• Further evidence that the field of Behavioral Finance is gaining traction: An investor’s worst enemy? Their brain
• Quite an interesting list of trading/investing observations: Wisdom From Jason Zweig
• The post speaks to the point that if you have an edge in the market you should maximize its application. An argument for why not trading much makes no sense
• While I tend to agree that US brokers would take a big hit were retail spot forex trading forced to go on-exchange, I’m not convinced it would kill the retail forex business all together. In fact, I could strengthen it…. US Treasury Department reconsiders exempting Forex from OTC Derivatives Regulations
• An interesting discussion of the use and implication of limit orders: Limit Orders, on the Crumbling Edge of Behavioral Finance
• Penny Stocks or Forex for the new trader
• An interesting discussion of what’s happening in market regulation. CFTC – MF Global’s collapse didn’t happen because of a lack of regulation, NFA ponders segregation rules
• The estimates put retail forex trading volume at $217bln per day, a bit less than 7% of the $4trln total… Retail Forex Market Volume Q4 2011 – Japan’s decline puts pressure on global volumes
• Will Dodd-Frank end up killing the US forex business?
• Forex volume infographic.
• Just one reason why it behooves us all to understand all the trading vehicles available to us in whatever market… Combining Trend Following and Option Selling Strategies

Two weeks ago yesterday, I began my venture into learning how to day trade. Expect to start in Penny Stocks &/or Forex. Here’s my Q’s…

1. Which one do you suggest I try first, Penny Stocks or Forex? Penny Stocks I’ve studied the most already.

2. How do I open a paper account, (to practice what I’ve been studying about Penny Stocks) the same Broker I plan to open my actual trading account with later, or somewhere else?

3. I like what I see at Peter Leeds web site… the list of Brokers he recommends, (as choices for opening our 1st trading account) and system he’s developed for picking stocks he recommends to those who subscribe to his newsletter. What do you think of his expertise?

Any suggestions for helping us get started, are greatly appreciated.

Let me start with the last question first. I don’t know Mr. Leeds, nor am I familiar with his website, system for picking stocks, or his newsletter. As a result, I cannot speak to his expertise or the value of what he does.

When I am confronted with questions like this my standard response is that you need to make sure whatever product or service you’re contemplating investing your money and/or time in is what you need right now to either further your trader development or to improve the efficiency and effectiveness of your work developing trade ideas and/or managing positions. Way too much money and effort are invested into things which don’t fulfill those criteria. This is largely because the person in question hasn’t taken the time to build up their foundational knowledge and worked through the process of understanding how they need to approach the markets and their own trading. Helping them do that is the major driving focus of what I am trying to do with this site and my various educational efforts.

Getting back to the other two questions…

Penny Stocks vs. Forex
I cannot tell you penny stocks or forex is better. Both have their strengths and weaknesses. A major factor in the decision, though, is time. You won’t be able to trade penny stocks outside exchange hours, so if that is something important then you’ll have to go with forex. On the flip side, there are only a limited number of really tradable currency pairs, so if working with a broad array of potential trading vehicles is important for your strategy, then penny stocks would be the better choice.

One thing I would note here is that penny stocks tend to attract low-capital traders because of their lower cash requirements. This is not a good reason to opt for penny stocks, though, because their lower liquidity tends to mean higher bid/ask spreads than in higher-cap stocks and commissions have a higher negative impact on a smaller account than on a bigger one. You will likely find if you are a very low capitalized trader that transaction costs in forex are smaller.

If you’re new to trading, my advice is to pick one or the other. Working on learning two quite different markets when you’re trading to develop your knowledge and skills will be problematic.

Picking a demo platform
In an ideal world, you’d go with the demo platform of the broker you plan on trading through when you go live. That said, part of the demoing process is also finding a broker whose platform you like. Also, if you’re planning on doing an extended period of demo trading you may be constrained by the time limits that some demo platforms have.

• I’ve mentioned attending a Behavioral Finance conference discussion on the use of social media, etc. in trading/investing in the markets. This article is on the same subject…. The Wisdom of Internet Crowds
• Visual History of Financial Crises from 1810 to 2010 by HistoryShots
• Everybody’s Trading Options
• Can ‘Trading on Tweets’ Really Make Money?
• This site may be something to keep tabs on for those interested in high frequency trading Thomson Reuters High-Frequency Trading
• Added to my reading list for eventual review on the blog: Currency Trading in the Forex and Futures Markets
• Let’s talk stops
• Where Are All The New Traders Going to Come From?
• Further progression toward more/better regulation of the retail spot forex market. NFA finalizes the Price Slippage and Price Requoting rules
• The Primary Trade Size Forumla: Position sizing is something that comes up ALL THE TIME in the discussions among… Read on
• The first step is to admit you have a problem. Are You Addicted to Trading?

Here is the basic formula:

Position Size = Amount at risk /(Number of Points or Pips being risked x Value of  Each Point or Pip)

Amount at risk comes from looking at the fraction of your account that you want to be exposed to loss on the given trade. So if you have a $5000 account and want to risk 2% then that would be $100.

The number of points or pips being risked is basically how far away from your entry point your initial stop will be. If you’re getting long at 100 and your stop is at 95, then the point risk is 5.

The value of each point or pip will depend on the market you’re trading.

Thinking in stock market terms where the value of a point is $1.00 per share (adjust for your own currency), the formula would be as follows:

Shares = $ to be risked / (Points risked)

So if you want to risk $1000 and your point risk is 10 you would trade 100 shares: $1000/(10 x $1)

If you’re trading a fixed size contract market such as futures or forex (lots), then it would look like this:

Contracts (Lots) = $ to be risk / (points risked x point value)

In the case of e-mini S&P 500 futures, the point value is $50, so if we want to risk $1000 and have a 10 point stop, we would trade 2 contracts: $1000/(10 x $50)

If we are trading micro lots of EUR/USD where the pip value is $0.10 and we are risking $1000 with a 125 point stop, we’d trade 80 contracts: $1000/(125 x $0.10)

Notice that nowhere in here did I bring up the question of appropriate leverage. It only matters if you don’t have enough available to you to put on the trade you’re looking to do.

• Greed is the Flip Side of Fear
• What do you trade and why?: A question came up on Trade2Win recently on a new thread. It asked the question of t… Read on
• Definitely a list worth reviewing: 5 Fatal Flaws of Trading
• If a system works why share it with the world?: A member of the BabyPips forum asked the other day “If a system … Read on
• Info graphic with an explanation of one concept of Purchasing Power Parity – The Big Mac Index
• Fewer traders, but higher profitability. Interesting. – US forex brokers profitability report for Q4 2011
• This post tends to contradict what most would suggest about when to be active in the forex market. When is the Best Time of Day to Trade Forex?
• Optimize trading performance by time of day selection: Yesterday I shared a link via Facebook and Twitter to an … Read on
• Spotlight starting to shine on the Swiss franc once more
• Does Higher Risk Really Lead To Higher Returns?
• Some things to think about in terms of your trading environment – Highly influenceable traders

I have long held the view that volatility is a major factor in trader performance and one day I hope to do some real research to see if that’s really the case. Certainly systems and methods that are based on trading narrow ranges will suffer when that isn’t the case and range trading systems will fall victim to trending markets.

There’s a problem with the data presented in the DailyFX article, though. It only shows the win % of trades done during those periods (though we don’t know if they are opened and closed, just opened, or just closed in the hours presented). As I’ve harped on here and in other places, win % alone doesn’t tell you anything. You need to know the average gains and losses as well.

To back this up, I once saw data on the performance of a large collection of forex traders. Over a given time frame (don’t remember how long that was) they traders were profitable on something like 60% of their trades. Even though that was the case, the group as a whole still lost money.

Now, the DailyFX article does show performance figures for a trading system when times of day are factored in which suggests better profitability. That would tend to support the overall hypothesis, though obviously it’s just one example. I’m not arguing the general point. It definitely does make sense to look at how the markets trade during certain times of day and not just go along with the matra of the London/NY overlap presenting the best trading opportunities. I want to make sure we’re looking at the data properly and applying it effectively to our own situations in a useful fashion.

My take in the question is this:

The only way letting loose a system on the world is going to impact its performance is if a whole lot of money starts using it. Notice I said “money” not “people”. Ten thousand small retail traders all trading the same system probably won’t move the needle very much (unless we’re talking a very thinly traded market), but a group of big hedge funds could.

Beyond that, most people cannot trade most systems effectively. This is why I have long argued against buying trading systems and have written about the lack of a secret. A trader needs a system that works for them, not just something off the shelf. As a result, even if a system is used by a whole bunch of people, chances are they will “tweak” it along the way to suit their own individual needs.

Consider the CANSLIM methodology introduced in How to Make Money in Stocks. That book has been read by millions of people yet as best I can tell it still works. Why? Because some people toss it aside right away because it requires some work or doesn’t produce instant results they way they expect. Others don’t actually implement it as laid out (for better or worse). Also, there will be variation in which stocks traders may focus on at any given time.

I have traded just about everything you could think of a retail trader trading. Basically, it’s about finding good opportunities. I’m primarily a technically driven trader who operates mainly in the swing to position time frames, so I don’t need to have the narrower focus of someone who trades in the shorter time frames.

That said, stocks and forex are my two main markets.

In the case of stocks, that’s what I came up following. Back in the 80s when I got started it was still the main market available to retail market participants. I didn’t have the funding to effectively play in the futures market (there were no mini contracts back then). Also, when I read How to Make Money in Stocks it really resonated with me in terms of approaching the market. The strategies I use to this day have a foundation in what I learned from that book.

I got active in forex in the early 2000s. This was as online trading was really starting to develop and I was covering the forex market professionally at the time (as I am today). I liked that I could trade at any time of day or night, which you couldn’t really do in other markets at that time. I also liked how technical the forex market was. It suited my trading orientation very nicely.

These days my #3 is stock indices. I go through periods where I will lock in and fairly actively trade the likes of the mini S&P 500 futures. It’s very much a market conditions and available focus sort of thing, though.

What about you? What market(s) do you trade and why?

Here’s a graph of EUR/USD volume based on Thursday’s trading (times noted are in GMT).

The pattern is pretty obvious. The volume in the Europe/US overlap is the most significant. Outside of that it’s markedly lower.

And to provide a perspective on a currency that would be thought to have a more regional bias, here’s AUD/USD.

Here we see more of an Asian time frame volume spike, but still we have to look at the US morning as the biggest volume period.

Of course this is just one day – a day when there were important data releases in both the US and European mornings, which is reflected in the spikes we see in EUR/USD. Other days will show different distributions. The primary pattern of heaviest volume in the overlap will basically always be there, though.