This is a topic I revisit periodically because I think the ways that online forex traders interact with their charts raise all kinds of important issues in trading discipline and execution. First off, I should state my own bias: I look at charts every day, primarily a candlestick / moving average / Bollinger Band combination, but I don't make trading decisions based on them. They're fun to look at, always fascinating, but for me, also dangerous. My worst trading decisions were all made based on charts because, as I've written before, they can be very deceptive. On the other hand, some of my best trading ideas came from looking at charts; however, their development and execution all took place on spreadsheets. In fact, all my current trades are identified by equations run through an Excel spreadsheet, and I could spend my entire day without looking at a chart once and it wouldn't affect my trading activity. I'd probably just get a little bored without any pretty candlesticks to look at.
So that's the background for the thought experiment I came up with. (In case you're wondering what I mean by "thought experiment," here's an excerpt from the Wikipedia definition: "A thought experiment in the broadest sense is the use of an imagined scenario to help us understand the way things really are. The understanding comes through reflection on the situation...Thought experiments are well-structured hypothetical questions that employ 'What if?' reasoning.")
Now here's my "What if" question: What if two traders of similar experience and temperament traded the same currency pair using exactly the same trading indicators for exactly the same period. However, one trader makes all his trading decisions based on the indicators depicted on a chart. The other trader doesn't look at a chart once, but responds to the same signals identified by equations in an Excel sheet or comparable software. After an initial trial period, the traders would then switch places and trade using the other system for the same period of time. This way both traders would have used both systems, providing a more balanced set of data to draw conclusions from.
At the end of these test periods, what would the trading results look like? Would the charts have enabled the traders to make decisions with better market context and understanding of the larger trends at work...or would they have led to confusion, indecision, and losses as the traders got caught by deceptive patterns, jumped to conclusions about where an indicator was heading, or delayed their trades because of contradictory visual cues?
And over at the chart-free trading desk, would the traders have benefited from the strict Yes/No answers this more mechanical system would generate? Would they place their trades more precisely and exit them with more discipline and less second-guessing? Or would they have gotten bored by the relative lack of discretion allowed them, along with the absence of interesting visuals, and gotten sloppier in their trading as a result? Or maybe during the stress of a losing streak, they'd have begun doubting the integrity of the system without a chart to reassure them that their indicators were valid.
Of course, the ultimate deciding factor would be the total profits (or losses) resulting from each system. So which would win? You can probably figure out my answer - feel free to leave yours in the comments below!
Ask: Price at which broker/dealer is willing to sell. Same as "Offer". For example, if EUR/USD is quoted at 1.1850/1.1854, the 1.1854 is the "Ask" or "Offered" price.
Bid: Price at which broker/dealer is willing to buy. For example, if EUR/USD is quoted at 1.1850/1.1854, the 1.1850 is the "Bid" price.
Bid/Ask Spread (or "Spread"): The distance, usually in pips, between the Bid and Ask price. A tighter spread is better for the trader.
Cost of Carry (also "Interest" or "Premium"): The cost, often quoted in terms of dollars or pips per day, of holding an open position.
Currency Futures: Futures contracts traded on an exchange, most typically the Chicago Mercantile Exchange ("CME"). Always quoted in terms of the currency value with respect to the US Dollar. Parameters of the futures contract are standardized by the exchange.
Drawdown: The magnitude of a decline in account value, either in percentage or dollar terms, as measured from peak to subsequent trough. For example, if a trader's account increased in value from $10,000 to $20,000, then dropped to $15,000, then increased again to $25,000, that trader would have had a maximum drawdown of $5,000 (incurred when the account declined from $20,000 to $15,000) even though that trader's account was never in a loss position from inception.
EBS: "Electronic Brokerage System", the electronic system on which major banks trade with each other. This is considered to be the most definitive indicator of prices at which currencies are "really" trading, at least for EUR/USD and USD/JPY.
Fundamental Analysis: Macro or strategic assessments of where a currency should be trading based on any criteria but the price action itself. These criteria often include the economic condition of the country that the currency represents, monetary policy, and other "fundamental" elements.
Leverage: The relationship between the notional contract value and the margin required to trade. For example, if the notional amount traded (also referred to as "lot size" or "contract value") is $100,000 dollars and the required margin is $2,000, the trader can trade with 50 times leverage ($100,000/$2,000); or "50:1" leverage. Leverage is the inverse of the percentage margin requirement.
Limit: An order to buy at a specified price when the market moves down to that price, or to sell at a specified price when the market moves up to that price.
Liquidity: A function of volume and activity in a market. It is the efficiency and cost effectiveness with which positions can be traded and orders executed. A more liquid market will provide more frequent price quotes at a smaller bid/ask spread.
Long: A market position that has been bought. It will generate profits as the market moves up and losses as the market moves down. For example, if you bought Euros, you will be "long" Euros.
Margin: The amount of funds required in a clients account in order to open a position or to maintain an open position. The percentage of the contract value required as margin is inversely related to the leverage.
Margin Call: A requirement by the broker to deposit more funds in order to maintain an open position.
Market Order: An order to buy at the current Ask price.
Offer: Price at which broker/dealer is willing to sell. Same as "Ask".
Pip: The smallest price increment in a currency. Often referred to as "ticks" in the futures markets. For example, in EURUSD, a move from .9015 to .9016 is one pip. In USDJPY, a move from 128.51 to 128.52 is one pip.
Premium (also "Interest" or "Cost of Carry" or "Roll"): The cost, often quoted in terms of dollars or pips per day, of holding an open position.
Short: A market position that has been sold. It will generate losses as the market moves up and profits as the market moves down. For example, if you sold Euros, you will be "short" Euros.
Spot Foreign Exchange: Often referred to as the "interbank" market. Refers to currencies traded between two counterparties for "spot" or current delivery rather than future delivery. Generally more liquid and widely traded than currency futures, particularly by institutions and professional money managers.
Stop: An order to buy at the market only when the market moves up to a specific price, or to sell at the market only when the market moves down to a specific price. For example, if EUR/USD is trading at around 1.1850, you could place a stop order to buy at 1.1870. This order would be filled only if the market moved up to 1.1870 or higher.