Electronically traded products such as individual stocks, bonds, emini index futures contracts (such as the S&P 500 Index and the Dow Jones Industrial Average), or other index futures contracts such as the DAX or the Nikkei Index are traded daily by millions of traders worldwide. In addition to the online trader, these products are traded by institutional traders, hedge funds, mutual funds, specialists, or large producers or users of a commodity. These powerful traders have the ability to move and support markets, and influence price action, often without even entering the market. The actions by these traders continually affect the market environment. Without the ability to observe and understand how these actions affect the market environment, an online trader will find himself lagging behind.However, in order to understand the importance that the market environment has to the online trader, he first must understand trading activity taking place within it. Products such as those mentioned above, are bought and sold by and to traders throughout the trading day. It is useful to compare trading these products to the way a vehicle can travel on a highway, that is in one direction or the other. For a trader, the market in which a product is traded is the highway, and the product being traded is a vehicle occupied, or controlled, by either buyer or seller. At any given moment a battle takes place between a seller and a buyer initiated by one or the other when they choose the one of the two directions in which to drive the vehicle; this battle is for control over the price for the product being traded. After this battle is complete and a trade is made, volume is created.A trader uses the market environment to make the decision of whether he wants to control the vehicle, or price. In some market environments, the trader will want to be the driver; while in other market environments, he might allow the other trader to drive because he has determined that it is in his best interest to do so. The analogy chosen—that of a battle for control of a vehicle on a highway—is to assist in the creation of a picture which will allow a more comprehensive understanding of the market elements which determine the outcome of a trade. By understanding these market elements and how they fit together to form the market environment, a trader will understand the different concepts embodied in MarketDelta™, thereby allowing a trader to utilize MarketDelta™ as if it were both the front windshield and rear-view mirror of his vehicle. With the information provided by MarketDelta™, a trader will be able to control his trading to his advantage, given the particular highway road conditions of the moment—or, the current market environment.Before examining the elements which make up the market environment, it is necessary to understand that, from the perspective of a trader using MarketDelta™, each and every element of the market is comprised of one or more of the following core trading variables: buyer’s action, seller’s action, bid price, ask price, traded price and volume. Each of these variables, their interactions and relationships, come together to form the various elements of the market. MarketDelta™ graphically displays each of these variables and their relationships in a logical multi-dimensional manner so a trader can observe them effectively. Through a trader’s experience and understanding of these variables, MarketDelta™ can allow a trader to make the best use of his knowledge or trading “edge.”
Tuesday, May 8, 2007
MarketDelta as a Decision Support Tool
To illustrate how a trader can utilize MarketDelta when buying or selling, take again our scenario where a hypothetical trader chooses to enter the market by waiting for 1126.25 to become the bid price before selling. Although he wants to sell 200 contracts at this price, what if only 10 are available on the bid? If the trader chooses to sell the 10 contracts available, the unwanted affect of the bid price becoming the ask price may occur, i.e. price will move lower. If it does, this would leave his 190 contracts to sell exposed at the previous ask price. This, in turn, can send a trade-entry signal to other traders in the marketplace who also want to sell into the market and create more supply. This introduces the chance of the price shifting due to the influence of this supply and our trader will not be able to complete his intended trade. Now unfortunately, our trader, who has studied diligently using his “edge”, is suddenly prevented from successfully completing his trade. By understanding how MarketDelta™ interacts with price prior to, and at the time when, our hypothetical trader sells at his studied price when it becomes the bid, he will be better prepared to avoid exposing his entire order if the available quantity is not sufficient, and instead, sell his order in four separate trades of 50 contracts. Conversely, perhaps other clues in the market environment, such as momentary low demand, indicate to our trader that adding supply to this respective low demand would be in his best interest. In this instance, he might sell the available 10 contracts. This may cause a price shift from bid price to ask price, and this shift would perhaps send a signal out that there is supply at this ask price. His remaining 190 contracts might attract other trader’s to join in with more supply, thereby creating a buffer inhibiting the movement of the price upward. The trader may have chosen this course of action hoping for such events to unfold. Proper knowledge and use of environment has allowed the trader to complete a desirable mission. In both of the above situations, our trader would be steering his vehicle properly by acting on signals he has drawn from current market dynamics. In sum, by observing and understanding the market environment using MarketDelta , a trader dramatically increases the chance that his studied trade will be completed successfully. When a trader knows the market he is trading in, he can act in sync with the market as opposed to against it. When a trader unknowingly is acting against the market, he becomes his own worst enemy.
As mentioned above, it is not of concern as to why a trader is buying the ask or selling the bid. Of concern is only the fact that it has occurred. This fact is reflected by MarketDelta™ showing that a completed trade has been created accordingly, either on the bid or the ask side. From this fact, the premise, as discussed above, follows (using a buyer as an example): buyer’s action to buy the ask price to create a trade which results in volume does so because that buyer chooses to perform an aggressive action in the marketplace; he has chosen to drive by attempting to steer the price. It must be understood that these are aggressive actions and a trader using MarketDelta™ must follow this premise. Conceptually, this is what MarketDelta™ performs at its most basic level: it allows the trader to observe on which side—at the ask or at the bid—the aggressive actions are being taken. Armed with this knowledge, MarketDelta™ can thus be used as a viable decision support tool.
As mentioned above, it is not of concern as to why a trader is buying the ask or selling the bid. Of concern is only the fact that it has occurred. This fact is reflected by MarketDelta™ showing that a completed trade has been created accordingly, either on the bid or the ask side. From this fact, the premise, as discussed above, follows (using a buyer as an example): buyer’s action to buy the ask price to create a trade which results in volume does so because that buyer chooses to perform an aggressive action in the marketplace; he has chosen to drive by attempting to steer the price. It must be understood that these are aggressive actions and a trader using MarketDelta™ must follow this premise. Conceptually, this is what MarketDelta™ performs at its most basic level: it allows the trader to observe on which side—at the ask or at the bid—the aggressive actions are being taken. Armed with this knowledge, MarketDelta™ can thus be used as a viable decision support tool.
The MarketDelta Display
Now that we have covered the importance of observing the battle between the buyer and the seller before and during a successful trader’s entry into the market, let’s take a closer look at how MarketDelta™ displays this invaluable information. As stated, MarketDelta™ graphically displays the aforementioned market variables, plus the Delta (which shows market pressure), in a logical, coherent, and intuitive manner—and all of these elements are displayed in real time. There are four primary components to the MarketDelta™ display window: (a) the Battle Price line, (b) the Footprint Chart, (c) the Price Indicator Chart, and (d) the MarketDelta Indicator.
Again, one of MarketDelta™’s primary features is its ability to show bid and ask volume being created in real time. There are two places where MarketDelta™ displays this information: in the Battle Price Line or BPL window, and in the Footprint window. The BPL window shows trading volume, in real time, on both the bid and ask side while simultaneously showing price moving as it is affected by this volume. Here is where a trader should begin his observation of the market. The BPL contains two columns: a red column, which shows volume accumulating on the bid side, and, a blue column, which shows volume accumulating on the ask side. The bid price or ask price is indicated by showing this volume immediately adjacent to the price, which is displayed in a white column residing between the red and blue column. The price is shown descending from the top to the bottom of the window at the products’ smallest price interval, or price tick. Both the traded bid volume and the traded ask volume appear and aggregate in real time as the market product is traded. Drawing upon our earlier discussion of the battle between buyer and seller, the blue column will accumulate volume as the buyer’s action attempts to influence the price to shift from the ask price to the bid price; conversely, the red column will accumulate volume as the seller’s action attempts to influence the price to shift from the bid price to the ask price. By watching these numbers which in reality are traded volume accumulated, and by observing under what conditions these price shifts occur, a trader’s awareness of the current market conditions will increase as he will be witnessing the market environment pulsating with each trade being made in the market.To further illuminate how the distinct mechanics of BPL show how traded volume on the both the bid and ask side of the market interact with price as the market is traded, the following is a step-by-step portrayal of the BPL as it operates. As stated above, as a trade is created at the bid price or ask price, BPL reflects this change in either the red column or blue column, respectively, increasing the number to indicate the number of contracts traded. In addition to showing the volume, it must be understood that BPL is also showing whether the trade was made on the bid side of price, or on the ask side of price. For example, if the current bid traded volume of the S&P emini was 40 contracts at a bid price of 1125.50, the BPL will display the number 40 in the red column left of price which is designated (in S&P emini quarter point increments) in the white column separating the red and blue columns. Suppose the next trade is for 10 contracts at 1125.75, the current ask. As this trade is made, BPL will increase the number already to the right of 1125.75 in the blue column by 10. Thereafter, when a trade is made at new bid or ask price, the BPL will display the number of contracts for this trade adjacent to this new price, in either the red column or blue column, as the case may be, and erase the volume which had accumulated at the previous bid or ask. So to continue with our example, if the next trade is for 5 contracts at a new bid price of 1125.75, BPL will erase the bid volume of 40 in the red column adjacent to 1125.50, and display the number 5 at 1125.75 in the red column left of price. For the moment, the BPL shows the bid and ask volume at 1125.75. This will likely appear unusual because, typically, the bid more commonly is below the ask. In our example, bid traded volume at bid price 1126.75 is totally creditable and informative although it just takes understanding. Even though trade was made at what usually would be perceived as the ask, we know that this trade was actually made on the bid side, as evidenced by BPL’s display of a volume of 5 in the red column. The volume at the previous bid price of 1125.50 is erased, and BPL now displays bid volume accumulating next to 1125.75 in red column. And although the previous bid volume of 40 at 1125.50 is cleared to allow the BPL to show the current bid volume accumulating at 1125.75, MarketDelta™ records this volume in the aforementioned Footprint window (as detailed below).
A unique feature of the BPL is that as the volume on the bid and ask side is accumulating, a trader can simultaneously observe the product’s available quantities at the bid or ask diminish accordingly. This is shown in market depth, available through most order-entry or charting platforms, such as Trading Technologies, Patz, Eccoware, Trader Workstation (Interactive Brokers), MB Trader or other Independent Software Vendor (ISV). If this information is not provided to a trader, MarketDelta™ provides the first line of market depth located in its ticker window.
As pointed out above, as only the current bid or ask volume is displayed in the BPL, a trader can see the volume for a previous bid or ask price by referring to the Footprint window, the second place within MarketDelta™ a trader can observe the ongoing battle between the buyer and seller. In the Footprint window, while the market is trading at a particular price, a rectangular box is plotted on a price chart at this trading price; this box is called a Footprint. Traded volume at both the bid and the ask accumulate and this volume is shown within this rectangular box in the form of B x A, with B representing the traded bid volume and A representing the traded ask volume. While the market is trading at this price during a given moment, this bid and ask volume is displayed, similar to the BPL, within the Footprint.
The Footprint window works in concert with the BPL to give the user a multi-dimensional representation of the market environment. When a trade is made by the aggressor (i.e., at the bid price or the ask price), the same information that is revealed in the BPL will simultaneously be presented in a Footprint. The Footprint is permanent record of this volume. MarketDelta™ provides two modes which determine how Footprints are plotted, either in response to (i) price action, or (ii) time. When Footprints are plotted in response to price action, there are three factors relating to price, which determine how and when the Footprints are plotted, moving from left to right across the price chart. The first factor is that the volume must continue to be created at a particular price; this is simply due to the fact that volume drives the market. The second factor is that as price moves and volume is created at a particular price tick, it creates a Footprint series. The Footprint series will be given a direction, either up or down, as price moves, and new Footprints will be created at each tick accession where traded volume occurs, creating a column of Footprints. Lastly, this directional price series will continue in the direction the series is given until volume occurs at a user-specified number of ticks in the opposite direction to the direction of the series. At this point, a new Footprint column begins immediately to the right of the previous column with this volume placed in the first new Footprint in the new column. From here the process repeats itself. In this manner, new columns are created in response to price action, where each column is a trend in price, similar to “point and figure” charts. Alternatively, a user can set the Footprint chart to plot in response to time. In this mode, a new column of Footprints is created at a specified time interval, similar to classic bar charts. In either mode, as price moves up and down before a new column is triggered—be it in response to price action or time—volume at both the bid and ask will be added to the Footprints already plotted in that column, adding to the previous traded volume already in the Footprint. The Footprint chart provides a record to which a trader can refer to examine how the volume traded at both the bid and the ask interact with price.
In addition to the presenting and recording all of the information displayed in the BPL, the Footprint can be set to display alternative interpretations of this data. The Footprint window can be set to show bid and ask volume together, as discussed above, or it can be set to show the volume as the Delta (market pressure), total volume, or as strike volume. The Delta is the net of ask volume over bid volume; the current bid volume accumulating decreases the Delta while current ask volume accumulating will increase the Delta. For example, if 35 contracts are traded at the ask as a result of an aggressive buyer or buyers attempting to influence the ask to go bid and there are 100 contracts as a result of an aggressive seller or seller attempting to influence bid to go ask, the Delta, displayed within the applicable Footprint, is shown as -65 (-100 contracts (bid) + 35 contracts (ask) = -65). As mentioned above, this number is a barometer of market pressure.
If the Footprint window is set to total volume, each Footprint simply displays the aggregate of bid and ask volume. If set to strike volume, each footprint shows the total number of trades, or strikes, on the bid side and on the ask side, displayed in a format similar to the way bid and ask volume is displayed. Each strike represents a single trade as opposed to the number of contracts comprising a trade.Lastly, MarketDelta™ has the ability to display volume in a manner, which allows the user to determine overall market pressure. Market pressure is simply the pressure being put on the market by the aggressive buyers and sellers. By understanding how this pressure intensifies and diminishes, and what effect, if any, this pressure has on price, a trader using MarketDelta™ as a depiction of the market environment will be better prepared to anticipate a potential market trend or change.
Market pressure is displayed in the MarketDelta Indicator window. Similar to the way the Delta in each Footprint indicates market pressure at a particular price or for a specified unit of time, the MarketDelta Indicator displays the aggregate volume traded at the ask over the aggregate volume traded at the bid for the entire trading day, or a sum of all of the Delta levels contained in each Footprint. In addition, the MarketDelta Indicator will display the low and high-pressure levels for the trading day to allow a user to use these levels similar to the way support and resistance levels are used with price. Every time a trade is created, the MarketDelta Indicator will change, increasing the indicator number by the number of contracts traded at ask price and decreasing the indicator number by the number of contracts traded at the bid price.
So as to allow the trader using
MarketDelta to visualize what affect market pressure has on traded price, there is the Price/Indicator window. The Price/Indicator window plots both the value of the MarketDelta Indicator, and the price, in an equivalently scaled overlay chart. With the Price/Indicator window a trader can see at any point whether the buyer or the seller is exerting pressure on the market, either by observing how price is being plotted as traders seek a price at which to trade, or by observing volume created by aggressors. From these observations, the trader using MarketDelta™ can refer to the traded price in either the BPL or Footprint window, and note how these pressures are affecting it.
To understand how a trader using MarketDelta can observe the interaction between market pressure and the traded price, it is necessary to understand who, between the buyer and seller, is exhibiting strength in the market. Essentially, at any given moment there is a battle by the buyer over the price being asked by the seller (i.e., the ask price), or conversely, by the seller over the price being bid by the buyer (i.e., the bid price). Whenever a participant in the market is attempting an aggressive action, by either selling the bid price or buying the ask price, pressure is being exerted on price. So how does a trader know if either the buyer or seller is showing strength? Strength in the market is shown primarily using the principles of supply and demand. A successful online trader must understand how both supply and demand can independently affect market price. MarketDelta™ monitors demand by the buyer seeking trade with use of his purchasing power (or potential supply to seller) or demand by seller seeking a trade with use of his selling power (or potential supply to buyer). I want to allow for my use of demand to be understood as it is being put into this context. It can be confused when thinking in the economics sense from the academia. I am using demand in the sense of “eagerness.” Trader can be eager to demand price up or down as well as demand the reception of volume when available. For instance, high demand by buyer or high demand by seller may or may not effect movement of price. High demand in the market will only affect price when there is an imbalance of supply between buyer and seller. Consequently, if the supply available to buyers and sellers is relatively equal, then the demand seeking trade will cause minimum price movement. By understanding supply and demand within the framework of MarketDelta™ an online trader can thereby observe strength in buying and selling in two ways.
The first way a seller or buyer shows strength is by observing strong demand by the buyer or seller in his attempts to seek a trade. When there is a quantity available from sellers at the ask price, buyers may buy from this quantity by buying at the ask price, simultaneously decreasing supply and, in addition increasing traded ask volume. As noted above, when a buyer buys at the ask price, the buyer is being aggressive. If the buyer demand is high, meaning the buyers’ actions to seek trade increasingly become more aggressive, eventually—if additional supply is not created by sellers adding to the quantity available at that ask price—the supply at that ask price is reduced to zero. At this point, the ask price will shift and become the bid price. It is this price shift, which indicates complete strength by the buyer. The buyer, showing demand and having purchased all available supply at the ask price, indicates his dominance over price and the next higher price having a quantity or supply available will become the new ask price. At this moment, the buyer is dominating the price, and in turn, showing strength in the market. Sellers show strength in the market in exactly the same way. Aggressive sellers show demand by seeking to trade at the bid where supply exists. Selling at the bid will decrease supply available at the bid price while increasing traded bid volume. If the supply coming from the sellers wishing to sell at the bid is greater than the demand from buyers wanting to pay the bid price, the number of contracts to buy at the bid will be exhausted by the sellers at the bid and the next highest bid will become the best bid-i.e. the bid will decline. The former bid price will then probably become the ask price. At this moment, sellers are dominating the bid price and showing strength in the market. When buyers are showing strength in this way, traded ask volume exceeds traded bid volume resulting in an increase in the value of the MarketDelta Indicator. When sellers are showing strength in this way, traded bid volume exceeds traded ask volume resulting in decrease in the value of the MarketDelta Indicator. When this happens, MarketDelta’s™ Price/Indicator window will show both the plotting of price and that of the value of the MarketDelta Indicator increasing, or decreasing, as the case may be, as price and volume (created by the aggressive buyers or sellers) move together, as demand outstrips supply and price moves up.
The second way strength is shown in the market is through price velocity. In this situation strength by buyer is the result of seller’s weakness. In this case, supply is low enough for buyers to continue to drive price in search of trade with no signs of sellers’ strength. Buyers strength is such that price is being driven up by the buyer because supply cannot meet the current demand by buyers seeking trade; price increases in search of supply. Essentially, buyer demand, while not being high, is uncontested by sellers. In other words, as there is little to no supply available from sellers at the ask price, so price marches upward to find quantity to buy. Buyers are able to drive the price up due to the fact that quantity is scarce at these prices. Buyer demand while seeking a trade may necessitate travel through several prices. Until buyers find sufficient quantity available, volume will not increase. This in turn will be reflect by MarketDelta’s™ Price/Indicator window showing the plotting of price increasing with the MarketDelta Indicator bar remaining relatively flat. This is also shown when there is a gap in the Footprint chart indicating no trades were made at particular prices during the price series. In these situations when buyers are driving prices upward without the corresponding ask volume, the buyer is showing strength by its ability to drive prices higher due to minimal supply by seller.
MarketDelta = The Market Environment
As previously stated, just knowing on which side of the market the aggressive actions are being taken will not benefit the trader unless he continually observes and understands the market environment. Here is where MarketDelta becomes more than just a decision support tool. Besides showing trades being completed at the bid or ask side, MarketDelta also displays all six market variables mentioned above (buyer’s action, seller’s action, bid price, ask price, traded price and volume), plus a barometer which displays market pressure, referred to as the Delta. The six market variables and their numerous interrelationships comprise the entire market environment. The Delta is displayed in two formats. The trader may view it in one window as a spot indicator for a unit of time (called a Footprint, discussed below), and in another window as an overall number for the trading day. Each variable interacts with the others variables in unlimited ways while traders seek a price at which to trade. Using MarketDelta™, a trader can observe each of these variables change and interact during the trading day. Before and after buyer and seller meet and a trade is created, any one or more of these variables may change, which in turn, may cause one or more of the variables to change again, and so on, each variable being altered in an ongoing manner while trades are being made. The constant state of flux is due to each variable’s subtle influence on the remaining variables. By being able to see these variables influence each other and change according to the dynamic of a given trade allows MarketDelta to become the environment in which the trader can exist and be a part of so as to trade more effectively.
As stated above, when a buyer meets a seller at a particular price a trade is created, increasing volume. That price can be at the ask or the bid. After the trade is made and volume is created, the trading variables comprising the market environment are altered and there is the potential for a price shift, e.g., the ask price can become the bid price (price moves higher), or, alternatively, the bid price can become the ask price (price moves lower). Due to the fact that there are several trading variables, which comprise the market, it cannot be known to any degree of certainty how much volume is needed for this price shift to occur. However, a trader can utilize MarketDelta™ to observe how the remaining variables are influenced by a trade; he can observe how these variables react and change in real time. This knowledge- and observing the repercussive outcomes- can assist a trader in his understanding of how each trade reverberates throughout the market. This allows the trader to possess the requisite knowledge needed to anticipate a potential price shift with increased accuracy. As each trading variable is affected by the change of another, a shift in price may result from any number of factors relating to the changes in these variables. It follows therefore, given the almost infinite conditions a market may experience, absolute prediction is an impossibility. However, learning how these variables interact and influence one another allows a trader to significantly increase his awareness of the market environment. Through experience a trader will begin to see familiar rhythms and patterns, and while, as stated, these rhythms and patterns will probably never be identical, his experience of previous market conditions which comprised different market environments can guide him with more precision when placing his trade.
MarketDelta™ focuses on the change of each of the trading variables and how their interactions affect a particular product’s environment. By increasing your awareness of your product’s market environment, the benefits of your chosen trading tool or “weapon” will increase dramatically. Trading tools such experience, knowledge of support/resistance, pivot points, indicators, Fibonacci numbers, Gann forecasting, Elliot Wave analysis, among many others, will become more valuable to the trader who uses them. Not only will the benefits gained from using these tools increase, but by observing and understanding the trader’s product’s environment, he will develop the knowledge to recognize when to use a given tool, or, just as importantly, when not to use it! MarketDelta™ will allow immersion into the market so a trader can act with it and not against it. Because MarketDelta™ graphically displays the elements of the market and interaction between buyer’s action, seller’s action, bid price, ask price, traded price and volume, MarketDelta™, with time and diligence, can signal to a trader using it, a familiar condition experienced previously. As stated, no two-market environments will ever be identical; as with life, the only constant in a market environment is change itself. However, a trader will become familiar with these changes, and begin to understand them and not fear them because of his experience of other market environments previously observed through MarketDelta .
Consider again our hypothetical trader: while he is diligently armed with his Fibonacci retracement number, ready to enter the market at his studied price, he may not have courage or experience to complete his trade successfully. As stated above, he may not fill his entire order, or, he may miss getting his studied entry price. This is where MarketDelta’s™ representation of the market environment provides a trader a place in which to immerse himself in order to gain experience. By observing the market environment through MarketDelta™, his ratio of success will increase. Over time, a trader will gain experience about the interactions of price, action of buyers, action of sellers, and the bid and ask volume traded. Consequently, his confidence in making his trades will thus improve. This is the foundation MarketDelta™ is built on: by observing the market and by operating within it, a trader increases his chance for success.
MarketDelta’s™ representation of the market environment does not only assist a trader in his entries or exits in the market. A successful trader’s job is not to just sit back and wait for his targets or his stops to be hit. Once placed, a successful trader needs to continually manage his trade. After entering the market, a successful trader must be proactive; he must continue to observe the ongoing battle between the buyer and seller who are trying to exert their will on the ask price and bid price, respectively, so to cause it to move in their desired direction. A successful trader must make use of all available information at his disposal once his trade has been placed. MarketDelta™ displays the variables and their altered state (buyer’s actions, seller’s actions, bid price and ask price --and their respective volume - and market pressure). Delivering key information pertaining to the buying and selling pressure left behind after each and every trade is an important concept behind MarketDelta’s™ creation. This key information will enable a trader to manage his trade by knowing in advance if conditions are right for him to stay in or get out.
Again, one of MarketDelta™’s primary features is its ability to show bid and ask volume being created in real time. There are two places where MarketDelta™ displays this information: in the Battle Price Line or BPL window, and in the Footprint window. The BPL window shows trading volume, in real time, on both the bid and ask side while simultaneously showing price moving as it is affected by this volume. Here is where a trader should begin his observation of the market. The BPL contains two columns: a red column, which shows volume accumulating on the bid side, and, a blue column, which shows volume accumulating on the ask side. The bid price or ask price is indicated by showing this volume immediately adjacent to the price, which is displayed in a white column residing between the red and blue column. The price is shown descending from the top to the bottom of the window at the products’ smallest price interval, or price tick. Both the traded bid volume and the traded ask volume appear and aggregate in real time as the market product is traded. Drawing upon our earlier discussion of the battle between buyer and seller, the blue column will accumulate volume as the buyer’s action attempts to influence the price to shift from the ask price to the bid price; conversely, the red column will accumulate volume as the seller’s action attempts to influence the price to shift from the bid price to the ask price. By watching these numbers which in reality are traded volume accumulated, and by observing under what conditions these price shifts occur, a trader’s awareness of the current market conditions will increase as he will be witnessing the market environment pulsating with each trade being made in the market.To further illuminate how the distinct mechanics of BPL show how traded volume on the both the bid and ask side of the market interact with price as the market is traded, the following is a step-by-step portrayal of the BPL as it operates. As stated above, as a trade is created at the bid price or ask price, BPL reflects this change in either the red column or blue column, respectively, increasing the number to indicate the number of contracts traded. In addition to showing the volume, it must be understood that BPL is also showing whether the trade was made on the bid side of price, or on the ask side of price. For example, if the current bid traded volume of the S&P emini was 40 contracts at a bid price of 1125.50, the BPL will display the number 40 in the red column left of price which is designated (in S&P emini quarter point increments) in the white column separating the red and blue columns. Suppose the next trade is for 10 contracts at 1125.75, the current ask. As this trade is made, BPL will increase the number already to the right of 1125.75 in the blue column by 10. Thereafter, when a trade is made at new bid or ask price, the BPL will display the number of contracts for this trade adjacent to this new price, in either the red column or blue column, as the case may be, and erase the volume which had accumulated at the previous bid or ask. So to continue with our example, if the next trade is for 5 contracts at a new bid price of 1125.75, BPL will erase the bid volume of 40 in the red column adjacent to 1125.50, and display the number 5 at 1125.75 in the red column left of price. For the moment, the BPL shows the bid and ask volume at 1125.75. This will likely appear unusual because, typically, the bid more commonly is below the ask. In our example, bid traded volume at bid price 1126.75 is totally creditable and informative although it just takes understanding. Even though trade was made at what usually would be perceived as the ask, we know that this trade was actually made on the bid side, as evidenced by BPL’s display of a volume of 5 in the red column. The volume at the previous bid price of 1125.50 is erased, and BPL now displays bid volume accumulating next to 1125.75 in red column. And although the previous bid volume of 40 at 1125.50 is cleared to allow the BPL to show the current bid volume accumulating at 1125.75, MarketDelta™ records this volume in the aforementioned Footprint window (as detailed below).
A unique feature of the BPL is that as the volume on the bid and ask side is accumulating, a trader can simultaneously observe the product’s available quantities at the bid or ask diminish accordingly. This is shown in market depth, available through most order-entry or charting platforms, such as Trading Technologies, Patz, Eccoware, Trader Workstation (Interactive Brokers), MB Trader or other Independent Software Vendor (ISV). If this information is not provided to a trader, MarketDelta™ provides the first line of market depth located in its ticker window.
As pointed out above, as only the current bid or ask volume is displayed in the BPL, a trader can see the volume for a previous bid or ask price by referring to the Footprint window, the second place within MarketDelta™ a trader can observe the ongoing battle between the buyer and seller. In the Footprint window, while the market is trading at a particular price, a rectangular box is plotted on a price chart at this trading price; this box is called a Footprint. Traded volume at both the bid and the ask accumulate and this volume is shown within this rectangular box in the form of B x A, with B representing the traded bid volume and A representing the traded ask volume. While the market is trading at this price during a given moment, this bid and ask volume is displayed, similar to the BPL, within the Footprint.
The Footprint window works in concert with the BPL to give the user a multi-dimensional representation of the market environment. When a trade is made by the aggressor (i.e., at the bid price or the ask price), the same information that is revealed in the BPL will simultaneously be presented in a Footprint. The Footprint is permanent record of this volume. MarketDelta™ provides two modes which determine how Footprints are plotted, either in response to (i) price action, or (ii) time. When Footprints are plotted in response to price action, there are three factors relating to price, which determine how and when the Footprints are plotted, moving from left to right across the price chart. The first factor is that the volume must continue to be created at a particular price; this is simply due to the fact that volume drives the market. The second factor is that as price moves and volume is created at a particular price tick, it creates a Footprint series. The Footprint series will be given a direction, either up or down, as price moves, and new Footprints will be created at each tick accession where traded volume occurs, creating a column of Footprints. Lastly, this directional price series will continue in the direction the series is given until volume occurs at a user-specified number of ticks in the opposite direction to the direction of the series. At this point, a new Footprint column begins immediately to the right of the previous column with this volume placed in the first new Footprint in the new column. From here the process repeats itself. In this manner, new columns are created in response to price action, where each column is a trend in price, similar to “point and figure” charts. Alternatively, a user can set the Footprint chart to plot in response to time. In this mode, a new column of Footprints is created at a specified time interval, similar to classic bar charts. In either mode, as price moves up and down before a new column is triggered—be it in response to price action or time—volume at both the bid and ask will be added to the Footprints already plotted in that column, adding to the previous traded volume already in the Footprint. The Footprint chart provides a record to which a trader can refer to examine how the volume traded at both the bid and the ask interact with price.
In addition to the presenting and recording all of the information displayed in the BPL, the Footprint can be set to display alternative interpretations of this data. The Footprint window can be set to show bid and ask volume together, as discussed above, or it can be set to show the volume as the Delta (market pressure), total volume, or as strike volume. The Delta is the net of ask volume over bid volume; the current bid volume accumulating decreases the Delta while current ask volume accumulating will increase the Delta. For example, if 35 contracts are traded at the ask as a result of an aggressive buyer or buyers attempting to influence the ask to go bid and there are 100 contracts as a result of an aggressive seller or seller attempting to influence bid to go ask, the Delta, displayed within the applicable Footprint, is shown as -65 (-100 contracts (bid) + 35 contracts (ask) = -65). As mentioned above, this number is a barometer of market pressure.
If the Footprint window is set to total volume, each Footprint simply displays the aggregate of bid and ask volume. If set to strike volume, each footprint shows the total number of trades, or strikes, on the bid side and on the ask side, displayed in a format similar to the way bid and ask volume is displayed. Each strike represents a single trade as opposed to the number of contracts comprising a trade.Lastly, MarketDelta™ has the ability to display volume in a manner, which allows the user to determine overall market pressure. Market pressure is simply the pressure being put on the market by the aggressive buyers and sellers. By understanding how this pressure intensifies and diminishes, and what effect, if any, this pressure has on price, a trader using MarketDelta™ as a depiction of the market environment will be better prepared to anticipate a potential market trend or change.
Market pressure is displayed in the MarketDelta Indicator window. Similar to the way the Delta in each Footprint indicates market pressure at a particular price or for a specified unit of time, the MarketDelta Indicator displays the aggregate volume traded at the ask over the aggregate volume traded at the bid for the entire trading day, or a sum of all of the Delta levels contained in each Footprint. In addition, the MarketDelta Indicator will display the low and high-pressure levels for the trading day to allow a user to use these levels similar to the way support and resistance levels are used with price. Every time a trade is created, the MarketDelta Indicator will change, increasing the indicator number by the number of contracts traded at ask price and decreasing the indicator number by the number of contracts traded at the bid price.
So as to allow the trader using
MarketDelta to visualize what affect market pressure has on traded price, there is the Price/Indicator window. The Price/Indicator window plots both the value of the MarketDelta Indicator, and the price, in an equivalently scaled overlay chart. With the Price/Indicator window a trader can see at any point whether the buyer or the seller is exerting pressure on the market, either by observing how price is being plotted as traders seek a price at which to trade, or by observing volume created by aggressors. From these observations, the trader using MarketDelta™ can refer to the traded price in either the BPL or Footprint window, and note how these pressures are affecting it.
To understand how a trader using MarketDelta can observe the interaction between market pressure and the traded price, it is necessary to understand who, between the buyer and seller, is exhibiting strength in the market. Essentially, at any given moment there is a battle by the buyer over the price being asked by the seller (i.e., the ask price), or conversely, by the seller over the price being bid by the buyer (i.e., the bid price). Whenever a participant in the market is attempting an aggressive action, by either selling the bid price or buying the ask price, pressure is being exerted on price. So how does a trader know if either the buyer or seller is showing strength? Strength in the market is shown primarily using the principles of supply and demand. A successful online trader must understand how both supply and demand can independently affect market price. MarketDelta™ monitors demand by the buyer seeking trade with use of his purchasing power (or potential supply to seller) or demand by seller seeking a trade with use of his selling power (or potential supply to buyer). I want to allow for my use of demand to be understood as it is being put into this context. It can be confused when thinking in the economics sense from the academia. I am using demand in the sense of “eagerness.” Trader can be eager to demand price up or down as well as demand the reception of volume when available. For instance, high demand by buyer or high demand by seller may or may not effect movement of price. High demand in the market will only affect price when there is an imbalance of supply between buyer and seller. Consequently, if the supply available to buyers and sellers is relatively equal, then the demand seeking trade will cause minimum price movement. By understanding supply and demand within the framework of MarketDelta™ an online trader can thereby observe strength in buying and selling in two ways.
The first way a seller or buyer shows strength is by observing strong demand by the buyer or seller in his attempts to seek a trade. When there is a quantity available from sellers at the ask price, buyers may buy from this quantity by buying at the ask price, simultaneously decreasing supply and, in addition increasing traded ask volume. As noted above, when a buyer buys at the ask price, the buyer is being aggressive. If the buyer demand is high, meaning the buyers’ actions to seek trade increasingly become more aggressive, eventually—if additional supply is not created by sellers adding to the quantity available at that ask price—the supply at that ask price is reduced to zero. At this point, the ask price will shift and become the bid price. It is this price shift, which indicates complete strength by the buyer. The buyer, showing demand and having purchased all available supply at the ask price, indicates his dominance over price and the next higher price having a quantity or supply available will become the new ask price. At this moment, the buyer is dominating the price, and in turn, showing strength in the market. Sellers show strength in the market in exactly the same way. Aggressive sellers show demand by seeking to trade at the bid where supply exists. Selling at the bid will decrease supply available at the bid price while increasing traded bid volume. If the supply coming from the sellers wishing to sell at the bid is greater than the demand from buyers wanting to pay the bid price, the number of contracts to buy at the bid will be exhausted by the sellers at the bid and the next highest bid will become the best bid-i.e. the bid will decline. The former bid price will then probably become the ask price. At this moment, sellers are dominating the bid price and showing strength in the market. When buyers are showing strength in this way, traded ask volume exceeds traded bid volume resulting in an increase in the value of the MarketDelta Indicator. When sellers are showing strength in this way, traded bid volume exceeds traded ask volume resulting in decrease in the value of the MarketDelta Indicator. When this happens, MarketDelta’s™ Price/Indicator window will show both the plotting of price and that of the value of the MarketDelta Indicator increasing, or decreasing, as the case may be, as price and volume (created by the aggressive buyers or sellers) move together, as demand outstrips supply and price moves up.
The second way strength is shown in the market is through price velocity. In this situation strength by buyer is the result of seller’s weakness. In this case, supply is low enough for buyers to continue to drive price in search of trade with no signs of sellers’ strength. Buyers strength is such that price is being driven up by the buyer because supply cannot meet the current demand by buyers seeking trade; price increases in search of supply. Essentially, buyer demand, while not being high, is uncontested by sellers. In other words, as there is little to no supply available from sellers at the ask price, so price marches upward to find quantity to buy. Buyers are able to drive the price up due to the fact that quantity is scarce at these prices. Buyer demand while seeking a trade may necessitate travel through several prices. Until buyers find sufficient quantity available, volume will not increase. This in turn will be reflect by MarketDelta’s™ Price/Indicator window showing the plotting of price increasing with the MarketDelta Indicator bar remaining relatively flat. This is also shown when there is a gap in the Footprint chart indicating no trades were made at particular prices during the price series. In these situations when buyers are driving prices upward without the corresponding ask volume, the buyer is showing strength by its ability to drive prices higher due to minimal supply by seller.
MarketDelta = The Market Environment
As previously stated, just knowing on which side of the market the aggressive actions are being taken will not benefit the trader unless he continually observes and understands the market environment. Here is where MarketDelta becomes more than just a decision support tool. Besides showing trades being completed at the bid or ask side, MarketDelta also displays all six market variables mentioned above (buyer’s action, seller’s action, bid price, ask price, traded price and volume), plus a barometer which displays market pressure, referred to as the Delta. The six market variables and their numerous interrelationships comprise the entire market environment. The Delta is displayed in two formats. The trader may view it in one window as a spot indicator for a unit of time (called a Footprint, discussed below), and in another window as an overall number for the trading day. Each variable interacts with the others variables in unlimited ways while traders seek a price at which to trade. Using MarketDelta™, a trader can observe each of these variables change and interact during the trading day. Before and after buyer and seller meet and a trade is created, any one or more of these variables may change, which in turn, may cause one or more of the variables to change again, and so on, each variable being altered in an ongoing manner while trades are being made. The constant state of flux is due to each variable’s subtle influence on the remaining variables. By being able to see these variables influence each other and change according to the dynamic of a given trade allows MarketDelta to become the environment in which the trader can exist and be a part of so as to trade more effectively.
As stated above, when a buyer meets a seller at a particular price a trade is created, increasing volume. That price can be at the ask or the bid. After the trade is made and volume is created, the trading variables comprising the market environment are altered and there is the potential for a price shift, e.g., the ask price can become the bid price (price moves higher), or, alternatively, the bid price can become the ask price (price moves lower). Due to the fact that there are several trading variables, which comprise the market, it cannot be known to any degree of certainty how much volume is needed for this price shift to occur. However, a trader can utilize MarketDelta™ to observe how the remaining variables are influenced by a trade; he can observe how these variables react and change in real time. This knowledge- and observing the repercussive outcomes- can assist a trader in his understanding of how each trade reverberates throughout the market. This allows the trader to possess the requisite knowledge needed to anticipate a potential price shift with increased accuracy. As each trading variable is affected by the change of another, a shift in price may result from any number of factors relating to the changes in these variables. It follows therefore, given the almost infinite conditions a market may experience, absolute prediction is an impossibility. However, learning how these variables interact and influence one another allows a trader to significantly increase his awareness of the market environment. Through experience a trader will begin to see familiar rhythms and patterns, and while, as stated, these rhythms and patterns will probably never be identical, his experience of previous market conditions which comprised different market environments can guide him with more precision when placing his trade.
MarketDelta™ focuses on the change of each of the trading variables and how their interactions affect a particular product’s environment. By increasing your awareness of your product’s market environment, the benefits of your chosen trading tool or “weapon” will increase dramatically. Trading tools such experience, knowledge of support/resistance, pivot points, indicators, Fibonacci numbers, Gann forecasting, Elliot Wave analysis, among many others, will become more valuable to the trader who uses them. Not only will the benefits gained from using these tools increase, but by observing and understanding the trader’s product’s environment, he will develop the knowledge to recognize when to use a given tool, or, just as importantly, when not to use it! MarketDelta™ will allow immersion into the market so a trader can act with it and not against it. Because MarketDelta™ graphically displays the elements of the market and interaction between buyer’s action, seller’s action, bid price, ask price, traded price and volume, MarketDelta™, with time and diligence, can signal to a trader using it, a familiar condition experienced previously. As stated, no two-market environments will ever be identical; as with life, the only constant in a market environment is change itself. However, a trader will become familiar with these changes, and begin to understand them and not fear them because of his experience of other market environments previously observed through MarketDelta .
Consider again our hypothetical trader: while he is diligently armed with his Fibonacci retracement number, ready to enter the market at his studied price, he may not have courage or experience to complete his trade successfully. As stated above, he may not fill his entire order, or, he may miss getting his studied entry price. This is where MarketDelta’s™ representation of the market environment provides a trader a place in which to immerse himself in order to gain experience. By observing the market environment through MarketDelta™, his ratio of success will increase. Over time, a trader will gain experience about the interactions of price, action of buyers, action of sellers, and the bid and ask volume traded. Consequently, his confidence in making his trades will thus improve. This is the foundation MarketDelta™ is built on: by observing the market and by operating within it, a trader increases his chance for success.
MarketDelta’s™ representation of the market environment does not only assist a trader in his entries or exits in the market. A successful trader’s job is not to just sit back and wait for his targets or his stops to be hit. Once placed, a successful trader needs to continually manage his trade. After entering the market, a successful trader must be proactive; he must continue to observe the ongoing battle between the buyer and seller who are trying to exert their will on the ask price and bid price, respectively, so to cause it to move in their desired direction. A successful trader must make use of all available information at his disposal once his trade has been placed. MarketDelta™ displays the variables and their altered state (buyer’s actions, seller’s actions, bid price and ask price --and their respective volume - and market pressure). Delivering key information pertaining to the buying and selling pressure left behind after each and every trade is an important concept behind MarketDelta’s™ creation. This key information will enable a trader to manage his trade by knowing in advance if conditions are right for him to stay in or get out.
The Dynamic of Price Movement Revisited
Let’s refer back to our analogy using a vehicle on the highway to look at how market price behaves under market pressure and traded volume. When buyers are driving the price up continually, forming an upward price trend, it is the buying pressure, which results in strength by buyers in the market. Buyers are driving the vehicle down the highway (and up in price) and the strength of the buyer is at 100%. Eventually, there comes a point where the sellers will decide to show some form of strength and attempt to dominate by placement of some quantity or supply at the ask. Alternatively (or in addition to providing supply at the ask), the seller may attempt to take advantage of buyer’s strength and attempt to gain strength back by selling at a high bid price. By using the BPL, the trader using MarketDelta™ can observe this by seeing a trade take place at the bid while price is steadily rising. This can be viewed as a challenge by the seller; he is taking an aggressive action in the face of the 100% strength by the buyer, or put another way, he is selling into the 100% strength of the buyer. At that moment that reflection of sellers’ strength is read through Delta growth. The seller may not succeed in this challenge to buyer’s strength. You will note that this aggressive action by seller may or may not create a price shift causing the bid price to become the ask price. To influence the price to the seller’s advantage, the seller must gain strength first by taking away the buyer’s available bid and replacing the bid price with the seller’s available supply at the ask.
Looking at these price dynamics as a whole, realize that for every trade, there is an aggressor, or a driver—whether buyer or seller—for every vehicle on the highway. The seller or buyer who is driving the vehicle is motivated for reasons known to him to take this aggressive action in a trade. When the trader takes aggressive action, MarketDelta™ shows this as traded volume on the bid or ask side as the case may be. For this trader taking an aggressive action by controlling the vehicle, there is a possibility that this aggressive action will cause an intended price shift, and the trader will be able to continue to drive on the highway in the direction he desires. As seen above, strength can result from volume or price velocity, as either can provide fuel for the vehicle. Both forms of strength can serve as fuel for the vehicle, causing the tires to rotate. Although the tires are rotating and attempting to move the vehicle, often the tires will rotate without gaining any traction to enable movement, while at other times the tires make solid contact with the highway and the vehicle is driven in the desired direction. The point behind creating a picture of tires rotating on the vehicle is that a trader using MarketDelta™ can watch the aggressive buyers, for instance, take the ask with quantifying results, i.e., traded ask volume. However, this volume may move the vehicle effectively, or possibly it will be unable to move the vehicle at all. To see which of the two outcomes takes place, the trader using MarketDelta™ can observe the effect on price through use of Indicator/ Price Chart while referring to the Footprint window. When the MarketDelta Indicator remains flat and yet the vehicle is moving and price is being driven up or down, a trader can see the market environment in a dynamic way, and at the same time note what changes to the market environment take place. Not only will the price line plot be diverging away from the MarketDelta Indicator value line plot, but also a trader will observe Footprints being drawn more rapidly, reflecting this velocity. In the opposite circumstance, aggressive actions may be taking place, but price is not responding to these market actions. Here, a trader using MarketDelta™ can observe the price line remaining relatively flat or unchanged, while volume/market pressure is being indicated by a sloping plotline of the MarketDelta Indicator value. Footprints are stable in their vertical movement, and growth of pressure will be indicated through the change in color of Footprints showing an increase in volume.
Using MarketDelta™ to observe the market environment manifest itself through the BPL, the Footprint chart, the MarketDelta Indicator, and the Indicator/Price chart, a trader will see the result of these aggressive actions and whether they accomplish their desired result in affecting price action. When an aggressive action is made by the buyer or seller, this will be indicated by the Marketdelta Indicator. By watching the BPL, the Footprints, and by observing the Price/Indicator window, a trader can see to what degree aggressive action by either side in the market is required to cause the corresponding desired shift in price. Having this information continually paint a picture of the current market environment at a given moment, plus the ability to see how the market environment has changed from past trades, will allow a trader to constantly monitor: (i) the buying and selling pressure currently being exerted, (ii) the volume being traded on either side of the market, and (iii) how and if this volume or velocity by either buyer or seller is able to affect the market accordingly. From this more complete picture of the market environment, a trader will learn to know what side of the market the probability for success lays.Conclusion
By being aware of the many market variables and elements as depicted by MarketDelta™, a trader will have the most complete depiction of the market environment available to the online trader. Throughout this article, it should be clear however that MarketDelta™ is not a system, but rather the market environment from which more successful systems can be cultivated and developed. As with anything that is rewarding, to use MarketDelta™ to its fullest beneficial extent will require time spent observing this new market environment. Through continual observation of the market variables in the unique environment provided by MarketDelta™, a trader will learn to become an integral part of the market environment as it relates to his trading, by acting with the market as opposed to against it. A trader must understand that the many changes and rhythms within the market environment observed through MarketDelta™ will gradually allow an insight to be part of the flow of the market. MarketDelta™ provides the online trader an accurate painting of a particular product’s environment, within which he will learn how to exist so as to increase the probability that his trades will be successful. The goal of MarketDelta™ is to increase the awareness of a trader’s landscape; a place to merge trader and environment so as to see what previously could not be seen.
Looking at these price dynamics as a whole, realize that for every trade, there is an aggressor, or a driver—whether buyer or seller—for every vehicle on the highway. The seller or buyer who is driving the vehicle is motivated for reasons known to him to take this aggressive action in a trade. When the trader takes aggressive action, MarketDelta™ shows this as traded volume on the bid or ask side as the case may be. For this trader taking an aggressive action by controlling the vehicle, there is a possibility that this aggressive action will cause an intended price shift, and the trader will be able to continue to drive on the highway in the direction he desires. As seen above, strength can result from volume or price velocity, as either can provide fuel for the vehicle. Both forms of strength can serve as fuel for the vehicle, causing the tires to rotate. Although the tires are rotating and attempting to move the vehicle, often the tires will rotate without gaining any traction to enable movement, while at other times the tires make solid contact with the highway and the vehicle is driven in the desired direction. The point behind creating a picture of tires rotating on the vehicle is that a trader using MarketDelta™ can watch the aggressive buyers, for instance, take the ask with quantifying results, i.e., traded ask volume. However, this volume may move the vehicle effectively, or possibly it will be unable to move the vehicle at all. To see which of the two outcomes takes place, the trader using MarketDelta™ can observe the effect on price through use of Indicator/ Price Chart while referring to the Footprint window. When the MarketDelta Indicator remains flat and yet the vehicle is moving and price is being driven up or down, a trader can see the market environment in a dynamic way, and at the same time note what changes to the market environment take place. Not only will the price line plot be diverging away from the MarketDelta Indicator value line plot, but also a trader will observe Footprints being drawn more rapidly, reflecting this velocity. In the opposite circumstance, aggressive actions may be taking place, but price is not responding to these market actions. Here, a trader using MarketDelta™ can observe the price line remaining relatively flat or unchanged, while volume/market pressure is being indicated by a sloping plotline of the MarketDelta Indicator value. Footprints are stable in their vertical movement, and growth of pressure will be indicated through the change in color of Footprints showing an increase in volume.
Using MarketDelta™ to observe the market environment manifest itself through the BPL, the Footprint chart, the MarketDelta Indicator, and the Indicator/Price chart, a trader will see the result of these aggressive actions and whether they accomplish their desired result in affecting price action. When an aggressive action is made by the buyer or seller, this will be indicated by the Marketdelta Indicator. By watching the BPL, the Footprints, and by observing the Price/Indicator window, a trader can see to what degree aggressive action by either side in the market is required to cause the corresponding desired shift in price. Having this information continually paint a picture of the current market environment at a given moment, plus the ability to see how the market environment has changed from past trades, will allow a trader to constantly monitor: (i) the buying and selling pressure currently being exerted, (ii) the volume being traded on either side of the market, and (iii) how and if this volume or velocity by either buyer or seller is able to affect the market accordingly. From this more complete picture of the market environment, a trader will learn to know what side of the market the probability for success lays.Conclusion
By being aware of the many market variables and elements as depicted by MarketDelta™, a trader will have the most complete depiction of the market environment available to the online trader. Throughout this article, it should be clear however that MarketDelta™ is not a system, but rather the market environment from which more successful systems can be cultivated and developed. As with anything that is rewarding, to use MarketDelta™ to its fullest beneficial extent will require time spent observing this new market environment. Through continual observation of the market variables in the unique environment provided by MarketDelta™, a trader will learn to become an integral part of the market environment as it relates to his trading, by acting with the market as opposed to against it. A trader must understand that the many changes and rhythms within the market environment observed through MarketDelta™ will gradually allow an insight to be part of the flow of the market. MarketDelta™ provides the online trader an accurate painting of a particular product’s environment, within which he will learn how to exist so as to increase the probability that his trades will be successful. The goal of MarketDelta™ is to increase the awareness of a trader’s landscape; a place to merge trader and environment so as to see what previously could not be seen.
Monday, May 7, 2007
Fundamental Analysis – an Introduction
Fundamental analysis is the study of economic, social and political data that represents and quantifies the economy in question with the goal of determining future movements in a financial market.
Analysts have been grouped into either Technical of Fundamental camps for many years but if truth be told there are very few pure technicians or fundamentalists. Technical analysts cannot really ignore the effect and timing of economic announcements and fundamental analysts cannot really ignore various signals derived from the study of historic prices and volatility.
It is fairly difficult to take into account all the different economic announcements as well as the political and social situations that affect an economy particularly in today's global market, however by understanding the basics and delving deeper into the various fundamentals of the economies one will likely find that his understanding of the financial markets improves dramatically.
There are a myriad of economic announcements and while it may be important to be familiar with schedules and understand the nature and possible impact of the announcements it would be very easy to be too bogged down by the various information until such time as there is too much and one may simply not be able to come up with an effective basis for trading.
Because of the vast number of fundamentals out there, it may be more important to focus on the main price movers as a basis, rather then try to know a little about a lot.
Technical Trading Guide
1. Chart the Trends and Range Bound Markets
Use long term charts to decide trends or range bound markets. Begin a chart analysis with daily, weekly and even monthly charts spanning several years if possible. A larger scale chart essentially shows the life of the market and provides clearer visibility and a better long-term perspective on a market. Once the long-term has been established, consult daily and intra-day charts, these charts can include anything from say 10 minute to daily charts. A short-term market view alone can often be deceptive. Even if you only trade the very short term, you will do better if you're trading in the same direction as the intermediate and longer-term trends. If there is no trend then a different strategy is necessary, possibly playing the range until the market begins to trend once more.As can be seen in the 1-hour EUR/USD candle chart below there has been an uptrend with three peaks and three troughs. Long entry positions would at 1.2700, 1.2760 and 1.2800.2. Follow the TrendIf you determine the trend, then follow it. Market trends come in a variety of terms - long-term, intermediate-term and short-term. The first thing you have to determine is what type of a trader are you, long term or day trader, that decision will determine which charts you should be using. For instance, if you're day trading, use the daily and intra-day charts, but always use the longer-range chart to determine the trend, and then use the shorter-term chart for timing. Make sure you trade in the direction of that trend and then buy on dips if the trend is up and sell on rallies if the trend is down.3. Locate Support and Resistance LevelsFind the support and resistance levels. As above when you want to buy an instrument, its best to buy near support levels. The support is usually a previous reaction low. Using the same logic, the best place to sell an instrument would be near its resistance levels. The resistance level is usually a previous peak. After a resistance peak has been broken, it will usually provide support on subsequent pullbacks. In other words, the old high becomes the new low. In the same way, when a support level has been broken, it will usually produce selling on subsequent rallies - the old low can then become the new high.4. RetracementsMeasure retracements in percentage terms. Market corrections up or down often retrace a significant portion of the previous trend. One can measure the corrections in an existing trend in simple percentages. A fifty percent retracement of a prior trend is most common. A minimum retracement is usually one-third of the prior trend. The maximum retracement is usually two-thirds. Fibonacci retracements of 38% and 62% are also worth watching. Therefore popular buy points in an uptrend are usually between 33-38% retracement of the original trend.As can be seen from the chart below, when joining the trough at 1.2750 to the peak at 1.2890 in the 1-hour EUR/USD chart we can see the Fibonacci levels drawn out. The first retracement ended at the 38% line and the major retracement at the 62% line.5. Trend LinesOne of the simplest and most effective charting tools are trend lines – use them. Draw a straight line that join two points on the chart. Up trend lines are drawn along two successive lows and down trend lines are drawn along two successive peaks. Prices will often pull back to trend lines before resuming their trend. The breaking of trend lines often signals a change in a trend. The longer a trend line has been in effect, and the more times it has been tested, the more significant it becomes; a trend line becomes valid if it is touched at least three times.6. Moving AveragesMoving averages often provide objective buy and sell signals, hence they should be watched. They show you if an existing trend is still in motion and help confirm a trend change. Do not rely on moving averages to tell you in advance if there is a trend change imminent; use it as a back-up to your chart analysis for trend identification. A combination chart of two moving averages is the most popular way of finding trading signals. Signals are given when the shorter average line crosses the longer. Price crossings above and below a 40-day and 200-day moving average also provide good trading signals. Since moving average chart lines are trend-following indicators, they work best in a trending market.As can be seen in the EUR/USD 1-hour chart below the 5-period and 25-period moving averages project and confirm the trend in progress. The 5-period moving average crosses over the slower 25-period moving average at 1.2715 confirming the up-trend with an exit point at 1.2770. The same rate 1.2770 is another indication of a resume in the up-trend with an exit at 1.2850.7. OscillatorsOscillators help identify overbought and oversold markets. While moving averages offer confirmation of a trending market, oscillators can often warn us in advance that a market has rallied or fallen too far and will soon turn or retrace. Two of the most popular oscillators are the Relative Strength Index or RSI and the Stochastics. Both these oscillators work on a scale of 0 to 100. With the RSI, readings over 70 are overbought while readings below 30 are oversold. The overbought and oversold values for Stochastics are 80 and 20. Oscillator divergences often warn of market turns and as opposed to moving averages they work best in range bound markets. Weekly signals can be used as filters on daily signals. Daily signals can be used as filters for intra-day charts.As can be seen in the EUR/USD 1-hour chart below, the Stochastics break through the 80-20 barriers and cross over themselves on corrections of the price. This occurs several times.8. Know the Warning SignsThe Moving Average Convergence Divergence (MACD) indicator combines a moving average crossover system with the overbought/oversold elements of an oscillator. A buy signal occurs when the faster line crosses above the slower and both lines are below zero. A sell signal takes place when the faster line crosses below the slower from above the zero line. Longer-period signals take precedence over shorter-period signals. The MACD histogram plots the difference between the two lines and gives even earlier warnings of trend changes. It's called a histogram because vertical bars are used to show the difference between the two lines on the chart.As can be seen in the EUR/USD 1-hour chart below, the MACD indicators cross over one another beneath the zero line to show a buy signal and vice versa for the sell signal. This occurs most prominently at 1.2760 to buy, 1.2870 to sell.9. Trend or Range Bound MarketThe Average Directional Movement Index (ADX) line helps determine whether a market is in a trending or range bound phase. It measures the degree of trend or direction in the market. A rising ADX line suggests the presence of a strong trend. A falling ADX line suggests the presence of a trading market and the absence of a trend. A rising ADX line favors moving averages; a falling ADX favors oscillators. By plotting the direction of the ADX line, the trader is able to determine which trading style and which set of indicators are most suitable for the current market environment.10. StudyTechnical analysis is a skill that improves with experience and study. The more you learn and practice the better you'll be, keep studying, fine tune methods, learn what works for you and what doesn't and remain technical and not emotional.
Use long term charts to decide trends or range bound markets. Begin a chart analysis with daily, weekly and even monthly charts spanning several years if possible. A larger scale chart essentially shows the life of the market and provides clearer visibility and a better long-term perspective on a market. Once the long-term has been established, consult daily and intra-day charts, these charts can include anything from say 10 minute to daily charts. A short-term market view alone can often be deceptive. Even if you only trade the very short term, you will do better if you're trading in the same direction as the intermediate and longer-term trends. If there is no trend then a different strategy is necessary, possibly playing the range until the market begins to trend once more.As can be seen in the 1-hour EUR/USD candle chart below there has been an uptrend with three peaks and three troughs. Long entry positions would at 1.2700, 1.2760 and 1.2800.2. Follow the TrendIf you determine the trend, then follow it. Market trends come in a variety of terms - long-term, intermediate-term and short-term. The first thing you have to determine is what type of a trader are you, long term or day trader, that decision will determine which charts you should be using. For instance, if you're day trading, use the daily and intra-day charts, but always use the longer-range chart to determine the trend, and then use the shorter-term chart for timing. Make sure you trade in the direction of that trend and then buy on dips if the trend is up and sell on rallies if the trend is down.3. Locate Support and Resistance LevelsFind the support and resistance levels. As above when you want to buy an instrument, its best to buy near support levels. The support is usually a previous reaction low. Using the same logic, the best place to sell an instrument would be near its resistance levels. The resistance level is usually a previous peak. After a resistance peak has been broken, it will usually provide support on subsequent pullbacks. In other words, the old high becomes the new low. In the same way, when a support level has been broken, it will usually produce selling on subsequent rallies - the old low can then become the new high.4. RetracementsMeasure retracements in percentage terms. Market corrections up or down often retrace a significant portion of the previous trend. One can measure the corrections in an existing trend in simple percentages. A fifty percent retracement of a prior trend is most common. A minimum retracement is usually one-third of the prior trend. The maximum retracement is usually two-thirds. Fibonacci retracements of 38% and 62% are also worth watching. Therefore popular buy points in an uptrend are usually between 33-38% retracement of the original trend.As can be seen from the chart below, when joining the trough at 1.2750 to the peak at 1.2890 in the 1-hour EUR/USD chart we can see the Fibonacci levels drawn out. The first retracement ended at the 38% line and the major retracement at the 62% line.5. Trend LinesOne of the simplest and most effective charting tools are trend lines – use them. Draw a straight line that join two points on the chart. Up trend lines are drawn along two successive lows and down trend lines are drawn along two successive peaks. Prices will often pull back to trend lines before resuming their trend. The breaking of trend lines often signals a change in a trend. The longer a trend line has been in effect, and the more times it has been tested, the more significant it becomes; a trend line becomes valid if it is touched at least three times.6. Moving AveragesMoving averages often provide objective buy and sell signals, hence they should be watched. They show you if an existing trend is still in motion and help confirm a trend change. Do not rely on moving averages to tell you in advance if there is a trend change imminent; use it as a back-up to your chart analysis for trend identification. A combination chart of two moving averages is the most popular way of finding trading signals. Signals are given when the shorter average line crosses the longer. Price crossings above and below a 40-day and 200-day moving average also provide good trading signals. Since moving average chart lines are trend-following indicators, they work best in a trending market.As can be seen in the EUR/USD 1-hour chart below the 5-period and 25-period moving averages project and confirm the trend in progress. The 5-period moving average crosses over the slower 25-period moving average at 1.2715 confirming the up-trend with an exit point at 1.2770. The same rate 1.2770 is another indication of a resume in the up-trend with an exit at 1.2850.7. OscillatorsOscillators help identify overbought and oversold markets. While moving averages offer confirmation of a trending market, oscillators can often warn us in advance that a market has rallied or fallen too far and will soon turn or retrace. Two of the most popular oscillators are the Relative Strength Index or RSI and the Stochastics. Both these oscillators work on a scale of 0 to 100. With the RSI, readings over 70 are overbought while readings below 30 are oversold. The overbought and oversold values for Stochastics are 80 and 20. Oscillator divergences often warn of market turns and as opposed to moving averages they work best in range bound markets. Weekly signals can be used as filters on daily signals. Daily signals can be used as filters for intra-day charts.As can be seen in the EUR/USD 1-hour chart below, the Stochastics break through the 80-20 barriers and cross over themselves on corrections of the price. This occurs several times.8. Know the Warning SignsThe Moving Average Convergence Divergence (MACD) indicator combines a moving average crossover system with the overbought/oversold elements of an oscillator. A buy signal occurs when the faster line crosses above the slower and both lines are below zero. A sell signal takes place when the faster line crosses below the slower from above the zero line. Longer-period signals take precedence over shorter-period signals. The MACD histogram plots the difference between the two lines and gives even earlier warnings of trend changes. It's called a histogram because vertical bars are used to show the difference between the two lines on the chart.As can be seen in the EUR/USD 1-hour chart below, the MACD indicators cross over one another beneath the zero line to show a buy signal and vice versa for the sell signal. This occurs most prominently at 1.2760 to buy, 1.2870 to sell.9. Trend or Range Bound MarketThe Average Directional Movement Index (ADX) line helps determine whether a market is in a trending or range bound phase. It measures the degree of trend or direction in the market. A rising ADX line suggests the presence of a strong trend. A falling ADX line suggests the presence of a trading market and the absence of a trend. A rising ADX line favors moving averages; a falling ADX favors oscillators. By plotting the direction of the ADX line, the trader is able to determine which trading style and which set of indicators are most suitable for the current market environment.10. StudyTechnical analysis is a skill that improves with experience and study. The more you learn and practice the better you'll be, keep studying, fine tune methods, learn what works for you and what doesn't and remain technical and not emotional.
Technical Analysis – an Introduction
Technical analysis is the study of market data such as historical and current price data and volume in an effort to forecast future market activity. Historical price data is the most commonly used available data that is implemented into the analysis.Historical market data is saved and forms charts over various periods of time. The technical trader can analyze varying periodical charts over a specific length of time for the basic purpose of picking the entry and exit levels of a trade. By studying the chart the chartist is able to get information at a glance that will hopefully represent the direction of the instrument in the future.There is a never ending argument between fundamentalists and technical analysts about which method of analysis will show the best results. Technical analysts will claim that all the fundamentals are already built into the price, and so apart from natural disasters and unexpected world events the current price shows the market's expected value taking all the known information into consideration. The chartists are in fact looking for patterns or repetitions in price movements to guess the likely outcome of future prices – in a word they are looking for trends. Technical analysis assumes three main points,1. Fundamentals are already built into the price2. History has a habit of repeating itself – find what happened in the past and project it into the future.3. Trends are key – establish whether the instrument is moving in a trend, and then follow it. Typically there are three variations upward, downward or side wards. Once the type of trend is established an entry point is picked for the commencement of the trade.Over the years various mathematical manipulations were placed upon market prices and volumes. Theses manipulations (known as studies) helped the technical analyst focus on identifying the trend and the entry and exit levels.As with any analysis, discipline is the most important aspect of the study. If your studies showed that something was to occur, then follow your studies – do not let the market change your plan. If you were wrong then you were wrong, but stick to your game plan. (see Technical Trading Tips and Guide to Trading for helpful hints to trade).Charts - TypesThere are three main types of charts, line, bar and candle.Line charts are the most basic and simply join one period closing price to another.Bar charts give more detail then a regular line chart in that each period is represented by a bar. The bar not only shows price movements from one period to the next, they also show price movements within the period itself.Candlestick charts. These are very similar to bar charts except there colored bodies are able to give the viewer greater detail in movements within the period at a glance. Each period is made up of a candlestick – the candlestick is made up of a body and a wick on both ends. The candle body is then colored (typically red and either blue or green). The wick represents the high and low of the period, while the body represents the open and close of the period, the color lets us know if the price rose or fell in that period. If the candle body is red then the top of the candle represents the opening price and the bottom the closing, a green or blue candle would represent the opposite, the top of the candle would be the closing while the bottom would be the opening.PeriodsCharts are viewed as a sequence of periodical prices. The fastest moving chart is a tick chart. Tick charts can only be seen in a line format since the low, high, opening and closing price during that period are one and the same. Every point on the chart represents one tick or one price quote. The next period is usually a 1 minute chart and then periodically higher 5 min, 10 min, 30 min, 1 hour, 4 hour, daily, weekly and monthly.The longer the period the slower the chart, longer period charts tend to show more stable trends, shorter period charts tend to be used to pick entry and exit points.Technical IndicatorsThere are many different types of technical indicators; however they can be grouped into five types.1. Trend Indicators: As mentioned before trends show the persistence of price directions, either upwards, downwards or side wards. Trend indicators smooth out the historical prices to show market direction. The most common of these are Moving Averages. Simple trend lines can also be used to the same affect by drawing a line that joins the low and high points over a section of time; these are also used to form tunnels and triangles as popular analysis. Trend lines are also used to pick support and resistance levels.2. Strength Indicators: This is essentially a volume indicator and more popular in futures markets then foreign exchange. The most popular of these is Volume.3. Volatility: Measures and shows fluctuations over a section of time. These indicators help to pinpoint support and resistance levels, the most popular of these is Bollinger Bands.4. Cycle: These indicators tend to find patterns or more correctly repetitious cycles. Once again more popular in other financial markets. The most popular Cycle indicator is the Elliot Wave.5. Momentum or Oscillators: These indicators map the speed at which prices move over a given section of time. Momentum indicators determine the strength or weakness of a trend as it progresses over time. Momentum is highest at the beginning of a trend and lowest at trend turning points. Any divergence of directions in price and momentum is a warning of weakness; if price extremes occur with weak momentum, it signals an end of movement in that direction. If momentum is trending strongly and prices are flat, it signals a potential change in price direction. The most popular momentum indicators are the Stochastic, MACD and RSI.Commonly used technical indicatorsMoving AveragesMoving averages are trend indicators and are used by traders as a tool to verify existing trends, identify emerging trends and signify the end of trends. Moving averages are smooth lines that enable the trader to view long term price movements without the short term fluctuations.Of the three types of moving averages, the most common is the simple moving average; the other two are the weighted and exponential moving averages.All the moving averages are calculated as the average of a specified number of either low, high or closing price of the period. The difference between the three types is the weighting or importance placed on each particular period. For example the weighted and exponential moving averages give greater importance to the latest prices whereas the simple gives equal importance to all the periods chosen.Each new point of the moving average drops off the oldest period and brings in the newest period. A moving average line will change depending upon the number of periods chosen, the greater the number the slower the average. Some traders will play with a different number of moving averages all with different periods until they find a series of moving averages that they feel best indicate the behavior of the particular instrument being studied.When choosing a moving average to work with, ideally in an upward trending market the current price should not fall beneath the moving average line chosen more then once. The moving average should form a support line during upward trends and a resistance during down trends. If the upward trend continues yet it breaks the moving average line on more then one occasion, then this is a good indication that the moving average line chosen is too fast, and has not been smoothed out enough. If for example a 30-day moving average was used then a 45-day moving average may be more appropriate for this particular instrument.Once a trader is content with the behavior of the moving average line against the actual prices he may use the line to signify the continuation of a trend or the end of a trend. If the price closes below the moving average line on two occasions in an upward trending market – this is an indication of the end of the trend and time to exit a long position. The same logic follows in a downward trending market except in reverse; the current price needs to close above the moving average on two occasions to indicate that the downtrend is over.Another way of using moving averages is in pairs. Many traders will first find the long-term moving average as described above and add a faster moving average (smaller period) as an even earlier indication of the end of a trend. I the shorter moving average crosses the slower moving average this may signal an earlier exit point for a trend.StochasticsThe most commonly used stochastic is the slow stochastic. Stochastic oscillators are also used to determine either the strength of a trend or when the end of a trend is approaching. Stochastics are displayed by two lines known as %K (Faster) and %D (Slower) that oscillate between a scale ranging from 0 to 100.The mathematics behind the oscillators is unimportant, what is important is the meaning and placement of the lines. When the lines cross above the 80 line, this is a representation of a strong upward trend, when they cross below the 20 line it is a representation of a strong downward trend. When the %K line crosses over the %D line this could be an indication of a change in the trend, and a possible exit point. When prices are fluctuating a normal appearance for the stochastics will be for them to be crossing over one another in mid range – here what is being shown is a lack of a trend.The stochastics give their best signal when both the lines are moving to new ground at the same time as the actual price; this is a good indication of a continuation of a trend. However when the stochastics cross in a different direction of a prolonged trend this could be an indication to either exit or switch directions.Relative Strength Index (RSI)RSI is another momentum oscillator. RSI attempts to pick reversals in the trend. As with Stochastics they are read on a scale between 0 and 100. A Reading above 80 indicates an overbought market and readings below 20 indicate an oversold market. Trading on RSI's should occur only when there is a direction change above or below the 80 and 20 lines; as RSI lines can often remain above or below the 80, 20 levels for prolonged periods of time during strong trending markets.The shorter the RSI period, the faster it will be and the more signals will be issued. Here a trader needs to find his balance. Day-traders will often use shorter lines for more regular signals and longer term traders will use longer RSI's.Bollinger BandsBollinger Bands are volatility indicators and are used to identify extreme highs or lows in relation to the current price.Bollinger Bands are based on a set number of standard deviations from the moving average. It essentially tries to indicate support and resistance levels or bands of expected trading.As with the moving average, here too the trader can pick and adjust the moving average to base his Bollinger Bands on and the number of standard deviations to use. The trader can adjust these over time to suit his individual trading style. The default used is usual a 20-day moving average and two standard deviations from the moving average.A break above or below the Bollinger Bands may show an exit point or a reversal.Moving Average Convergence Divergence (MACD)MACD is an enhanced study of the moving averages and behave as an oscillator. The MACD plots the difference between a 26-day exponential moving average and a 12-day exponential moving average. A 9-day moving average is generally used as a trigger line, meaning when the MACD crosses below this trigger it is a bearish signal and when it crosses above it, it's a bullish signal.Traders use the MACD for trend reversals. For instance if the MACD indicator turns higher while prices are still falling this could be an exit point and a possible reverse trade.Fibonacci RetracementsFibonacci retracement levels are a sequence of numbers that indicate changes in trends from previous peaks or troughs. After a significant price move, prices will often retrace a significant portion of the original move. As prices retrace, support and resistance levels often occur at or near the Fibonacci retracement levels.In the currency markets, the commonly used sequence of ratios is 23.6%, 38.2%, 50% and 61.8%. Fibonacci retracement levels are drawn by joining a trend line from a significant high point to a significant low point. The pullback simply represents a correction in the trend and not an end to the trend. The most significant pullbacks are the 38.2%, and 61.8% levels.
Introducation to Forex
The FX MarketThe Foreign Exchange market which is often referred to as the "Forex" or "FX markets" is the largest, most liquid, most transparent financial market in the world. Daily average turnover has now exceeded 2 trillion USD. All the U.S. equity markets combined do not reach 3% of the total volume traded on the FX market.Unlike other financial markets, where for the most part you can only profit in rising markets, in the FX market whenever one enters into a position he is long (bought) one currency and short (sold) another currency simultaneously which means as opposed to other cyclical financial markets in the FX markets there are endless opportunities.Basic ConceptsThe term Foreign Exchange means the transferring of one currency into another simultaneously. Since currencies are traded in pairs, to profit from an exchange rate move you need to buy the currency that you expect will strengthen and sell the other. For example if you believed that the Euro (EUR) was going to appreciate against the dollar (USD) you would buy the EUR/USD; or in other words buy the EUR and sell the USD. Alternatively, if you believed that the EUR was going to depreciate against the USD then you would sell the EUR/USD; or sell the EUR and buy the USD.As can be seen there is no need to wait for a bullish market to profit, for at any given moment, one currency will be strengthening against another. The FX market is therefore constantly producing opportunities to invest.
Who Trades in the FX Market?Foreign exchange traders can be separated into two groups, hedgers and speculators.Hedgers: Governments, companies (exporters and importers) and some investors have foreign exchange exposure. Adverse movements between their local or domestic currency and the foreign currency of the group they are either doing business with (for the exchange of goods and services) or investing in will affect their bottom line. This is the core of all foreign exchange trading; however it only makes up approximately 5% of the actual market.Speculators: These groups which range from banks, funds, corporations and individuals – create artificial rate exposure in order to profit from the variations or movements in the price.Currency PairsCurrency Pairs: Each currency is recognized by a three letter code. For example EUR (is the EURO and refers to the European currency), USD (is the United States Dollar). The worlds leading currencies (often referred to as the majors) are the EUR, USD, JPY (Japanese Yen), GBP (the British Pound or Sterling), CHF (the Swiss franc), AUD (the Australian Dollar) and the CAD (the Canadian Dollar).Currencies are traded in pairs and are displayed as such. There is always the three letter currency code a slash and another three letter currency code. The first currency displayed refers to the "base", "leading" or "primary currency"; the second currency refers to the "secondary currency".
For instance when looking at the EUR/USD the EUR is the leading currency and the USD is the secondary currency. The "currency pair" or "currency cross" is then followed by a number; this is typically a five digit number with a decimal point after the first, for instance 1.2660.The number represents the ratio of one currency against the other, and can be read as "the amount of the secondary currency needed in order to have one unit of the major currency". In the example just given, EUR/USD 1.2660, one would require 1 Dollar and 26.6 cents to exchange for 1 Euro.
Bid and Ask or Buy and SellThere are always two numbers given after the currency pair, the first always has a smaller numerical value then the second. This can once again be shown using the same example (EUR/USD 1.2660 1.2663). The first number is known as the "Bid" or "Sell" and the second number is known as the "Ask", the "Offer" or "Buy".The smaller number or the Bid (Sell) (1.2660) represents that price where one can sell the major currency and buy the secondary currency; sell the EUR and buy the USD. The second price the Ask (BUY) (1.2663) represents the price where one can buy the major currency and sell the secondary; buy the EUR and sell the USD.In the trading window below the trader is able to buy the EUR against the USD at 1.2847 or sell the EUR and buy the USD at 1.2844. The trader is also able to buy the USD against the JPY at 117.60 and sell the USD and buy the JPY at 117.57.Calculating your P&LAs discussed above the foreign exchange rate represents the value of one unit in the major currency in the terms of a secondary currency. Since when opening a trade you exercise the trade in a set amount of the major currency and when closing the trade you do so in the same amount, the profit or loss generated by the round trip (open and close) trade will be in the secondary currency.
For example if a trader sells 100,000 EUR/USD at 1.2820 and then buys 100,000 EUR/USD at 1.2760, his net position in EUR is zero (100,000-100,000) however his USD is not. The USD position is calculated as follows 100,000*1.2820= $128,200 long and -100,000*1.2760= -$127,600 short. The profit or loss is always in the second currency. For simplicity's sake the P&L statements often show the P&L in USD terms. In this case the profit on the trade is $600.As can be seen from the Open position window below in Ticket number 411 the trader has Bought 20,000 EUR against the USD at 1.2806 the current rate to close is 1.2844, therefore the trader has a current profit of 38 pips and 20000*0.0038= $76.A PipWe can see that in this case the trader made 60 points or pips. This is calculated as follows 1.2820-1.2760=0.0060; therefore 1 pip=0.0001 and on a 100,000 EUR/USD position 1 pip is worth $10. In a USD/JPY position where the market rate is 118.30 one pip is 0.01. We can therefore see that a pip is equal to the last decimal point shown on a rate. The value of 1 pip in USD/JPY for a 100,000 position can be calculated as follows: 100,000*0.01= 1,000 JPY, in USD terms this is equal to 1,000/118.30= $8.45 (rounded to the nearest cent).Orders - Stops and LimitsAs in other financial markets, one can enter the foreign exchange markets at the market or deal rate (this is often known as a Market Order) or at a future rate this is known as a Stop (often known as a Stop Loss) or Limit Order. However as opposed to other financial markets, placing orders in the FX market is much easier, gives far better results and has many more opportunities and variations on the order placed.
When you wish to enter into a trade at current market conditions one simply executes a buy or a sell market order. Often a trader may wish to either limit the loss of the position that he has open (in which case he is able to set a stop order) or he may wish to enter a trade but at a rate that is more attractive then the current market (in which case he can place a limit order).As discussed above, a stop order can be placed on an existing open position to limit the possible loss on the open trade. For instance say if a trader is long 100,000 EUR/USD at 1.2820, he is obviously expecting that the EUR/USD rate will rise where he will be able to get out at a profit. However the trader may wish to limit the loss that he is willing to take on the trade. If the maximum loss the trader is willing to take is $1,000 and he knows that every pip is worth $10 in this case, calculated by 100,000 EUR*0.0001= $10, then he will want to set his stop order 100 pips from his execution price in this case 1.2720. At 1.2720 the client will lose $1,000 if it is not closed earlier and the AVA platform will execute the order if and when the Bid (since in this case the stop order is a sell order) reaches the stop rate of 1.2720.Orders – O.C.O's, I/D's and Trailing StopsAs mentioned above there are many combinations of orders that are possible to you in the FX market and in the AvaTrader platform. Stop and Limit orders as described above are the basic orders available, all the rest are simply a combination of them or contingent orders.
O.C.O'sO.C.O's is short for "One Cancels the Other". This is used against an open position, and is done in the following way; the trader places a stop order and a limit order against an existing open position, the first one that hits closes the position (a loss if the stop order hits and a profit if the limit order hits) and when the trade is closed the remaining order is cancelled.This can best be described by an example. Say the trader is short 250,000 AUD/USD at 0.7730 and he wishes to profit $1,250 USD but is only willing to risk losing $750 USD, then he would place the following orders. The trader would set a limit order 50 pips away from the execution price since 50 pips at $25 per pip is $1,250USD; therefore the limit order would be placed at 0.7680 at the same time the trader sets a stop order 30 pips from the executed open price since 30 pips at $25 per pip is $750US; therefore the stop order would be 0.7760. The orders would be placed O.C.O which means that one order can be hit or triggered to close the open position and when that occurs the remaining order is cancelled automatically.I/D'sI/D's is short for "If Done". This is a spin on the O.C.O, where the O.C.O is placed on an existing trade, the I/D is placed on a trade that has not yet been exercised. This can best be shown by an example. Say the trader wishes to go short on the AUD/USD at 0.7770 in 250,000 AUD but the bid price is currently only 0.7730. Now as above the client wishes to profit $1,250 USD but is only willing to risk losing $750 USD; then he would place the following orders. The trader would set an original limit to sell the 250,000 AUD/USD at 0.7770 and place another limit that becomes active if the first limit hits (hence the term If Done).The I/D order can also have a stop order attached as above, if the trader would like to set the same conditions as the O.C.O order above i.e. 50 pip profit and 30 pip loss then the full order would read as follows: Sell 250,000 AUD/USD at 0.7770 I/D 0.7720 Limit and 0.7800 Stop.Below we can see an actual I/D order with a combination O.C.O on the Orders worksheet where in Order number 205 the trader wishes to buy 20,000 EUR against the USD at 1.2680 if this occurs then there is a stop order against it at 1.2670 (a maximum loss of 10 pips) and an O.C.O limit of 1.2790 for a profit of 110 pips.Trailing StopsA Trailing Stop is an active stop loss that keeps a set distance away from the current market price and updates according to the market. This is best used in a moving market that is going in the direction the trader wants and the trader wishes to guarantee the profits made. This can be best illustrated by an example.Say a trader enters into a long 200,000 USD/CHF position at 1.2430 and set a stop order at 1.2380 with a trailing stop of 50 pips. The maximum the trader can lose is 50 pips as above, however the stop loss will automatically update itself as the market moves. For instance, if the market moves to 1.2450 then the stop loss would update itself to 1.2400, always keeping 50 pips from the maximum rate; the stop loss will keep updating itself until it triggers or the original trade is closed.Hedging TradesOn the AvaTrader platform, traders have the opportunity to hedge their positions. A hedge is a trade that is in the opposite direction of an existing trade or open position. This can be a partial or a full hedge and does not close the position although it has the same affect. Some traders enjoy this feature and capability to hedge an open trade rather then close it out as part of their trading strategy. It should be noted that a hedge has the same affect as closing or partially closing an existing trade except for the fact that both the long and the short positions remain in the open positions table, are treated as open trades and must be closed at a later date.RolloversOn the AvaTrader platform all open positions are automatically rolled or swapped to the next business day. Traditionally all spot trades in the FX market are performed for a period of two working days when the delivery of the transaction is to take place. Since Ava through its AvaTrader platform does not permit delivery trades all trades must eventually be closed. Hence in order to avoid the delivery of the trade, the positions are automatically closed for the original trade date and reopened for the next trade date. In order to keep things simple and give a maximum advantage to its clients the open and close rates of the roll are kept the same as the open position rate. A premium is then either added or subtracted based on the interest rate differential between the two currencies being traded.This is a very beneficial and time saving method to continue the trade on the traders behalf until such time as the trader decides to close the trade
Who Trades in the FX Market?Foreign exchange traders can be separated into two groups, hedgers and speculators.Hedgers: Governments, companies (exporters and importers) and some investors have foreign exchange exposure. Adverse movements between their local or domestic currency and the foreign currency of the group they are either doing business with (for the exchange of goods and services) or investing in will affect their bottom line. This is the core of all foreign exchange trading; however it only makes up approximately 5% of the actual market.Speculators: These groups which range from banks, funds, corporations and individuals – create artificial rate exposure in order to profit from the variations or movements in the price.Currency PairsCurrency Pairs: Each currency is recognized by a three letter code. For example EUR (is the EURO and refers to the European currency), USD (is the United States Dollar). The worlds leading currencies (often referred to as the majors) are the EUR, USD, JPY (Japanese Yen), GBP (the British Pound or Sterling), CHF (the Swiss franc), AUD (the Australian Dollar) and the CAD (the Canadian Dollar).Currencies are traded in pairs and are displayed as such. There is always the three letter currency code a slash and another three letter currency code. The first currency displayed refers to the "base", "leading" or "primary currency"; the second currency refers to the "secondary currency".
For instance when looking at the EUR/USD the EUR is the leading currency and the USD is the secondary currency. The "currency pair" or "currency cross" is then followed by a number; this is typically a five digit number with a decimal point after the first, for instance 1.2660.The number represents the ratio of one currency against the other, and can be read as "the amount of the secondary currency needed in order to have one unit of the major currency". In the example just given, EUR/USD 1.2660, one would require 1 Dollar and 26.6 cents to exchange for 1 Euro.
Bid and Ask or Buy and SellThere are always two numbers given after the currency pair, the first always has a smaller numerical value then the second. This can once again be shown using the same example (EUR/USD 1.2660 1.2663). The first number is known as the "Bid" or "Sell" and the second number is known as the "Ask", the "Offer" or "Buy".The smaller number or the Bid (Sell) (1.2660) represents that price where one can sell the major currency and buy the secondary currency; sell the EUR and buy the USD. The second price the Ask (BUY) (1.2663) represents the price where one can buy the major currency and sell the secondary; buy the EUR and sell the USD.In the trading window below the trader is able to buy the EUR against the USD at 1.2847 or sell the EUR and buy the USD at 1.2844. The trader is also able to buy the USD against the JPY at 117.60 and sell the USD and buy the JPY at 117.57.Calculating your P&LAs discussed above the foreign exchange rate represents the value of one unit in the major currency in the terms of a secondary currency. Since when opening a trade you exercise the trade in a set amount of the major currency and when closing the trade you do so in the same amount, the profit or loss generated by the round trip (open and close) trade will be in the secondary currency.
For example if a trader sells 100,000 EUR/USD at 1.2820 and then buys 100,000 EUR/USD at 1.2760, his net position in EUR is zero (100,000-100,000) however his USD is not. The USD position is calculated as follows 100,000*1.2820= $128,200 long and -100,000*1.2760= -$127,600 short. The profit or loss is always in the second currency. For simplicity's sake the P&L statements often show the P&L in USD terms. In this case the profit on the trade is $600.As can be seen from the Open position window below in Ticket number 411 the trader has Bought 20,000 EUR against the USD at 1.2806 the current rate to close is 1.2844, therefore the trader has a current profit of 38 pips and 20000*0.0038= $76.A PipWe can see that in this case the trader made 60 points or pips. This is calculated as follows 1.2820-1.2760=0.0060; therefore 1 pip=0.0001 and on a 100,000 EUR/USD position 1 pip is worth $10. In a USD/JPY position where the market rate is 118.30 one pip is 0.01. We can therefore see that a pip is equal to the last decimal point shown on a rate. The value of 1 pip in USD/JPY for a 100,000 position can be calculated as follows: 100,000*0.01= 1,000 JPY, in USD terms this is equal to 1,000/118.30= $8.45 (rounded to the nearest cent).Orders - Stops and LimitsAs in other financial markets, one can enter the foreign exchange markets at the market or deal rate (this is often known as a Market Order) or at a future rate this is known as a Stop (often known as a Stop Loss) or Limit Order. However as opposed to other financial markets, placing orders in the FX market is much easier, gives far better results and has many more opportunities and variations on the order placed.
When you wish to enter into a trade at current market conditions one simply executes a buy or a sell market order. Often a trader may wish to either limit the loss of the position that he has open (in which case he is able to set a stop order) or he may wish to enter a trade but at a rate that is more attractive then the current market (in which case he can place a limit order).As discussed above, a stop order can be placed on an existing open position to limit the possible loss on the open trade. For instance say if a trader is long 100,000 EUR/USD at 1.2820, he is obviously expecting that the EUR/USD rate will rise where he will be able to get out at a profit. However the trader may wish to limit the loss that he is willing to take on the trade. If the maximum loss the trader is willing to take is $1,000 and he knows that every pip is worth $10 in this case, calculated by 100,000 EUR*0.0001= $10, then he will want to set his stop order 100 pips from his execution price in this case 1.2720. At 1.2720 the client will lose $1,000 if it is not closed earlier and the AVA platform will execute the order if and when the Bid (since in this case the stop order is a sell order) reaches the stop rate of 1.2720.Orders – O.C.O's, I/D's and Trailing StopsAs mentioned above there are many combinations of orders that are possible to you in the FX market and in the AvaTrader platform. Stop and Limit orders as described above are the basic orders available, all the rest are simply a combination of them or contingent orders.
O.C.O'sO.C.O's is short for "One Cancels the Other". This is used against an open position, and is done in the following way; the trader places a stop order and a limit order against an existing open position, the first one that hits closes the position (a loss if the stop order hits and a profit if the limit order hits) and when the trade is closed the remaining order is cancelled.This can best be described by an example. Say the trader is short 250,000 AUD/USD at 0.7730 and he wishes to profit $1,250 USD but is only willing to risk losing $750 USD, then he would place the following orders. The trader would set a limit order 50 pips away from the execution price since 50 pips at $25 per pip is $1,250USD; therefore the limit order would be placed at 0.7680 at the same time the trader sets a stop order 30 pips from the executed open price since 30 pips at $25 per pip is $750US; therefore the stop order would be 0.7760. The orders would be placed O.C.O which means that one order can be hit or triggered to close the open position and when that occurs the remaining order is cancelled automatically.I/D'sI/D's is short for "If Done". This is a spin on the O.C.O, where the O.C.O is placed on an existing trade, the I/D is placed on a trade that has not yet been exercised. This can best be shown by an example. Say the trader wishes to go short on the AUD/USD at 0.7770 in 250,000 AUD but the bid price is currently only 0.7730. Now as above the client wishes to profit $1,250 USD but is only willing to risk losing $750 USD; then he would place the following orders. The trader would set an original limit to sell the 250,000 AUD/USD at 0.7770 and place another limit that becomes active if the first limit hits (hence the term If Done).The I/D order can also have a stop order attached as above, if the trader would like to set the same conditions as the O.C.O order above i.e. 50 pip profit and 30 pip loss then the full order would read as follows: Sell 250,000 AUD/USD at 0.7770 I/D 0.7720 Limit and 0.7800 Stop.Below we can see an actual I/D order with a combination O.C.O on the Orders worksheet where in Order number 205 the trader wishes to buy 20,000 EUR against the USD at 1.2680 if this occurs then there is a stop order against it at 1.2670 (a maximum loss of 10 pips) and an O.C.O limit of 1.2790 for a profit of 110 pips.Trailing StopsA Trailing Stop is an active stop loss that keeps a set distance away from the current market price and updates according to the market. This is best used in a moving market that is going in the direction the trader wants and the trader wishes to guarantee the profits made. This can be best illustrated by an example.Say a trader enters into a long 200,000 USD/CHF position at 1.2430 and set a stop order at 1.2380 with a trailing stop of 50 pips. The maximum the trader can lose is 50 pips as above, however the stop loss will automatically update itself as the market moves. For instance, if the market moves to 1.2450 then the stop loss would update itself to 1.2400, always keeping 50 pips from the maximum rate; the stop loss will keep updating itself until it triggers or the original trade is closed.Hedging TradesOn the AvaTrader platform, traders have the opportunity to hedge their positions. A hedge is a trade that is in the opposite direction of an existing trade or open position. This can be a partial or a full hedge and does not close the position although it has the same affect. Some traders enjoy this feature and capability to hedge an open trade rather then close it out as part of their trading strategy. It should be noted that a hedge has the same affect as closing or partially closing an existing trade except for the fact that both the long and the short positions remain in the open positions table, are treated as open trades and must be closed at a later date.RolloversOn the AvaTrader platform all open positions are automatically rolled or swapped to the next business day. Traditionally all spot trades in the FX market are performed for a period of two working days when the delivery of the transaction is to take place. Since Ava through its AvaTrader platform does not permit delivery trades all trades must eventually be closed. Hence in order to avoid the delivery of the trade, the positions are automatically closed for the original trade date and reopened for the next trade date. In order to keep things simple and give a maximum advantage to its clients the open and close rates of the roll are kept the same as the open position rate. A premium is then either added or subtracted based on the interest rate differential between the two currencies being traded.This is a very beneficial and time saving method to continue the trade on the traders behalf until such time as the trader decides to close the trade
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