MetaTrader is among the most used trading platforms and there are many reasons why this Forex platform has become so popular over the years. MetaTrader is not only super user-friendly, it also comes with a variety of great features and functions that make the life of traders easy. In this article, we take a look at the 9 most helpful features and tips that you have to know about when using this software.

Optimus FX Offers both Futures Trading(ES,GC,CL and NQ) and Forex Trading over MT4.

This is via the CQG FIX API bridge.

1. MetaTrader – Using Profiles for an effective routine

When it comes to organizing your MT4 platform, most people completely overlook the profiles function. Within a profile, you can combine and organize your charts much nicer.

For example, the screenshot below shows 4 different profiles: British Pound, Euro, Market Overview, Swiss Franc. When you open a new profile, for example, the British Pound, MetaTrader will show you a multi-timeframe analysis if the GBP/USD pair all in one view with top down timeframes.

So instead of flipping through timeframes endlessly, you can create multiple profiles for different markets that you want to watch. With the combination CTRL + F5 you can easily switch between the different profiles and create a more effective trading routine.

2. OCO order – “One cancels the other” order types for easy trading

The next thing about MetaTrader is that it makes entering a trade and managing orders very easy. The screenshot below shows the regular order execution window in MetaTrader. In MetaTrader, the COC order (One Cancels Other) is standard and it means that when you enter a trade, you can directly set your stop loss and take profit orders at the same time with your entry.

Furthermore, depending on whether price hits your stop loss or take profit order first, MetaTrader cancels the other. So when the price reaches your take profit order, the stop loss automatically gets deleted in MetaTrader.

Whereas you have to manually set stop loss and take profit orders and then also delete orders after you have exited your position in other trading platforms, this is completely automatized in MetaTrader.

3. Dragging orders and assessing risk

In MetaTrader, In addition to moving your stop loss and take profit orders around with one click you can also click on the order and drag it around – MetaTrader directly shows you the potential amount you can win or lose based on the order distance. This is ideal when it comes to managing risk, sizing positions or trailing your stop loss. In the screenshot below you can see that when you click on your take profit, for example, MetaTrader shows you the potential money amount you can win when the price reaches your order and it also gives you the pip distance.

If you enter a new trade, you can also just click on the entry order, hold your mouse down and MetaTrader will then allow you to create new stop loss and/or take profit orders.

4. The multi-purpose crosshair

The crosshair in MetaTrader is a great tool that makes the life of traders much easier. Simply click on your mouse wheel or use the MetaTrader hotkey CTRL + F and you will see the crosshair in the price chart.

When you click and hold your right mouse button, you can then activate the measurement feature of the MetaTrader crosshair. Move your cursor around and MetaTrader will show you the distance between the price level where you first clicked and your current cursor position.

The crosshair function is ideal to measure potential stop loss/take profit distances, explore chart pattern targets or measure other price distances.

MetaTrader will show you three numbers next to your cursor:

1) The amount of periods between your current mouse position and the start

2) The amount of pips between your current mouse position and the start

3) The current price level

5. Text on trendline

MetaTrader offers a lot of great chart studies and charting tools, but it’s very easy to lose track of what you were trying to show with the different trendlines and chart studies. You can annotate individual trendlines and then display the information right on your chart.

When creating a new trendline, enter the information you want to see on your charts under “Description” and it will show this text directly on the trendline.

When it comes to trendlines, MetaTrader has another feature. Once you have created a trendline, select it, press CTRL and MetaTrader will then copy the trendline. This is an especially helpful shortcut when it comes to drawing parallel channels or quickly creating a new line.

6. MetaTrader Window split

Many traders follow the habit of endlessly flipping through timeframes where they randomly go through the same charts again and again without really knowing what they are looking for. In the first point, we showed how to set up profiles in MetaTrader to structure and organize your trading platform effectively.

With MetaTrader’s function of splitting windows easily, you can create better views within your profiles. Simply click on Window in the top menu and choose from one of the styles that show up. MetaTrader will then take the currently opened charts in your profile and arrange them based on your selection.

7. MetaTrader’s free backtesting

Many traders spend hundreds of Dollars on backtesting software where MetaTrader offers a built in function for free. You can scroll back in a chart in MetaTrader and when you then hit the F12 button on your keyboard, MetaTrader scrolls forward one candle at a time.

This is a great way to replay previous price action and sharpen your skills. Some traders use the F12 backtesting method to replay their past trading week and see if they missed trades or could have done something differently.

8. Drag and drop orders on a chart

Not many traders know about this feature but you can visualize your closed trades directly on your charts. For that, open your terminal (hotkey CTRL + T), go to account history and then drag and drop a trade onto your chart.

MetaTrader will then draw the entry and the exit with 2 arrows and connect the distance with a dotted line. MetaTrader also visualizes the stop loss order and take profit orders with small red and blue lines.

This feature is especially helpful if you want to save screenshots of your older trades. This way, you don’t have to mark them manually and you can do the process much faster.

9. Using price alerts

Alerts are a great way to stay on top of things and using price alerts also makes sure that you don’t miss trades. In MetaTrader, creating price alerts is very simple. Just right-click on the price level where you want to set your price alert to, go to Trading and then select Alert. Then, MetaTrader will show you a red arrow with a dotted line on the right which indicates the price level of the alert.

Once price reaches the alert level, MetaTrader will output an audio signal and notify you about the event.

As you can see, MetaTrader is much more than a regular trading platform but its unique features can be used to help you organize your whole trading approach and stay on top of things, improving the way you handle your trading.

Click on the next link to view MetaTrader’s Tutorial Videos 

Optimus Forex

Previously, we showed you how to use TradingView’s charting tools, how to organize your TradingView platform for maximum efficiency and how to create a great feedback-loop. Now, we want to show you how to execute your trades with TradingView.

Trading Panel Overview

When you open your TradingView execution platform, you see the Buy/Sell buttons directly on your chart (1). In the middle of the field, you see the spread for the market and on the right you can adjust the contracts.

By clicking on either the Buy or Sell button, the order execution window opens up. You can also open your Trading Panel at the bottom of your TradingView platform (2). Inside the Trading Panel, you find information about your orders, your actual positions and about your account overall (3). We will get into the specifics later.

Placing a trade

After you click on Buy or Sell (1), the execution window opens up and inside, you can then adjust the parameters of your trade and finally execute it (2). Let us walk you through the individual parameters step by step.

Account: If you have multiple accounts, you can switch between the individual accounts here

Side: Select whether your order is a buy or a sell order

Type: Choose between market, Limit, Stop, or Stop Limit orders here

Limit: Order that is triggered when the specified limit price is hit.

Market: Order at the best available current price.

Stop: Market order that is triggered when the stop price is hit.

Stop Limit: Limit order that is triggered when the stop price is hit.

Duration: Under duration, you can pick how long your order is good for. Here are the different options Tradingview provides:

Day: Order cancelled at the end of the trading session if not filled.

GTC: Good Till Cancelled – Order that remains open until canceled by the trader.

FOK: Fill or Kill – Order that requires the entire quantity be executed immediately or the order is cancelled.

FAK: Fill and Kill – Order that requires any remaining quantity after a partial fill be cancelled.

GTT: Good Till Time – Order that remains open until a specified time. At that time, any unfilled lots are cancelled.

GTD: Good Till Day – Order that remains open until the date specified by the trader.

ATO: At the Open

Symbol:  You can change the symbol (market) here

Quantity: Adjust the amount of contracts you want to buy or sell here

Execution orders from your chart

You can also place Limit or Stop orders directly from your charts. For that, click on the price level on your chart where you want to execute your order from and either choose Limit or Stop. TradingView will then automatically pick up the price based on your mouse position.

This is especially helpful when you want to create stop and profit orders for your actual trades. For example, when you are in a Buy trade, you’d click above current price and select Sell Limit to create a profit order and you’d click below price and select Sell Stop to create a stop loss price.

Trading Settings

In TradingView, you can also adjust the settings for how and what is being displayed on your charts when it comes to execution and order visualization. You can access the regular settings and then click on the tab Trading to see the different settings.

Show Positions: Displays your executed trades on your charts

Show Orders: Shows Stop and Limit orders on your charts that haven’t been executed yet

Extend Lines Left: Marks the price level of your executed orders

Show executions: Visualizes closed trades on your charts

Show Buy/Sell Panel: Gives you the Buy/Sell feature directly on your charts

Show Active Orders Only: Only display the active orders on your charts

Require Order Confirmation: When ticked disables one-click order execution.

Positions and live trades

After you have placed your trade, you will see the trade details directly on your chart. Tradingview shows the current Profit/Loss for that trade, the quantity, the option to reverse your trade (turn a buy trade into a sell trade) and close your position with one click (1).

In your Trading Plan at the bottom, you can see your current positions under Positions (2) and Tradingview then lists all your current active trades with a variety of information (3). You can also directly close your positions form here by using the X icon at the most right.

Visualize your past trades on your charts

If you have activated the visualization of past trades, TradingView will show red and green arrows directly on your charts where you have previously bought and sold a position. You also see the amount of contracts and the date of your execution.

Working Orders

In TradingView, you can place and modify limit and stop orders and also monitor all working orders in one place – let us show you how.

First, after you have placed your limit and stop orders, TradingView marks them on your charts and you can drag and drop them by left-clicking on them and moving your mouse up or down (1). In your Trading Panel, you can click on Orders (2) and then get a list of all your current working orders (3). Similarly to the positions overview, you get a variety of different metrics and you can also modify and cancel your orders directly from the panel.

Account Summary And Overview

The third component in the execution Trading Panel is your account overview. You have a variety of different statistics and we will go over them one by one:

Account Balance: Is your current account balance

OTE: Open Trade Equity

MVO: Market Value of Options

P/L: Profit/Loss

OTE/MVO + P/L: Purchasing Power

NLV: Net Liquidity Value

UPL: Unrealized Profit Loss

Check TradingView Trading Platform

There is a substantial risk of loss in futures trading. Past performance is not indicative of future results,

At first glance, the Ichimoku indicator is a trading tool that looks very fancy and many traders are intimidated by all the different lines and shapes that the indicator produces on their charts. We are here to show you that once you understand how to read the Ichimoku indicator, you will quickly see that the information and the signals this trading indicator provides can be very helpful and easy to implement in your own trading.

The three signals of the Ichimoku indicator

The Ichimoku indicator provides three different types of information about price action and market sentiment. First, it shows the direction of the trend; second, it visualizes momentum and trend strength; and it also acts as support and resistance.

Before we get started, let us show you how to change the look of the Ichimoku indicator in Metatrader so that it is easier to interpret and use. The left chart shows the standard look of the Ichimoku indicator in Metatrader and the right one the new, adjusted look. The information on the right are much easier to understand.

You can get the adjusted look of the Ichimoku indicator with a few clicks. First, open the settings of the indicator and go to colors. Then, just copy the settings from the screenshot below. We deactivated the “Chikou Span” since it is not needed for our purposes (red shaded box). To make the Ichimoku cloud easier to see, we have changed the setting for it as you can see in the blue shaded box.

Getting to know the Ichimoku indicator

Although the Ichimoku indicator can look intimidating at first glance, it is easy to use once we understand the basic principles behind it. Before we get into trade examples, we have to understand what the different lines are.

The red line (Conversion line) is the fastest moving line. It shows the middle of the previous 9 candle period. That means it’s the middle of the range of the past 9 candles. The blue line (Base line) moves slightly slower. The blue line marks the middle of the range of the past 26 candles. Essentially, the red and blue lines are similar to moving averages.

The cloud consists of two lines. As you can see, one moves faster and one cloud boundary adjusts slower. The faster moving line is the middle of the red and blue lines from above. The cloud boundary that moves stepwise is the middle of the 52 candle period.

As you can see, all lines represent some form of price averages. Using price averages allows the trader who uses the Ichimoku indicator to immediately see momentum, trend direction and support and resistance. We will now explore how to identify trading opportunities using the Ichimoku indicator.

Trend direction

The Ichimoku indicator works well as a directional filter. Once you see a green cloud, it means that the overall long-term trend is up. Conversely, a red cloud means that the trend is down. Furthermore, when the red line is above the blue line, it emphasizes the bullish short-term trend. And when the red line dips below the blue line, it indicates a bearish short-term trend.

During a new bullish trend, you will see that first the red line crosses above the blue line, showing that the short-term trend had changed, followed by the cloud turning green, confirming that the long-term trend is up as well.

Pullbacks, support and resistance and trend re-entries

Once the cloud and the higher time-frame confirm the overall direction of the trend, a trader can go to the lower time-frame to fine-tune his entries. To find re-entry opportunities during trends, traders usually wait for a pullback to, or into the cloud. Once price then leaves the cloud and the red and blue line cross back again into the original trend direction, it can provide re-entry opportunities.

The red shaded boxes mark the periods when price dipped into the cloud and left it again afterwards. The green arrows point to the cross of the red and blue lines, confirming that the short-term momentum went back to bullish.

The Ichimoku indicator can be combined with support and resistance principles or other trend tools and indicators. However, momentum indicators such as the RSI, the MACD or the Stochastic could provide redundant trading signals.

The Fibonacci tool is a very commonly used tool among traders, but one of the greatest functions of the Fibonacci tool is often neglected. Whereas most traders use the Fibonacci retracements to determine entries – which can be tricky because it is always unclear which Fibonacci level price will adhere to – the Fibonacci extensions are much less subjective. With the help of the Fibonacci extensions, identifying potential profit targets becomes very simple and it takes out a lot of guesswork.

What are Fibonacci extensions?

Whereas most traders only know about the regular Fibonacci retracement levels (0.382, 0.618 and 0.764), the Fibonacci extensions are levels that extend beyond current price. When it comes to Fibonacci extensions, there are mainly two levels traders need to be aware of: 1.382 and 1.618.

Once you have identified a trend-leg with a retracement (an A-B-C move), you can use the Fibonacci tool and the extensions project the 1.382 and the 1.618 levels onto your charts. Those two levels are then potential D price target levels.

All graphs are used for illustration only and not meant to imply any profit or loss. 

The difference between 1.382 and 1.618

So which of the two price levels do you choose as potential take profit orders for your trades? There are three things a trader has to take into consideration when picking take profit orders:

First, the strength of the ongoing trend can help you make a decision between the two levels; in a market environment with less trend-strength, the 1.382 level often makes for safer take profits target as wide trend swings cannot be expected.

Second, your risk appetite determines the choice of your take profit level. A more conservative trader might choose 1.382 more often than a more aggressive trader who chooses the 1.618 level. Another option would be to use two different take profit orders and scale out over the two Fibonacci levels.

And finally, the depth of the Fibonacci retracement can provide information about the likelihood of price reaching the Fibonacci retracements. A very deep retracement often means that the trend lacks strength and momentum, and choosing the closer 1.382 can be the safer option. A C-retracement which is short and price reverses back into its original direction fast can mean that the trend is strong and the 1.618 is likely to happen.

How to use Fibonacci to time your trades 

Traders often make the mistake of jumping the gun and immediately enter a trade after they can spot an A-B-C sequence. The problem with that is that at such a point, it is unclear if price will even break the C-point and make another run.

The safer option is usually to wait for a confirmed break of the B-point. However, in an established trend, more aggressive traders often choose to enter as soon as they can spot the A-B-C pattern which then provides a much larger (potential) reward to risk ratio. On the other hand, such premature entries usually lead to more false signals as well.

Another way to go about this is to look for Fibonacci sequences on the higher time-frames and then follow your regular trading system on the lower time-frames; the Fibonacci extensions then only serve as potential take profit areas and are not used as trade entry signals.

All graphs are used for illustration only and not meant to imply any profit or loss.

Conclusion: The Fibonacci tool helps you find better take profit targets

As we have shown you, there are many different ways how the Fibonacci extensions can help you find better ways to identify take profit areas. Especially if you are currently unsure about how to pick reasonable take-profit levels and are more or less just randomly choosing your trade exits, the Fibonacci extensions can help you eliminate the subjectivity in your trading approach.  The following point sum up what we have discovered in this article:

• Wait for an A-B-C move to apply the Fibonacci extensions
• Wait for a confirmed break of B
• Entering before B has been broken can provide a better reward to risk ratio, but also leads to more false signals
• The 1.382 is the more conservative target and the 1.618 should be chosen in a strong trending environment
• The depth of the C-retracement can provide information about trend strength
• Fibonacci extensions on higher time-frames can be used as profit targets on lower time-frames

There is a risk of loss in futures and forex trading. Past performance is not indicative of future results. 

Bid/Ask Spread Every currency pair has a Buying Price (Offer) and a Selling Price (Bid). The difference between the two is called Spread, and it determines how fast you can exit with a profit if the market has gone your way. The Spread is a cost that is associated with each trade, and it is an important part of your trading method. For short term traders, the Spread usually has a much bigger impact because the Spread makes up the more significant portion of their profits. Longer term traders, on the other hand, often have fewer trades and they hold their trades longer – the Spread usually does not have a meaningful impact for longer term traders. Currency Spreads have to be considered together with account size, position size, and platform costs; these factors determine the cost structure for traders. Forex traders often call the Bid/Ask spread also the Pip Spread. It is very easy to see the spread on your Forex trading platform as you can compare the buying price and the selling price. The narrower the range, the better it is for you.

CPM (Commission Per Million) to reduce the Bid/Ask Spread, more experienced traders are charged Commissions per Million which represents a fixed commission. Experienced traders may, at times, choose a fixed commission structure as opposed to a wider and fluctuating Spread. This may, at times, help them lower the cost of transactions and fees. Just a clarification: the trader does not have to place one a one million Dollar trade. Instead, his commission is broken down to the fractional units of a million.

ECN Forex Broker (Electronic Communication Network) This type of trading forex model allows a Forex broker to provide a number of liquidity providers. The broker matches buyers and sellers, and the broker does not have the ability to trade against the customer.
Typically, ECN Forex Spreads are much narrower; however, there is a commission cost involved. In essence, the Forex broker links retail Forex traders with Tier 1 liquidity providers through a technology called FIX Protocols (Financial Information Exchange Protocol). The ECN Forex broker that uses ECN technology could potentially provide you with instant fills with minimal slippage during non-news trading hours.

Market Maker/Liquidity Providers (dealing desk) Market makers provide the Bid/Ask Spread for the different Forex pairs and displays them electronically on their Forex trading platforms. They stand prepared to make transactions at these prices with their customers who range from banks to retail Forex traders. In doing this, market makers provide some liquidity to the market. As counterparties to each Forex transaction, in terms of pricing, market makers must take the opposite side of your trade. In other words, whenever you sell, they must buy from you, and vice versa.
There are Tier 1 liquidity providers that are the major banks and institutions that are willing to make a price in almost any currency pair available.

Low Latency Forex Execution When you spot a trading opportunity you usually do not have much time to take advantage of it. You should be able to deliver your orders to your brokers instantly and benefit from your perceived favorable market condition. Latency measures the delay it takes for your order to get the broker, execute it and report the price back to you. In this day and age, it should be done within milliseconds and latency should be very low. Just like Spreads and commissions, Latency will affect you P&L (profit and loss) because conditions can change rapidly and get a fill on your trade too late can have meaningful impacts.

No Last Look It simply means that a Liquidity Provider (LP) can reject a trade within a given time interval. No last look means that once an LP offers a price quote, it must accept the trade on it. No Last Look appears to be more of a transparent way for execution; however, those who use the Last Look do it because they want to protect themselves from a “Stale Quote.” However, an advanced ECN should keep liquidity providers that execute well, and do not promote those who underperform. No Last Look provides the same opportunity for all participants to make a profit.

Trading Anonymity This is the case where certain avenues allow you to stay anonymous when you place your traders. This may result in a number of advantages where the trader could reduce his costs, his limit orders do not get imitated, and trading patterns are not being revealed. If you run an automated trading strategy, scalp trading for ticks, or any other short-term horizon, this is usually the preferred trading environment.

RFQ (Request For Quote) As the name suggest, it is a request for a Bid/Offer from a liquidity provider. Since Forex offers deep liquidity, those who use RFQ might have a larger size for a trade, like 5 Yards (5 Billion). Also, some less liquid OTC markets like FX Options may require special pricing.

Margin (leverage) Forex trading is a highly leveraged trading venture. What drives many small players to the Forex trading arena is the ability to leverage their capital with a much larger amount.
As an example: You can execute a currency trade with a volume of $100,000 with only $500 in capital. This is what traders mean by “broker margin” or “leverage.” Naturally, trading on leverage increases your profits, and the same time increases, by an equal amount, the level of risk you are undertaking if the markets are not going in your favor. High leverage is not always a benefit for the beginning Forex trader. The choice of leverage, whether it is [1:10]0 or [1:40]0, should depend on the trader’s experience, risk tolerance, and risk capital.

Re-Quote A re-quote is a price change that occurs between the time that the trader sends the order and when the market order cannot be filled. At that point, you can accept the newly quoted price or reject it. Although many consider re-quotes as a bad business practice, there are legitimate reasons for re-quotes, for example when the market is moving fast or when the liquidity becomes very thin.

Slippage The difference between the price you saw on the screen and your fill that you realized on your trade. Slippage can occur on ECN and Dealing Desks alike.

There is a substantial risk of loss in futures and Forex trading. Past Performance is not indicative of future results. Forex Trading offers are not intended to US based customers. 

Full Disclaimer

Indicators are very popular and almost all traders use, or have used, some sort of indicator before. At the same time, the vast majority of traders don’t really understand what their indicators tell them and how to use indicators effectively. This goes so far that traders have been passing on inaccurate information about indicators for years and even decades. If you want to be successful in the trading business it is essential to have a very deep understanding of the tools you use to make your trading decisions.

In this article we explore the myth of the overbought and oversold indicator reading and why misinterpretations can lead to false trading decisions.

An introduction to overbought and oversold

Overbought and oversold readings can be found on almost all oscillator indicators. The most common ones are the STOCHASTIC, the RSI and the CCI. People call a scenario overbought when the oscillator reaches high values (typically 70 or 80). Conversely, traders call a price scenario oversold when the oscillator dips below a certain value (usually 30 or 20).
The belief is that an overbought indicator reading suggests that price has been going up for too long or too fast and that a reversal is imminent because a strong rally is not sustainable for a long period of time. On the other hand, traders believe that an oversold oscillator indicates that price has been moving lower for too long and that a reversal to the upside is going to happen. In the next point we show you why such an interpretation can be very misleading.

Understanding your STOCHASTIC indicator
Indicators are tools which apply a specific mathematical formula to the price movements you can see on your charts. We don’t want to get too technical at this point and just briefly summarize what the STOCHASTIC indicator does because it is a very commonly used indicator.
The Stochastic indicator measures the size of your price candles/bars and analyzes the close of a candlestick. If, during an uptrend, price closes at the top of the candle and does not leave a wick, the STOCHASTIC value rises. Thus, a rising STOCHASTIC indicator value tells you that price has been moving higher and that the price closes near the top of the candle – signaling rising bullish momentum.

What is overbought really?
Thus far you have learned how price movements influence the STOCHASTIC indicator values and what it means when the STOCHASTIC values rise. Now you will be able to quickly see why the general understanding of overbought is not entirely correct.
A STOCHASTIC value of 80 or higher means that price has been moving higher significantly and that price closes near the top of the candlesticks. Thus, both things suggest a very bullish environment and strong momentum to the upside. The STOCHASTIC formula does not include a component that focuses on reversals – it is a pure momentum indicator.

Fixed mindset when thinking in fixed terms A wrong understanding and a false interpretation of the STOCHASTIC indicator can put traders into a mindset where they are constantly looking for trades into the opposite direction of the current trend. Instead of following the trend, which the STOCHASTIC actually signals, traders keep looking for counter-trend trades and miss potential profitable trading opportunities.
It is therefore important to really understand what your trading tools are telling you. Inconsistent trading results are often just the result of a lack of understanding and can be avoided.

When to use the STOCHASTIC and how
After we have discovered what the STOCHASTIC does not do, we can now take a look at how to use the indicator in your trading. There are 3 main ways the STOCHASTIC indicator can be used:
1. Trend following
Although this is not the real purpose, the STOCHASTIC indicator does provide information about the strength of a trend. In an uptrend, rising/high STOCHASTIC values confirm high momentum. High STOCHASTIC values suggest the existence of a strong trend and should not be mistakes for an ‘overbought’ scenario.
2. Turning points in a range environment
In a range-bound market, with very precise and clearly defined boundaries, the STOCHASTIC could provide clues about turning price. If price reaches the upper boundary of a range and the candles get smaller and start closing lower, the STOCHASTIC indicator will also turn.
3. Divergences and the hidden loss of momentum
A divergence exists when price makes a higher high and the STOCHASTIC does not make a higher high. A STOCHASTIC that fails to make a new high signals the loss of momentum. The new price high is not confirmed by momentum and the bullish force behind the price move is not signaling strength.

This article has two goals. First, it explains what the STOCHASTIC indicator really does, how it analyzes price and then manifests on your charts. But the real take away message should be the importance of developing a better understanding of your trading tools. If you are using indicators or other principles to make trading decisions, it is essential to fully understand what they are doing. Blindly following signals and other trader’s instructions often leads to incorrect assumptions and false interpretations.

There is a substantial risk of loss in futures trading. Past performance is not indicative of future results.

Last week the National Bank of Switzerland (SNB) announced that it will remove its peg to the Euro currency. As a result of this decision, the Swiss Franc currency soared 30%, and wiped out many retail traders, brokerages, and even sophisticated traders from various hedge funds. The focus of bloggers, journalists, and many news outlets has quickly turned to the impact of the SNB’s decision on many institutions who have relevance to the Swiss Franc, but little emphasis has been placed on the topic of leverage or the concentration of positions which has been one of the primary causes of trading losses during this unprecedented news event.

“Black Swan” events or “Fat Tails” are nearly impossible to predict with any financial model, therefore being being strict on leverage and risk limits is essential not only in specific cases such as these, but for all trades.

First, let’s discuss the significant elements that took place during these market movements:

1) SNB came to the decision to remove the rate-restriction peg to the Euro. This delivered a blow to many institutions in the financial industry due to the policy change in the interest of their country, and not in the interests of the financial community as a whole. The ‘Don’t fight the fed’ policy that many have believed in has proven to be unreliable. Sadly, the group of academics that control central banks are able to make announcements with little consideration for the trading community, and the effects of the trading community and financial institutions that result from these announcements.

2) The market soared 30% within hours. Only time will tell whether this was an overreaction to the announcement, but the end result meant liquidity providers had to scramble to accommodate the influx of orders. The markets can accommodate good news, they can accommodate bad news, but they can have an affinity to issues where there is difficulty interpreting the long term implications of breaking news. In this case, the Swiss Franc (CHF) exchange rate policy change will alter the economy, exports, Swiss currency borrowers, and more. With this in mind, it does not seem that the policy change should have been implemented overnight, but who is to say that economists are the best at what they do? Switzerland has the lowest debt-to-GDP ratio of 33% while the USA has 71.8% and Japan has a whopping 226.1%. (Party in Tokyo, anyone? Anyone?)

For those that are looking for rationale and logic within this market move, good luck. Identifying the precise reason a market has moved in such a dramatic way can lead to unsubstantiated theories that rarely provide any further assistance to a trader. Let’s discuss in detail what happens during these moves:

Within seconds of this announcement prices started to gap while liquidity for those who are on the opposite side of the tracks has dried up and caused execution to become nearly impossible. On some broker’s desks, the gap between the bid & ask has inflated up to 2,000 pips. In these cases, even for a trader on the ‘right’ side of the track, a Market Order could have provided far less of a gain than expected due to dwindling liquidity. Yes, even in a situation where a trader is right they must be able to execute at the ideal price for exit for it to be worth it. Black Swan events, like the Flash Crash, tend to create a large bid-ask spread that prohibits traders from executing within their normal price differential. For example, during the Flash Crash, the Emini S&P bid-ask was 12 points, or 48 ticks wide.

Every single point above can affect a trader, even if they are not in the market at the time. Why is this? This is because it is possible within any asset class, where it be stock indices, energies, metals, or others. The psychological effect of seeing it in real-time can jar a trader.

Many traders will go and compare this to a Black Swan event. However, in reality, it is not. We live in a world of countless intertwined and interconnected economic policies, politics, and ever changing supply and demand that constantly shifts the markets. Central banks, policy makers, and those who determine actionable events that can affect pricing do so in the interest of economics and not to satisfy speculators or market analysts. Unfortunately, as demonstrated by the SNB, the implications of such policy changes can be further reaching and with more drastic changes than they may have anticipated.

The longer a trader has been in the game, the more likely they will have encountered these rare, but significant events that many will call a Black Swan. Events such as these can come by surprise, which is out of the control of the trader. However, leverage and risk management can provide major impact on the bottom line. The key is to constantly, and strictly, control risk for all trades. Risk, risk, risk: It should be a habit, and the first thought that comes to mind when looking for trade setups. The institutions that were most affected, and went under as a result of the SNB policy change, were either heavily concentrated in the Swiss Franc, and/or extended leverage to customers beyond what many would consider sound risk management. Even though one may have concrete risk measures put in place they must also keep in mind that the maximum leverage extended may not the best use for every trade. Consider if a fund leveraged [1:20]. In this case, a 5% move could wipe out 100% of the fund’s equity. As we all have heard before: Leverage is a double-edged sword.

It is also valuable to be wary of what the consensus is amongst traders. The financial media can only provide accurate commentary and explain what the current state of the market calls for, but trading in line with the media can be a recipe for leaning towards the wrong side of the market. It is important to study and develop a methodology that is individualistic and specific to one’s trading profile, risk concerns, and strengths rather than to lean too far on a single resource for information.

Of course, the thought may come to mind: “Well, there must have been a winner here somewhere.” Even though many were affected negatively, the game of zero sum does not necessarily apply here. Those who did hold long CHF positions, or long 6S Futures, were very far and few between. The winners will hopefully emerge, but the proportion in size to the effect on losers is not always equal. The fundamental dynamic for a rate limited currency would not allow for any rational trader to take the other side of a strict policy. Therefore, going long the CHF was not only risky, but just not practical for most. To the credit of some market commentators, they did question the rationality of pegging the CHF to the Euro and argued that it would eventually need to be removed. However, speculating on such an impactful policy change, and actually entering into a position are not comparable in risk. An article that theorizes such a scenario doesn’t need a stop-loss.

In summary, it is essential to constantly evaluate, monitor, and double-check the amount of leverage that is deployed for each position. Leverage can be beneficial in many ways, but it must be used carefully and with complete awareness. It is recommended to have a clear, defined risk model that incorporates leverage in a safe way to combat any single event from wiping out an account. Ambiguity has no place in risk, or leverage, and should not be decided based on intuition, but with caution and hard numbers.

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