Trading strategies

军形篇 - The Chapter of Tactical Dispositions Original Text: 善战者，先为不可胜，以待敌之可胜。 Translation: Good commanders first evaluate the possibility of being defeated and then wait for an opportunity to defeat the enemy. Don’t you think this sounds very similar to using a trading stop-loss? The concept of setting up a stop-loss is to estimate and prepare for the worst case scenario.

As a commander, Master Zhu would suggest you treat the money in your account as your soldiers and take care of their lives. Let's say you're on the battlefield and you strategize that a plan of attack might sacrifice 50% of your army, that's 50% of your soldiers' lives (i.e., 50% of your account balance), surely no respected commander would approve that kind of attack. However, in forex trading, some people will quickly lose 50% of their money in a short period.

In Sun Zhu's eyes, this would make for a very unqualified commander. Therefore, placing a stop-loss that could cause you to lose 50% in a single trade is a poor decision. Most experienced traders might suggest a 2%~5% stop is a wiser move.

Even a 10% stop may be considered quite extreme. Would you risk the lives of 10% of your infantry? Some might argue that it depends on the circumstances, either way, the same level of consideration must be given in trading to have any chance of success.

Also, most traders lose 50% of their account or more because they fail to place any stop-loss measures at all. Under the context of the Art Of War, this means you never bothered to estimate the worst scenario before you attacked. In Master Sun’s eyes, that is extremely unacceptable.

Original Text: 不可胜在己，可胜在敌。 Translation: The ability to secure ourselves against defeat lies in our own hands. The opportunity to defeat the enemy is provided by themselves. A very remarkable concept.

Many investors believe they can actively beat the market, which is wrong. The market is far stronger and smarter beast than the average person. Instead of trying to "beat" the market, more time and effort should go into improving yourself.

For example, try focussing on how to better to defend, such as setting up suitable stop-losses as the previous saying suggests. Once you've developed the ability to protect your soldiers, then all you need is to do is wait for an opportune time to attack (you can observe it from chart patterns), then and only then, will you be trading like an intelligent commander, prepared to lose a battle and win the war. Original Text: 故善战者，能为不可胜，不能使敌之必可胜。 Translation: Thus, a good commander can secure himself against defeat but cannot make sure of defeating the enemy.

Master Sun corrects us here on another common misunderstanding. Nowadays many fund managers will brag about their “target profit” to attract your attention. As an individual investor, you might be vulnerable to being misled and start to think “maybe it's good to set a target profit for my investing too?.” Well, Sun Tzu would argue that this is wrong.

If you set a target return for yourself and you are unable to achieve it, you will most likely become hurried and vulnerable. Imagine your basketball team is losing and it's the last few minutes of the game. How many times have we seen teams abandon their defensive tactics, throwing caution to the wind and put everything they have into the final attack?.

Perhaps having Michael Jordan on the court may help, but ultimately, this scenario doesn't end well for those losing teams. With little to no defense in place, the opposing team will typically score more points and much more easily than before making matters worse. The same logic applies to the financial markets.

There is a general tendency to increase your position and attack more at the worst possible time, and the market will more often punish those who fail to defend their position adequately. Original Text: 故曰：胜可知，而不可为。 Translation: Hence the saying: You may know how to win, but sometimes you are not able to do it. Original Text: 见胜不过众人之所知，非善之善者也； Translation: To see victory only when it is within the ken of the common herd is not the acme of excellence.

Original Text: 战胜而天下曰善，非善之善者也。 Translation: Neither is it the acme of excellence if you win and the whole world says, “Well done!” to you. In this paragraph, Sun illustrates another common misunderstanding by the general public. You probably heard of the 20-80 rule, which states that roughly 20% of the population controls 80% of the global wealth.

You may have also heard that 20% of the population will win at trading while the other 80% will lose. When it comes to trading, this theory suggests the most popular idea about price direction will cause you to lose money in the long run. Thus, if your opinion falls within the common herd, then perhaps you need further training as a trader.

Many beginner traders will follow those famous pundits on the major television stations. You know the ones I'm talking about, those who claim they can predict the market direction with 80% accuracy and never fail. If we consider the 20-80 rule above, then this claim starts to sound quite absurd or should at least raise some internal alarm bells.

Most of these analysts have a claim to fame because they successfully predicted one or two big financial events, say the start of the 2008 crisis. Does this mean they can accurately predict every other upcoming event with such accuracy? Of course not, nobody can.

Hence, Sun Zhu said those who won the applause of the whole world might not be as good as you think. Original Text: 故举秋毫不为多力，见日月不为明目，闻雷霆不为聪耳。 Translation: To lift a hair is no sign of immense strength; to see the sun and moon is no sign of sharp sight; to hear the noise of thunder is no sign of a quick ear. Original Text: 古之所谓善战者，胜于易胜者也。 Translation: Thus the ancients said an excellent winner is one who not only wins but excels in winning with ease.

Original Text: 故善战者之胜也，无智名，无勇功， Translation: Hence his victories bring him neither reputation of wisdom nor credit for courage. Original Text: 故其战胜不忒。不忒者，其所措胜，胜已败者也。 Translation: He wins his battles by making no mistakes. Making no mistakes is what establishes the certainty of victory, for it means conquering an enemy that is already defeated.

Here Sun describes for us what kind of person can be known as an “excellence winner.” This person has trading success based on defense. They make minimal mistakes (i.e., choosing the right time, trend and setting up sensible stop-losses) they also understand that some losses are inevitable while protecting their account for future battles. This kind of success is often very low-key.

It's unlikely to receive any applause or stardom because he or she is not looking to parade their wins in public as it's all part of a more important strategy. Original Text: 故善战者，立于不败之地，而不失敌之败也。 Translation: Hence a skillful commander puts himself into a position which makes it impossible for being defeated and does not miss the moment of defeating the enemy. Original Text: 是故胜兵先胜而后求战，败兵先战而后求胜。 Translation: Thus a victorious strategist only seeks battle after the defense is guaranteed, whereas a losing strategist first encounters a fight and then looks for victory.

These two sentences summarized what we had covered today. First, make sure it is impossible to be defeated (by managing your positions and stop-losses well). In essence, this means even though losses are possible, blowing up an account on a single trade is not.

Seek the most opportune time for a battle (Open a position). Don't just go with the crowd. Do your analysis and study wisely.

Once opened, closely monitor the five elements of the markets ( we covered this in part 1 of this series), then you are heading towards victory. By Lanson Chen – Analyst Lanson Chen @LansonChen This article is written by a GO Markets Analyst and is based on their independent analysis. They remain fully responsible for the views expressed as well as any remaining error or omissions.

Trading Forex and Derivatives carries a high level of risk.

What Is The Art Of War? The Art of War is an ancient Chinese book on military tactics and strategy who written by Sun Tzu around 500 BC. These writings are considered by many to be the most significant literature on military tactics and wisdom that can be applied to everyday life ever conceived.

In this multi-article series, we will be interpreting this ancient text, and exploring its application to modern day investing and trading. The whole book has 13 chapters and is only 6,000 characters long, which is relatively concise for such an old and complex language. I will be breaking this down into sections, explaining the meaning behind each phrase and how to apply this to your trading style or strategy.

Military Style Trading Imagine this. You're sitting in front of your screen opening a candlestick chart and trying to figure out the recent patterns and getting ready to place an order. What if you viewed this chart like a military map?

The money in your account is like the soldiers under your command, and the buy or sell orders are like attack or retreat orders. Can you see what I'm hinting at here? —— Trading and War tactics are both arts and similar in many ways. So why don’t we try absorbing some knowledge from the ancient masterpiece?

Perhaps we'll discover some inspirational gems that we can use in our approach to the financial markets. Chapter 1: Strategy Tips: As we progress through the following sections, whenever you see the word “War,” try to replace it with either “Investment” or “Trading” in your head. Explanation: In ancient society, the theory was those who fail to consider strengthening their military force will die.

Nowadays, modern society suggests if you ignore investment principles, you will also die, not physically, but perhaps perish in mediocrity. For example, we all know that since 2008, the wealth inequality gap has become much worse. A vast number of billionaires have emerged, while the middle classes are considerably poorer than one decade ago.

Different Class Different Mentalities One possible explanation behind this is because most rich people tend to invest their money into the stock market or high yielding assets in contrast to the general middle-class who's mentality is geared towards savings and consumption. If Sun Tzu were around today, he'd likely suggest investments over savings. The reason for this is because investing can amplify your wealth if managed correctly, but the method of saving money could be considered a slow death.

Death By Inflation In short, cash in the bank is devalued over time by the act of inflation. While saving money is not necessary a bad thing for some, failing to learn about investing might mean sacrificing opportunities or degrading one's wealth as its value inevitably starts to erode on the sidelines. (1) Tao Explanation: Tao could represent the basic, intrinsic rules of each investment product. For example, the movement of a currency pair (say GBPUSD) is often affected by the fundamentals, news events (such as Brexit) or even just human behavior.

So how can we trade the intrinsic values as the price is always changing? The answer is to find specific patterns or characteristics that are inherent to whatever product you are trading. To do this, you need to explore all the elements and try to make an informed decision as to the possible move in price.

However, given nobody can predict these moves with 100% accuracy, perhaps the only thing we can do is use the following four factors as a guide to help eliminate bad trading habits, and increase the probability of executing profitable trades. (2) Time You can think of this second factor as Fundamentals. As a qualified investor, you should understand what economic data means (such as GDP growth, unemployment, CPI, etc.), What types of events could cause the price to rise and fall (for example you should know how Bond-yield affects the value of USD) As with the cyclical nature of seasons or knowing the exact time of the sunrise and sunset, fundamentals can provide clues as to when we should place a trade based on the upcoming data. This idea is just like a weather forecaster predicting the chances of rain tomorrow.

Keep in mind that the weather, like markets, is not an accurate science and is subject to change. (3) Earth Ea rth or Topography would represent the field of Technical analysis because this method explores the “landform” of a price chart. For example, the highs and lows are like highlands and lowlands in battlefields, with support and resistance lines acting as potential grounds to set up an ambush or mount a defense. By mastering technical analysis, you will be like a commander, studying the geographical features of a map, navigating the terrain and using this knowledge to plan an attack or send reinforcements.

I will use a straightforward chart to illustrate all the factors that mentioned in Sun Tzu's original text. From the chart below, we can see the trend of oil prices is going up, and the most obvious move is to look for an area of value. The idea is to place a buy order while the level is relatively low.

When the price approaches the trend line, perhaps this is a safer place an order? On the other hand, when activity reaches the upper band, in the context of Sun Tzu, it might be considered “too far and dangerous” to keep attacking; thus the best move is to retreat (close your position and take your profit). We'll be discussing more on topography and technical analysis in further chapters. (4) Commander A commander (i.e., investor) should aspire to obtain the characteristics listed above.

If any of these traits are missing, Sun Tzu would perhaps suggest you are more vulnerable to trading losses in the future. Thus, Investment is also a process of exercising yourself to become a better person. (5) Discipline Discipline involves organizing a set of rules to follow while trading and the text would suggest you should not change these on a discretionary basis. Similar to military orders on a battlefield, it is imperative a commander's orders are followed and not disobeyed.

In short, without discipline and proper execution, the fundamental and technical analysis that you apply above will be meaningless. By Lanson Chen - Analyst Lanson Chen @LansonChen This article is written by a GO Markets Analyst and is based on their independent analysis. They remain fully responsible for the views expressed as well as any remaining error or omissions.

Trading Forex and Derivatives carries a high level of risk. Sources: DB Global Markets Research, "The Art Of War" -Sun Tzu.

As a trader, you’ve probably found that having the right trading plan plays a significant role in your trading success. A basic trading plan should tell you what, when and how much to trade. It should also have specific instructions on when to close out your trades.

As traders, we all need a well thought out trading plan to navigate our way through the turbulent waters of financial markets, with the added benefit of having something to hang on to when we’re in the middle of a trade. Devising a trading plan needs detailed analysis and careful consideration. Unfortunately, we are not able to go through how to develop a complete trading plan in a short article such as this.

However, we are going to discuss some fundamental points to assist anyone who already has a trading plan or is in the process of developing one, helping to make sure it includes these minimum standards. 1. A trading plan that suits your character In any trading plan lies a trading philosophy that determines the overarching framework. The trading philosophy represents your beliefs about the markets.

For example, it shows whether you believe in short-term technical trades, or if you think success can be achieved by making long-term fundamental trades. It shows if you are a trend trader looking to move with the flow of the market, or if you are contrarian in nature and are looking for opportunities to go against the others. Regardless of the trading philosophy you choose, our suggestion is to make sure that it A) is proven and valid, and B) suits your personality.

If the trading philosophy does not suit your character and the way you look at the markets, you will inevitably deviate from your plan and potentially put yourself in a difficult situation, both financially and psychologically. Once you are confident that your trading philosophy is appropriately reflected in your trading plan, your plan should be capable of delivering and managing desired trading opportunities in the context of your trading philosophy. To achieve this, you need to make sure all the below requirements are met as a bare minimum. 2.

Your trading plan should be bias-free Biases occur because we have pre-set ideas in our minds that stop us from making objective decisions. This problem lies within human nature and is the result of our emotional and cognitive limitations. Within the long list of biases that exist, there are two which are the most harmful to many traders: confirmation bias and hindsight bias.

Confirmation bias is when we systematically look for what confirms our prior beliefs and ignore most evidence that challenges our set preconceptions. An excellent example of this bias is when we are trying to ascertain a simple breakout strategy by looking at a chart, a strategy used by many traders to trade the news. If the market keeps going in the direction of the breakout, we gladly count it as a success (after the fact), but if it fails — that is, it reverses its course after the breakout — we call it a Bull/Bear Trap and forget about the failure which has just happened.

By renaming the model, we have shifted our attention from a failed breakout strategy to a now successful Bull/Bear Trap! Under the influence of the confirmation bias, we are likely to pursue trading patterns which otherwise would have had little to no merit. This bias makes us derive conclusions that we’d like to see, instead of seeing what’s actually happened in reality.

The second most crucial bias traders face is the hindsight bias. Hindsight bias is when we look at a chart and find ourselves counting easy trades that would have worked well in the past. It is the moment that you go “it was an obvious head and shoulder” after seeing what had happened afterwards.

This bias comes from our tendency to distort our judgment towards the successful event. If you are given a set of questions about uncertain events (i.e. is the market going to consolidate, trend, reverse etc…) and the correct answer at the same time, it is very likely that you would distort your analysis to conclude in line with the correct answer, as if it really was obvious. Hindsight bias makes trading look easy, and can trick you into believing in trading rules and your ability to forecast – either of which may not be accurate.

If your trading plan has seemingly worked well on historical data but is failing to deliver desired results in real time, then it may be suffering from the above biases. Biases must be removed from your trading plan in order for it to be objective and testable. 3. Your trading plan should be objective An objective trading plan can enable traders of different market views to arrive at the same trading decision.

It has enough details and instructions that it takes any confusion out of trades and leaves no room for personal judgment. For example, a good trading plan does not allow traders to draw any trend lines they see fit, but instead, it dictates the trend line which is appropriate to be drawn. It has as many detailed guidelines as possible to stop traders from improvising. 4.

Your trading plan should be testable The best way to make sure your trading plan is objective and bias-free is to convert it into a set of clear trading rules and let a computer test the trading plan for you. This is called backtesting. By using a computer to do the testing, you are essentially removing human emotions and biases from the equation.

Often during the backtest, you will get a much better understanding of the strengths and weaknesses of your trading plan. The downside to backtesting is that it is not easy (it requires coding), and validating a backtested result requires some maths and statistical skills to avoid being trapped by the backtest itself. However, this is still one of the better and cleaner ways to ascertain the validity of your trading system. 5.

Information about the market you are trading The trading plan must hold enough historical information about the performance of the patterns and behaviours of markets you are looking to trade. Whilst the type of the information required depends on the trading strategy, below are a few suggestions that we think should be present in any trading plan that is based on intraday charts: Average size and duration of price swings per trading session Average range per trading session Times of major turning points per trading session Correlations between various trading sessions Historical reactions of the currency to news announcements Important pivots and trends Technical indicators that have worked best over recent history Historical reaction to the session opening and closing times Volatilities per trading session (this can be used to set dynamic stop losses) Intraday correlation with other markets The above should be modified based on your trading strategy. Note that the more you can do to add to the list above, the more confidence you can have in your trading plan. 6.

A solid risk management plan Many of us believe that “stop losses” are the same as risk management. The truth is, stop losses are an essential part of a risk management plan, but are only an element of appropriate risk management. A good risk management plan should have three parts: Tradable instruments: Sometimes you may need to leave a specific currencies/indices out of your tradeable universe just because they can’t justify the risks you will have to take to trade them.

On the other hand, you may at times need to add a few instruments to your universe in order to reduce your risk and maximise your return. You should be able to refer to your risk management plan for these types of questions. Trading size: Your risk management plan should be able to tell how much to trade each time.

It must have a mechanism in place to make sure one or two bad trades do not impact the integrity of your account. Stop losses: Your risk management plan should make sure that your stop losses suit the trading strategy you’re pursuing. For example, a trend trading system may require having close stop losses, whereas this might not be the case for a mean-reverting strategy.

Stop losses should be adaptable to market changes and should be backtested and validated during the testing process. Conclusion: Trading plans are vital for trading success. They have many parts which should be carefully designed and tested.

We appreciate that contemplating all the above points can be challenging and time consuming, however you will become more confident in your trading as you will have in place a structured and improved trading plan.

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US Markets With relatively sound fundamentals driven by strong earnings growth so far in this earning season, US equity markets have continued their bullish trend. The S&P500 bounced back strong from its 100-day moving average in early July, and by going over the 2800 level, it seems to be on track to reach its all-time high of 2870, possibly even winning new grounds. Chart 1: US S&P 500 Whilst it is hard to make a case against the trend above, we also want to be ready for when markets descend into a (possibly overdue) correction phase.

UBS has recently released a note suggesting we are going to see some serious pain should the tariff war between U.S and China intensify. They also argue that the current rate of tariffs has minimal impact on the markets, but if the U.S takes it to the next level by putting a 10% tariff on US$200 billion worth of imports from China, then the S&P500 would most likely be hit by a 10% decline. They also predict that the S&P500 could drop by an additional 10 percent (a total of 20%) if the current situation between U.S and China escalates into a full-blown trade war.

On a macroeconomic level, we note that the difference between short term and long term interest rates is narrowing down rapidly. This phenomenon, also known as yield-flattening, is usually seen as a signal that long-term growth is potentially not as strong as short-term growth. When yield-flattening turns into yield-inversion (where short-term rates are higher than long-term rates) and is combined with increasing cost of borrowing for companies, higher inflation, and rising unemployment, it can be a serious sign of an upcoming recession.

Inflation expectations have somewhat stalled over the past few months, but as shown in the chart below they are on a clear strong upward trend. Chart 2: U.S five year break even (inflation expectation) US unemployment seems to be stable, but corporate borrowing costs are moving higher. Therefore, while traders enjoy the current calm they should also be on the watch for signs of risk.

This article primarily allows readers to understand better risk monitoring; by undertaking a historical analysis, we show some instruments’ sensitivity to volatility. Monitoring Risk: A common way to monitor market risk is to monitor volatility. In simple terms, you can think of volatility as the range of candlesticks in your candlestick chart.

In the more volatile periods, the candlestick ranges are larger, and in the less volatile periods, the candlestick ranges are smaller; as volatility is the magnitude of price swings whether upwards or downwards. Reading candlestick charts or price swings to determine the state of volatility is seen as backward looking. That means you would be only limited to past information to make an inference about the future state of the markets — This can be problematic for traders.

The Volatility Index measures the implied volatility as opposed to historical (or so called realized volatility). It is a forward-looking measure and roughly estimates how much volatility traders are incorporating into their pricing models. One of the reasons volatilities are so important to watch is that high volatilities will usually cause stock markets to fall rapidly.

With stocks falling fast, investors will switch to a risk-off mode, which in turn has a follow-on impact on all other markets including currencies, commodities, etc. To better see how the VIX affects other markets, we have selected 5 scenarios in Chart 3 where volatility has significantly jumped up over the past ten years. Chart 3: VIX over the past 10 years Table 1 shows the duration of each period and subsequent fall in the S&P500.

The last column in this table measures how fast the market has fallen over the volatility period. During the GFC, the market fell on average 0.15% per day for almost 367 trading days. Table1: Volatile Periods and their impact on S&P500 (measured close to close) Period Start Period end No of Days Change in S&P Average %Drop per business day Scenario 1 11/10/2007 6/03/2009 367.00 -56% -0.15% Scenario 2 26/04/2010 1/07/2010 49.00 -15% -0.31% Scenario 3 7/07/2011 4/10/2011 64.00 -17% -0.26% Scenario 4 19/08/2015 11/02/2016 127.00 -12% -0.09% Scenario 5 26/01/2018 9/02/2018 11.00 -9% -0.80% Source: Bloomberg Let’s explore how asset classes have performed during these scenarios.

Equity Indices: Watch the Nikkei We may have heard that correlations go to 1 during crises. This means that if a major risk event were to hit one corner of the world markets, others would be affected too. The table below shows that each time the S&P has sneezed (or gotten sick during the GFC) the rest of the world followed suit.

Table 2: Performance of major indices during crises (measured close to close) S&P 500 DAX 30 FTSE 100 ASX 200 Nikkei 225 Scenario 1 -56% -54% -47% -50% -59% Scenario 2 -15% -7% -16% -13% -18% Scenario 3 -17% -30% -18% -15% -16% Scenario 4 -12% -18% -14% -8% -22% Scenario 5 -9% -9% -7% -3% -10% Source: Bloomberg With the exception of Scenario 3, the Nikkei 225 has almost always dropped more than the U.S market. This means that traders would have received a bigger bang for their buck should they chose to short Japan 225 in risk-off environments. Interestingly, ASX 200 has been a better performer than S&P 500 in times of crises.

Precious Metals: Gold and Platinum We previously wrote about how Gold historically turns into a safe haven asset during crisis periods, as depicted in the table below. Unlike Gold, platinum does not hold up during these times, and in fact seems to have been instead highly correlated with stocks — an interesting fact for pair-traders. Table 3: Performance of Precious metals during crises (measured close to close) Gold Silver Platinum Scenario 1 26% -3% -24% Scenario 2 4% -3% -14% Scenario 3 6% -17% -15% Scenario 4 10% 3% -5% Scenario 5 -2% -6% -5% Source: Bloomberg Energy: A case for short-sellers?

During crises all energies can drop quite significantly. Specifically, let’s look at WTI, Brent, and Natural Gas. On average Oil tends to drop a bit more than Nat Gas, but the gap is not wide enough to make Oil a prime shorting candidate.

Table 4: Performance of energies during crises (measured close to close) Oil (Crude) Oil Brent Natural Gas Scenario 1 -45% -44% -43% Scenario 2 -13% -17% 14% Scenario 3 -23% -16% -12% Scenario 4 -36% -36% -27% Scenario 5 -10% -11% -26% Source: Bloomberg Currencies: Commodity currencies once more We have previously written about how USD, CHF and JPY become safe haven currencies during crises. Seeing the US Dollar Index and JPY going higher was not a surprise for us, but it is quite interesting to see the magnitude of AUDJPY’s drop, as it underperformed all other currencies in this analysis. The last row of Table 4 shows the average drop per currency.

The AUDJPY ‘s average decline is almost twice (or even more) that of others. Table 4: Performance of currencies during crises (measured close to close) USD index EURUSD AUDUSD JPYUSD GBPUSD CHFUSD AUDJPY AUDEUR CADUSD Scenario 1 13% -11% -29% 19% -31% 2% -40% -20% -24% Scenario 2 4% -6% -9% 7% -2% 1% -15% -3% -6% Scenario 3 6% -7% -11% 6% -3% -8% -16% -4% -9% Scenario 4 -1% 2% -3% 10% -8% -1% -12% -5% -6% Scenario 5 2% -1% -4% 0% -2% -1% -3% -2% -2% Average (including GFC) 5% -5% -11% 8% -9% -1% -17% -7% -9% Average (not including GFC) 3% -4% -8% 6% -5% -2% -13% -4% -6% Source: Bloomberg Given current markets conditions in the US, Europe, Asia and emerging economies, the smart trader would want to keep his finger on the pulse for any signs of changes in volatility. GO Markets Pty Ltd

Many traders consider trading daily timeframes but when used to trading the shorter timeframes, overnight holding costs of positions may not be something they have come across previously. This brief article has the aim of understanding why these trading costs exist and how they are calculated. But First…An important message about holding costs… Let us start by stating a little “reality check” perspective.

Holding costs, like “slippage” and Pip spreads are NOT ultimately the deciding factors as to whether you become a successful trader with sustainable positive results. Much is made of these, but the reality is there are other things which are far more impactful such as effective position sizing and appropriate and timely exits from trades. Nevertheless, for those of you that are treating trading seriously enough, indeed, let’s use the term “trading as a business”, as with all the above, holding costs should be considered in your trading.

So how does it work… To understand overnight holding costs it is worthwhile starting by looking at what you are doing when you trade a currency pair. If you are buying 0.5 EURUSD position for example, in practical terms you are ‘borrowing’ US dollars and buying euros with the proceeds. If this position is held “overnight”, (i.e. in practical terms this means at 4.59pm US EST), you pay interest on the US dollars you borrow, but earn interest on the euros you bought.

There is a long rate and a short rate which you can find on your MT4 platform (This obviously changes daily). Rates are set globally, and the actual dollar figure is dependent on the size of position you have. To find this on your platform: a.

Right click on your chosen currency pair in “Market Watch” b. In the drop-down menu choose “Specification”. This brings up a pop-up with details of the contract information relating to that specific currency pair. c.

Scroll down to find the long and short swap rates (the example shown is of EURUSD). This calculation creates either a debit or credit to your account per day (termed the swap rate) and is shown in the “swap” column in your trade window at the bottom of your screen. The calculation is as follows: Current long/short rate x number of lots = swap debit/credit in second currency For example, if we held long 5 mini-lots of EURUSD, the “swap long” shown is Long Swap rate of -12.88.

Therefore this looks like -12.88 x 0.5 (contracts) = -$6.44USD This is then converted into your account currency (so AUD if based in Australia) and shown accordingly as a debit. Likewise, If we held short 5 contract of EURUSD, then the calculation would be: 7.14 x 0.5 (contracts) = $3.57 This is then converted into your account currency) and shown accordingly as a credit. We trust that helps.

Of course, please get in touch with us if you need any more clarity on holding costs at any time. This article is written by an external Analyst and is based on his independent analysis. He remains fully responsible for the views expressed as well as any remaining error or omissions.

Trading Forex and Derivatives carries a high level of risk.