Or why we tend to rely heavily upon the first piece of information we receive.

 

Our minds can have an enormous impact on our trading and the returns that we generate from it. The way we think, act and behave when we trade or invest is at least as necessary if not more so than our trade selection, particularly in the kind of one-way markets that we have seen post the covid crash.  

 

A rising tide lifts all ships they say, and, in this case, the rising tide of the markets was provided by the printing presses of the major central banks along with the stimulus packages from national governments.

 

However, Central banks won't always be there to rescue us and we need to be aware of the kind of tricks that our brains can play on us if we are to avoid making the wrong trading decisions.

 

One of these tricks has a nautical moniker, anchoring, in which our brain subconsciously latches on to an idea, an assumption or a set of figures and uses that information in decision making, regardless of whether it's accurate or even relevant to the matter at hand.  

 

What's more, as humans, we tend to carry these impaired decision-making processes forward so that we end up using an inherently flawed system and often without realising it.

 

Behavioural psychologists have highlighted these tendencies in their experiments.  

 

In the case of anchoring American academic Professor Jay Edward Russo performed tests on 500 graduate students in which he asked them pairs of questions on history and general knowledge, but, unknown to the students, he had "salted "the questions with erroneous dates and figures.

 

The student's answers invariably reflected the incorrect numbers, which were varied across different groups of students within the experiment, highlighting a clear bias.

 

Professor Russo was effectively projecting those values into the student's subconscious, creating an anchor point.

When we become anchored to figures or a plan of action, we filter new information through that framework, which distorts our perception and decision making.  

 

This can even make us reluctant to change our plan or framework even if the situation calls for it.

 

There are few consequences if any when this happens in an experiment inside a university psychology department. Still, if it happens in the real world like in trading or investing, then there most certainly can be consequences.

 

Anchoring Bias has been described as one of the most robust effects in psychology, the fact that our decisions can be swayed by values not even relevant to the task (or trade) at hand.

Let's say we are negotiating the purchase of a house and I tell you it's worth $1,000,000, and I wouldn't sell it for less. You, as the willing buyer might have only had a price of $800,000 in your head. But all of a sudden, you now are anchored on my price. Not yours. The worst part is that the person who goes first in the negotiation tends to anchor the other party (remember this for the next salary negotiation you need to do with your boss!)

 

The studies even show that if you rolled a pair of two dice, gave the numbers (e.g. 10 and 19) to the study participant, that subconsciously, you would anchor them on these two numbers. Ask them what they would pay for a house, bottle of wine, or in one notorious study, the judges sentencing a criminal, these numbers are in and heavily influencing the participant's decisions whether they like it or not.

 

Anchoring always occurs in making our trading decisions, especially as it might help to explain our fixation with round numbers. E.g. EURUSD at 1.20. Gold at $2000/ounce. DJ30 - 30,000. Once we get hooked on the number, we always use it as a reference point in future, probably because it "feels right".  

Let's say in the past you might have successfully gone long EURUSD at 1.20 earlier in the year, and now whenever it comes back to that number, you will buy it again (the same thing happened to EURUSD at 1.10). You can't explain it, but you had past success with that number and you will gravitate towards it without understanding why.

 

Take a moment to consider some key support and resistance levels on your favourite instruments. Are they round numbers too? Why might that be? Could it be because people are anchored at Gold at $1900? And that every man and his dog has placed their buy orders at that level because it's "good value" or has spent time around that level in the past? Remember that the market is driven by sentiment and agreed upon narratives. Think what else could the crowd be anchored on that might be to your advantage knowing what you know now.

How do we avoid being anchored? 

Given that we don't completely understand the processes that cause anchoring to happen in the first place, we are unlikely to avoid it entirely.  

 

However, by being aware of its existence, we can revisit and retest our assumptions when making important decisions, to ensure that we are acting rationally and basing our decision on the situation at hand, not irrelevant inputs.

 

Perhaps the best way to avoid anchoring in trading is to treat every trade as an individual event and to judge a trading opportunity on its current merits. By doing this, you have a better chance to ignore any reference or prior interactions you have had with the instrument you are trading. It won't be easy to do at first, but it could prove to be a valuable discipline over time. As mentioned, this is crucial to comprehend for putting your stops and limits around key support and resistance levels.

Think about a time you have been fixated on a number. Was it buying a house? A pair of shoes? Trading? Now think whether that number could have been influenced by someone else, e.g. the seller, the shoe store etc.

 

Anchoring can certainly also play a part in other hidden biases and behaviours such as loss aversion (e.g. not wanting to close your open losing trade).

 

The next time that you are about to trade, take time to think about why you are fixated with that number for entering and exiting the trade, and how you reached the decision to pull the trigger. A few moments of reflection might make all the difference.

A wonderful client of ours named Jimmy from up north in Indonesia wanted to learn a little more information about the sentiment tools that we have on offer.  We love helping traders grow and your feedback so figured it deserved its own post.

Because the sentiment is based on advanced Natural Language Processing (NLP), an advanced form of Artificial Intelligence, we know it might seem daunting to look at on first glance, so hopefully, you find the below Q&A interesting.  

What is the sentiment chart telling me? Is there any significance to the “wave” itself?  

The wave line is the sentiment score. The wave effect was created to show that contrary to prices on the particular asset class, the sentiment is not a precise measure. It is more a proxy than anything else.  
 

What is the sentiment score? How is that calculated?  

The machine learning model creates a sentiment score by scouring all of the words in the sources selected (e.g. nouns, pronouns, adjectives) within the articles it scans each day. In a simplified way, it is the difference of the score of the positive words (e.g. good, very good, great) minus the score of the negative words (e.g. bad, very bad, awful) embedded within the article.  

The calculation is made on a 24h rolling window with a recalculation latency of 15 minutes.  

The usefulness of the current sentiment the score is relatively short term (1-3 weeks).  

 

What is the subjectivity score? How did it arrive at this number? What happens if it goes higher or lower?  

The subjectivity is calculated on the difference between the factual words and the emotional words embedded within an article. If there are a lot of words that fall into the “fear” lexicon for instance compared to factual observation, then the gauge will be more inclined towards subjectivity or irrationality. At 0% the gauge would tell you there is no irrationality from the crowd and any article published is based on factual elements. If the gauge is above 50% and close to 100%, it means the crowd is a bit irrational about the asset and the price of the asset is not a reflection of its fundamental value. This is a great tool to detect bubbles in asset classes like equities.  

 

What is the confidence index?  

The confidence index is a relative index. It looks at the history of the volume of news and will scan over a period of 24 hours. If the volume of news is greater than the average of news published over the last 7 days, it would give you an indication about the quality of the sentiment score and how much trust you should have on it. e.g. if the sentient score is very positive but the confidence is low, you should be sceptical of the sentiment. In summary, the more sources and the more information, the more accurate the AI will be in providing its level of confidence.  

Hi Traders,

By popular demand, we wanted to share our top five most used tools and features that are provided to you for free in our client area.

These are a bit like my Top Five Tools for Traders, but these are a little different as they're all internal rather than other websites or companies. 

Here are 5 of the most popular tools (in order) our clients are loving:

#1 - Analyst Views by Trading Central. This is my personal favourite. You can view it in the hub now, download it and use it as an indicator on MT4 desktop (in "Downloads on Hub) or visit your "News" tab in MT4 where it's constantly updated too.

#2 - The Economic Calendar is a must too. Are you using this already? If you're trading and don't know what announcements are coming up, you could easily be blown away by a big move and have no idea why. My favourite is that it will show you the historical price impact of previous announcements. You can even save the future events as a calendar invite!

#3 - News Tab - Knowledge is power. You know that already. You might already have your own news sources which are cool, but with Fusion's news tab, you can create a personalised feed (e.g. only show me EURUSD) or see what's most popular for others. Don't be an uninformed trader.

#4 - Sentiment - I love the idea of knowing what the crowd is bullish or bearish on. What are people talking about? Why are they talking about it? Check out our post on why this is important.

#5 - Technical insight is excellent if you'd like to go into a deeper dive on technical analysis on Forex and Indices. I prefer these charts over MT4 truth be told and want to know short, medium and long term outlook for each trade I'm considering.

That's it for now. We've built these for you and believe they'll truly help you excel as a trader.

#6 – Historical and Live Spreads Tool - with this tool, you can see how spreads have fluctuated over time, as well as the current live spreads. This information can be incredibly valuable in helping you make informed decisions about when to enter and exit trades. No more surprises, no more hidden fees – just transparent, competitive pricing. Read our blog post to learn how spreads actually affect your trading costs. 

To start using these tools now, create a Fusion account.

Fusion Markets prides itself on its low-cost approach to trading, but have you ever wondered why access to low-cost execution is important and what part it might play in your long-term success as a trader?

 

You might not even link the two things together, and I can see why. After all, a few pips of spread, or dollars and cents of commission paid, is small potatoes when you are trading in tens of thousands of dollars worth of currencies and other instruments daily.

 

But not so fast because these costs make a difference in the long-term, and that is the timescale that Fusion wants to be your partner in the markets.

 

Let’s look at some numbers and imagine that you are a moderately active trader with a strategy that you deploy across five instruments daily. On average, you make 20 trades per day. Let’s call you Trader A. You have a friend who deals with another broker using a similar strategy, but they don’t offer Fusion Markets low commission rates. Let’s refer to them as Trader B.

 

You pay our low commission rate of USD 2.25 per trade whilst Trader B pays $5.00 per trade. You both trade 20 times a day, five days a week. That means that you, Trader A, pay $225 per week in commission while your friend, Trader B, pays $500 in commission per week. That’s $275 more than what you pay.

 

Now let’s scale that up...

 

Over a month, that’s a difference of around $1,100 commission, and over the course of the year, Trader B pays an additional $14,300 dollars more in commission than you for the same or similar trades.

 

That means that Trader B will pay away an astonishing $71,500 of additional commission over five years of this type of active trading.

 

Not only does Trader B pay those additional costs, he or she also “pays” the opportunity costs of not having that money available to them. Money that could have been saved or invested or that could have helped pay off the mortgage, the car loan or a nest egg for your kids that much quicker.

All that before we even consider the possibility of compound growth on that money over time.

 

Tighter spreads matter too.

 

Now not only do lower commissions benefit your trading and finances so do tighter spreads. After all, some brokers charge astronomical amounts in spreads.  

 

Spreads are the difference between the bid and ask prices in the market, the prices at which you can buy or sell a financial instrument like a currency pair or equity index.

 

Each time we buy or sell an instrument at the market price, we are said to be” crossing the spread” or if you prefer incurring the cost of spread in our trade.

 

The spread is seen as a cost because we have to make it back before our trade moves into profit.

 

Think of it like this: Instrument A is priced at 100-101. We can sell at 100 and buy at 101.

If we buy a unit of instrument A at 101, we incur an immediate running loss. That’s because our trade is valued at the price that we can sell the unit of instrument A for, and in this case, that’s 100.

 

In making the trade, we have incurred the spread as a cost. To make those costs back, we need to see the price of instrument A move up to 101-102 or higher. If it does that, it means that we now can sell our unit of instrument A at the price we paid for it. That is, we are now at breakeven on the trade.

 

And if the price of instrument A moves to 102-103, then we have a running profit on our trade because the bid price of Instrument A is now above our trade entry-level.

 

Spreads in FX trading may appear small but don’t forget that trade sizes are typically larger here.  Remember that a standard FX lot is US$100,000 of notional value.

 

What’s more, FX trading is leveraged, meaning that clients can gear up their account and at the maximum available leverage of 500:1 (30:1 if you're a retail client with ASIC), that means that a deposit of just US$ 2000 could control 10 FX lots or US$ 1,000,000 worth of a currency pair.

 

Even a small value like the spread in EURUSD grows pretty quickly when you multiply it by another 6 or 7 figure number. So, the difference between a 0.1-0.2 pip spread, that you typically find at Fusion Markets, in this most active of currency pairs, and a 1-2 pip price that you might well find elsewhere, quickly becomes material (in your head, you can do the math - 10-20x the figure is a LOT).  Our Historical and Live Spreads Tool is designed to allow you to see how spreads have changed historically, discover our average, minimum and maximum spreads and, consequently, make better informed trading decisions. 

 

Quite simply, the narrower or tighter that the spread you pay is, then the more chance you have of your trade moving into profit and doing so more quickly. Which, in turn, means more of your trades are potentially viable. Of course, you still have to do the leg work and get the direction of your trade right, but tighter spreads also mean that if you are wrong, and you cut or close the position. Then you are doing so at a more advantageous price, which can help keep your trading losses to a minimum.

 

Think of trading like an Olympic hurdle race. With a low-cost broker, you have a tiny hurdle to jump over in the form of lower costs. Your friend at Broker B has a giant hurdle he has to jump over every time he enters a trade. Who has the better chance of success here? Do you want to jump over a 1 ft hurdle or a 6 ft hurdle?

 

Successful trading is not a get rich quick scheme. It’s about finding and honing a style or system of trading that works for you and applying that to the markets over time. Successful traders often talk about slanting the odds of success in their favour, and they try to do this not just for the trade that’s in front of them now but for all of their trades during the months and years they are active in markets. Having a trading cost base that works in your favour can play a key part in this. It means the margin for error can be 10x lower than what your friend pays at Broker B.

So, isn't it time you stopped paying too much to trade?

When you start to learn about trading, you'll come across plenty of material about minimising risk and money management, because they're two of the most critical areas of the business. 

Learning to manage risk and preserve trading capital is fundamental to a successful trading journey. 

One area the literature focuses on is the use of stop losses. A stop loss is simply a price level beyond which you choose not to run an unprofitable or losing trade.

But for me, stop losses are one of the most misunderstood tools in a trader's arsenal, and I wanted to offer a different perspective than what is usually found in the research.  

I'll give you a hint; it's in the name!

Knowing your risk

It's important to know the risk you are taking on any given trade, this can be calculated by multiplying the distance of your stop loss, from the entry-level of your trade, by the notional size of your trade.  

In theory, this simple calculation determines the maximum risk or loss that you face on a given trade. I say in theory because that risk figure is not cast in stone.  

Firstly, if the stop loss you use on a trade is just a mental one, i.e. a figure that you have chosen, (but will watch rather than attach to an order), then it will be down to you to monitor price action and trade it. That's a sure recipe for looking like a maniac checking your platform or mobile app every second you get.

Systemise your process

Rather than rely on them being in front of the screen to close a trade (which in a 24/5 market is not that realistic), many traders will place a stop loss to an open position. This is essentially creating an instruction to close the position should the price of the underlying instrument reach a pre-set level.

In doing so, traders are systemising this part of their trading. On the face of it, that sounds like a good idea doesn't it? 

But what if that automated stop loss level was defining the loss you make on a trade and eating away at your trading capital, not protecting it?  

The use of a stop loss should be what its name suggests – the prevention of a loss, not the realisation of losses as 90% of traders currently use their SL for.  

Crowding together

Here's the thing. Traders of all sizes fall foul of "clustering" which means they place their stop losses in the same areas, at the same time.  

For example, at or around round numbers, (e.g. USDJPY 110) just above or just below a moving average or indeed close by the same support or resistance levels everyone else is keenly watching.  

The market is aware of this behaviour and is often on the lookout for these clusters of stop losses. When they are, it's known as a stop hunt.  

But what exactly does that mean? 

Well, a big bank (a price "Maker") might see on their books that they have a cluster of orders around 1.10 on EURUSD, and then be willing to commit large sums of capital to "hunting down" that stop loss level. They do this by moving the underlying price towards it, in a selfish way, to reward themselves, rather than because of natural order flow (and they wonder why they have bad reputations!).  

As an aside, a broker such as Fusion Markets, that typically services "retail" clients, e.g. mum and dad investors, often get accused of doing the same thing, despite the fact we are a price "Taker" not a price "Maker", and have no control over the prices coming through to you, as a client.  

Think about it if the market can find these groups of stop losses and trigger them, then that's easy money for the banks and traders who have the opposing view and positions.  

Remember that in FX trading there is a winner for every loser and vice versa. A successful trader endeavour's to be on the winning side of that relationship more often than not.

A different approach to stop losses

Are we saying then that you should trade without a stop loss? No, we are not! 

But what if we took a different approach to stop loss placement? Instead of lining up to provide a free lunch for the banks, what if we placed our stop losses above our entry price rather than below it?   

Of course, that means that we'd have to risk-manage our trades in a different way.

For example, employing less leverage and taking smaller positions relative to our account size. But that is really what we should be doing anyway. And of course, we would have to monitor performance closely in a trade's early stages, as we should.  

However, if the trade we have taken is the correct one, then our position will soon be on-side, and once we have a buffer between the current price and our entry-level. Then, our stop loss can be locking in profits rather than minimising (or realisation of) our losses.  

Trailing a stop-loss behind a profitable position is something of a holy grail in trading it's often talked about, but rarely seen in the markets. By not acting like the crowd, maybe we can turn the tables on the stop hunters.  

What are you waiting for? Why not stop your losses in the way they're supposed to be stopped?