Dealing with Forex Trading Volatility

The currency markets are generally considered to be volatile in nature. The volatility is usually magnified by the use of leverage by the participating traders. There are certain things that traders have to do to survive volatile markets. This is a short guide to surviving a volatile currency trading environment.

Trading Psychology

Trading psychology is about controlling your emotions. The mood of the trader can have a profound effect on how he or she views the market. Here are a few major psychological hurdles that are particular during volatile markets.

Deal with your losses

Sometimes you just have to admit when you are plain wrong about a trade that you made. If an extra volatile market, even holding on to a bad trade for an extra day can cost you plenty. It is better to admit when you are clearly wrong and cut a small loss before it can become a sizable loss.

Deal with your gains

It might seem silly, but you have to also figure out a rational way to deal with your winning trades. It seems simple, but winning trades can put you off balance by making you feel like you cannot make a mistake. It’s important to keep an objective eye, even if you are making a large amount of winning trades.

Know when to back off

Sometimes the market lacks any kind of sense whatsoever. It will keep pulling you in, and then taking out your stop and dragging your account balance down. It’s ok, to step back and leave the market for awhile until it settles down. There is money to be made every day.

Risk Management

There could be no better time to use proper risk management than during a volatile market. Risk management can save your trading account!

Position Sizing

When the swings are wild, trade smaller. The size of the moves will make up for smaller position size. A large position size will just make you feel nervous as the market whips around with your trade. This could make you do something you will regret later when the market takes off on your intended direction.

Correct use of Stops

Special care needs to be taken on the placing of stops in an overly volatile market. Most of the time, tight stops will not work at all in a wild market. Trades will need room to breathe. Otherwise traders can be stopped out often by price whipsaws. If using the proper position sizing, it is ok to use a wide stop to let your trade breathe.

Lock in gains often

Once the market moves in your preferred direction and your trade is in the money, do not hesitate to adjust your stop and lock in some of those gains. There is no shame in getting stopped out for a gain, large or small. When markets are out of control, you have to use every little edge you can get. Locking in your gains as often as you can will insure that you end up with gains rather than losses.

Mistakes to Avoid

There are some forex mistakes that traders need to avoid in general. Those mistakes can hurt 10 times as much if you make them in a volatile market.

Large Position Sizes

I cannot stress this enough, take a smaller position size. Take a position size that you could handle seeing terribly negative, if you had to. It’s not to say that you want to have negative trades sitting on your account, but having smaller position sizes will keep your head level if they come under pressure. You might not make a fortune on each trade, but your account will survive to see the next trading day.

Averaging Down

Averaging down is when you are in a losing trade, and you take another position to try to make your average entry price lower. This is a strategy that can work under certain conditions, but it is very dangerous in a volatile market. Most traders will try to keep averaging down because they expect that the trade will turn at any moment. The losses will get larger and larger, more than you might have ever imagined, and you end up with a blown account. It is generally a bad idea to average down at all, it usually results in disaster.

Picking tops and bottoms

Do not try to pick the point where you think price will turn around. This is one of the number one killers of trading account equity. Picking tops and bottoms has to do with trader ego. It is not necessary to beat the market by figuring out the turn. You can simply follow the trends and use reasonable stops and you will make money. You will find that volatile markets can surprise you on how far they will go, and how fast they will get there. Stay away from trying to pick tops and bottoms and avoid becoming a casualty of a fast market.

Summary

Take care of yourself as a trader. When markets are volatile, be conservative and follow the rules of the trading road. Volatile markets plus leverage can be painful to your account. There are old traders, and there are bold traders, but there are no old and bold traders. There is a reason for that!

Income Investing

Income investing, which aims to pick companies that provide a steady stream of income, is perhaps one of the most straightforward stock-picking strategies. When investors think of steady income they commonly think of fixed-income securities such as bonds. However, stocks can also provide a steady income by paying a solid dividend. Here we look at the strategy that focuses on finding these kinds of stocks.

Who Pays Dividends? 

Income investors usually end up focusing on older, more established firms, which have reached a certain size and are no longer able to sustain higher levels of growth. These companies generally no longer are in rapidly expanding industries and so instead of reinvesting retained earnings into themselves (as many high-flying growth companies do), mature firms tend to pay out retained earnings as dividends as a way to provide a return to their shareholders. 

Thus, dividends are more prominent in certain industries. Utility companies, for example, have historically paid a fairly decent dividend, and this trend should continue in the future. 

Dividend Yield 

Income investing is not simply about investing in companies with the highest dividends (in dollar figures). The more important gauge is the dividend yield, calculated by dividing the annual dividend per share by share price. This measures the actual return that a dividend gives the owner of the stock. For example, a company with a share price of $100 and a dividend of $6 per share has a 6% dividend yield, or 6% return from dividends. The average dividend yield for companies in the S&P 500 is 2-3%. 

But income investors demand a much higher yield than 2-3%. Most are looking for a minimum 5-6% yield, which on a $1-million investment would produce an income (before taxes) of $50,000-$60,000. The driving principle behind this strategy is probably becoming pretty clear: find good companies with sustainable high dividend yields to receive a steady and predictable stream of money over the long term. 

Another factor to consider with the dividend yield is a company's past dividend policy. Income investors must determine whether a prospective company can continue with its dividends. If a company has recently increased its dividend, be sure to analyze that decision. A large increase, say from 1.5% to 6%, over a short period such as a year or two, may turn out to be over-optimistic and unsustainable into the future. The longer the company has been paying a good dividend, the more likely it will continue to do so in the future. Companies that have had steady dividends over the past five, 10, 15, or even 50 years are likely to continue the trend. 

An Example 

There are many good companies that pay great dividends and also grow at a respectable rate. Perhaps the best example of this is Johnson & Johnson. From 1963 to 2004, Johnson & Johnson has increased its dividend every year. In fact, if you bought the stock in 1963 the dividend yield on your initial shares would have grown approximately 12% annually. Thirty years later, your earnings from dividends alone would have rendered a 48% annual return on your initial shares! 

Here is a chart of Johnson & Johnson's share price (adjusted for splits and dividend payments), which demonstrates the power of the combination of dividend yield and company appreciation: 

This chart should address the concerns of those who simply dismiss income investing as an extremely defensive and conservative investment style. When an initial investment appreciates over 225 times - including dividends - in about 20 years, that may be about as "sexy" as it gets. 

Dividends Are Not Everything 

You should never invest solely on the basis of dividends. Keep in mind that high dividends don't automatically indicate a good company. Because they are paid out of a company's net income, higher dividends will result in a lower retained earnings. Problems arise when the income that would have been better re-invested into the company goes to high dividends instead. 

The income investing strategy is about more than using a stock screener to find the companies with the highest dividend yield. Because these yields are only worth something if they are sustainable, income investors must be sure to analyze their companies carefully, buying only ones that have good fundamentals. Like all other strategies discussed in this tutorial, the income investing strategy has no set formula for finding a good company. To determine the sustainability of dividends by means of fundamental analysis, each individual investor must use his or her own interpretive skills and personal judgment - for this reason, we won't get into what defines a "good company". 

Stock Picking, not Fixed Income 

Something to remember is that dividends do not equal lower risk. The risk associated with any equity security still applies to those with high dividend yields, although the risk can be minimized by picking solid companies. 

Taxes Taxes Taxes 

One final important note: in most countries and states/provinces, dividend payments are taxed at the same rate as your wages. As such, these payments tend to be taxed higher than capital gains, which is a factor that reduces your overall return. 

Trading Double Tops And Double Bottoms

No chart pattern is more common in trading than the double bottom or double top. In fact, this pattern appears so often that it alone may serve as proof positive that price action is not as wildly random as many academics claim. Price charts simply express trader sentiment and double tops and double bottoms represent a retesting of temporary extremes. If prices were truly random, why do they pause so frequently at just those points? To traders, the answer is that many participants are making their stand at those clearly demarcated levels. 

If these levels undergo and repel attacks, they instill even more confidence in the traders who've defended the barrier and, as such, are likely to generate strong profitable countermoves. Here we look at the difficult task of spotting the important double bottom and double tops, and we demonstrate how Bollinger Bands® can help you set appropriate stops when you're trading these patterns.

An example of a double top in EUR/USD forming as longs.

A very tight double bottom leads to a 150 point explosion.

React or Anticipate? 

One great criticism of technical pattern trading is that setups always look obvious in hindsight but that executing in real time is actually very difficult. Double tops and double bottoms are no exception. Although these patterns appear almost daily, successfully identifying and trading the patterns is no easy task. 


There are two approaches to this problem and both have their merits and drawbacks. In short, traders can either anticipate these formations or wait for confirmation and react to them. Which approach you chose is more a function of your personality than relative merit. Those who have a fader mentality - who love to fight the tape, sell into strength and buy weakness - will try to anticipate the pattern by stepping in front of the price move.

Anticipatory trader will set an entry zone.

The strategy works if the trader is able to obtain an excellent entry.

The strategy runs the risk of failing.

Reactive traders, who want to see confirmation of the pattern before entering, have the advantage of knowing that the pattern exists but there's a tradeoff: they must pay worse prices and suffer greater losses should the pattern fail.

Patience has viture for the reactive trader.

Waiting for confirmation will often leave the trader buying the top.

What's Obvious Is Not Often Right 

Most traders are inclined to place a stop right at the bottom of a double bottom or top of the double top. The conventional wisdom says that once the pattern is broken, the trader should get out. But conventional wisdom is often wrong. 

Leaving the trade early may seem prudent and logical, but markets are rarely that straightforward. Many retail traders play double tops/bottoms, and, knowing this, dealers and institutional traders love to exploit the retail traders' behavior of exiting early, forcing the weak hands out of the trade before price changes direction. The net effect is a series of frustrating stops out of positions that often would have turned out to be successful trades.

A stop here is a big mistake.

What Are Stops For?

Most traders make the mistake of using stops for risk control. But risk control in trading should be achieved through proper position size, not stops. The general rule of thumb is never to risk more than 2% of capital per trade. For smaller traders, that can sometimes mean ridiculously small trades.

Fortunately in FX where many dealers allow flexible lot sizes, down to one unit per lot - the 2% rule of thumb is easily possible. Nevertheless, many traders insist on using tight stops on highly leveraged positions. In fact, it is quite common for a trader to generate 10 consecutive losing trades under such tight stop methods. So, we could say that in FX, instead of controlling risk, ineffective stops might even increase it. Their function, then, is to determine the highest probability for a point of failure. An effective stop poses little doubt to the trader over whether he or she is wrong.

Implementing the True Function of Stops 

A technique using Bollinger Bands can help traders set those proper stops. Because Bollinger Bands® incorporate volatility by using standard deviations in their calculations, they can accurately project price levels at which traders should abandon their trades. 

The method for using Bollinger-Bands stops for double tops and double bottoms is quite simple: 

• Isolate the point of the first top or bottom, and overlay Bollinger Bands with four standard-deviation parameters.
• Draw a line from the first top or bottom to the Bollinger Band. The point of intersection becomes your stop.

At first glance four standard deviations may seem like an extreme choice. After all, two standard deviations cover 95% of possible scenarios in a normal distribution of a dataset. However, all those who have traded financial markets know that price action is anything but normal - if it were, the type of crashes that happen in financial markets every five or 10 years would occur only once every 6,000 years. Classic statistical assumptions are not very useful for traders. Therefore setting a wider standard-deviation parameter is a must. 

The four standard deviations cover more than 99% of all probabilities and therefore seem to offer a reasonable cut-off point. More importantly they work well in actual testing, providing stops that are not too tight, yet not so wide as to become prohibitively costly. Note how well they work on the following GBP/USD example.

An anticipatory trader can survive.

More importantly, take a look at the next example. A true sign of a proper stop is a capacity to protect the trader from runaway losses. In the following chart, the trade is clearly wrong but is stopped out well before the one-way move causes major damage to the trader's account. 

This is clearly wrong but is stopped out well before there are damages.

The Bottom Line 

The genius of Bollinger Bands is their adaptability. By constantly incorporating volatility, they adjust quickly to the rhythm of the market. Using them to set proper stops when trading double bottoms and double tops - the most frequent price patterns in FX - makes those common trades much more effective.

Five Major Concerns in Transferring Money Overseas

Great amounts of money are being sent overseas everyday. Some send large and some small amounts. Some transfer abroad on a regular basis, whereas others may have to send a one-off payment overseas. What is important is that for every occasion there is a unique service that optimizes transfer factors such as cost and speed. One must know the best option for each case in order to get the best deal.

In any particular case of money transfer, there are five major concerns to look out for. These are: 

1. Cost: The most important thing for someone who wants to transfer money overseas is to find a deal which will give the most value for money. There are three different costs involved. Firstly, as the term international depicts, it's the matter of currency exchange rate. All international money transfers involve this stage and it is hence important to find the best deal. 

The second cost that many transfer agents may charge is commissions, which is usually dependant on the amount of money transferred. Remember that the exchange rate you get is crucial. Many companies that transfer money claim to be charge-free/commission-free but then give you a substantially worse exchange rate, meaning you get less value for your money. 

The third and most occasional cost you may acquire when sending money is the actual transfer fees, usually charged by banks.

In any case, when you want to compare two international money transfer services for cost purposes it is best to ask the golden question of 'How Much Euros/Yen/Dollars Will I Get For My Pound, Etc. After All Fees And Charges?'

2. Security: While small amounts may not involve high risks for transfer, larger amounts of money call for extra security measures. For this reason it is always best to work with those services which have been long in the business. One might consider the use of a colleague or a friend's past experience in a successful money transfer.

3. Transfer Speed: Another very important factor involved in transferring money abroad is the speed with which the transfer is conducted and the time it takes for the money to reach its destination. While some services offer transfer times as low as 20 minutes others may take days or even weeks to reach completion. It is therefore very important to find out about the transaction speed before committing to transfer the money. 

4. Choice of Destination/Destination Type: While many companies may be able to offer the cheapest or fastest deal to transfer money overseas many are often limited in the choice of destination countries which they can offer for the transfer. To find the right deal you must refer to a service that offers transfer of money to your desired destination country.

Other than the country to which you are transferring money, it is important to decide about the type of money you wish to receive at the destination, which may be in the form of a bank deposit, bankers draft, traveller's check, postal order, etc. Again it is important to consider the costs involved when choosing any of the above.

5. Transfer Amount: Many services tend to impose limits on the amount of money you are allowed to send, based on whether or not they are designed for large transfer amounts. This limit should also be considered when trying to choose the best method for overseas money transfer.

Now that you are aware of the main concerns in transferring money overseas, you can easily compare different services and find one that best suits your current needs.

Real Estate Investing Guide

For many people, real estate is the easiest to understand investment because it is simple, straight-forward and involves a fair exchange between a property owner (the landlord) and the property user (the renter).  As long as the hot water keeps flowing and the rent arrives on time, everyone is happy and benefits.  Investing in real estate is much more complex than this, though, because there are several different types of real estate investments including residential, commercial, and industrial, as well as real estate that trades on stock exchanges, which are called REITs.  This guide was designed to help you.

1. Real Estate Investing 101 for Beginners

When you invest in real estate, your goal is to put money to work today and make it grow so you have more money in the future. You have to make enough profit, or "return", to cover the risk you take, taxes you pay, and the costs of owning the real estate investment such as utilities and insurance.  This overview explains the basics of real estate investing for beginners to help you learn what to expect and how investors make money from their real estate properties. 

2. The 8 Different Types of Real Estate Investments

There are eight different types of real estate investments that new investors need to understand: Commercial real estate, residential real estate, industrial real estate, mixed-use real estate, retail real estate, REITs, mortgage lending, and sale/leaseback transactions.  Each has its own benefits and drawbacks. 

This basic guide gives you a brief explanation so you won't be intimidated or overwhelmed when you are examining potential investments and see the terms used. 

3. Where Is the Best Place to Invest My Down Payment Money?

If you are considering buying real estate, whether it is a primary residence for your family or an investment property, you need to know how to keep your downpayment money safe.





4. Which Is Better - Real Estate or Stocks?

As a new investor, do you ever wonder which is better: stocks or real estate?  Both have certain advantages and drawbacks but the answer may depend just as much on your personality and tastes as it does your portfolio.  

5. What are REITs? Are They Better Than Buying Property Directly?

Getty Images

One of the most popular ways to own real estate is through a special type of investment known as a REIT, which is short for real estate investment trust.  You can trade REITs just like stocks through a brokerage account and the dividends are taxed differently than dividends from stocks.

6. Should You Pay Off the Mortgage on Your Real Estate Early?

Some financial advisers tell you to send extra payments in to lower your real estate debt.  Others say you want to keep more money on hand so you have emergency funds.  

7. Using LLCs to Own Your Real Estate Investments for Risk Management

You should almost never, under any condition, own a real estate investment directly in your own name!  Most of the time, serious real estate investors own properties through something known as a limited liability company, or LLC.  These special types of companies can protect your personal assets from lawsuits and other dangers.  In fact, most wealthy investors own their home through an LLC as a risk management practice.  As a potential new real estate investor, it is imperative that you understand how LLCs work and why you may want to use them to hold your rental properties or other real estate investments ...

8. The Great Real Estate Myth

One of the biggest investments someone will make is a primary residence.  Unfortunately, few new investors realize that once you factor in the cost of insurance, maintenance, net interest costs on the mortgage and other expenses, your real rate of return after inflation on a home is roughly 0%.  That doesn't have to be the case but you should go into your first major real estate investment with your eyes wide open.

Forex Major Economic Factors

Unlike other trading exchanges such as the NYSE, NASDAQ, and other major stock trading organizations, trading in the foreign exchange market can be extremely volatile on a day-to-day basis. It is crucial that anyone who is going to invest in the Forex market be as informed as possible on the global economic news of the day that influences the market. There are numerous economic factors that influence the movement of a particular currency.

When you are considering investing in the foreign exchange market there are many economic indicators and factors that governments, as well as privately owned companies provide that can give an inside look at possible economic performance. When countries issue economic reports they not only show the country's particular policies and current events but also reveal the economic health of the country.

Many times a responsible and reputable broker can be a good source of economic news and give good advice on what particular trades may be good at a particular time. If you don't have the time to stay up on the most current reports, a good broker can be crucial to your Forex trading success by studying these reports and determining whether a particular country is in an economic decline or enjoying a major increase. The great thing about Forex is that you can make money either way.

News that is necessary for the Forex trader is of much greater detail than the typical investor is interested in or even cares to follow. When you are considering investing in a particular country's currency, a few of the main factors to look at include current events and the state of the economy in that given nation. Statistics such as housing, unemployment, inflation, budget deficits, and current political climate can all affect the value of the currency. As mentioned before, money can be made in positive as well as negative political climates. You can make money from countries that are experiencing tremendous political unrest and rampant inflation as easily as one that is fiscally responsible and experiencing great economic growth.

The Gross Domestic Product, known more commonly as the GDP, is another huge economic indicator that experienced traders look at intensely when considering trades. The GDP is the total market value of all goods and services that are normally produced within a particular country. Normally this figure is an annual one and is not given in shorter periods. Because of the volatility of the Forex market this is considered a lagging indicator that becomes more measurable after the particular country's economy has started to follow a unique trend. 

Other important factors for Forex trading include retail sales reports, which are the total sales receipts of all the retail stores in the country, industrial production that includes factories, mines, utilities and more, and the CPI or consumer price index. The CPI is the measure of the change in the prices of consumer goods in 200 different categories. This report can show whether or not a country is making a profit or losing money on their products and services. The exports a country contributes is are very important when looking at this indicator because the amount of exports can reflect a currency's weakness or its strength. 

As you can see there are a lot of factors that need to be considered when investing in foreign currencies. It can be fun and exhilarating, but doing your homework will always pay the largest dividends.

Trading with an edge

In order to be a successful trader, you need to understand that trading starts with having an edge in the markets.

The biggest mistake new traders make is assuming that making sole use of things such as indicators will allow them to become a successful trader.

There is much more to it. The basis of trading starts with identifying an edge in the market. Only after you have identified an edge should you then go on to use such things as indicators to help you make trading decisions.

What is a trading edge?

A trading edge in the financial markets can be described as a set of conditions that when present, give a higher probability of a trade working than not working.

An example of an edge could simply be identifying when the market is trending, in which case you base your trades on the direction of the trend. If you take trades in the direction of the trend, you have a higher probability of producing profitable trades.

Despite having an edge, there will be losing trades as well as winning trades. Trading in the direction of a trend does not guarantee a winning trade, merely a higher probability of a trade working out. The first trade that you take in the direction of the trend could be a losing one. However, taking a series of trades in the direction of the trend is likely to result in trades that win.

Winning and losing trades are randomly distributed

Fundamentally, winning and losing trades are randomly distributed, and a trader must take multiple trades to ensure they incorporate winning ones. If you base a series of trades on an edge that you have identified, then the probability of having winning trades increases over time.

A further example of a trading edge could also be that you are able to recognise when the market is ranging and so you can then buy at the lower boundary and sell at the upper boundary of that range. Notice in the chart below that a trend and a range have been identified in the same chart:

Building on a trading edge

Once you have identified an edge, the focus is how to recognise these market conditions more easily and how to trade in them. That is when you can start to seek signals from such things as indicators, to provide buying and selling signals based on these conditions.

Consider the following chart where the market has been identified as a ranging market: 

The edge in the above scenario, is that the price is trading in a range – the price is more likely to fall at the upper boundary and rise at the lower boundary. Based on this edge, you can use an indicator, such as the stochastic indicator that signals when the price has reached the upper or lower boundary.

These trading signals are still based on probability. In other words, if your indicator is producing a buying signal, then this does not mean the price will go up, it means that there is a higher probability of the price going up than going down in the current market conditions.

The truth is, once you enter the market with any given trade, you are at the mercy of the markets. This is where a system or a strategy comes into trading. A strategy is a set of rules that you trade by and those rules are based on identifying an edge and then trading accordingly.

This means that it does not matter if the trade wins or loses, because if you trade with a strategy based on an edge, then your trading system will produce winning trades over time that will make up for the losses. Of course this is not the whole picture, because you must take into account risk to reward and money management. However, when you have an edge, you have a starting point in which you can then begin to build a system.

Now that you have been introduced to the fact that successful trading is based on an edge, the following lesson will demonstrate how to start building a system or strategy based on the edge you have identified.