2Bull Forex Blog

There are two basic ways to execute a trade, on the exchange floor or electronically. With the ever changing technological advancements in this day and age, there is a drive to move more trading to the networks and off the trading floors, however this is meeting with some resistance. Most markets trade stocks electronically.

The New York Stock Exchange (NYSE) is the first type of exchange where much of the trading is done face-to-face on a trading floor. This is also referred to as a listed exchange. Orders come in through brokerage firms that are members of the exchange and flow down to floor brokers who go to a specific spot on the floor where the stock trades. At this location, known as the trading post, there is a specific person known as the specialist whose job is to match buyers and sellers. Prices are determined using an auction method: the current price is the highest amount any buyer is willing to pay and the lowest price at which someone is willing to sell. Once a trade has been made, the details are sent back to the brokerage firm, who then notifies the investor who placed the order. Although there is human contact in this process, don’t think that the NYSE is still operating in the dark ages: computers play a huge role in the process.

Thanks to television and movies it’s easy to conjure up an image of what trading on the floor of the NYSE would look like. I guess reality isn’t much different than what’s portrayed in the media because when the market is open, there are hundreds of people rushing about shouting and gesturing to one another, talking on phones, watching monitors and entering data into terminals. You want chaos, this is it. Despite what looks like organized confusion, the process works. Here’s how a very simple trade on the NYSE would occur:

1. You tell your broker to buy 100 shares of BNB Widgets at market

2. Your broker’s order department sends the order to their floor clerk on the exchange

3. The floor clerk alerts one of the firm’s floor trader who finds another floor trader willing to sell 100 share of BNB Widgets. This process is easier than it sounds as the floor trader knows which floor traders make markets in particular stocks.

4. The two agree on a price and complete the deal. The notification process goes back up the line and your broker calls you back with the final price. The process may take a few minutes or longer depending on the stock and the market. A few days later, you will receive the confirmation notice in the mail.

This was a rather basic trade, simply to give an example of the process on the NYSE, complex trades and large blocks of stocks involve considerable more detail, and more space than I have to write in.

Electronic markets use vast computer systems to match buyers and sellers, as opposed to human brokers. Several large institutional traders, such as pension funds and mutual funds, among others, prefer this method of trading. For the individual investor, you typically can get almost instant confirmations on your trades. It also facilitates further control of online investing by putting you one step closer to the market. You still need a broker to handle your trades as individuals don’t have access to the electronic markets. Your broker accesses the exchange network and the system finds a buyer or seller depending on your order.

How a system that can facilitate one billion shares trading in a single day works is a mystery to me, so I thought I’d do a little digging and see if I could come up with the general process on how stock trading works. Here is what I found.

The purpose of a stock market is to facilitate the exchange of securities between buyers and sellers, reducing the risks of investing. Just imagine how complicated it could become to sell shares if you had to search for someone who wanted to buy your stock.

When it comes to trading stocks, it’s not trading in the typical sense of the word, where I give you this, if you give me that. Trading on the stock market is more a matter of buying and selling, these two components are what make up ‘trading’ when it comes to investing in the stock market. As opposed to something like retail shopping where the prices are set by the seller and you can just walk into a store and purchase something, the stock market functions more like an auction in which both buyers and sellers are actively setting the prices at the same time.

With both buyers and sellers actively setting the prices in the stock market, it is only logical that there are subsequently two prices associated with every stock, the bid price and the ask price. The bid price is the price at which buyers are willing to buy the security whereas the ask price is the price at which sellers say they will sell the security. These two prices are pretty much never the same: generally, the bid is slightly below the ask. The difference between the two is called the spread, the amount that is taken by your broker as profit. Specialists, who are in charge of the coordination of the buying and selling of a certain stock, pair bids and asks together to streamline the process and keep the spread small, but positive.

Considering that the bid and ask prices are always changing, you need to be careful about your sales and purchases. The price that is quoted may or may not be the price at which you actually buy or sell the stock. There are several options regarding the method of execution for your trades:

Market Orders: an order to buy or sell stocks at the prevailing market price. These are often the lowest-commission trades because they involve very little work on the broker’s part.

Limit Order: You tell your broker to buy a security at or below a specified price, or to sell a security at or above a specified price. This ensures that you will never pay more for the stock than whatever price you set as your “limit.”

Stop Order: You tell your broker to buy a security at the market price once it reaches a level higher than the current market price. The opposite would be true if you were selling: you would tell your broker to sell your security once it reaches a level below the current market price. A market order to buy or sell a certain quantity of a certain security if a specified price (the stop price) is reached or passed.

Day Order: You tell your broker to execute the trade by the end of the day; otherwise, he or she does not fill the order.

All or None: an order type for a broker to execute a trade only if every share of an order can be filled in its entirety, or else not at all.

Fill or Kill: You tell your broker to execute the trade immediately; if the trade is not filled right away then your broker does not execute the order.

W D Gann amassed a fortune of $50 million dollars in the first half of the last century, although he died in 1955, his trading techniques are still used today.

If you have a FOREX trading system then Gann’s trading methods are an ideal vehicle to seek big profits with low risk.

Gann’s Method

Gann’s method takes the emotion out of trading and like any successful FOREX trading system will liquidate losses quickly and try and hold the longer-term trends and milk them for profits.

Gann’s method was tried and tested and many of his trades were publicly recorded and worked in ANY financial market.

1. He predicted improvements in the economy in 1921 and the huge Bull Run in stocks.

2. In 1928 he predicted the end of the Bull Market, a full year in advance of the 1929 crash.
Not only this but he then bought stock in the Dow at the all time low that occurred in 1932.

3. In 1935, a newspaper verified 98 of his trades, in cotton, grain, and rubber.

The result?

83 were profits.

Why Was Gann’s Unique?

Gann was a technical trader but introduced a unique slant to his method by calculating the interaction between price and time and its influence.

Gann believed that crucial price trend changes happened when price and time converged.

If price and time were not in synch, then time would always by the main determining factor over price.
Time, was therefore the ultimate indicator for him as Gann once said:

“All of nature was governed by time”.

In the “Wall Street Stock Selector” Gann gave an insight into repetitive price patterns that would always occur and said:

“Just remember one thing, whatever has happened in the past in the stock market and Wall Street will happen again. Advances in bull markets will come in the future, and panics will come in the future, just as they have in the past. This is the working out of a natural law”

Gann also had other unique concepts that he incorporated in his methods

He utilized such concepts as Gann angles as well as The Fibonacci Number Sequence which were revolutionary and are still used today.

Gann wrote extensively and produced vast volumes of work over his lifetime and all traders can learn from him.

Why Is Gann influential today?

Quite simply, as his methods are based on recurring price patterns they will never go out of date and savvy traders worldwide still use them to gain a trading edge.

FOREX markets are some of the best markets to trade and if you have a FOREX Trading system Gann’s methods could help you in your quest for profits and give you the trading edge you desire.

Fact: Most traders don’t have the mental discipline to make big gains. This may sound odd we all want them don’t we?

Of course, but most traders don’t have the mental discipline to hold them they bank them early or get stopped out. Let’s look at why and how to hold and bank the big moves.

Why most traders cannot maintain discipline.

The reason lies in human nature. We all hate to be wrong and when we have a small loss we let it get bigger (after all it will turn around soon) so a small loss becomes a big loss, then it’s too big to take and the trader hangs on until he is wiped out.

Traders have problems with losses, but they also don’t have the discipline to make profits!

If this sounds odd (after all we all want forex profits) on reflection it’s not.

When a trader has a profit he gets excited and the bigger the profit becomes the more the temptation is there to take it before it gets way.

As normal market action eats into open equity, the greater the temptation becomes to take it, after all no one goes broke taking a profit?

YES they do!

If you don’t have the discipline to run the big profits, you will ever cover your inevitable loses.

The way to get disciplined in simple steps is.

1. Understand what you are doing

If you follow anything you don’t understand you will lack discipline and this is what many traders do.

They follow gurus or systems they don’t understand the logic of and of course wilt and throw in the towel when losses occur.

Understanding is the key to:

2. Confidence

If you don’t understand you won’t be confident to follow your system through the bad times. You will over ride it or bin it and frankly you may as well not have a system at all

3. The key

Here is the equation for success

Understanding = Confidence = Discipline

Let’s look at this in a bit more detail.

1. On your method make sure its simple and you understand why it works long term and think of losses as just a normal cost of doing business. Don’t ever follow a system blindly.

2. Make sure you place your stop as soon as you open a trade

3. Understand that the big profits in forex trading are made following the long term trends, and these last months or years and can be worth 10, 20, 30,000 or more!

4. To hold these trends you must learn to take pullbacks in open equity. This is hard when you lose a 1,000 in a day or more but keep your eye on the bigger picture. Don’t move stops to soon, you will get taken out by market noise

5. To win you have to have the discipline to cut losses, but you also have to have the mental discipline to accept big profits.

If you think about the above it’s logical, but is very hard to achieve in practice when money is on the line emotions kick in even with experienced traders, but if you understand the above you can stay disciplined and if you do you can achieve some huge forex profits.