Forex Trading Tips: The Value of Price

Why Is This Still Legal?

Currency markets continue to churn with everyone clueless as to how our economic future will turn out. As unemployment lines grow ever longer and the sense of dread is spreading from Wall Street to Main Street I would like to ask just one question. Why are over the counter markets still legal?

Financial markets, like healthcare cannot exist without supervision. Finance like medicine is an inelastic good. We have no choice in the matter. Short of keeping our cash in a mattress, none of us can exist without financial services just as none of us can survive without medical care. In no advanced industrialized nation would we ever consider surrendering our body to the care and surgery of an unlicensed, unregulated quack, but we don’t even think twice about doing so with our investment capital.

Perhaps the fear of rigid, bureaucratic control keeps us from considering the regulatory option but financial markets do not have to devolve into a some nightmare version of the DMV or the Post Office in order to be safe yet flexible. They can still be highly competitive and productive as long as they are simply exchange based.

A centralized exchange eliminates a series of calamitous costs of over the counter markets –
secrecy, counter party risk and outright fraud. On a centralized exchange AIG, Lehman, Bear Sterns would have never been able to cheat they way they did, by putting on trades for which they lacked proper capital requirements.

In conducting the autopsy of those firms, an alphabet soup of derivative products from MBSs, to CDOs to CDSs were singled out as the culprits for the collapse. But those securities are actually useful gambling tools designed to trade and hedge risk. At their core they are no different than other speculative products such as options or futures contracts. The problem is that all of them were traded over the counter, away from the oversight of a centralized exchange which would have maintained strict margin enforcement and long ago would have forced AIG, Bear and Lehman to liquidate their positions saving the US taxpayers a trillion of dollars of unnecessary debt as we try to clean up the mess.

Everyone has a right to gamble, but with that freedom comes responsibility. In order for speculative markets to work effectively, all the other players must know that you are good for the money. A centralized exchange helps enforce that key function. An over the counter market does not, and the end result is a complete breakdown of trust and cessation of all economic activity such as we saw occur in October.

So why do these over the counter markets still exist? Why do all of the major banks still control this multi-trillion dollar game acting as primary dealers of these securities while continuing to put our whole civilization at risk? To paraphrase Rick Santelli – President Obama are you listening?

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————--The Value of Price—————-

This weeks video embedded below focuses on how I try to find exploitable opportunities in currency market. As many of you know I always trigger fundamentally but enter trades technically. However irrespective of whether you trade charts or data there is one common truth that unites us all.

Last week-end at the New York Traders show I sat in on a panel with an old colleague of mine Mike Bahgdady from Online traders Academy. Mike has been in the business longer than most us have been born and has traded every speculative instrument imaginable. In response to one of the questions from the audience Mike made the following point, “Regardless of what you use for analysis,” he said,”don’t ever forget you are always trading price, not value.”

This was a simple but incredibly important observation, and one I thought worth repeating here. We are not investors. We are traders. We do not get paid for the accuracy of our analysis, only for the accuracy of our entries and exits.

Trading is and always will be about getting the price action right. Once you understand that, losing trades matter less and less. It becomes natural to accept that your analytics may be accurate but the price action may not always confirm them. Instead of fighting the tape, by insisting that you “know” that a currency pair should fall for such and such reason, and endlessly repeat your trade getting stopped every time, you can calmly walk away to trade another day.

By focusing on price rather than value, you can develop a clinical, detached attitude toward your trades and avoid the single greatest sin of most speculators -- repetitive fighting of the tape which almost always ends in ruin and tears. So when you trade remember its nothing personal -- its always about price not value.

Now on to this week’s video

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