How do people make money? What do they do? We are going to watch a trader at work. We’ll examine the news and analyses that led to the decision to open the position and we’ll follow the trade through to its successful conclusion.
It’s true, of course, that success does not come out of the blue. The best improvisation is the thoroughly prepared improvisation. The trader has a sound grounding in the principles of trading: she has made a complete study of this book. She has paid close attention to the fundamentals of the market and is ready to make some money.
A woman to show us the way
Why a woman? Well, why not? Susan W is a successful trader. Here is a brief profile:
- Key personality trait: ambitious; resourceful
- Intelligence: Upper quadrant
- Luck: average
- Preferred financial instrument — EUR/USD (Reasons: High volume pair meaning truer technical performance. GBP moves ‘funny’ and JPY is ‘prone to too many influences’)
So what’s this about luck? Does luck exist? I really don’t know. I reckon that luck is all a matter of what you think, what you say, what you do and how you do these things. I really believe that you make your own luck in life. If there is a deeper meaning to luck than that, I say let’s leave it in the laps of the gods or the hands of Fortuna. We’d be better off focusing on a working understanding of the methods of analysis and a grasp of market psychology.
The psychology of the crowd moves the market. At least 90% of the market players are men and those who are successful on the market are not driven by ‘mass folly’. They act, if not opposite to market opinion, then at least subtly different to it. This well-documented way of working is known as Contrary Opinion trading.
Women and men frequently interpret the same events differently. So perhaps being a well-informed woman on the market gives an edge – certainly a more substantial edge than an intangible force like luck. All I can say about *luck* is that some have been *lucky* and some will be *lucky*.
Meanwhile, Susan was absorbed in her analysis. It was Monday 30 May 2005. At about 9am GMT, Susan sat herself down in front of her laptop and began to catch up on the news and the freshest analytics.
What she had been waiting for was already there:
PARIS (AP)–French voters rejected the European Union’s proposed constitution Sunday, President Jacques Chirac said, delivering a stunning blow to the 25-nation bloc’s ambitions…
She clicked over to the previous Friday’s analysis of the past week and forecast for the next one and read:
… as for the European currencies; they, too weakened against the dollar… In addition to this, expectations of a French ‘No’ vote in the referendum brought further pressure to the Euro as the weekend drew closer. All recent opinion polls point to a rejection of the pan- European constitution adoption. The referendum will take place on 29 of May.
Further on she read:
Questions of political stability within the Eurozone could have a long-term influence on the Euro itself. The anticipated ‘No’ vote in France could result in a EUR/USD breakout from important support levels this Monday. Monday will see a significant fall in trading on account of holidays in both the US and UK, leading to a “thin” market, where even a relatively low trading volume can have a high impact on currency rates “.
The big picture was that the coming week was going to be hot for the Euro with all the signs pointing to a dramatic fall in Euro against the dollar. More uncertainty was added by the fact that a similar Constitution referendum was due in the next few days in The Netherlands whose population were known to be distinctly lukewarm about the new European order.
“Selling Euro short against the Dollar could well be a nice earner,” mused Susan reasonably. “Of course, there is any number of reasons why Euro could begin to rise; but informed opinion points to a fall.”
Susan had also spotted an interesting pattern on the previous week’s EUR/USD price chart. Price had moved within a channel , that is, on the whole price was fluctuating between two almost parallel lines.
The channel is well known to all traders. It is an important element of technical analysis — one of the big two market analyses. When price in a channel moves from the upper line to the lower one, the trader should be ready either for a breakout from the lower line or a reversal upwards.
If you look at the price chart you’ll see that price is displayed as a series of black and white rectangles. This type of chart is called a candlestick chart.
Later on in this book I’ll expand on what additional information can be gleaned from candlestick charts. Susan knew how to calculate the possible price target using the channel. With price currently at 1.2520 and the channel boundary at around 1.2475; Susan reckoned on a probable initial price fall of 0.0045, in other words 45 points. The news up to this point had not been extremely negative, probably because the market had not yet ‘woken up’. However, the general feeling from city analysts, economists and politicians was one of concern at the ‘No’ vote. This concern convinced Susan that despite of the fact that price was already in the bottom half of the channel; her wisest course was to play on a further fall and sell Euro. She was aware that there was a possibility that Euro could rise, but there was a strong likelihood that she would be on to a money maker. What’s more, growing uncertainty about the European project, could well lead to the Euro breaking through the lower channel line, leading to yet more profit.
Susan began to put her plan into action.
On May 30th Susan’s trading account stood at 7 544 US dollars. Susan decided to sell 100 000 EURO, using the leverage of 100 to 1.
Susan only needs to do three things before being able to turn in for the night and go to sleep without any concern for her position:
Open a position
She does this by using Deal which is in the bottom half of the trading terminal.
Place a stop-loss order
A stop loss order sets the limit that she is prepared to risk. The stop-loss order stops excessive losses if price happens to move against you.
Place a take-profit order
She places this order at her price target.
We use Placing/Removing Orders on the platform to place these orders.
These two orders allow the trader to pre-plan his trade and remove all emotion from the position. If you trade without placing stop-loss and take-profit orders, you will lose in the long-term. In this world there are so few sure things but this is one of them. We guarantee it: you will lose.
Orders are not compulsory of course. You can enter a position without the safeguard they offer. Many people do, and others get rich on these fools. Listen to sense and place your orders.
It takes a few seconds to open a position and place your orders. It’s not complicated and, in fact, it takes longer to describe than it does to do. Mark my words though: the essence of trading is not making a few mouse clicks. It’s all about determining and observing the flow of currencies, information and prices and then making decisions.
Let’s just recap. In the Forex market currencies come in pairs. The first currency in the pair is the base currency and the second in the pair is known as the quotecurrency . One thing to get straight: we can only buy or sell the base currency. If we are working with the pair EUR/USD and we click ‘Buy’, then we buy EUR and simultaneously sell USD. If we click ‘sell’ then we sell EUR while simultaneously buying USD.
On 30.05.2005 approximately at 9:20am GMT, Susan sells the Euro at a rate of 1.2520. This is what she does:
She selects her instrument (that is her currency pair) in Deal. She selects EUR. The EUR/USD pair is often designated as simply EUR because when the USD is part of a currency pair there is no need to mention it.
- She selects a lot of 0.10. A lot of 1.0 is a million so 100000 is a lot of 0.10.
- She then clicks ‘request price’.
She is sent two prices ‘Buy: 1.2525’ (this is the ASK price) and ‘Sell: 1.2520’ (this is the BID price).
The buy and sell buttons are now active and display these buy and sell rates. Susan can do one of three actions: she can buy, she can sell or she can do nothing at all which effectively rejects the offer.
The difference between the price you can buy at and the price you can sell at is called the spread . The banks earn money on the spread.
You can monitor the currency prices of all the main pairs in the indicative quotes pane. Sometimes the prices you see in indicative quotes will be slightly different to those you get when you click request price ; this is because the rates are in constant motion.
Susan clicks Sell: 1.2520 and is immediately sent a confirmation of the transaction.
Position then tracks Susan’s position:
- She has sold Euros against the Dollar
- The lot is 100000
- The current profit is -$50 (because of the spread)
- The position is 5 points in the red (because of the spread)
- The opening price was 1.2520
And that was that: the Euro was in the bag and working for Susan. Now she needs to place her orders. She wants to protect herself against heavy losses in case of a steady rise in prices but she does not want to overprotect herself and prematurely close her position before a downswing occurs. Therefore she needs to place the stop-loss order at the optimum distance from the level of the opening position. Like so many things: it’s all a matter of balance.
Now Susan knows her business and is aware that potential profit should exceed potential loss. Most traders look for a 3:1 potential profit/loss ratio. This ratio is not written in stone, mind you, it’s only a guide-line.
Susan is expecting an initial fall of around 45 points. She decides her take-profit level will be at 1.2480 which will net her 40 points ($400). She then charts Fibonacci levels (more of them later) and with their help decides to place her stop- loss order at 1.2545. This sets her risk at (1.2545-1.2520) =25 points, that is 250 dollars. It’s not as healthy a ratio as 3:1 but it’s the best Susan can do in the circumstances.
Susan is also aware that stop-losses are usually placed further from price to give it room for maneuver, but this is quite a special opportunity and she is fairly sure that price is going to fall.
The French Republic and the people of France were at hand to help her and on the news service she reads:
10:28 Forex News EURO slowly falls after referendum in France
The EURO is experiencing a small downturn during European trading. The effect of the French vote against the adoption of the European Union Constitution has been more significant than it expected. The fact that 55% of the French electorate voted “Non” will have a negative effect on European integration and probably will result in a decline in international investment. Some pundits suggest that business confidence will also be undermined. At 10.30 GMT the Euro fell to 1.2517 against the dollar, down from 1.2574 on Friday evening in New York. Nevertheless it is much higher than a key technical support level of 1.2460.
Feeling buoyed by this news, Susan continues working.
Susan receives confirmation of the order.
Let’s follow her as she places her stop-loss order. She went to Placing/removing orders:
- In Type of order she selects BUY . She opened the position by selling EUR so to close it she must buy EUR
- She selects EUR in Instrument
- And the lot of 0.1
- She enters the level of the order in Price
- Then she clicks Place.
So if price reaches 1.2545 the order will snap into action.
She clicks OK on the confirmation and her order appears in the Orders window.
Some points to remember when working with orders:
- You remove active orders by clicking the order to highlight it and then clicking Remove in the Placing/removing orders.
- Change an order by clicking the order and then change the Lot Price or , Type of order and then click Change.
In Placing/removing orders there are two buttons labeled One cancels the other orders and If done orders . These are conditional orders and are very useful.
- One cancels the other orders are a pair of orders. When one of these orders is executed the other is automatically cancelled. This can be useful when, for example, you want to place a stop-loss and a take-profit order on a recently opened position on a currency pair. If the take-profit order is executed then you won’t have to remove the stop-loss yourself.
- If done orders allow a trader to place an opening order on a specified currency pair to be followed by one or two further orders which become active only after the first order has been executed. You can use this type of order to set a stop-loss and take-profit order on an ordered position. To place the second If done order, just check the box in the bottom left corner of the If done orders window.
One last point on orders is to be very careful when you are entering the price. A misplaced decimal point or a wrong number could result in a waste of time (at the very least).
Susan continues working. After setting her stop-loss order at 1.2545; she places her take-profit order at 1.2480. If price moves in her favour, she’ll make 400 USD. It’s not a fortune but it’s not a bad bit of work.
As it turned out, however, she earned 1700 dollars. What happened was this:
This dramatic fall sets Susan thinking about another entry onto the market. Technical analysis, based on Fibonacci levels suggests that if the market continues to be shook by the French referendum, the Euro could continue to fall to 1.2280 and then on to 1.2200. She needs confirmation from the fundamentals, the news. She starts looking for pessimistic statements from political figures and economists.
The news for May 30 streams through:
14:52: French Prime Minister rumored to be heading for the sack by the end of the day
16:09: In FOCUS: EU leaders reaction to French referendum outcome
17:42: ECB president Trichet: ‘Europe is experiencing a difficult moment’ after French referendum
All this pointed to gathering storm clouds on the Euro’s horizon. But miraculously, after the breakout from the price channel, all was quiet until deep into the night. There were neither significant rises nor falls. Susan concludes that this could be due to the fact that the UK and US markets were on holiday. Susan decided that the opening of the Asian markets would see sharp price movements. If the Euro fell against USD, it would mean that Asia was also responding to the events in Europe.
It was also probable, according to Susan’s reckoning that if a price fall should happen, it would be an appreciable one. Therefore she decides to place an If done order. If price heads down move, a short position on EURO will open and a stop-loss and take profit orders would simultaneously activate.
Here is the order:
- Sell 0.10 EUR at 1.2450. Note that this is below the key level of 1.2460.
- The stop-loss order is at 1.2500 which means Susan is risking 50 x 10 = $500.
- The take-profit order is at 1.2320 which would bring in 130 x 10 = $1300.
The levels of the two orders were set using Fibonacci levels. After placing the ‘If done’ order, Susan calls it a day, goes to bed and sleeps the st sleep of the righteous. The EUR starts to fall and on May 31 at approximately 01:10, her order opens a position for 100000.
She returns to her computer at 9 o’clock GMT on May 31 . She sees that the position is still open; price is in the region of 1.2390-1.2380 and profit is currently around 600 dollars. Susan is torn. Susan does not want to close her position because price could continue to fall, but at the same time it is not absolutely certain that the fall would continue.
With price at 1.2384, Susan decides that it is better to be safe than sorry and lowers the stop-loss order. She is going to ensure that she keeps some of the currently unfixed profit in case of price reverses. This is what she does:
- She changes the stop-loss order Price setting from 1.2500 to 1.2420. Now, even if this order is executed, we won’t be talking about minimizing losses, but salvaging profit. The new order guarantees $300 dollars of profit. Remember the position opened at 1.2450. If price starts rising and the position closes at 1.2420, Susan’s left with 30 points in the bag. This new order is called a stop-trade order.
She continues to follow news on the European Constitution:
09:40 Jean-Pierre Raffarin, French Prime-minister, resigns. 09:53 French President Chirac has named Dominique de Villepin as the new Prime-minister
That last item rocks the market. As the analytical review said later:
12:00 REVIEW: The dollar continues to strengthen against the Euro after news about the appointment of de Villepin as PM.
The French rejection of the European Union Constitution is still having an influence upon market mood. As short-term traders’ sales of hedging funds are considered the basic reason for the fall of the Euro, it is now very difficult to determine whether the Euro fall will provoke sales from long-term traders, who now could be losing faith in the future of European integration. The European currency unit fell again after the former French minister for internal affaires Dominique de Villepin replaced Jean-Pierre Raffarin as the Prime-minister. De Villepin is considered to be leftward leaning and oriented against fiscal reforms designed to bolster the Euro. After this appointment the market is now anticipating the Netherlands’ referendum which will take place on Wednesday. The latest poll results show that the constitution opponents share has increased up to 60%.
The Euro continues its fall and at 10:20 GMT Susan’s take-profit order is executed at 1.2320.
Susan had had a good day with a fresh 1300 US dollars going into her account. All in all she had made 1700 US dollars (400 + 1300) over the two days.
Through to June 1 , Susan and the rest of the trading world were presented the opportunity to capitalize on a further 100-130 point fall, as pessimism continued around the Euro. With a lot of 100000, this drop would net 1000-1300 dollars. The total fall for the next three days could have boosted your account by between 2700- 3000 USD.
In the aftermath of May 31 and June 1::
Last week could well be remembered as the week of Euro- failure. The Euro fell to an 8 month low. The interesting factor here is that the French rejection was widely anticipated and many commentators felt that the actual result would have little effect on rates as rejection had already been taken into account. This opinion seemed to have some validity with the initial insignificant fall in EUR/USD. However, our analysts hold that this insignificant fall was connected with British and American public holidays. With this absence of significant players, volumes were down. Along with that our analysts warned us to consider the ramifications of the political instability that constitution rejection heralded; and the long- term implications for the euro. The following day saw the market functioning at full volume and EUR/USD dropping from the very beginning of trading. The day had only begun when the EURO rate dropped below 1.2400. The continuing fall was a combination of fundamental and technical pressures, with system players having shorted at the 1.2500 breakout. The Euro decline gathered momentum. German business confidence plummeted and discussions of the very future existence of the Euro were reported in the corridors of power in various European countries. The resignation of Jean-Pierre Raffarin and the appointment of Dominique de Villepin meant further body blows for EUR.
This real-life example illustrates how the news and some technical analysis can combine to make a successful trade.