Contracts for differences (CFDs) are financial instruments that track many assets including forex, individual equity shares, commodities, indices, and cryptocurrencies. CFDs allow you to trade the capital markets using leverage.
What is a Contract for Differences (CFD)?
A contract for differences (CFD) is a financial instrument that tracks the movements of an underlying asset such as a stock, currency pair, commodity, cryptocurrency or index. It differs from the underlying instrument in that you do not have to post the entire amount of capital to buy the underlying instrument. Instead, you only need enough to cover the change in the price from where you plan to enter the trade, and where you will exit the trade.
This compares to a stockbroker who might require that you need to have nearly all the capital in your account to buy equity shares. In some cases, when you purchase a CFD, you might be entitled to the dividend that is granted by the company on the underlying shares. CFDs can be used to trade directionally, or you can buy one CFD and simultaneously sell a different CFD and capture the relative value change.
Do CFDs Provide Leverage?
A CFD has an imbedded leverage feature which will differ from broker to broker and asset to asset. Leverage is a feature that enhances your trading returns, as it allows you to increase the capital you control with borrowed capital.
For example, some brokers will allow you to purchase $4,000 of EUR/USD while only posting collateral of $10. To use leverage, you need to open a margin account. Each broker will have different criteria for opening a margin account. They will generally ask you questions about your trading experience as well as your investing knowledge.
It’s important to understand how leverage can impact your trading returns. If you can purchase $4,000 of EUR/USD using 400-1 leverage, it will only take a 0.25% ($4,000 * 0.0025 = $10) move to either double your money or wipe out your capital. So, while leverage is an attractive tool, it can be a double-edged sword.
When you open a margin account, your broker will require that you always have a specific amount of capital in your account. Each time your place a new trade your broker will require that you post a specific amount of fund which is referred to as initial margin. The margin required is the amount of capital needed if the price of the CFD moved against you by a larger than the normal amount.
Your broker wants to make sure that you have enough capital allocated to a trade that if there was a larger than normal change in the price, that you have the funds to cover the losses. As the market moves, the amount of margin that you need to hold against each trade will change. If the price of the asset that you are trading moves against you, your broker will take maintenance margin to cover additional losses in addition to your initial margin. If the price of the security you are trading moves in your favor, the initial margin will remain unchanged, but any maintenance margin that was collected will decline.
The margin calculation is in real-time, and it tells your broker the minimum amount of capital you must have in your account to continue to hold your position. If your trade moves against you and you are unable to increase the capital you have in your account, your broker will have the right to begin to liquidate your position. Make sure you completely understand the margin agreement you sign and your broker’s rights to liquidate your position before you start to trade CFDs.
Trading CFDs relative to Stocks
CFDs can be very efficient for investors who are looking to trade stocks. This is because the leverage that is used in CFD trading, is much higher than the leverage you can receive with a stockbroker. For example, Amazon shares are trading near $1800 per share.
This means that you would need $1,800 just to purchase one share of Amazon stock. Many CFD brokers offer leverage of 20-1 which would allow you to purchase 1 CFD of Amazon for as little as $90 per CFD. A 5% rise in Amazon shares will allow you to double your money. Additionally, for the same $1,800 that would allow you to purchase 1-share of Amazon stock, you could buy 20 Amazon CFDs. Lastly, CFDs allow you to short the stock without having to borrow the shares.
Managing Your Risk
CFD trading can be risky, especially if you use leverage, so you must have a plan in place before you make each trade. To avoid the risk of ruin, you should limit the amount of capital you place on each trade to 5-10% of your portfolio. For example, if you plan to trade a portfolio of $5,000 the maximum you should post for each trade should be $500. This will provide you with a strategy that will provide some forgiveness if you start slowly.
Another concept you should follow is to cut your losses and let your profits run. If the market moves against you and hits your stop loss, you should exit and live to see another day. If the market moves in your favor, move your stop-loss up and let your gains compound as the market moves in your favor.
Contracts for differences (CFDs) are financial instruments that allow you to trade the capital markets without purchasing the underlying instrument. CFDs track underlying instruments and provide leverage to help you enhance your returns. This would include equity shares, commodities, indices, forex, and cryptocurrencies. To trade CFDs with your broker you will need to open a margin account. While leverage can significantly enhance your trading returns, it is a double edge sword and can also lead to robust loses. You must have a well thought out risk management plan that you can employ on each trade, before risking any of your hard-earned capital.
Sadly, we’re still having to cope with jittery markets and widespread instability due to a range of political, environmental and technological factors, but that’s not to say there won’t be some great investment opportunities which we can capitalize on in the coming years.
The previous decade gave us a taste of the almighty potential that disruptive technology possesses, and cryptocurrencies, in particular, taught us that the sky’s the limit if investors are shrewd, wise and, in many cases, lucky enough.
Of course, cryptocurrencies are way too volatile to consider as anything other than a gamble, but there are plenty of opportunities out there that hold potential for the coming decade. Though it’s important to note that there are lots of unforeseeable circumstances that could undermine the value of just about any investment in the future – so it’s advisable to keep on guard if you decide to buy specific assets.
Looking to the clouds
Hamish Douglass is the billionaire chairman of Magellan and is an expert when it comes to investing in tech companies in particular. Speaking to the Financial Review, Douglass is confident that cloud computing will be the star player of the 2020s. “Mobility, internet of things, edge computing, enables the whole cloud to come together and do things we can’t even imagine today and businesses we haven’t even thought of will be $100 billion businesses in ten years,” he explained.
The beauty of cloud computing is that it’s demonstrably effective already. As opposed to the industries of AI and Virtual Reality, which still rely on some degree of speculation, the cloud is already largely used for the storage of images, home entertainment, collaboration tools, and within a range of smart devices. Many speculate that it’s soon to infiltrate the world of gaming, too.
As technology becomes smarter, the necessity of communicating with other smart devices increases. Add to this the fact that wires are fast becoming redundant in a world that’s dependent on convenience and it leaves the Internet of Things and cloud computing as an essential development in everyday life. The massive processing power of the cloud will also be key for industries depending on the interpretation of big data and powerful calculations.
In a jittery financial landscape, it’s fair to say that shares in the cloud technology companies could be one of the safest investments of the coming decade. This isn’t to say it’s completely immune from extraneous circumstances, but it’s one of the best shots to build a healthy portfolio.
Safety in real estate
Writing for Market Watch, Mark Hulbert believes that real estate is set to offer value investments over the next 10 years.
Hulbert highlights a Bankrate survey that asked investors which type of investment they would pick if they were using money that wouldn’t be needed for 10 years. The choices were stocks, bonds, real estate, cash, gold or metals, or cryptocurrencies.
The winner by some margin was real estate, which goes some way in showing that the best investments can come from more traditional places. Nearly one-third of respondents chose the housing market, and given that the stock markets as a whole face an uncertain short-term future, it could be one of the wisest decisions.
Hulbert believes that the performance of real estate during bear markets – with the notable exception of the 2008 market crash – shows that homes are safer than equities should an economic downturn occur. “In every other stock market bear market since the 1950s, the Case-Shiller Home Price Index rose in all but one. And in that lone bear market prior to 2007 in which the index did fall, it did so by just 0.4%.”
There’s also the added perk of the housing market being much less prone to the level of volatility shown by the world stock markets, meaning that over a 10-year period, your investments are likely to fluctuate less.
Interconnectivity has been making the world a smaller place for some time, and when looking for future investments it’s vital to look beyond the western world.
Tobias van Gils, of Countach Research believes that the fastest GDP growth of the 2020s will come from Asia. Furthermore, Van Gils highlights neglected economies surrounding both China and India as possessing great potential for growth.
The driving force behind Asian growth in the 2020s will be China’s multi-trillion dollar Silk Road Economic Belt, as well as the 21st Century Maritime Silk Road – two infrastructure investments that are designed to bring unprecedented levels of trade across the eastern hemisphere and beyond.
Of course, such an ambitious project comes with more caveats. Firstly, much of the GDP forecast for Asia will be influenced by the successful arrival of the Silk Road. Secondly, with so many nations working together, it’s reasonable to expect some hitches in the development of such a large project.
Relationships with the US and China have been frosty to say the least, and the decade has arrived with fresh tensions in the Middle East. While China’s emerging economy still seems like a wise investment, its level of progress will depend on a more optimistic political climate.
Capitalising on disruption
Another safe set of investment options stem from the growing range of disruptive technologies set to become available in the coming decade.
There are five key areas where disruptive technologies are ripe for the future, and they include:
Green-tech and energy
Helping to propose solutions to the growing climate emergency comes renewable energy sources like wind power and fuel cells, as well as green buildings and carbon capture and storage solutions.
Including nanomaterials, graphene and solid-state batteries.
Relating to both 5G and 6G, AI, quantum computing, blockchain and both augmented and virtual reality.
Involving exoskeletons, service robots, medical robots, 3D printing, driverless vehicles and industrial robots.
Potentially disrupting healthcare could come technology like personalised medicine, gene therapy, nanobiosensors, cell therapy and 3D bioprinting.
Given the important role each piece of technology can play, it’s fair to assume that the future will see widespread implementation of many disruptive solutions. However, in the next 10 years, it could come down to which governments are more willing to spend money on developing the tech.
Once again, China could play a significant role in developing disruptive technology, and may focus on sectors that carry the most economic importance.
While investments in these sectors would appear generally safe, the issue is that most disruptive technology requires significant levels of funding, and in an economically unstable environment, it can be tricky to find a government or organisation willing to invest heavily in the implementation of such tech.
However, in a world that’s beginning to wake up to climate change, it’s worth taking a look at disruptive technologies in the field of sustainability and renewable energy as an area that could develop comfortably as the new decade rumbles on.
The very mention of a downturn can strike fear into the hearts of investors. Economics tends to be cyclical in nature and while steady periods of growth are revered with widespread speculation, they’re usually followed by a profound decline.
We currently live in challenging times for world economies. Uncertainty surrounding the United Kingdom’s Brexit alongside ongoing trade wars between the United States and China have sent some clear warning signs that investors may be facing some challenging times in the near future.
The UK isn’t alone in its uncertainty. With four possible outcomes of Brexit in the coming months leading to wildly different GDP forecasts, the United Kingdom is just one of many nations operating in a fragile economic climate.
But is it possible to successful invest within the volatile markets of a recession? Here are a few points on how to wisely develop your portfolio while navigating the potentially choppy waters of an economic downturn.
Coming to terms with a recession
It could be useful to clarify what is meant by the use of the term ‘recession’, as well as ‘economic downturn’.
Essentially, a recession is the name given to a sustained period of economic decline. Economists typically agree that two consecutive quarters of negative Gross Domestic Product (GDP) growth can be defined as a recession, but this isn’t always the case. It’s also worth noting that GDP acts as a measure of all the goods and services produced by a country over a pre-designated period.
There are plenty of factors that can contribute to a recession, which is why many economists avoid predicting their arrival with much certainty. In 2008 the collapse of the US housing market sparked a worldwide downturn, while other factors like governmental change, natural disasters, and new legislation can all be big contributors.
Recessions take shape as a result of a widespread loss of confidence from consumers and businesses when it comes to spending money. This, in turn, leads to stagnant incomes, loss of sales and ultimately production. Unemployment generally rises due to cutbacks in industries and national leaders face the challenge of kickstarting a weak economy to remedy the effects.
Right now you may be wondering how it’s even possible for anyone to build a successful portfolio from these circumstances, let alone those looking to make intelligent investments.
As they’re intrinsically linked to the financial markets, recessions tend to point towards more instances of risk aversion from investors as they plot methods of keeping their money safe from damaging losses of value. However, the cyclical nature of finance means that recessions must give way to recovery sooner or later. Let’s take a deeper look into some of the opportunities presented to investors during a time of severe financial difficulty:
Can opportunities be identified?
Recessions are terrible things that can severely impact the lives of millions, possibly billions of individuals worldwide.
But many negative events can come with some opportunities attached. And while recessions represent a considerable burden on the world financial markets, they can also offer some extremely high-value prospects for new investors.
When a recession takes hold, asset prices typically fall hard. This means that investors who were previously priced out of making meaningful revenue from stocks, bonds, mutual funds, real estate, private businesses to name but a few, can suddenly find themselves presented with considerably lower costs than a year or two prior. As other investors are forced to part with their assets, you could swoop in and grab yourself a bargain.
The Financial Times recognises that the US Treasury yield curve has inverted due, largely, to ongoing trade wars. Further to the chart above, the newspaper also reported that UK yield curves on two and ten-year gilts inverted over the past summer – indicating that there are challenging times ahead for investors.
Naturally, when market predictions appear ominous, bearish investor sentiments become more prominent. The Financial Times reports that in the current climate, the price of gold is “soaring.” With “the price of the yellow metal rising above $1,500 per troy ounce for the first time in six years” back in August.
Prolific investors will always be on the lookout for opportunities to buy low and sell high, and even though the markets will no doubt show volatility, there’s a good chance that as a recession subsides, the assets you’ve bought into will begin to regain their true value.
With this in mind, it’s worth exploring the prices associated with specific stocks and bonds. If their respective values appear to be outstandingly low compared to their value outside of the economic downturn, you could be looking at a good opportunity to gain money as the market recovers.
Searching for value in capital markets
When it comes to equity markets, the perceptions that investors hold of heightened risk typically leads to the urge for seeing higher potential rates of return for holding equities. For their expected returns to rise higher, current prices would need to drop. This happens when investors sell off riskier holdings and transition into safer securities like government debt.
This is what makes equity markets fall prior to recessions. As investors grow fearful of seeing the collective values of their assets decline, they take a series of steps in order to retain as much value as they can.
Safety in investing by asset class
History tells us that equity markets have a pretty useful habit of acting as reliable predictors of upcoming economic downturns, so it’s important to pay close attention to the optimism or pessimism of traders within this particular field.
However, even if the equity markets are in the midst of a deep decline, there’s still cause for optimism among investors. Assets still have the ability to undergo a period of outperformance, so it can often pay to keep your ear to the ground and hunt for small pockets of clear blue skies amidst the cloud-covered horizon.
Can efficiency be found within stock investing?
Stock markets can be volatile places even at the best of times. But history shows that there’s still plenty of security that can be found by investing during a recession.
One of the safest places to invest across a range of markets can be found within the stocks of high-quality companies that have been in existence for a long period of time. While this may not guarantee security, these types of businesses have shown that they can survive prolonged periods of financial difficulty in the past.
Indeed, the NASDAQ-100 index has experienced notably less profound volatility as it recovered from 2008’s crash than stock indexes comprised of less affluent companies.
Naturally, companies with credible balance sheets and little debt regularly outperform businesses with significant operating leverage and weaker cashflows. So it’s worth looking to established organisations for a little solidity when times get tight.
Will diversification remain a safe bet?
Even in the gloomiest of financial forecasts, always diversify your bonds. Even if you come across a company that appears to be thriving amidst an economic downturn, it’s vital that you diversify your assets.
Markets are extremely jittery when the world’s news is littered with closures and the falling GDP of nations and currencies. The landscape can change with little warning, and while diversification may not be a flawless way of thriving amidst the inevitable rainy days, it stands a much better chance than taking up the option of piling your faith into one company that looks stable today with no guarantee for tomorrow or the day after.
The world of finance hasn’t been brimming with confidence for some time now, and while investments should be made at the holder’s risk, there are certainly plenty of opportunities out there to build a respectable level of profits even in the midst of an economic downturn. Above all, stay patient, look out for emerging trends and make sure you diversify your investments.
Bonds, the bond market, bond yields, and the yield-curve are important aspects of the financial markets every trader should understand. It doesn’t matter if you are a bond trader or not, understanding the nature of the bond market can provide a deeper insight into just about every other market on the planet.
First let me answer the question, what is a bond? A bond is a pledge or a promise for one individual or entity to repay a debt that can be bought and sold by the public. It is, in essence, a way to guarantee a debt, the seller is borrowing money and the buyer is lending. Bonds can be issued by just about any type of organization but are most commonly used by governments and businesses to raise large amounts of capital.
The bond issuer agrees to pay the bondholder an amount of interest that is predetermined at the time of the exchange in return for a loan.
Governments and businesses often need to borrow more money than what they can access through traditional banking means. In order to raise this money, they use public bond markets so they can tap into a larger liquidity pool. Investors buy the bonds in return for interest payments they receive over time or upon maturity. The amount of interest the issuer pays and the owner receives depends on a number of factors including Credit Rating, Interest Rates, and Demand.
Credit ratings for bonds are similar to the credit score you get as an individual, it is a measure of the bond issuer’s ability to repay the debt. Ratings are issued by agencies like Moody’s and Standard & Poors in a range from Investment Grade through Junk. Investment Grade bonds have the least likely of default, the least amount of risk, while Junk bonds have the highest amount of risk. A higher risk of default equates to a higher interest rate for the borrower, the issuer of the bond. That is good for the owners of bonds because it means a higher rate of return.
Safety-seeking investors may accept smaller returns for guaranteed investments and focus only on investment-grade bonds.
Demand can affect a bond’s cost/return ratio the same as any trading asset. Because bonds are typically issued in batches the amount of debt available for investors to buy is limited. If there is enough demand it can drive the cost of ownership higher and lower the effective yield. This is bad news for the bond investor but good news for the issuer because it lowers their cost of borrowing.
Central Bank Policy Underpins Bond Market Conditions
Interest rates are important for bonds because they determine the cost for issuers and return for investors. What makes bond trading hard is that interest rates change over time which means there times you may want to be a seller of bonds and other times when you want to be a buyer of bonds.
The primary force behind this is the prime rate or base rate maintained by the central bank of the country in which the bond is issued. When the prime rate is high bond rates tend to be higher and when the prime rate is lower bond rates tend to be lower. The challenge for bond traders is when the central bank is the process of altering its policy and changing the prime rate.
Central banks move their target for the prime rate up and down in an attempt to maintain economic stability within their respective nations. If economic activity is too high they raise the cost of borrowing money to make it harder for businesses to borrow. If activity is too low they lower the rate in an effort to stimulate business investment and flow within the capital markets. Savvy investors can sell bonds short when rates are low and then buy them back when they are high profiting on the cost of the bonds and receive interest payments in the meantime.
Inflation – This Is Why Central Banks Change Their Policy
The number one tool that central banks use to measure the economy and determine the trajectory of their policy, whether rates are rising or falling, is inflation. Inflation is a measure of price increases over time and can be applied to many aspects of the economy. The two most commonly tracked are business and consumer inflation. To that end, two of the most tracked inflation reports are the Producer Price Index and the Consumer Price Index.
Of the two, the Consumer Price Index or CPI is by far the most important. Consumers are the backbone of modern economies. While producer prices may bleed through to the consumer level, if consumer prices get too high there is nothing for an economy to do but collapse. In the U.S., the Personal Consumption Expenditures Price Index or PCE is the favored tool for measuring consumer-level inflation. It is released once per month and as a part of the quarterly GDP announcement.
Regarding inflation, most central bankers favor a 2.0% target for consumer-level inflation. This means that when CPI or PCE prices are below 2.0% the central banks tend to be “accommodative” toward their economies and ease back on policy by lowering interest rates. When CPI or PCE is above 2.0%, central banks tighten policy by raising interest rates.
Labor Data And Its Role In The Inflation Picture
Labor data plays an important role in the inflation picture. First and foremost, no economy can function if its people are not working. The FOMC at least is mandated with two functions and one of them is to ensure maximum employment. Figures like the non-farm payrolls, unemployment, and average hourly earnings become important in that light. The difficulty the FOMC faces is that stimulating labor markets can lead to increased wage inflation.
Economic Activity, Central Banks And Bond Trading
Economic activity is the alpha and omega of bond trading. When economic conditions are good capital markets are flush, when economic conditions turn the capital markets dry up and bonds are harder to issue. The takeaway is that economic conditions are what the central banks are trying to manipulate and they do that through interest rates. When conditions are bad, interest rates will fall, when conditions improve interest rates will rise until they reach a point the economy recedes. That is the nature of the bond market and bond trading, understanding that ebb and flow is key to bond trading success.
According to Learn Bonds, when the economy is performing badly and the stock markets are highly volatile, investors tend to switch investments to fixed income securities and this boosts the activity in the bond market. But this is not always the case. High volatility can sometimes drive investors towards short-term trading via online trading platforms. This way, they can benefit from both sides of the market without having to hold stocks for long periods.
Yield Curve And Market Outlook
There is a limitless supply of bonds but not all are the same. When it comes to bonds the safest, most trusted, and closely watched are U.S. Government Treasuries. The U.S. Treasuries are issued in a variety of maturities that range from a few weeks to thirty years. The yields on each maturity are different due to demand for time-frame, either long or short-term investment and can be analyzed for insight into market sentiment.
Known as the yield curve, in good time the spread of yield increases the further out you go. This is because investors believe that interest rates will be higher in the future so they don’t want to lock-in a low yield for too long. This phenomenon results in a higher demand for shorter-maturity bonds and a “normal” yield curve. In bad times that all changes. Bond investors believe interest rates will be lower in the future so they are seeking to lock in the higher rate for a longer duration. That creates a higher demand for longer maturity bonds and a signal known as a yield-curve inversion
This graph shows a partially inverted U.S. yield curve.
Psychology Is The Most Important Factor For Your Trading Profits
When folks begin trading, the first instinct is to focus on the charts. After all, the charts are where all the action is. That’s where you find the Double-Bottoms, Reversals, Break Outs, and Trends that make big profits. What many traders come to realize, the successful ones at least is that there is more to trading than the charts, more than just making trades.
What you may have also realized is that finding winning trades isn’t enough. There’s something standing in the way to profits and that something is psychology.
Psychology is the study of the mind, behavior, and behavior patterns; what makes us do the things we do, how do we overcome the obstacles that are holding us back. Believe it or not, trading is mostly a head game. It’s not the market you need to beat, it’s yourself.
Trading Discipline Is The Foundation For Your Success
Trading discipline is the foundation for your success because it provides a set of rules for you to follow that will help prevent unnecessary losses. I say unnecessary losses because you can’t cut out all of your losses, as a trader, you must be prepared for it or else it will drive you mad. The root causes are Fear and Greed. Fear and Greed are the two strongest emotions felt by traders and not easily overcome.
What does discipline mean? It means coming up with a set of trading rules, rules you always follow so you don’t make decisions based on fear or greed. Rules can be as simple as only trading once per day, they can be as complex as only making trades when the asset price is bouncing from support after a bullish breakout and confirmed by a bullish crossover in MACD and rising RSI.
You may not believe me but the market will make you mad. It will infuriate you by not doing what you think it should. Your rules are intended to keep you from making trades based on the madness. Grudge-trading, revenge-trading, trying to get back at the market by making wild bets with valuable trading capital is a real thing.
Here is a list of sample rules for speculative traders. These rules can be used for Forex, CFDs, Options, Commodities, or Cryptocurrencies.
Every trade will always be 1% (or 2% or 3%, 5% is getting risky and 10% very risky) and no more or less (as close as can be had on your platform). Using a % instead of a fixed amount will allow the trade size to grow or shrink along with the account balance to maximize profits and minimize losses.
I will always trade with the trend. I will determine trend by price action, trend lines, moving averages, and MACD.
I will only enter on confirmed entry signals. My signals are bullish/bearish crossovers in stochastic and MACD, confirmed by a break of the 30-period moving average.
I will not enter if price action is within 3% of resistance (for bull trades) or support (for bear-trades).
I will use support and resistance targets as exits targets for my trades. If price action reaches a target I will exit to take profits. Some profits are better than no profits and infinitely more satisfactory than losses.
I won’t have more than one trade open on one asset at a time.
I won’t have conflicting trades open on the same asset at the same time.
I won’t have more than five trades open at the same time, that’s 5% of the account at risk at one time.
I will always follow my rules.
That last rule, I will always follow my rules, is the most important rule of all. It doesn’t make much sense to have rules if you don’t use them. I can say without a shred of embarrassment that I learned that last lesson myself more than once. Like I said before, the market will infuriate you and drive you to do things that are self-destructive to your account and trading capital.
Factors That Affect Your Trading Psychology
There are millions of factors that can affect your trading psychology. This list is intended to be a guide to what may drive you to make bad trades. The key to understanding your psychology and improving your list of rules is to be aware you can be driven to make decisions and recognize when that is happening. If you can do that you can take yourself out of the equation, step back from the situation, and regroup without losing money. The name of the game is consistent wins and capital preservation.
Fear – Fear is one of the most vicious emotions a trader can face. Fear can keep you from making a trade, it can also keep you from taking profits. Fear of losing money in your account will keep you making trades but you can’t let it, you have to make trades in order to make profits. If you keep your trades small no one loss will hurt you and you will still be able to trade again. Fear of losing profits you might make can keep you from taking profits you already have. What I’ve learned is that if you don’t take profits in favor of waiting for more, more often than not the profits you have will evaporate. You have to close your trades when the profits are showing.
Greed – Greed is the second most vicious emotions a trader can face. Greed is the other face of fear. Greed is the fear of losing profits you don’t have, or the desire to make huge trades and even huger profits. What takes traders by surprise is that greed rears its head when you are doing well. A string of wins can get your confidence up and that can lead to making aggressive trades and big losses.
Ambition – Ambition is a trait that all traders shares. It takes a certain amount of desire to succeed to embark on the journey that is a trader’s life.The problem with ambition is when it leads you to make bad decisions, like when you compare your results to another trader’s and let that influence your trading.
Losses – Losses, a trader’s worst nightmare. Losses occur when trades don’t go your way. They are an inevitable part of trading but can be managed. The trick is not letting them become too large, always use proper position size (the 1% or 2% in my rules), and not to throw good money after bad. If a trade goes against you don’t double up on it and don’t reverse it. If you feel yourself getting frustrated from a string of losses the best thing you can do for yourself is to walk away from the market.
Hope – Hope can lead traders to do bad things just as bad as fear or gree. Hope is good but it can turn against you. It’s one thing to go into the market hoping all your hard work will pay off. It’s something else entirely to go into the market hoping this one trade with your rent money will pay off huge. That’s gambling and the worst kind, it’s desperation and that’s not a good place for a trader to be.
Understanding Psychology Is The Path To Your Trading Success
Understanding your trading psychology is the path to your trading success. To put it bluntly, you have to remove all emotion from your trading if you want to be truly successful. Successful over the long-term.
Successful in a way that means you can live off of trading. In order to do that you have to have some rules, the discipline to follow them, and the ability to take yourself out of the market when emotions overtake your decision-making process.
A Word On Algorithmic Trading Versus Human Trading
Algorithmic trading is the use of computers to perform trading tasks. The big-money algo-traders have billions in money-making hundreds, thousands, and even millions of trades a day as they try to scalp whatever profits they can while waiting for the big score.
Smaller traders use Expert Advisers (MT4) and other trading software to determine trading entry and exit points. What I have to say is that the algorithms are usually good but not something you want to rely on blindly.
Algorithms are based on rules and only work while the market conditions match those rules. When market conditions change the algos stop working and losses can mount quickly. At no time should a small trader ever let an algorithm trade their account unsupervised.
That being said, social trading accounts allow you to tie your returns to professional self-disciplined traders. Using this service you are not blindly relying on algorithms but instead, you essentially let proven successful traders execute trades on your behalf.
This article is brought to you by the courtesy of Multibank Group.
Forex trading can be an exciting and lucrative activity, but it can also be tough, especially for beginners. Newcomers underestimate the important of financial education, tend to have unrealistic expectations, and struggle to control their emotions, pushing them to act irrationally and impair their overall performance.
What is the Forex market?
The Foreign Exchange market, also called the Forex or the FX market, is an over-the-counter market where the world’s money is exchanged. Many players trade the Forex market, such as institutional investors, central banks, multinationals, and commercial banks, among others.
As a retail trader, you can access this market with a Forex and CFD broker and make money by buying or selling currency pairs. Currencies are always quoted in pairs – for instance, in the EUR/USD currency pair, the EUR is the “base” currency, while the USD is the “quoted” currency. The quoted currency is always the equivalent of one base currency. If the EUR/USD exchange rate is worth 1.1222, then you will get $1.1222 for €1.
In our example, we can see that the EUR/USD has 4 decimals. This is typical of most currency pairs, except those that involve the JPY, which only display 2 decimals. When a currency pair moves up or down, the change is measured in “Pips”, which is a one-digit movement in the last decimal of a currency pair. When the EUR/USD moves from $1.1222 to $1.1223, the EUR/USD has increased by one “Pip”.
When you look at a currency pair quotation on your broker’s platform, you will see two prices: a selling price on the left (bid price), and a buying price on the right (ask price). The difference between both prices is called the “spread”. This “spread” is pocketed by the broker, and is one of the main ways in which they make money.
The Bank for International Settlements declared in its last triennial survey that the daily average trading volume of the Forex market reached more than 5 trillion US Dollars. It also shows that, due to this huge volume, the Forex market is the most liquid market in the world. Liquidity refers to how easy it is for traders to open and close their trading positions without affecting the price of the underlying asset. Liquidity is a good indication of how active a market is.
The concept of liquidity also works hand-in-hand with volatility, which measures the way in which market prices change. Volatility is something to be welcomed, as it is volatility that gives traders the opportunity to make profits, especially for short-term traders like scalpers and day traders.
What are the different trading styles?
As a Forex trader, there are different trading methods you can use, with the main styles being:
Day trading and scalping are two of the most aggressive and active trading styles. In both cases, all trading positions will be closed before the end of the trading session. Where these 2 styles differ is in trade frequency – scalping is about taking advantage of very small price changes, often buying and selling within a few seconds or minutes, while day traders may hold a position for up to several hours. While day trading and scalping are very short-term trading methods, swing trading is longer-term, with positions held up to several weeks.
Depending on the trading style you choose, you will use different types of orders. For instance, “market” orders will be used by scalpers more so than by swing traders, as these orders offer the best available price for you to enter or exit the market instantly.
For day trading or swing trading, “limit entry” orders will be more useful, are they allow traders to enter the market at a pre-determined price (“buy limit” orders are for when you want to open a “long” position, and “sell limit” if you want to open a “short” position).
As Forex trading is often offered with leverage, potential profits are magnified, along with potential losses. For this reason, it’s important to use stop-loss orders to limit your losses if the market goes against you. One of the best ways to mitigate your risk is to trade with the trend.
How important is the trend in Forex trading?
The trend is at the heart of one of the most popular techniques for trading the Forex markets – technical analysis. This strategy follows 3 assumptions: prices discount everything, history tends to repeat itself, and prices move in trends.
Therefore, when a given currency pair exchange rate moves, the market trends. While most traders think that prices can only go up or down, Charles Dow’s theory asserts that there are in fact 3 trends in the market: up, down and “sideways”.
According to Dow, you need to analysis highs and lows to be able to determine a trend. An uptrend is formed by higher highs and higher lows, while a downward trend is formed by lower highs and lower lowers. When neither the “bulls” (buying investors) nor the “bears” (selling investors) have control of the market, prices evolve within a lateral consolidation, also called a “range”.
Dow’s theory shows that each trend is formed by 3 other trends: a “primary”, a “secondary” and a “minor” trend. A primary trend usually lasts more
than a year and describes a bullish or a bearish market. Within the primary trend, the secondary trend usually goes against the main trend – it represents a corrective movement, or a “pullback”, lasting between 3 weeks and 3 months. Finally, a minor trend represents the noise of a market within the secondary trend, usually lasting less than 3 weeks.
How can candlestick analysis can help you fine-tune your entry and exit timing?
Candlestick analysis is a Japanese type of chart analysis that goes back to the 18th century. It is still one of the most popular ways to read charts today. Candlesticks are used to make better trading decisions by analyzing prices through the “body” and “wicks” of candles to decide when and where to enter or exit the markets.
A bullish candle usually has a white or green body, while a bearish candle will usually be black or red. Candles describe market participant psychology through their wicks (also called “shadows”), which show the volatility and the intensity of the movement through the highest and lowest level reached. The longer a candle, the more intense the buying/selling pressure. Conversely, the shorter the candlestick, the more indecisive the market.
Candlestick analysis is quite an effective way to analyze the markets, as it helps traders spot great trading opportunities through the visualization of “continuation”, “indecision” and “reversal” patterns in the charts.
The FX market is quite popular among newcomers, and has never been easier to access. If you use leverage and margin trading wisely, you can make a lot of money trading currencies. Learning the basics of Forex trading isn’t overly complicated. Deciding what kind of trader you are, based on your personality, and building your trading strategy accordingly, however, is a different story.
The more you know about Forex and trading, the better you will trade. So, be patient, dedicated, and committed to keep learning about trading and improving your strategy. Eventually, you will develop the skills to be profitable in Forex trading over the long-term.
While the strong global economic growth of the late 19th and early 20th centuries was driven in part by the two first phases of industrialization and the transport revolution in Western Europe, successive wars on the old continent have weakened growth and European countries. Since then, globalization has given a boost to global growth, while propelling the United States to global superpower status.
What is globalization?
Globalization is all about commercial interaction between different parts of the world. These flows can be exchanges of goods, capital, services, people or information. This was all made possible by the improvement of the means of communication (NICT), the containerization revolution, the very low cost of maritime transport, the increasing liberalization of trade (GATT and then WTO in 1995) and the deregulation of financial flows between countries.
Since the 1990s, globalization has accelerated, with the fall of the USSR, the rise of the Internet, the creation of the World Trade Organization (WTO, 1995) and regional free trade agreements such as NAFTA all contributing to this acceleration.
With the First World War, the United States quickly became the world’s leading economic centre
In 1945, the US held ⅔ of the world’s gold stock and accounted for 50% of global production. The new world economic order was organized by the US (IMF and IBRD in Bretton Woods in 1944, GATT in 1947), and their currency – the American dollar, or USD – became the currency of international trade. Wall Street in New York became the economic and financial heart of the world.
What made the United States a unique superpower?
The American democratic, capitalist and liberal model, as well as the American way of life, spread to the non-communist world, with the Marshall Plan (1947) and the development of multinational companies.
By the end of the 20th century, the emergence of mass media and the Internet revolution gave Americans the opportunity to influence the entire world even more.
With the development of mass consumption that began in the 1950s, many American products arrived on other markets. Some products are now an integral part of the lives of many Europeans, Asians and South Americans, such as the Visa card, sportswear such as Nike, soft drinks such as Coca-Cola, fast food such as McDonald’s, as well as American music, cinema, universities, etc.
This undeniable cultural influence, called “soft power”, is a huge source of influence for the US across the world. This “soft power” indirectly influences and positively shapes the view of the USA in the eyes of other countries. This power makes adoption of the American point of view much more palatable to other countries, all without the need for force or threat.
In addition to “soft power”, there is also “hard power”, characterized by economic hegemony, technological progress (information technology, nuclear, space conquest) and first-rate military and diplomatic power, which make it possible to impose the will and power of the United States on the rest of the world by force or intimidation.
The US – the powerful (and criticized) nation at the heart of globalization
The American system arouses as much wonder as questions/criticism in regards to their management of the social crisis and poverty, political extremism, weak environmental protection measures, etc. It could be argued that American influence has declined in recent years, although the country remains a first-rate power that dominates many sectors of activity.
First of all, we can see heightened criticism of the American hegemony, even if anti-Americanism is not exactly a new phenomenon. Several countries (Russia and China foremost among them) and political currents reject the American model, while US involvement in foreign wars are subject to the harshest criticism.
The United States is also experiencing an increasing number of economic competitors, such as from the European Union and the BRICS countries (Brazil, Russia, India, China and South Africa). The subprime crisis in 2007 also eroded the power of the US, both immediately following the crisis, and in the years since.
China became the world’s leading economic power ahead of the United States in 2014, after 142 years of “American rule” according to IMF figures. The increased debt burden and evidence of the United States’ dependence on foreign capital (particularly Chinese capital) is also a factor that challenges US supremacy.
How has the election of Trump altered the future of globalization?
The surprise election of Donald Trump as the 45th American president invites a re-evaluation of the future of the global economic order. Movement of goods, money, and people across international borders have all certainly changed since Trump’s election, as “resistance to globalization” was one of his prominent policy themes during his election campaign, with particular emphasis on the US-China relationship.
China and the United States have an extensive – but tense – economic partnership, often triggering periods of conflict, such as the current situation. Trade tensions have significantly increased since 2018, when Trump first sought to limit Chinese economic influence with tariffs.
Trump’s plan to reduce his country’s dependence on China focuses on increasing taxes on their imported products, so American products are favored locally and purchased instead. Of course, China reacted by increasing taxes on American imported products. These trade tensions and tariffs could cut global output by 0.5% in 2020, according to the IMF. Consequently, the organization cut its global growth forecast.
”There are growing concerns over the impact of the current trade tensions. The risk is that the most recent US-China tariffs could further reduce investment, productivity, and growth,” said IMF chair Christine Lagarde.
Trump’s wish to implement US protectionist policies will have one important consequence for the country: as the USA turns inward on worldwide economic integration, this will certainly have an impact on global stocks and flows. Knock-on effects to this policy, such as retaliation from countries like China, canceled contracts with American companies and suppliers, and countries that seek to imitate Trump’s anti-globalization agenda (like Greece and Hungary), may also all lead to significant consequences for the global economy.
What consequences on the global economy can be expected if the trade war escalates?
”In the case of a generalized global increase in tariffs, higher import prices could increase firms’ production costs and reduce households’ purchasing power, particularly if domestic and imported goods cannot be substituted for each other easily. This could affect consumption, investment and employment. Moreover, an escalation of trade tensions would fuel economic uncertainty, leading consumers to delay expenditure and businesses to postpone investment,” declared the ECB.
How to take advantage of the changes in our interconnected global economy?
”In response to higher uncertainty, financial investors could also reduce their exposure to equities, reduce credit supply and require higher compensation for risk,” added the European organization.
It’s worth mentioning that ”through close financial linkages, heightened uncertainty could spill over more broadly, adding to volatility in global financial markets”, which can create great trading opportunities for investors.
Thankfully, there are plenty of available instruments that can turn a profit in any market condition. You can short an Index, diversify into a new, more promising, geography or just bet on volatility. The main things to watch for when seeking such exposure is that your broker is regulated and the scope of instruments it can provide. It doesn’t hurt when a broker has a robust, efficient and reliable trading platform, such as Multibank Group.
Times of great uncertainty breed great opportunities, investors and traders can make the most of the potential changes in the world order by focusing on the most promising region, or business sector.
The United States remains one of the world’s largest economies. It is a major power that excels in many areas, with an influence that is exercised both with hard power (economic, military and diplomatic power) and soft power (cultural influence).
However, the country faces many challenges, challenges that threaten to erode its role as a superpower, such as the emergence of significant economic competition from other countries, and their recent policy shift to economic isolationism.
Highly integrated into globalization, the recent decisions of the United States regarding greater protectionism, and the hard retreat from globalization wanted by Trump, affect the world economic order and global trade flows.
The current global climate is well encapsulated by Harvard Business Review – ”the myth of a borderless world has come crashing down. Traditional pillars of open markets – the United States and the UK – are wobbling, and China is positioning itself as globalization’s staunchest defender”…
This article is brought to you by the courtesy of Multibank Group.
The recent spike in cryptocurrencies prices and trading volume suggests an increasing interest from investors who want to take part in this monetary revolution. This revolution started 10 years ago with the launch of the Bitcoin (BTC), the first, biggest and most important cryptocurrency, which has gained more than 114% since the beginning of January at the time of writing.
The two most popular ways to take advantage of the crypto-currency market is to
Buy coins through an exchange
Trade cryptos via a CFD broker. Each way has its own advantages and disadvantages.
To decide which method is the best for you, you should first think about and develop your investment strategy. Owning cryptos (long term horizons) or trading them (short-term horizons) do not offer the same level of protection, fee scheme, payment methods, withdrawal methods, etc.
Let’s discover what differentiate them.
What does owning cryptocurrencies imply?
Owning cryptocurrencies is great if you want to use them to shop or to transfer money anywhere at any time quickly (faster than with normal bank transfers), at a lower cost and with a higher degree of anonymity than with traditional wire transfers.
To own crypto-currencies, you first need to find an exchange you can trust, one that’s available in your country, and that offers a payment method for buying cryptocurrencies with fiat currencies (American/Australian/Canadian Dollars, Euros, Sterling…).
Once you’ve bought your virtual currencies, you have to put them into a “wallet”, a program that can contain them. Most exchanges have their own “wallet” that clients can use, but it is widely recommended that you use a wallet that only you have access to and fully control.
There are different types of wallets, they can be gathered into two main groups: “cold” and “hot” wallets. The main difference is whether or not they are connected to the Internet. While “hot” wallets are connected to the net, “cold” wallets are not.
Cryptocurrency buyers and owners are often seen as soft and easy targets for hackers, as virtual currencies transactions are final, there is no anti-fraud protection, nor is it possible to reverse the charges offered by financial institutions in case of problems, as explained by IBM X-Force senior cyber threat researcher John Kuhn to NBC News. Cold storage is thus usually a more effective solution to protect your funds, as it limits the risk of hacks. The two most popular cold wallets are physical hardware wallets, such as external hard drives, and paper wallets.
Why trading currencies can be a safer and cheaper option to take advantage of the crypto-market volatility
When held on digital services, cryptocurrencies are vulnerable to cyber-thieves. Hackers usually target crypto exchanges to drain their crypto wallets (hence the reason why you shouldn’t keep your cryptos online in an exchange). In addition, as the crypto-sphere is quite new, it isn’t a regulated industry.
For this reason, using derivative financial products like CFDs (Contract For Difference) through a regulated broker can be an interesting option for you to make a profit from the crypto-market.
A CFD is a financial contract you enter into with the broker you’re using. This contract allows you to benefit from a rise (or fall) in the price of an asset, as you will exchange the difference between the opening and the closing price of your trading positions with your broker.
An important aspect of CFDs is that you never actually own the underlying asset. So, you won’t own any coins when trading CFDs on cryptos – you will simply take advantage of their price fluctuations.
Of course, using CFDs is only a good option if you want to take advantage of short-term crypto-currencies price movements, because it is a leveraged financial product that relies on margin trading. It means that as a CFD trader, you only need to put aside a part of the total value of your position to open it – this is called the margin. This technique therefore increases your market exposure.
Conclusion: owning vs. trading crypto-currencies
Are you not sure about whether you should own or trade cryptocurrencies? Think first about your financial needs, goals, and horizons.
In addition to being able to transfer money and use cryptocurrencies to shop whenever you want, owning virtual currencies can also be compared to longer-term investments. Having coins in your wallet means that you can hold your virtual currencies until you want to sell them at a higher price later on in the future. In the meantime, you won’t pay fees for holding them.
Trading crypto-currencies via leveraged products like CFDs means that you do not own any coins, you’re just taking advantage of the crypto market volatility instead. So, trading crypto-currencies is a short-term investment strategy, where you are using price changes to make a quick profit without holding the underlying asset.
So, ask yourself: would you consider yourself as an investor or a speculator?
While both seek maximum profit, an investor doesn’t have the same trading strategy, level of risk aversion and objectives as a speculator. In any case, the key to successful investing of any kind is to use the right platform for your needs.
Exchanges appear to be riskier than CFD brokers, who are regulated and offer protections to retail traders. Brokers can be useful for you to be able to apply your short-term trading strategy and appropriate money management rules in a responsive and regulated trading environment, while strengthening your financial knowledge.
With a regulated, reliable and safe broker, like Skilling, you can make your money grow while taking advantage of protections offered to retail traders. Regulated brokers in Europe, for instance, are part of a fund recovery program that can protect trader funds in case of bankruptcy. The European Securities and Markets Authority (ESMA) also imposes some restrictions on CFDs, such as a limited leverage effect (2:1 for cryptocurrencies), a 50% margin close out rule, and a negative balance protection.
It’s no surprise to anyone who’s up-to-date on the financial markets that cryptocurrency is the new “big thing” with investors. For good reasons, too. Financial and business ideas are well-suited to the blockchain, and cryptocurrency is how they absorb value. Countless businesses, financial organizations, and applications are built on blockchain, and pinpointing the cryptocurrencies that act as foundation to this innovative decentralized environment allows one to take advantage of its overall growth.
The market capitalization of blockchain is measurable through the amount of fiat money invested into its many cryptocurrencies, and therefore the services funded by them. Since the invention of the grandfather cryptocurrency Bitcoin in 2009, this new market reached $8 billion in 2016, $25 billion by 2017, and $135 billion by 2018. For fresh and veteran cryptocurrency investors alike, the best cryptocurrencies to trade are simple to identify.
Factors to Focus on for Crypto Traders
If a cryptocurrency satisfies all four of the criteria below, then it exhibits longevity, making it a solid trading option.
Traders will appreciate cryptocurrencies that have high daily volume, which also usually means a larger market capitalization and a presence on many cryptocurrency exchanges. This is beneficial because it’ll be easier to find another trader to take the opposite side of a trade and act on market trends in an agile manner.
Example: Bitcoin (BTC)
Bitcoin enjoys the highest market cap ($102 billion) and volume ($16 billion daily) of any cryptocurrency and has yet to be unseated. It’s the grandfather coin and remains popular among traders due to its first-mover status, and an ambition to replace banks. With the decentralized ledger used to keep track of BTC transactions over a peer-to-peer network, its main value is derived from the ability to transact easily across the globe, but also its place as a common counter-currency.
Follow the Value
Blockchain is good at improving services that already exist, but also creating new value-added utilities as well. New and improved blockchain platforms have cryptocurrencies that generate value because their core ideas are so useful, and these are excellent assets to trade because of their potential.
Example: Ethereum (ETH)
Ethereum is called the “decentralized computer”. As far as creating value using new ideas, there are few more impressive. Used as a type of fuel to power applications on its blockchain, people can also use ETH to participate in games, decentralized financial services, and blockchain businesses that are a part of the growing Ethereum ecosystem.
Private Sector Enthusiasm
Look for mature blockchain solutions that have a market history, established team, and some sort of partnership or integration with the traditional private sector. It’s well and good to exist in the margins and slowly steal value from a business sector, but blockchain and crypto solutions that are invaluable enough are readily welcomed by those with deep pockets. This ensures a future purpose and progress to fuel fundamental price action.
Example: Ripple (XRP)
Ripple takes a constructive view of blockchain and resists the decentralized model in favor of its own administrated approach, exemplified by the cryptocurrency XRP which has some of the fastest transaction speeds in the market. Moreover, a notable group of international banks have partnered with the Ripple Foundation to appropriate XRP’s agility for their own purposes, and the list continues to grow.
It’s important for traders who don’t want to operate blockchain wallets and would rather have a unified investment portfolio to consider accessibility. Some cryptocurrencies are only available on the blockchain, necessitating knowledge about public and private keys, operating on exchanges, and more. For many it’s preferable to trade cryptocurrency Contracts for Difference (CFDs) with an online platform like Plus500, which offers direct bank deposits and CFDs for Bitcoin, Ethereum, Ripple and more (Availability subject to regulation).
Cryptocurrencies that are tradable as CFDs allow users to participate in these volatile markets without holding the underlying coins themselves. For instance, the BTC Plus500 instrument mirrors the rises and falls of Bitcoin itself, empowering traders to take advantage of its noteworthy price swings from outside the blockchain ecosystem.
It may be the new kid on the block compared to traditional assets, but cryptocurrency’s limited lifespan has proven nothing short of breathtaking. Although enormity of the risk does merit caution, traders with a taste for volatility will appreciate cryptocurrency’s immense possibilities.
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CFDs are relatively new financial derivatives that have become increasingly appreciated among investors, especially in the Forex market. But as with any other activity, to be successful while trading CFDs, you need to have the right set of tools – the most important one being your broker.
Of all the different CFD brokers available, almost all fall within 2 overall categories – ECNs and Market-Makers. While a novice user may not notice much of a difference between them, the behind-the-scenes mechanics are substantially different. These differences have a significant impact on you, the trader, whether you realize it or not.
What are the differences between an ECN broker and a Market Maker, and which one is best for your trading style? Let’s jump right in.
What is a CFD and how does it work?
CFDs, which stands for Contract For Difference, are financial contracts you have with your broker to exchange the difference between the opening and the closing price of a trading position.
When you trade CFDs, you do not own the underlying asset you’re investing in, as you are only getting (or paying) the difference in price between the value of your contract when you opened it and when you closed it.
CFDs are leveraged financial products, allowing you to use margin trading to profit from increased market exposure. Every time you want to open a trading position, you have to put aside a fraction of the total value of this position as collateral – this is the margin.
As a result, you are able to invest more money than what you possess in your trading account. Consequently, as leverage amplifies price movements in all directions, they can be risky – you might make larger profits, but you could also lose just as much.
In addition to leverage, one of the biggest advantages you have, when you trade CFDs, is that you can benefit from rising as well as falling markets, which means that you can earn money regardless of the market direction.
Why are CFDs popular in the Forex market?
The Forex market is the market dedicated to currencies. It is one of the most liquid and active financial markets in the world, and it is open 24-hours a day, 5 days a week. It is also the largest financial market, with US$ 5.1 trillion exchanged every day.
If you decide to trade the Forex market with CFDs, you can do so by borrowing capital from your broker to place a trade. This is called margin trading.
Trading CFDs on Forex currency pairs is very popular, as it is an ideal market for leverage and margin trading due to its high liquidity, as you can enter and exit the market quite easily with small slippage. Of course, leverage can be offered on many different markets, but leverage, as applied to the Forex market, is generally much higher than any other trading instrument.
Because CFDs are very risky leveraged products that are linked to speculation, they are not allowed everywhere. For instance, there are forbidden for US residents, but they generally are permitted in many other countries.
In Europe, the European Securities and Markets Authority is the deciding authority on the rules brokers need to follow when it comes to trading CFDs. Recently, the organization decided “to strengthen restrictions on the marketing, distribution or sale of contracts for differences to retail clients”.
A “No Dealing Desk” Forex broker usually provides direct access to the interbank market and can either be an STP or an ECN broker (or a mix of both).
This type of broker only sends trading orders directly to liquidity providers, which means that it doesn’t bear the risks of its clients internally. They only act as an intermediary between trader orders and the liquidity providers available.
ECN, which stands for “Electronic Communication Network”, describes the broker type that is connected to an electronic trading system in which many buying and selling orders from different large liquidity providers compete. Therefore, an ECN broker only connects different market participants together, so then they can trade with each other.
STP stands for “Straight-Through-Processing” and describes a broker that does not execute trader orders. They only carry out trading operations, without human intervention (No Dealing Desk – NDD) to external liquidity providers connected to the interbank market.
Dealing Desk (DD) – Market Maker
A Dealing Desk Forex broker is a Market Maker, which means that they don’t offer liquidity provider prices, as they are the ones providing liquidity for its traders by offering their own prices. It is for this reason that they are called market makers, as they “create” the market for their clients. This means that they are the ones setting the bid and ask prices of any financial instruments offered.
A Dealing Desk broker is very often the counterparty of their traders’ positions, as they do not directly trade, or hedge their clients’ position, with their liquidity providers. Therefore, a Dealing Desk broker has to pay for profitable client trades with their own money. If a client makes a winning trade, the broker loses money – and vice-versa.
How do CFD brokers make money?
A No Dealing Desk CFD broker earns money on the trading volume of their clients, as it receives a commission on all trades, and/or a markup on the spread (the difference between the buying and the selling price). Most of the time, these spreads are variable spreads, which fluctuate depending on the market conditions.
A Dealing Desk CFD broker usually gets money from spreads, as well as client losses. Spreads offered by market makers are usually fixed spreads.
The most important thing for a No Dealing Desk broker to provide is the best trading conditions for their clients – that way, their clients are more successful, they trade more, and everybody earns more money. It is for this reason that most traders prefer to use an ECN or STP broker, as they find them more reliable and profitable.
As a market maker broker earns money from their traders losing money, it is often seen as less transparent, as they have the ability (and motivation) to manipulate prices. Revenue is usually higher for a Market Maker than for an ECN/STP broker, given the same trading volumes.
CFDs are complex financial products that are not suitable for everyone, as leverage can trigger big losses. But, leverage also means that you can make huge gains on the financial markets by using volatility to your advantage.
CFDs are generally a good fit if you’re a short-term trader (like a scalper or a day trader), and if you have time to spend in front of the markets. Most importantly, to trade CFDs you need to have a high tolerance for risk – especially if you’re trading the Forex market, as it’s a very volatile market.
To better protect your trading capital, always use tight money and risk management rules when trading CFDs on the FX market. Equip yourself with the right suite of trading tools by selecting the right broker for your trading needs.
Regardless of whether you choose a dealing or a non-dealing desk broker, both can be perfectly reliable. Trading with No Dealing Desk broker, like SimpleFX, is likely to be a better choice, both for avoiding the conflict of interest inherent in the Market Maker model, and for partnering with a broker whose interests are aligned with yours.
To find the best broker for your trading needs, be sure to:
Establish your preferred trading style and your requirements first
Make sure your broker is regulated and licensed (in the more regional markets the better)
Be sure that the broker’s client support is knowledgeable and easy to access
Open a demo account first to know if the trading platform is going to be a good fit for your trading strategy
Before you can understand what a tokenised security is, you must first know what constitutes a security. A security is a tradable financial asset. However, the term security differs from jurisdiction to jurisdiction depending on how the regulatory body defines it.
For instance, the UK’s Financial Conduct Authority defines securities as either equities, debentures, government bonds, pensions, and anything that may be admitted to the Official List. The United States’ Securities and Exchange Commission (SEC) defines a security as a tradable financial asset of any kind, providing it can pass the Howey test.
The term ‘security’ is, then, that of one with two meanings: it has both a conceptual and legal definition. What constitutes a security isn’t universally agreed upon, however, it is probably fair to define one as I did so prior: a tradable financial asset.
A tokenised security is therefore a tokenised tradeable asset. But what does it mean for a security to be tokenised? This means taking existing financial instruments and starting to maintain shareholder balances on an encrypted distributed ledger or a blockchain.
This process of issuing digital tokens that represent an underlying financial instrument on a blockchain is called ‘tokenisation’. It is easier to consider tokenised securities away from the abstract definition. For instance, tokenised securities can take the form of a tokenised stock or tokenised bond.
Cryptocurrencies and tokenised securities
Like anything blockchain-related, it doesn’t take long until you hear talk of cryptocurrencies. Cryptocurrencies and tokenised securities are both built upon the same underlying technology: blockchain.
Cryptocurrencies were conceived as digital money and designed to be independent of any platform, whereas tokenised securities were conceived as a means of digital ownership, a solution to various problems and are run within a platform.
What is a security token offering (STO)?
You’ve probably heard of an initial public offering (IPO). You may even have heard of an initial coin offering (ICO), but chances are, you have little idea what a security token offering (STO) is.
An STO is where an investor is issued with a security token, but unlike an ICO, a security token represents an investment contract into an underlying investment asset such as a stock, bond or fund.
STOs are commonly described as a hybrid approach between cryptocurrency ICOs and the more conventional IPO. This is because an STO seemingly overlaps these two methods of raising capital through investment.
What is the purpose of tokenised securities?
Using blockchain technology to maintain transactions and ownership is vastly different to the historical way of storing this information in a spreadsheet or privately owned central database.
Storing information on a distributed ledger increase efficiencies in several areas. These include: paper-free transfer speed and cost, transparency, auditing and the maintenance of the shareholders’ registry. Tokenised securities will improve clearing and settling processes for traditional stocks in the post-trade market.
The decentralized nature of blockchain would reduce the time, cost and counterparty risk of clearing and settlement. It was estimated, by a 2014 Oliver Wyman report, that as much as $80 billion is spent annually on post-trade processes, with the majority of that money going to depositories and agents along the settlement process.
Blockchain technology would dramatically reduce this amount and alleviate the need for intermediary agents, allowing the counterparties to deal directly with one another.
There has long been a problem among cryptocurrency traders accessing traditional financial markets. Namely, that they cannot easily trade equities, indices or commodities without having to first swap their cryptocurrency for fiat.
However, through the tokenisation of derivative products such as CFDs, cryptocurrency traders can gain access and trade traditional markets whilst simultaneously using their cryptocurrency as collateral.
This means that crypto traders need not exit the crypto market (which can often come with fees or opportunity cost) to profit from trading traditional markets.
Where can you trade tokenised securities?
There are currently only a handful of tokenised securities exchanges due to the fact that this technology is such a recent innovation. However, the trading space for tokenised securities is currently exploding with many companies working on developing their exchanges at this instance.
Are tokenised securities regulated?
The legal status of cryptocurrencies and tokenised securities varies across the globe. Countries can broadly be categorised into three groups in terms of the legal recognition of these markets.
Firstly, there are countries that have been proactive in passing laws that recognize and regulate cryptocurrencies and tokenised securities. Countries in this list include Belarus and Malta.
Secondly, there are countries that allows the markets to exist but are yet to pass industry-specific laws. These include countries such as Brazil and France.
The last group of countries are those that have taken measures to ban cryptocurrencies and tokenised securities, such as China and Iran.
There are few countries with fully-scoped crypto legislative frameworks, partly due to poor institutional acceptance and the tendency of regulation to be reactive instead of proactive.
Description: Currency.com is the world’s first regulated tokenised securities exchange. As a project it is democratising investment in traditional markets by allowing clients to trade and profit using cryptocurrency as collateral.
While the word leverage is commonly used, few investors know the definition of leverage and how it is incorporated into their profits and losses.
Leverage is a double-edged sword and while it can help you generate enhanced gains, it can also accelerate your losses. If you plan on using leverage while you are trading the forex markets you need to have a complete understanding of the benefits of investing with borrowed capital.
What is Leverage?
You probably have used leverage before in your life without realizing it. If you have purchased a house or car or even used a credit card you are using leverage. When you purchase a house, you generally take out a mortgage which is a loan that is collateralized using the house. The term collateral refers to the asset that the lender will take if you are unable to pay off the loan. In many cases, you will only put up 20% of the purchase price while a bank will lend you 80% of the value of your new house. By using borrowed capital you are able to purchase a home for a cost that is likely more than you could afford if you did not borrow from the bank.
When you trade in the forex market, you can borrow capital to place a trade. Your broker will lend you capital and your collateral is the value of the currency pair. For example, your broker might require that you post 5% on a EUR/USD trade that has a total notional value of $10,000.
In this case, you would need to have a minimum of $500 in your account to initiate this transaction. With leverage, instead of placing a trade that has a total value of $500, you can borrow $9,500 from your broker and make a $10,000 trade. In essence, leverage is the ability to control elevated levels of capital by borrowing money from a forex broker.
What is a Margin Account, and How Do You Use It?
Before your broker will hand over borrowed capital to allow you to trade the forex markets, you will need to open a margin account. Margin is a term that describes a good faith deposit, which is used by your broker as a portion of the collateral on your trades. Remember, your forex broker is in business to make money by facilitating trades. They will not take losses on your behalf. They will not put themselves in a position where your losses will exceed the amount of money you have in your account.
When you open a margin account at a forex broker it is in some ways similar to applying for a credit card. Your broker will question about your trading background including your experience. They want to know how long you have been trading, as well as your investing goals. Your broker might also ask about the potential account size, as well as other accounts that you currently have open. All of these questions are used to determine if they should provide you with a margin account and the type of leverage they should offer you.
Your broker will charge interest on the money that is used in your margin account. So, if you make a EUR/USD trade that has a notional value of $10,000, and borrow $9,500, your broker will charge you a margin interest rate on that balance for as long as you have a trade open. Once you close the trade, the interest charge ceases. The interest rates that are charged on margin are generally market rates.
Prior to trading using margin you should find out the rate that your broker charges. If it is out of line with other market rates you might consider using a different broker. A 5% difference on $9,500 for an entire year would come out to be $475. Remember, you are only charged for margin when your trades are active. For example, if you borrow $9,500 for 1-week, at a rate of 5%, you will be charged $9 =(5% * $9,500)/52.
What is a Margin Call?
When you open a margin account and use leverage, your broker will require that you maintain your account. The margin that you use to open trade can change as the profits and losses accrue for each transaction. If you place a trade, and the exchange rate moves against you, your broker will require that you have enough capital in your account to meet the new margin requirements.
If your trade is underwater, your broker will begin to charge you for the borrowed losses you have accrued, on top of the money that you used to initially place a trade. This is referred to as the maintenance margin.
For example, if you borrow, $9,500 to buy $10,000 of EUR/USD and the value of the trade declines to $9,500, you will have to pay interest on the initially $9,500 as well as interest on the additional $500. So there is a charged on the initial margin and a charge on the maintenance margin.
If the equity in your account drops below the maintenance margin level, your broker will generate a margin call. This is an alert to you that you have a certain number of days, to deposit additional capital in your account. If you do not meet the margin requirements following a margin call, your broker will have the right to liquidate your position. Prior to making your first leveraged transaction, you should find out exactly what the margin requirements are as it pertains to a margin call.
Because you have the potential to lose more money in your account that is initially deposited, the requirements to open an account are generally rigorous. Your broker wants to make sure you understand how the process works before you begin to risk capital on forex investments. They also want to understand the broker’s rights and what will happen if you don’t comply with a margin call. If a broker liquidates your position to meet a margin call, they will not try to get out at the best exchange rate. They will sell your position at the market and you will incur any slippage from the liquidation of the trade.
You broker will post the amount of margin that is currently being used on trades, as well as the total available. You might see a designation called “used margin” as well as “available margin”, in your account balance.
Margin Requirements and Leverage
The amount of margin that is required determines the maximum leverage on your account. For example, if you are required to post a 5% margin, the leverage you can generate is 20:1. As the margin requirement falls, the leverage increases.
High levels of margin are generally granted by reputable brokers such as Multibank. By using well-known platforms such as MT4 and Mt5, Multibank can offer leverage up to 500:1 on liquid currency pairs:
Your margin-based leverage is the total transaction value divided by the margin that is required. For example, if you place a EUR/USD trade that has a notional value of $10,000, and the margin that is required is $500, then your margin-based leverage is 20:1.
There is a theory that some refute that margin increases the amount of capital that you are willing to rise. Just because you can control more capital, does not mean that you are willing to lose more money.
Even if you only have to post 2% of the value of a trade, it does not preclude you from adding more money to your account if one of your trades moves against you. This means that your risk is more of a function of real leverage than margin leverage. Your real leverage is the amount you are able to leverage based on your discretionary capital. You would calculate real leverage by dividing the average margin requirement by your discretionary capital. For example, if you are willing to risk $10,000 on forex trading then your real leverage using 5% margin is $200,000 ($10,000 / 5%).
How Does Leverage Effect Your Trading
It’s important to understand the pros and cons of using leverage. Here is an example.
You place a $10,000 EUR/USD trade using 5% margin which is leverage of 20:1. This means that you would post $500 and borrow $9,500. Assume that the margin interest rate is 5%. In this hypothetical trade, you achieve gains of 2%, on the entire notional value of the trade which is $200 ($10,000 * 2%). Your trade only lasted 1-week.
This would allow you to achieve gains on the capital you risk of nearly 40%. Your gain of $200 is reduced by $9.13 as an interest charge for 1-week of margin on $9,500 ($9,500 * 5%) / 52-weeks in a year. Your net gain is $200 – $9.13 = $190.87. Since you only posted $500, your net return is 38%. Your annualized gain is 1,985% = (38% * 52).
What is important to understand is that while the gains are robust, leverage is a double-edged sword. A loss of 5% on $10,000 ($500) would wipe out the entire amount of equity you have in this trade. In addition to a margin call, you would be subject to an interest charge on the initial $9,500 as well as the $500 of borrowed capital to handle your unrealized loss as maintenance margin.
Risks of Trading with Leverage
The risks stem from the amounts you can lose from small changes in the value of a currency pair:
You are exposed to market risks, especially if you are unaware that your position has moved during hours when you are not watching the market.
You also are subject to political risks, that can affect the value of your position, and make it impossible for you to exit your position. This is more likely to happen with an emerging currency pair as opposed to a major currency pair.
You are exposed to interest rate risks. If interest rates rise, the cost of borrowing capital will also increase.
Why Is Leverage Offered in Forex Trading
There are several reasons why brokers offer leverage. Leverage is offered in many instances of capital markets trading, but forex leverage is generally much higher than any other trading vehicle. The leverage that is offered for US equities is approximately 1.5 times the value of the stock. So your margin is at most 50% the notional value of the trade.
Forex leverage can reach levels up to 500:1. Brokers are comfortable offering this type of leverage for several reasons.
Forex markets are very liquid – You can enter and exit with very little slippage. If a broker has to liquidate your position, they can easily exit.
Forex markets are less volatile – The average volatility on major currency pairs is close to 10%. This compares to 40% volatility in many equity shares
Forex markets are open around the clock – you can trade in and out 24-hours a day, 6-days a week. Many other markets are only open during exchange hours.
Trading the forex markets is popular as it can enhance your gains and allow you to generate robust returns with only a portion of your portfolio. Many investors are attracted to forex trading as the margin requirements are low relative to the value of the capital you can control.
Leverage is a double-edged sword and while it can help you generate enhanced gains, it can also generate large losses. There are several risks involved in trading forex with leverage, but the most obvious risk is market risk. When you trade with borrowed capital, your broker will charge a margin interest fee. Make sure you are aware of all the fees related to leverage before you place your first trade. Lastly, spend time going through examples of how leverage will affect your projected gains and losses and make sure you have allocated enough capital to an account before you begin to trade with a margin account.
The Forex market is the world’s largest financial market with a turnover in excess of around $4 trillion a day. Despite its huge size, this market has no central exchange for Forex traders to conduct their transactions. Instead, Forex traders must conduct their trading activities through an intermediary, the Forex broker. This shows the importance of the broker’s role in the trading process. When it comes to choosing a broker, traders have literally thousands of Forex brokers to choose from on the internet. But the real question is how can you be certain that the broker you have chosen is the right fit for your trading needs.
To help you in your broker selection process, we have prepared a guide with a list of key factors that you have to look at when choosing a broker.
The first thing that you should look at when selecting a broker is to see if the broker is regulated by a competent regulatory agency(read more about Forex and CFD broker regulations). By dealing with a regulated broker, you can have the assurance that the broker has met the operating standards imposed by the regulatory body. Some of these standard regulatory requirements include having adequate capitalization and maintaining segregated accounts in order to protect the clients’ funds. Additionally regulation offers fund protection should the firm become insolvent and ensures the broker is upholding rigorous standards as a financial service provider.
Countries that have financial regulatory agencies that are backed with strict regulatory enforcement include:
As the trading platform is your gateway to the market, you want to ensure that the trading platform that you are using can be relied upon. Most brokers will offer traders a selection of trading platforms to choose from. Most of the time, the trading platforms are provided by third party trading solutions providers such as MetaQuotes Software. There are also some brokers who have taken to developing their own proprietary trading platforms in an attempt to differentiate themselves from other brokers in the industry. Often times, these proprietary platforms are the best platforms to trade with as they are specifically designed by the broker’s client base.
Nevertheless, a good broker should be able to provide a good selection of platforms. This is because some traders prefer to trade from the desktop computer and some traders prefer to trade from their smartphones. It should be noted that the most common trading platform that you will find among the different brokers in the industry is the MetaTrader 4 platform. It is estimated that at least 85% of brokers in the industry uses the MetaTrader 4 platform. So this means there is a very strong possibility that this is one of the platforms that you will be using.
Look at the features which the trading platforms have to offer. Do they come with:
Comprehensive charting package
Wide range of technical indicators
One click trading on the trading platform
Risk management tools such as stop loss order and trailing stops.
While all these may seem trivial initially, they will later play a crucial part in ensuring that you will get to enjoy a seamless and productive trading experience.
But when it comes to platform selection, it is really a matter of personal choice. Most of these platforms will have the same basic features. The best way for you to find out which platform is right for you is to try them out with the demo account provided by the broker. For those brokers that do not provide a demo account, they may not be worth considering.
Commissions & Spreads
This market unlike other traditional financial markets mostly operates on spreads rather than commissions. This is the reason why most brokers advertise their services as being commission free.
So how do brokers make money?
Simply, they earn by charging traders a spread. The spread is the difference between the buying price and selling price. For example if the Bid & Ask price for the EUR/USD currency pair is 1.0875/1.0878, this means the spread is 3 pips.
As a Forex trader, you will come across 3 kinds of trading cost structure charged by a broker:
Fixed spread – where the spread is not changing and you know the spread amount before you trade.
Floating spread – this spread is variable and always moving depending on the market volatility.
Commission fee – this is calculated as a percentage of the brokers spread. You should be aware of the amount payable before you trade.
Generally for traders looking for certainty with their trading costs, fixed spreads will be the preferred choice. Traders who are looking to pay a smaller spread would prefer floating spreads. Ultimately as to which is better will depend on your specific trading needs.
The kind of spreads that you will receive depend to a large extent on the kind of business model the broker is operating on.
Broker’s Business Model
In the course of your search for a broker, you will come across terms like “STP”, “ECN”, “NDD” and “Market Maker”. All these terms are in fact used to describe the business model which the broker is operating by. So what do they all mean?
There are two major types of broker – Dealing Desk and Non Dealing Desk.
Forex dealer or Market Maker processes their clients trading instructions through a dealing desk within their company. A dealing desk broker takes the other side of the trade to you, meaning when you open a position like the EUR/USD the trade will be executed by the broker and they are then exposed to that trade.
A Non-Dealing Desk (NDD) broker passes the trade straight through to a third party. There are two kinds of NDD broker (ECN and STP). They are both essentially the conduit between you the trader and the market maker or dealer.
With the first type (ECN) when you press “Buy” on your trading platform, your trade orders will be processed on the broker’s computer trading system automatically and transmitted through the Electronic Communications Network (ECN) without a dealing desk (This is where the term “Non Dealing Desk” (NDD) comes from).
With the second type of NDD broker, upon receiving your trade orders they will pass the trade orders directly to another party to be executed by the market maker’s dealing desk. In this instance, the broker is known as a Straight Through Processing (STP) broker.
Both the Forex ECN and STP brokers are intermediaries to several dealing desks or market makers in the global Forex market. Market makers or dealers will transmit their pricing to the ECN or third party liquidity provider together with the volume which the quote is valid for. The ECN/STP will in turn distribute the pricing to traders/market makers linked to the system. It should be noted that the ECN/STP does not execute trades but rather acts as the conduit for transmitting the trade orders from the trader to the dealing desk where the trader took the price from.
Why is this important?
The business model of the broker is important as this will affect the kind of spreads that you will receive and whether the spread will be fixed or variable.
Forex Broker for Beginners
For beginner traders, look for brokers with the following qualities:
Comprehensive trading education resources – many brokers supply a suite of education materials to help push traders into mastering their skills. These usually include webinars, videos, courses, guides and articles.
Unlimited access to the demo account for practice trades – most if not all Forex brokers supply demo-trading accounts to their clients. This is particularly useful if you are new to the world of Forex trading or if you’d like to test-drive a broker’s platform before you trade for real.
User friendly trading platform – there are a whole host of trading platforms on the market, some more complicated than others. As a beginner trader you will not need a complicated platform with features like EA’s and complex trading strategies. That comes later, but now you should be looking for a platform that is fast and simple to grasp.
For professional traders, their trading needs differ significantly from those of a beginner trader. Generally, professional traders prefer brokers which can provide them with:
Comprehensive trading tools – as a professional trader you will now need a variety of tools including commission calculator, economic calendar and of course complex live charts in order to implement trading strategies.
High leverage – not for the faint hearted, professionals will seek to use leverage in order to multiply their capital. Leverage increases the risk and equally increases the reward.
Low spreads – if you trade a lot you want to ensure that your spreads aren’t eating away at your capital. It’s important to check the spreads payable before you select a broker, usually the greater the account type you take the lower are your spreads.
Forex Broker for Day Trading
Generally for a day trader, most brokers will be able to meet their trading needs. However given the shorter time period with day traders are trading with, it is best that the broker is able to provide a diverse range of instruments for the day trader to scout for trading opportunities. These can include a signal service, tools like an economic calendar, updating market news and also earnings reports. As you will probably be placing more short term trades make sure that you are aware of the spreads before you trade.
Forex Broker for Scalping
Scalpers are traders who hold their market positions for an extremely short period. While they only hold a market position a short period of time, the frequency of their trades is higher than the average trader. Their objective is only to make a small profit on all the trades that they make spread across a large number of trades. Note that not all brokers allow scalping. As such if you intend to trade as a scalper, you should always check with the broker that you intend to sign up if they allow scalping.
The majority of the forex brokers in the industry offer traders a selection of trading accounts to cater for different categories of traders.
Micro Account – The smallest type of trading account is the Micro trading account where one trading lot is equivalent to 1000 units of the instrument traded.
Mini Account – The next type of trading account higher up the hierarchy is the Mini account where one lot represents 10,000 units.
Standard Account – The standard account is where one lot is equivalent to 100,000 units.
With the Micro and Mini account, only a low minimum initial investment is required to let you start trading. With the standard account, although the minimum investment may vary from broker to broker, generally you will need a higher amount of trading capital. Given the varying minimum investment for each type of trading account, you should select the trading account that is commensurate with your investment capital.
Most beginner traders tend to forget to factor in customer service when making their choice of the broker to sign up with. They may not realize the importance customer service plays in their overall trading experience. With customer service, it is not whether you will ever need their assistance but rather a question of when you will need their assistance. Because regardless of how experienced or knowledgeable a trader might be, there will always come a time when assistance from customer service is required. When that time comes, you want to be able to get in touch with the support team without any difficulties. So it is important to check if the broker that you intend to sign up with is able to provide you with reliable customer support.
Check to see if there are multiple ways of contacting customer support. Most brokers will provide their clients with several ways such as email, live chat and telephone for their clients to get in touch with customer support. In short, you don’t want to be in a position where you have to spend countless nights worrying about what your broker is going to do with your problem.
In an industry as competitive as the online forex trading industry, some brokers will try to distinguish themselves from other brokers, by offering additional value added services such as free market analysis, real time news feeds and trading signals. Most of these value added services are provided free of charge but there are some brokers which may require you to deposit a minimum amount before you can have access to these services.
Questions to Ask the Broker
If you have any general questions regarding brokers we can usually advise and recommend, however for more specific information you can read our broker reviews for deep insight. Our video reviews cover many aspects of the trading cycle. Please note, it is important that if you have any doubts about a broker’s product offerings or service, by asking the right questions you can clear up any ambiguity that you might have before they develop into an issue later after you sign up.
The kind of questions that you should ask include:
How the broker maintains the safety of your funds
The broker’s regulatory status
The range of instruments that is available for trading
Their business model
Their customer service hours
Their deposit and withdrawal process and whether there any fees involved
Whether there are any conditions attached to the value added services provided
Check our broker filter tool >>> FX Empire is perfectly placed to help our readers choose reliable CFD brokers to work with. We have compiled this resource, which looks at all the key factors a trader should consider before selecting a broker to work with. We hope you find it useful.
We are here to help with that! Check out our list above and choose the most suitable broker for you.
Should I Pick a Regulated Broker?
Yes, you should try to pick a regulated broker to work with. This ensures recourse in the event of a dispute or should your broker face insolvency. Remember by using a regulated broker you will also have access to an investor compensation fund, which insure your deposit up to a certain amount.
What Else Should I Look at When Selecting a Broker?
You should look at the range of platforms on offer and even ideally test-drive the platform you may wish to use. Take a look at the additional resources being offered by that broker eg. Signal service, educational tools, copy trading. Finally remember to find out about spreads, and account types before you place a deposit.
As noted above, there are many factors that you have to consider when selecting your broker. Nevertheless with the help of this guide that we have provided, you should be able to see which broker is better suited to your needs. To further facilitate your search, we have also conducted in-depth reviews and vetted each of the brokers in our recommended list to ensure they meet up the right standards. Once you have found the right broker to work with, you can focus more on your trading activities and trade more confidently thereby increasing your chances of success trading the market.
One of the biggest risks when using Forex brokers that aren’t under regulatory supervision is that they don’t have to conform to any established standards, and so unethical – or even illegal – behavior cannot be ruled out. Worse, should something happen, there is often no way to take legal action against them.
Forex broker regulations are thus essential – they ensure that you’re trading with a broker that adheres to standard business norms, acts in your best interests, and offers some manner of financial protection.
Selecting the right broker starts by checking that it is truly licensed, regulated and authorized where you live. In addition to a broker’s regulatory status, you need to know which regulatory body it belongs to, as they do not all follow the same kind of regulations or offer the same type of financial protection.
Regulators around the world have tightened regulations to protect traders in recent years, with increased oversight from regulatory bodies such as the SEC in the US, the FSA in the UK and the CySEC in Europe. Typically, Forex brokers are required to deal with top-tier financial institutions and liquidity providers, as well as to keep their client funds in separate accounts. FX brokers also need to meet certain other criteria, such as capital and fiscal requirements.
Comissão do Mercado de Valores Mobiliários (CMVM) in Portugal,
Malta Financial Services Authority (MFSA) in Malta.
Members of the European Union, under the supervision of the MiFID directive – which we talk about later – are allowed to “passport” an authorization received from a European regulatory body, to be allowed to operate legally within the European Union (EU) as well as within the European Economic Area (EEA).
One of the most attractive regions in Europe to set up a forex company is Cyprus, due to its advantageous fiscal and tax structure.
So, if a financial company decides to set up shop in Cyprus, it will be registered, licensed, authorized and operate under the Cyprus Securities and Exchanged Commission (CySEC), which monitors the financial markets with the support of the European regulatory authorities and the European Commission to protect traders.
But this company would also be able to legally offer its financial services in other countries in the EU and the EEA, and it will be registered in every local European regulatory body.
To be a CySEC Forex broker, as of April 2019 a financial firm must follow certain rules, such as*:
An initial share capital of at least €200,000,
At least €750,000 in operating capital,
Submit regular financial statements, as well as yearly audit reports through certified independent third-party auditors,
Ensure the protection of clients funds by holding them in segregated accounts, and using top tier 1 banks and quality liquidity providers,
Adhere to the Investor Compensation Fund (ICF), which means that in case of bankruptcy, each client can recover up to €20,000.
To verify the authenticity of a CySEC regulated broker, always look for the 5 digit CySEC License Number (CIF) on the broker’s website:
Then verify the license on the CySEC website and make sure that the domain on CySEC website is the broker’s one:
Warn their clients about risks involved and categorize them (retail investors vs. professional investors),
Display their prices,
And act honestly towards their customers.
However, transparency in the financial markets did not improve following the establishment of MiFID, with the 2007-2008 financial crisis highlighting the lack of liquidity, settlement and delivery defaults, as well as the circumvention of the transparency principle through highly secret platforms, known as “dark pools”.
In light of these issues, the European Commission considered a revision of this regulation. MiFID II, which went into effect last year, thus aimed to address the grey areas in fast-growing OTC markets, particularly for derivative products. The direction also wants to work for better investor protection by ensuring that consumers have a clear understanding of the financial products in which they invest.
For instance, it is now necessary for a broker to assess a future client’s knowledge and risk profile before doing business with them. It is, therefore, a question of selling the right financial product to the right customer. To do this, a broker usually asks future clients a few questions about their personal and financial situations, but also about their knowledge of the financial markets and trading.
Brokers must also comply with procedures to be sure they know their clients and where the money used for trading comes from – Know Your Customer (KYC) and Anti-money laundering (AML) procedures.
To sum up, this new directive is supposed to enhance the transparency of regulated platforms, as well as of the financial markets, improving trader protection through better business conduct.
The European Securities and Markets Authority (ESMA)
Because of high leverage and margin trading, retail investors have lost a lot of money over the years on the Forex market trading CFDs.
A leverage limit of 30:1 for major currency pairs, 20:1 for non-major currency pairs, and 2:1 for cryptocurrencies,
50% margin closeout rule,
Negative balance protection,
Restriction about the incentives offered by brokers to trade CFDs,
Standardization of a risk warning showing the average retail investor’s percentage of losses on CFDs accounts.
On March 27th 2019, the ESMA decided to renew these restrictions on CFDs for another 3 months from May 1st, 2019.
As the UK is still in the European Union until at least April 12th, this means that UK firms must comply with ESMA’s decisions and measures until then. However, the FCA Forex regulation could change, as it declared that it “expects to consult on whether to apply these measures on a permanent basis to UK firms providing CFDs to retail clients.”
The ESMA is constantly publishing updates linked to the Brexit situation and the recognition of UK central counterparties (CCPs) like LCH Limited, ICE Clear Europe Limited and LME Clear Limited, and Central Securities Depository (CSD) like Euroclear UK and Ireland Limited.
In the UK
According to the BIS Triennial Central Bank Survey 2016, the UK hosts the most important sales desk in the world, via its trading hub in London. It alone processes 36.9% of global OTC Forex turnover.
In order to prevent broker scams, financial malpractice or other types of fraud affecting traders, there are 2 important financial regulatory bodies in the UK, the FCA and the PRA.
To be able to undertake financial services activities in the UK, a broker needs to be authorized by the Financial Conduct Authority (FCA). This national regulatory body ensures consumer protection while guaranteeing the integrity of the financial markets in the UK
The Prudential Regulation Authority (PRA), which belongs to the Bank of England, helps in developing ethical and professional standards to protect the financial firms it is responsible for, so that in the case of a failing financial firm, there is no real impact to the financial markets or the taxpayers.
To be an FCA Forex broker, a broker should adhere to strict guidelines, such as:
Having at least £1,000,000 in operating capital,
Submitting audit reports and financial statements,
Ensuring the protection of client financial funds with the Financial Services Compensation Scheme (FSCS). This scheme is about protecting clients in case of bankruptcy of insolvency. If an investment firm failed between January 2010 and Mar 31st 2019, a client can ask for £50,000. If it failed after April 1st, you could be compensated up to £85,000.
In the USA
With 19.5% of global OTC FX turnover, the United States is the world’s 2nd most important sales desk. To regulate the Forex markets, and other derivative and OTC markets, there are 2 main regulatory bodies, the NFA and the CFTC, who work together.
The National Futures Association (NFA) helps investors to be more protected. The NFA also works to ensure its members respect their regulatory responsibilities for better market integrity, fighting scams and fraud through best financial practices.
The NFA also works with the Commodity Futures Trading Commission (CFTC). Together, they fight systemic risk, and ensure traders of the quality and reliability of Forex firms regulated by them.
In 2010, the CFTC issued regulations. Among those, the leverage used by retail trades was limited to:
1:50 for major currency pairs,
and 1:20 for all other pairs.
To be an NFA and CFTC FX broker, a broker must follow the below rules:
Follow safe and transparent best market practices:
hire knowledgeable and professional staff,
use real facts and numbers in advertising and promotional materials without misleading traders,
submit reports and financial statements that are later on published on the NFA website,
follow the FIFO rule (first in, first out),
never open positions against its clients,
never allow hedging for traders,
offer a leverage effect of 50:1 maximum,
Keep client funds in segregated accounts,
Have at least $20,000,000 in operating capital.
The Australian Securities & Investments Commission (ASIC) is the main regulatory body supervising the securities and investment market in Australia. It works with various regulators and organisations in protecting consumers and investors.
For instance, ASIC works with the Australian Prudential Regulations Authority (APRA), which supervises financial institutions to maintain the safety of financial institutions.
To be able to conduct financial service activities in Australia, brokers are required to have an Australian Financial Services (AFS) licence. As an ASIC Forex broker, certain criteria must be followed:
At least AUD 1,000,000 in operating capital,
A representative office in Australia,
Must comply with the organizational competence obligation in s912A(1)(e) of the Corporations Act 2001 (Corporations Act),
Adhere to a professional indemnity (PI) insurance cover,
Total financial transparency, with the submission of periodic audit reports,
Work with tier-1 banks, keeping client funds in segregated accounts.
In South Africa
Regulation in the financial sector in South Africa was maintained by the Financial Service Board (FSB) but it is now in the hands of the Financial Sector Conduct Authority (FSCA). The core mission of these regulatory bodies is to protect investors from losing money through scams and fraud thanks to a safer, more transparent and reputable trading environment.
The FSCA is quite new. It was created in April 2018, as “the start of a new, more holistic and intensive approach to regulating the conduct of financial institutions operating in South Africa – focusing on how they treat financial customers and on how they support the efficiency and integrity of the financial markets”.
The Forex market is one of the most volatile markets in the world. This highly leveraged market is also an unregulated market, with no real international regulatory body that monitors currency trading world-wide.
However, we’ve seen that there are national regulatory authorities that are working on protecting Forex investors. In addition, a Foreign Exchange Working Group (FXWG) was created in 2015 to provide global good practices for the FX market. In May 2017, this group published an FX Global Code to provide a set of guidelines to promote market integrity and protect traders against large losses, scams or other financial manipulation.
It is therefore essential that before investing real money on the Forex market with a specific broker, you check its regulated status.
In Europe, for instance, you can make sure the broker you want to make business with is regulated and authorized to provide investment services by an EU regulator on the ESMA website. In addition, each country’s regulatory body keeps a record of all the firms it regulates.
The ESMA also keeps a list of companies (or persons) that offer (or are suspected to offer) services without proper authorization. More details about these companies/persons can be found on the websites of the regulators. There is also the International Organization of Securities Commissions (IOSCO) website, which ggathers alerts and warnings from the IOSCO’s members in its “Investor Alerts Portal”.
Choosing a broker that is regulated in one place is good, but it’s always best to pick one that is regulated in several countries. For instance, Tickmill is registered in three different places – firstly, as a Securities Dealer by the Seychelles Financial Services Authority (with the FCA via Tickmill Ltd), secondly, by the UK FCA via Tickmill UK Ltd, and thirdly, by the CySEC as a CIF limited company, via Tickmill Europe Ltd.
This article is for those of you who would like to develop something I call a “Trump Tweets Proof” trading strategy. President’s Trump’s surprising comments on Twitter can swing markets. They are an example of events that are not only themselves unpredictable but also can move the price of a USD-based instrument either way.
It’s challenging to develop an effective trading strategy when you have to verify your methods against such events.
Searching for “Trump Tweets Proof” forex pairs
Unless you are a master forex trader or you’d like to take an enormous risk, you should consider trading any combination of the so-called eight major currencies. These are merely the currencies of the world’s biggest economies.
Here are the eight major currencies:
The US Dollar (USD)
European Euro (EUR)
Japanese Yen (JPY)
British Pound (GBP)
Swiss Franc (CHF)
Canadian Dollar (CAD)
Australian/New Zealand Dollar (AUD/NZD)
South African Rand (ZAR)
Why USD is better for you than, let’s say, the Thai Baht? Because there’s a much bigger volume of USD in the circulation and therefore it should be less susceptible to big players manipulating it.
There are many uncertainties in the forex market – that is why you should take a “negative road” – know what you’d like to avoid. And it’s best to avoid big players (such as international banks) using their size to trade against the crowd – that is all the smaller investors including you.
Choosing a significant currency is a good solution. However, trading the most popular USD pairs can also prove to be the wrong decision. The most popular currencies can also potentially be played.
In this post, I will present the advantages of trading so-called “cross pairs” – the currency pairs that don’t involve the US dollar.
The Swiss franc, British pound and euro are big enough but not as popular as USD, which is dominating forex trading. The most traded pair in the world is EURUSD. It seems to be just a fashion because there aren’t many rational reasons to do it.
First of all, the instrument you want to trade using chart analysis should be trending most of the time. Whenever it’s an uptrend or a downtrend you can make money trading CFD. It’s much more difficult to do so when there’s no visible trend. And with EURUSD it happens often.
Second, EURUSD as the most popular pair is at the center of interest of the biggest forex players (including international banks). This raises the risk of somebody with market share significant enough to go against the crowd.
Following this logic, you should try to avoid USD pairs. This makes GBP, CHF, and EUR more attractive.
Let’s take the euro. Since it’s the currency of Eurozone – which consists of 19 countries – it’s less affected by macroeconomic news such as nonfarm payroll (NFP), which can cause a turmoil in all USD instruments.
The political events in the Eurozone countries also have a limited effect, since their influence is somehow diluted. Even if German Chancellor Angela Merkel started to tweet like Donald Trump, it would cause less market stir.
The history shows that euro pairs (except for EURUSD) are not affected by news from America. This replaces unpredictability of Donald Trump with a boring, predictable economist Mario Draghi, who has been the president of the European Central Bank since 2011.
Now let’s take a look at pound sterling. The historical data shows that the currency does not correlate with the Swiss franc as much as euro (for a long time the two were pegged together) or as USD and Japanese yen, who often react to random global events similarly since they are considered to be a safe haven.
The good thing about the Britins pound pairs is that they seldom stagnate. You can trade with or against the trend most of the time. This is an environment much more natural to make a profit in. The UK related events are much easier to grasp, as there are just fewer of them.
The Swiss franc is the most “news resistant” of all the eight major currencies which increases the currency’s predictability substantially.
Now let’s take a look at the two pairs I’m discussing in this post.
The EURGBP is a slow instrument. It has a low average true range (ATR), which means the volatility is low; however, the trends are active and visible. That is why it’s great for people wanting to develop their trading skills not worrying about the NFP or tweets. The pair is trending strongly over time and seldom stagnates. This is why you can test your trading signals with it efficiently. There is much less noise here than in case of other pairs.
On the other hand, the GBPCHF is much faster, with higher ATR. The pair is also tweet-proof. It also trends even better than EURGBP.
If you are not interested in news trading – and that’s what this article is about – avoid trading or having some strong positions open during the upcoming Brexit (or no Brexit) milestones.
If all three discussed currencies are so attractive, you may wonder why not trade EURCHF. The reason is simple – there’s a relatively short history of the two currencies moving independently. They have been closely correlated for years until the Swiss franc was set loose at the beginning of 2015. We are learning more and more about the pair so that it may be an exciting option soon.
A good piece of advice for the risk-averse traders, or the ones that’d like to practice before taking on a substantial risk is not to trade the two pairs at the same time, since this creates a position where you are too much exposed to the pound, which can be risky when something big happens, especially Brexit-related.
EURGBP daily chart – nice trends from Feb 2016 (you can see the Brexit referendum candle). It’s less volatile than GBPCHF but relatively rarely consolidates, and when it does signal it with the volume.
As you can see GBPCHF trends strongly and show almost no consolidations. It’s volatile with a proven record of no crazy unexpected moves that would blow your position up.
EURCHF used to be untradeable due to the Swiss franc being pegged to euro. You can see when it was finally released.
You can give you a new strategy a try and trade all the mentioned pairs with SimpleFX.
Currency trading is when a person buys and sells different types of currencies, money, that are used worldwide. Foreign Exchange, or Forex, is the more commonly used name. Anyone can trade currencies, market access is easy, however, you’re encouraged to learn everything you can before starting to help avoid unnecessary losses. You can start the learning process from sites like Forexhandel and nextmarkets and try trading demo accounts to get a feel for how it forex trading works.
What is Foreign Exchange?
The currency market or Foreign Exchange is the most liquid market in the world. It contains all the worlds money and continues to grow annually. The U.S. Dollar is the primary currency traded and it is traded against virtually every other currency on the market. Its safety and liquidity make it invaluable to traders, allowing them to enter and exit the market at will.
The OTC (over-the-counter) foreign exchange market, what you are accessing with a forex or CFD broker, has no physical location or central exchange and is usually open 24-hours per day, Sunday evening through Friday evening. Forex trading with CFD’s is a speculation on the direction an underlying currency pair like the EUR/USD (US Dollar versus the EU Euro) is going to move.
You make money by buying or selling the pair before the move begins and profit on the amount of movement that happens. For example, if you buy the EUR/USD at 1.1200 and it moves up to 1.1400 you make 0.0200. That may not sound like a lot but when you factor in the leverage provided by CFD trading it can amount to hundreds of dollars in profit.
Trading currencies can be very difficult, especially for those with no clue how to make a good trade. There are three primary sessions successful traders focus on. These include the European, Asian, and United States trading session. These sessions may overlap but the main trading is associated with the hours these markets are open (when the traders are awake, business hours).
This means that certain pairs will have more active during certain times of the day. Those who stay with pairs based on the dollar will find the most volume in the U.S. trading session and when the opposing pair’s market is open.
The Basics of Trading
A lot is the standard number of units in trading currencies. When you buy a position it will be in lots, one lot two lots, three lots or more depending on how large a trade you want to make. Each lot represents a regulated quantity of a financial instrument as set out by the exchange you are using or the regulator in charge of your jurisdiction.
Some exchanges and brokers allow micro-lots for smaller trading accounts and those with lower risk tolerance. The micro-lot is equivalent to 1,000 units of one currency. If you have an account that is financed with the use of U.S. dollars, a micro-lot signifies 1000 USD of the base currency. A mini lot is 10,000 units of your base currency and a standard lot is 100,000 units.
What are Pairs and Pips?
A currency pair is an expression of exchange between two currencies. For example the EUR/USD. There are literally hundreds of pairings, any currency can be traded against another one, you just have to find the right market or exchange.
A Pip is the smallest amount of movement among major currency pairs. It is usually tracked as the fourth significant digit after the decimal place but this is not true in some cases. The USD/JPY (Japanese Yen) only goes to two significant digits at most exchanges.
How Forex Trading Works
Currencies are traded against each other because the exchange rates are always fluctuating. If you buy one currency when it is cheap and then sell it when it is expensive you can make money. Traders watch the market using financial charts of price movement to pinpoint when they want to buy or sell. Because most forex trading is done with pairs and speculative CFDs you never really have to own the currencies you are trading.
For example, if you think the EUR/USD is going to go higher you would buy 1 lot of EUR/USD. If it moves up you can profit, each PIP will be equal to $0.10 or more depending on your leverage. If you think the EUR/USD will move lower you would sell 1 lot. If it does move lower you will profit for each pip that it falls.
So, what makes Currency Trading trendy nowadays?
Currency trading is popular for three reasons; the market is easy to access, it is challenging, and you can make a lot of money. The problem is that too many would-be traders get into trading forex without the full knowledge of the risks. Just like with any investment, it is possible to lose a lot of money. If you make a trade and the market does not move in the direction you want but in the opposite direction, you will lose money with each PIP the pair falls.
Learning the basics in currency trading is not complicated. Building your own strategy to make and making it work is a different story. You will need a lot of patience and practice to reach your goals. There are many helpful articles and applications online that can help you develop your skills in getting ahead of the game in trading currencies.
Trading bullish and bearish divergences is a popular strategy to take advantage of the price movements in the forex market. While there are numerous strategies to use technical analysis as a useful tool to make profits, trading bullish and bearish divergences is said to be one of the most powerful approaches of them all. How it works and what you need to know about it isis explained in detailly in the following text.
The Relative Strength Index (RSI) is shown as the purple wave above the price chart in the example below. As you can see, there are two dotted lines, one at the top and one at the bottom. If the RSI reaches above the line, the RSI signals us that the price is in overbought regions, indicating that there will be a sell-off soon enough.
The opposite case holds true if the RSI falls below the line at the bottom. If the RSI reaches oversold regions, it indicates that the recent drop will soon come to an end and there will be a wave towards the upside in the not-too-distant future.
As seen above, the RSI touching or overreaching the dotted lines often resulted in tremendous price movements in the opposite direction. Thus, the RSI is a very powerful tool to find entry levels for long and short positions.
In the chart above, the RSI shows a bearish divergence. If the price climbs higher while the RSI performs lower highs, it indicates that there will be a (massive) sell-off in the near future. The bigger the timeframe, the bigger the price movement. In this example, EUR/USD lost 15 percent after the divergence formed over two years in the monthly chart.
In the bull case seen below, the RSI must form higher lows while the price is performing lower lows. In this case, the price climbed nearly 5 percent after the bullish divergence formed in the daily chart.
The same strategy can be applied to the Moving Average Convergence Divergence (MACD) indicator.
In the example below, the MACD shows a bearish divergence in the monthly chart. If we want to spot a bullish or bearish divergence in the MACD, we look at the green histogram and not at the blue and red lines. Thus, it can be observed that the histogram forms a lower high while the price was continuously climbing higher to form new highs. As indicated by the bearish divergence in the MACD, a massive price drop of more than 20 percent occurred after that.
The same principle is applied when spotting a bullish divergence in the MACD, but of course, in the opposite way. The MACD forms a higher low while the price chart is showing lower lows. This divergence indicates that a trend switch in the opposite direction is about to take place very soon. The price chart acted accordingly, surging by nearly 100 percent after the bullish divergence formed.
The money flow index works similar to the RSI, showing overbought and oversold regions to indicate trend switches. Unlike the Relative Strength Index (RSI), the Money Flow Index combines both price and volume data, as opposed to just price. Because of that, some analysts refer to the MFI as the volume-weighted RSI.
Looking at the weekly chart of EUR/JPY, the MFI shows a series of lower highs while the price chart is forming higher highs. The principle is exactly the same as in the RSI and shortly after the bearish divergence formed, a heavy price decline of nearly 27 percent took place.
What we can see below is the EUR/JPY daily chart. The money flow index shows a bullish divergence forming higher lows while the price continues to decline to form new lows. Thus, if we would trade according to the divergences strategy, we would have considered placing a long position after the bullish divergence has formed, which would have resulted in a 4 percent profit.
It is advised to take the bodies and not the wicks of the price movements to spot bullish and bearish divergences. This way we ensure that the divergence is correct and not a false signal.
Forex trading doesn’t take place on a regulated exchange (like shares or other assets do), as it occurs between buyers and sellers from anywhere in the world, through an over-the-counter (OTC) market. To be able to access this market, you need to use a broker.
As this market is not centralized, you’ll quickly realize that you can access different exchange rates and trading conditions, depending on the broker you use.
For this reason, choosing the right broker for your trading style is essential in becoming a successful Forex trader.
It’s important to note that even if there are many brokers out there offering similar products and services, there are a few things you should check before deciding which one to use, to be sure you’ll be giving yourself the best chance to succeed.
Of course, the first thing you need to be sure of is that you’re trading with a regulated broker.
For instance, the broker MultiBank Group is registered with 7 different regulators, including Spain, Germany (BaFin), Austria, Australia (ASIC) and the UAE. In addition to being heavily regulated, MultiBank follows strict rules and obligations regarding client funds and security. For instance, MultiBank uses fully segregated client accounts and offers negative balance protection to its clients.
Besides checking out the regulatory status of your broker, you also need to be sure it offers the right kinds of trading platforms and trading accounts for your trading style – not to mention other details such as trading conditions, spreads, minimum deposit, payment methods, main currency of the account, and the availability of the technical support.
Another very important thing to consider when choosing a broker is what type of broker that they are, as they are different kinds – predominately, Market Makers and ECNs.
Market Maker vs. ECN broker
Understanding the definition of a Market Maker is pretty straightforward – it’s a broker that “makes the markets” by setting the bid and the ask prices via its own systems. Then, they display these prices via their platforms, so that investors can open and close trading positions.
Usually, a Market Maker broker will not hedge its client positions with other liquidity providers like an ECN broker would do. Instead, what Market Markets do is they pay winning client positions out of their own accounts. It also means that when a client has a winning trading position, a Market Maker broker loses.
An ECN broker stands for Electronic Communication Network (ECN). This type of broker provides its traders with direct access to other market participants via interbank trading prices. This network allows buyers and sellers in the exchange to find a counterparty of their trading positions.
By using different liquidity providers, an ECN broker is able to allow prices from these providers to compete in the same auction, which usually means that traders get better prices and cheaper trading conditions. Moreover, by using an ECN broker, traders usually trade in a more efficient and transparent environment.
Usually, the way an ECN broker makes money is with the trading volume of its clients, charging a commission on each position.
Why you should trade with an ECN broker?
An ECN broker doesn’t trade against its clients
An ECN broker is only the intermediary between your buying and selling orders, matching you up with different market participants.
Hence, an ECN broker doesn’t bet against you, which means that it never takes the other side of your trading positions.
This trading model ensures you that there is no conflict of interest, as an ECN broker gets a commission whether you make or lose money.
Using an ECN broker limits price manipulation, increases transparency and provides better trading conditions
As an ECN broker doesn’t “make the market” by creating its own quotes, it is harder for it to manipulate prices, simply because it uses prices from different liquidity providers.
With an ECN broker, you have access to real-live, current information, as well as more accurate prices history, hence why it is more difficult for this type of broker to manipulate prices.
Displaying prices from official sources transparently in the ECN broker’s trading platforms makes it easier for you to trade instantly, with tighter spreads than other types of brokers. Moreover, you usually get lower fees and commissions, as well as immediate confirmations.
Another benefit of accessing real quotes is that you avoid “re-quotes”, which can have a negative impact on your overall trading performance. This usually happens when your trading order is rejected because of the change in the price of the asset you want to invest in. Then, the broker offers you a “re-quote” of the given asset (which rarely works out in your favor).
As you can see, using an ECN broker allows you to trade more efficiently and profitably, thanks to better trading conditions and better trading execution. With increased transparency and no conflict of interest, ECN brokers like MultiBank are the most reliable and safe way to trade.
The behavior of the masses works differently from the mechanism that determines individual actions. The discovery is quite old and well described in a book by a French anthropologist Gustave Le Bon in 1895 “The Crowd: A Study of the Popular Mind.” The author states some of the characteristics of the psychology of the crowds: “impulsiveness, irritability, incapacity to reason, the absence of judgment of the critical spirit, the exaggeration of sentiments, and others…”
Every trader knows the importance of emotions. You can see it in market volatility; you can see that some stock is overvalued in comparison to the company’s fundamentals, and others are undervalued.
Just like people on a rock concert, football game, or political demonstration transcend from individuals to a crowd, traders around the world create an entity that has its emotions and moods. The state of mind of the crowd of traders is called market sentiment.
The market sentiment is one of the three possible pillars for any trading strategy:
Fundamental Analysis / Trading the News
Reading Market Sentiment
For Forex and especially cryptocurrency traders fundamental analysis is much more difficult to apply than on the stock market. That is why these markets traders focus on technical analysis.
Bulls, bears and “dumb money”
Understanding the sentiment will let you know whether the crowd is optimistic (bull market), cautious or pessimistic (bear market) about a currency, stock or crypto. Identifying the current trend can help you predict the future overall market sentiment and will open sentiment-based trading opportunities.
Market sentiment works for all kind of markets, but it is very difficult to read. There are big players, such as institutional banks that can play against the prevailing sentiment, and seek for so-called “dumb money.” Wait until the crowd gets all in on a particular position – be it long or short – and use the trading power to incite a reversal.
Follow or go against the market sentiment
There are two possible strategies for using the market sentiment. You can go with the current and try to join the crowd or trade against the sentiment. The first strategy would include tactics involving the Fibonacci retracement tool, that can help traders profit from local price corrections.
The second strategy is all about hunting for reversals identifying support and resistance levels and taking into consideration the overall market sentiment to decide whether a breakout may happen.
Safe-havens play an important role when the market sentiment goes to extremes, or there’s an overwhelming uncertainty. Assets like gold, USD, CHF or JPY are considered an excellent shelter in case of too much risk. When more volatile assets are entering a bear market, traders (including the most prominent players) tend to seek these safe-havens, which automatically creates a bull market on ultrasafe assets.
The two most dominant emotions
Fear and greed are the most dominant emotions among traders. They are either afraid of losing money, or they want to earn more. Greed is overwhelming at market peaks when the bubble is created.
More and more people open the same long position on a hot asset be it a tech company, a currency of a fast-growing economy or a popular cryptocurrency. Just take a look at the most significant burst in crypto.
On the other hand, fear takes over when the market hits bottom. Traders are panicking underestimating the real value of an asset. A savvy investor can see an opportunity for opening a long position in these situations. However, trading against the trend always involves high risk.
How to identify fear or greed? When you see a trend accelerating breaking new resistance levels without any fundamental explanation – no critical information that would justify it – you may expect the greed is in action. The same mechanism works the other way around with fear. If during a downtrends support levels are broken without an apparent reason, the fear may have taken over.
How to spot “dumb money”
“Dumb money” is where traders are taking the most popular and the most obvious moves. Everyone takes the hottest position, more and more people join and put themselves in a very vulnerable position.
Let’s take a look at Forex, a market where individual traders compete with the largest banks to make successful trades. Forex is as susceptible to market sentiment. Both the biggest institutional traders and the smartest individual traders see where the “dumb money” goes. Then when there’s the right time, the most prominent players open an opposite position and take the profit.
You can find indicators that show the number of traders having a short or a long position on an instrument. It turns out that the market almost always suddenly goes the other way rapidly cleaning the trading accounts of those who “hang out with the popular kids,” that follows the crowd.
The market sentiment is very easy to read if you take a look back. Everything seems to be visible. Even if you are new to trading, you can easily spot greed taking over just when the bubble is about to burst. However, at the time of the bubble, hardly anyone notices it, even the wisest and most experienced traders.
It’s difficult to profit directly from fear or greed taking over. Even if you can read the past and present sentiment correctly, you need to know what the collective traders’ mood will be like tomorrow. Without any insider knowledge or ability to influence the prices with your trading volume it’s impossible to do it repetitively.
What is the best market sentiment strategy?
Keep away from it. If you don’t use the most popular technical analysis tools and don’t trade reversals, you can avoid the riskiest moves. If you don’t want to play the “dumb money” but avoid it, you can focus on developing an effective trading strategy. You don’t have to know where the “dumb money” will go. All you need to know is where the “dumb money” is usually and at present.
There’s no good way to chase sentiment. It doesn’t matter if you want to trade along with it or against it. Guessing the future sentiment is a risky move, that’s why avoiding market sentiment at all may prove to work best for you. Doing so you could develop a sustainable trading strategy with the right mixture of technical and fundamental analysis.
Don’t chase the sentiment. Invest not in the most popular assets, such as EURUSD, but the ones that are more off the radar. It’s best to find your own niche. Don’t be a herd trader. Choose one of the hundreds of instruments available at SimpleFX WebTrader, and use the best technical analysis UX and tools to learn how to trade effectively and don’t get disturbed.
According to the OECD (Organisation for Economic Co-Operation and Development), “recent developments have made financial education and awareness increasingly important for financial well-being”. On the topic of when one should start acquiring a financial education, one of the organization’s top recommendations was that “financial education should start at school, for people to be educated as early as possible.”
However, this is rarely the case…
In an interview published on the business news website CNBC, famous investor Warren Buffet declared that the biggest mistake parents make when it comes to teaching their kids about money is to “wait until their kids are in their teens before starting to talk about managing money when they could be starting when their kids are in preschool.”
For adults, one of the biggest challenges regarding their financial education is to face up to the fact that they’re not as financially literate as they think they are.
There is almost always a gap between what you think you know and what you actually know
Research conducted for the OECD showed that the global level of financial literacy is low, even amongst developed countries. The most worrying factor was that when people were asked to assess their level of financial knowledge, most marked themselves much higher than the level that they scored in the study.
This research is concerning for 2 reasons – firstly and most obviously, financial literacy across the globe is low. Secondly, as most people think they already know enough about finance, they don’t think they need to pursue further knowledge in the topic, thus keeping them locked into their poor level of financial understanding.
According to the Council for Economic Education, more than 1 in 6 students in the U.S. don’t reach the baseline level of proficiency in financial literacy, and nearly 1 in 4 millennials in the country spend more than they earn.
Financial education is thus important for financial wellbeing
Poor financial decisions can have a large and long-lasting impact – on not only your life, but the lives of people who depend on you, such as your family.
The first step to achieving financial wellbeing and financial literacy is to understand personal finances and basic economics – subjects that are admittedly dry for most people.
The first step is to understand your own money. What is your financial situation?
For instance, you should know:
How to set a budget
How to get your budget back on track if you do not follow it
Where your money comes from
What your expenses are
How much you can save
Where you can cut back on expenses
If you can pay back your loans and debts
Financial education is also important for pursuing a career in Finance
Beyond improving your personal life, financial education is also necessary if you want to work within the financial services industry, or trade for a living.
Let’s look at an example.
Most traders make the same mistakes over and over again, leading them to lose money over the long run. Why is that?
Many will say that it’s because of trading psychology and the incapacity of the trader to control their emotions and learn from mistakes.
But, above all, these traders are unprepared and lack discipline, as they do not realize to what extend unpreparedness and lax discipline costs them. A well-educated trader, on the other hand, knows full-well that preparedness and discipline are the cornerstones of good trading.
Sometimes people think that just because they read a handful of books and watch a few financial documentaries, they are ready to trade. Nothing could be further from the truth.
Imagine you need surgery. Would you think that you’re ready to do it yourself because you read a book about medicine? No! You would ask an experienced surgeon to do it because he has spent years learning how to do so.
It’s exactly the same with investing! While the stacks aren’t as high as surgery, you should prepare to spend some time to delve into the subject. Take some trading courses, read books, get some experience with a demo account before starting to invest real money in the markets.
How can a summer school help you increase your financial knowledge?
Whether it’s to support your career goals, or to be more aware of what you need to know about your personal finances to make more informed decisions, a summer school is a great way to set you on the right path.
A good summer school can provide you with a variety of modules on a specific topic to enhance your knowledge of the area, as well as provide great exposure to the field of study you want to learn more about. In any case, it’s a unique learning experience!
Thomas Whale from Oxford Summer School explains: “Attending a summer school is an excellent place for entrepreneurial-minded young people who can see an opportunity to improve a skill or learn something new that will benefit them in a real-world scenario, whether for work or play.”
Whether you choose to go to summer school, or you prefer to take the self-education route via books/online courses and other means, you should make learning about finance a priority – the earlier you start, the better.