Did you ever wonder why over 90% of traders lose their initial deposit in the first 6 months? What is the main reason for such a dreadful statistic? Greed and fear are the reasons. Greed leads to overtrading, as human nature is responsible for traders looking for a constant gain on a daily basis. The problem is that markets are not moving every day. Thus, it may be that for a specific period, ranges are dominating. When the price is in a range, it means that neither bulls nor bears are making money. If anything, they’ll try so hard to make the same amount as when the market is moving that they’ll end up overtrading. Overtrading is something that brokers love (due to the high level of commissions that are pouring in), and that traders should avoid at all costs. There is nothing more frustrating in a trader’s life than sticking to their guns regarding the direction the market will move in, but failing to resist due to overtrading. How does overtrading occurring? It has everything to do with the trading style, or with how the trader enters/exits the market.
Trading Styles
The aim of this article is to offer a glimpse into the basic trading styles, but this should be viewed only as a short introduction to the subject. Trading styles are so important to a trader’s success that it is worth mentioning much more about the subject, and we will do that later in our project. Trading styles define the money-management system that needs to in place, as well as the type of a trader one is. The time horizon is crucial for a trade to be profitable or not, based on the timeframe the analysis is based on, or the reason why the trade is taken in the first place. As a starting point, we need to acknowledge a difference between trading at market and trading with pending orders. Even the terminology gives us a clue about the risks involved: trading at market is riskier than trading with a pending order.
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At Market
Trading at market, literally, means simply clicking on a currency pair and buying at the current price. This is what “at market” means: at the current price.
In the example above, the EUR/USD currency pair was selected from the currency pairs list (this can be simply done by double-clicking on it) and the two implicit options are to “Sell by Market” (in red) or “Buy by Market” (in blue). If selected, any one of the two options represents trading “at market”. All brokers offer this possibility, and they execute the trading order in the blink of an eye. However, that is not 100% true! Depending on the type of the trading account and the broker, the actual price on the trade might be slightly different from the one that appears on the screen. There are a few reasons for this:
- The broker – If the broker offers only four-digit trading accounts (a feature that is typically associated with market makers), chances are that, when trading at market, you’ll get a lot of “re-quotations”. This means that the broker will not be able to open the trade every time you want to, at that specific level.
- The time of day – The moment in the day when such a trade is intended is important as well. If there is an important economic event, such as the Non-Farm Payrolls in the United States, or a press conference, volatility is rising, and trading at market is subject to quick changes in price levels.
The advantages of trading at market are fast execution and a quick exit if the trade is proving to be wrong. However, in the long run, trading at market is not as viable a strategy as trading with pending orders.
Trading with Pending Orders
Pending orders are orders to buy or sell from specific future levels. They imply planning, and this is always better when compared with trading at market. To have a plan, it means that either technical or fundamental factors were priced in, or both. Planning comes most likely with a defined risk, as well as with a clear target. There are multiple types of pending orders, which we will treat in the next article here on the trading academy. The aim of this article is to look at the potential reasons why traders use pending orders, and look at the advantages, if any, over trading at market. Pending orders are specifically useful when the technical analysis is made on the longer timeframes. Not all retail traders are trading for a living, and, as a matter of fact, almost everyone has a main day-to-day job. Why would you be interested in trading the Forex market, then? The reason is investment diversification, passion, love for finance, etc.; or simply, maybe a change in career is planned. These traders look over the weekend at the bigger picture, like the economic calendar for the week ahead, or maybe even a few weeks, and on the longer timeframes. When markets open, the trading plan goes into practice, with pending orders being placed. A pending order contains not only the entry level, but also the stop loss and take profit. After all, what can go wrong in a trade? If anything goes wrong, the stop loss would be hit. This is the reason why a stop loss order is placed, after all: to protect you from the market going against your direction. Using pending orders like this gives you a competitive advantage over traders who trade at market. First, pending orders leave little room for overtrading in the way that trading at market does. Trading at market is subject to emotional influence, depending on the state of a person at any one moment during the trading day. Sometimes we’re angry for a different reason, and this is reflected in the trading account, as trading is more aggressive and, most likely, at market, which results in overtrading. Sometimes, on the other hand, we’re too soft, and fail to trade a specific set-up accordingly. To avoid the typical ups and downs of human nature, pending orders should be used (more about Pending Orders here). Planning your trade and trading your plan are two things that are important for any successful trader. Forex trading should not transform a trader into a prisoner – a person who stays glued to the trading screens to find out the perfect entry and exit level. These can be found with proper planning, and technical analysis is the right tool for planning your trading set-ups.
Recommended Further Readings
- Forex Brokers Types – ECN or STP?
– What is ECN, STP, how do brokers deal with client’s orders, advantages, and disadvantages of the tw- types. - What Makes a Good Forex Broker?
– Things to consider when deciding what broker to trade with. What are the factors that weigh the most in the decision-making process? - Why Trading with a Regulated Forex Broker?
– What regulation for a brokerage house is ; why it is important; things to look for; how to check if the broker is telling the truth, etc. - Benefits of Mobile Forex Trading
– Pros and cons of mobile trading, highlighting the net benefits of it.
Other Educational Materials
- “Market vs. limit orders: the SuperDOT evidence on order submission strategy.” Harris, Lawrence, and Joel Hasbrouck. Journal of Financial and Quantitative analysis 31, no. 02 (1996): 213-231.
- Anatomy of a market failure: NYSE trading suspensions (1974–1988). Bhattacharya, U. and Spiegel, M., 1998. Journal of Business & Economic Statistics, 16(2), pp.216-226.
