Forex: Trusting Probabilities and Mastering Psychology


Introduction

Traders, and especially new traders, seem to not grasp the fact that trading currencies is a
game of numbers and where mastering the psychological states are essential to good trading.
Even seasoned traders with an excellent track record seem to forget the law of numbers and
give no thought to the psychological aspects of trading.
Traders who understand the law of large numbers, make it work for them to benefit their
trading strategies and ultimately their profitability.

The Law of Large Numbers

The law of large numbers states that if the probability of something to happen is X%, the result
will approach closer and closer to that probability the more attempts are made.

Take a small test:

A coin will be flipped 100 times. With each tale, you will win R0.50 and with each head you
forfeit R0.25. (Flipping a coin has a 50% of landing on tales)
Would you participate in this adventure?
If not, then you are no trader / entrepreneur and can only operate in the safety and comfort of
a steady job – you are overly risk averse. The trader with an appetite for risk on the other hand
has an expectant return of: Profit = 100*(0.5*50 – 0.5*25) = 100 * 12.5 = R1250

In the given example above, the AVERAGE profit is R12.50 per flip. But that does not mean that
R12.50 will be made with each flip. The trader could lose on 10 flips in a row, which might
shaken his / her confidence, but this losing streak will NOT change the expected profit of the
game in the long run.

The lesson from this small test is that with each coin flip, EDGE will emerge to produce a net
winner. The trader needs to internalize and accept uncertainty: the result of one trade is not
guaranteed, not even for the best trader in the world. The trader needs to preset conditions to
exit losing trades to be able to trade again and again. This also means that not every trade will
stretch to 1 000 pips and the trader will need some way to estimate where to exit from a trade.
To take probability even further, a compromise between Stop Loss and Take Profit levels are
required as distance from the starting point. A target of 500 pips will not be obtained regularly
and there should be “breathing space” for price movement. Price movement will ultimately hit
your Stop Loss, and if to wide large losses will be suffered.

To have more winners than losers in trading requires everything….. chart analysis,
understanding market momentum and mood, macro analysis, risk and money management.

THE item that that makes all of this possible: emotional control and clarity of mind. The trader
must find a system or strategy and stick to it at all times.

Trading Psychology

Looking at a trading chart the trader has to realize that the chart has no feelings and neither
does the chart care about the trader. The currency market is driven by a mixture of
fundamental forces and the aggregate “belief” of the market participants. The market
participants are humans and computer programs developed by humans. The interpretation of
the market may be polluted by wishful thinking, reality check problems and a variety of other
human emotions.

In trading, the majority of participants are doing the wrong things or following incorrect
actions. That is why there are so many traders in the market losing money. Some of these items
include the setting of to tight stops or no stops at all, using to high leverage, chasing the
market, not able to “see” clear trade setups, using items such as “head and shoulders” as
magical formulae and trading with technical indicators as if the indicators will accurately predict
the future. It is not wrong to use these items, but only in a responsible manner. These items do
not provide the trader with an edge – nearly everybody else utilize them. What is required is a
deeper understanding of the market and to not fall victim to the psychological traps of denial,
avoidance, cognitive capture / information bias, fear, greed and other mental toxins providing a
distorted reality. The trader must be able to look at the chart without wanting to see a buy or
sell opportunity. Just notice “WHAT IS”. Ask if recent candlestick patterns are convincing? Is this
part of the bigger picture or is something seen which looks bigger than it really is? Look at the
15 minute chart and be convinced that the price can’t go higher while reality is a 5 year low.

What is required from the trader is to understand and trust large number probabilities, keep
losses small in relation to profits, avoid setting stop losses to tight, find a system with a small
edge that would suit a particular trading personality, aim for an 80% win rate and a 20% loss
rate, look at the market without emotions, ego, psychology and manage stress. This way the
trader can enjoy process without ever stop learning. No trader can stop learning, reading,
working on self, strategies and understanding the market.

Conclusion

The aforementioned discussion is all good, neat and well, but also need to be put in practice
and practically applied.

One of the best suggestions to approach the market without fear, misgivings or greed is to have
a well-documented trading plan. A trading plan that sets out the traders’ goals which starts
from the ideal situation to be achieved and cascaded down to practical small units to be
achieved. In addition to the personal goals to be achieved, the actual strategy on the currency
pairs to be traded must be included. This strategy will spell out which currency pairs will be
followed, the type of analysis (fundamental versus technical), which indicators will be used, the
time scale, on which circumstances will entry and exit points be based, the leverage, risk and money management. These rules need to be followed very meticulously and record must be
kept in a disciplined manner.

Utilizing a trading plan should be the only routine that need to be followed during the trading.
It should be followed religiously and the results recorded. The trading plan need to be analyzed
and the trader must learn from mistakes. Mistakes must be used to tweak the trading plan to
better the plan. The habit to follow the trading should be reinforced with a positive mindset
and on a conscience the trader must address any and all psychological issues.

With the trading is it possible for the trader to act without emotions and see what the factual
situation on the chart is. By repeating the trading plan over and over (big number probability)
the trader will become profitable in the long run. By repeating the trading over and over the
trader will overcome psychological attachments fear, greed, anxiety elation and any other
human instinct or emotion which could have a negative impact on profitability.

What differentiate C2Wealth Training from the rest?

Introduction

In the Forex industry there are many honest and many not so particularly honest persons

working. The same notion may be applied to the training provided in the industry.

Apart from the honesty and integrity factor, there is also the notion that every service provider

considers his or her service to be different from the pack. And again, the same may be said of

the training service providers in the Forex industry.

Being different from the rest of the pack does not implicate dishonesty. Each service provider

places different levels of emphasis on different items. This does not mean that a service

provider is wrong – the approach is different from the rest of the pack.

It is of critical importance to be able to define what is different in the service that is

being delivered. One cannot just claim to be different and therefore call the service to be of a

better quality and standard. The difference must define and presented to be able to offer the

potential a reasonable chance to make an informed decision.

C2Wealth is a training service provider and prides itself to be different from the rest of the

industry. We have been able to define our difference and is proud to present the reasons for

being different in this article.

The defined difference in presenting training to potential investors stand on two legs – firstly,

we recognize and accepts the fact that there is a difference between education on the one

hand and training on the other hand. Secondly, we recognize the fact that newcomers to the

industry need to find a business from which they potentially can make a profit and a sustainable

income from they may live.

Let us look at these two aspects separately:

Education versus Training

At C2Wealth we believe that there is a difference between education and training. This

difference is built into our programs, which have been developed with this difference in mind.

But what is difference between education and training?

C2Wealth see education as a process of systematic learning that develops a sense of judgement

and reasoning. Training implies the act of imparting a special or behaviour or skill to be utilized

on an operational level.

In this difference we recognize that education has a wider perspective and is comparatively

longer than training. Training on the other hand is the further enhancement of skills

development which improves performance and productivity in the current environment.

 

We therefore have a strong believe that class-room based interventions are more effective and

productive than technology based and self-study actions. The contact and exchange between

the learner and tutor cannot be fully replicated in a technology-based environment. We also

believe that that self-study is most of the time done in an unstructured manner, is time

consuming and with no feedback from a teacher is less effective. Over time, self-study will be

less cost effective than classroom-based interventions.

It is true that learners do not learn at the same speed in a classroom environment. A seasoned

tutor can, however, with the frame of reference of previous experiences make a big difference

and ensure that all learners receive equal interventions.

At C2Wealth we guard against being overly theoretical. Theory is acknowledged, but the

emphasis is on practical education. Learners need to open a demo account beforehand and

practice what is being taught on the demo accounts. Functionality is not the only aspect that

receives attention – we teach the wider picture and show what impact actions have on each

other. For instance, we teach learners the relationship between lot size, margin and equity and

how a change in the one will affect the other.

One the more serious problems we have identified in the Forex training industry is the fact that

there is tendency amongst certain training service providers to provide limited functional

training and mainly focus on teaching a specific strategy. In this lies a huge problem. In the

Forex industry there is no such thing as “one size fits all”. One strategy cannot deliver positive

results for all. Every trader must find his or her own niche and comfort zone. Traders does not

react the same to the various technical indicators. Trader personalities differ and trading styles

differ. Certain strategies require the trader to be on the trading platform constantly with no

room for free time. C2 Wealth aim to avoid this environment and teach learners to become

skilled in all trading functionalities and independently arrive at their own trading strategy.

There are various training programs available after completing the initial foundation training

course. These training interventions are aimed the further enhancement of the skills acquired

during the foundation education phase. The focus is on practical and specialized skills and can

thus, be training and not education.

We are satisfied that after completing our initial 3 day Forex Foundation course, the new trader

will be able to independently make a judgement call to enter into a transaction after careful

analysis of the market to identify entry and exit points and practice sound risk and money

management.

Forex Business Approach

The new trader must realize and understand from the outset that Forex trading is not a “get-

rich-quickly” scheme. Unfortunately, many new traders fall for the trap of cheap propaganda

on the web or by other media that Forex trading holds the magical key to untold riches in an

easy manner. Nothing can be further from the truth. Treating Forex trading like a trip to the casino will end in the same manner – all money will be lost. Traders should be calm and

calculating with a goal of making profit. Not hoping for that one “lucky draw” that will bring the

riches.

At C2Wealth we educate learners the entrepreneurial aspect of trading. Trading, like any other

type of business has associated costs. The trader must aim to bring in more revenue with

winning trades than funds going out with costs. When costs get out of control, money will be

lost and the Forex business will go under.

What are then associated costs of trading? Here is an illustrative list:

  • Losing trades
  • Broker spreads and commissions
  • Trade roll-over and swaps
  • Computer hardware
  • Internet costs
  • Other office equipment

Of the six items listed above, the first one, namely losing trades, has the single biggest influence

and has the possibility to totally wipe out the account.

Losing trades is a fact of life in the Forex trading business and traders must learn to accept

losses and learn from it. The approach at C2Wealth is to educate traders to combat and restrict

losing trades by means of the following:

  • Have a well-documented trading strategy and stick to the strategy
  • Develop from the trading strategy a trading plan and treat the plan as the Forex Business Plan
  • Be the eternal student with an unquenchable appetite for learning
  • Stop the search for the trading “Holy Grail” – it does not exist
  • Be careful and mindful of the tips and good intentions of the “trading experts”
  • Invest in yourself and not trading bots

The foundation education also stresses the importance of risk and reward. The risk and reward

strategy that we teach emphasize a focus on more winning trades significantly larger than the

losing trades. With a risk to reward ratio of 1:2 a winning streak of 35% – 40% will make a

decent profit. This is more achievable than trying for a high percentage of 70% – 80% of the

time with a lower risk to reward percentage.

In the foundation training time is spend on calculations required to better understand where

profit and loss will occur. Learners are taught the calculation of pip values, broker spreads, lot

sizes, margin, equity, free margin and margin percentage. Classroom exercises and homework is

given to ensure an understanding of what make up the profit or loss of a trade. We are of the

opinion that merely showing on-line calculators for this important function is not efficient.

 

Types of trader also has an influence on trading costs. Scalpers and day traders normally close

their trades before end of day. Swing traders and position traders hold their positions open for

much longer periods – days, weeks and even months. The latter type of trading also incurs

costs, namely roll-over and swaps. These items are the cost that arises in the form of interest

between different banks from different countries (not central banks). Depending on the

interest differential between banks the trader must either pay interest or receive interest.

C2Wealth ensure through foundation education that the trader is aware of these facts for

interest can become a major cost element.

Trader expectation also need to be managed. C2Wealth provide ample examples of prudent

funding of accounts. An expectation to earn a R1 000,00 per month from a R100,00 account will

not be met. With prudent funding comes the importance of correct lot sizes, type of currency

pair to be traded (spread costs) and the use of risk management items.

Forex trading is not an easy scheme, but requires hard work, dedication and discipline. Forex

trading must be treated as a business and not like a casino game. Trading skills are honed when

operational trading is consistent with a documented trading plan and losing trades are seen as

learning opportunities.

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Future Forex Trading to be Blockchain Driven?

What is Blockchain Technology

By now, we are sure that everyone has heard of cryptocurrencies and Bitcoin, but not everyone
knows about blockchain or understands what exactly it is.
A basic way to think about it is as a public ledger of all the transactions that took place in the
cryptocurrency

For the uninitiated, a ledger is simply a record of something — whether it be trades executed
by traders, or financial transactions to buy goods and services – and as the amount of ‘data’ the
world now produces continues to grow at parabolic rates, people’s ability to use and
understand that data is lagging behind.
Essentially, blockchain is a decentralized and publicly available register of all data in the
network that is open for viewing to all users at all times, but no one can edit or alter any of the
information that has already been recorded in the database. This is achieved by
cryptographically securing the network which makes it practically unbreachable and is exactly
what makes the blockchain technology so powerful.
It’s a fully transparent database of all the transactions and there is literally no space for any sort
of falsification to take place. The blockchain ledger is constantly updated as new transactions
are recorded and is automatically distributed to all of its users.

Forex Complex Problems

Forex currency trading involves the trading of one currency for another. The trading takes place
on a global decentralized network. Important in the trading is the use of middlemen and the
settlement of transactions post the closing of transactions.
Foreign currency exchange is a nightmare because it has multiple co-dependencies and parties
with separated ledgers to keep all the transactions in place. The system relies on regulatory
agencies, monopolies such as SEPA and SWIFT, brokers, traders and banks all over the world to
perform a simple transaction.
Corruption at any level of a centralized organization can cause distortion across the business
and consequentially, can cause distortion for all its connected nodes (clients, employees,
vendors etc.). In the world of FX trading, manipulated transactions are difficult to detect due to
the industry’s Over the Counter (OTC) nature and vast depth.
The system is clunky and relatively expensive, operating on dispersed, decentralized exchanges
with duplicate processes, a lack of standardization, an emphasis on direct relationships and
increasing capital requirements. Although the infrastructure has radically improved over the
past few years with the introduction of new trading venues, greater liquidity, algorithmic execution and improved data aggregation, the industry still regards settlement risk as one of its
greatest threats.

Solutions for the Problem

If we look at the forex market, there’s no doubt that the emergence of online and
mobile trading platforms such as MT4 has made the foreign exchange more accessible to
investors. The same cannot be said for major institutions, however, who still need to push
transactions through a number of middlemen while paying a slight fee for the privilege.
It was with this in mind that Goldman Sachs applied for a patent on a blockchain-inspired
ledger, which could quickly process forex trading transactions without charge.
The application, which was published in the autumn of 2016, outlined a distributed ledger that
would ultimately revolutionize this marketplace, while also potentially introducing a new,
Bitcoin-sequel digital currency for traders.
Goldman Sachs is not the only bank experimenting with Blockchain, but they’re among the
first to apply this technology to forex market trading. Once the patent is applied and rolled
out, it would create a new model for trading currencies in the digital age, and one which
eschewed the need to send funds to an intermediary foreign exchange settlement service
while the transaction is being completed.
With blockchain technology, it is possible to eliminate all the bad – complexity, security and high
cost, and emulate and exponentiate all the good: instant international currency conversion that
is secure and affordable.
This is possible because by being open, records are held in public: the KYC, transaction and
contracts are publicly available data. It means that regardless of the currency type, money is
ultimately being held in all currencies and in multiple accounts by default. With nothing to
convert, there is no money being lost.
Investors could still use the MT4 app to execute orders, they would complete transactions
by connecting to a decentralized and distributed ledger that optimized market access. This
would also allow for direct, real-time settlement for all traders while creating greater
accountability and transparency in relation to individual orders.

Last Thought

Blockchain can be applied to any number of products and markets, and the forex market is
no exception. Given this and the imperfections of the current model, which is
relatively complicated and opaque, it’s only a matter of time before this technology will
revolutionize FX trading and the way in which investors access the market.

Rollover Interest in Forex

Introduction

Overnight interest is either paid or earned on all open positions at 17h00 Eastern Standard Time (EST) – which is 22h00 South African time. The time might vary between some brokers. This interest, also called rollover or swap, will either be credited or debited on the full size of the open positions and is also dependent the established margin and position in the market. Depending on the interest differential, interest will be either received or paid.

Description of mechanics

The interest fees are called rollover, because it occurs when an open position from one settlement date is rolled over into the next settlement date. Rollover transactions occur automatically if the open position is hold past the change in value date. Behind the scenes, the settlement occurs in two business days. Thus, if its Mondays before 17h00 EST currencies are trading for value on a Wednesday, so that after 17h00 EST on Monday the trade date becomes Tuesday and the trade is traded for value on a Thursday.

Trades that are opened and closed before 17h00 EST are not liable for rollover as there is no change in settlement date.

Wednesdays carries a 3 day rollover. On 17h00 EST, the value changes from Friday to Monday, a weekend rollover which means a three day rollover (Saturday / Sunday / Monday) which means the rollover costs / gains are going to be three times as much as any other day.

Why does rollover Interest Credit or Debit Occur?

Trading with currencies is trading with cash. Going long with a currency is similar to holding a deposit in a bank and interest will be earned. Going short on a currency is similar to borrowing money on which interest is to be paid. With traded currencies the relationship is more complicated. With a currency pair, a currency with a positive balance is being hold (currency going long) and a currency with a negative balance (currency going short) is being held simultaneously. The difference in the interest rate of the two countries is called the interest-rate differential.

Being credited or debited for rollover is dependent on two factors: 1) the position being hold (long or short) and 2) the interest-rate differential between the two currencies in the pair being traded.

Every currency trade involves borrowing one currency to buy another currency. Therefore is interest rollover charges part of Forex trading. Interest is being paid on the currency borrowed and interest is being earned on the currency being bought. Effectively, interest is being earned or paid depending on the direction of the trade.

Currency being bought with a higher interest rate than the one being borrowed will result in a positive net differential rate. Funds will be earned. Selling a currency with a higher interest rate than the currency being bought will result in a negative net differential, and interest will be paid for the rollover. The rollover costs/credits are based on the position size and the larger the position size, the larger the cost or gain will be.

Interest rates are not cast in concrete and are changing constantly with changing economic conditions.

Can paying swap rates be avoided?

Normally, there are three ways to avoid paying swap rates:

1.      Trade in the direction of positive interest

Trades can be entered in the direction of the currency that gives positive swap. But only focus on this when there is a history of positive results

2.      Trade only intraday and close transactions before 17h00 EST

This way swap would be avoided. This strategy should only be employed because of trading strategy and not because of swap considerations.

3.      Open a swap free Islamic Account offered by some brokers

These particular accounts are run in full compliance with Islamic beliefs and the policy of no interest to be paid upon business transactions.

Finding rollover rates on trades

Current rollover rates are available in MetaTrader 4. Find the rates from the following path:

  • Open Market Watch (Ctrl + M)
  • Click Specifications
  • Scroll down to find:
    • Swap Long; and
    • Swap Short

A positive number will indicate interest to be received. A negative number will indicate interest to be paid. If both numbers are negative means that interest rates are nearly the same.

Conclusion

Rollover swap rates are a reality when trading currencies. The trader needs to take this cost seriously to ensure that accounts stay profitable. If possible, avoid the paying of rollover fees and if rollover fees are unavoidable ensure prudent funding of accounts.