Tuesday, October 30, 2012

Slippage - The Day Trader's Scourge

When I first began to day trade, I was not too worried if some of my trades suffered a bit of slippage. It hardly detracted from the feeling of pleasure in a winning trade, or the feeling of pain in a losing trade.

Slippage typically occurs when I issue a market order to buy at, say, 1450, but my order is filled at some worse price, say 1450.5. Beneficial (positive) slippage is also possible if, for instance, the fill comes back at 1449.75.

The opposite applies for a short trade. If I issue a sell order at 1450, I have 2 pips of negative slippage if I am filled at 1449.5, or 1 pip of positive slippage if I am filled at 1450.25.

However, as time passed, I came to realise that slippage is my greatest enemy. The reason is that it is my most significant cost. In any business, cost control is important, and trading is certainly no different.

In general, a day trader is targeting a smaller profit than a long-term trader. If I enter a trade targeting 2 S&P E-mini points ($100 per contract), I have one inescapable fixed cost, the brokerage commission (say, $5, or 5% of my targeted profit).

However, if I suffer slippage on the trade, things turn ugly. 1 pip of slippage costs $12.50 per contract, 2 pips cost $25, that is 25% of my target profit! These are substantial bites out of my potential return.

Often, it is worse for losing trades. If I have a risk/reward strategy of 1:2, I would anticipate losing $50 if the trade hit my stop loss exit point. Now, the $5 commission represents 10% additional loss, and 2 pips of slippage ($25) represents a massive 50% of additional loss.

The fact is, with 2 pips slippage, I stand to make just $70 on a winner, and to lose $80 on a loser. My projected 1:2 risk/reward ratio, which may have seemed quite attractive, has been savaged. It is now an 8:7 risk/reward ratio; I am risking more than I hope to gain!

My style of day trading involves analysing trading setups which have yielded profitable outcomes over a long period. While what has worked in the past cannot be guaranteed to work in the future, it is my belief that it can be a powerful guide, getting me into trades with a higher probability of a successful outcome.

But in analysing past results, I had better make realistic assumptions about the slippage I can expect on my trades. A strategy that may look like a potential winner with no slippage can very easily turn into a long-term losing strategy if slippage is anticipated.

I use a simulator to back-test strategies that I think have good potential. In a recent blog post, I discussed a possible wheat strategy. I back-tested the strategy from April 2009 through to July 2012. With no slippage, the return was an excellent 228%. But with an average 1 pip of slippage per trade, this came right down to 95%, and with an average of 2 pips slippage, the return was −37%!

One way of avoiding slippage is to enter your trades with limit, instead of market, orders. Limit orders certainly will cure the slippage problem, since your order is not filled at a worse price then you have requested. Unfortunately, the gains made by avoiding slippage can easily be lost by missing winning trades when price moves so quickly that the limit order isn't filled.

Another way of mitigating slippage is to use "smart" entries. By this I mean making use of your knowledge of the market to enter at a level which you know will trigger a fight between bulls and bears. If your market order is placed early in the fight, it is likely to be filled at, or close to, your target entry point. You may even be fortunate enough to receive positive slippage!

Friday, October 26, 2012

Automate Your Day Trading to Maximise Success and Profits

Day trading commodity futures contracts is a tough business. Especially for beginners, who must compete against experienced campaigners in an activity where the success of one trader is built upon the losses of another.

In this environment, you must have a trading plan. Nothing is more essential to survival and success. Without a plan, you will find yourself adrift in a shark infested trading ocean!

The objective of the plan is clear. It must tell you when to get in, went to get out, how large a position to take, and how to manage the trade. It should be unambiguous and precise.

The plan implements a trading strategy with an "edge". (The strategy will have made steady profits in back-testing, without large drawdowns. Nobody can guarantee the future, but such a plan, based on sound trading principles, has good prospects.)

Beginners soon come to appreciate the necessity of a plan, but that is only the first step. There is still much that can go wrong. The best plan in the world is useless if implementation is botched!

Indeed, if plan development is the entrée, flawless and disciplined implementation is the main course.

That is where automation comes in. A properly documented plan can be implemented automatically, and there are three excellent reasons for doing so:

    Many traders fail because they do not have the discipline to follow their plan. Watching charts during a session is hypnotic, and there is an overwhelming temptation to tinker with a trade, or enter extra trades outside of the plan. Automated trading beats this problem, because the computer trades for you while you do something else. Computers cannot be tempted, they are not impatient and they are not subject to fits of recklessness.

    Even if you are disciplined and stick to your plan, it is easy to make a mistake. You may be tired, you may be rushed by fast price action, you might make a simple arithmetic error, you might click the wrong button. Mistakes are usually expensive; missing just one winner, or turning one winner into a loser, can easily destroy a trading month. With automated trading, errors are eliminated. The computer executes the plan accurately every time, at lightning speed.

    Not everybody has the time or temperament to sit in front of a computer for hours each day waiting for the kind of opportunity which triggers a trade. Some poor souls have to work while markets are open. Others, like me, are in different time zones and need to sleep. Automated trading solves the problem. (I simply start my trading program during the evening and it trades while I sleep.)

Automated trading used to be restricted to professional organisations with strong technical resources. Now, using appropriate software, retail customers with no technical background can also automate their trading activity.

The switch to automation signalled a new phase of my trading career. For the first time, I began to see real trading results matching my simulation results... the fact is that it is not too difficult to discover a strategy with a winning edge, but it is incredibly difficult to implement it successfully over a period of months and years without the benefit of automation.

Automating your trading plan is the embodiment of working smarter, not harder. Your performance is improved, and you save countless hours each week chained to a computer.

Friday, October 19, 2012

How to Choose a Binary Options Platform/Broker

Due to the fact that binary options trading has only been around for a couple of years, most binary options brokers haven't yet had the opportunity to establish themselves as reliable and trustworthy.

In this new, innovative and exciting market, brokers are competing hard for traders business. To the average investor, this is a very good thing, as it translates to better contract terms and higher quality service. But there are some factors that differentiate binary options brokers from one another.

When researching a Binary Options Platform keep the following points in mind.

· Always choose the platform that gives you the biggest payout, this is just common sense. When you are shopping online for any other product you go with the cheapest assuming all other things are equal, right? You get the best value for your money. "Shopping" for a Binary Options platform should be no different, choose the platform that maximises your returns.

· Pick a trading platform that pays out 65-70%. You do know in advance what the payout is going to be or indeed what the loss is going to be before the expiration of the option, this is one of the greatest advantages of trading in Binary Options.

· Choose a platform that pays even when you lose "out of the money". Some platforms pay back as much as 15% when you are "out of the money" which is better than nothing and looking for "out of the money" returns will help you narrow down the choices.

· Chose a platform that offers a wide range of assets. This increases the chances of that asset being discussed or reported on. Your chances of finding good research on the assets increase as the variety of assets offered increases. The research you find will help you make the "put" or "call" decision.

· Watch for "extra" charges such as fees to deposit or withdraw funds. There are some with low or zero charges.

· The platform should have a good customer service support facility. You never know when you will need help or support. Many have live chat and local helpdesk numbers.

· Look for a platform that has good security with 128 bit SSL encryption.

Something many traders over look is the broker's terms & conditions. It is very important to review closely any contract or terms & conditions when choosing a binary options broker. Look for their rate of pay out, as I said above this should be in the region of 65-70%, if a broker is paying less you should consider alternatives.

Likewise any rebate on "out of the money if offered will be in the terms of contract as will the list of assets offered, the range of expiry times offered and any minimum or maximum investment amounts allowed. The terms and conditions will give you a good picture as to whether or not that particular broker/platform suits your needs.

As the Binary Options trading market is relatively new, many of the brokers are new too. It is your responsibility to check them out by researching them using online resources, forums, recommendations, referrals etc. There are many sources online today which have reviews of platforms and brokers and are worth a visit. If anything at all crops up you should move on as there are plenty to choose from.

In summary, there are many variables and points to consider but you are looking for value. You need to try and maximise your returns, get something back if you lose, you need the widest choice of assets to trade and have minimal extra costs to trade and above all you need a secure environment in which to trade. Don't forget to review any terms & conditions offered and to carry out some research on the brokers' reputation.

Until next time - Have fun and good luck!

In summary, Binary options are a new and innovative way for speculating on stocks, forex, indices and commodities but come with advantages and disadvantages.

Thursday, October 4, 2012

Stock Trading Clubs: Why They Don't Work

To think there is safety in numbers in a stock trading group is a mere fallacy. So many traders I know, the first thing they want to do is join a users group. The big question: why? Look at your peers. Do any of them look like they know more than you? Would you want to take advice from some of them?

Even if someone shares some knowledge that you crave, soak it in. But recognize that they just because they knew that one kernel of information, that they are not suddenly a prophet of profit. A common issue is that traders latch onto fellow traders emotionally. After all, this is a very emotional business and it's easy to place your complete trust in a fellow trader. They would never want to hurt me, right? And they don't; but they will not always have the answers, just as you won't always have answers either.

Traders by definition are independent thinkers. They also have egos. All too often, you'll hear of someone's wins. How many speak of their losses? Attach yourself to someone you perceive as a winner and you may be in for a disappointment. Eventually, even if they don't admit it, you will see a side that also loses. So which do you believe? Your fellow group member means well and will gladly take the credit for a recommendation but more often that not, they will quickly hide should the trade turn out to be a dog.

Groups are beneficial for exchanging knowledge, no question. I have learned a great deal from groups. But for actual trading, it's always best to be your own person, disregard others' opinions and base your trades on material you learned and understand.

The other side of the coin is that if you are perceived to be the winner, your fellow members will lean on you for tips. You'll feel great as long as the winners continue but once a loser sets in - and it's just a matter of time - not only will you feel bad but will become the haunt of others.

I've been a part of groups where we simply drop in, like an all day coffee club. This is hardly beneficial as it becomes addictive and unproductive. I prefer to learn the ropes, get in a trade using my own perceptions, make my money and get out. Usually, I'm done by 11 am, leaving me the rest of the day to spend with my family.

Monday, October 1, 2012

How to Choose The Viable Binary Option Strategies To Maximize Profit

Finding The Best Binary Option Strategies To Profit From

Binary Options trading is an innovative concept of trading. The new concept creates a simple system that allows you to either lose or gain. Binary options system provides you with two options. If you are expecting the price to increase, you can choose to place a "call option". If you are expecting the price to fall, you can choose to place a "put option". You can make use of other strategies as well in order to make your mind.

The pairing strategy, also known as straddle, allows you to place both the options discussed above on a trade. Let us suppose that you have chosen a "call option" on an asset that is expected to expire in an hour. After 30 minutes, the price of the asset goes up quickly. At this point, the price is likely to decrease quickly so you might choose to place a "put option" and the amount should be the same. The "put option" should be based on the asset price at the time of placing the option, not at the beginning price. This will expire one of the options "in the money". This will maximize your profits and minimize your losses.

Another strategy is termed as the Reverse Strategy. In order to use this easy and safe strategy, you must be familiar with the market. In the trading market, asset prices are affected by routine market events. You should choose a strategy once you have collected enough information about those events and the way they affect the assets. Normally, you have to take actions after an event has occurred and the prices have stabilized. If the prices reduce to the minimum level, you should consider placing a "call option".

You may check out the Non Directional Strategy if you have enough knowledge and experience. When the market is unstable, the prices of assets continue to fluctuate. In such a situation, you have to make decision based on your speculations about the asset prices. Aside from that, you might choose assets with lowest prices.

In order to choose and implement the best strategy, you choose use the services of a binary options broker. You have to do some research to find an experienced broker. Binary options brokers can handle most your work. With their assistance, you can gain as much as 75 per cent on your investment. It is important to mention that some brokers offer a rebate of 15 per cent on options expiring "out of the money". Using a broker is an ideal choice if you have no experience in trading.

In sum, no matter what strategy you choose to implement, you should be familiar with the ups and downs and current trends in the trading market. Also, keep in mind that no investment is without risk. Last but not least, do not invest an amount of money that you cannot afford to lose.