This article asks the question: what does the active retail trader in derivatives actually need in intelligence and risk management tools in order to achieve their trading objectives, as opposed to what is actually provided by the generic CFD-FX margin broker?
It is important to highlighting the gap in both the knowledge and tools that are required for the retail trader to create and meet their trading objectives and what is available. The solution: what next generation trading platform looks like, so that the active trader can create and meet their unique trading objectives.
Most FX broker platforms offer the following headline services on their webpage:
- Instrument universe
- Trading platform choices
- Spread and leverage options across instruments and accounts
- Education, news, research blogs/insights
- Charting and technical analysis tools
- API for data and automated trading
Most FX broker platforms offer these widely accepted tools and education programs for active retail traders. There is little differentiation or edge for a trader in the main FX broker platform offerings because, if it is available to everyone, then by definition there is no edge as it will be provided by all.
Retail traders have many choices, but they are all standardised off the shelf products made available through or external to the broker platforms. The following is a commentary on what are the main risk management tools available for derivative trading, provided by the CFD-FX broker on their platform, and what actually is needed by the active trader to meet their own trading objectives.
The following is a commentary on what are the main risk management tools available for derivative trading, provided by the CFD-FX broker on their platform, and what actually is needed by the active trader to meet their own trading objectives.
What the retail trader gets
The appropriate leverage for the trade is not generally addressed, as it is assumed to be the required margin to execute the trade, and as standard 100:1 or 200:1 or even 500:1 – the choice is left to the retail trader in the account selection or standard leverage.
Leverage is a material factor in trade performance, in whether the trade is profitable (achieving price targets), and whether the actual trade as structured is ‘survivable’, i.e. no margin call, stop loss, to achieving the trade objective.
It is not generally known that the use of leverage can be dynamic – it can be used to both reduce the chance of margin call (reduce the leverage when entering the trade) and maximize the returns when the trade is in the money.
- Adopting a dynamic methodology in reducing and increasing leverage through the trade cycle is not discussed, nor are there tools (calculators) to help the trader to effectively manage the risks within the trade cycle. Tools related to creating and monitoring a cash buffer (above the required or minimum margin) that ensures that the exposure won’t be stopped out before the targeted exit but can be monitored and managed to maximize the ‘safe’ leverage to maximize returns.
- There is nothing worse than having the right trade but being stopped out prior, and the selected leverage plays a significant role in the time to stress of the margin call.
What the retail trader needs
If you define the ‘optimal’ leverage as the safe leverage for the exposure (trade) at a point in time, so as not to face a margin call and yet still maximize the return then you need to know the ‘cash buffer’ or ‘drawdown capital’ required to support the maximum drawdown over the course of the trade cycle.
Call it the ‘no margin call leverage’ which will change through time as the trade progresses towards its exit price.
- The process is to reduce the exposure to margin call with a ‘cash buffer’ to the required margin or even minimum margin at the start of the trade
- To then progress to the maximum leverage through time to the exit price: using leverage as it should be, to maximize returns while staying in the profitable trade
- And not as a one-dimensional static tool
This is a very broad title, so we will break the discussion into several segments-categories related to the tools used in setting up the trade and in the prediction of the price direction:
- Technical analysis and charting tools
- The price structure of the instrument: momentum, mean reverting or random
- When the price structure is about to change direction-regime
- Automated trading programs
What the active retail trader gets
Most FX margin brokers offer the standard charting and technical analysis tools. All these tools are freely available to retail traders either on the broker platform, purchased or subscribed via a third-party provider.
Technical analysis will fail for many reasons, but one main factor is when the market price structure-regime of the instrument changes from its current state to a new state. This includes momentum to mean reversion or random, when there is no way to tell what the current state is nor if it has changed to anew state in advance:
- Technical analysis tools fail to clarify what is the current price structure-regime and when the price structure-regime has changed, or about to change = so trading insights or tools designed for mean reverting price regimes will fail when the price structure-regime moves to a momentum or random regime
- No technical analysis tool can tell the trader when the current price structure-regime is about to change: that is if the price structure is momentum based (trending) but is about to change to a mean reversion or random price structure (regime). This means ahead in time (RSI based technical tools do not tell the trader what the price regime is, only that the instruments price is overbought or oversold).
Automated trading programs have gained traction in broker offerings, both to allow greater coverage of the trade cycle in terms of both the number of instruments and duration of the trade cycle. This is true as the programs can work day 24/5 and 24/7 until switched off, running on pre-set formalised rules.
Platform offerings also allow the novice trader to be able to create and execute automated programs of their own design (no coding required) and even back test them. Quantopian is a platform for back testing and various platforms that either offer coding services on trade ideas or programs that allow the creation of trading rules.
Again, the main fault with automated trading programs are that they work until they don’t, and more specifically, they are designed for specific market price regimes. For example trending, random, or mean reversion, and when these price regimes are about to change, then so does the earnings tail of the trading program.
What the active retail trader needs to meet their own trading objectives
Retail traders require trade analysis stops with the current price that projects the probable future price based on either volume-based analysis or historical price patterns. Additionally, traders as benefit from the advent of machine learning pattern matching or factor-based modeling.
- Now you also have sentiment or unstructured price data analysis (packaged as AI)
Within the market regime and price structure there are 5 basic projected price paths:
- Momentum-trending LONG or SHORT,
- Mean reverting LONG or SHORT or
- Trending simply means, as a probability the next price will be in the same direction as the most recent prices direction
- Mean reversion means the next price is most likely to be in the opposite direction to the previous prices direction
What a trader would want to know (e.g. the missing piece of the puzzle) is what is the next price or the direction of the next series of prices from the current spot price:
The holy grail of trading requires three pieces of the puzzle for what is still the mystery:
- The market structure (is the instrument price path moving in a trending +/- or mean reverting +/- or random pattern), and
- The forward price path, or where the price will be over the next series of time windows [(rom 1 minute to 24 hours and onwards)
- And when the current price path is about to change, from say moving up in a persistent momentum structure to a persistent short price structure
If this knowledge is known, then it certainly is not available on any retail broker platform. Rather what is offered and what can only be offered is off the shelf technical-charting programs and proprietary trading signals, whether wrapped around discretionary trading or automated programs.
And so, without this particular piece of information (intelligence), the retail traders tend not to achieve their trading objectives – it is a series of battles within a long war that inevitably leads to financial losses.
If one were to look at each CFD-FX broker’s platform as an ecosystem for active traders to utilise their own knowledge and tools, as well as the tools provided by the broker, we see a reasonably standard offering in which all the tools that are available to traders are offered or provided.
All in all, with all these resources, including education programs, it is a wonder why still the majority of retail traders in the aggregate do not achieve their trading objectives (to put it nicely) and so why most FX margin brokers are of the market maker model.
Solution as a platform
With this in mind, ML^2 created the next generation+ derivative trading platform designed to offer ALL the tools that a retail active derivative trader needs to achieve their trading objectives. Not singular tools but an integrated program that offers a suite of 45 and more tools that cover off leverage and market intelligence, portfolio construction.
This includes monitoring within automated and discretionary trading programs across multiple time windows from 1 minute out to days, weeks, or even months.
Welcome to the “ML^2 ecosystem”
The ML^2 platform provides all the required tools needed by the trader in order from them to create and then achieve their trade objectives:
- What the price structure is for each selected financial instrument (momentum +/-, mean reverting +/- and random price regimes)
- The time duration of this price regime
- Whether the market price will close higher or lower in the selected forward time windows
- The high, low and close prices in each time window
- when the current price structure will change, ahead in time (forewarning of imminent change in price regime)
- Will the price increase or decrease its volatility?
The traders ‘edge’ is in the ML^2 algorithms and tools:
The ability to define the current market price structure (regime), the forward market price structure and when the market price structure is about to change into a new known price structure:
- It is the old adage, if the trader knew what the forward price will be in any time window, then they know all that is required to achieve their trading objectives
- ML^2 Core Structure index (CSi) algorithms do 1 thing and the one thing very well: they signal where the next price will be through a series of forward time windows under any market price regime and all market conditions
This analysis can be applied to outright directional trades, statistical arbitrage, as well as option arbitrage, PAIRs trading, portfolio construction and capital protection (hedging). The ML^2 platform tools will tell the trader what the price trend is, how long it will last, when the trend will change BEFORE the price trend changes and then what the new price trend will be: all within time windows ranging from 1 minute to 24 hours to weeks, and months.
The ML^2 platform is not just a signal generation service, although it offers a very unique price signal program. The platform offers more than 40 unique tools that can support the active trader in building their own trading programs to achieve their own unique trading objectives.
Managedleverage.com The next generation+ platform ML^2 is in a Beta testing program [after 5 years in testing] and will be available in May 2018 for active derivative traders to test, prior to the sale of membership tokens via an ICO.
The ML^2 platform is in a Beta testing program (after 5 years in testing) and will be available in May 2018 for active derivative traders to test, prior to the sale of membership tokens via an ICO.
The ML token (only 1 is needed) creates perpetual access rights to the ML^2 platform (current and all future tools). The tokens will be offered globally and there will be a restricted number of tokens, which will never to be increased, and managed by a smart contract on the Ethereum blockchain
Furthermore, ML will manage its own Decentralised Exchange to create an enclosed ecosystem for the restricted number of active retail traders. The purchase of the token in the ICO is the only cost to its owner – there are no further fees no costs to access and trade through the ML^2 platform. Managed Leverage is commencing pre ICO on the 7th May 2018 with a limited token release.
The ML platform is designed around 45+ tools that sit within a series of modules:
- Leverage intelligence tools
- Market intelligence tools
- Portfolio construction and monitoring tools
- Intra-day trading programs
- Fully automated or hybrid trading platforms
- All major asset classes (10,000 + instruments) including crypto currencies
The time windows are set from 1 minute out to 15, 30, 60 minutes and 24 hours (EoD) price feeds to suite most trading styles – intraday out to months.
So to reflect on the title: most FX margin platforms offer all the tools available but they are limited in their effectiveness – as measured by the percentage or sheer number of global retail traders not achieving their trading objectives.
Broker platforms, for no fault of their own, fail to provide the right tools needed, but they do provide the tools that are currently available. The ML^2 platform achieves this benchmark [providing the tools that are required, either as primary tools or as secondary tools. The platform can navigate the retail trader to create and own their trading program, to achieve their unique own trading objectives.
Managed Leverage is commencing pre ICO on the 7th May 2018 with a limited token release, access your pre ICO tokens at managedleverage2ico.com
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