locate specific levels at which prices inflect. Rather,
support and resistance levels form as orders cluster in places where many
traders expect the price to stop. In this way, it becomes useful to pinpoint in
advance these specific points in order to optimize any trading strategy.

Ultimately, there are multiple approaches to identifying important
market levels. These techniques involve swing highs and lows, psychological
levels, trendlines, moving averages, pivot points, and Fibonacci, among others.

Swing highs and lows

A
swing is a distinct movement of the price chart. Highs and lows of such moves
are the natural reference points for traders. Take note of swing highs and lows
in the visible area of the chart.

It is important to
not to forget to check higher timeframes for levels that are not normally in
your field of vision but that can still create obstacles near the current
price. The more times a level stopped the price and made it reverse, the
stronger it is.

Making use of psychological levels

Next up is psychological levels, which are points that are considered to
be psychologically important when its price quote ends with 0. The more zeros a
level has, the more important it is. If you ask for someone’s opinion about the
future price of EUR/USD, no one will say something like 1.1932 but they can
mention 1.2000 or 1.1500.

Harnessing trendlines

Diagonal lines are also important just as numbers are with several
zeroes attached to them. It is important to note that you need at least 2
points (2 highs or 2 lows) to draw a trendline. There should be about 20-30
candlesticks between these points so that the trend had a 45-degree angle. The
more times the price touches the trendline, the stronger this trendline
becomes.

Moving averages

Although moving averages lag behind the price in a sense that they are
slow to reflect the most recent changes of the market, they act as good
support/resistance levels. One way to utilize moving averages is to rely on
200-, 100- and 50-period lines for this purpose. These MAs are especially
strong hurdles for the price on the weekly and daily charts because many
“big bank” analysts use them.

Exploring pivot points

Pivot
points represents an instance when math comes to trading. Pivot points are
calculated on the basis of previous highs, lows, and closing prices. There are
many custom indicators that will draw these levels for you.

One
way is to look at Pivot Points Multi-timeframe indicator for MetaTrader. It
shows a central pivot level, 3 support levels and 3 resistance levels for each
timeframe. The indicator will let you see daily levels applied to any other
timeframe you use.

A good starting point
is to analyze weekly levels of this indicator. They are redrawn after the end
of every week and provide a very good idea of what the scope of the pair’s
movement will be like during the coming days.

Fibonacci

Fibonacci constitutes one of the core trading strategies that exists for
users. In order to use this instrument correctly it is important to spread the
line from the left to the right of any chart and take into account the
candlesticks’ shadows in the figure. In the example above, key levels of the
Fibonacci retracements are 38.2%, 50%, and 61.8%. A correction is expected to
end at one of these levels so that the overall trend could resume.

– This article was
submitted by LegacyFX.
What happened in the sterling flash episode (and what to do next time)

What happened in the sterling flash episode (and what to do next time)

On October 7, 2016 the pound fell 10% in 40 seconds

Flash crashes in financial markets may become an increasingly frequent part of the landscape.

The preponderance of algos, instant electronic access and the illusion of liquidity make for fragile markets. In early January 2019, a flash crash took place in yen crosses. In 2016, it was the pound that fell 10% in less than a minute.

There are lessons in these events but they’re not always the same. In the 2019 event, I wrote as the crash was underway:

“These are some of the biggest moves you will ever see. I’m sticking my
neck out here but this looks like a one-off liquidity event and those
tend to retrace.”

The moves all did.

For those who bought the dip it was an incredible buying opportunity. One that yielded hundreds of pips in minutes and hundreds more within days.

The cable crash was similar. The pound plunged but was able to recover most of the gains.

One thing was entirely consistent: the timing. Both flash crashes happened at the most-illiquid time of day — after the US shuts down and before Tokyo really ramps up. The yen crash also took place on a Japanese holiday, thinning liquidity further.

But the algos don’t sleep. Or do they?

A Bank of England analysis shows there were a healthy amount of bids on each side of the market — £60 million of orders in the observed ten levels of price closest to the best bid and ask prices. Yet when the selling started, it vanished.

This chart shows triangles where transactions occurred on the Thomson Reuters platform. Those blue and pointing down show transactions initiated by a participant seeking to sell sterling. Those green and pointing up show trades initiated with an order to buy. The dark shaded regions show limit orders. The white areas indicate that liquidity had completely vanished.

The implication is that the algos switch off once an event outside its limits takes place. Some algos might shutter after a 1 standard deviation move, others may only halt after 5 standard deviations but them dropping out might have cascaded just as stops were cascading lower. Ultimately there was no liquidity.

Looking deeper at the episode, the BIS concludes that the flash crash appears to have been triggered by a large order to sell the pound. At this point, it wasn’t a major event but enough to send GBP/USD to 1.24 from 1.26 in a somewhat orderly fashion. That was followed by a number of minutes of “extreme dysfunction” in lower volumes that added up to a 10% decline followed by a gradual recovery.

“There is still a relatively limited understanding
of the implications of widespread automated trading, the reduced role of traditional
market-makers, and the increasingly important role of principle trading firms and other non-bank
liquidity providers in FX and other market,” the BIS concludes.

Here are my lessons for traders:

1) Trade with a stop

I read far too many heartbreaking messages from traders who lost far more than they could afford in the SNB, GBP and JPY flash crashes among other events. Most forex brokers now protect retail traders from negative balances but there’s no excuse not to have a stop somewhere.

2) These are remarkable opportunities

These are harrowing episodes but they’re opportunities. In practice, it’s tough to be aggressive at a time like this but a small-sized trade to fade the move can be prudent.

3) Longer term outcomes vary

Ultimately, the pound fell much further after the GDP flash crash, which only helped to underscore the disorder in the UK after the vote. In other episodes, policymakers have levers to pull on that can and have reversed the sentiment, making these ‘blow off’ moves bottoms.

4) Algos are here to stay

Policymakers have tried to understand these moves but the answers haven’t been satisfactory. Ultimately, I believe a global policy will emerge where central banks agree to coordinate in order to step in after certain parameters are hit. I think we’ve been lucky so far that none of these events spilled over into critical derivatives markets, leading to cascading problems in an event that leads to some kind of breakdown in a bank or the broader financial system. The trigger could easily be FX but ETFs are also vulnerable. Information will be at a premium when that happens and we here at ForexLive will be with you every step of the way.

ForexLive

ECB’s Nowotny: Our approach to rate hikes will be cautious

ECB’s Nowotny: Our approach to rate hikes will be cautious

Dovish comments from Nowotny with Austria’s Der Standard

  • Concerned about psychological factors driving slowdown

  • Germany vulnerable to slump in global machinery demand

  • Don’t see 2008-style crisis, only slowdown

Why’d he have to bring up 2008?

ForexLive

The conspiracy theory behind the latest rally in the Chinese yuan

The conspiracy theory behind the latest rally in the Chinese yuan

Trump wants a stronger yuan

This is possibly the most-important chart for the global economy. It’s the exchange rate between the world’s two biggest economies; the US dollar against the Chinese yuan.

In the past three days, it’s fallen precipitously, at least by the narrow standards of this pair, which is managed within a supposedly-liberalized band by Beijing.

In the past week, the pair has fallen 1.3% — meaning the yuan has risen against the dollar.

One school of thought is that this is all about the US dollar. The dovish shift at the Fed has given all currencies a relative lift, especially emerging market currencies. China also cut the RRR for banks.

Others see echoes of the 2016 episode of yuan weakness that rattled global markets in an August wave of risk aversion. That led to the so-called Shanghai Accord, which was a real or imagined episode where China agreed to ease in a coordinated move with central bankers elsewhere.

The rumors this time is that the Fed agreed to shift to easier policy in exchange for Chinese officials pushing the yuan higher.

Another idea is that this is part of the negotiating tactics for the US-China trade war. It’s a concession from China to clear the way to a deal and show goodwill. It could be a signal that they will follow this with further stimulus that will boost Chinese demand and, in turn, narrow the US-China trade deficit.

ForexLive

Fox Business: Trump to end impasse w/ govt emergency as soon as next week

Fox Business: Trump to end impasse w/ govt emergency as soon as next week

Charlie Gasparino out with a SCOOP

Charles Gasparino is out with what he calls a SCOOP, saying that Trump will end the impasse with government emergency as soon as next week. He also says the White House economic team is divided over the Davos attendance.  

Taking that power, is a dangerous precedent that may not sit with lawmakers on both sides of the aisle. First, is where do the funds come from.  Presumingly, they are funds earmarked for other projects.  Also, there is a legal question on whether it can be done at all. 

It may also be a ploy to work toward a compromise before it were to happen. 

ForexLive

US House passes bill to fund and reopen Interior Department, EPA

US House passes bill to fund and reopen Interior Department, EPA

Sends the bill to the Senate

The US House has passed a bill to fund and reopen the Interior Department and the Environmental Protection Agency (EPA).  

The Joshua Tree National Park became news when pictures of fallen trees were shown.

The photos sparked outrage.  Parks remain open leaving them understaffed and vulnerable to the antics of unruly visitors. Parks have also struggled with a variety of issues including littering, overflowing public restrooms, and vandalism.

ForexLive

European equity close: Stocks slide to the downside but weekly gains solid

European equity close: Stocks slide to the downside but weekly gains solid

Closing changes for the main European bourses:

  • UK FTSE 100 -0.4%

  • German DAX -0.3%

  • French CAC -0.7%

  • Spain IBEX -0.1%

  • Italy MIB -0.1%

On the week:

  • UK FTSE 100 +1.1%
  • German DAX +1.1%
  • French CAC +0.8%
  • Spain IBEX +1.5%
  • Italy MIB +2.3%

Italian stock markets had a nice week but the index is closing in on the Nov/Dec highs.

 

Q4 New York Fed GDP Nowcast 2.48% vs 2.49% last week

Q4 New York Fed GDP Nowcast 2.48% vs 2.49% last week

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Trump laments ‘humanitarian crisis’ at border, calls it ‘an invasion’

Trump laments ‘humanitarian crisis’ at border, calls it ‘an invasion’

Trump on twitter

There are no signs of the shutdown ending or the wall being built. This all sounds like Trump is ramping up to declare an emergency and build it anyway.

If that’s coupled with a deal to re-open the government, I think it would be net-positive for risk sentiment. If he makes the move but doesn’t reopen the government, then I think you’re got to price in some real turmoil in Washington (more that we’ve priced in already).