Trading Secrets: Things most traders don't know

Trading is hard. Most people lose their money, because they don't know how to trade. Here is some open trading secrets that will help you avoid many common mistakes in trading.

Trading Secrets

Trading is a fun game and you could potentially make a lot of money in the financial markets.

15. April 2024 by Web Money Guy / Finance & Trading

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Trend following strategy

Remember the saying Don't fight the tape? This encapsulates the idea of trend following. According to this strategy, you should not bet or trade against the trend in the financial markets.

If the market as a whole is moving up, be a bull. In a bear market, bet on downward moves. This is the key to trend following.

How to operate a trend following strategy

This is probably one of the easiest day trading strategies to understand. Trading on the trend says you should:

  • buy assets when prices are rising
  • sell assets when prices are going down

In other words, the trader is expecting the movement of prices to continue in the same direction as before. Of course there may be times when there is no clear trend, and it may be difficult to understand if the market is moving up, down or sideways.

How to identify trends

If a trader has decided to follow trends he must also know how to spot trends. Trend spotting can be done using an array of techniques. This often involves looking at the market price in contrast to historic prices, using technical analysis to identify averages and possible breakouts.

The purpose of trend following is not to forecast markets. Rather, it is simply a hop-on hop-off ride along strategy. The trend is your friend.

Market trends can be spotted both in the short term, as well as medium and long term.

Spotting trends is a skill. Some will claim it is impossible, or that there is no such thing as trends in the market. In hindsight one can be tempted to define where the market has been trending, or where the market had a tendency of to move in a particular direction.

Trend following as a risk management strategy

Trend following is not just an investment strategy. Some traders like to use trend spotting as a way to cut losses.

They exit the market as soon as they identify a significant change in the trend and when the market moves against them. Trend following as such can be a method to minimize losses.

This strategy has worked great for many investors. They cut their losses early, and run with the profits.

Why trend following?

The market is made up of people, or software written by people, or even software written by software written by people. As such, human behavior with all our biases is highly prominent in the markets.

Humans are pack animals. The herding effect is easy to spot in markets. When a significant portion of the participants of the market have spotted a trend, some will jump on and the trend will continue. It's the bandwagon effect. If everyone is doing it, how can it possibly be wrong? Of course this is biased, but that is just how markets work and trend followers know this.

Conformity. People tend to look for information that confirms their views, rather than to look for evidence that is not in support of their held beliefs.

Trends are also self-enforced. Participants may choose to cut losses when markets are falling rapidly, and invest more into winners. Behavior such as this will add fuel to the trend.

What to look at in trend following

The most obvious one would be the price. Although there are many indicators that could provide some analytical feedback on the future movement of prices, the current price itself is the most important element of trend trading.

Trend followers are often obsessed over preserving capital, and from an investment perspective this is a very good philosophy to adopt. As we said, trend following is also a tool for cutting losses. This is why trend followers often reduce their exposure to the market when volatility increases.

Just as with any other strategy, trend following is not bulletproof, and as such one should adopt a method to properly diversify the portfolio.

Size of losses matter. Number of losses don't

It does not matter if you make n number of losses. The only thing that really matters, for trend traders and any other investor, is your overall gains. Your bottom line is all that counts.

Take care of your portfolio and manage your losses in a good way, and the profits will take care of themselves. This is of course easier said than done.

When not to be a trend follower

Trend following is viewd as one of the best trading strategies, but not all the time.

It will be hard to spot trends at times when the market is moving sideways and there is mostly low volatility. Some periods may not have any clear trends.

Remember that no stock, currency or asset can be seen in isolation. The market is a highly intricate and a very complex structure, and assets trends must be seen in relation to the trends of related markets. Since all markets are related in some ways, trend followers will need a broad picture view of the whole market, as well as looking at the sectors, verticals, closest competitors, and more.

You should also look at short term trends for one asset in contrast to mid-term and long term trends for the same asset.

This may be outside the scope of the trend following strategy itself, but every successful trend follower is probably doing this.

Trend following can be done with most assets, but it is highly popular for commodities, because there is a stronger trending tendency here than in most other assets.

Hedge Fund Secrets: How to become a billionaire

Ever thought seriously about how you (an ordinary kid) could become a billionaire? The key is: First, don't mess too much with the system, it'll destroy you. Second. Work with the system, and build your own hedge fund.

What is a hedge?

A hedge is typically a row of closely spaced shrubs, bushes or trees. The kind that is planted and trained to form a barrier or to mark the boundary of an area. The purpose? To define the area between neighbouring properties, or just for aesthetics.

The hedge in a hedge fund is simply a metaphor ment to illustrate that there has been some limits on risk. At least, that was the original idea. Today, many hedge funds are using trading strategies that do not hedge the risk at all.

You may have heard about George Soros, Ray Dalio, Steven A. Cohen, John Paulson, David Tepper and Michael Platt. All these people are or have been famous hedge fund managers.

The hedge fund portfolio

What can you expect to find inside a hedge fund portfolio?

  • a variety of assets
  • complex portfolio-construction
  • advanced risk-management
  • use of leverage
  • liquid assets
  • less volatile (as compared to say, S&P500)

Can I invest in a hedge funds?

You may be interested in investing in a hedge fund, but that will be very hard unless you belong to the financial elite, the class of sophisticated traders and investors. Hedge fund investors must be qualified investors and must understand the investment risks.

Hedge funds cannot be sold to the general public.

As a result hedge funds can be controlled with greater flexibility than say, mutual funds, and hedge fund managers usually avoid regulatory oversight, and may bypass licensing requirements.

While many mutual funds aim to simply keep up with the market, hedge funds are often on oa mission to beat the market, and even profit while the markets are falling.

How hedge funds are making money

Like any investor, hedge funds need an effective strategy to make returns. There are several strategies used by hedge funds, typically divided in these categories:

  • global macro hedge fund strategy
  • directional hedge fund strategies
  • event-driven hedge fund strategy
  • arbitrage hedge fund strategies which focuses on relative value

All the above contains risk and return strategies characteristic for hedge funds. A combinatory strategy of the mentioned may also be used.

If you have been following the performance of any hedge fund, you may have noted that the returns does not reflect the overall markets, and it's basically uncorrelated.

Risk management: The definition of a hedge fund

Running a hedge fund is all about managment of risk.

While hedge funds typically is designed to reduce exposure to certain risk, they are not immune to it.

Risk management is crucial part of hedge fund management. If they can manage risk well, there is a high probability that they will succeed.

If you want to learn about risk and how to manage it, you will find some of the most sophisticated strategies within hedge funds.

How to be a contrarian trader

Contrarians takes a contrary position typically opposed to that of the majority. As such, contrarian traders speculate against the market sentiment of the overall market.

The contrarian investing style is defined by trading in contrast to the prevailing market sentiment.

Why should you bet against the market? I have always regarded the trend as my friend.

The reason, according to contrarian belief, is that the crowd is biased, they are always doing something wrong, and there is exploits to be made for such faulty behavior.

Contrarians are not herd animals

Contrarians often regard the securities markets as mispriced. When the market is overly optimistic or radically pessimistic about an asset, sector or anything really, this belief can drive a price to levels that does not reflect reality of the underlying asset. It only reflects the biased view of the market.

The market will eventually catch up with whatever the contrarian knew all along, but before they do, contrarians move in and adjust their positions accordingly. Contrarians are people too, and they are prone to make mistakes as everyone else, and the contrarian view can be just as incorrect as that of the market.

Contrarians may prefer to short-sell investments, especially when they think the market have a hyped view of an investment.

Contrarians will investigate what the market thinks of an individual stock or any asset, a sector, and the overall market. They will not necessarily do the opposite, but if they act, they will usually do something different than what the market does.

Again, contrarians are not in the business of going in the opposite direction. They are just going in a different direction, or simply going their own way regardless of what other people think.

You may have noted contrarians often hols a pessimistic view of the market. The bearish view is typical of many contrarians, but not all. When the market is bearish, they will often point out that: this is nothing, just wait and see, it will get much, much worse. Or perhaps they will claim the market is overreacting, and that now is a good time to buy.

In many ways, the contrarian investor resembles the value investor and what they do also overlap. They are both searching for investments opportunities where there may be any mispricing. They both look for assets and sectors that may be undervalued by the rest of the market.

The hidden risk of contrarian investments

Contrarian investment strategies can be risky.

A contrarian is not just betting against the market itself. He is also betting that the market will eventually wake up and realize that they have been wrong.

But if the market is wrong about something now, they may also be wrong about this tomorrow. They may be ignorant today, perplexed tomorrow, and by next week it's panic and total collapse. Justified or not.

Even if you are right, you may still lose. As such, contrarian investment style needs not only take into account that the market is wrong about something, they will also need a risk management strategy that will protect their assets in case of further confusion in the market.

In the end, the price itself is what determines who is right and who is wrong.

Contrarians and the VIX

Contrarians depend on an array of indicators, one famous being the Volatility Indexes, especially the VIX, a.k.a. the Fear index. This index presents a measure of the market sentiment based on the price of options (high VIX equals pessimistic market, low VIX is optimistic market).

Psychologists in behavioral sience have shown that that the market tend to overreact to recent events. Past performance is never a certain indicator of future price movements. This is especially true with recent trends. When the market is panicing about short term effects, contrarians will see this in contrast with the long term.

Scalping and Arbitrage Secrets

Arbitrage traders identify price gaps from the spread in bid price and ask price, or between excnanges. Here is what you need to know about arbitrage and scalping.

In trader lingo, "arbing" is to exploit any change in price. As such, scalpers can be viewd as independent market makers which attempt to buy at the bid price and sell at the ask price.

If there is any gap between the two, and the scalper can execute both trades in a short period without any significant price movement, there is gains to be made.

Scalping is milliseconds

Scalping is not only best for day traders, but it should be done quickly. Usually a scalp trade will only last a few seconds, even milliseconds or less, sometimes minutes.

Whether scalpers are good for the market or not is another discussion. They do provide liquidity to the market and improves the overall flow of orders. At least that is a general view, but some are more critic of the practice. Arbitrage in itself is neither good or bad.

While you can do arbitrage trading with a lot of different assets, it is usually conducted in cases where there are huge amounst of money. There should be an option for high leverage and the liquidity must be very good in order for the scalper to execute the trade in the required time frame. The currency market is typically a market where many scalpers trade.

Scalp trading legal or not?

There are both legal and illegal ways to scalp trade.

Example of fraudulent use of arbitrage may be when someone is purchasing a stock shortly before they recommend investing in the same stock and then immediately after selling the stock. Similar to a pump-and-dump scheme (but not exactly).

The legality of scalping depends on wether the trader is an individual, professional trader, advisor or corporation. Furthermore, there rules on arbitrage trading may vary from between countries and within states.

Individual scalpers are trading spreads and they can sometimes benefit from the larger spreads.

Another group of "arbers" are the market makers, these are corporations or specialists who provide liquidity sometimes from within a platform they operate themselves.

Brokers in the spot foreign exchange business are also taking part in arbitrage trading.

Risk management in arbitrage trading

Risk management is very important for any arbitrage trader.

The point of scalping is not to hit a home run, but rather identify and act on hundreds of small trades that can be executed fast and bring profits.

They are not concerned with the number of losses, but the overall focus is that the gains must be larger than the losses.

Successful scalp trader must not allow accumulation of losses.

The Best Kept Real Trading Secret: Predicting Financial Markets is 100% Impossible

That's right. Markets are totally unpredictable.

You cannot predict what the markets will do next.

It's impossible.

So, should you just give up trading and try something else?

The thing is: EVERYTHING IS UNPREDICTABLE.

Everything.

The bad: The market cannot be predicted. The good: We can still try to forcast, and with luck you might even succeed.

You may not believe it (but then you would be wrong about that).

Markets are unpredictable. Most traders will not believe this. But it's the fact.

The good news: There are hacks, work-arounds, which are being used by most clever traders.

We cannot predict the future by looking at historic events. Even less so for the social parts of life, including financial markets.

Markets are unpredictable. Unforeseeable. Uncertain. Unstable. Erratic. Inconstant. Dicey. Incalculable. Capricious. Random.

Some dishonest people will deny this, and perhaps backing up their claims with a reference to the past performance of their own investments. Or even worse; they prove the predictability of markets using "science".

Truth can often be found in the fine print:

Past performance is not an indicator of future success.

Forcasting: How to do the impossible

You can't fly like Superman, and you can't foresee the future with absolute certainty. Yet, you can try at both - and survive.

Fortune telling is woo-woo. It does not matter if it is performed by a which with a crystall ball or by ecomoists.

Or as one famous philosopher pointed out:

Real magic (...) refers to the magic that is not real, while the magic that is real, that can actually be done, is not real magic.

Do not be fooled by those that claim they can predict the future with any level of certainty.

Remedy: What to do with your money

Technical analysis is flawed, and so is fundamental analysis and any other method based on historic data.

Don't expect any assistance from "cutting edge" fintech tools, artificial intelligence or with the use of big data. Don't base your investments on the advice from "helpers".

We can't predict. No tool or person can help us to pick winners. But you still have to decide what to do with your money.

By all means spend money if it will make life better, but hopefully you understand by now the value of saving.

Aim first to become free of any debt and build a buffer for any rainy days that may come. This will keep you peace of mind.

Next, be determined and begin accumulating money each and every month. Build a stack of digital cash in the bank (or preferably, elsewhere). As you probably can imagine, having tons of money and few obligations will provide additional options and freedom in your life.

Most people are not debt free and don't have a huge savings account. But if you do have a pool of money or valuable assets, you need to know how to protect them and possibly how to make it grow.

To answer the question then, what should you do with your money?

  1. First of all, don't listen to "experts".
  2. Determine what you want. Why do you choose to keep the money? Why not spend it all? Define why first.
  3. Risk management. What you should do, and do well, is to manage risk.
  4. Manage your losses.

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