The principles of working in financial markets

          It is propose to examine the simplest sample. Let us assume, you used to have a new laptop that unexpectedly broke down, no matter for what reason. You received the FIRST EXTERNAL SIGNAL. Having your boss reasonably remarked that if you fail to submit a report (that is saved on the broken laptop), you will be dismissed. Now you received the SECOND EXTERNAL SIGNAL. At last, while talking to your colleague, you realized that there are a lot of candidates for this job and it is better go to a store and buy a new laptop. You received the THIRD EXTERNAL SIGNAL. After complicated processing and analysis of received signals, we take action, i.e. we take money and go to the shop to buy a new laptop. There are 3 results of this action:

          PIC. 1

Zero result: you had certain amount of money and you just bought what you wanted.

Profit: you managed to buy a laptop at a lower price. Thus, you have balance formed.

Loss: you were brought to the most expensive store and bought the same goods, but three times expensive.

          One more sample of everyday life. Your family needs to go abroad. That requires foreign currency (dollars, euros, etc.). You receive the FIRST EXTERNAL SIGNAL. Currency can be bought in a bank or currency exchanges. You have a notion of selling rate range. You receive the SECOND EXTERNAL SIGNAL. Finally, after walking along the nearby streets, you find the currency exchange with best selling rate and receive the THIRD EXTERNAL SIGNAL. After processing and analysis of received signals, we take action, i.e. we buy necessary currency. There are 3 results of this action:

          PIC. 2

Zero result: you had certain amount of money and you just bought the necessary amount of foreign currency.

Profit: you managed to buy currency at the best selling rate.

Loss: you bought currency at the highest (unprofitable) rate , and an exchange loss was generated. Naturally, the best option would be to act according to “Profit” or “Zero Result” option. 

         So, you returned from the trip. There is foreign currency balance. Why should it be kept? Perhaps, it would be better to exchange it into national currency. It is the FIRST EXTERNAL SIGNAL. You can have the currency exchanged, again, in a bank or currency exchange. You have a notion of buying rate range of the currency that you have. You receive the SECOND EXTERNAL SIGNAL. Finally, after walking along the nearby streets, you find the currency exchange with best buying rate and receive the THIRD EXTERNAL SIGNAL. After processing and analysis of received signals, we take action, i.e. we sell the balance of the currency. There are 3 results of this action:

          PIC. 3

Zero result: You exchange your foreign currency balance at a one-to-one rate simply having your money back.

Profit: you managed to sell currency at the best buying rate in a bank or currency exchange.

Loss: during your trip, the currency decreased in value, as a result you sold the currency at the lowest (unprofitable for you) selling rate that caused an exchange loss.

We use the the simplest trading system relying on common sense and experience. You just do what is beneficial to you.

          PIC. 4

          The simplest “model” of making a profit. The first external signal: a few months ago somebody told you that if you buy certain amount of merchandise, you will be able to sell it much more expensively. The second external signal: you has found out that the current merchandise price, that you are intending to work with, is in range between points 1 (a) – 2 (b). You analyze information and decide to act. Having raised capital, you bought merchandise. You made this with EXPECTATIONS, that merchandise cost would rise and you would be able to sell it and earn a profit. However, nobody guaranteed 100 % commercial success. It is a miracle, everything worked out! You made a successful deal using M-G-M' form of trade (money is used to buy a goods which is resold to obtain a larger sum of money).

          PIC. 5

          Let us consider the second form. In this case, merchandise price, that you sell, fluctuate within some horizontal corridor, i.e. the price neither increases nor decreases for an exact timeframe. You need the buy products as closer as possible to the boundary of minimal price and sell at a higher price, i.e. closer to the boundary of maximum price.

          PIC. 6

         This one is more complicated, but quite easy for understanding. The third “model” of making a profit. In this case, the price is falling. You need merchandise. As we can recollect, the price is falling, we have the Second external signal – point 2 (b) that lies below point (0). Thus, the product price in point 2 (b) is 500$ and it's not profitable for us to buy it. We analyze information and decide to wait until price decreases. Please pay attention that there is no guarantee and we act according to our expectations. Price in point 3 (c) falls to 200$ per 10 items of merchandise, that we buy and the difference (500-200=300) is our profit. Here, G-M-G (a goods is sold for money, which buys another, different goods with an equal or higher value) form has been used.

          Certainly, the last 3 pictures will have some associations for you. These are, graphically presented, the most simplest “models” of making a profit in a small business. Let's try to understand what is goods when working in financial market and how to make a profit with this goods. Imagine that you are going to the shop to buy, let's say, a television. In a shop window you can see a price tag next to an electronic box that has a price of the goods, i.e. of the television. It's simple, you see goods and their price. Now, imagine Forex as a huge online currency retailer. Take a look at the shop windows above, that you see everyday. There is the symbol GBP/USD at the top and numbers 2,0029 / 2,0032  below text “Instant execution”. In this case GBP (pound sterling) is playing the role of a television in the example above, which price is 1,2716 / 1,2718 USD (American dollar). Unlike price tags in an ordinary shop, Forex price has a view 1,2716 / 1,2718 since here we are dealing with a mixture of an online retailer and currency exchange (banks and currency exchanges always indicate two prices). The first one is called Bid=1,216. That is the highest price at which you open deals “Sell”. The second one is called Ask=1,218. That is the minimum price a seller wants to receive and at which you open deals “Buy”. 1,1276 – 1,278 =0,0002 (or two points), the difference between Bid and Ask is called Spread. Let's have a look at more examples, such as USD\CAD, EUR\JPY, GBP\CHF. There are no fundamental differences from the example above. There are 3 currencies USD (American dollar), EUR (euro) and GBP (pound sterling) are playing the role of commodities, which prices are indicated with currency equivalents, accordingly CAD (Canadian dollar), JPY (Yen) and CHF (Swiss Franc).

          PIC. 7-9

         Take pictures 4-6 and substitute abstract notion of "merchandise" with financial tools, i.e. sterling pound from GBP/USD pair. Remember, that we receive profit, and nothing else, currency equivalent, i.e. in USD.

          Summary

1. Everyone uses the simplest trading systems relying on common sense and experience. Receiving external signals from the environment and doing what is beneficial for us.

2. Principles of functioning of trading systems and signal reception don't have fundamental differences both in large commercial companies and in a family.

3. In our opinion, the aforementioned principles are fully applied to functioning of all financial markets.