From a speculator to an investor
Based on a presentation during КievExpo 2011.
Part 1. FOREX
Stock market trading has been rapidly developing in recent years in the post-soviet space. But quite a few people are unclear as to what they face and where and how they can really make money. Like the majority of others, I had to start from the ABC - trading based on technical analysis in the forex. I have ended up with stocks - but this will be discussed later.
We live at a time when practically all markets and trading instruments are available to us for trading. Their appropriate selection is a key to the issue of how fast and easily a trader reaches success - the ability to make profits consistently and confidence in profitability of their trading.
Alexander Elder, a famous trader and analyst, offered the following classification of markets in the order of lesser preference:
1. Stocks
2. Futures
3. Options
4. Forex
This article will not deal with options as they are quire a peculiar instrument where trading is very different from traditional instruments. Besides, different markets have their own peculiar features.
Now each of us is at their own stage of trader development. So I will say a few basic, in my opinion, things. Some points might be incomplete to some degree but I will try to show this from the viewpoint of a real trader rather than a theoretician - what I have experienced and how I understand it.
You can see advertising of fast profits at all lamp-posts, in the subway, even on TV - all roads take you to the FOREX.
In two words, what is it? In general, forex is a system for exchange of money from one currency into another used mainly by banks or other large entities for their own purposes.
How does this affect us, then? The matter is that we, private investors and speculators, are also offered an opportunity to 'participate' in this process and make our living. However, our peculiar realities connected with this market impose a number of limitations...
The thing is that most of us trade through dealing centers which, by definition, do not send your orders to the market and simply let you trade within their own structure. It means you simply gamble based on prices relayed by the DC (there simply is no common trading center and, as a result, unified prices) and the DC carries out its trading activity in the foreign currency market regardless of positions of simple traders - clients of this dealer. This all is stipulated by contracts you sign - just read more carefully and then you cannot make and claims related to prices which may be vary in different DCs at a certain moment of time.
So, you simply are players within a DC and have nothing in common with real exchange trading. As a result, you cannot exercise influence on the market and play in somebody else's field by somebody else's rules. I remember an interesting saying in this respect: 'You are trying to gather wealth by running from one currency exchange outlet to another with different exchange rates'.
Scalpers and intraday traders sometimes manage to win big but, eventually, this 'running around' may simply cause a 'burn-out'. So, it is more practical to trade medium- and longer-term in this market. Here, however, you'll have to accept relevant risks - stop orders - so you are not kicked out of the market by small moves. If you manage to find a system with a consistent mathematical expectation (the profit to loss ratio) of 3:1 and higher, there is nothing else for you to look for - this is your market, work here and enjoy your life.
For those who still have to achieve this, we will deal with ways of improvement that have taken us to such a concept as SNIPING - direct hit in the price.
Nevertheless, the FOREX market has a few unquestionable advantages, including a rather low cost of 'admission ticket' for you to master the ABCs of exchange trading. You can even open a micro real account of 10 or more dollars and train to get trading skills.
Besides, many DCs now offer access to such instruments as CFDs - contracts for a difference. I won't dwell in detail but here you can 'simulate' trading stock market instruments - stocks and futures. It means, apart from currencies, you can trade (allegedly) oil, gold, metals, grains... up to stocks of individual companies (only a small number of them). This all is useful to develop your trading skills, monitor market tendencies. But if you are going not simply to play but to really make money in the market - you'll have to switch to trading real instruments such as futures or stocks. We will discuss below why.
Let's have a look what can help us determine tendencies of market movement and possible reversals. Here I will not cover general market indicators because reactions to them can be very unexpected and a lot of news is often played on before release - this is what strategies of market professionals are built on as they have large funds and access to information we will get a little later. Later analysts will explain everything to us (but where were they before?). Some might have had the right guess - this is their big time.
So, apart from the price chart itself (it can vary from different dealers), it uses a host of indicators - to any taste. This is an example of what you can see in your monitor (a figure from the Academy's forum):
But all these indicators are built on two parameters: price and time. It means the idea behind analysis is built on the existence of certain regularities in behavior of the market price, the assumption that everything repeats based on some universal laws or psychology of the market crowd. It appears that we create our trading systems based on statistical observations of the past and use indicators which help in in decision-making or price patterns that work out with a certain probability. The more confirming conditions we see, the likelier the change of a successful trade.
Therefore, given the absence of sufficient specific information available in the futures and stock markets we are simply forced to build our trading strategies primarily on technical indicators, waves, channels and other elements.
In general, as the path of technical analysis suggests, according to the Masterforex-V concept, we look for a coincidence of several important parameters (synthesis of binary regularities) and enter a trade (further details - in the Academy's forum). This is approximately how we are looking for exits:
As concerns protecting interests of a private investor or speculator, there is only what has been stipulated by the contract with the dealing center (only a few people work through a broker as requirements are very different). We practically have no laws and special agencies that would protect traders from bad faith actions of a dealer so different incidents often take place (a list of such DCs is available at the Academy's forum).
This is why we apply SNIPING - a direct hit in the price - in markets with transparent enough structures and a necessary volume of information which we will cover in the next issues...
Igor Vasev, Head of the Futures Trading and Stock Exchange Faculty
