Trading, in stock market terms, means to buy or sell shares in a publicly held company. Also known as the equity market, the stock market provides companies with access to capital in exchange for giving investors a small percentage of ownership in the company. Most people who are new to the stock market understand the concept of buying a share at a low price and then selling it at a higher price to make a profit (This is called trading “long”). The great thing about short term trading however is that you can make a profit by selling a share (a derivative of the instrument which carries higher risk) at a high price and then buying it at a lower price again (Trading “short”).
The 4 Quadrants
Content: Content consists of all the internal and external market information that is available to traders before they make their trading decision. Without instantaneous time, price and market information we would just be trading in the dark.
Psychology: The psychology aspect of trading is extremely important and the reason for that is straight forward: a trader will be in and out of positions fairly quick and on short notice, there for a trader is forced to make quick decisions. Your emotions can get in the way of either entering a good or bad trade resulting in either profit or loss. Fear and Greed need to be kept in check in order to be a successful trader.
Mechanics: Mechanics is how you access the markets and the methodology used when entering and exiting any trades. One small error can mean taking a loss on the trade or profiting. The good thing is, it doesn’t take long to master the mechanics of it all, it is merely about what works for you personally.
Discipline: The most important for last, you have to attain discipline with every trade every single day if you want to be successful in trading. Stick to your rules, manage your content, keep your psychology in check and make sure your mechanics are all on track.
What Moves The Market
The stock market has traditionally received the lion’s share of attention in the trading industry, but foreign currency (forex) trading has surged in recent years. Forex’s 24-hour access, liquidity and high leverage has attracted many active traders. Intraday traders can respond immediately to breaking news and events, thus avoiding having to wait for the market to open and risk “paying the gap.”
Fundamental analysis focuses on the economic, social and political forces that drive supply and demand. More so than other markets, currencies tend to develop strong trends, and one of the key roles of fundamental analysis is forecasting long term trends. Analysts consider various macroeconomic indicators, such as economic growth rates, interest rates, inflation and employment when forecasting the markets. Fundamental drivers of currency moves include economic data releases, interest rate decisions, news and announcements, all of which can indicate potential changes in the economic, social and political environment.
The Major Forex Players
- Central banks
- Commercial & Investment Banks
- Institutional Traders
- Hedge Funds
- Retail Forex Brokers and Traders
Central banks are there to stabilise a countries economy which they do by monitoring one of the most important benchmarks in the economy; the inflation. Inflation is commonly described as the rate at which prices of goods and services are rising. If the central bank doesn’t control inflation it can lead to a down turn in purchasing power.
In most countries inflation is measured through the consumer price index (CPI). The CPI is a weighted average of prices of a basket of consumer goods and services. A Central banks controls inflation in 3 ways:
- It regulates interest rates
- It intervenes by buying or selling currencies
- It regulates the reserve requirement ratio
Commercial & Investment Banks
Commercial banks are the biggest traders of forex currencies worldwide. They are connected to the interbank market, which banks trade currencies with each other through electronic networks. The spreads / difference between bid and ask prices are stupidly thin with the interbank market. These thin spreads allow the banks to transact huge amounts at a very low cost.
Institutional investors in the forex market include investment and insurance companies, pension funds, endowment funds, mutual funds and hedge funds. These Institutions make up about 30% of all forex transactions worldwide.
These investors are there purely to trade for profit. However they are also trading to mitigate risks, with a global portfolio spanning over many countries , fluctuations in the forex markets require investment managers to hedge there portfolios against currency risks.
Retail Brokers and Traders
Forex brokers are firms that provide currency traders with access to a trading platform that allows them to buy and sell foreign currencies. A currency trading broker, also known as a retail forex broker, or forex broker, handles a very small portion of the volume of the overall foreign exchange market.
A retail investor is an individual investors who buy and sell securities for their personal account, and not for another company or organization.
Also known as an “individual investor” or “small investor”.
Short Position – An instrument that is sold now with intention to buy later at a lower Price
Bear or Bearish – Our Bias is towards lower Prices Trend is Down / Trade to the downside
Bulls or Bullish – Our Bias is towards Higher Price Trend is Up / Trade to the upside