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Hi guys,submitted by getmrmarket to Forex [link] [comments]
I have been using reddit for years in my personal life (not trading!) and wanted to give something back in an area where i am an expert.
I worked at an investment bank for seven years and joined them as a graduate FX trader so have lots of professional experience, by which i mean I was trained and paid by a big institution to trade on their behalf. This is very different to being a full-time home trader, although that is not to discredit those guys, who can accumulate a good amount of experience/wisdom through self learning.
When I get time I'm going to write a mid-length posts on each topic for you guys along the lines of how i was trained. I guess there would be 15-20 topics in total so about 50-60 posts. Feel free to comment or ask questions.
The first topic is Risk Management and we'll cover it in three parts
Why it mattersThe first rule of making money through trading is to ensure you do not lose money. Look at any serious hedge fund’s website and they’ll talk about their first priority being “preservation of investor capital.”
You have to keep it before you grow it.
Strangely, if you look at retail trading websites, for every one article on risk management there are probably fifty on trade selection. This is completely the wrong way around.
The great news is that this stuff is pretty simple and process-driven. Anyone can learn and follow best practices.
Seriously, avoiding mistakes is one of the most important things: there's not some holy grail system for finding winning trades, rather a routine and fairly boring set of processes that ensure that you are profitable, despite having plenty of losing trades alongside the winners.
Capital and position sizingThe first thing you have to know is how much capital you are working with. Let’s say you have $100,000 deposited. This is your maximum trading capital. Your trading capital is not the leveraged amount. It is the amount of money you have deposited and can withdraw or lose.
Position sizing is what ensures that a losing streak does not take you out of the market.
A rule of thumb is that one should risk no more than 2% of one’s account balance on an individual trade and no more than 8% of one’s account balance on a specific theme. We’ll look at why that’s a rule of thumb later. For now let’s just accept those numbers and look at examples.
So we have $100,000 in our account. And we wish to buy EURUSD. We should therefore not be risking more than 2% which $2,000.
We look at a technical chart and decide to leave a stop below the monthly low, which is 55 pips below market. We’ll come back to this in a bit. So what should our position size be?
We go to the calculator page, select Position Size and enter our details. There are many such calculators online - just google "Pip calculator".
So the appropriate size is a buy position of 363,636 EURUSD. If it reaches our stop level we know we’ll lose precisely $2,000 or 2% of our capital.
You should be using this calculator (or something similar) on every single trade so that you know your risk.
Now imagine that we have similar bets on EURJPY and EURGBP, which have also broken above moving averages. Clearly this EUR-momentum is a theme. If it works all three bets are likely to pay off. But if it goes wrong we are likely to lose on all three at once. We are going to look at this concept of correlation in more detail later.
The total amount of risk in our portfolio - if all of the trades on this EUR-momentum theme were to hit their stops - should not exceed $8,000 or 8% of total capital. This allows us to go big on themes we like without going bust when the theme does not work.
As we’ll see later, many traders only win on 40-60% of trades. So you have to accept losing trades will be common and ensure you size trades so they cannot ruin you.
Similarly, like poker players, we should risk more on trades we feel confident about and less on trades that seem less compelling. However, this should always be subject to overall position sizing constraints.
For example before you put on each trade you might rate the strength of your conviction in the trade and allocate a position size accordingly:
To keep yourself disciplined you should try to ensure that no more than one in twenty trades are graded exceptional and allocated 5% of account balance risk. It really should be a rare moment when all the stars align for you.
Notice that the nice thing about dealing in percentages is that it scales. Say you start out with $100,000 but end the year up 50% at $150,000. Now a 1% bet will risk $1,500 rather than $1,000. That makes sense as your capital has grown.
It is extremely common for retail accounts to blow-up by making only 4-5 losing trades because they are leveraged at 50:1 and have taken on far too large a position, relative to their account balance.
Consider that GBPUSD tends to move 1% each day. If you have an account balance of $10k then it would be crazy to take a position of $500k (50:1 leveraged). A 1% move on $500k is $5k.
Two perfectly regular down days in a row — or a single day’s move of 2% — and you will receive a margin call from the broker, have the account closed out, and have lost all your money.
Do not let this happen to you. Use position sizing discipline to protect yourself.
Kelly CriterionIf you’re wondering - why “about 2%” per trade? - that’s a fair question. Why not 0.5% or 10% or any other number?
The Kelly Criterion is a formula that was adapted for use in casinos. If you know the odds of winning and the expected pay-off, it tells you how much you should bet in each round.
This is harder than it sounds. Let’s say you could bet on a weighted coin flip, where it lands on heads 60% of the time and tails 40% of the time. The payout is $2 per $1 bet.
Well, absolutely you should bet. The odds are in your favour. But if you have, say, $100 it is less obvious how much you should bet to avoid ruin.
Say you bet $50, the odds that it could land on tails twice in a row are 16%. You could easily be out after the first two flips.
Equally, betting $1 is not going to maximise your advantage. The odds are 60/40 in your favour so only betting $1 is likely too conservative. The Kelly Criterion is a formula that produces the long-run optimal bet size, given the odds.
Applying the formula to forex trading looks like this:
Position size % = Winning trade % - ( (1- Winning trade %) / Risk-reward ratio
If you have recorded hundreds of trades in your journal - see next chapter - you can calculate what this outputs for you specifically.
If you don't have hundreds of trades then let’s assume some realistic defaults of Winning trade % being 30% and Risk-reward ratio being 3. The 3 implies your TP is 3x the distance of your stop from entry e.g. 300 pips take profit and 100 pips stop loss.
So that’s 0.3 - (1 - 0.3) / 3 = 6.6%.
Hold on a second. 6.6% of your account probably feels like a LOT to risk per trade.This is the main observation people have on Kelly: whilst it may optimise the long-run results it doesn’t take into account the pain of drawdowns. It is better thought of as the rational maximum limit. You needn’t go right up to the limit!
With a 30% winning trade ratio, the odds of you losing on four trades in a row is nearly one in four. That would result in a drawdown of nearly a quarter of your starting account balance. Could you really stomach that and put on the fifth trade, cool as ice? Most of us could not.
Accordingly people tend to reduce the bet size. For example, let’s say you know you would feel emotionally affected by losing 25% of your account.
Well, the simplest way is to divide the Kelly output by four. You have effectively hidden 75% of your account balance from Kelly and it is now optimised to avoid a total wipeout of just the 25% it can see.
This gives 6.6% / 4 = 1.65%. Of course different trading approaches and different risk appetites will provide different optimal bet sizes but as a rule of thumb something between 1-2% is appropriate for the style and risk appetite of most retail traders.
Incidentally be very wary of systems or traders who claim high winning trade % like 80%. Invariably these don’t pass a basic sense-check:
How to use stop losses sensiblyStop losses have a bad reputation amongst the retail community but are absolutely essential to risk management. No serious discretionary trader can operate without them.
A stop loss is a resting order, left with the broker, to automatically close your position if it reaches a certain price. For a recap on the various order types visit this chapter.
The valid concern with stop losses is that disreputable brokers look for a concentration of stops and then, when the market is close, whipsaw the price through the stop levels so that the clients ‘stop out’ and sell to the broker at a low rate before the market naturally comes back higher. This is referred to as ‘stop hunting’.
This would be extremely immoral behaviour and the way to guard against it is to use a highly reputable top-tier broker in a well regulated region such as the UK.
Why are stop losses so important? Well, there is no other way to manage risk with certainty.
You should always have a pre-determined stop loss before you put on a trade. Not having one is a recipe for disaster: you will find yourself emotionally attached to the trade as it goes against you and it will be extremely hard to cut the loss. This is a well known behavioural bias that we’ll explore in a later chapter.
Learning to take a loss and move on rationally is a key lesson for new traders.
A common mistake is to think of the market as a personal nemesis. The market, of course, is totally impersonal; it doesn’t care whether you make money or not.
Bruce Kovner, founder of the hedge fund Caxton Associates
There is an old saying amongst bank traders which is “losers average losers”.
It is tempting, having bought EURUSD and seeing it go lower, to buy more. Your average price will improve if you keep buying as it goes lower. If it was cheap before it must be a bargain now, right? Wrong.
Where does that end? Always have a pre-determined cut-off point which limits your risk. A level where you know the reason for the trade was proved ‘wrong’ ... and stick to it strictly. If you trade using discretion, use stops.
Picking a clear levelWhere you leave your stop loss is key.
Typically traders will leave them at big technical levels such as recent highs or lows. For example if EURUSD is trading at 1.1250 and the recent month’s low is 1.1205 then leaving it just below at 1.1200 seems sensible.
If you were going long, just below the double bottom support zone seems like a sensible area to leave a stop
You want to give it a bit of breathing room as we know support zones often get challenged before the price rallies. This is because lots of traders identify the same zones. You won’t be the only one selling around 1.1200.
The “weak hands” who leave their sell stop order at exactly the level are likely to get taken out as the market tests the support. Those who leave it ten or fifteen pips below the level have more breathing room and will survive a quick test of the level before a resumed run-up.
Your timeframe and trading style clearly play a part. Here’s a candlestick chart (one candle is one day) for GBPUSD.
If you are putting on a trend-following trade you expect to hold for weeks then you need to have a stop loss that can withstand the daily noise. Look at the downtrend on the chart. There were plenty of days in which the price rallied 60 pips or more during the wider downtrend.
So having a really tight stop of, say, 25 pips that gets chopped up in noisy short-term moves is not going to work for this kind of trade. You need to use a wider stop and take a smaller position size, determined by the stop level.
There are several tools you can use to help you estimate what is a safe distance and we’ll look at those in the next section.
There are of course exceptions. For example, if you are doing range-break style trading you might have a really tight stop, set just below the previous range high.
Clearly then where you set stops will depend on your trading style as well as your holding horizons and the volatility of each instrument.
Here are some guidelines that can help:
For example if you stop understanding why a product is going up or down and your fundamental thesis has been confirmed wrong, get out. For example, if you are long because you think the central bank is turning hawkish and AUDUSD is going to play catch up with rates … then you hear dovish noises from the central bank and the bond yields retrace lower and back in line with the currency - close your AUDUSD position. You already know your thesis was wrong. No need to give away more money to the market.
Coming up in part IIEDIT: part II here
Letting stops breathe
When to change a stop
Entering and exiting winning positions
Coming up in part IIISqueezes and other risks
Crap trades, timeouts and monthly limits
Disclaimer:This content is not investment advice and you should not place any reliance on it. The views expressed are the author's own and should not be attributed to any other person, including their employer.
Would you like to entertain yourself with a story about one of the greatest schemes in the history and, maybe, learn a few plays? This story is about three brave autistic brothers, who almost cornered the entire commodity and how one (not so brave, but shrewd) bank did it without anyone noticing. As in any good fable – there’s a moral and a strategy that you could draw from it.submitted by negovany to wallstreetbets [link] [comments]
The year is 1971. Nixon temporarily abolishes gold standard. And every temporary government program is never reversed, as you know. Trading price of gold went sky high: from 270s to 800s in two years or so. Enter Hunt brothers, sons of H. L. Hunt, oil tycoon, one of, if not the, richest man in the world at that time. Hunt family was, what one might describe as, right-wing libertarian and anti-globalist. They believed that Keynesian economics and the US shift to the left in the 60s will lead to the debasement of the US dollar and monetary collapse. Thus, return to the gold or silver standard was the way, as they thought. Allegedly, Hunts also had a feud with Rothschild family and other financial speculators, and were resentful towards the US government for doing nothing to protect their oil assets in Libya, confiscated by Gaddafi. So they started their move against America, alpha-silver bug style.
In 1973 Hunts began buying all the silver they could. And, instead of just speculating futures contracts, they actually took delivery. Initial price was $1.5/oz. Silver was shipped to Switzerland in secretive and costly operations and stored in vaults (brothers feared confiscations – remember, private citizens were still prohibited from owning gold in the US).
The following events are quite vivid and include the efforts to create a cartel similar to OPEC, talks with Iran and Saudi monarchs, pump and dump publicity and large scale purchases of miners. But we will spare the details, except one: Hunts even tried to corner the soy market at the same time. Reminds you how WSB slv gang quickly switched to corn gang. But the soy scheme didn't fly and they focused on silver only. Their efforts pumped the price to almost $50/oz by early 1980. At some point Hunts controlled around 230 million oz of silver and the majority of what was traded.
Hunt brothers laughing at your pump&dump effort
Of course, when you are such a smart ass, you become a target. Chicago exchange officials became very concerned citizens by 1979. They started issuing numerous regulations limiting the amount of market share one can accumulate in one hands. As all American concerned citizens, they had financial incentive to do so: Hunts managed to prove that Chicago exchange board members had short positions against silver. Finally, CFTC (Commodity Futures Trading Commission) issued a ruling that basically forced Hunts to liquidate part of their portfolio by February 1980. This sent silver prices down dramatically and brothers started to get margin calls which they could not cover. And so their story ended with bankruptcies and heavy fines for the family. Shortly after, Reagan and Volcker raised interest rates and silver price never recovered to $50/oz ever since.
We skip to the year 2008. Global financial crisis is in full swing. Bear Stearns is royally fucked, as due to all bears. Before the music was over, they mastered paper speculation of futures contracts like no one else. Bear Stearns accumulated world biggest naked short position on silver. What could go wrong? Stonks go up, silver goes down. Until it reversed and silver skyrocketed from $11 to $21. This became one of the margin calls to screw Bear Stearns. JP Morgan is asked by the FED and co. to buy out BS and to save the entire market. Since BS's shorts are now deeply down - JPM gets the whole bank with pennies on a dollar.
But the problem is that JPM themselves have massive naked short position on silver. Combined with BS it will exceed anything permitted by the CFTC. Since Obama administration was in a rush, they push CFTC to grant JPM basically a carte blanche to accumulate any position over the limit for a period of time. Period of time comes due and turns out that JPM not only didn’t trim the shorts significantly – they even bought more shorts at some point. Even with all the fines, it went very much their way, because in 2009 silver dropped. So they pocketed hundreds of millions of dollars.
But come 2011 and silver spiked again, dramatically. JPM, now bleeding cash on shorts, could close short positions, like any of us would do, right? Nope, fuckyall says JPM and starts hedging short futures positions with… physical silver. 'But wouldn’t that be even more control over the commodity?' - you might ask. See, nothing in the rules of CFTC says you can’t do that, because to help cronies speculate with paper futures contracts, made of thin air, CFTC basically started treating physical silver and futures as two different instruments (it’s, actually, even more complicated than that: google difference between physical, eligible, registered and so on).
In the next 9 years JPM becomes the world biggest holder of both short contracts and physical silver. The later they 'loaned' to SLV trust, of which they are custodian. This way upkeep of physical silver, which otherwise would be a liability for hedging, becomes an asset, because we, retards, who own SLV pay the maintenance. People are often confused here, because SLV is issued by Black Rock, not JPM. Well, there is a difference between being an operator of a financial instrument and being a custodian providing backing. Now, to confuse you even more – JPM is one of the major holders of Black Rock itself with 1.6% or sth like that.
By estimates of Theodore Butler, JPM acquired 900 million oz of physical silver since 2011. That’s 4 times more than what Hunts owned. Just shows you, that banks can get a pass with something that even the richest individuals can not. And you have to give it to JPM - their play was very clever. Instead of risking it all on a margin call, they make money on every turn.
As of 2020, JPM still holds both shitton of physical silver and short COMEX contracts. You can call this the most epic straddle of all time. With such mass they can swing prices in any directions and profit from this on any given day. Latest example you’ve seen on the August 11th.
Why am I bothering your poor gambling soul with this wall of text, you might ask? Market makers manipulate the market as they please, what’s new about that? Well, here we come to the conclusions and a strategy. How can a small retard replicate what the big boys are doing?
a) Only long expiration dates and calls; no weekly expiration, not even monthly. Ideally – at least half year options;
b) Go long on certain silver stocks. Maybe I’ll do a write up on good silver stocks to buy;
c) Sell covered calls on long positions;
d) Buy 1-3 month puts on your long positions as a hedge;
Now, day trade with those positions: on red days sell your puts and buy back covered calls. On green days – reload puts and sell calls. Repeat until lambo.
P. S.: I gathered these facts from the open sources, since these events were of interest to me. Some facts are intentionally oversimplified, google for more details, there are good reads. And feel free to correct me if you know contradictory facts.
P. P. S.: JPM, plz don’t whack me.
Margin Trading can be a risky game to play. Yet, if used correctly and with prudence, it can also help us reap better returns on our investments. For a quick background, let us explain what is margin trading and how does it work when it comes to trading cryptocurrencies. A margin account is a brokerage account in which the broker lends the customer cash to purchase assets. When trading on margin, gains and losses are magnified. more. Debit Balance. Margin in trading is the deposit required to open and maintain a leveraged position using products such as CFDs and spread bets. When trading on margin, you will get full market exposure by putting up just a fraction of a trade’s full value. The amount of margin required will usually be given as a percentage. Frequently Used Terminologies in Margin trading. Some of the most used terms in margin trading are: Margin call – Is a demand by the lender that a trader deposits additional funds or securities (as maintenance margin) to their account as an assurance that they are in a position to pay back the loan. Remargining: The process of bringing an account up to minimum equity standards by depositing more cash or equity. This typically occurs after the account holder has received a margin call. When a
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