High frequency finance, with the analysis of tick-by-tick market data, offers new insights in how to trade. Before you continue reading, I want to caution you that over 80% of the traders in any one-year lose money. Of the 20% who ended with a profit, many were just lucky and are likely to lose money in the following year. Does this mean that it is impossible to make money in financial markets? No, definitely not – it is feasible to earn money on a consistent basis, but it is difficult.
The reason why you can make money is simple: during the course of one year, the price risk is a lot smaller than the profit opportunity. The price change from say the 1st of January to the 31st of December for a particular exchange rate is 10, 20 or rarely 30 percent. If you sum up all price movements larger than 0.05% during the course of one year and deduct transaction costs, then you could, with perfect foresight, earn 1600% without leverage - that is more than 50 times the risk of 30 percent, so a big opportunity to make money does exist.
Trading is so difficult because 98% of the volume in liquid markets is speculative; only 2% is fundamentally driven. The 98%, the speculative volume, is the major force of the market determining the price trajectory – you need to understand the behaviour of the speculative traders to make money.
What is covered in this Booklet?
In this small booklet I discuss how traders need to restrain their natural urge to open large positions. There is an abundance of trading opportunities. So for any one trading idea, it is better to reserve a limited amount of capital and to have a contingency reserve in case that the trading idea was premature.
I also discuss apparently irrational market movements that turn fundamentals upside down. They occur when an initially small price spike triggers a whole cascade of price moves fuelled by a sequence of margin calls. When market participants have large unrealized losses, any small price spike can trigger margin calls; the position closeouts increase the imbalance of buyers and sellers and fuel a continuation of the price move, which may last for only a few minutes or hours, but can also take days, weeks or even months.
Finally, I will cover a number of different issues from turning a losing position into a profitable trade through active management of the position to implementing stop loss strategy and trade diversification.
This booklet does not include any technical or fundamental analysis. In general, the usefulness of these methods is exaggerated. You might be shocked to read that I do not have a lot of faith in their ability to be good predictors of financial markets. These approaches scratch the surface and can only spuriously explain the market movements – they seem to work precisely because the coastline of price movements is so long. The tools are helpful because they provide a frame of reference and are a means of making your trading decisions more consistent: When you get bruised by big losses or your ego gets ahead of itself, you should stick to your trading strategy when it prints money.
Olsen Ltd is a research and development company and investment manager based in Zurich, Switzerland. Olsen has yielded practical applications and managed accounts and third-party products, investing in currencies as a separate asset class or as an overlay to an existing currency exposure.
Copyright © 2009 by Olsen Ltd
All rights reserved. No part of this work may be reproduced or transmitted in any form by any means, electronic or mechanical, including photocopying and recording, or by any information storage or retrieval system, without permission in writing from the publisher. No Investment Advice. The information contained has no regard to the specific investment objective, financial situation or particular needs of any specific recipient. OLSEN does not endorse or recommend any particular securities, currencies, or other financial products. The content published here is solely for informational purposes and is not to be construed as solicitation or any offer to buy or sell any spot currency transactions, financial instruments or other securities. OLSEN does not represent or guarantee that any content is accurate, nor that such content is a complete statement or summary of the marketplace. Nothing contained in here is intended to constitute investment, legal, tax, accounting or other professional advice and you should not rely on the reports, data or other information provided on or accessible through the use of this work for making financial decisions. You should consult with an appropriate professional for specific advice tailored to your situation and/or to verify the accuracy of the information provided herein prior to making any investment decisions.
Editors’ Picks
EUR/USD hovers around nine-day EMA above 1.1800
EUR/USD remains in the positive territory after registering modest gains in the previous session, trading around 1.1820 during the Asian hours on Monday. The 14-day Relative Strength Index momentum indicator at 54 is edging higher, signaling improving momentum. RSI near mid-50s keeps momentum balanced. A sustained push above 60 would firm bullish control.
GBP/USD holds medium-term bullish bias above 1.3600
The GBP/USD pair trades on a softer note around 1.3605 during the early European session on Monday. Growing expectation of the Bank of England’s interest-rate cut weighs on the Pound Sterling against the Greenback.
USD/JPY drops back below 157.00 on Japan's verbal intervention
USD/JPY has come under moderate selling pressure below 157.00 in the Asian session on Monday. The Japanese Yen lost ground to near 157.70 following Japan’s ruling Liberal Democratic Party's outright majority win in Sunday’s lower house election, opening the door to more fiscal stimulus by Prime Minister Sanae Takaichi. However, JPY buyers jumped back and dragged the pair southward on FX verbal intervention by Japan’s Finance Minister Katayama.
Editors’ Picks
EUR/USD hovers around nine-day EMA above 1.1800
EUR/USD remains in the positive territory after registering modest gains in the previous session, trading around 1.1820 during the Asian hours on Monday. The 14-day Relative Strength Index momentum indicator at 54 is edging higher, signaling improving momentum. RSI near mid-50s keeps momentum balanced. A sustained push above 60 would firm bullish control.
Gold sticks to gains above $5,000 as China's buying and Fed rate-cut bets drive demand
Gold surges past the $5,000 psychological mark during the Asian session on Monday in reaction to the weekend data, showing that the People's Bank of China extended its buying spree for a 15th month in January. Moreover, dovish US Federal Reserve expectations and concerns about the central bank's independence drag the US Dollar lower for the second straight day, providing an additional boost to the non-yielding yellow metal.
GBP/USD holds medium-term bullish bias above 1.3600
The GBP/USD pair trades on a softer note around 1.3605 during the early European session on Monday. Growing expectation of the Bank of England’s interest-rate cut weighs on the Pound Sterling against the Greenback.
Bitcoin, Ethereum and Ripple consolidate after massive sell-off
Bitcoin, Ethereum, and Ripple prices consolidated on Monday after correcting by nearly 9%, 8%, and 10% in the previous week, respectively. BTC is hovering around $70,000, while ETH and XRP are facing rejection at key levels.
Weekly column: Saturn-Neptune and the end of the Dollar’s 15-year bull cycle
Tariffs are not only inflationary for a nation but also risk undermining the trust and credibility that go hand in hand with the responsibility of being the leading nation in the free world and controlling the world’s reserve currency.
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