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Wednesday, July 17, 2013
solid strategies for investing money
Investing has been a massive exercise in frustration for millions of Americans over the last decade or so.
Two market crashes in 12 years drove many people away from equities. Now key U.S. stock market indexes are at or near record highs again, after a strong 2012 rally that has spilled into 2013.
Two market crashes in 12 years drove many people away from equities. Now key U.S. stock market indexes are at or near record highs again, after a strong 2012 rally that has spilled into 2013.
The
average domestic stock mutual fund rose 15% last year, the third annual
gain in four years. Meanwhile, the hunger for perceived safety has
driven interest rates on bonds and other fixed-income securities to
record lows. It's a backdrop that seems to cry out for a complex,
headache-inducing game plan.
But in fact, the best strategy for many people may be just the opposite: Focus on the basics. Mainly, keep sight of the things you can control to reduce your mental stress and improve your odds of long-term success.
Here are four strategies for keeping it simple:
Keep it balanced. You say you can't decide how to build and maintain a diversified portfolio? Then don't bother. Let someone else do it for you. That's the beauty of "balanced" mutual funds — portfolios that always own a mix of stocks and bonds.
A balanced or "allocation" fund is the simple, elegant solution for people who know they want to be in financial markets for the long haul but don't have the time or interest to devote to closely managing their nest eggs.
The basic idea is that the stock portion of a balanced fund provides long-term growth while the less-volatile bond portion provides regular interest income and a buffer against any plunge in stock prices. A typical mix is 60% big-name stocks, 40% bonds, but the mix varies depending on whether a fund follows a conservative, moderate or aggressive strategy.
Here's how it works in practice: In the 10 years ended Dec. 31, the average moderate-mix balanced fund gained 6.4% a year, according to investment research firm Morningstar Inc. That was only modestly less than the 7.1% average annual gain in the Standard & Poor's 500 stock index in that period.
But the balanced fund's return came with a lot less volatility, including much smaller losses than in the overall stock market in down years.
You could create a balanced portfolio of individual stock funds and bond funds on your own. But if your goal is to maintain a specific percentage of your portfolio in each type of asset, you'd need the discipline to "rebalance" each year by selling some portion of the funds that have done best and channeling that money into the funds that have performed worst.
"Buy low, sell high" always sounds easy, but psychologically it's very difficult. "What you're asking investors to do is really against their human intuition," said Fran Kinniry, a principal at Vanguard Group's investment strategy unit in Valley Forge, Pa.
A balanced fund makes that decision for you. And it keeps you in the stock market in periods when your instinct might be to flee — such as after the 2008 crash.
But in fact, the best strategy for many people may be just the opposite: Focus on the basics. Mainly, keep sight of the things you can control to reduce your mental stress and improve your odds of long-term success.
Here are four strategies for keeping it simple:
Keep it balanced. You say you can't decide how to build and maintain a diversified portfolio? Then don't bother. Let someone else do it for you. That's the beauty of "balanced" mutual funds — portfolios that always own a mix of stocks and bonds.
A balanced or "allocation" fund is the simple, elegant solution for people who know they want to be in financial markets for the long haul but don't have the time or interest to devote to closely managing their nest eggs.
The basic idea is that the stock portion of a balanced fund provides long-term growth while the less-volatile bond portion provides regular interest income and a buffer against any plunge in stock prices. A typical mix is 60% big-name stocks, 40% bonds, but the mix varies depending on whether a fund follows a conservative, moderate or aggressive strategy.
Here's how it works in practice: In the 10 years ended Dec. 31, the average moderate-mix balanced fund gained 6.4% a year, according to investment research firm Morningstar Inc. That was only modestly less than the 7.1% average annual gain in the Standard & Poor's 500 stock index in that period.
But the balanced fund's return came with a lot less volatility, including much smaller losses than in the overall stock market in down years.
You could create a balanced portfolio of individual stock funds and bond funds on your own. But if your goal is to maintain a specific percentage of your portfolio in each type of asset, you'd need the discipline to "rebalance" each year by selling some portion of the funds that have done best and channeling that money into the funds that have performed worst.
"Buy low, sell high" always sounds easy, but psychologically it's very difficult. "What you're asking investors to do is really against their human intuition," said Fran Kinniry, a principal at Vanguard Group's investment strategy unit in Valley Forge, Pa.
A balanced fund makes that decision for you. And it keeps you in the stock market in periods when your instinct might be to flee — such as after the 2008 crash.
There
are two types of balanced funds in most 401(k) retirement savings
programs. One is the conventional balanced fund, including such hugely
popular offerings as the Vanguard Wellington fund and American Balanced
fund. These funds generally keep the stock-versus-bond ratios in a
specific range, depending on where the manager believes there is better
value.
The other type is the target-date retirement fund. You pick a target-date fund based on your expected retirement year, and the portfolio is automatically adjusted over time to gradually lower its stock assets and raise its bond assets. The goal is to lower the portfolio's risk and volatility as you age.
Lately, some investors may be worried less about the stock portion of their balanced fund than the bond portion. With bond yields at or near historic lows, a jump in market interest rates could devalue bonds.
That may happen eventually. But calling the turn is no easy feat.
"Just because the level of interest rates is low doesn't tell you about the direction of rates," Kinniry said. "Japan has had low rates for 25 years."
And if stocks pull back soon, high-quality bonds would be a logical refuge.
Get on the right side of the tax man, and stay there. This is the true no-brainer. Shelter as much wealth as you can from current taxes, allowing your nest egg to compound over time.
If you have access to a 401(k) or similar retirement savings plan, contribute as much as possible. If you don't at least max out any match from your company, you're leaving free money on the table.
If you're eligible and able to contribute to traditional individual retirement accounts and Roth IRAS, those too can be no-brainers.
Realistically, many people are limited in how much they can save. But the start of every year is the logical time to rethink your spending versus saving goals.
For investors, 2013 kicked off with good news from Washington: Congress kept the top tax rate on long-term capital gains and on dividends at 15% for most people.
The other type is the target-date retirement fund. You pick a target-date fund based on your expected retirement year, and the portfolio is automatically adjusted over time to gradually lower its stock assets and raise its bond assets. The goal is to lower the portfolio's risk and volatility as you age.
Lately, some investors may be worried less about the stock portion of their balanced fund than the bond portion. With bond yields at or near historic lows, a jump in market interest rates could devalue bonds.
That may happen eventually. But calling the turn is no easy feat.
"Just because the level of interest rates is low doesn't tell you about the direction of rates," Kinniry said. "Japan has had low rates for 25 years."
And if stocks pull back soon, high-quality bonds would be a logical refuge.
Get on the right side of the tax man, and stay there. This is the true no-brainer. Shelter as much wealth as you can from current taxes, allowing your nest egg to compound over time.
If you have access to a 401(k) or similar retirement savings plan, contribute as much as possible. If you don't at least max out any match from your company, you're leaving free money on the table.
If you're eligible and able to contribute to traditional individual retirement accounts and Roth IRAS, those too can be no-brainers.
Realistically, many people are limited in how much they can save. But the start of every year is the logical time to rethink your spending versus saving goals.
For investors, 2013 kicked off with good news from Washington: Congress kept the top tax rate on long-term capital gains and on dividends at 15% for most people.
Monday, July 15, 2013
Money Management
Money Management Myths:
Myth 1: Traders should focus on pips.
You may have heard that you should concentrate on pips gained or lost instead of dollars gained or lost. The rationale behind this money management myth is that if you concentrate on pips instead of dollar you will somehow not become emotional about your trading because you will not be thinking about your trading account in monetary terms but rather as game of points. If this doesn’t sound ridiculous to you, it should. The whole point of trading and investing is to make money and you need to be consciously aware of how much money you have at risk on each and every trade so that the reality of the situation is effectively conveyed. Do you think business owners treat their quarterly profit and loss statements as a game of points that is somehow detached from the reality of making or losing real money? Of course not, when you think about it these terms it seems silly to treat your trading activities like a game. Trading should be treated as a business, because that’s what it is, if you want to be consistently profitable you need to treat each trade as a business transaction. Just as any business transaction has the possibility of risk and of reward, so does every trade you execute. The bottom line is that thinking about your trades in terms of pips and not dollars will effectively make trading seem less real and thus open the door for you treat it less seriously than you otherwise would.
From a Mathematical standpoint, thinking of trading in terms of “how many pips you lose or gain” is completely irrelevant. The problem is that each trader will trade a different position size, thus, we must define risk in terms of “Ddollars at risk or dollars gained”. Just because you risk a large amount of pips, does not mean you are risking a large amount of your capital, such is the case that if you have a tight stop this does not mean your risking a small amount of capital.
Myth 2: Risking 1% or 2% on every trade is a good way to grow your account
This is one of the more common money management myths that you are likely to have heard. While it sounds good in theory, the reality is that the majority if retail forex traders are starting with a trading account that has $5,000 in it or less. So to believe that you will grow your account effectively and relatively quickly by risking 1% or 2% per trade is just silly. Say you lose 5 trades in a row, if you were risking 2% your account is now down to $4,519.60, now you are still risking 2% per trade, but that same 2% is now a smaller position size than it was when your account was at $5,000.
Thus, in the % risk model, as you lose trades you automatically reduce your position size. Which is not always the best course of action. There’s psychological evidence that suggests it’s human nature to become more risk averse after a series of losing trades and less risk averse after a series of winning trades, but that doesn’t mean the risk of any one trade becomes more or less simply because you lost or won on your previous trade. As we can see in my article on randomly distributed trading results, your previous trade’s results don’t mean anything for the outcome of your next trade.
What ends up happening when traders use the % risk model is that they start off good, they risk 1 or 2% on their first few trades, and maybe they even win them all. But once they begin to hit a string of losers, they realize that all of their gains have been wiped out and it is going to take them quite a long time just to make back the money they have lost. They then proceed to OVER-TRADE and take less than quality setups because they now realize how long it will take them just to get back to break even if they only risk 1% to 2% per trade.
So, while this method of money management will allow you to risk small amounts on each trade, and therefore theoretically limit your emotional trading mistakes, most people simply do not have the patience to risk 1 or 2% per trade on their relatively small trading accounts, it will eventually lead to over-trading which is about the worst thing you can do for your bottom line. It is also a difficult task to recover from a drawn down period. Remember, once you drawn down, using a 2 % per trade method, your risk each trade will be smaller, there fore, your rate of recovery on profits is slower and hinders the traders effort.
The Most important fact is this.. if you start with $10,000 , and drawn down to $5,000, using a fixed % method, it will take you “much longer” to recover because you started out risking 2% per trade which was $200, but at the $5,000 draw-down level, your only risking $100 per trade, so even if you have a good winning streak, your capital is recovering at “half the rate” it would using “fixed $ per trade risk.
Myth 3: Wider stops risk more money than smaller stops
Many traders erroneously believe that if they put a wider stop loss on their trade they will necessarily increase their risk. Similarly, many traders believe that by using a smaller stop loss they will necessarily decrease the risk on the trade. Traders that are holding these false beliefs are doing so because they do not understand the concept of Forex position sizing.
Position sizing is the concept of adjusting your position size or the number of lots you are trading, to meet your desired stop loss placement and risk size. For example, say you risk $200 per trade, with a 100 pip stop loss you would trade 2 mini-lots: $2 per pip x 100 pips = $200.
Now let’s you want to trade a pin bar forex strategy but the tail is exceptionally long but you would still like to place your stop above the high of the tail even though it will mean you have a 200 pip stop loss. You can still risk the same $200 on this trade, you just need to adjust your position size down to meet this wider stop loss, and you would adjust the position down to 1 mini-lot rather than 2. This means you can risk the same amount on every trade simply by adjusting your position size up or down to meet your desired stop loss width.
Let’s now look at an example of what can happen if you don’t practice position sizing effectively by failing to decrease the number of lots you are trading while increasing stop loss distance.
Example: Two traders risk the same amount of lots on the same trade setup. Forex Trader A risks 5 lots and has a stop loss of 50 pips, Trader B also risks 5 lots but has a stop loss of 200 pips because he or she believes there is an almost 100% chance that the trade will not go against him or her by 200 pips. The fault with this logic is that typically if a trade begins to go against you with increasing momentum, there theoretically is no limit to when it may stop. And we all know how strong the trends can be in the forex market. Trader A has gotten stopped out with his or her pre-determined risk amount of 5 lots x 50 pips which is a loss of $250. Trader B also got stopped out but his or her loss was much larger because they erroneously hoped that the trade would turn around before moving 200 pips against them. Trader B thus losses 5 lots x 200 pips, but their loss is now a whopping $1,000 instead of the $250 it could have been.
We can see from this example why the belief that just widening your stop loss on a trade is not an effective way to increase your trading account value, in fact it is just the opposite; a good way to quickly decrease your trading account value. The fundamental problem that afflicts traders who harbor this believe is a lack of understanding of the power of risk to reward and position sizing.
The Power of Risk to Reward
Professional traders like me and many others concentrate on risk to reward ratios, and not so much on over analyzing the markets or having unrealistically wide profit targets. This is because professional traders understand that trading is a game of probabilities and capital management. It begins with having a definable market edge, or a trading method that is proven to be at least slightly better than random at determining market direction. This edge for me has been price action analysis. The price action trading strategies that I teach and use can have an accuracy rate of upwards of 70-80% if they are used wisely and at the appropriate times.
The power of risk to reward comes in with its ability to effectively and consistently build trading accounts. We all hear the old axioms like “let your profits run” and “cut your losses early”, while these are well and fine, they don’t really provide any useful information for new traders to implement. The bottom line is that if you are trading with anything less than about $25,000, you are going to have to take profits at pre-determined intervals if you want to keep your sanity and your trading account growing. Entering trades with open profit targets typically doesn’t work for smaller traders because they end up never taking the profits until the market comes swinging back against them dramatically. (I think this is very important, go back an re read that last sentence)
If you know your strike rate is between 40-50% than you can consistently make money in the market by implementing simple risk to reward ratios. By learning to use well-defined price action setups to enter your trades you should able to win a higher percentage of your trades, assuming you TAKE profits.
Myth 1: Traders should focus on pips.
You may have heard that you should concentrate on pips gained or lost instead of dollars gained or lost. The rationale behind this money management myth is that if you concentrate on pips instead of dollar you will somehow not become emotional about your trading because you will not be thinking about your trading account in monetary terms but rather as game of points. If this doesn’t sound ridiculous to you, it should. The whole point of trading and investing is to make money and you need to be consciously aware of how much money you have at risk on each and every trade so that the reality of the situation is effectively conveyed. Do you think business owners treat their quarterly profit and loss statements as a game of points that is somehow detached from the reality of making or losing real money? Of course not, when you think about it these terms it seems silly to treat your trading activities like a game. Trading should be treated as a business, because that’s what it is, if you want to be consistently profitable you need to treat each trade as a business transaction. Just as any business transaction has the possibility of risk and of reward, so does every trade you execute. The bottom line is that thinking about your trades in terms of pips and not dollars will effectively make trading seem less real and thus open the door for you treat it less seriously than you otherwise would.
From a Mathematical standpoint, thinking of trading in terms of “how many pips you lose or gain” is completely irrelevant. The problem is that each trader will trade a different position size, thus, we must define risk in terms of “Ddollars at risk or dollars gained”. Just because you risk a large amount of pips, does not mean you are risking a large amount of your capital, such is the case that if you have a tight stop this does not mean your risking a small amount of capital.
Myth 2: Risking 1% or 2% on every trade is a good way to grow your account
This is one of the more common money management myths that you are likely to have heard. While it sounds good in theory, the reality is that the majority if retail forex traders are starting with a trading account that has $5,000 in it or less. So to believe that you will grow your account effectively and relatively quickly by risking 1% or 2% per trade is just silly. Say you lose 5 trades in a row, if you were risking 2% your account is now down to $4,519.60, now you are still risking 2% per trade, but that same 2% is now a smaller position size than it was when your account was at $5,000.
Thus, in the % risk model, as you lose trades you automatically reduce your position size. Which is not always the best course of action. There’s psychological evidence that suggests it’s human nature to become more risk averse after a series of losing trades and less risk averse after a series of winning trades, but that doesn’t mean the risk of any one trade becomes more or less simply because you lost or won on your previous trade. As we can see in my article on randomly distributed trading results, your previous trade’s results don’t mean anything for the outcome of your next trade.
What ends up happening when traders use the % risk model is that they start off good, they risk 1 or 2% on their first few trades, and maybe they even win them all. But once they begin to hit a string of losers, they realize that all of their gains have been wiped out and it is going to take them quite a long time just to make back the money they have lost. They then proceed to OVER-TRADE and take less than quality setups because they now realize how long it will take them just to get back to break even if they only risk 1% to 2% per trade.
So, while this method of money management will allow you to risk small amounts on each trade, and therefore theoretically limit your emotional trading mistakes, most people simply do not have the patience to risk 1 or 2% per trade on their relatively small trading accounts, it will eventually lead to over-trading which is about the worst thing you can do for your bottom line. It is also a difficult task to recover from a drawn down period. Remember, once you drawn down, using a 2 % per trade method, your risk each trade will be smaller, there fore, your rate of recovery on profits is slower and hinders the traders effort.
The Most important fact is this.. if you start with $10,000 , and drawn down to $5,000, using a fixed % method, it will take you “much longer” to recover because you started out risking 2% per trade which was $200, but at the $5,000 draw-down level, your only risking $100 per trade, so even if you have a good winning streak, your capital is recovering at “half the rate” it would using “fixed $ per trade risk.
Myth 3: Wider stops risk more money than smaller stops
Many traders erroneously believe that if they put a wider stop loss on their trade they will necessarily increase their risk. Similarly, many traders believe that by using a smaller stop loss they will necessarily decrease the risk on the trade. Traders that are holding these false beliefs are doing so because they do not understand the concept of Forex position sizing.
Position sizing is the concept of adjusting your position size or the number of lots you are trading, to meet your desired stop loss placement and risk size. For example, say you risk $200 per trade, with a 100 pip stop loss you would trade 2 mini-lots: $2 per pip x 100 pips = $200.
Now let’s you want to trade a pin bar forex strategy but the tail is exceptionally long but you would still like to place your stop above the high of the tail even though it will mean you have a 200 pip stop loss. You can still risk the same $200 on this trade, you just need to adjust your position size down to meet this wider stop loss, and you would adjust the position down to 1 mini-lot rather than 2. This means you can risk the same amount on every trade simply by adjusting your position size up or down to meet your desired stop loss width.
Let’s now look at an example of what can happen if you don’t practice position sizing effectively by failing to decrease the number of lots you are trading while increasing stop loss distance.
Example: Two traders risk the same amount of lots on the same trade setup. Forex Trader A risks 5 lots and has a stop loss of 50 pips, Trader B also risks 5 lots but has a stop loss of 200 pips because he or she believes there is an almost 100% chance that the trade will not go against him or her by 200 pips. The fault with this logic is that typically if a trade begins to go against you with increasing momentum, there theoretically is no limit to when it may stop. And we all know how strong the trends can be in the forex market. Trader A has gotten stopped out with his or her pre-determined risk amount of 5 lots x 50 pips which is a loss of $250. Trader B also got stopped out but his or her loss was much larger because they erroneously hoped that the trade would turn around before moving 200 pips against them. Trader B thus losses 5 lots x 200 pips, but their loss is now a whopping $1,000 instead of the $250 it could have been.
We can see from this example why the belief that just widening your stop loss on a trade is not an effective way to increase your trading account value, in fact it is just the opposite; a good way to quickly decrease your trading account value. The fundamental problem that afflicts traders who harbor this believe is a lack of understanding of the power of risk to reward and position sizing.
The Power of Risk to Reward
Professional traders like me and many others concentrate on risk to reward ratios, and not so much on over analyzing the markets or having unrealistically wide profit targets. This is because professional traders understand that trading is a game of probabilities and capital management. It begins with having a definable market edge, or a trading method that is proven to be at least slightly better than random at determining market direction. This edge for me has been price action analysis. The price action trading strategies that I teach and use can have an accuracy rate of upwards of 70-80% if they are used wisely and at the appropriate times.
The power of risk to reward comes in with its ability to effectively and consistently build trading accounts. We all hear the old axioms like “let your profits run” and “cut your losses early”, while these are well and fine, they don’t really provide any useful information for new traders to implement. The bottom line is that if you are trading with anything less than about $25,000, you are going to have to take profits at pre-determined intervals if you want to keep your sanity and your trading account growing. Entering trades with open profit targets typically doesn’t work for smaller traders because they end up never taking the profits until the market comes swinging back against them dramatically. (I think this is very important, go back an re read that last sentence)
If you know your strike rate is between 40-50% than you can consistently make money in the market by implementing simple risk to reward ratios. By learning to use well-defined price action setups to enter your trades you should able to win a higher percentage of your trades, assuming you TAKE profits.
Money Management
Money Management
Smart money management doesn't just involve risking an appropriate amount on every trade (covered in the risk management section), it also involves managing a winning trade from start to finish. This is an important part of any good trading methodology that is often overlooked by beginning and expert traders alike.
"What do I do after I enter a trade and it begins to make money?", is a question that is frequently asked by my traders
You hear so-called experts often making general comments such as "Don't let a winning trade turn into a loss," or "You'll never go broke taking a profit." These tidbits belong in the same trash can as "The trend is your friend" and other similar remarks. This general pieces of advice can do more harm than good because of their nature - THEY ARE TOO GENERAL!!!
A beginning trader cannot be left filling in the blanks. Everything must be defined. That is why a complete trading strategy must include specifically how winning trades will be managed until the position is closed.
The basic diagram below was provided to illustrate, in a funny way, what typically happens to traders that don't have a smart trade management plan in place. I have included the trader's thoughts (in blue) on the diagram as the trade progresses (in this example, I assumed that the trader is not completely clueless and at least has a stop loss in place. In reality, if the trader did not use a stop loss, it could have gotten a lot nastier and funnier).
Click image to enlarge
Even though the example about is very basic, it does illustrate the importance of protecting existing profits by raising your stops. When the trade became profitable, instead of having left the stop at 1% below the initial entry point, the trader should have raised the stop.
The stops on different portions of the entire position could have been set at different logical points; for example, a certain amount above the initial entry point, below the point corresponding to thought number 4, below the point corresponding to thought number 5, and so on and so forth. Even though I am oversimplifying the management of these stop losses, this example demonstrates the importance of using a logical money management technique to handle winning trades.
Since one of the goals of every day trader should be to protect his trading capital, protecting profits becomes just as important as limiting losses. If you think about it, protecting profits is a way to limit losses as well. When a trader is in a winning trade, the amount of unrealized profit becomes part of the total equity of his account. Consequently, protecting profits through smart money management is equivalent to conserving the value of the trading account.
Smart money management should be a part of every trading strategy and it is something that I really stress all the time to my traders.
Smart money management doesn't just involve risking an appropriate amount on every trade (covered in the risk management section), it also involves managing a winning trade from start to finish. This is an important part of any good trading methodology that is often overlooked by beginning and expert traders alike.
"What do I do after I enter a trade and it begins to make money?", is a question that is frequently asked by my traders
You hear so-called experts often making general comments such as "Don't let a winning trade turn into a loss," or "You'll never go broke taking a profit." These tidbits belong in the same trash can as "The trend is your friend" and other similar remarks. This general pieces of advice can do more harm than good because of their nature - THEY ARE TOO GENERAL!!!
A beginning trader cannot be left filling in the blanks. Everything must be defined. That is why a complete trading strategy must include specifically how winning trades will be managed until the position is closed.
The basic diagram below was provided to illustrate, in a funny way, what typically happens to traders that don't have a smart trade management plan in place. I have included the trader's thoughts (in blue) on the diagram as the trade progresses (in this example, I assumed that the trader is not completely clueless and at least has a stop loss in place. In reality, if the trader did not use a stop loss, it could have gotten a lot nastier and funnier).
Click image to enlarge
Even though the example about is very basic, it does illustrate the importance of protecting existing profits by raising your stops. When the trade became profitable, instead of having left the stop at 1% below the initial entry point, the trader should have raised the stop.
The stops on different portions of the entire position could have been set at different logical points; for example, a certain amount above the initial entry point, below the point corresponding to thought number 4, below the point corresponding to thought number 5, and so on and so forth. Even though I am oversimplifying the management of these stop losses, this example demonstrates the importance of using a logical money management technique to handle winning trades.
Since one of the goals of every day trader should be to protect his trading capital, protecting profits becomes just as important as limiting losses. If you think about it, protecting profits is a way to limit losses as well. When a trader is in a winning trade, the amount of unrealized profit becomes part of the total equity of his account. Consequently, protecting profits through smart money management is equivalent to conserving the value of the trading account.
Smart money management should be a part of every trading strategy and it is something that I really stress all the time to my traders.
Trading and Money Management
Trading and Money Management
Money management is the key to successful commodities trading. Trading requires discipline. In trading, we need to let the amount of money in our account dictate to us how we are going to trade. This is called trading within our means or… money and risk management.
Money management is one of the most crucial and yet one of the most overlooked aspects of trading and investing. Even when it is not overlooked, it is often misunderstood and unnecessarily made overly complicated.
There are several aspects of successful money management. They all share the same goal - to control our exposure to the markets. This is the only thing that we have complete control over in trading.
Most futures traders focus solely on trying to maximize returns. In reality, however, no one can predict the markets. No one knows which trades will be the big winners and which will be the losers. Successful commodity traders focus on playing defense. They focus on keeping their money and staying in the game through the use of advanced money management techniques.
In our commodities trading, we strive for one major accomplishment at the end of each year. Simply put… we strive to be able to continue trading next year. If you can consistently do this, you will make money trading... lots of money!
We control our exposure to the markets on three levels:
Initial Trade Risk (position exposure)
Sector Correlation Risk (sector exposure)
Portfolio Heat (total portfolio exposure)
These levels of controlling market exposure apply to taking new trades. We also need to manage exposure on our existing trades. This is accomplished through:
Managing our trailing stops
Resizing positions
Switching positions
After we have incorporated sound money management strategies into our commodities trading, we can use some advanced money management techniques to enhance our returns. We can achieve this through:
Position Sizing or Betsizing
Knowing when to add money or trading the equity curve
Dynamic Portfolio Selection
Maximizing exponential growth rates (Kelly Formula)
We can increase our edge by enhancing returns with these advanced techniques. Remember, however, that our main goal is to control and manage our exposure to the market. Enhancing returns using these strategies is only secondary.
Many futures traders make this mistake and get a little carried away with trying to maximize their returns. There is a fine line between creating a greater edge and optimizing a strategy to the point that it will not work as expected in the real world.
The core of our money and risk management strategies are built on most of these techniques. They create the foundation for controlling our risk. There is no need to overly complicate them. For the most part, they are common sense. Most traders however, to their own peril, choose to ignore management techniques. Why do they choose not to use them?
Traders often get caught up in the emotions of commodities trading. Not only do fear and greed take control of their trading, but also hope and panic. It is impossible to be a successful futures trader when these emotions take over. Traders with wild emotions change their tactics consistently. This is a good way to lose your money.
Nobody likes to play defense. Proper money management should be boring. We all want to catch that next big trade. But, we don’t know when it will come. We need to protect ourselves, stay in the game, and the market will eventually pay us for it.
It also takes a lot of hard work and specialized trading platforms to calculate your exposures every day and make the required, necessary adjustments to positions in your account. If this was easy, everyone would be rich.
Our strategies incorporate the techniques described above plus some additional highly-advanced proprietary money management and risk management strategies. It is a trading advantage that benefits our clients greatly.
Money management is the key to successful commodities trading. Trading requires discipline. In trading, we need to let the amount of money in our account dictate to us how we are going to trade. This is called trading within our means or… money and risk management.
Money management is one of the most crucial and yet one of the most overlooked aspects of trading and investing. Even when it is not overlooked, it is often misunderstood and unnecessarily made overly complicated.
There are several aspects of successful money management. They all share the same goal - to control our exposure to the markets. This is the only thing that we have complete control over in trading.
Most futures traders focus solely on trying to maximize returns. In reality, however, no one can predict the markets. No one knows which trades will be the big winners and which will be the losers. Successful commodity traders focus on playing defense. They focus on keeping their money and staying in the game through the use of advanced money management techniques.
In our commodities trading, we strive for one major accomplishment at the end of each year. Simply put… we strive to be able to continue trading next year. If you can consistently do this, you will make money trading... lots of money!
We control our exposure to the markets on three levels:
Initial Trade Risk (position exposure)
Sector Correlation Risk (sector exposure)
Portfolio Heat (total portfolio exposure)
These levels of controlling market exposure apply to taking new trades. We also need to manage exposure on our existing trades. This is accomplished through:
Managing our trailing stops
Resizing positions
Switching positions
After we have incorporated sound money management strategies into our commodities trading, we can use some advanced money management techniques to enhance our returns. We can achieve this through:
Position Sizing or Betsizing
Knowing when to add money or trading the equity curve
Dynamic Portfolio Selection
Maximizing exponential growth rates (Kelly Formula)
We can increase our edge by enhancing returns with these advanced techniques. Remember, however, that our main goal is to control and manage our exposure to the market. Enhancing returns using these strategies is only secondary.
Many futures traders make this mistake and get a little carried away with trying to maximize their returns. There is a fine line between creating a greater edge and optimizing a strategy to the point that it will not work as expected in the real world.
The core of our money and risk management strategies are built on most of these techniques. They create the foundation for controlling our risk. There is no need to overly complicate them. For the most part, they are common sense. Most traders however, to their own peril, choose to ignore management techniques. Why do they choose not to use them?
Traders often get caught up in the emotions of commodities trading. Not only do fear and greed take control of their trading, but also hope and panic. It is impossible to be a successful futures trader when these emotions take over. Traders with wild emotions change their tactics consistently. This is a good way to lose your money.
Nobody likes to play defense. Proper money management should be boring. We all want to catch that next big trade. But, we don’t know when it will come. We need to protect ourselves, stay in the game, and the market will eventually pay us for it.
It also takes a lot of hard work and specialized trading platforms to calculate your exposures every day and make the required, necessary adjustments to positions in your account. If this was easy, everyone would be rich.
Our strategies incorporate the techniques described above plus some additional highly-advanced proprietary money management and risk management strategies. It is a trading advantage that benefits our clients greatly.
Management Techniques (money)
By Dan Blystone
The Kelly Criterion
The Kelly Criterion was originally developed by John Kelly while working for AT&T’s Bell Laboratory. When the method was published in 1956 it was embraced at first by the gambling community, and was then discovered as an effective money monagement tool by the investing world.
The Kelly Criterion looks at two major inputs:
W – The probability that a given trader/system will be a winner.
R – The Win/Loss Ratio – amount gained from winning trades divided by amount lost from losing trades.
These inputs are used to calculate the Kelly percentage in the following equation:
Kelly % = W – [(1 – W) / R]
The Kelly percentage is interpreted as reflecting the size of positions you should be taking. For example a Kelly percentage of 0.08 suggests that you should take an 8% position in the securities in your portfolio.
The formula specifies the percentage of the current portfolio to be used in a given system.
Interpreting the Results
The Kelly percentage is interpreted as reflecting the size of positions you should be taking. For example a Kelly percentage of 0.08 suggests that you should risk 8% of your portfolio using that system. The formula specifies the percentage of the current portfolio to be used in a given system. In gambling the formula specifies the percentage of the current bankroll to be bet at each iteration of the game. Kelly’s formula was applied by Edward O. Thorp, both in blackjack and in the stock market.
Optimal F
Ralph Vince’s optimal-f method is one method of finding the optimal amount to risk on each trade to maximize profits. It is used to find the fraction of equity to risk on the next trade. Optimal f is a money management scheme that assists in determining the correct position size at a given time. Ralph Vince analyzed many systems as computer programmer for Larry Williams, winner of the 1987 World Cup Championship of Futures Trading.
Optimal f Formula
Number_of_shares = (Optimal_F * Current_Capital / starting_risk_per_unity_of_assets)/Security_Price where starting risk = maximal loss at trade(in %).
The Martingale System
A money management system where the dollar values of investments continually increase after losses, or the position size increases with lowering portfolio size. The principle behind the Martingale system is that statistically you cannot lose all the time, and therefore you should increase the amount allocated in investments, even if they are declining in value, in anticipation of a future increase.
The Martingale system is commonly compared to betting in a casino. When a gambler using this method loses, he or she doubles his or her bet. By repeatedly doubling the bet when he or she loses, the gambler will (in theory) eventually even out with a win. Of course, this is assuming the gambler has an unlimited supply of money to bet with.
Anti Martingale System
A system of position sizing that correlates the levels of investment with the risk and portfolio size. Contrary to the Martingale system, the anti-Martingale accepts greater risks during periods of expansive growth, and an increasing market exposure, with larger equity.
2% Rule
The 2 percent rule is a basic tenet of money management. Even if the odds are stacked in your favor, it is inadvisable to risk a large portion of your capital on a single trade. The 2% rule states that you should never risk more than 2% of your account equity on a single trade. Market Wizard Larry Hite “Never risk more than 1% of total equity on any trade. By only risking 1%, I am indifferent to any individual trade.”
6% Rule
The 6% rule, outlined by Alexander Elder in ‘Come into my Trading Room’ states that if the value of your account falls 6% below it’s closing value the prior month you should stop trading for the rest of the month.
Recovering Lost Equity
Consider the following percentages required to recover from significant percentage losses in your account: 25% Equity Loss requires a 33% return to recover former equity value. 50% Equity loss requires a 100% return to recover former equity value. 75% Equity loss requires a 400% return to recover former equity value.
The table above reflects how difficult it is to recover from large percentage losses of your equity.
Stop Loss Strategies
Equity Stop. In this scenario the trader risks a fixed percentage of their equity on a trade and uses this to determine the placement of the stop loss order. Chart Stop. This technique uses technical analyis such as support and resistance levels to determine the position of the stop loss order. Volatility Stop. This method uses volatility as a measure of where to place the stop loss order – in a highly volatile setting the loss should be wider and in a lower volatility setting the stop should be tighter. Average True Range and Bollinger Bands® are two indicators that can be used in determining the postion of the volatility stop loss order.
Position Sizing Turtle Style
The Turtles used a volatility based constant percentage risk position sizing algorithm. See: http://www.traderslog.com/forum/showthread.php?t=7017
The Kelly Criterion
The Kelly Criterion was originally developed by John Kelly while working for AT&T’s Bell Laboratory. When the method was published in 1956 it was embraced at first by the gambling community, and was then discovered as an effective money monagement tool by the investing world.
The Kelly Criterion looks at two major inputs:
W – The probability that a given trader/system will be a winner.
R – The Win/Loss Ratio – amount gained from winning trades divided by amount lost from losing trades.
These inputs are used to calculate the Kelly percentage in the following equation:
Kelly % = W – [(1 – W) / R]
The Kelly percentage is interpreted as reflecting the size of positions you should be taking. For example a Kelly percentage of 0.08 suggests that you should take an 8% position in the securities in your portfolio.
The formula specifies the percentage of the current portfolio to be used in a given system.
Interpreting the Results
The Kelly percentage is interpreted as reflecting the size of positions you should be taking. For example a Kelly percentage of 0.08 suggests that you should risk 8% of your portfolio using that system. The formula specifies the percentage of the current portfolio to be used in a given system. In gambling the formula specifies the percentage of the current bankroll to be bet at each iteration of the game. Kelly’s formula was applied by Edward O. Thorp, both in blackjack and in the stock market.
Optimal F
Ralph Vince’s optimal-f method is one method of finding the optimal amount to risk on each trade to maximize profits. It is used to find the fraction of equity to risk on the next trade. Optimal f is a money management scheme that assists in determining the correct position size at a given time. Ralph Vince analyzed many systems as computer programmer for Larry Williams, winner of the 1987 World Cup Championship of Futures Trading.
Optimal f Formula
Number_of_shares = (Optimal_F * Current_Capital / starting_risk_per_unity_of_assets)/Security_Price where starting risk = maximal loss at trade(in %).
The Martingale System
A money management system where the dollar values of investments continually increase after losses, or the position size increases with lowering portfolio size. The principle behind the Martingale system is that statistically you cannot lose all the time, and therefore you should increase the amount allocated in investments, even if they are declining in value, in anticipation of a future increase.
The Martingale system is commonly compared to betting in a casino. When a gambler using this method loses, he or she doubles his or her bet. By repeatedly doubling the bet when he or she loses, the gambler will (in theory) eventually even out with a win. Of course, this is assuming the gambler has an unlimited supply of money to bet with.
Anti Martingale System
A system of position sizing that correlates the levels of investment with the risk and portfolio size. Contrary to the Martingale system, the anti-Martingale accepts greater risks during periods of expansive growth, and an increasing market exposure, with larger equity.
2% Rule
The 2 percent rule is a basic tenet of money management. Even if the odds are stacked in your favor, it is inadvisable to risk a large portion of your capital on a single trade. The 2% rule states that you should never risk more than 2% of your account equity on a single trade. Market Wizard Larry Hite “Never risk more than 1% of total equity on any trade. By only risking 1%, I am indifferent to any individual trade.”
6% Rule
The 6% rule, outlined by Alexander Elder in ‘Come into my Trading Room’ states that if the value of your account falls 6% below it’s closing value the prior month you should stop trading for the rest of the month.
Recovering Lost Equity
Consider the following percentages required to recover from significant percentage losses in your account: 25% Equity Loss requires a 33% return to recover former equity value. 50% Equity loss requires a 100% return to recover former equity value. 75% Equity loss requires a 400% return to recover former equity value.
The table above reflects how difficult it is to recover from large percentage losses of your equity.
Stop Loss Strategies
Equity Stop. In this scenario the trader risks a fixed percentage of their equity on a trade and uses this to determine the placement of the stop loss order. Chart Stop. This technique uses technical analyis such as support and resistance levels to determine the position of the stop loss order. Volatility Stop. This method uses volatility as a measure of where to place the stop loss order – in a highly volatile setting the loss should be wider and in a lower volatility setting the stop should be tighter. Average True Range and Bollinger Bands® are two indicators that can be used in determining the postion of the volatility stop loss order.
Position Sizing Turtle Style
The Turtles used a volatility based constant percentage risk position sizing algorithm. See: http://www.traderslog.com/forum/showthread.php?t=7017
Scalpers Strategy
Scalpers Strategy
The 15 pip breakout scalper’s strategy is specifically designed to scalp 15 pips on 1 minute time period volatile currency pair charts.
The 15 pip breakout scalping strategy has been developed specifically for trading volatile currency pairs in the one minute time period with the utmost accuracy. The currency pairs that can be traded are the EUR/USD, the GBP/USD, the NZD/USD and the USD/CHF and they should be traded during the European and USA sessions for the most volatility. The stop used is rather narrow at 6 to 8 pips and the target profit is 14 pips or more.
The 15 pip breakout scalper’s strategy is specifically designed to scalp 15 pips on 1 minute time period volatile currency pair charts.
The 15 pip breakout scalping strategy has been developed specifically for trading volatile currency pairs in the one minute time period with the utmost accuracy. The currency pairs that can be traded are the EUR/USD, the GBP/USD, the NZD/USD and the USD/CHF and they should be traded during the European and USA sessions for the most volatility. The stop used is rather narrow at 6 to 8 pips and the target profit is 14 pips or more.
Kept Secret of Trading
Kept Secret of Trading
Of all the trading markets, London usually shows the most movement because it involves a number of countries such as UK, EU member countries and many others. The US market comes next. Hence, it is during the intersection between these two markets which usually provides the greatest return for trading.
Forex trading is not only about using appropriate strategies, but also about proper timing. Yes, it’s true that the Forex market is open 24 hours a day but it isn’t always active. This means that while you can make money when the market is going up or down, you’ll find it difficult to make a profit if the market isn’t moving at all. Hence, it is important that you learn about the different market hours as well as the best times of the day and the best days of the week to trade.
The Forex market has 3 major trading sessions: the Tokyo Session, the London Session and the US Session. Between each session is a period when two sessions are open at the same time. For example, both the Tokyo and London sessions are open between 3 AM -4 AM EST while the London and US markets are open from 8AM -12 PM EST. These, then are the busiest time for trading since traders who wish to purchase currency from another continent can do so.
Many Forex expert traders believe that the best time to trade is actually at 10 AM since this is the period when the London market is getting ready to close and more buyers and sellers have started moving to participate in the US market. During this time, currencies experience volatility as buyers and sellers bid for prices and turn out last minute wagers before the London market closes. The drastic change in market prices during this period allows traders to create profit from these movements.
The best day of the week to trade
There are also days in the week when markets show the most movement. According to researches by expert traders, the most movement in the 4 major pairs (EUR/USD, GBP/USD, USD/CHF, USD/JPY) is experienced in the middle of the week, from Tuesday to Wednesday. Fridays are also busy but it is best to trade until 12 PM EST only since currency movement tends to be chaotic after that.
Of all the trading markets, London usually shows the most movement because it involves a number of countries such as UK, EU member countries and many others. The US market comes next. Hence, it is during the intersection between these two markets which usually provides the greatest return for trading.
Forex trading is not only about using appropriate strategies, but also about proper timing. Yes, it’s true that the Forex market is open 24 hours a day but it isn’t always active. This means that while you can make money when the market is going up or down, you’ll find it difficult to make a profit if the market isn’t moving at all. Hence, it is important that you learn about the different market hours as well as the best times of the day and the best days of the week to trade.
The Forex market has 3 major trading sessions: the Tokyo Session, the London Session and the US Session. Between each session is a period when two sessions are open at the same time. For example, both the Tokyo and London sessions are open between 3 AM -4 AM EST while the London and US markets are open from 8AM -12 PM EST. These, then are the busiest time for trading since traders who wish to purchase currency from another continent can do so.
Many Forex expert traders believe that the best time to trade is actually at 10 AM since this is the period when the London market is getting ready to close and more buyers and sellers have started moving to participate in the US market. During this time, currencies experience volatility as buyers and sellers bid for prices and turn out last minute wagers before the London market closes. The drastic change in market prices during this period allows traders to create profit from these movements.
The best day of the week to trade
There are also days in the week when markets show the most movement. According to researches by expert traders, the most movement in the 4 major pairs (EUR/USD, GBP/USD, USD/CHF, USD/JPY) is experienced in the middle of the week, from Tuesday to Wednesday. Fridays are also busy but it is best to trade until 12 PM EST only since currency movement tends to be chaotic after that.
The goal of any trader, trading strategy
The goal of any trader, trading strategy
The goal of any trader is to keep to the major rules of trading in buying high and selling low. This however is probably easier said than done because it is not easy to identify trade entries and trade exits. Therefore it is a prudent trader who works on several strategies which help identify the appropriate entry and exit points. Some trading strategies are fairly complex but for a newbie trader in particular there are some strategies which are simple to understand and easy to execute in order to acquire Forex trading practice. One of these strategies is called the three duck strategy and it uses three time period price charts and a 60 period simple moving average.
How to Trade a Three Ducks Forex Strategy:
This particular strategy involves using a 4 hour price chart which is the first duck, a 1 hour price chart which is the second duck and a 5 minute price chart which is the third duck and a 60 period simple moving average. The idea is to make sure that all the ducks are in a row. How do we do this?
The first task we need to do is to take a look at a 4 hour price of the currency pair we want to trade in. The chart below is a EUR/USD 4 hour chart and we have added a 60 period simple moving average line to the chart.
The goal of any trader is to keep to the major rules of trading in buying high and selling low. This however is probably easier said than done because it is not easy to identify trade entries and trade exits. Therefore it is a prudent trader who works on several strategies which help identify the appropriate entry and exit points. Some trading strategies are fairly complex but for a newbie trader in particular there are some strategies which are simple to understand and easy to execute in order to acquire Forex trading practice. One of these strategies is called the three duck strategy and it uses three time period price charts and a 60 period simple moving average.
How to Trade a Three Ducks Forex Strategy:
This particular strategy involves using a 4 hour price chart which is the first duck, a 1 hour price chart which is the second duck and a 5 minute price chart which is the third duck and a 60 period simple moving average. The idea is to make sure that all the ducks are in a row. How do we do this?
The first task we need to do is to take a look at a 4 hour price of the currency pair we want to trade in. The chart below is a EUR/USD 4 hour chart and we have added a 60 period simple moving average line to the chart.
forex flutuation
forex flutuation
Gaps are situation that occur when a financial asset’s opening market price is higher than its closing price from the previous trading day. In a price chart, this will end up showing as an ‘empty’ space from the previous day’s closing price to today’s opening price. The closing price is taken from 4pm (EDT) the previous trading day to the present 9.30am (EDT) opening price. Gaps in prices can be either up or down and they can occur in any financial market. Although, trading after market hours is possible through the Electronic Communication Networks (ECNs) beginning from 8am to 8pm, they are not considered as the ‘typical’ market trading hours. Hence, for our purpose of discussion, post and pre market trading activities do not count as affecting the price gap.
For example, a financial asset closed at $50 at 4pm (EDT) from the previous day trading. After market hours trading continues and pushes the price up to $52. At 8am the next day, the asset continues to be traded at an opening price off $52.50. Let us say that by 930m (the normal opening time for the market), the price of the asset have dropped down to $50.50. The price difference that is taken as the ‘Gap’ is just 50 cents and all the fluctuations that occurs during the aftermarket hours trading is not taken into account. Even though the asset had been traded and gains or losses have occurred, these occurrences do not affect the ‘gap’ in any way. Gaps in prices occur usually due to a news event. A financial asset can gap down or up when it react to news like earning reports or earning pre-announcements, upgrade or downgrade of its financial rating by an analyst, rumours or comments by key personals.
Nevertheless, gaps are not isolated to just a single financial asset. It can also occur to a whole class of assets, group of stocks or even the whole market due to news or report about the whole economy being released. Political news or world events can also cause gaps (A good example of a world event which caused a huge gap down was the 9/11 incident in New York). Regardless of the reason, gaps usually occur as a result of an event that happened during the time that the market is closed. Because of the event that resulted when the market was closed, this created a strong buying or selling pressure when the market reopen causing a gap down or gap up situation.
The reason why ‘gaps’ are important in the analysis of prices is the fact that they are often indication of a major change in momentum for the financial asset. Normally, during a large gap up at the opening of the market, never buy into the market. Conversely, when there is a large gap down at the opening of the market, never sell short at the opening of the market. Staking a market position during a large gap up or down is a risky situation as the gap is usually extended by the market maker as well. One way to deal with price ‘gaps’ is to fade in; in other words, play the market for the prices to come back to its original position. Thus, go short when there is a large gap up and vice versa.
Gaps are situation that occur when a financial asset’s opening market price is higher than its closing price from the previous trading day. In a price chart, this will end up showing as an ‘empty’ space from the previous day’s closing price to today’s opening price. The closing price is taken from 4pm (EDT) the previous trading day to the present 9.30am (EDT) opening price. Gaps in prices can be either up or down and they can occur in any financial market. Although, trading after market hours is possible through the Electronic Communication Networks (ECNs) beginning from 8am to 8pm, they are not considered as the ‘typical’ market trading hours. Hence, for our purpose of discussion, post and pre market trading activities do not count as affecting the price gap.
For example, a financial asset closed at $50 at 4pm (EDT) from the previous day trading. After market hours trading continues and pushes the price up to $52. At 8am the next day, the asset continues to be traded at an opening price off $52.50. Let us say that by 930m (the normal opening time for the market), the price of the asset have dropped down to $50.50. The price difference that is taken as the ‘Gap’ is just 50 cents and all the fluctuations that occurs during the aftermarket hours trading is not taken into account. Even though the asset had been traded and gains or losses have occurred, these occurrences do not affect the ‘gap’ in any way. Gaps in prices occur usually due to a news event. A financial asset can gap down or up when it react to news like earning reports or earning pre-announcements, upgrade or downgrade of its financial rating by an analyst, rumours or comments by key personals.
Nevertheless, gaps are not isolated to just a single financial asset. It can also occur to a whole class of assets, group of stocks or even the whole market due to news or report about the whole economy being released. Political news or world events can also cause gaps (A good example of a world event which caused a huge gap down was the 9/11 incident in New York). Regardless of the reason, gaps usually occur as a result of an event that happened during the time that the market is closed. Because of the event that resulted when the market was closed, this created a strong buying or selling pressure when the market reopen causing a gap down or gap up situation.
The reason why ‘gaps’ are important in the analysis of prices is the fact that they are often indication of a major change in momentum for the financial asset. Normally, during a large gap up at the opening of the market, never buy into the market. Conversely, when there is a large gap down at the opening of the market, never sell short at the opening of the market. Staking a market position during a large gap up or down is a risky situation as the gap is usually extended by the market maker as well. One way to deal with price ‘gaps’ is to fade in; in other words, play the market for the prices to come back to its original position. Thus, go short when there is a large gap up and vice versa.
currency Trading - Direct Trade
currency Trading - Direct Trade
Direct Trade can provide personalized service, and customized pricing, that was once limited to large corporations. If you engage in frequent transactions requiring currency conversion, you may qualify for Direct Trade. A minimum of $10,000 US of transaction volume per month is required.
You'll receive -
Personalized service through direct access to a team of dedicated foreign exchange professionals
Up-to-the-minute foreign exchange market information
Guidance and tools to help you manage your currency exposure, including Spot Contracts, Forward/Option-Dated Contracts and Cash Secured Forwards
Access to TDFX, our online dealing system which provides you with real-time quotes, direct execution of your trades and more
Timely settlement of your trades arranged through a
TD Canada Trust
account
To get started today, simply open a business account and ask for Direct Trade Foreign Exchange, or, if you have an existing account, ask a Small Business Specialist to sign you up.
Direct Trade can provide personalized service, and customized pricing, that was once limited to large corporations. If you engage in frequent transactions requiring currency conversion, you may qualify for Direct Trade. A minimum of $10,000 US of transaction volume per month is required.
You'll receive -
Personalized service through direct access to a team of dedicated foreign exchange professionals
Up-to-the-minute foreign exchange market information
Guidance and tools to help you manage your currency exposure, including Spot Contracts, Forward/Option-Dated Contracts and Cash Secured Forwards
Access to TDFX, our online dealing system which provides you with real-time quotes, direct execution of your trades and more
Timely settlement of your trades arranged through a
TD Canada Trust
account
To get started today, simply open a business account and ask for Direct Trade Foreign Exchange, or, if you have an existing account, ask a Small Business Specialist to sign you up.
forex foray could burn the Reserve
forex foray could burn the Reserve
With the Australian dollar trade-weighted index recently around 28-year highs, there have been calls for official intervention to weaken the exchange rate. But suggestions the Reserve Bank might need an injection of capital due to potential losses on its foreign exchange reserves highlights the risk to taxpayers from intervention in foreign exchange markets. The appropriate instrument for addressing concerns about a high Australian dollar is the official cash rate.
Since the Australian dollar was floated in 1983, the Reserve Bank has typically turned a profit on its interventions in foreign exchange markets. The Reserve buys the Australian dollar when the exchange rate is low and sells it when it is high. In its portfolio management operations, the Reserve takes advantage of periods of Australian dollar strength to add to its foreign exchange reserves.
As Milton Friedman argued in his classic defence of speculative activity in foreign exchange markets, such profitability is evidence these market operations have been stabilising on average, although that does not mean they have been particularly influential in determining the value of the exchange rate.
Buying low and selling high has been more challenging in recent years with the Australian dollar seeing strong gains on the back of a rising terms of trade and foreign capital inflows taking advantage of investment opportunities in Australia. Appreciation of the Australian dollar has resulted in unrealised valuation losses on the Reserve Bank's foreign exchange reserves.
According to information released under Freedom of Information legislation, a further 10 per cent appreciation in the Australian dollar could lead to unrealised losses of around $3.4 billion this financial year.
Many consider the Australian dollar overvalued, not least the Reserve Bank itself. The Reserve may be in a position to sell any further additions to its reserves at a profit at a later date if the exchange rate subsequently weakens, but official intervention would implicate Australian taxpayers in a punt on the future direction of the currency.
The Reserve Bank also incurs a cost in selling a relatively high yielding currency like the Australian dollar in order to buy low yielding securities denominated in foreign currencies. The so-called 'carry trade' that makes Australia an attractive destination for foreign investors should also make foreign currency investments unattractive to the Reserve Bank and, by extension, Australian taxpayers.
Indeed, it is questionable whether the Reserve Bank should hold large net long positions in foreign currency assets. It should instead seek to broadly match its foreign currency assets and liabilities.
Foreign exchange reserves give the Reserve Bank the capacity to intervene in foreign exchange markets, but the effectiveness of such intervention is questionable. Currency markets are simply too deep and liquid for official sector purchases to have persistent effects.
Intervention is most effective when seen as signaling the future stance of monetary policy. But a few well-chosen and well-timed words from Governor Stevens can send such a signal far more effectively and at less risk to taxpayers.
It has been argued that Australia is somehow a victim of a 'currency war' being waged between foreign central banks engaged in quantitative easing. Yet there is nothing unusual about the effects of quantitative easing on exchange rates.
Quantitative easing is simply a change in the operating instrument of the central bank, from a price variable (the official interest rate) to a quantity variable (base money).
In itself, quantitative easing tell us nothing about whether central bank policy is easy or tight. Low inflation and low interest rates in countries like Japan and the United States imply policy settings are if anything too tight, not too easy.
The exchange rate is just one of the channels through which a change in monetary policy is transmitted to the rest of the economy and quantitative easing does not fundamentally alter this transmission mechanism.
In previous decades, Australians worried about a low exchange rate and capital flight. In the current international environment, foreign capital inflows are an affirmation of our relatively sound economic fundamentals and not a bad problem to have.
The Reserve Bank already factors the economic implications of the exchange rate into its setting of the official cash rate. Unlike foreign exchange market intervention, further reductions in the official cash rate can ease monetary conditions in Australia without posing unnecessary risks to taxpayers.
With the Australian dollar trade-weighted index recently around 28-year highs, there have been calls for official intervention to weaken the exchange rate. But suggestions the Reserve Bank might need an injection of capital due to potential losses on its foreign exchange reserves highlights the risk to taxpayers from intervention in foreign exchange markets. The appropriate instrument for addressing concerns about a high Australian dollar is the official cash rate.
Since the Australian dollar was floated in 1983, the Reserve Bank has typically turned a profit on its interventions in foreign exchange markets. The Reserve buys the Australian dollar when the exchange rate is low and sells it when it is high. In its portfolio management operations, the Reserve takes advantage of periods of Australian dollar strength to add to its foreign exchange reserves.
As Milton Friedman argued in his classic defence of speculative activity in foreign exchange markets, such profitability is evidence these market operations have been stabilising on average, although that does not mean they have been particularly influential in determining the value of the exchange rate.
Buying low and selling high has been more challenging in recent years with the Australian dollar seeing strong gains on the back of a rising terms of trade and foreign capital inflows taking advantage of investment opportunities in Australia. Appreciation of the Australian dollar has resulted in unrealised valuation losses on the Reserve Bank's foreign exchange reserves.
According to information released under Freedom of Information legislation, a further 10 per cent appreciation in the Australian dollar could lead to unrealised losses of around $3.4 billion this financial year.
Many consider the Australian dollar overvalued, not least the Reserve Bank itself. The Reserve may be in a position to sell any further additions to its reserves at a profit at a later date if the exchange rate subsequently weakens, but official intervention would implicate Australian taxpayers in a punt on the future direction of the currency.
The Reserve Bank also incurs a cost in selling a relatively high yielding currency like the Australian dollar in order to buy low yielding securities denominated in foreign currencies. The so-called 'carry trade' that makes Australia an attractive destination for foreign investors should also make foreign currency investments unattractive to the Reserve Bank and, by extension, Australian taxpayers.
Indeed, it is questionable whether the Reserve Bank should hold large net long positions in foreign currency assets. It should instead seek to broadly match its foreign currency assets and liabilities.
Foreign exchange reserves give the Reserve Bank the capacity to intervene in foreign exchange markets, but the effectiveness of such intervention is questionable. Currency markets are simply too deep and liquid for official sector purchases to have persistent effects.
Intervention is most effective when seen as signaling the future stance of monetary policy. But a few well-chosen and well-timed words from Governor Stevens can send such a signal far more effectively and at less risk to taxpayers.
It has been argued that Australia is somehow a victim of a 'currency war' being waged between foreign central banks engaged in quantitative easing. Yet there is nothing unusual about the effects of quantitative easing on exchange rates.
Quantitative easing is simply a change in the operating instrument of the central bank, from a price variable (the official interest rate) to a quantity variable (base money).
In itself, quantitative easing tell us nothing about whether central bank policy is easy or tight. Low inflation and low interest rates in countries like Japan and the United States imply policy settings are if anything too tight, not too easy.
The exchange rate is just one of the channels through which a change in monetary policy is transmitted to the rest of the economy and quantitative easing does not fundamentally alter this transmission mechanism.
In previous decades, Australians worried about a low exchange rate and capital flight. In the current international environment, foreign capital inflows are an affirmation of our relatively sound economic fundamentals and not a bad problem to have.
The Reserve Bank already factors the economic implications of the exchange rate into its setting of the official cash rate. Unlike foreign exchange market intervention, further reductions in the official cash rate can ease monetary conditions in Australia without posing unnecessary risks to taxpayers.
Dollar weakness
Dollar weakness
Dollar weakness lifts sterling from 3-year lows
Sterling pulled away from three-year lows against the dollar on Thursday with the greenback under pressure after the Federal Reserve chief's comments injected doubts over when monetary stimulus will be withdrawn.
Yields on U.S. Treasuries fell after Ben Bernanke's comments and spreads over UK gilts narrowed, offering a reprieve to the British pound which has lost over 7 percent against the dollar so far this year.
Sterling had fallen to a three-year low of $1.4814 on Tuesday, highlighting the monetary policy divergence between the Bank of England and the Fed. While the BoE has pledged to keep rates low to boost a nascent economic recovery, the Fed in late May signalled it was ready to slow its asset purchase programme, perhaps as early as later this year.
But Bernanke on Wednesday said the U.S. central bank would continue to pursue an accommodative monetary policy as inflation remained low and the unemployment rate might be understating the weakness of the labour market.
Before his comments, the minutes of the last Fed meeting also suggested that many board members wanted further improvement in the U.S. labour market before the pace of asset purchases could be slowed.
All of which left the dollar index sharply lower and boosting currencies like sterling. The pound was up 0.3 percent at $1.5090 while it was flat against the euro. The euro was at 86.45, off a four-month high of 86.945 pence struck earlier in the session.
"We think any rise in sterling/dollar is a sell. The dollar's long term uptrend remains intact," said Alvin Tan, currency strategist at Societe Generale. "In the short term, any gains to $1.52/53 should be sold into and we retain our year end forecast at $1.43."
Investors, particularly hedge funds, were also looking to sell sterling against the euro on expectations the BoE would be far more aggressive in easing monetary policy in coming months than the European Central Bank.
The euro was likely to remain weak against the dollar as the ECB has indicated monetary policy will stay accommodative as it grapples with a recession in the euro zone. But since the euro is Britain's largest trading partner, a recession there will prompt BoE policymakers to keep policy accommodative and the pound weaker to help exports.
As such, many expect the euro to outperform the pound.
"Yesterday's pullback managed to hold above the 85.80 area and keeps the higher lows, higher highs scenario intact. We need to make new highs beyond 86.70 to keep the recent grind higher going towards 87.30," CMC Markets said in a daily note.
Dollar weakness lifts sterling from 3-year lows
Sterling pulled away from three-year lows against the dollar on Thursday with the greenback under pressure after the Federal Reserve chief's comments injected doubts over when monetary stimulus will be withdrawn.
Yields on U.S. Treasuries fell after Ben Bernanke's comments and spreads over UK gilts narrowed, offering a reprieve to the British pound which has lost over 7 percent against the dollar so far this year.
Sterling had fallen to a three-year low of $1.4814 on Tuesday, highlighting the monetary policy divergence between the Bank of England and the Fed. While the BoE has pledged to keep rates low to boost a nascent economic recovery, the Fed in late May signalled it was ready to slow its asset purchase programme, perhaps as early as later this year.
But Bernanke on Wednesday said the U.S. central bank would continue to pursue an accommodative monetary policy as inflation remained low and the unemployment rate might be understating the weakness of the labour market.
Before his comments, the minutes of the last Fed meeting also suggested that many board members wanted further improvement in the U.S. labour market before the pace of asset purchases could be slowed.
All of which left the dollar index sharply lower and boosting currencies like sterling. The pound was up 0.3 percent at $1.5090 while it was flat against the euro. The euro was at 86.45, off a four-month high of 86.945 pence struck earlier in the session.
"We think any rise in sterling/dollar is a sell. The dollar's long term uptrend remains intact," said Alvin Tan, currency strategist at Societe Generale. "In the short term, any gains to $1.52/53 should be sold into and we retain our year end forecast at $1.43."
Investors, particularly hedge funds, were also looking to sell sterling against the euro on expectations the BoE would be far more aggressive in easing monetary policy in coming months than the European Central Bank.
The euro was likely to remain weak against the dollar as the ECB has indicated monetary policy will stay accommodative as it grapples with a recession in the euro zone. But since the euro is Britain's largest trading partner, a recession there will prompt BoE policymakers to keep policy accommodative and the pound weaker to help exports.
As such, many expect the euro to outperform the pound.
"Yesterday's pullback managed to hold above the 85.80 area and keeps the higher lows, higher highs scenario intact. We need to make new highs beyond 86.70 to keep the recent grind higher going towards 87.30," CMC Markets said in a daily note.
three-year low vs dollar in sight
Investors continued to sell the UK currency and buy the dollar after stronger-than-expected U.S. employment data fed expectations the Federal Reserve would pare back its stimulus programme. In contrast, the Bank of England last week poured cold water on expectations for future interest rate hikes.
As a result, the yield gap between 10-year U.S. Treasuries
and UK gilts was the widest since 2006, pointing to more gains for the dollar .
Sterling was slightly lower on the day at $1.4885 , not far from a four-month low of $1.4855 struck on Friday after the U.S. jobs numbers. A drop below that would see it test its March low of $1.4832 and further losses would send the pound to its lowest in three years.
"The pound is likely to be weighed down against the dollar throughout 2013 to 2015 by the BoE using forward guidance to anchor interest rate expectations," said Mansoor Mohiuddin, chief currency strategist at UBS.
"Given the ECB has just adopted much stronger forward guidance for policymaking in the euro zone, the BoE is also likely to commit to keeping interest rates very low for an extended period." The euro zone is Britain's biggest trading partner and is battling a recession. The European Central Bank last week pledged to keep rates at current levels, if not lower, to help spur economic recovery.
The euro was flat on the day at 86.15 pence, staying well below a recent high of 86.34 struck last Thursday.
Analysts said the preferred way to express a bearish view on the currency would be to sell sterling against the dollar especially after new BoE chief Mark Carney warned the market had been too quick to price in UK interest rate hikes further down the line. Citi has initiated a short position in the pound against the dollar. It has entered into the trade at $1.4881 for a target of $1.45 and stop losses at $1.5123.
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tax-free imports are a retail red herring
Ideally, imported goods would be taxed on the same basis as domestic goods and there would be no low value threshold exemption. Tax neutrality between imports and domestic goods would remove a distortion in relative prices and expand the tax base.
Australia’s struggling retailers have stepped-up their campaign for a reduction in the $1000 low value threshold exemption for goods and services tax and duty on imported goods. But lowering the threshold is likely to be self-defeating and ignores the real problems confronting local retailers.
That is fine in theory, but it is not the end of the story. While there are potential economic efficiency gains from lowering or eliminating the exemption, there are also offsetting costs.
The collection of taxes is not costless. For every dollar of revenue raised, the government and private sector incur compliance and collection costs.
Taxes that cost more to collect than they raise in revenue are self-defeating, especially if the government has more efficient revenue raising options.
The existing $1000 exemption threshold recognises that collecting GST and duty on the huge variety of low value imported items would be very expensive relative to domestic goods. Simply lowering the threshold, without any effort to lower these costs, would be pointless.
That is not to say that measures could not be taken to lower compliance and collection costs for low value imports. The Low Value Parcel Processing Taskforce last year identified a range of measures that could make a lower threshold more viable.
But these measures would still entail an expensive up-front investment in new processes and systems. This investment would substantially offset any revenue gain or wider economic benefit.
Some of these measures may still be worth implementing as governments should aim to lower compliance and collection costs where possible.
But it is difficult to escape the fundamental trade-off identified by the taskforce and other government advisory bodies like the Productivity Commission: the lower the exemption threshold, the greater the cost relative to any benefit.
While it may be possible to reform current arrangements that would then justify a threshold lower than $1000 on cost-benefit grounds, the efficient threshold is almost certainly not zero.
The GST should have only one purpose: to raise revenue for state governments. The design and administration of the tax should not be compromised to serve other objectives, such as protecting local retailers from international competition.
Australia’s retailers are almost certainly barking up the wrong tree in seeking salvation through a lowering in the low value exemption threshold.
It would seem unlikely that the threshold is driving the growth in overseas online sales and imports.
A simple test should make this point: is the online overseas price still cheaper than the local price after GST and duty is applied? Sadly for Australian retailers, the answer to this question will often be yes.
The exchange rate is also a factor in this calculation. The currency has not done Australian retailers any favours, but it is more of a symptom rather than a cause of other economic fundamentals. The exchange rate is a price signal that retailers must heed along with everyone else.
Australian retailers would be better served examining their own business models than campaigning for higher taxes on low value imports.
Well before the advent of the internet, Australian tourists often found that overseas retailers beat the locals not only on price, but often on product range, quality and service, too.
What the internet has changed is that Australian consumers no longer need to get on a plane to enjoy what overseas competitors have to offer.
With some notable exceptions, Australian retailers have been slow to innovate in response to these competitive pressures.
The rows of deserted shops on Sydney’s Oxford Street will not be filled again by raising taxes on low value imports.
They will return to life when Australian retailers adopt new and internationally competitive business models that better appeal to local consumers.
There is much governments could do to alleviate cost pressures and tax burdens on Australian business, including retailers. Retailers would be better served lobbying government for policies other than raising inefficient taxes on low value imports
As a result, the yield gap between 10-year U.S. Treasuries
and UK gilts was the widest since 2006, pointing to more gains for the dollar .
Sterling was slightly lower on the day at $1.4885 , not far from a four-month low of $1.4855 struck on Friday after the U.S. jobs numbers. A drop below that would see it test its March low of $1.4832 and further losses would send the pound to its lowest in three years.
"The pound is likely to be weighed down against the dollar throughout 2013 to 2015 by the BoE using forward guidance to anchor interest rate expectations," said Mansoor Mohiuddin, chief currency strategist at UBS.
"Given the ECB has just adopted much stronger forward guidance for policymaking in the euro zone, the BoE is also likely to commit to keeping interest rates very low for an extended period." The euro zone is Britain's biggest trading partner and is battling a recession. The European Central Bank last week pledged to keep rates at current levels, if not lower, to help spur economic recovery.
The euro was flat on the day at 86.15 pence, staying well below a recent high of 86.34 struck last Thursday.
Analysts said the preferred way to express a bearish view on the currency would be to sell sterling against the dollar especially after new BoE chief Mark Carney warned the market had been too quick to price in UK interest rate hikes further down the line. Citi has initiated a short position in the pound against the dollar. It has entered into the trade at $1.4881 for a target of $1.45 and stop losses at $1.5123.
Diposkan oleh hary money di 04.10 Tidak ada komentar: Kirimkan Ini lewat Email
BlogThis!
Berbagi ke Twitter
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tax-free imports are a retail red herring
Ideally, imported goods would be taxed on the same basis as domestic goods and there would be no low value threshold exemption. Tax neutrality between imports and domestic goods would remove a distortion in relative prices and expand the tax base.
Australia’s struggling retailers have stepped-up their campaign for a reduction in the $1000 low value threshold exemption for goods and services tax and duty on imported goods. But lowering the threshold is likely to be self-defeating and ignores the real problems confronting local retailers.
That is fine in theory, but it is not the end of the story. While there are potential economic efficiency gains from lowering or eliminating the exemption, there are also offsetting costs.
The collection of taxes is not costless. For every dollar of revenue raised, the government and private sector incur compliance and collection costs.
Taxes that cost more to collect than they raise in revenue are self-defeating, especially if the government has more efficient revenue raising options.
The existing $1000 exemption threshold recognises that collecting GST and duty on the huge variety of low value imported items would be very expensive relative to domestic goods. Simply lowering the threshold, without any effort to lower these costs, would be pointless.
That is not to say that measures could not be taken to lower compliance and collection costs for low value imports. The Low Value Parcel Processing Taskforce last year identified a range of measures that could make a lower threshold more viable.
But these measures would still entail an expensive up-front investment in new processes and systems. This investment would substantially offset any revenue gain or wider economic benefit.
Some of these measures may still be worth implementing as governments should aim to lower compliance and collection costs where possible.
But it is difficult to escape the fundamental trade-off identified by the taskforce and other government advisory bodies like the Productivity Commission: the lower the exemption threshold, the greater the cost relative to any benefit.
While it may be possible to reform current arrangements that would then justify a threshold lower than $1000 on cost-benefit grounds, the efficient threshold is almost certainly not zero.
The GST should have only one purpose: to raise revenue for state governments. The design and administration of the tax should not be compromised to serve other objectives, such as protecting local retailers from international competition.
Australia’s retailers are almost certainly barking up the wrong tree in seeking salvation through a lowering in the low value exemption threshold.
It would seem unlikely that the threshold is driving the growth in overseas online sales and imports.
A simple test should make this point: is the online overseas price still cheaper than the local price after GST and duty is applied? Sadly for Australian retailers, the answer to this question will often be yes.
The exchange rate is also a factor in this calculation. The currency has not done Australian retailers any favours, but it is more of a symptom rather than a cause of other economic fundamentals. The exchange rate is a price signal that retailers must heed along with everyone else.
Australian retailers would be better served examining their own business models than campaigning for higher taxes on low value imports.
Well before the advent of the internet, Australian tourists often found that overseas retailers beat the locals not only on price, but often on product range, quality and service, too.
What the internet has changed is that Australian consumers no longer need to get on a plane to enjoy what overseas competitors have to offer.
With some notable exceptions, Australian retailers have been slow to innovate in response to these competitive pressures.
The rows of deserted shops on Sydney’s Oxford Street will not be filled again by raising taxes on low value imports.
They will return to life when Australian retailers adopt new and internationally competitive business models that better appeal to local consumers.
There is much governments could do to alleviate cost pressures and tax burdens on Australian business, including retailers. Retailers would be better served lobbying government for policies other than raising inefficient taxes on low value imports
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