In this episode of Truth About FX, Walter digs into the advantages and disadvantages between swing trading and day trading. According to him, the success of your trades — and whether you use a broker or not — depends on the movement of the market and when your trades are placed and executed.
You will also find out here about two groups — and which one you might belong — and more about the human psychology that affects your biases.
Download (Duration: 06:22 / 7.28 MB)
In This Episode:
00:35 – face the fear
01:38 – market maker
03:35 – blindsided
05:29 – get addicted
Tweetables:
Your set-up and rules should depend on the timeframe [Click To Tweet].
Do you reduce your position size? [Click To Tweet].
Risk is what makes or breaks any system. [Click To Tweet].
Announcer: Sometimes, forex trading is a wild and wooly place to be. That’s why Hugh is here, to post your questions to Walter, the naked forex guy. Hugh’s got questions and Walter’s got the answers. Here at the Truth About FX Podcast.
Hugh: Hi, Walter. Somebody contacted me, viewed my blog, and they were asking you to explain the benefits and risk of swing trading vs day trading. Their second question is, how do you face the fear of currency meltdown?
Like you mentioned, like Francogeddon or Brexit or something like that. I guess, two questions.
Walter: Yeah, right. Great questions, by the way, these are excellent. Here is the way to look at this. If your broker is matching up orders to the true forex market so, you have a retail forex broker and they are matching up orders to the real market like FXCM or whatever.
If you’ve got a broker that claims STP or ECN and they are telling you, “Look, we’re legit,” and all that, you must know — and everyone should know now based on Francogeddon — that the weakness in that model is if the market moves extremely fast and their system cannot execute trades quick enough from their platform to the interbank market which is, essentially, what caught FXCM. Then, you must know that that is a risk.
I am not suggesting — like if you are a scalper — I am not suggesting that you should go and trade with the market maker but know that the market maker has the advantage here because the market maker does not have that risk. In fact, if you look at some of the market makers on Francogeddon, what they’ll you is that they made money that day.
FXCM goes out in business. Essentially, they are liquid and then the loan sharks came in and save them but, that is the difference between the market maker and a broker who’s trying to be honest and say, “Look, everyone’s in group A” — because most of the market makers they have group A and group B.
Group A are the traders that make money and the group B are the traders that do not make money. Everyone gets put in group B until proven otherwise, basically. They do not really care that much about you if you are in group B.
If you are group A, they do and they will edge you and make sure that you do not send them bankrupt. The thing that I want to get clear here is that things like Brexit, that is totally in your control.
Leading up to Brexit, I had a trade on SGD/USD and a trade on GBP/SGD. Now, I exit both of those trades that are leading up. If I had left my trade in the SGD/USD trade, I would’ve hit — I have 3 targets I hit target 1 and then I get out of the trade — I would’ve hit target 2 leading up to Brexit and then it would’ve just gone [0254 inaudible] gaps against me and will probably would’ve lost quite a bit on that by the time my stop was executed.
Now, the GBP/SGD was the opposite. If I have left that trade in and, let’s say, I removed my profit target because I knew there was potential of something wild happening with the GBP, that would’ve probably been the best trade of my life.
You know what I mean? That is the kind of thing that happens. So, leading up to Brexit, you knew that there is something possible to happen. You knew that your brokers were scared and they changing the merging world and all that.
Some of these you can see but there are ones like the black swan, like the Swiss National Bank thing, and the Francogeddon, that was just blindsided everyone except for the insiders that may have a lot of money on that trade.
The people knew that was going to happen because there was huge bets on the options market on that. Some people knew, obviously, because it leaked but the point is you control what kind of broker you deal with.
I think that the number one thing, if you are worried about another black swan, I would say remember that the market maker has the advantage. They can survive these things more easily in most cases than the ECNs or STPs. That is something to keep in mind.
The second part of the question — which you rightly say there is a two part question here — is what is the benefit of swing trading vs day trading?
Now, the subtext here — I am reading through the lines and saying — it sounds like this trader is trying to get me to say you should be in and out. You should just scalp and be day trader so that your flat, right? That is definitely an advantage.
Or, you close at your trade so you don’t get gapped on the weekend or whatever. I get that and that is cool. I understand that but, no. Some people are going to point to that and say that is such an advantage. I do not want a whole swing trade for 17 days and this and that and blah, blah. I do not want get gapped. I do not want Francogeddon to get me.
That is cool. I understand that thinking but here is the thing. I believe the difficulties and the pitfalls of trading the lower timeframes charts for most traders, especially if you are new to this, far outweigh the advantages of being flat over the weekend and when you are sleeping and all that.
In other words, there are things that happen in your brain when you trade the lower timeframes that do not happen when you trade the 8-hour or the daily or the weekly charts.
You are really kind of fighting your biology, is what I am saying. We are not build to make profits easily and our brains get addicted to the lower timeframe trading just as we get addicted to drugs and gambling and all those other things.
You can say, “I do not have any addictive personality.” Well, okay that is fine. Then, why are you trying to trade these lower timeframe charts because it is just like playing the video games in Las Vegas where you put, where you’re playing the video poker and all that.
It is the exact same thing so that is my point and I understand some people are going to argue, “Look, I am going to be flat. I want to get in and out.” That is cool but it is probably only going to be beneficial for the trader who is very good at setting themselves in the right mind frame and probably has a lot of years of experience. That is my take.
Hugh: Okay, cool. A lot of great points there. Thanks.
Walter: Thanks.
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