Basics
Basics

• What is the difference between traders and portfolio managers?

As traders we have a completely different view on wealth management as the financial industry as a whole. An example: Traders decide much more frequently than strategists in portfolio management. While the representatives of the portfolio approach use theoretical constructs and metrics to predict prices, traders are much more practical and need no long-term opinion about a market. Good traders are mainly observers, even if privately, of course, they have own opinions on political and economic isues.

Trader say: We accept the market and its movements as a fact. The thinking of traders and portfolio managers is fundamentally different in this point. The big financial houses sell investors great strategies and have a vested interest in mind that as many market participants as possible should run after them. Therefore analysis will be published publicity. So the own forecasts are followed by more market participants and ultimately generate a higher probability. Research in the U.S. has shown that most analysts behave exactly like private investors, if certain opinion leaders set among the analysts one direction - have upgraded one share, for example - then the lemmings of the analysts follow in the same direction.

Another difference arises necessarily from the considered time frame. An example: Even though we are in the long run very skeptical for the U.S. dollar and see a change of the global economy in the next decades, this does not mean that we on view from days, hours or minutes would not buy the U.S. dollar. Finally, we provide the market with our liquidity, only a limited time and our long-term opinions do not matter. Similarly, it can happen throughout the day, traders that accompany the identical underlying instrument at different times in opposite directions.

• Which trading approaches exist?

We want to give you a brief overview on possible trading concepts. Even traders have different ideas and trade classifications. At the end is really what works.



Some approaches are: The rates sometimes move in a narrow trading range. Then traders make money to trade the so-called counter trends, so in principle assume the continuation of a sideways movement. A trader who works as a trend follower will suffer at such a time many small losses. Then the market leaves its former system and a trend is establishing, then the counter-traders suddenly have problems and the trend follower finds lucrative opportunities.

Both basic trading concepts (trend and counter trend) have their own rationale. Traders are also distinguished by different time frames that you create based on their activities and assessments. Swing traders will follow, for example, sometimes longer, sometimes several days of development, while speculating scalper's approach to relatively small movements and "cut them out of the market." The trading frequency of scalping is correspondingly much higher than that of swing traders. Even among swing traders and scalpers, there are no right or wrong, but it does or does not work in a concrete market. For traders the situational selection of a market is decisive for their success. For traders to choose the right instruments is another important decision. Some traders analyze technical indicators, and others do just chart analysis in the corresponding time frame.

The different system of counter-trend and trend-following can help with the so-called profit-factor can be well illustrated. The profit factor is particularly useful for the analysis of trading systems. The profit factor is a mathematical-static method for the diagnosis of trading.

Important: We mean by scalping a trading method that is a very short-term engagement. This is something other than the supervisory authorities with scalping connect normally. For supervisors scalping is a method of market influence and the selective publishing of market-moving news. Such methods of market manipulation or insider trading, we reject, of course.

• The profit factor

For the calculation of the profit factor, one first needs the ratio of winning trades to losing trades - the hit rate (hit ratio):

Hit Ratio = No. of winner trades / No. of loss trades

One thinks first: the larger the value, the better. This is true at first glance, but is only half of the truth. At trend-following trading strategies, a few, but highly profitable winning trades compensate for many relatively small losses. For the analysis of results further considerations are the ratio of average profit to average loss (payoff ratio).

Payoff Ratio = average profit / average loss

Payoff is the ratio of one obtained that the trader's trades higher profits than losses. Also, this ratio should be interpreted in combination with the hit rate. The combination of both formulas is the profit factor.

Profit Factor = Hit Ratio x Payoff Ratio =


No. of winner trades x average profit
No. of loss trades x average loss

A trader that continuously has a profit factor of two or more will certainly be called a very good trader. A trader who immediately produced many winners as losers (hit rate of 50%) and its average losers are only half as large as the winner achieves exactly this profit factor. One trader, whose average earnings exactly equal to the average losses, needs a hit rate higher than 50 percent in order to generate profits. The best course is the combination of a positive payoff ratio, while hit rate is as well over 50 percent.

• It counts what works

Some investors believe in the abbreviation for capital markets. We think this is wrong. Success in trading is hard work and requires some basic conditions and own rules.

Occasionally, investors are offered trading systems. Behind it stands the perfectly reasonable idea of ​​an investment process without emotion. Such systems often help investors not always: the most used software solutions are trend-following systems that do not work well in certain phases of the market. Described as markets change their systematic, phases of successful trades are usually followed by long losing streaks. While experienced traders understand such changes, machine bots continue to trade the wrong way. Inexperienced investors are lured with great performance figures for trading systems, in reality it is often, however, by over-optimized systems that work magnificently in the past, but probably never more in the future. We mainly rely on discretionary trading. This means that we use computers and software in particular as an aid in order processing, but trading decisions are taken by human beings.

• Factors of success

Most important are three personal characteristics of traders: patience, discipline and experience.
  • A trader must be able to wait for suitable conditions in the trade, so be patient enough to put his money on a good chance.
  • To trade with success you need to be disciplined to a convincing idea.
  • Experience is an important corrective to impatience. Experienced traders know that good trading opportunities will come.
Risk control is the most important aspect of trading. For the purpose of limiting risk traders rely on the control of individual trades and follow appropriate rules for their own trading ideas. These rules are known as money and risk management. While the money management focuses of the single trade, the risk management deals with fundamental issues and defines the general risk rules, such as loss thresholds during a trading day or a week of trading may not be exceeded.
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