Exchange Trading Methods
The methods of trading on the exchange largely depend on the types of trading that the trader adheres to.
The following trading methods are distinguished:
- Technical method
- Scalping method
- Trading on the intermarket spread
- Impulse Trading
- Arbitration Trading
- Automated trading
- Intuitive Trading
- Trading on the news
The technical method is based on technical analysis tools and indicators. All these tools were created and worked out over the years based on the analysis of price movements for a particular asset. Technical tools reflect historical patterns.
On the one hand, patterns are repeated and such repetitions over time reflect technical tools, on the other hand, the market is constantly evolving and changing. This suggests that the application of the technical method is not always effective and reasonable.
A good example of a changing market is the use of trading robots. All trading robots are configured and installed in accordance with the technical analysis tools. But any robot eventually begins to drain the trader’s money.
This suggests that despite the general historical patterns, the market is constantly changing and it does not always change in accordance with market patterns. He is moving in his own direction. Because of this, all technical indicators are not constant, they change, new indicators appear.
All new market changes are being analyzed. Based on this analysis, experts create new indicators that are effective for some time. Until the market changes again and they stop making profit. Therefore, a trader working with technical analysis tools needs to constantly improve and learn new tools. Otherwise, his knowledge will become obsolete and not so effective. As a result, the trader will begin to lose money.
The scalping method is used by traders who prefer short-term trading deals. Scalping is a type of short-term trading. During the day, the trader makes up to 100 transactions, simultaneously opening and closing several different positions. For scalping, technical analysis is not important. Neither the entry point to the position, nor the exit point, that is, the sale of the asset, matters. The trader does not wait and analyze them. The main thing for a trader is to “scalp the market”, that is, enter a position, fix his profit, so that the profit exceeds the trader’s expenses on the broker’s commission, and exit the position by selling the asset.
Profit with the scalping method is achieved solely due to the large volume of turnover of funds. Constantly opening and closing positions, the trader creates large trading volumes.
Trading on the intermarket spread
Trading on an intermarket spread requires a trader to have multiple accounts on different exchanges. Accordingly, the money should be in different accounts. A trader opens several interconnected positions on different exchanges for long and short terms. With this trading method, losses from one position are compensated by income from other positions.
Impulse trading is based on the principles that in the event of a price increase, it will continue to grow, and in the event of a fall, the price will continue its further decline. Analysis of suitable assets for trading is based on dynamic indicators. Impulse trading refers to high-risk trading methods.
Arbitrage trading refers to the types of trading on the intermarket spread. As well as in the case of trading on the intermarket spread, a trader needs to have several trading accounts opened on different exchanges. But if in the case of an intermarket spread, trading is carried out by different, albeit interrelated assets for different periods, then in the case of trading in arbitration, trading is carried out by the same asset almost simultaneously.
The fact is that for the same asset simultaneously at different exchanges there are different prices. Thus, having simultaneously open accounts on different exchanges, a trader can buy an asset on one exchange and immediately sell it on another exchange at a higher price.
Some experts attribute arbitrage trading to risk-free types of trading, because due to the difference in price, simultaneous purchase and sale of the same assets on different exchanges, the trader carries practically no markets.
However, in practice, trading in arbitrage requires a trader to have sufficiently large assets on trading accounts on various exchanges and large trading volumes.
For example, in order to buy Bitcoin on one exchange and simultaneously sell it on another exchange at a higher price, the account of a trader on a exchange with a higher price must have sufficiently large Bitcoin reserves in order to earn substantial funds on arbitration.
The most productive is arbitrage trading on cryptocurrency exchanges. On them, the price of the same asset may vary significantly.
In almost all markets, regardless of the trading methods used, the share of automated trading is growing. Automated trading is highlighted as a separate trading method, although it is present in all methods.
With the technical method, automated trading is actively used, since robots monitor market patterns and use indicators much more efficiently than humans.
When scalping at the conclusion of numerous trade transactions, the use of robots is also much more effective than with manual trading. A person cannot simultaneously track dozens of positions qualitatively. A robot can.
Trading on the intermarket spread is a rather complicated and complex type of trading, but even in this area robots are widely used that successfully track the positions most suitable for trading.
When trading on impulses, fairly simple dynamic indicators are used and such trading is ideal for using trading robots.
Trading in arbitration is also carried out mainly using trading robots. There are special robots created exclusively for the purpose of arbitration.
Thus, automated trading is not an independent method, but an integral part of existing trading methods.
Intuitive trading is opposed to automated trading and is based on the principles of crowd psychology. Psychologists noted that under the same circumstances, different people behave in a similar way. There is even such a section of psychology as the psychology of a trader (as well as the psychology of an investigator, the psychology of a criminal, the psychology of a teacher, and other sections and subsections of psychology).
Over the course of many years, experts have been analyzing the behavior of traders when changing market movements, how people behave in specific circumstances. Based on historical research and analysis, experts can predict people’s behavior in similar situations. Experienced traders who have spent many years on the market can predict in advance how their colleagues will behave.
Over time, traders no longer need any indicators, they begin to feel the market. They themselves are traders and they are driven by the same feelings and emotions as their competitors. Therefore, many experienced traders consider intuitive trading one of the most effective trading methods.
On the other hand, do not forget that over time, the share of manual trading in the market decreases sharply. Already now in many areas of the market automated trading prevails. Therefore, knowledge of the laws of psychology and the intuition of traders may not work.
It’s like with automated trading, over time, any robot begins to drain the trader’s money, as the market changes and the old settings and parameters stop working. But unlike a robot, human psychology is very flexible and is able to change and adjust over time depending on the mood of the market. Trader feels the market. A machine will never learn to feel it.
Trading on the news
Just like automated trading, trading on the news is opposed to intuitive trading. It is believed that to trade on the news you need knowledge, information that a robot can possess. Intuitive trading needs feelings. The crowd does not always follow logic. Not necessarily the crowd follows knowledge. Knowledge is not needed for intuitive trading.
As with other trading methods, when using news trading, automated trading can be used. There are special robots that track news. Traders know in advance when the news will be released and what asset it will affect, but they do not know its content.
That is, they do not know whether after the news release the price of the asset will rise or will it fall. Therefore, they open two opposite pending orders in advance of publishing the news. After the news release, they cancel the pending incorrect order and continue to trade on the correct one.
Thus, trading on the news is a fairly effective method, although this method requires the trader to have special knowledge and study the news.
Trade Regulation Methods
Both when trading on the Forex market and when trading on the stock market, the sale and purchase of real assets takes place, whether it is currency, securities, security obligations.
Therefore, states pay close attention to trade regulation. In the process of trading activities, quite stringent laws for regulating trade were formulated. Among these laws, there are laws aimed at fair trade, which protect the rights of bona fide entrepreneurs and traders and laws of state regulation, which are necessary for the implementation of state power functions of the state. The main of these laws are the rules of compliance with KYC and AML, that is, the mandatory verification of traders and compliance with anti-money laundering legislation.
Trading methods were formed by the customs of a trade of a country, and then in the process of development of the state, in order to adopt the binding character and protection of the state, the customs of trade were fixed in state norms.
One of the most famous collections of laws governing the customs of trade is the Civil Code. Each country has its own Civil Code. On the other hand, trade norms around the world are unified and in many countries are very similar.
The main goal of trade laws around the world is to protect the rights of bona fide traders from unscrupulous actions. Despite the general unification of trade laws around the world, there are countries that support trade with the most favorable legislation, and countries where all the rules are strictly regulated, and very stringent requirements apply to traders.
Trading methods are aimed at:
- The fight against market speculation,
- The fight against various frauds and dishonest trading methods that give some traders advantages over others, this includes unfair competition, commercial espionage, insider information,
- Combat unfair trading strategies.
Assets are traded on exchanges. States impose even stricter requirements on exchanges than on banks. Therefore, exchanges are trying on their sites to provide traders with the most regulated trading conditions.
That is, on exchanges during trading there should be a maximum order so that the rights of all participants are respected. Very stringent requirements are made for the participants themselves, since a narrow circle of professionals who know their job well and are interested in the result is much easier to control than a crowd that does not quite understand what it wants and does not have the necessary knowledge. The crowd is driven by emotions.
For this reason, very stringent requirements for education, the amount of capital are imposed on traders on exchanges. It is difficult to obtain a license to trade on the exchange, it is expensive. At the slightest violation, the trader may lose the license.
Since most traders do not have access to exchanges, traders trade through intermediaries, brokers, to whom they pay commission for accessing the market.
States control exchanges, exchanges control brokers. Also, the states themselves control the brokers by giving them licenses. Brokers control traders and monitor the legitimacy of transactions. Different states have different requirements for brokers. Typically, brokers work with those jurisdictions that are most democratic about traders and whose requirements are not so severe.
State imperious methods
State dominant regulatory methods as well as commercial regulatory methods are enshrined in laws. But if trading methods of regulation are needed to protect the rights of traders, they are unified in nature and are enshrined in the Civil Code, then the state itself needs government methods to exercise control over exchanges and traders.
In each country they are different. It depends on state policy. State imperious methods of regulation are enshrined in the Tax Code, in the Administrative Code, in the Criminal Code. State imperious methods consist of 2 parts: the norm itself and the punishment for its violation. Moreover, for violation of one norm, the punishment can be both in the Tax Code, and in the Administrative Code, and in the Criminal Code, depending on the fault of the offender.
Exchanges, as well as brokers, should ensure that there are no trade disruptions on their sites. States need to control traders, it is necessary that even bona fide traders pay taxes.
It is difficult for any state to control tens and even hundreds of thousands of small traders. It is much easier to control one broker of an intermediary and, on pain of losing his license, oblige the intermediary to collect all the information about traders trading on his site. This is exactly what almost all states do.
In return for taxes paid, traders receive security and protection from the state. Compliance with trade rules is controlled not only by brokers and exchanges, but also by the state. If the exchange or broker sees that some trader violates the rules of the exchange, then the exchange and the broker inform state regulators about the violations and the guilty persons are deprived of their licenses and trading rights. If the trader is an individual, he may even be subject to criminal liability, and in many countries of the world criminal liability is also imposed on legal entities.
Thus, the observance by trade of the rules of fair trade is guaranteed by the state mechanism of coercion and imposition of liability on the violator.
From a practical point of view, the entire mechanism of state regulation means that a trader must trade through a broker licensed by the regulator and pay taxes on his income. At the same time, the protection of the rights of the trader from dishonest actions of other persons is guaranteed by the mechanism of state coercion.
If the trader feels that the broker is violating his rights, he can complain about the broker to the regulator that issued the license, and the regulator will already check the broker. For this reason, it is very important for the trader that the broker with whom he works also has a license issued by the local regulator. Regulators are usually authorized to consider only complaints from their citizens.