2Bull Forex Blog

FOREX Day traders are loved by brokers these are the traders they simply want more than any other type of trader.

FOREX day traders are wary of brokers, because they think they pick their stops off and that’s why they love them, but the real reason is:

Day traders are guaranteed to lose their money without any help from a broker. I used to work in the back office of a broker and we factored them in as losing straight away and a big fat profit for us.

So here are the reasons we loved them and other brokers do to:

1. Day trading by its very nature doesn’t work

Trying to trade in short time spans of a few hours or a day and to try and measure where prices are going is ridiculous.

All short term volatility is random and prices can and do, go anywhere.

We traded several thousand day traders and not one made money, they all lost.

The logic FOREX day trading is based upon is totally flawed.

Try this simple test:

Ask any vendor selling a system on the net and ask for a real time track record and see if you get one! You won’t.

Many of them are simply writers or failed brokers.

They make up track records sell them and then do a deal with a broker for a kick back commission and believe me the commission is good,  we paid out tens of thousands every month!

2 Great commission

Day trading is the best commission to equity you can get and for a broker that’s great.

Lots of trades, eroding account equity to zero and paying commission every day.

Much better than a trader coming in and blowing his equity in a couple of trades.

Market makers are equally happy.

As they want the traders deposit lost and on their book.

They are trading against the client and don’t need to worry it will soon be in the bank. Furthermore, as day traders never make any big profits (running profits is totally alien to them)

The risk of carrying a day trader on your own book as a broker is low.

DO BROKERS HUNT STOPS?

The answer is no.

Day traders believe this, but the real reason is they set their stops to close.

Support and resistance are meaningless in day sessions and that’s why stops get hit all the time.

Its not the brokers fault, it’s the day traders for being stupid and placing his stops in meaningless time frames where volatility is random.

There you have it.

The reason brokers love day traders is their great money earners for the house and guaranteed to lose as well, which is perfect for market makers.

It’s a headline that every stock market investor fears will happen. The markets crash and their hard-earned nest egg evaporates. They’re forced to go back to work and must resort to eating beans and rice. Is that fear justified? No.

Stock markets around the world dropped on Tuesday. The news media echoed that it was the biggest one-day drop since September 11th, 2001. The Chinese stock market dropped almost 10%. Here in the U.S., the major indexes were down over 3%. At one point the Dow Jones Industrial Average dropped over 150 points in one minute!

Should investors panic? No. The world is not coming to an end. The world’s economies continue to be strong and are growing. Interest rates are still low compared to historical standards. And yesterday’s decline follows 7 months where the markets recorded increases of 15%, 25%, 40%, and even 77%.

First, let’s put yesterday’s drop in proper perspective. I remember watching the ticker back in 1987 when the stock market tumbled. It’s something that I will never forget and is one of the reasons I have developed the systems and strategies I use to manage my client’s money today.

On Tuesday the Dow Jones Industrial Average dropped a little over 400 points. To equal the market drop in 1987, Tuesday’s total decline would need to be 2700 points. Tuesday, the Dow dropped 3%. In 1987 it dropped around 20%!

Second, there are going to be times when the markets make rapid adjustments. This applies not just to the stock markets, but to bond and real-estate markets as well. The introduction of electronic trading and the proliferation of hedge funds only add to volatility.

That may have been what occurred yesterday. Hedge funds can be leveraged as much as 30:1. That means if they have one dollar, they borrow thirty dollars more and invest it all. If the markets go up, a hedge fund can make enormous returns. If the markets drop too much then they get a ‘margin call’. That’s when those that lent the money decide they want it back–right away.

When someone trading on margin receives a margin call, typically they have to sell investments to generate the cash needed to cover the call. When you’re leveraged 30:1, it means you have to sell a lot of investments. Hundreds of millions of dollars can be sold in a matter of minutes with the use of electronic trading. That selling causes the market to go down, which causes others to receive margin calls. So they then have to sell.

Many of today’s mutual fund managers haven’t experienced a decline like 1987 or 2001. Initially, they hang in there. But as the markets drop further they succumb to the fear and decide to start dumping investments. In my opinion, that’s why the sell off picked up speed Tuesday afternoon.

That brings me to my second point. Who’s watching your money? When things go bad they can go bad in a hurry. That’s why it is so important that you know there is someone who is closely monitoring your money and will take action if necessary to protect it.

Unlike most managers, I employ multiple strategies in each account. Some are short-term, some medium term and others long-term. Days like yesterday illustrate the benefits of this multi-strategy approach. The money in short-term strategies was quickly moved to cash. Some sales actually took place the day before the big drop. Others occurred shortly after trading started. If 25% of an account is quickly moved to cash in such instances, that reduces the overall risk to the portfolio substantially.

Third, it’s important that you be selective in what you sell. Liquidating short-term positions allows me to hold on to high-dividend paying stocks and other investments that should comfortably weather the storm. Even if the market languishes, I hold strategies that pay dividends of 6-9%.

Lastly, after the market closed yesterday I saw a picture of a U.S. soldier carrying an Iraqi child needlessly killed. I talked with a client who was undergoing additional testing to see if she has cancer.

While it’s my job to monitor and manage my client’s money and your job to safeguard your nest egg, it’s important to remember in the end, there are things in life that are much more important than money.

Here we will look at a trading opportunity we looked at recently and look at two more that are shaping up right now.

Let’s look at them.

Pull up any free chart service such as futuresource.com and add the following indicators:

Bollinger bands, stochastic and Relative strength Index (RSI)

Now let’s look at some trading opportunities

US V Canadian Dollar

This trade made us some great profits on the downside and now we have taken a contrary trade as we have zeroed in on key support at 1.10

Prices are trying to hold current levels a close below the 1.10 level – negates the contrary trade.

RSI is oversold at 24.38 and stochastics are flat.

We are already long at current levels to enter new positions we look for stochastics to cross with bullish divergence.

Target is the middle of the Bollinger band.

British Pound

We have had a lot of good trades in this currency and made a great profit from the recent breakout.

Prices have pulled back from the highs and another opportunity is presenting itself:

Prices have dropped to the middle of the Bollinger band and started to steady, RSI Has started to rise but stochastic momentum remains down -= The key to this trade is to watch the stochastic

A cross to the upside with bullish divergence should see a quick pop to the highs.

As per usual wait for confirmation of strength before going long.

US Dollar V Japanese Yen

This trade treated us well last time we looked at it and we made a great profit trading the dollar to the long side and were looking to exactly the same again.

Prices broke up above the 120.00 level and prices are testing the breakout point.

If this point can hold and stochastics turn bullish – the bulls will take charge and the US Dollar looks set for strength.

Again, it’s a question of waiting for confirmation before getting in.

Price momentum has not yet turned up so wait for the stochastic to give the signal.

Getting In the market. Confirmation Is The key!

In any trade you attempt, don’t try and impose your view on the market, wait for your view to be backed up by confirmation that price momentum is in your favor.

This will dramatically increase your odds of success.

We love the Relative Strength Index and particularly the stochastic indicator – it amazes me that more traders don’t use them.

If you don’t read our other articles to find out how they can help increase the odds of success in your own trading.

Trading is all about getting the odds in your favor.

For this you need to understand and use changes in price momentum to enter your trades.

Good Trading!