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Hi guys, I have been using reddit for years in my personal life (not trading!) and wanted to give something back in an area where i am an expert. I worked at an investment bank for seven years and joined them as a graduate FX trader so have lots of professional experience, by which i mean I was trained and paid by a big institution to trade on their behalf. This is very different to being a full-time home trader, although that is not to discredit those guys, who can accumulate a good amount of experience/wisdom through self learning. When I get time I'm going to write a mid-length posts on each topic for you guys along the lines of how i was trained. I guess there would be 15-20 topics in total so about 50-60 posts. Feel free to comment or ask questions. The first topic is Risk Management and we'll cover it in three parts Part I
Why it matters
Using stops sensibly
Picking a clear level
Why it matters
The first rule of making money through trading is to ensure you do not lose money. Look at any serious hedge fund’s website and they’ll talk about their first priority being “preservation of investor capital.” You have to keep it before you grow it. Strangely, if you look at retail trading websites, for every one article on risk management there are probably fifty on trade selection. This is completely the wrong way around. The great news is that this stuff is pretty simple and process-driven. Anyone can learn and follow best practices. Seriously, avoiding mistakes is one of the most important things: there's not some holy grail system for finding winning trades, rather a routine and fairly boring set of processes that ensure that you are profitable, despite having plenty of losing trades alongside the winners.
Capital and position sizing
The first thing you have to know is how much capital you are working with. Let’s say you have $100,000 deposited. This is your maximum trading capital. Your trading capital is not the leveraged amount. It is the amount of money you have deposited and can withdraw or lose. Position sizing is what ensures that a losing streak does not take you out of the market. A rule of thumb is that one should risk no more than 2% of one’s account balance on an individual trade and no more than 8% of one’s account balance on a specific theme. We’ll look at why that’s a rule of thumb later. For now let’s just accept those numbers and look at examples. So we have $100,000 in our account. And we wish to buy EURUSD. We should therefore not be risking more than 2% which $2,000. We look at a technical chart and decide to leave a stop below the monthly low, which is 55 pips below market. We’ll come back to this in a bit. So what should our position size be? We go to the calculator page, select Position Size and enter our details. There are many such calculators online - just google "Pip calculator". https://preview.redd.it/y38zb666e5h51.jpg?width=1200&format=pjpg&auto=webp&s=26e4fe569dc5c1f43ce4c746230c49b138691d14 So the appropriate size is a buy position of 363,636 EURUSD. If it reaches our stop level we know we’ll lose precisely $2,000 or 2% of our capital. You should be using this calculator (or something similar) on every single trade so that you know your risk. Now imagine that we have similar bets on EURJPY and EURGBP, which have also broken above moving averages. Clearly this EUR-momentum is a theme. If it works all three bets are likely to pay off. But if it goes wrong we are likely to lose on all three at once. We are going to look at this concept of correlation in more detail later. The total amount of risk in our portfolio - if all of the trades on this EUR-momentum theme were to hit their stops - should not exceed $8,000 or 8% of total capital. This allows us to go big on themes we like without going bust when the theme does not work. As we’ll see later, many traders only win on 40-60% of trades. So you have to accept losing trades will be common and ensure you size trades so they cannot ruin you. Similarly, like poker players, we should risk more on trades we feel confident about and less on trades that seem less compelling. However, this should always be subject to overall position sizing constraints. For example before you put on each trade you might rate the strength of your conviction in the trade and allocate a position size accordingly: https://preview.redd.it/q2ea6rgae5h51.png?width=1200&format=png&auto=webp&s=4332cb8d0bbbc3d8db972c1f28e8189105393e5b To keep yourself disciplined you should try to ensure that no more than one in twenty trades are graded exceptional and allocated 5% of account balance risk. It really should be a rare moment when all the stars align for you. Notice that the nice thing about dealing in percentages is that it scales. Say you start out with $100,000 but end the year up 50% at $150,000. Now a 1% bet will risk $1,500 rather than $1,000. That makes sense as your capital has grown. It is extremely common for retail accounts to blow-up by making only 4-5 losing trades because they are leveraged at 50:1 and have taken on far too large a position, relative to their account balance. Consider that GBPUSD tends to move 1% each day. If you have an account balance of $10k then it would be crazy to take a position of $500k (50:1 leveraged). A 1% move on $500k is $5k. Two perfectly regular down days in a row — or a single day’s move of 2% — and you will receive a margin call from the broker, have the account closed out, and have lost all your money. Do not let this happen to you. Use position sizing discipline to protect yourself.
If you’re wondering - why “about 2%” per trade? - that’s a fair question. Why not 0.5% or 10% or any other number? The Kelly Criterion is a formula that was adapted for use in casinos. If you know the odds of winning and the expected pay-off, it tells you how much you should bet in each round. This is harder than it sounds. Let’s say you could bet on a weighted coin flip, where it lands on heads 60% of the time and tails 40% of the time. The payout is $2 per $1 bet. Well, absolutely you should bet. The odds are in your favour. But if you have, say, $100 it is less obvious how much you should bet to avoid ruin. Say you bet $50, the odds that it could land on tails twice in a row are 16%. You could easily be out after the first two flips. Equally, betting $1 is not going to maximise your advantage. The odds are 60/40 in your favour so only betting $1 is likely too conservative. The Kelly Criterion is a formula that produces the long-run optimal bet size, given the odds. Applying the formula to forex trading looks like this: Position size % = Winning trade % - ( (1- Winning trade %) / Risk-reward ratio If you have recorded hundreds of trades in your journal - see next chapter - you can calculate what this outputs for you specifically. If you don't have hundreds of trades then let’s assume some realistic defaults of Winning trade % being 30% and Risk-reward ratio being 3. The 3 implies your TP is 3x the distance of your stop from entry e.g. 300 pips take profit and 100 pips stop loss. So that’s 0.3 - (1 - 0.3) / 3 = 6.6%. Hold on a second. 6.6% of your account probably feels like a LOT to risk per trade.This is the main observation people have on Kelly: whilst it may optimise the long-run results it doesn’t take into account the pain of drawdowns. It is better thought of as the rational maximum limit. You needn’t go right up to the limit! With a 30% winning trade ratio, the odds of you losing on four trades in a row is nearly one in four. That would result in a drawdown of nearly a quarter of your starting account balance. Could you really stomach that and put on the fifth trade, cool as ice? Most of us could not. Accordingly people tend to reduce the bet size. For example, let’s say you know you would feel emotionally affected by losing 25% of your account. Well, the simplest way is to divide the Kelly output by four. You have effectively hidden 75% of your account balance from Kelly and it is now optimised to avoid a total wipeout of just the 25% it can see. This gives 6.6% / 4 = 1.65%. Of course different trading approaches and different risk appetites will provide different optimal bet sizes but as a rule of thumb something between 1-2% is appropriate for the style and risk appetite of most retail traders. Incidentally be very wary of systems or traders who claim high winning trade % like 80%. Invariably these don’t pass a basic sense-check:
How many live trades have you done? Often they’ll have done only a handful of real trades and the rest are simulated backtests, which are overfitted. The model will soon die.
What is your risk-reward ratio on each trade? If you have a take profit $3 away and a stop loss $100 away, of course most trades will be winners. You will not be making money, however! In general most traders should trade smaller position sizes and less frequently than they do. If you are going to bias one way or the other, far better to start off too small.
How to use stop losses sensibly
Stop losses have a bad reputation amongst the retail community but are absolutely essential to risk management. No serious discretionary trader can operate without them. A stop loss is a resting order, left with the broker, to automatically close your position if it reaches a certain price. For a recap on the various order types visit this chapter. The valid concern with stop losses is that disreputable brokers look for a concentration of stops and then, when the market is close, whipsaw the price through the stop levels so that the clients ‘stop out’ and sell to the broker at a low rate before the market naturally comes back higher. This is referred to as ‘stop hunting’. This would be extremely immoral behaviour and the way to guard against it is to use a highly reputable top-tier broker in a well regulated region such as the UK. Why are stop losses so important? Well, there is no other way to manage risk with certainty. You should always have a pre-determined stop loss before you put on a trade. Not having one is a recipe for disaster: you will find yourself emotionally attached to the trade as it goes against you and it will be extremely hard to cut the loss. This is a well known behavioural bias that we’ll explore in a later chapter. Learning to take a loss and move on rationally is a key lesson for new traders. A common mistake is to think of the market as a personal nemesis. The market, of course, is totally impersonal; it doesn’t care whether you make money or not. Bruce Kovner, founder of the hedge fund Caxton Associates There is an old saying amongst bank traders which is “losers average losers”. It is tempting, having bought EURUSD and seeing it go lower, to buy more. Your average price will improve if you keep buying as it goes lower. If it was cheap before it must be a bargain now, right? Wrong. Where does that end? Always have a pre-determined cut-off point which limits your risk. A level where you know the reason for the trade was proved ‘wrong’ ... and stick to it strictly. If you trade using discretion, use stops.
Picking a clear level
Where you leave your stop loss is key. Typically traders will leave them at big technical levels such as recent highs or lows. For example if EURUSD is trading at 1.1250 and the recent month’s low is 1.1205 then leaving it just below at 1.1200 seems sensible. If you were going long, just below the double bottom support zone seems like a sensible area to leave a stop You want to give it a bit of breathing room as we know support zones often get challenged before the price rallies. This is because lots of traders identify the same zones. You won’t be the only one selling around 1.1200. The “weak hands” who leave their sell stop order at exactly the level are likely to get taken out as the market tests the support. Those who leave it ten or fifteen pips below the level have more breathing room and will survive a quick test of the level before a resumed run-up. Your timeframe and trading style clearly play a part. Here’s a candlestick chart (one candle is one day) for GBPUSD. https://preview.redd.it/moyngdy4f5h51.png?width=1200&format=png&auto=webp&s=91af88da00dd3a09e202880d8029b0ddf04fb802 If you are putting on a trend-following trade you expect to hold for weeks then you need to have a stop loss that can withstand the daily noise. Look at the downtrend on the chart. There were plenty of days in which the price rallied 60 pips or more during the wider downtrend. So having a really tight stop of, say, 25 pips that gets chopped up in noisy short-term moves is not going to work for this kind of trade. You need to use a wider stop and take a smaller position size, determined by the stop level. There are several tools you can use to help you estimate what is a safe distance and we’ll look at those in the next section. There are of course exceptions. For example, if you are doing range-break style trading you might have a really tight stop, set just below the previous range high. https://preview.redd.it/ygy0tko7f5h51.png?width=1200&format=png&auto=webp&s=34af49da61c911befdc0db26af66f6c313556c81 Clearly then where you set stops will depend on your trading style as well as your holding horizons and the volatility of each instrument. Here are some guidelines that can help:
Use technical analysis to pick important levels (support, resistance, previous high/lows, moving averages etc.) as these provide clear exit and entry points on a trade.
Ensure that the stop gives your trade enough room to breathe and reflects your timeframe and typical volatility of each pair. See next section.
Always pick your stop level first. Then use a calculator to determine the appropriate lot size for the position, based on the % of your account balance you wish to risk on the trade.
So far we have talked about price-based stops. There is another sort which is more of a fundamental stop, used alongside - not instead of - price stops. If either breaks you’re out. For example if you stop understanding why a product is going up or down and your fundamental thesis has been confirmed wrong, get out. For example, if you are long because you think the central bank is turning hawkish and AUDUSD is going to play catch up with rates … then you hear dovish noises from the central bank and the bond yields retrace lower and back in line with the currency - close your AUDUSD position. You already know your thesis was wrong. No need to give away more money to the market.
Coming up in part II
EDIT: part II here Letting stops breathe When to change a stop Entering and exiting winning positions Risk:reward ratios Risk-adjusted returns
Coming up in part III
Squeezes and other risks Market positioning Bet correlation Crap trades, timeouts and monthly limits *** Disclaimer:This content is not investment advice and you should not place any reliance on it. The views expressed are the author's own and should not be attributed to any other person, including their employer.
Just looking for some advice on my situation I'm 28 on $70k/year with: 20k savings 20k student loan 3k ETFs(VTI) My job is quite stable for the next few years fortunately. My goals are eventual home ownership but do not feel pressured to buy, although house prices are ever increasing and that the fact that I save more rent the sooner I buy are motivating. What do? Much appreciated.
Hi, I’m 16 borrowed 1k from my parents. I was confident i can be profitable after studying and trading paper money for 4 months. Basically after months of trading on a live account I blew up my 1k account. It was a good experience and somewhat knowledgeable. For the past few weeks I was up +500 then down -400 then finally I blew up my account. Shortly after blowing my account I’ve realized, trading might not be my thing or I just need more practice. This made me realize how much greed and how much trading is more of a psychological warfare. It was easy to stick to your trading plan using only 1-3% of your account per trade when your not using real money. My plan for now is to just try and get a job and return the money i borrowed (still scared to say i lost all the money) and keep paper trading for 6 months or longer. Edit: Thanks for the advice and helpful comments as well as for the criticism. I’ve been reading the comments and getting the most value out of them. I’ve decided to follow some of the comments I think made the most sense. So here’s my plan:
Get a part time job
Pay back my parents
Learn, practice, learn forex
Also a lot of people have asked me how in the world did I manage to trade when I’m only 16. Answer to that is my parents agreed to open an account under their own name. Also thank you again for going out of your way giving advices. It really helps me out a lot.
Wannabe trader in Europe desperate for cheap broker.
I live in Europe(not uk) and am so struggling to open a broker account. I've been reading books about daytrading and what not but here wanting to start low doesn't seem possible. Is anyone here from Europe? Do you know some really cheap( if not commission free) but that has pretty big range of companies to buy stocks on Us market? Especially penny stocks, I mean fixed commission per share can be really expensive if the share is less than a dollar. And please not brokers that sell only CFDs(like eToro or Trading212) . I'm really struggling to find a cheap broker being European resident, and willing to start with little money. I've tried Revolut but it only has major companies to buy stocks from, and doesn't really look reliable at all. I tried to make account on Td Ameritrade, found out can't. Then on Interective Brokers, and found out after making the account it was available only Pro version(the paid one) out of Us (and that's at least 20$ per month). And have been considerig many more brokers. Can you please let me know if there is any good and reliable broker for someone from Europe, that wants to start with penny stocks on Us market, with a capital as low as 50$? I'm getting desperate here.
Hey guys, I’m relatively new to forex trading. I have some really basic understanding on terms and definitions and whatsoever because I read through some of the lessons in babypips already. Plus, I was also wondering if enrolling in an online course would be worth it? I wanna hear some opinions but please go easy on me lol thanks a lot
I have been involved with an organization called Tradehouse that is affiliated with the popular MLM IML/IM MASTERY ACADEMY/whatever name they go by now... sadly for a few months now. If you have any friends or family that are involved with either of these entities - please get them out if you can. They have probably already been roped in and indoctrinated with the language that the community uses (which often includes every clap back and argument in the book) but please try anyways. They get you in by leveraging the higher ups in their organization ("chairman") and showing them live their lavish lifestyles.. and imply that you can too. As soon as you're welcomed in you're lovebombed and called "family" by everyone in this massive telegram group chat. And then it's radio silence right after. You're assumed to learn everything that you can about trading on your own. And soon you realize it's impossible because retail trading involves SO much risk.. which is exactly why many DON'T... lmao. You're literally trading against big banks and hedge funds. And if you don't know anything about trading let me tell you something that you might not know yet - for every winner or winning trade there is a loser. Banks can afford to trade because they are going in trades from both positions and skimming off the top of the profits. Retail traders? Yeah we aren't so lucky lol. So you realize that trading isn't as easy as it seems.. but your monthly payment is coming up and you have to do something. Here is where they get you - once you sign up (RECRUIT) two people you get your monthly fee waived (mind you.. JUST FOR THAT MONTH). The pressure is then on you to flex a lifestyle you don't have yet, in order to sell people a dream you aren't even living. All to avoid a monthly charge that they are going to have to handle unless they start the same cycle.. It's honestly horrible. The whole thing is just slimly. Everyone that is brought in is indoctrinated and taught to say the exact same things, just mindless robots. "Its all about the mindset if you're losing it's on you" "Forex isn't a scam" "broke mindset" just the dumbest stuff.. I’m making this post to anyone on here that was like me, just looking for all the information that they could about what they think or thought seemed like a good idea, but suddenly doesnt.. your conscience knows. It’s okay to get roped into these things, they are marketers after all. You aren’t stupid for joining or inquiring, and if you’re in it already like me you can make it out. You’ve already done the first step and that’s look outside of the bubble.. time to pop it. Anyone that has any questions about the above groups, advice or stuff you’d like to hear about my experience please drop it in the comments. I’m not sure how reddit works still lol but I’m always free to help.
I see all the posts and comments, articles on websites, etc saying it is stupid hard to become profitable that you might as well not even start. Also saying if you don’t have sufficient starting capital you’re pretty much doomed from the start. Im a young guy(18 years old) with about 3-7 thousand dollars total at the moment in all bank accounts that can be used to trade forex. I’m also a newbie.and am very naive when it comes to thing and believe almost everything I hear. I would really appreciate your professional discretion to help me decide if I should continue down this route(almost 2 months so far) or not and if it can even be done at my level:( I find learning about trading very interesting and facinating! If I decide not to I will probably try dropshipping again or FBA, maybe even affiliate marketing. Something business related. I fucking hate school and hate jobs! I want FIRE(financial independence, retire early) a a younger than average age. I want to be able to enjoy life and the luxuries it offers without being tied down by a dead end job!
Despite having all my family and friends next to me, I feel so alone when trading forex?
I can talk about trading with my friends and family whenever I like and they listen to me and try to understand. But when I'm actually trading, I feel so alone even when my family are right next to me. I think it's because I am 100% responsible for my account. It's not like a regular 9-5 job where if you screw up, you don't take all the blame. And even if you do, the problem gets sorted by someone else while you get a little slap on the wrist. When you're trading, your problems are your own. You have to sort it out yourself, and that can feel a bit isolating at times. Does anyone else feel this? Not trying to be im14andthisisdeep, just saying how I feel. I made a £78 loss today. Maybe I'm just being too dramatic and letting my emotions get to me. Either way, I will be taking a break this week and resume trading next Monday.
Hey everyone! First let me give you some background. I live in Mexico, I'm a scientist (Biotech), but science is the least priority in Mexico, never the less I'm one of the lucky ones in Mexico, because only 10% of the population in Mexico makes more than $440 usd a month ($10,000 pesos), and I'm currently making around $500 usd a month. You might think, $500 a month and you are part of the top 10%?, yup, that's life in Mexico. I already spent 6 years in college, I'm totally willing to spend another 10 years learning a new skill if that means at least making more that $500 usd a month. I've been studying technical analysis for the past year, and I've been trading on a paper account for at least 6 months, but I'm nowhere near profitable. Yes, I'm setting a stop loss, yes I'm only taking at least 1:3 risk reward trades, yes I'm only risking 2% per trade, but I'm still loosing money. Is it possible to make a decent living trading Forex? I know one year of experience is nothing, I didn't learn to play the guitar in a single year, but I wonder if I'm better spending my next 10 years in another skill like marketing, or something else.
Someone posted on here a few days ago asking about forex and forex trading in Kenya, I have gone through the responses and clearly, most people don’t have an idea. It is 3am in the morning and am in a good mood so let me make this post. This will be a comprehensive and lengthy post so grab a pen and paper and sit down. We’ll be here a while. FIRST OF ALL, who am I..? I am a forex trader, in Nairobi, Kenya..i have been actively involved in forex since I found out about it in Feb 2016 when I somehow ended up in a wealth creation seminar (lol) in pride inn Westlands, the one close to Mpaka Rd. Luckily for me, it was not one of those AIM global meetings or I’d be on Facebook selling God knows what those guys sell. I did not take it seriously till August of the same year and I have been active ever since. I don’t teach, mentor or sell a course or signals, I trade my own money. I am also posting from a throwaway account because I don’t want KRA on my ass. What the fuck is forex and forex trading. In simple plain English, forex is like the stock market but for currencies. Stock Market = Shares, forex = currencies. If you want more in-depth explanation, google is your friend. These currencies are pegged on specific countries, united states- dollar, UK- pound, euro zone- euro, Switzerland- Swiss franc, Kenya- Kenya shilling.. you get the point. Now, there are specific events and happenings between these economies that affect the movement and values of the currencies, driving their value (purchasing power up and down). Forex trading exploits these movements to make money. When the value is going up, we buy and vice versa (down –sell) Is forex trading illegal in Kenya? Is it a scam? Illegal, no. scam, no. All the banks in the world do it (KCB made about 4 billion from trading forex in 2019) Have there been scams involving forex in Kenya? Yes. Here is one that happened recently. This one is the most infamous one yet. Best believe that this is not the end of these type of scams because the stupidity, greed and gullibility of human beings is unfathomable. However, by the end of this post, I hope you won’t fall for such silliness. What next how do I make it work..? Am glad you asked. Generally, there are two ways to go about it. One, you teach yourself. This is the equivalent of stealing our dad’s car and hoping that the pedal you hit is the brake and not the accelerator. It is the route I took, it is the most rewarding and a huge ego boost when you finally make it on your own. Typically, this involves scouring the internet for hours upon hours going down rabbit holes, thinking you have made it telling all your friends how you will be a millionaire then losing all your money. Some people do not have the stomach for that. The second route is more practical, structured and smarter. First Learn the basics. There is a free online forex course at www.babypips.com/learn/forex this is merely an introductory course. Basically it is learning the parts of a car before they let you inside the car. Second, start building your strategy. By the time you are done with the babypips, you will have a feel of what the forex market is, what interests you, etc. Tip..Babypips has a lot of garbage. It is good for introductory purposes but not good for much else, pick whatever stick to you or jumps at you the first time. Nonsense like indicators should be ignored. The next step is now the most important. Developing the skill and building your strategy. As a beginner, you want to exhaust your naivety before jumping into the more advanced stuff. Eg can you identify a trend, what is a pair, what is position sizing, what is metatrader 4 and how to operate it, what news is good for a currency, when can I trade, what are the different trading sessions, what is technical analysis, what is market sentiment, what are bullish conditions what is emotion management, how does my psychology affect my trading (more on this later) an I a swing, scalper or day trader etc Mentors and forex courses.. you have probably seen people advertising how they can teach and mentor you on how to trade forex and charging so much money for it. Somehow it seems that these people are focused on the teaching than the trading. Weird, right..? Truth is trading is hard, teaching not quite. A common saying in the industry is “Those who can’t trade, teach” you want to avoid all these gurus on Facebook and Instagram, some are legit but most are not. Sifting the wheat from the chaff is hard but I did that for you. The info is available online on YouTube, telegram channels etc. am not saying not to spend money on a course, if you find a mentor whose style resonates with you and the course is reasonably priced, please, go ahead and buy..it will cut your learning curve in half. People are different. What worked for me might not work for you. Here are some nice YouTube channels to watch. These guys are legit..
After a short period of time, you will be able to sniff out bs teachers with relative ease. You will also discover some of your own and expand the list. Two tips, start with the oldest videos first and whichever of these resonates with you, stick with till the wheels fall off. How long will it take until things start making sense Give yourself time to grow and learn. This is all new to you and you are allowed to make mistakes, to fail and discover yourself. Realistically, depending on the effort you put in, you will not start seeing results until after 6 months. Could take longeshorter so there is no guarantee. Social media, Mentality, Psychology and Books Online, forex trading might not have the best reputation online because it takes hard work and scammers and gurus give it a bad name. However, try to not get sucked into the Instagram trader lifestyle as it is nowhere close to what the reality is. You will not make millions tomorrow or the day after, you might never even make it in this market. But that is the reality of life. Nothing is promised, nothing is guaranteed. Your mentality, beliefs and ego will be challenged in this market. You will learn things that will make you blood boil, you will ask yourself daily, how is this possible, why don’t they teach this in school..bla bla bla..it will be hard but growth is painful, if it wasn’t we’d all be billionaires. Take a break, take a walk, drink a glass of whatever you like or roll one..detox. Chill with your girl (or man) Gradually you will develop mental toughness that will set you up for life. Personally, I sorta ditched religion and picked up stoicism. Whatever works for you. Psychology, this is unfortunately one of the most neglected aspects of your personal development in this journey. Do you believe in yourself? Can you stand by your convictions when everyone is against you? Can you get up every day uncertain of the future? There will be moments where you will question yourself, am I even doing the right thing? the right way? It is normal and essential for your growth. People who played competitive sports have a natural advantage here. Remember the game is first won in your head then on the pitch. Books: ironically, books that helped me the most were the mindset books, Think and grow rich, trading for a living, 4 hour work week, the monk who sold his Ferrari..just google mindset and psychology books, most trading books are garbage. Watch and listen to people who have made it in the investing business. Ray Dalio, warren, Bill Ackman and Carl Icahn. This is turning out to be lengthier than I anticipated so I’ll try to be brief for the remaining parts. Brokers You will need to open up an account with a broker. Get a broker who is regulated. Australian ones (IC Market and Pepperstone) are both legit, reliable and regulated. Do your research. I’d avoid local ones because I’ve heard stories of wide spreads and liquidity problems. International brokers have never failed me. There are plenty brokers, there is no one size fits all recommendation. If it ain’t broke..don’t fix it. Money transfer. All brokers accept wire transfers, you might need to call your bank to authorize that, avoid Equity bank. Stanchart and Stanbic are alright. Large withdrawals $10k+ you will have to call them prior. Get Skrill and Neteller if you don’t like banks like me, set up a Bitcoin wallet for faster withdrawals, (Payoneer and Paypal are accepted by some brokers, just check with them.) How much money can I make..? I hate this question because people have perceived ceilings of income in their minds, eg 1 million ksh is too much to make per month or 10,000ksh is too little. Instead, work backwards. What % return did I make this month/ on this trade. Safaricom made 19.5% last year, if you make 20% you have outperformed them. If you reach of consistency where you can make x% per month on whatever money you have, then there are no limits to how much you can make. How much money do I need to start with..? Zero. You have all the resources above, go forth. There are brokers who provide free bonuses and withdraw-able profits. However, to make a fulltime income you will need some serious cash. Generally, 50,000 kes. You can start lower or higher but if you need say 20k to live comfortably and that is a 10% return per month, then you can do the math on how big your account should be. Of course things like compound interest come into play but that is dependent on your skill level. I have seen people do spectacular things with very little funds. Taxes..? Talk to a lawyer or an accountant. I am neither. Family? Friends? Unfortunately, people will not understand why you spend hundreds of hours watching strangers on the internet so it is best to keep it from them. Eventually you will make it work and they will come to your corner talking about how they always knew you’d make it. The journey will be lonely, make some trading buddies along the way. You’d be surprised at how easy it is when people are united by their circumstances (and stupidity) I have guys who are my bros from South Africa and Lebanon who I have never met but we came up together and are now homies. Join forums, ask questions and grow. That is the only way to learn. Ideally, a group of 5-10 friends committed to learning and growth is the best model. Pushing each other to grow and discovering together. Forex is real and you can do amazing things with it. It is not a get rich quick scheme. If you want a quick guaranteed income, get a job. And now it is 5am, fuck. This is oversimplified and leaves out many many aspects. Happy to answer any questions.
I've been spending the last few weeks while in furlough learning about FOREX for three main reasons,
To learn something new
To do something productive with my free time (vs browsing reddit or playing games)
To make some money on the side
Now, ignoring #1 and #2, I've just been thinking about #3. I have a pretty good day job when I'm not furloughed (work in marketing data analytics in the tourism sector which is obviously fucked), but I've been thinking about ways to get some cash on the side to fund my sort of expensive hobbies. I've been thinking, if I could trade on the Japanese market from 6-10pm Mountain Time a few nights a week, could I net more than I would working a part time job? And the answer is, based on the research I've done making the assumptions below, not without a starting capital of in the $20,000-$25,000 range... Which is doable, I guess, but I can think of better uses for my savings account and will probably be playing with less than $5,000 and tiny risks to live test. Anyway, I've made some assumptions below and I guess I'm just looking for someone who wants to step in and confirm or deny my thoughts. That being said, I'm not going to *not* continue on with forex trading as a hobby, but I think I just need to throw out #3 above unless there's something I'm missing. Assuming 1.5% a month which seems reasonable based on the research I've done so far, compounding: https://preview.redd.it/70kd6z2paq051.png?width=175&format=png&auto=webp&s=4a79d70e44d52ca0c9b3b0c5cc8f56bd93e1dad4 With these assumptions, and $20,000 to start, you're looking at about $4,000 in earnings over the course of a year. Now, I could go across the street, get a job at a hotel front desk, and work for $15/hr times 8 hours per week times 40 weeks a year and beat this. Not as fun, clearly, but it seems to take the "making money" side of this whole thing away. So what are you all in this for? Do you actually have six figure or million dollar accounts and are making something worthwhile off the ROI, or set up with prop firms and hedge funds? Are people here actually hitting 20%, 30%+ yearly, more? Or is everyone else just here for shits & giggles?
Everything You Always Wanted To Know About Swaps* (*But Were Afraid To Ask)
Hello, dummies It's your old pal, Fuzzy. As I'm sure you've all noticed, a lot of the stuff that gets posted here is - to put it delicately - fucking ridiculous. More backwards-ass shit gets posted to wallstreetbets than you'd see on a Westboro Baptist community message board. I mean, I had a look at the daily thread yesterday and..... yeesh. I know, I know. We all make like the divine Laura Dern circa 1992 on the daily and stick our hands deep into this steaming heap of shit to find the nuggets of valuable and/or hilarious information within (thanks for reading, BTW). I agree. I love it just the way it is too. That's what makes WSB great. What I'm getting at is that a lot of the stuff that gets posted here - notwithstanding it being funny or interesting - is just... wrong. Like, fucking your cousin wrong. And to be clear, I mean the fucking your *first* cousin kinda wrong, before my Southerners in the back get all het up (simmer down, Billy Ray - I know Mabel's twice removed on your grand-sister's side). Truly, I try to let it slide. Idomybit to try and put you on the right path. Most of the time, I sleep easy no matter how badly I've seen someone explain what a bank liquidity crisis is. But out of all of those tens of thousands of misguided, autistic attempts at understanding the world of high finance, one thing gets so consistently - so *emphatically* - fucked up and misunderstood by you retards that last night I felt obligated at the end of a long work day to pull together this edition of Finance with Fuzzy just for you. It's so serious I'm not even going to make a u/pokimane gag. Have you guessed what it is yet? Here's a clue. It's in the title of the post. That's right, friends. Today in the neighborhood we're going to talk all about hedging in financial markets - spots, swaps, collars, forwards, CDS, synthetic CDOs, all that fun shit. Don't worry; I'm going to explain what all the scary words mean and how they impact your OTM RH positions along the way. We're going to break it down like this. (1) "What's a hedge, Fuzzy?" (2) Common Hedging Strategies and (3) All About ISDAs and Credit Default Swaps. Before we begin. For the nerds and JV traders in the back (and anyone else who needs to hear this up front) - I am simplifying these descriptions for the purposes of this post. I am also obviously not going to try and cover every exotic form of hedge under the sun or give a detailed summation of what caused the financial crisis. If you are interested in something specific ask a question, but don't try and impress me with your Investopedia skills or technical points I didn't cover; I will just be forced to flex my years of IRL experience on you in the comments and you'll look like a big dummy. TL;DR? Fuck you. There is no TL;DR. You've come this far already. What's a few more paragraphs? Put down the Cheetos and try to concentrate for the next 5-7 minutes. You'll learn something, and I promise I'll be gentle. Ready? Let's get started. 1.The Tao of Risk: Hedging as a Way of Life The simplest way to characterize what a hedge 'is' is to imagine every action having a binary outcome. One is bad, one is good. Red lines, green lines; uppie, downie. With me so far? Good. A 'hedge' is simply the employment of a strategy to mitigate the effect of your action having the wrong binary outcome. You wanted X, but you got Z! Frowny face. A hedge strategy introduces a third outcome. If you hedged against the possibility of Z happening, then you can wind up with Y instead. Not as good as X, but not as bad as Z. The technical definition I like to give my idiot juniors is as follows: Utilization of a defensive strategy to mitigate risk, at a fraction of the cost to capital of the risk itself. Congratulations. You just finished Hedging 101. "But Fuzzy, that's easy! I just sold a naked call against my 95% OTM put! I'm adequately hedged!". Spoiler alert: you're not (although good work on executing a collar, which I describe below). What I'm talking about here is what would be referred to as a 'perfect hedge'; a binary outcome where downside is totally mitigated by a risk management strategy. That's not how it works IRL. Pay attention; this is the tricky part. You can't take a single position and conclude that you're adequately hedged because risks are fluid, not static. So you need to constantly adjust your position in order to maximize the value of the hedge and insure your position. You also need to consider exposure to more than one category of risk. There are micro (specific exposure) risks, and macro (trend exposure) risks, and both need to factor into the hedge calculus. That's why, in the real world, the value of hedging depends entirely on the design of the hedging strategy itself. Here, when we say "value" of the hedge, we're not talking about cash money - we're talking about the intrinsic value of the hedge relative to the the risk profile of your underlying exposure. To achieve this, people hedge dynamically. In wallstreetbets terms, this means that as the value of your position changes, you need to change your hedges too. The idea is to efficiently and continuously distribute and rebalance risk across different states and periods, taking value from states in which the marginal cost of the hedge is low and putting it back into states where marginal cost of the hedge is high, until the shadow value of your underlying exposure is equalized across your positions. The punchline, I guess, is that one static position is a hedge in the same way that the finger paintings you make for your wife's boyfriend are art - it's technically correct, but you're only playing yourself by believing it. Anyway. Obviously doing this as a small potatoes trader is hard but it's worth taking into account. Enough basic shit. So how does this work in markets? 2. A Hedging Taxonomy The best place to start here is a practical question. What does a business need to hedge against? Think about the specific risk that an individual business faces. These are legion, so I'm just going to list a few of the key ones that apply to most corporates. (1) You have commodity risk for the shit you buy or the shit you use. (2) You have currency risk for the money you borrow. (3) You have rate risk on the debt you carry. (4) You have offtake risk for the shit you sell. Complicated, right? To help address the many and varied ways that shit can go wrong in a sophisticated market, smart operators like yours truly have devised a whole bundle of different instruments which can help you manage the risk. I might write about some of the more complicated ones in a later post if people are interested (CDO/CLOs, strip/stack hedges and bond swaps with option toggles come to mind) but let's stick to the basics for now. (i) Swaps A swap is one of the most common forms of hedge instrument, and they're used by pretty much everyone that can afford them. The language is complicated but the concept isn't, so pay attention and you'll be fine. This is the most important part of this section so it'll be the longest one. Swaps are derivative contracts with two counterparties (before you ask, you can't trade 'em on an exchange - they're OTC instruments only). They're used to exchange one cash flow for another cash flow of equal expected value; doing this allows you to take speculative positions on certain financial prices or to alter the cash flows of existing assets or liabilities within a business. "Wait, Fuzz; slow down! What do you mean sets of cash flows?". Fear not, little autist. Ol' Fuzz has you covered. The cash flows I'm talking about are referred to in swap-land as 'legs'. One leg is fixed - a set payment that's the same every time it gets paid - and the other is variable - it fluctuates (typically indexed off the price of the underlying risk that you are speculating on / protecting against). You set it up at the start so that they're notionally equal and the two legs net off; so at open, the swap is a zero NPV instrument. Here's where the fun starts. If the price that you based the variable leg of the swap on changes, the value of the swap will shift; the party on the wrong side of the move ponies up via the variable payment. It's a zero sum game. I'll give you an example using the most vanilla swap around; an interest rate trade. Here's how it works. You borrow money from a bank, and they charge you a rate of interest. You lock the rate up front, because you're smart like that. But then - quelle surprise! - the rate gets better after you borrow. Now you're bagholding to the tune of, I don't know, 5 bps. Doesn't sound like much but on a billion dollar loan that's a lot of money (a classic example of the kind of 'small, deep hole' that's terrible for profits). Now, if you had a swap contract on the rate before you entered the trade, you're set; if the rate goes down, you get a payment under the swap. If it goes up, whatever payment you're making to the bank is netted off by the fact that you're borrowing at a sub-market rate. Win-win! Or, at least, Lose Less / Lose Less. That's the name of the game in hedging. There are many different kinds of swaps, some of which are pretty exotic; but they're all different variations on the same theme. If your business has exposure to something which fluctuates in price, you trade swaps to hedge against the fluctuation. The valuation of swaps is also super interesting but I guarantee you that 99% of you won't understand it so I'm not going to try and explain it here although I encourage you to google it if you're interested. Because they're OTC, none of them are filed publicly. Someeeeeetimes you see an ISDA (dsicussed below) but the confirms themselves (the individual swaps) are not filed. You can usually read about the hedging strategy in a 10-K, though. For what it's worth, most modern credit agreements ban speculative hedging. Top tip: This is occasionally something worth checking in credit agreements when you invest in businesses that are debt issuers - being able to do this increases the risk profile significantly and is particularly important in times of economic volatility (ctrl+f "non-speculative" in the credit agreement to be sure). (ii) Forwards A forward is a contract made today for the future delivery of an asset at a pre-agreed price. That's it. "But Fuzzy! That sounds just like a futures contract!". I know. Confusing, right? Just like a futures trade, forwards are generally used in commodity or forex land to protect against price fluctuations. The differences between forwards and futures are small but significant. I'm not going to go into super boring detail because I don't think many of you are commodities traders but it is still an important thing to understand even if you're just an RH jockey, so stick with me. Just like swaps, forwards are OTC contracts - they're not publicly traded. This is distinct from futures, which are traded on exchanges (see The Ballad Of Big Dick Vick for some more color on this). In a forward, no money changes hands until the maturity date of the contract when delivery and receipt are carried out; price and quantity are locked in from day 1. As you now know having read about BDV, futures are marked to market daily, and normally people close them out with synthetic settlement using an inverse position. They're also liquid, and that makes them easier to unwind or close out in case shit goes sideways. People use forwards when they absolutely have to get rid of the thing they made (or take delivery of the thing they need). If you're a miner, or a farmer, you use this shit to make sure that at the end of the production cycle, you can get rid of the shit you made (and you won't get fucked by someone taking cash settlement over delivery). If you're a buyer, you use them to guarantee that you'll get whatever the shit is that you'll need at a price agreed in advance. Because they're OTC, you can also exactly tailor them to the requirements of your particular circumstances. These contracts are incredibly byzantine (and there are even crazier synthetic forwards you can see in money markets for the true degenerate fund managers). In my experience, only Texan oilfield magnates, commodities traders, and the weirdo forex crowd fuck with them. I (i) do not own a 10 gallon hat or a novelty size belt buckle (ii) do not wake up in the middle of the night freaking out about the price of pork fat and (iii) love greenbacks too much to care about other countries' monopoly money, so I don't fuck with them. (iii) Collars No, not the kind your wife is encouraging you to wear try out to 'spice things up' in the bedroom during quarantine. Collars are actually the hedging strategy most applicable to WSB. Collars deal with options! Hooray! To execute a basic collar (also called a wrapper by tea-drinking Brits and people from the Antipodes), you buy an out of the money put while simultaneously writing a covered call on the same equity. The put protects your position against price drops and writing the call produces income that offsets the put premium. Doing this limits your tendies (you can only profit up to the strike price of the call) but also writes down your risk. If you screen large volume trades with a VOL/OI of more than 3 or 4x (and they're not bullshit biotech stocks), you can sometimes see these being constructed in real time as hedge funds protect themselves on their shorts. (3) All About ISDAs, CDS and Synthetic CDOs You may have heard about the mythical ISDA. Much like an indenture (discussed in my post on $F), it's a magic legal machine that lets you build swaps via trade confirms with a willing counterparty. They are very complicated legal documents and you need to be a true expert to fuck with them. Fortunately, I am, so I do. They're made of two parts; a Master (which is a form agreement that's always the same) and a Schedule (which amends the Master to include your specific terms). They are also the engine behind just about every major credit crunch of the last 10+ years. First - a brief explainer. An ISDA is a not in and of itself a hedge - it's an umbrella contract that governs the terms of your swaps, which you use to construct your hedge position. You can trade commodities, forex, rates, whatever, all under the same ISDA. Let me explain. Remember when we talked about swaps? Right. So. You can trade swaps on just about anything. In the late 90s and early 2000s, people had the smart idea of using other people's debt and or credit ratings as the variable leg of swap documentation. These are called credit default swaps. I was actually starting out at a bank during this time and, I gotta tell you, the only thing I can compare people's enthusiasm for this shit to was that moment in your early teens when you discover jerking off. Except, unlike your bathroom bound shame sessions to Mom's Sears catalogue, every single person you know felt that way too; and they're all doing it at once. It was a fiscal circlejerk of epic proportions, and the financial crisis was the inevitable bukkake finish. WSB autism is absolutely no comparison for the enthusiasm people had during this time for lighting each other's money on fire. Here's how it works. You pick a company. Any company. Maybe even your own! And then you write a swap. In the swap, you define "Credit Event" with respect to that company's debt as the variable leg . And you write in... whatever you want. A ratings downgrade, default under the docs, failure to meet a leverage ratio or FCCR for a certain testing period... whatever. Now, this started out as a hedge position, just like we discussed above. The purest of intentions, of course. But then people realized - if bad shit happens, you make money. And banks... don't like calling in loans or forcing bankruptcies. Can you smell what the moral hazard is cooking? Enter synthetic CDOs. CDOs are basically pools of asset backed securities that invest in debt (loans or bonds). They've been around for a minute but they got famous in the 2000s because a shitload of them containing subprime mortgage debt went belly up in 2008. This got a lot of publicity because a lot of sad looking rednecks got foreclosed on and were interviewed on CNBC. "OH!", the people cried. "Look at those big bad bankers buying up subprime loans! They caused this!". Wrong answer, America. The debt wasn't the problem. What a lot of people don't realize is that the real meat of the problem was not in regular way CDOs investing in bundles of shit mortgage debts in synthetic CDOs investing in CDS predicated on that debt. They're synthetic because they don't have a stake in the actual underlying debt; just the instruments riding on the coattails. The reason these are so popular (and remain so) is that smart structured attorneys and bankers like your faithful correspondent realized that an even more profitable and efficient way of building high yield products with limited downside was investing in instruments that profit from failure of debt and in instruments that rely on that debt and then hedging that exposure with other CDS instruments in paired trades, and on and on up the chain. The problem with doing this was that everyone wound up exposed to everybody else's books as a result, and when one went tits up, everybody did. Hence, recession, Basel III, etc. Thanks, Obama. Heavy investment in CDS can also have a warping effect on the price of debt (something else that happened during the pre-financial crisis years and is starting to happen again now). This happens in three different ways. (1) Investors who previously were long on the debt hedge their position by selling CDS protection on the underlying, putting downward pressure on the debt price. (2) Investors who previously shorted the debt switch to buying CDS protection because the relatively illiquid debt (partic. when its a bond) trades at a discount below par compared to the CDS. The resulting reduction in short selling puts upward pressure on the bond price. (3) The delta in price and actual value of the debt tempts some investors to become NBTs (neg basis traders) who long the debt and purchase CDS protection. If traders can't take leverage, nothing happens to the price of the debt. If basis traders can take leverage (which is nearly always the case because they're holding a hedged position), they can push up or depress the debt price, goosing swap premiums etc. Anyway. Enough technical details. I could keep going. This is a fascinating topic that is very poorly understood and explained, mainly because the people that caused it all still work on the street and use the same tactics today (it's also terribly taught at business schools because none of the teachers were actually around to see how this played out live). But it relates to the topic of today's lesson, so I thought I'd include it here. Work depending, I'll be back next week with a covenant breakdown. Most upvoted ticker gets the post. *EDIT 1\* In a total blowout, $PLAY won. So it's D&B time next week. Post will drop Monday at market open.
Hello everyone, I'm writing this so the ones who are just starting can get an idea of what they are getting into and also would appreciate any advice from more experienced traders. I'm going to be honest. I got into forex trading seduced by the idea of making easy money from my computer. I started following some "traders" on instagram, subscribed to a signal service to "earn while learn". The first 3 weeks I actually obeyed to the risk parameters of that signal group (1% per trade) , but that on my 700€ account didn't even earn me enough to pay the monthly fee of the signals. So I moved on the next chapter, I changed signal provider and, most dangerously, I opened a high leverege account. If you are experienced you know what comes next, I tasted the sweet feeling of big profits in short amount of time, I gambled the whole account to 10x few times to then blow it and repeat the vicious cycle. The cycle continued until early march, then reality set in my mind and realized that I was just gambling. I felt very bad, like trapped in a hole and started thinking that I could never make it in this industry. In desperation I decided to give it a last chance, I found a cheap course/mentorship, I signed up and actually learned a very good strategy, I started practicing and backtesting on demo account, started implementing risk management, got into live trading again and the next 4 months went really good. But then one month ago I had a losing streak, every trade I took went straight into SL, under that pressure my bad habits came back, I over-traded, over-levereged and over-risked. This time I felt even worse than in march because this time I finally though I got it figured out. I thought trading is nonsense, etc... After some weeks off the charts I came back, I knew one thing, that the strategy works, but also that I can often get subjective on my analysis. That led me to the conclusion that I have to automate the strategy, and that's where I am now. Still far from where I want to be, but also from where I have begun. I can't imagine giving up now.
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