Why you need to have rules in your trading careerHello,
The importance of rules cannot be underestimated in any business. This must not be different in trading/investing since it must be viewed at all times as a business.
Below are my rules as a wave trader. Wave trading is a trading strategy that combines technical analysis with Elliott Wave Theory to identify and predict future market movements. This approach involves analyzing market price patterns to understand the cyclical nature of market trends and capitalize on these patterns for trading opportunities. Below is an example of how markets move in waves
Rules are very important (Our trading rules)
Identify Impulse & Correction
The first step in trading is to identify the impulse and correction phases in the market. An impulse phase is characterized by strong, directional price movement, indicating a clear trend. Corrections, on the other hand, are smaller, counter-trend movements that typically follow an impulse. By recognizing these phases, you can better understand the market's structure and prepare for potential trading opportunities. Below is an example of impulses & corrections identified
Identify the Pattern Formations
Once you have identified the impulse and correction, the next step is to look for specific pattern formations. These patterns, such as head and shoulders, double tops, or triangles, provide clues about future price movements. Understanding and recognizing these formations can significantly enhance your ability to predict market direction and make informed trading decisions. Below are patterns identified that can be tradeable
Most of these patterns can nowadays be identified for you using Tradingview under indicators, metrics & strategies.
Identify Entry Points
After identifying the patterns, the next crucial step is to pinpoint entry points. This involves determining the optimal moment to enter a trade based on your analysis of the market. Entry points should be chosen carefully to maximize potential gains while minimizing risk. Look for confirmations, such as breakouts from patterns or specific technical indicators, to ensure a higher probability of success. Below is an example with a risk free entry
We shall be looking in another post on different types of entries.
Look for Targets
Setting targets is essential for effective trading. Targets help you establish your profit goals for each trade and ensure that you remain disciplined in your approach. These targets can be based on various factors, such as previous support and resistance levels, Fibonacci extensions, or measured moves from the identified patterns. Clear targets allow you to exit trades strategically and lock in profits.
Below is our clear target for the entry we made with a clear stop loss as well
Look for Exits in Case the Trade Doesn't Go Your Way
Not all trades will go as planned, so it's vital to have exit strategies in place for unfavorable scenarios. This involves setting stop-loss levels to limit potential losses and protect your capital. By defining these exits beforehand, you can remove emotional decision-making from your trading process and adhere to a systematic approach, ensuring long-term success and sustainability in your trading business.
I trust that these rules can help you in your trading journey. You can think of having them written somewhere. That way you can look at them & follow them for each trade you make.
All the best
Community ideas
GOLDTrend Analysis
Downward Trend Line: There is a red downward trend line indicating that gold has been in a downtrend. This line acts as a resistance level.
Support Zone: There is a green support zone around the $2,318.00 level. This indicates that there is buying interest around this price, and it has historically acted as a support level.
Resistance Levels
First Resistance: Around $2,325.66.
Second Resistance: Around $2,332.00.
These resistance levels indicate where selling pressure has previously been strong enough to halt upward price movement.
Fair Value Gap (FVG)
A Fair Value Gap is highlighted in a beige rectangle from approximately $2,340.00 to $2,354.60. This gap suggests an area where the price might move quickly if it enters this zone, potentially due to a lack of liquidity or previous rapid price movement.
Price Action
Current Price: As of the latest data on the chart, gold is trading at $2,319.26.
Recent Movement: The price recently bounced off the support zone but faced resistance near $2,332.00, aligning with the downward trend line.
Potential Scenarios
Bullish Scenario: If the price can break above the resistance at $2,325.66 and subsequently the downward trend line, it may target the next resistance level at $2,332.00. A break above this level could lead to a move towards the Fair Value Gap, potentially reaching the upper boundary around $2,354.60.
Bearish Scenario: If the price fails to hold the support level at $2,318.00, it might move lower, with the next significant support level potentially being around $2,312.00. Further bearish movement could target levels below $2,310.00.
Key Levels to Watch
Support: $2,318.00, $2,312.00.
Resistance: $2,325.66, $2,332.00, $2,354.60 (FVG zone).
Ichimoku Watch: Nvidia Eyeing Ichimoku Cloud Support In three successive days of selling, triggered after a bearish outside reversal formed on Thursday last week from all-time highs of $140.76, Nvidia (ticker: NVDA) has shed approximately -15.0% from the peak.
The company’s market value dropped more than US$500 billion to US$2.91 trillion, consequently pulling the chipmaker back to third place after briefly becoming the most valuable company in the world and surpassing Microsoft (ticker: MSFT) and Apple (ticker: AAPL).
Behind the sell-off is a combination of the CEO, Jensen Huang, selling almost US$100 million worth of shares a handful of days before (and after) it became the world’s most valuable company, along with worries about the company’s effect on the broader stock market indexes, and profit-taking after what has been a meteoric rise.
Ichimoku Cloud Support
As can be seen from Nvidia's daily chart, the stock’s recent movement has easily crossed below the Conversion Line (blue at $129.40) and is fast approaching the Base Line (red at $116.28), which could deliver support.
However, should further downside develop, the Ichimoku Cloud support (made up of the Leading Span A at $122.95 and the Leading Span B at $108.23) could be seen as a logical downside target for sellers in this market at the moment. You will also see that the chart offers support at $96.77 around the Ichimoku support zone.
Price Direction?
While it is unlikely that the party is over for Nvidia, the current correction will likely be viewed as an opportunity to get in at cheaper prices. Dip buyers, therefore, may seek suitable support levels to enter this market long. The combination of support just below $100.00 at $96.77 and the Ichimoku Cloud support area could be worthy of the watchlist.
Nvidia - Massive rejection soon!NASDAQ:NVDA is clearly overextended after the +1.000% rally and ready for a correction.
Trees simply do not grow to the sky. And neither do stocks, especially Nvidia. I know that a lot of people are calling price targets of $250 and beyond, but we still have to respect gravity and the nature of fear and greed. Nvidia is simply overextended a retesting a 6 year resistance trendline. I do expect a correction between -20% and -30%, but also -60% is definitely possible.
Levels to watch: $120, $50
Keep your long term vision,
Philip - BasicTrading
GBPJPY - BIG BULLISH CONTINUATION OPPORTUNITY Here's a big potential bullish trend continuation opportunity on the GBPJPY using structure and price action.
In this video I walk you through the 4-step I.P.D.E. process used to set up the trading idea & talk about different ways to both get in & out of the trade.
We'll probably revisit this opportunity as it develops so make sure you watch this space.
If you have any questions or comments about the setup (or anything else) please leave it in the comment section below as I do read each and every one.
I wish you a great week in the markets - Akil
TSLA : its now or never!TSLA is coiling to make a large directional move.
The Question is...up or down?
With August appraoching quickly, this could be a key pivotal shift in TSLA business model
Once they announce their ROBO - TAXI, this could be a huge winning success for the company and stock .
A ROBO - TAXI could be a mega disruption for many sectors and companies.
I think theres a strong chance that investors are going to start bidding up this name ahead of that 1st week of August in anticipation of the massive launch.
Keep in mind with every new launch comes hiccups and capital expenditures so its not always smooth sailing.
Lets face it though...no other company has attempted this yet and if anyone can have success it would be Elon.
I also think now that Elons pay package has been approved, he really is incentivized to grow this business.
Will his Optimus Robot be the new taxi, uber or Lyft drivers?
Premium & Discount Price Delivery in Institutional TradingGreetings Traders!
In today's educational video, we will delve into the concepts of premium and discount price delivery. The objective is to provide you with a comprehensive understanding of institutional-level market mechanics. Before we proceed, it is crucial to define what we mean by "institutional level" and "smart money," as these terms are often misunderstood. We will also address the common misconceptions about who the liquidity providers are in the market.
By grasping these foundational concepts, you will gain a new perspective on the market, realizing that its movements are not random but calculated and precise, orchestrated by well-informed entities often referred to as smart money.
If you have any questions, please leave them in the comment section below.
Best Regards,
The_Architect
Is USD/JPY Trade of Decade? US Dollar Nears 34-Year High Again.If you’re a ‘90s baby, the yen is the weakest you’ve ever seen it. Putting it back with the cool guys in forex town isn’t going to be easy. In this Idea, we discover why.
Yen Languishes in 34-Year Lows
The Japanese yen is trading at a 34-year low against the stronger US dollar. This means that the volatile USD/JPY pair is flying high. Very high. To many, this is the opportunity of a lifetime — pop a short, load up on the leverage and go for the jugular (to use Soros slang ). Only that it’s not as easy as it looks.
So not-easy that there’s even a term for that. It’s called “widow maker trade” and it describes those unfortunate souls who dare to bet against the Bank of Japan in hopes of anticipating the right direction. It’s so difficult to predict the path of Japan’s interest rates that many have seen their fortunes wiped out in trying to do so.
So why’s the yen so badly hurt? Until recently, Japan’s central bank was the only one in the world to flaunt negative interest rates. It was holding on to an easy-money regime to stimulate economic growth — low to negative rates encourage businesses and consumers to borrow cheap money and spend it on whatever they want.
Biggest Loser on Forex Board
But this loose money policy has a downside — it makes the local currency highly unattractive. The Japanese yen is the biggest loser among the major currencies on the forex board so far in 2024. It’s down more than 13% against the dollar this year.
Against that backdrop, in March, the Bank of Japan abandoned its negative rate regime and hiked interest rates for the first time since 2007. The shift provided little relief to the yen.
The USD/JPY this week blasted beyond ¥159 and extended its winning streak to seven days in a row. But bulls’ efforts to carry the exchange rate above the ¥160 milestone might meet an archnemesis.
Japanese officials have been monitoring the speculative moves around the yen and have said many times they’re ready to intervene by buying boatloads of it. Traders, however, have already seen this play out. And they've seen the aftermath, too.
A Failed InterYention
In late April, the Japanese yen tumbled beyond the key ¥160 level to the dollar, hitting ¥160.20 — a low last seen in 1990. Japan then decided to lean against the skyrocketing dollar and sank as much as $60 billion going long the yen and shorting the dollar.
Briefly, the yen rose about 5% before bargain-hungry traders were back for more.
Moral of the story? The downturn of the yen is predictable and until the Bank of Japan introduces a more aggressive policy to buck the trend, it may remain vulnerable to attacks.
More of the Same?
Meanwhile, bullish traders are excited to try their hand at shooting the dollar-yen pair to a fresh 34-year high. It must be noted, however, that the exchange rate is overstretched and overbought. This skews the risk-reward ratio and makes the upside look fairly limited, at least in the short term. Or does it?
Zoom out, and you’ll see the yen was trading at ¥300 to the dollar back in the ‘70s. And that’s not something Japan wants to see now. A cheap yen is generally good for exports but it makes imports a lot more expensive. And that’s where the Asian economy is getting its technology, energy, cars, and many foods from.
Japanese officials, namely the Ministry of Finance, remain tight-lipped about any potential intervention. What’s more, the Bank of Japan joins the silence with no forward-looking guidance on future interest rate hikes.
And all this means one thing — yen volatility is bound to continue as traders engage in some extra spicy speculation fundamental price discovery.
Long or Short?
If you’re in the trade, which side are you on? Are you long the dollar-yen or short it? Let us know in the comments below!
43 lessons about forex trading at 43 that I wish I’d known at 23I turned 43 last week. I’ve been working for global brokerages and trading for 16 years. Here’s 43 things I wish I knew back then when I first started trading:
1. Start with your objectives first. I once asked a hedge fund manager what his advice for new traders is, and he said ‘get your objectives clear first.’ Set your goals first, and then create a plan to achieve them.’
2. Risk/reward is everything. As a trader, your job is to place trades with an asymmetrical risk/reward profile – i.e. trades where you can make more than you can lose. That’s what good trading is all about.
3. You are a risk manager first, and a trader second. Your top priority as a trader is to protect your trading capital. Then, secondly, it is to make money. Not the other way around.
4. Cut your losses short and let your profits run. After working in brokerages for 16 years, if I know one thing about retail traders, it is they let their losses run and take their profits too quickly. Don’t be like them.
5. Be properly capitalised. The main reason I’ve seen traders lose is they have too small accounts and use too much leverage. Keep your risks small compared to the size of your account.
6. Use a rules-based approach to trading. Write a plan that contains rules for every decision you need to make as a trader…and then follow it.
7. Be clear and specific. Be clear about your goals, your objectives for each trade, and when you will enter and exit the market. If you are not clear, then keep planning until you are.
8. Mistakes kill trading systems. Errors – for example, not following your rules (or even worse, trading without rules) can make the difference between hitting your goals, or having a losing month.
9. Trade your best idea. Keep it simple and focus on your best idea at the time. Don’t trade too many strategies or systems all at one time.
10. Trade the correct strategy for the market type. Sell in bear markets, buy in bull markets. Range trade or stay out of sideways markets. If the market forms a tight range, trade the breakout. Pick the right approach for the current market conditions.
11. You will not win all the time… and that’s ok. Even the best traders have losing weeks, months and years. Go easy on yourself when things are not working out. Keep trying to improve.
12. Trade less, not more. I made 3% a month over 3 years, taking one trade a day. You don’t need to trade often to hit your objectives.
13. You only need one good trade. One good trade a week or month is all you need to achieve your objectives.
14. You achieve your goals through position-sizing. Controlling the size of your position is more important than getting the trade direction correct.
15. It’s not how often you win, but how much you make when you do. It does not matter if you take lots of small losses, as long as you make large gains when you win.
16. Play the probabilities, not what you think is going to happen. Don’t try to ‘make a trade work’ by taking profit early or not taking a trade, rather trust in the probabilities and your plan.
17. Time of day matters. The forex markets often change direction when the Tokyo, London and New York markets open. Be prepared.
18. Don’t trade on Monday mornings. Funny things happen on Monday mornings when most traders are asleep and the markets are illiquid. It’s best to avoid trading at this time...oh and stay away from New York Friday afternoon too.
19. Keep your entries simple…Don’t over-complicate your entries. A simple breakout or pull-back during a trend will work. Keep your entries simple so you can act decisively.
20. …and your exits complex. Many things happen after you enter a trade, so you need a toolbox of exit strategies.
21. Take some profit when the market gets overbought or oversold. I used to hold on to every trade, hoping it would be a massive winner, only to see it reverse and my profit disappear. Now, I’m happy to take profit as soon as the market signals it’s about to reverse.
22. Trail your stop-loss, but not too close. A trailing stop will allow you to keep your gains. Don’t put it so tight that it will knock you out of the big winners.
23. Move your stop to breakeven, but not too early. Having a trade that you’ve made risk-free by moving the stop loss point is a great feeling. But don’t do it so early that you get whipsawed.
24. News events will be the greatest source of profits and losses . Pay close attention to news events, as they have the power to wipe out your hard-earned gains or generate windfall profits - in the blink of an eye.
25. Record your trades. Keep track of all the trades you make so you can review your performance and…
26. Do more of what works, and less of what doesn't. Doing this over and over again is the secret to success.
27. Know your macros. I’m not talking about calorie-counting. Learning macro analysis of the forex markets will prove valuable in the long run as you will understand what is behind the movements on the charts.
28. Scale-in to high-conviction trades. If you have a high-conviction winner, backed by the fundamentals, then maximise it by adding to the trade as it goes your way.
29. Practice mental rehearsal. Like an elite athlete before their big event, practice executing your trades perfectly in your mind's eye. And take deep breaths while you’re rehearsing.
30. Trading is a game. View trading as a game, where you make the rules and your profits are your winning score.
31. Develop personal discipline. The key to consistent trading is developing the discipline to trade your tested rules, even when you have a series of losses.
32. Keep your thinking flexible. Don’t hold onto a view too tightly, and be prepared to do a u-turn and go the other way.
33. Trade for yourself, not what others will think of you. Do you for you. Not for what others will think of you, or because of what you’ve seen another trader do on social media.
34. Know yourself, before you trust others. Don’t give your money to someone else to trade, until you at least understand how to manage risk yourself. Then you can tell if they are any good at it.
35. Your broker is (probably) not your enemy… in my 16 years of experience, major regulated brokers are not trading against you. They want you to have a good trading experience.
36. …but they are not your mate. They are not always going to call you if you lose money to assist you. That’s not their priority.
37. Costs add up. Costs compound negatively, just like returns compound positively. Keep your transaction costs and fees as low as you can.
38. There is always a marketmaker. If your broker is not the marketmaker, then their liquidity provider is. In the forex market, there is always a marketmaker somewhere down the line.
39. Grind it out. Show up each day, follow your processes, and the results will come. Get used to the grind, and don’t chase the fast win.
40. Don’t tie your self-worth to the markets. The markets are a fickle, challenging beast and your success as a trader is not something to base your personal self-esteem on.
41. Spend your time being happy. Good traders are relaxed and happy. Remain calm and have a positive expectation.
42. Fight the good fight. Author Paulho Coelho said: “The Good Fight is the one that we fight in the name of our dreams.” If you are passionate about trading, keep up the fight. Keep trading, learning and growing and you’ll get there.
43. Enjoy the journey. Trading is a journey through the Himalayas. The highs are high and the lows are lows. The key is to enjoy every step.
Thanks for listening.
Sam
RSI Indicator LIES! Untold Truth About RSI!
The Relative Strength Index (RSI) is a classic technical indicator that is applied to identify the overbought and oversold states of the market.
While the RSI looks simple to use, there is one important element in it that many traders forget about: it's a lagging indicator.
This means it reacts to past price movements rather than predicting future ones. This inherent lag can sometimes mislead traders, particularly when the markets are volatile or trade in a strong bullish/bearish trend.
In this article, we will discuss the situations when RSI indicator will lie to you. We will go through the instances when the indicator should not be relied and not used on, and I will explain to you the best strategy to apply RSI.
Relative Strength Index analyzes the price movements over a specific time period and displays a score between 0 and 100.
Generally, an RSI above 70 suggests an overbought condition, while an RSI below 30 suggests an oversold condition.
By itself, the overbought and overbought conditions give poor signals, simply because the market may remain in these conditions for a substantial period of time.
Take a look at a price action on GBPCHF. After the indicator showed the oversold condition, the pair dropped 150 pips lower before the reversal initiated.
So as an extra confirmation , traders prefer to look for RSI divergence - the situation when the price action and indicator move in the opposite direction.
Above is the example of RSI divergence: Crude Oil formed a sequence of higher highs, while the indicator formed a higher high with a consequent lower high. That confirmed the overbought state of the market, and a bearish reversal followed.
However, only few knows that even a divergence will provide accurate signals only in some particular instances.
When you identified RSI divergence, make sure that it happened after a test of an important key level.
Historical structures increase the probability that the RSI divergence will accurately indicate the reversal.
Above is the example how RSI divergence gave a false signal on USDCAD.
However, the divergence that followed after a test of a key level, gave a strong bearish signal.
There are much better situations when RSI can be applied, but we will discuss later on, for now, the main conclusion is that
RSI Divergence beyond key levels most of the time will provide low accuracy signals.
But there is one particular case, when RSI divergence will give the worst, the most terrible signal.
In very rare situations, the market may trade in a strong bullish trend, in the uncharted territory, where there are no historical price levels.
In such cases, RSI bullish divergence will constantly lie , making retail traders short constantly and lose their money.
Here is what happens with Gold on a daily.
The market is trading in the uncharted territory, updated the All-Time Highs daily.
Even though there is a clear overbought state and a divergence,
the market keeps growing.
Only few knows, however, that even though RSI is considered to be a reversal, counter trend indicator, it can be applied for trend following trading.
On a daily time frame, after the price sets a new high, wait for a pullback to a key horizontal support.
Your bullish signal, will be a bearish divergence on an hourly time frame.
Here is how the price retested a support based on a previous ATH on Gold. After it approached a broken structure, we see a confirmed bearish divergence.
That gives a perfect trend-following signal to buy the market.
A strong bullish rally followed then.
RSI indicator is a very powerful tool, that many traders apply incorrectly.
When the market is trading in a strong trend, this indicator can be perfectly applied for following the trend, not going against that.
I hope that the cases that I described will help you not lose money, trading with Relative Strength Index.
❤️Please, support my work with like, thank you!❤️
Economic Calendar: Top Market Events You Should Watch Out forMarkets tend to get especially volatile whenever there’s an economic report or some data dump that takes investors by surprise. That’s why we’re spinning up this Idea where we highlight all the major market-moving events you should watch out for when you do your trading.
Today, we look at the Economic Calendar .
🏦 Central Bank Meetings and Announcements
• Federal Reserve (Fed) Meetings
The US Federal Reserve holds Federal Open Market Committee (FOMC) meetings roughly every six weeks,or ( eight times a year ), to talk about monetary policy, including interest rates. Setting interest rates is arguably the most significant event with long-lasting consequences for markets.
Each of these meeting takes two days and wraps up with a speech by the gentleman who moves markets with a simple “Good afternoon” — Fed boss Jay Powell.
• European Central Bank (ECB) Meetings
Similar to the Fed, the ECB holds regular meetings to decide on monetary policy and borrowing costs for the Eurozone.
ECB officials’ decisions sway financial markets, especially those based in the old continent. Indexes such as the Stoxx 600 Europe (ticker: SXXP ) and the European currency tend to fluctuate wildly during ECB events.
• Bank of England (BoE) Meetings
The BoE's Monetary Policy Committee (MPC) frequently meets to discuss and set interest rates and other monetary matters.
Decisions made by BoE policymakers mainly affect the UK corner of the financial markets. That means elevated volatility in the British pound sterling and the broad-based UK index, the FTSE 100, among other UK-based trading instruments .
• Bank of Japan (BoJ) Meetings
The BoJ holds policy meetings to decide on interest rates and monetary stimulus, among other central-bank topics.
Until recently, the Japanese central bank was the only one to sport a negative interest rate regime .
📝 Economic Data Releases
• Nonfarm Payrolls
In the US, the Bureau of Labor Statistics releases the Employment Situation Summary on the first Friday of every month. The data package includes the non-farm payroll print , which tracks how many new hires joined the workforce, the unemployment rate, and average hourly earnings.
• Consumer Price Index (CPI)
Monthly CPI measures the rate of inflation at the consumer level. The reading is closely monitored by the Fed in order to gauge the temperature of the economy. A reading too hot indicates an expanding economy, and vice versa.
• Producer Price Index (PPI)
Similar to CPI, PPI measures inflation at the wholesale level and can provide signals about inflation trends.
• Gross Domestic Product (GDP)
Quarterly GDP churns out a comprehensive measure of a country's economic activity and growth.
• Retail Sales
Monthly retail sales indicate consumer spending patterns, which are a critical component of economic activity. The data shows whether consumers pulled back from spending or splurged like there’s no tomorrow.
• Purchasing Managers' Index (PMI)
PMI reports for manufacturing and services sectors lay out insights into business activity and economic health.
🏢 Corporate Earnings Reports
Publicly traded companies around the world release earnings reports every quarter. The hottest ones are America’s corporate giants, such as tech stocks , banking stocks , and more.
The quarterly earnings figures include financial performance for the most recent three months and forward-looking guidance, which comprises earnings and revenue expectations.
🌐 Geopolitical Events
Political developments, such as Presidential elections, and geopolitical tensions can have immediate and significant impacts on financial markets. These events are less predictable but are closely monitored by market participants and can quickly fuel volatility across asset classes, prompting investors to shuffle their portfolio holdings.
Final Considerations
Pay attention to these reports, events, and economic data and you’ll get to understand what moves markets. Anytime you witness a sharp reaction in gold ( XAU/USD ) or a quick reversal in the US dollar ( DXY ), it’s likely that the underlying factor is an economic report you didn’t know about.
If you do track them — which one is your favorite market report or economic news release? Let us know in the comments below!
Elliott Wave Expects Nasdaq 100 (QQQ) to Continue HigherShort Term Elliott Wave in Nasdaq 100 ETF (QQQ) suggests it shows a bullish sequence from 4.20.2024 low favoring more upside. Up from 4.20.2024 low, wave 1 ended at 461.5 and pullback in wave 2 ended at 443.06. The ETF has extended higher in wave 3. Internal subdivision of wave 3 is unfolding as a nesting impulsive structure. Up from wave 2, wave (i) ended at 455.58 and wave (ii) ended at 447.9. Wave (iii) higher ended at 465.55 and pullback in wave (iv) ended at 460.54. Last leg wave (v) ended at 465.74 which completed wave ((i)) in higher degree. Pullback in wave ((ii)) ended at 461.5 and the ETF has extended higher.
Up from wave ((ii)), wave i ended at 465.19 and wave ii dips ended at 462.03. Then it rallied higher in wave iii towards 478.28 and wave iv pullback ended at 473.80. Last leg wave v ended at 478.95 which completed wave (i) in higher degree. The ETF then pullback in wave (ii) towards 474.42. Near term, as far as it stays above 461.51, expect pullback to find support in 3, 7, or 11 swing for further upside.
Four Factors Driving Gold Prices Relative to Silver2600 years ago, the Anatolian Kingdom of Lydia minted the world’s first gold and silver coins. In doing so, the Lydian King Alyattes and his successor Croesus introduced the world’s first exchange rate: the gold-silver cross. Like any cross rate, the amount of silver that can be purchased with an ounce of gold is driven by both demand and supply-side factors, and the cross rate is anything other than stable. Sadly, we don’t have the time series of the gold-silver ratio dating back to ancient times, but we do have data going back to the launch of gold futures on December 31, 1974. Since the mid-1970s, one ounce of gold bought anywhere from 17 ounces to as many as 123 ounces of silver (Figure 1).
Figure 1: The amount of silver an ounce of gold can buy has been highly variable
In addition to the impact of monetary policy, which we have covered here, the gold-silver ratio appears to be governed by four other factors:
Relative volatility and the silver beta
Fabrication demand and technological change
Gold’s use as a monetary asset
Supply-side dynamics
Relative volatility and beta
To borrow an expression from the equity markets, silver is the high-beta version of gold. First, silver and gold prices usually have a strong positive correlation. Since 2004 the one-year rolling correlation of their daily price moves has hovered around +0.8 (Figure 2). Second, silver is more volatile than gold. As such, when gold prices move up, silver tends to move up more, thereby lowering the gold-silver price ratio. By contrast, during bear markets, the gold-silver ratio tends to rise.
Figure 2: The correlation of gold and silver price changes has hugged +0.8 since 2004.
For example, when gold and silver prices peaked in September 2011, one ounce of gold bought fewer than 32 ounces of silver (Figure 3). In the ensuing bear market, the ratio rose to as high as 124 ounces of silver per ounce of gold. The ratio snapped back to 64 in 2020 as gold and silver rallied early in the pandemic. In 2024, as both metals have rallied, silver has outperformed, rising 23% in the first five months of the year compared to 12% for the yellow metal.
Figure 3: Positive correlation plus much higher volatility give silver a high beta to gold
Fabrication Demand and the Impact of Technological Change
What is curious is that while gold and silver have rallied thus far in 2024, gold broke to new record highs of nearly $2,500 per ounce whereas silver prices remain 40% below their twin 1980 and 2011 peaks despite having outperformed gold since 2020 (Figure 4). The reason may lie in technological advances.
Figure 4: Gold has hit records in 2024 while silver is still 40% below its 1980 and 2011 record highs
Even before the Lydians minted the first gold and silver coins around 600 BCE, both metals had been used to make jewellery: silver since around 2500 BCE and gold since 4500 BCE. Some things don’t change. Even today, the primary use of both metals is to make jewellery. Yet, thus far this century, silver has been buffeted by two sets of technological developments: the digital revolution and the energy transition. Both have impacted the relative gold-silver ratio.
In 1999, photography used 267.7 million troy ounces of silver which accounted for 36.6% of that year’s total silver supply. By 2023 photography used only 23.2 million ounces of silver or about 2.3% of 2023’s total supply due to the rise of digital photography. Meanwhile, silver’s use in electronics and batteries grew from 90 million ounces to 227.4 million ounces or from 12.3% to 22.7% of silver’s total annual supply, partially offsetting the decline in traditional photography, which may partially explain why silver has struggled to hit new highs in recent years even as gold has set records.
The good news for silver, however, is that it is finding new use in the energy transition. Over the past few years silver has seen strong growth coming from solar panels, which accounted for 20% of 2023 silver demand, up from essentially nothing in 1999 (Figure 5). Solar panels may explain in part why silver has recovered relative to gold since 2020.
Figure 5: Battery and solar panel demand have grown as photography demand has shrunk
If you have futures in your trading portfolio, you can check out on CME Group data plans available that suit your trading needs www.tradingview.com
By contrast, gold fabrication demand has shown itself to be immune from recent technological developments and is still overwhelmingly dominated by jewellery demand, with electronics, dental and other uses absorbing just 17% of annual gold mining supply (Figure 6). The differences in silver and gold fabrication demand underscores that gold is considered the purer of the two precious metals.
Figure 6: Gold fabrication demand has remained little changed
Gold and global monetary policy
Indeed, central banks around the world treat gold as money while they largely ignore silver (Figure 7). They hold a combined 36,700 metric tons of gold, the equivalent of 1.2 billion troy ounces or 13 years of global mining output. Moreover, central banks have been net buyers of gold every year since the global financial crisis.
Figure 7: Central banks have been net buyers of gold since the global financial crisis
Central bank buying of gold since 2009 contrasts sharply with their tendency to be net sellers from 1982 to 2007. Central banks’ accumulation of gold suggests that they want a hard asset to complement their foreign exchange reserves of dollars, euros, yen and other fiat currencies, a view that appears to have been reinforced by on-and-off quantitative easing since 2009 and increased use of financial sanctions. Central bank buying impacts gold prices directly, but only boosts silver prices indirectly via the gold market.
The supply side of the equation
Central bank gold buying reduces the amount of gold available to the public. Over the past decade, central bank buying has removed the equivalent of 8%-20% of new mining supply from the gold market each year (Figure 8) which may also explain why the gold-silver ratio rose significantly from 2011 to 2020 and why, even today, it remains at 2x its 2011 level.
Figure 8: Net of central bank buying, gold supply has stagnated since 2003
Total gold supply net of official purchases has stagnated since 2003. Meanwhile, silver mining supply peaked in 2016 and gold mining supply peaked the next year (Figure 9). The fact that new supply is arriving on the market more slowly than in the past may be bullish for both gold and silver.
Figure 9: Gold and silver respond negative to changes in each other’s mining supply.
Our econometric analysis shows that gold and silver prices are negatively correlated with changes to one another’s mining supply. A 1% decrease in gold mining supply, on balance, boosted gold prices by 1.9% and silver by 3.0% from 1974 to 2023. A 1% decease in silver mining supply boosted the prices of the metals by 1.3%-1.6% (Figure 10). Secondary supply appears to respond to price rather than drive it. Higher prices incentivize more recycling, but recycled metal doesn’t appear to depress prices as it doesn’t bring any new metal onto the market.
Figure 10: Secondary supply responds to price rather than drives it
What connects the two markets is jewellery. Because gold is 70x as costlier than silver, when prices rise, demand for gold jewellery falls while silver’s jewellery demand is relatively unresponsive to price because it costs much less. Gold and silver can be seen as a sort of binary star system where the two stars orbit a common center of gravity or barycenter. Gold is the larger, more stable and more influential of the two, but it is by no means immune from silver’s pull.
If you have futures in your trading portfolio, you can check out on CME Group data plans available that suit your trading needs www.tradingview.com
By Erik Norland, Executive Director and Senior Economist, CME Group
*CME Group futures are not suitable for all investors and involve the risk of loss. Copyright © 2023 CME Group Inc.
**All examples in this report are hypothetical interpretations of situations and are used for explanation purposes only. The views in this report reflect solely those of the author and not necessarily those of CME Group or its affiliated institutions. This report and the information herein should not be considered investment advice or the results of actual market experience.
TSLA / NVIDIA / INTC - The rotation trade?TSLA has been upderperfing the market, but is now showing some signs of potential life since Elon musks pay package was approved.
A bullish breakout pattern is on watch.
NASDAQ:INTC looks ready for a bullish move. Just like NASDAQ:ADBE & NASDAQ:TSLA popped on earnings, it looks like NASDAQ:INTC could be the next oversold S&P500 stock to bounce.
If we see any weakness in NASDAQ:NVDA we may see capital rotate into other cheaper semis.
S&P500 setting nee ATH.
Options Blueprint Series: Swap Strategies for High VolatilityIntroduction
CME Group Gold Futures have always been a cornerstone in the commodities market, offering investors and traders a way to hedge against economic uncertainties and inflation. With the current market environment exhibiting heightened volatility, traders are looking for strategies to capitalize on these fluctuations. One such strategy is the Straddle Swap, which is particularly effective in high volatility scenarios.
By utilizing the Straddle Swap strategy on Gold Futures, traders can potentially benefit from price swings driven by news events, economic data releases, and other market-moving occurrences.
Strategy Explanation
The Straddle Swap strategy is designed to capitalize on high volatility by leveraging options with different expirations. Here’s a detailed breakdown of how this strategy works:
Components of the Straddle Swap:
1. Buy one call option (longer expiration)
This long call option benefits from upward price movements in Gold Futures.
2. Sell one call option (shorter expiration)
This short call option generates premium income, which offsets the cost of the long call option. As it has a shorter expiration, it benefits from faster time decay.
3. Buy one put option (longer expiration)
This long put option benefits from downward price movements in Gold Futures.
4. Sell one put option (shorter expiration)
This short put option generates premium income, which offsets the cost of the long put option. It also benefits from faster time decay due to its shorter expiration.
Rationale for Different Expirations:
Longer Expirations: The options with more days to expiration provide a longer timeframe to capture significant price movements, whether upward or downward.
Shorter Expirations: The options with less days to expiration decay more quickly, providing premium income that reduces the overall cost of the strategy. This helps mitigate the effects of time decay on the longer-dated options.
Market Analysis Using TradingView Charts:
To effectively implement the Straddle Swap strategy, it’s crucial to analyze the current market conditions of Gold Futures using TradingView charts. This analysis will help identify optimal entry and exit points based on volatility and price trends.
The current price action of Gold Futures along with key volatility indicators. Recent data shows that the 1-month, 2-month, and 3-month Historical Volatilities have all been on the rise, confirming a high volatility scenario.
Application to Gold Futures
Let’s apply the Straddle Swap strategy to Gold Futures given the current market conditions.
Identifying Optimal Entry Points:
Call Options: Buy one call option with a 100-day expiration (Sep-25 2024) at a strike price of 2370 @ 64.5. Sell one call option with a 71-day expiration (Aug-27 2024) at the same strike price of 2370 @ 53.4.
Put Options: Buy one put option with a 100-day expiration (Sep-25 2024) at a strike price of 2350 @ 63.4. Sell one put option with a 71-day expiration (Aug-27 2024) at the same strike price of $2350 @ 52.5.
Target Prices:
Based on the relevant UFO support and resistance levels, set target prices for potential profit scenarios:
Upper side, target price: 2455.
For put options, target price: 2260.
Potential Profit and Loss Scenarios:
Scenario 1: Significant Upward Movement
If Gold Futures rise sharply above 2370 within 100 days, the long call option will generate a potentially substantial profit. The short call option will expire in 71 days, limiting potential losses.
Scenario 2: Significant Downward Movement
If Gold Futures fall sharply below 2350 within 100 days, the long put option will generate a potentially substantial profit. The short put option will expire in 71 days, limiting potential losses.
Scenario 3: Minimal Movement
If Gold Futures remain relatively stable, the premiums collected from the short options (71-day expiration) will offset some of the cost of the long options (100-day expiration), minimizing overall losses. Further options could be sold against the long 2350 call and long 2350 put once the shorter expiration options have expired.
Specific Action Plan:
1. Initiate the Straddle Swap Strategy:
Enter the positions as outlined above following your trading plan, ensuring to buy and sell the options at the desired strike prices and expirations.
2. Monitor Market Conditions:
Continuously monitor Gold Futures prices and volatility indicators.
Adjust or close the strategy if necessary based on significant market changes.
3. Manage Positions:
Use stop-loss orders to limit potential losses.
If the market moves favorably, consider exiting the positions at the target prices to lock in profits.
4. Reevaluate Periodically:
Periodically reevaluate the positions as the options approach their expiration dates.
Make any necessary adjustments to the strategy based on updated market conditions and volatility.
By following this type of trade plan, traders can effectively implement the Straddle Swap strategy, taking advantage of high volatility in Gold Futures while managing risk through careful monitoring and the use of stop-loss orders.
Risk Management
Effective risk management is crucial for success in options trading, particularly when employing strategies like the Straddle Swap. Here, we will discuss the importance of risk management, key techniques, and best practices to ensure that traders can mitigate potential losses and protect their capital.
Importance of Risk Management:
Minimizing Losses: Trading inherently involves risk. Effective risk management helps minimize potential losses, ensuring that a single adverse move does not significantly impact the trader’s overall portfolio.
Preserving Capital: By managing risk, traders can preserve their capital, allowing them to stay in the market longer and capitalize on future opportunities.
Enhancing Profitability: Proper risk management allows traders to optimize their strategies, potentially increasing profitability by avoiding unnecessary losses.
Key Risk Management Techniques:
1. Stop-Loss Orders:
Implementing stop-loss orders helps limit potential losses by automatically closing a position if the market moves against it.
For the Straddle Swap strategy, set stop-loss orders for the long call and put options to exit positions if prices reach predetermined levels where losses would exceed the desired trade risk set by the trader.
2. Hedging:
Use hedging techniques to protect positions from adverse market movements. This can involve purchasing protective options or futures contracts.
Hedging provides an additional layer of security, ensuring that losses in one position are offset by gains in another.
3. Avoiding Undefined Risk Exposure:
Ensure that all positions have defined risk parameters. Avoid strategies that can result in unlimited losses.
The Straddle Swap strategy inherently has limited risk due to the offsetting nature of the long and short options.
4. Precision in Entries and Exits:
Timing is crucial in options trading. Ensure precise entry and exit points to maximize potential gains and minimize losses.
Use technical analysis key price levels such as UFO support and resistance prices, and volatility indicators to identify optimal entry and exit points.
5. Regular Monitoring and Adjustment:
Continuously monitor market conditions and the performance of open positions.
Be prepared to adjust the strategy based on changing market dynamics, such as shifts in volatility or unexpected news events.
Additional Risk Management Practices:
Diversification: Spread risk across multiple positions and asset classes to reduce the impact of any single trade. Other liquid options markets could be WTI Crude Oil Futures; Agricultural products such as Wheat Futures, Corn Futures, or Soybean Futures; Index Futures such as the E-mini S&P 500 Futures; and even Bond and Treasury Futures such as the 10-Year Note or the 30-Year Bond Futures.
Position Sizing: Carefully determine the size of each position based on the trader’s overall portfolio and risk tolerance.
Education and Research: Stay informed about market conditions, economic indicators, and trading strategies to make well-informed decisions.
By incorporating these risk management techniques, traders can effectively navigate the complexities of options trading and protect their investments. Ensuring more precision with entries and exits, using stop-loss orders, and implementing hedging strategies are essential practices that contribute to long-term trading success.
When charting futures, the data provided could be delayed. Traders working with the ticker symbols discussed in this idea may prefer to use CME Group real-time data plan on TradingView: www.tradingview.com This consideration is particularly important for shorter-term traders, whereas it may be less critical for those focused on longer-term trading strategies.
General Disclaimer:
The trade ideas presented herein are solely for illustrative purposes forming a part of a case study intended to demonstrate key principles in risk management within the context of the specific market scenarios discussed. These ideas are not to be interpreted as investment recommendations or financial advice. They do not endorse or promote any specific trading strategies, financial products, or services. The information provided is based on data believed to be reliable; however, its accuracy or completeness cannot be guaranteed. Trading in financial markets involves risks, including the potential loss of principal. Each individual should conduct their own research and consult with professional financial advisors before making any investment decisions. The author or publisher of this content bears no responsibility for any actions taken based on the information provided or for any resultant financial or other losses.
World's Top Companies: Who’s in the Exclusive $1T Club & Beyond?But wait, it gets even more exclusive than a mere $1 trillion! There’s a $2 trillion club with just a single player and a super-duper hyper-elite ultra club of $3 trillion. Can you name the participants?
Being part of the world’s biggest companies isn’t easy. It may look easy — these corporate giants gain billions of dollars in market cap before you make your morning cup of coffee (especially if you’re drowsy after a late-night options trading action).
In this Idea, we look at the dynamic docket of the world's most expensive companies, neatly stacked up in the TradingView Top companies list .
The world has never seen so much money concentrated in a few select companies. Fun fact: all of them had humble beginnings like starting out of a garage and trying to get clients through cold calling — but ended up changing the world with things like the iPhone.
Today, a total of seven companies are worth $1 trillion or more each and three of them boast a valuation of over $3 trillion each. Can you guess the common theme across all? It starts with “A” and ends with “I”.
Artificial intelligence (AI) has been popping these stocks to record highs for months now. And there’s no sign of slowing down the insane growth. All of these companies, except for one that’s not based in the US, are listed in the broad-based S&P 500 index and make up about 30% of its total weight. Can you spot them in the S&P 500 Stock Heatmap ?
Note that all numbers and rankings are measured by the companies' performances through mid-June of this year.
Let’s roll!
1. 🧩 Microsoft (ticker: MSFT )
Microsoft is the world’s most valuable company worth a staggering $3.289 trillion. The software maker quickly swooped in to lead the AI race by backing ChatGPT parent OpenAI . It has invested $13 billion in the startup.
Microsoft’s growth is largely driven by the adoption of AI across its product suite. Artificial intelligence-powered assistants such as Microsoft Copilot can operate without human intervention or direct commands, making companies’ lives easier and more productive.
💰 Market Cap : $3.289 trillion
🐮 Revenue : $211.91 billion (2023)
👶 How It Started : Microsoft's first major deal was with IBM in 1980. They developed the operating system for IBM's new computer, which they named PC DOS. The deal was worth $50,000.
2. 🧩 Apple (ticker: AAPL )
Apple has entered the chat. The iPhone maker just recently figured out how to play catch up in the AI race after doing virtually nothing for a year. Apple Intelligence — the company’s response to AI — got investors excited about the future growth prospects of iPhone sales and overall revenue generation.
The AI announcement, made during Apple’s annual developer conference, helped lift its shares by 10% and propelled the company to the number one spot, dethroning Microsoft. Briefly, though .
💰 Market Cap : $3.258 trillion
🐮 Revenue : $383.29 billion (2023)
👶 How It Started : Apple traces its humble origins to Steve Jobs’s garage where he and another founder — Steve Wozniak, would test the products before selling them over the phone. A third founder — Ronald Wayne — was in the company for just 12 days and sold his 10% stake for $800. That stake today is worth more than $325 billion.
3. 🧩 Nvidia (ticker: NVDA )
Nvidia is the highflyer technology company responsible for building out the infrastructure layer of the artificial intelligence revolution. Its coveted AI chips are the hottest commodity for all other technology giants and that’s where Nvidia’s power comes from.
Earlier this month, Nvidia’s market value crossed $3 trillion for the first time, overtaking Apple and becoming the third company to ever breathe the rarefied air of so much money. First place coming soon?
💰 Market Cap : $3.244 trillion
🐮 Revenue : $60.92 billion (2023)
👶 How It Started : Jensen Huang, who never interviews wearing anything other than a black jacket, was cleaning tables and washing dishes at his local Denny’s diner. And that’s where he sat with his two friends — hardware savant Chris Malachowsky and software geek Curtis Priem — when he founded his chip making business Nvidia.
4. 🧩 Alphabet (ticker: GOOGL )
Alphabet, parent of search dominator Google, is taking on Microsoft in the rushed race to market an AI assistant. The company’s first generation AI bot, Bard, suffered a major blow at launch (it returned false information). Subsequent attempts failed to present any threat to ChatGPT so Alphabet rebranded it to Gemini.
💰 Market Cap : $2.194 trillion
🐮 Revenue : $307.39 billion (2023)
👶 How It Started : The founders, Larry Page and Sergey Brin, initially worked on their search engine project from their dorm rooms at Stanford University. They later moved to a garage in Menlo Park, California, which was owned by Susan Wojcicki, former CEO of YouTube. Google purchased YouTube for $1.65 billion in 2005. Today, YouTube generates that amount in two weeks.
5. 🧩 Amazon (ticker: AMZN )
Amazon, the ecommerce and cloud computing heavyweight, is riding the AI wave thanks to its cloud computing division Amazon Web Services (AWS). It’s the company’s cash cow, revenue generator, profit driver, or however you want to call it.
For the most recent quarter, AWS hit $100 billion in annual revenue run rate — a financial metric that estimates future growth based on current performance. Or the opposite of "Past performance is no guarantee of future results."
💰 Market Cap : $1.911 trillion
🐮 Revenue : $574.78 billion
👶 How It Started : Amazon was founded by Jeff Bezos in 1994 after he left his analyst job at the hedge fund D. E. Shaw & Co, inspired by the rapid growth of the internet. He took the risk of selling things online and picked books due to their wide selection and ease of distribution. And the rest is history.
6. 🧩 Saudi Arabian Oil (ticker: 2222 )
An outlier in the rankings saturated by tech giants, Saudi Arabian Oil is the world’s largest oil producer. Also known as Saudi Aramco, it’s the single most important revenue source for the Saudi government (makes up 92% of its budget to be exact). In 2022, when energy prices boomed following the Covid lockdown, Aramco pocketed record profits of $161 billion.
💰 Market Cap : $1.783 trillion
🐮 Revenue : $440.80 billion (2023)
👶 How It Started : Saudi Aramco was established in the 1930s when Standard Oil of California discovered oil in Saudi Arabia and formed the California-Arabian Standard Oil Company. By the 1980s, the Saudi government had fully nationalized the company, renaming it Saudi Aramco.
7. 🧩 Meta Platforms (ticker: META )
Last on our list of $1 trillion companies and beyond is Meta Platforms, previously known as Facebook. The brainchild of Harvard dropout Mark Zuckerberg had a rough 2022 with more than 70% wiped out of its value and knocking it out of the $1 trillion club.
The following year, 2023, was a lot more generous to the social media behemoth as it gained nearly 200% and jumped right back into a 13-digit valuation. The company was up another 45% for the first half of 2024.
💰 Market Cap : $1.279 trillion
🐮 Revenue : $134.90 billion (2023)
👶 How It Started : Facebook was initially called "Thefacebook" and was limited to Harvard students when it first launched on February 4, 2004. The company’s first office was Mark Zuckerberg’s dorm room.
📣 Let’s Hear from You!
What’s your favorite pick of the world’s top seven companies ranked by market capitalization? Let us know in the comments!
You Need An Edge In The Markets - Tradingview Has The Tools!👉📈 In the video, we look at a EURUSD trade opportunity, but more importantly, we delve into essential features and tools available on TradingView, which can considerably enhance your trading edge. Here’s what we cover:
✅ 1: Multi-Chart Layout:
- TradingView’s workspace allows you to view multiple charts simultaneously. This feature is particularly useful when analyzing currency pairs like EURUSD.
- By comparing different timeframes or related assets, you gain a broader perspective on market dynamics.
✅ 2: Currency Indexes:
- Currency indexes provide crucial insights. They help answer questions like:
Is the EUR (Euro) truly under pressure?
Is the USD (US Dollar) gaining strength?
- For instance, even if the EURUSD pair appears bearish, understanding the individual currency strengths is vital. Sometimes, two currencies may be trending in the same direction with one slightly stronger than the other.. you might look to avoid trading the currency pair associated with this scenario.
✅ 3: Entry, Stop Loss, and Target Levels:
- We explore how to identify optimal entry points, setting a suitable stop-loss, and define profit targets.
📢Leveraging TradingView’s tools, you can fine-tune your trading strategy and gain a real edge in the currency markets.
📢 Remember, steady conservative and consistant trading, along with rigorous risk management, is key. Happy trading! 🛡️🌟
BTC looks ready to deliver a 9% moveBitcoin prices are currently stuck in a rectangle pattern. A break below $66,000 could potentially send prices down to $60,000, a drop of 9%. Conversely, a break above $72,000 could lift prices towards $77,970 per coin.
Recent trends show a stronger dollar, particularly against the Euro and British pound. If this strength continues, it could negatively impact Bitcoin prices, potentially leading to a break below the $66,000 support level. Additionally, the Nasdaq 100 is up 7.5% from its last swing low on May 31st without a major correction. While shorting the Nasdaq 100 is a high risk idea, a pullback is likely and could influence Bitcoin, pushing it below the critical $66,000 support.
If Bitcoin breaks out of this rectangle pattern, traditional risk management suggests placing a stop loss at the high of the breakout candle for a bearish break and below the breakout candle low for a bullish breakout. This strategy allows the price to return to the pattern but prevents it from moving too deeply, which could result in reaching the other side of the pattern.
As always, do your own research and proceed with caution. This content is not directed to residents of the EU or UK.
Any opinions, news, research, analyses, prices or other information contained on this website is provided as general market commentary and does not constitute investment advice. ThinkMarkets will not accept liability for any loss or damage including, without limitation, to any loss of profit which may arise directly or indirectly from use of or reliance on such information.
Forex Market Liquidity: Analysis and Implications for TradersForex Market Liquidity: Analysis and Implications for Traders
The foreign exchange market is renowned for its dynamic and fast-paced nature. As traders navigate this landscape, understanding the concept of liquidity becomes crucial. In this article, we analyse its components, explore factors that influence it, measure and analyse its impact, discuss potential risks for traders, and present real-life examples to illustrate its implications.
What Is Liquidity in the Forex Market?
Liquidity in the forex market refers to the ease with which a currency pair can be bought or sold without causing a significant change in its price. Highly liquid assets are usually easily tradable, while less liquid assets may experience more considerable price fluctuations during transactions and bear higher spreads.
Liquidity Components
The liquidity of a currency pair is influenced by several factors, which traders need to consider when constructing a liquidity-proof trading strategy. These include the market depth, the bid-ask spread, and the trading volume.
- Market depth represents the number of buy and sell orders at different price levels in the order book. A deep market with many orders at different price levels typically suggests higher liquidity.
- The bid-ask spread is the difference between the highest price a buyer agrees to pay and the lowest price a seller agrees to accept. A narrower spread typically indicates higher liquidity, while a wider spread reflects lower liquidity. Traders often monitor the spread to gauge current conditions.
- Trading volume refers to the total number of currency units traded within a specified period. Higher trading volume generally indicates greater liquidity, signalling a robust trend. Low trading volume could indicate liquidity issues.
Risks for Traders Arising From Liquidity Levels in Forex
Liquidity is a crucial consideration for traders as it directly affects transaction costs and the ease of entering or exiting positions. High levels generally result in lower transaction costs and less slippage, providing traders with potentially more exciting conditions. Additionally, liquidity may contribute to price stability, reducing the impact of large trades on prices.
Low levels, on the other hand, can pose certain risks that traders must be aware of. In illiquid markets, larger trades can have a more pronounced impact on prices, potentially resulting in random price movements and unfavourable execution prices. Forex market liquidity implications suggest that low liquidity can lead to increased volatility, making it challenging to analyse price movements accurately. In low liquidity conditions, traders may also experience slippage and delays in order execution, impacting the efficiency of trades.
Factors Influencing Liquidity in Forex Trading
Various factors influence current market liquidity in the forex market, and understanding these dynamics is essential for traders:
- Market Participants: The presence of a diverse range of participants, including retail traders, institutional investors, and central banks, contributes to liquidity. A balanced mix of participants often leads to a more liquid market.
- Economic Indicators: Economic releases, such as employment data, GDP figures, and interest rate decisions, can significantly impact a currency’s trading activity. Traders often witness increased volatility before and after such data is released, affecting market liquidity.
- Time of Day: Forex operates 24 hours a day, five days a week. Volume varies depending on the time of day, with peak liquidity during the overlap of major trading sessions.
Forex Market Liquidity Indicators and Measures
Assessing quantitative metrics is a fundamental initial step in a profound forex market liquidity analysis. Let’s discuss some popular indicators which can help evaluate the liquidity level using the trading volume:
- On-Balance Volume (OBV): OBV assesses the strength of a price trend by evaluating the relationship between volume flow and price movements. Higher liquidity often accompanies stronger and more sustained price trends.
- Volume Oscillator: When the volume oscillator is positive or above a specific threshold, it indicates that the recent trading volume has been relatively high. This may suggest that there is more liquidity in the asset.
- Money Flow Index (MFI): The MFI considers trading volume as a component of its calculation. A high trading volume, when combined with significant price movements, can result in a higher MFI reading, indicating strong market participation and potentially higher liquidity. A low trading volume during price movements may result in a lower MFI reading, suggesting reduced liquidity and potentially less market interest.
Price Gaps: In illiquid markets, there are fewer participants and lower trading volumes. In such conditions, price gaps are more likely to happen and can be more substantial. With fewer participants, it becomes challenging to match buyers and sellers efficiently. As a result, a significant order or news event can lead to a notable price gap when the market reopens.
You can visit FXOpen and explore new trading opportunities for some of the most liquid currency pairs through the free TickTrader trading platform.
Real-Life Examples of FX Liquidity
To illustrate the importance of considering liquidity in a forex strategy and how it can impact trader behaviour, let’s consider some real-life examples:
The 2015 Swiss Franc Depegging
In 2015, the sudden decision by the Swiss National Bank (SNB) to remove the Swiss Franc (CHF) peg against the euro had a profound impact on the forex. The depegging in January 2015 led to a sudden drop in value, causing not only an unprecedented shift in trading dynamics but also triggering a significant price gap. The market experienced a reduction in trading volume, highlighting the challenges of liquidity in the face of unexpected events.
High Volumes During Trading Session Overlaps
The EUR/USD currency pair experiences varying trading volumes throughout different global sessions, primarily influenced by the overlap of major trading hours. The chart below depicts the significant volume spikes occurring during the overlap between the European (UTC 08:00 - 17:00) and North American (UTC 13:00 - 22:00) sessions, commonly known as the "London-New York overlap." This period witnesses peak trading volumes, providing traders with optimal conditions for executing trades.
Takeaway
Understanding liquidity is paramount for traders navigating the complexities of the financial markets. By comprehending the components of trading activity and analysing influencing factors and their impact on real-life trading, traders may make more informed decisions to potentially reduce risks and optimise their trading strategies. You trade forex and commodity, stock, and index CFDs today by opening an FXOpen account!
This article represents the opinion of the Companies operating under the FXOpen brand only. It is not to be construed as an offer, solicitation, or recommendation with respect to products and services provided by the Companies operating under the FXOpen brand, nor is it to be considered financial advice.
Apple - Back to no.1 in the world!NASDAQ:AAPL is back to being no.1 in the world after rallying 11% in two days.
After moving higher +25% over the past two months, Apple is now back to being the most valuable company in the world with a market cap of 3.4 trillion dollars. This means that Apple is now back to leading the indices but Apple is also retesting resistance. A pullback is definitely likely considering that trees do not grow to the sky, but the overall trend is simply clearly bullish!
Levels to watch: $170, $215
Keep your long term vision,
Philip - BasicTrading
