ForexSpirit

There is a rather lengthy article that was recently added over at the Forex Factory, and it’s not even primarily a forex article. The article was written by John Carter and is concerned with introducing the reader to the futures markets. I found it worth the read, picking up some useful tidbits of information, especially on the advantages that the author feels the mini Dow has over the e-mini S&P. Some of these advantages are worth comparing to the currency market to see if they hold true as well.

The first main advantage is in the way that the points are broken up between the two markets. A one point move in the e-mini S&P market is worth $50, while each point is broken up into four quarter point increments. Each point increment is thus worth $12.50. With the mini Dow, a one point move is also worth $50, but each point is broken up into ten one tenth point increments. Each point increment for the mini Dow is therefore worth $5. This subtle difference give the trader an additional six points at which they can place a stop or profit target. The mini Dow and e-mini S&P markets will generally move in tandem; they are very highly correlated. In an example from the article, John Carter shows how a quarter point move on the e-mini S&P is equivalent to a 2.5 point move move on the mini Dow. This extra price granularity results in a reduction in the spread that the trader has to pay, which can add up to a lot of money over the long run.

How does this price granularity compare with forex pairs? Currency markets move in increments called pips, with each pip being either a one ten thousandth fraction of the base currency (such as with the EUR-USD or GBP-USD pairs), or a one hundredth fraction of the base currency (for USD-JPY). This extreme granuality is generally why forex brokers provide such large leverage capabilities for the average retail trader, so that you can actually make a decent amount of money on the small price movement that each pip represents. This available leverage is obviously a huge double-edged sword that you would be well advised to handle carefully. Some brokers are now even offering the ability to trade on even smaller fractions of a price move: one tenth the size of a regular pip, which are termed pipettes.

Liquidity in the futures markets is high. The same can be said for most currency pairs, especially all the main pairs. This means that in normal market conditions you should not encounter any slippage on a market order.

The mini Dow is made up of the same companies that comprise the regular Dow Jones Industrial Average Index, and consists of 30 companies. On the other hand, the e-mini S&P contains the same 500 companies that make up the S&P 500. It is a lot easier to keep track of 30 companies than 500. In forex, we have it even better. Any given currency pair is just comprised of the two countries whose currency makes up that pair. For the EUR-USD pair, we only need to concern ourselves with the European Union and the USA, and all the macro economic realities that affect these parts of the world on an on-going basis. For the GBP-JPY pair, you have Great Britain and Japan as the constituent parts of this forex pairing.

There is only one anomily in this analysis. In the DJIA, a positive increase in the stock price of any of the 30 companies that make up the index should result in an increase in the Dow itself (if all 29 other stock prices remained the same). All the companies whose stock makes up the Dow are positively correllated with the index itself.

With a currency pair, the current price of that pair represents the balance between the relative economic strengths of the countries that make up that pair. For example, you would expect positive news out of Great Britain to result in an increase in GBP-JPY, while positive news out of Japan should result in a downward move in the price of this pair.

The reason that John Carter goes to such great lengths to show the advantages of the mini Dow over the e-mini S&P is his belief that it is vitally important that a person trades a market that suits their personality. You therefore need to be intimately familiar with all the characteristics of the market that you are trading, both the positive and the negative aspects, and to make sure that your personality makes a complimentary fit with all those aspects.

Whatever markets you are trading, it is a valuable exercise to take the time and examine the characteristics of each market and verify that your personality gels with those characteristics.

If you’re trading forex, the 24 hour nature of the market is worth pondering on. As well as the lack of a central, regulated exchange. If you use a retail broker are you comfortable with them being the market maker, or would you rather deal directly with the big banks through an ECN? Why do you trade the pairs that you do? Just because you can? Or do you have a special reason for picking the pairs and countries that make up those pairs?

If you trade any futures, why did you pick the ones you did? Are you confortable with the fact that the contracts expire every three months?

You can ask yourself the same kind of questions for stocks, options and so on. If nothing else, it is worth asking these types of questions every so often. People change over time. Their interests, habits and nature are constantly changing. If you’re changing all the time (even if it is probably only slowly), doesn’t it make sense to re-evaluate these things maybe once or twice a year, to make sure that the markets you are trading are the best fit for you?

It might make sense for you to include these reasons in your trading plan. You can then review them as time goes by to see if they still hold true.

The final interesting point that John Carter makes in the article is very similar to one I have made a few times already in my postings.

Here is what John writes:

It took me a while to figure it out, but I finally got it: Whenever I focused on the setups and not the results, I did fine. Whenever I focused on the results and not the setups, I got killed. Why is this? Once I got my hands on a decent sized trading account, I would start to think of things like, “I want to turn this account into a million dollars.” Instead of focusing on the setups, I would focus on making a million dollars. This caused me to jump into the trading habits that ruin all traders: betting it all on one trade, not using a stop because the trade “had to work out,” and focusing on making a million bucks instead of the trade setup.

In my parlance, this means that you need to have objectives, not goals. Setting yourself a fixed monetary goal, with a fixed deadline, will generally only lead to disaster, or at the very best, just failure. As you remind yourself of your goal on a day-to-day basis you are just constantly reminding yourself of what you don’t have. It’s a train of thought that results in a vicious cycle of negative thinking.

What you need to be doing instead is focusing on the here and now. Have objectives that you can work on right now, that become part of your everyday life. These objectives should be actions that will result in you reaching those goals that you might have put together (but shouldn’t due to what I just said above). By focusing on your day-to-day objectives and completing them you are giving yourself constant positive reinforcement. This will only lead to improved confidence and accelerate your progress.

Life changes, and who knows what tangents your life might take before you reach whatever you have as your long-term fixed goals. On the other hand, if you have objectives that you can focus on in the present moment, and keep working on them as time goes by, then when those tangents and unexpected events that life throws at you arrive, you are more able to adapt and make the most of them. You are better able to deal with any situation that presents itself to you. If you work on things in the present moment, you are able to live life in the present, instead of being focused on things way over the horizon.

I do not have any goals of having a certain large amount of money in my trading account by a certain date. I used to. For example, I once set myself a goal of reaching financial indepedence by my 35th birthday.

Once I realised the futility and counter-productiveness of such goals, I scraped using them. In its place I developed an objective that I could work on day-to-day, something that I could measure myself against in the here and now.

My current objective is to trade profitably and consistently, following my trading plan. As I say in a previous post on this subject: my objective has to allow for flexibility, as you don’t always end up exactly where you had planned. Focusing on a goal prevents you from being open and flexible to alternate opportunities that come along.