Kelly Criterion and other common position-sizing methodsWhat is position sizing & why is it important?
Position size refers to the amount of risk - money, contracts, equity, etc. - that a trader uses when entering a position on the financial market.
We assume, for ease, that traders expect a 100% profit or loss as a result of the profit lost.
Common ways to size positions are:
Using a set amount of capital per trade . A trader enters with $100 for example, every time. This means that no matter what the position is, the maximum risk of it will be that set capital.
It is the most straight-forward way to size positions, and it aims at producing linear growth in their portfolio.
Using a set amount of contracts per trade . A trader enters with 1 contract of the given asset per trade. When trading Bitcoin, for example, this would mean 1 contract is equal to 1 Bitcoin.
This approach can be tricky to backtest and analyse, since the contract’s dollar value changes over time. A trade that has been placed at a given time when the dollar price is high may show as a bigger win or loss, and a trade at a time when the dollar price of the contract is less, can be shown as a smaller win or loss.
Percentage of total equity - this method is used by traders who decide to enter with a given percentage of their total equity on each position.
It is commonly used in an attempt to achieve ‘exponential growth’ of the portfolio size.
However, the following fictional scenario will show how luck plays a major role in the outcome of such a sizing method.
Let’s assume that the trader has chosen to enter with 50% of their total capital per position.
This would mean that with an equity of $1000, a trader would enter with $500 the first time.
This could lead to two situations for the first trade:
- The position is profitable, and the total equity now is $1500
- The position is losing, and the total equity now is $500.
When we look at these two cases, we can then go deeper into the trading process, looking at the second and third positions they enter.
If the first trade is losing, and we assume that the second two are winning:
a) 500 * 0.5 = 250 entry, total capital when profitable is 750
b) 750 * 0.5 = 375 entry, total capital when profitable is $1125
On the other hand, If the first trade is winning, and we assume that the second two are winning too:
a) 1500 * 0.5 = 750 entry, total capital when profitable is $2250
b) 2250 * 0.5 = 1125 entry, total capital when profitable is $3375
Let’s recap: The trader enters with 50% of the capital and, based on the outcome of the first trade, even if the following two trades are profitable, the difference between the final equity is:
a) First trade lost: $1125
b) First trade won: $3375
This extreme difference of $2250 comes from the single first trade, and whether it’s profitable or not. This goes to show that luck is extremely important when trading with percentage of equity, since that first trade can go any way.
Traders often do not take into account the luck factor that they need to have to reach exponential growth . This leads to very unrealistic expectations of performance of their trading strategy.
What is the Kelly Criterion?
The percentage of equity strategy, as we saw, is dependent on luck and is very tricky. The Kelly Criterion builds on top of that method, however it takes into account factors of the trader’s strategy and historical performance to create a new way of sizing positions.
This mathematical formula is employed by investors seeking to enhance their capital growth objectives. It presupposes that investors are willing to reinvest their profits and expose them to potential risks in subsequent trades. The primary aim of this formula is to ascertain the optimal allocation of capital for each individual trade.
The Kelly criterion encompasses two pivotal components:
Winning Probability Factor (W) : This factor represents the likelihood of a trade yielding a positive return. In the context of TradingView strategies, this refers to the Percent Profitable.
Win/Loss Ratio (R) : This ratio is calculated by the maximum winning potential divided by the maximum loss potential. It could be taken as the Take Profit / Stop-Loss ratio. It can also be taken as the Largest Winning Trade / Largest Losing Trade ratio from the backtesting tab.
The outcome of this formula furnishes investors with guidance on the proportion of their total capital to allocate to each investment endeavour.
Commonly referred to as the Kelly strategy, Kelly formula, or Kelly bet, the formula can be expressed as follows:
Kelly % = W - (1 - W) / R
Where:
Kelly % = Percent of equity that the trader should put in a single trade
W = Winning Probability Factor
R = Win/Loss Ratio
This Kelly % is the suggested percentage of equity a trader should put into their position, based on this sizing formula. With the change of Winning Probability and Win/Loss ratio, traders are able to re-apply the formula to adjust their position size.
Let’s see an example of this formula.
Let’s assume our Win/Loss Ration (R) is the Ratio Avg Win / Avg Loss from the TradingView backtesting statistics. Let’s say the Win/Loss ratio is 0.965.
Also, let’s assume that the Winning Probability Factor is the Percent Profitable statistics from TradingView’s backtesting window. Let’s assume that it is 70%.
With this data, our Kelly % would be:
Kelly % = 0.7 - (1 - 0.7) / 0.965 = 0.38912 = 38.9%
Therefore, based on this fictional example, the trader should allocate around 38.9% of their equity and not more, in order to have an optimal position size according to the Kelly Criterion.
The Kelly formula, in essence, aims to answer the question of “What percent of my equity should I use in a trade, so that it will be optimal”. While any method it is not perfect, it is widely used in the industry as a way to more accurately size positions that use percent of equity for entries.
Caution disclaimer
Although adherents of the Kelly Criterion may choose to apply the formula in its conventional manner, it is essential to acknowledge the potential downsides associated with allocating an excessively substantial portion of one's portfolio into a solitary asset. In the pursuit of diversification, investors would be prudent to exercise caution when considering investments that surpass 20% of their overall equity, even if the Kelly Criterion advocates a more substantial allocation.
Source about information on Kelly Criterion
www.investopedia.com
Community ideas
How to Trade The Break & RetestWelcome to our Power Patterns series in which we teach you how to trade some of the most powerful price patterns which occur on any timeframe in every market.
In this week's instalment, we delve into the Break & Retest pattern—a strategic approach to navigating breakout trades. If you've wrestled with the frustration of false breakouts, incorporating this pattern into your trading toolkit may help you overcome this challenge and put you on the path to becoming a more confident and consistent trader.
We’ll teach you:
How to identify and anticipate the pattern
The underlying reasons that make the Break & Retest pattern such a valuable asset
Three simple rules that can significantly enhance the pattern's effectiveness
I. Understanding the Break & Retest:
In essence, the Break & Retest pattern involves entering the market during the initial pullback following a breakout.
The pattern employs a three-step approach to validate the breakout signal. It relies on a fundamental tenet of price action trading: when resistance is effectively breached, it tends to transition into a supportive platform for the development of uptrends, while conversely, when a support level is convincingly broken, it typically transforms into resistance within markets trending lower.
Let’s run through the three steps in detail:
1. The breakout: This is the initial movement where the price breaches a significant support or resistance level. It's essential to look for signs of genuine momentum and increased trading volume during this phase to validate the breakout.
2. The retest: Following the breakout, the price retraces back to the level it previously broke through.
3. The reversal: This is price action confirmation that broken resistance has turned into support (in the case of a bullish breakout) or broken support has turned into resistance if the (in the case of a bearish breakout). The confirmation comes in the form of a reversal candle. Typical reversal candles are long-tailed hammer or pin-bar candles, but they can also be engulfing candles or multi-candle reversal patterns.
The bullish Break & Retest:
The bearish Break & Retest:
II. How to trade the break and retest:
Identifying and anticipating : The crucial first step in trading the Break & Retest pattern is to identify significant support and resistance areas on the price chart. Once these levels are recognised, traders should anticipate the pattern's development. Utilising price alerts can prove highly beneficial in this process, as they notify traders when the market is breaking out from these key levels. Additionally, setting alerts for the market's retest of the broken support or resistance level is equally valuable.
Entry points : Central to entering this pattern is the reversal formation observed during the retest of the broken support or resistance zone. An entry order may be strategically placed just above the high of the reversal candle (see bullish scenario) or below the low of the reversal candle (see bearish scenario).
Stop-loss placement : For risk management, positioning a stop loss is imperative. In a bullish scenario, a stop can be placed at a level below both the low of the reversal pattern and below the broken resistance level.
Price targets : Traders have the choice of setting a price target relative to market structure (the next key level or support or resistance) or a price target relative to risk. A price target twice the size of your risk is reasonable if you’re trading in-line with the dominant trend.
Bullish scenario:
Bearish scenario:
III. Why the Break & Retest pattern is so useful
Breakouts from key levels tend to be fast and volatile, making for a high-stress trading environment.
The Break & Retest pattern is so useful because it really helps to take the stress out of trading breakouts. It provides traders with a structured approach for confirming the authenticity of breakout signals while simultaneously reducing the associated risks of false breakouts.
It's important to acknowledge that not all breakouts will result in a pullback and retest of the breakout zone. However, over a large data set, traders who are patient enough to sit on their hands and wait for the first pullback will be less likely to be caught out by fakeouts and better positioned to manage their risk.
IV. Three simple rules to increase the patterns effectiveness:
Rule 1:The trend is your friend
It’s an old trading cliché, but when it comes to trading the Break & Retest pattern, the trend really is your friend. This is because the Break & Retest pattern fundamentally functions as a pullback pattern, and pullbacks tend to exhibit greater success within well-established trends.
Rule 2:The pullback should have less momentum than the breakout
The thrust of the breakout move should be steeper and have more momentum and volume than the pullback phase. A pullback that is just as steep as the breakout phase would be indicative of a failed breakout.
Rule 3:The retest should not linger
Optimal Break & Retest setups exhibit a resumption of breakout momentum shortly after the retest.. We do not want to see the market linger near the broken resistance (or support) level.
V. Managing risks and pitfalls:
Risk Management: Implement proper risk management techniques, such as position sizing, checking the economic calendar, and diversifying your trading portfolio. This helps protect against unexpected market movements and potential losses.
Additional Analysis: Don't rely solely on the Break & Retest pattern for trading decisions. Supplement your analysis with fundamental factors and market sentiment to gain a comprehensive view of the market.
Disclaimer: This is for information and learning purposes only. The information provided does not constitute investment advice nor take into account the individual financial circumstances or objectives of any investor. Any information that may be provided relating to past performance is not a reliable indicator of future results or performance.
Hawkish Fed! Strong Dollar! - What are the markets expecting?he Fed has kept interest rates steady as expected, but Chairman Jerome Powell's statements were much more hawkish than anticipated.
In summary, 12 out of 19 Fed members are calling for one more interest rate hike this year. No interest rate cuts are expected this year. Inflation is expected to remain high over the next 12 months. Tightening and balance sheet reduction will continue. An increase in unemployment is expected for 2024. Even if there's no interest rate hike this month, there could be one more increase later in the year.
Key takeaways from the monetary policy meeting minutes and Powell's remarks:
The year-end interest rate expectation for 2023 has been raised to 5.6%, and the expected rate for 2024, initially at 4.6%, has been increased to 5.1%. Additionally, the expectation for 2025, previously at 3.4%, has been raised to 3.9%.
Long-term interest rates will remain high, with the long-term rate expectation at 2.5%.
Unemployment expectations:
3.8% for 2023
4.1% for 2024
There is a bias towards an increase in unemployment.
Core inflation expectations:
3.7% for 2023
2.6% for 2024
2.3% for 2025
2.0% for 2026
Expectations suggest a gradual decline rather than a rapid one.
With the release of the monetary policy minutes, 2-year U.S. Treasury yields have risen to 5.1%, which is particularly negative news for stocks and gold.
MARKET EXPECTATIONS:
Gold:
Initially, gold may continue to rise to the range of 1,960-1,963 as an immediate response. However, the continued high-interest environment will exert downward pressure on gold, and we may see a decline to around 1,880 levels after reaching 1,960.
U.S. Stock Indices:
Given the high-interest rates and high inflation, we shouldn't expect significant gains in the stock market. Currently, it's prudent to view every increase as a selling opportunity.
USD:
The strengthening of the dollar is expected to persist, especially against currencies of countries signaling relaxation in their monetary policies. The dollar is likely to maintain its strength for some time.
EUR:
The European Central Bank (ECB) took a dovish stance in its recent interest rate decision, reducing the possibility of further rate hikes. Although there has been a slight decrease in Eurozone inflation data, we may see a chart indicating USD dominance and a downward trend in the EUR/USD pair.
JPY:
Japan remains the only country with negative interest rates (-0.10%) and a commitment to a loose monetary policy, suggesting that the depreciation of the yen will continue.
GBP:
The Bank of England (BoE) decision and statements tomorrow will be crucial for the pound. However, our expectation is that tomorrow's announcements will resemble the Fed's hawkish stance, leading to some strengthening of the GBP. We will publish a new analysis after tomorrow's meeting to provide an update on the pound's situation.
Oil:
Today's U.S. crude oil inventory data came in below expectations, indicating that OPEC's production cuts are still in effect. We expect oil prices to reach $100 due to ongoing production cuts, which will negatively impact both stock markets and inflation for some time.
How To Improve Your Win RateHey guys!
Today, we're discussing 3 concrete strategies that you can use to improve your win rate with your trading strategy. This includes:
1.) How to improve your underlying decision making (trade with the trend, take advantage of levels, and understand the fundamentals driving supply and demand).
2.) How to adjust your exit strategy to improve your win rate, trading psychology, and (potentially) expected value.
3.) How to reframe the markets using probabilities and options. Leveraging the law of large numbers can allow you to hit what you're aiming for, including a high win rate with many different option structures.
Questions? Hit us up in the comments.
Looking for more high-probability trade ideas? Follow us below. ⬇️⬇️
The Power of Support Lines: A Bullish Trend on the Horizon?Introduction:
In technical analysis, support lines play a crucial role in identifying potential trends and predicting future market movements. When multiple levels of support converge at higher levels, it can indicate a strong bullish trend. In this article, we will explore such a scenario and discuss how it could impact the overall direction of the market.
The Case Study:
Let's consider an example where the support lines for the weekly, daily, and hourly charts all intersect at a higher level. This convergence suggests that there may be a strong upward pressure pushing prices towards new highs. However, before jumping into conclusions, let's analyze each chart individually to gain a better understanding of the situation.
Weekly Chart ]Analysis:
On the weekly chart, the support line has been consistently above the price range, indicating a solid base of support. As long as this level remains intact, the bulls have control over the market. Moreover, the RSI (Relative Strength Index) is hovering around the mid-50s, which indicates a neutral market condition.
Daily Chart Analysis:
Moving down to the daily chart, we notice that the support line is also above the price range, confirming our initial observation from the weekly chart. Additionally, the MACD (Moving Average Convergence Divergence) indicator is showing a bullish divergence, suggesting that the uptrend may continue.
Hourly Chart Analysis:
Finally, let's examine the hourly chart. Here, we see that the support line is once again above the price range, reinforcing the idea of a solid base of support. Furthermore, the Stochastic Oscillator is reading near its oversold territory, signaling a potential bottom.
Conclusion:
While the intersection of these three support lines at higher levels is certainly intriguing, it's essential to remember that no single piece of evidence can guarantee a specific outcome. Other factors like economic indicators, geopolitical events, and investor sentiment must also be taken into account when making trading decisions. However, if we combine the findings from all three charts with other relevant data points, we might infer that the market is poised for a potential bullish move. It's important to monitor the situation closely and adjust our strategies accordingly based on further developments. Ultimately, the key to successful trading lies in staying adaptable and open to changing circumstances.
How To Sync Charts Within A Multi-Chart LayoutAre you interested in looking at multiple charts at once without the need of adding more monitors? Well in this video I'm going to show you how to do so here on Tradingview along with some tips on how you can sync the charts & make life a lot easier for you when it comes to watching multiple markets at once and/or backtesting.
Please leave any questions or comments below & make sure to HIT THAT BOOST BUTTON before you head out.
Akil
Unveiling Crypto Market Insights: RSIHello, market enthusiasts!
In previous post , we described a group of technical indicators - Oscillators, providing a solid foundation for today's discussion on RSI. The Relative Strength Index (RSI), developed by J. Welles Wilder, is a momentum oscillator that measures the speed and change of price movements.
Calculating RSI:
RS = Average of x days' up closes / Average of x days' down closes
RSI = 100 - (100/(1+RS))
Interpreting RSI:
RSI is plotted on a vertical scale of 0 to 100. Movements below 30 are considered oversold, and movements above 70 are considered overbought. In trending markets, it is common to adjust the conditions to 80 and 20, respectively.
In the book "Technical Analysis of the Financial Markets," John J. Murphy describes the scenarios where RSI holds the greatest potential.
"In my personal experience with the RSI oscillator, its greatest value lies in identifying failure swings or divergences that occur when the RSI is above 70 or below 30. Let's clarify another crucial point regarding the use of oscillators. In any strong trend, either up or down, an extreme oscillator reading typically appears sooner or later. In such cases, claims that a market is overbought or oversold are usually premature and can lead to an early exit from a profitable trend. In strong uptrends, overbought markets can remain overbought for an extended period. Just because the oscillator has moved into the upper region is not a sufficient reason to liquidate a long position (or, even worse, short into a strong uptrend)."
Failure Swings:
Failure swings can help us identify trading triggers. These occur when the RSI is above 70 or below 30. A top failure swing happens when the RSI (above 70) fails to exceed the previous peak in an uptrend, followed by a downside break of the previous trough. The opposite applies to a bottom failure swing.
Now, let's shift our focus to the BTC/USD chart:
Today, we are analyzing the price movements of BTC/USD on a 4-hour timeframe. The range marked with the blue lines represents last week's trading range. The current RSI value is approximately 75 (indicating overbought conditions), and the price has just broken the previous week's range high. Given the current price action, we should be vigilant for potential setups:
If the price remains above the previous week's high and the RSI remains in the overbought area, we could watch for:
a. A robust trend in which both price and RSI continue to ascend.
b. The potential setup of a "top failure swing," which would occur if the price rises further, but the RSI fails to surpass the previous peak in an uptrend, followed by a downside break of the previous trough. Signaling to exhaustion of the trend.
If the breakout turns out to be a false breakout or a fake-out :
c. A retracement to the range low with the RSI in the oversold area.
d. A breakout below the range low and a bottom failure swing.
e. Sideways price action in the previous week's range.
f. other
For the purposes of this post, we've highlighted some of the setups we discussed theoretically in today's post. Keep in mind that each of these setups takes time to unfold. Additionally, note that in trending markets, claims that a market is overbought or oversold are typically premature and can result in an early exit from a profitable trend.
Please let us know which option you find most likely. Additionally, share which method of using RSI has proven to be the most effective in your trading strategies.
The predictable Jerome Powell..!Jerome Powell is likely to say the following in the upcoming conference on Wednesday, September 20th:
* The Federal Reserve is committed to bringing inflation down to its 2% target.
* The Fed is prepared to continue raising interest rates until inflation is under control.
* The Fed is aware of the risks of a recession, but it believes that these risks are outweighed by the risks of high inflation.
* The Fed is monitoring economic data closely and will adjust its monetary policy as needed.
Powell may also discuss the following topics:
* The Fed's plans to reduce the size of its balance sheet.
* The impact of the war in Ukraine on the global economy.
* The Fed's outlook for the US economy.
"We expect economic growth to slow down below its average in the coming months, but we are important to avoid a recession."
Here are some specific quotes from Powell's previous FOMC press conferences that he may repeat or echo in the upcoming conference:
* "Inflation is running far too high, and we are strongly committed to bringing it back down to 2%."
* "We will continue to raise interest rates until we are confident that inflation is on a sustainable downward path."
* "We understand that high inflation is causing hardship for many Americans, and we are committed to doing everything we can to bring it down."
* "We are monitoring economic data closely, and we will adjust our monetary policy as needed."
* "We are committed to a smooth transition to a more neutral monetary policy stance."
"The US job market remains strong, with low unemployment and high job openings."
It is important to note that Powell's remarks at the upcoming FOMC conference will be based on the latest economic data and the FOMC's assessment of the risks and uncertainties facing the US economy.
However, e market reaction to a possible FED pause is almost unpredictable!
How to Trade with Andrews’ PitchforkIn the world of trading, tools like Andrews’ Pitchfork stand out for their precision and versatility. Dive in to discover how to use the Pitchfork for stock analysis and more with this comprehensive article, including how it’s drawn, its applications, and its limitations.
What Is the Andrews' Pitchfork Indicator?
Andrews' Pitchfork is a popular technical indicator in the financial markets, designed by Dr. Alan Andrews. This tool helps traders visualise price channels and anticipate possible trend directions. At its most basic, the Pitchfork is composed of three parallel lines that trace the journey of an asset's price on a chart.
To plot this tool, traders begin by identifying three significant points: a notable high, a low, and a subsequent high or low. The central line, known as the "median line," connects the first point to the midpoint of the second and third points. This median line represents the heart of the market's momentum over a given period.
On either side of the median line, two parallel lines are drawn, stemming from the second and third points. These lines act as boundaries, indicating possible areas where the price may encounter support or resistance.
In other words, the upper line showcases where the price might face hurdles in an uptrend, while the lower line pinpoints regions where the price could hold strong or face obstacles during downtrends. Together, these three lines create a channel that offers traders insights into potential price movements, making Andrews' Pitchfork a powerful tool in technical analysis.
How to Draw Andrews' Pitchfork in Technical Analysis
To effectively employ Andrews' Pitchfork in a strategy, one must first establish its foundation: the three pivotal points. Here's a systematic approach:
Identify the Initial Point: Start with a significant high or low on the price chart. This point will form the base of the Pitchfork.
Locate the Subsequent Points: After the initial point, identify the next major high and low in sequence. These points provide the width of the Pitchfork and help establish its angle.
Draw the Median Line: Connect the initial point to the midpoint of the line formed by the two subsequent points. This becomes your median line.
Form the Parallel Lines: Draw two lines, starting from the two subsequent points, running parallel to the median line. These will create the potential support and resistance boundaries of the Pitchfork.
With these steps, Andrews' Pitchfork is plotted on the chart, offering a structured view of potential price movements and trends. If you’d like to practise drawing Andrews’ Pitchfork, head over to FXOpen’s free TickTrader platform to get started in minutes.
How to Trade with Andrews' Pitchfork
The Andrews' Pitchfork trading pattern offers a strategic lens to interpret market movements. Traders aren’t restricted to just using Andrews’ Pitchfork for day trading; it’s flexible enough to suit a wide range of timeframes and strategies.
Leveraging this tool can be broken down into two primary strategies based on the price's interaction with the Pitchfork's lines.
Support and Resistance (Trading Ranges)
The outer lines of the Pitchfork chart pattern often act as dynamic levels of support and resistance:
Support Levels: When the price is in a downtrend and approaches the lower line of the Pitchfork, traders watch for potential buying opportunities. A bounce off this line might indicate strong support, presenting a chance to buy in anticipation of a price increase.
Resistance Levels: In an uptrend, the upper line represents a potential resistance point. If the price struggles to move past this line or shows signs of reversing, traders might consider selling or taking short positions, anticipating a price drop.
Breakouts and Breakdowns (Trending Markets)
Occasionally, prices can breach the boundaries of the Pitchfork:
Breakouts: If the price convincingly moves above the upper line during an uptrend, it may signal a strong bullish momentum. Traders can consider buying or adding to long positions, expecting further upward movement.
Breakdowns: Conversely, if the price closes below the lower line in a downtrend, it indicates heightened bearish sentiment. This can be an opportunity for traders to sell or initiate short positions, anticipating continued declines.
In all scenarios, it's essential to incorporate other technical indicators and maintain stop-loss orders to manage risks effectively.
Limitations of Using Andrews' Pitchfork
While Andrews' Pitchfork is a valuable tool for technical analysts, it's crucial to be aware of its limitations. Firstly, the accuracy of the Pitchfork heavily depends on the correct identification of the three pivotal points. An incorrect selection can lead to misleading channels and false signals. Additionally, in highly volatile markets, the price may frequently breach the Pitchfork's boundaries, making predictions challenging.
The tool also assumes that the market will respect the defined channels, which isn't always the case, especially during unexpected news events. Therefore, traders use Andrews' Pitchfork in conjunction with other technical indicators to enhance decision-making and minimise potential pitfalls.
Final Thoughts
Understanding the Pitchfork in technical analysis can provide traders with a strong framework to anticipate potential market movements. Its structured approach to visualising price channels is invaluable, yet it's essential to remember its limitations.
To kickstart your trading journey with this tool, you can open an FXOpen account to gain access to a wide variety of markets, lightning-fast execution speeds, and competitive trading costs. Good luck!
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.
Where is the Euro Headed?Despite unprecedented rate hikes up to 450 basis points over the last 12 months the Euro has lost ground to the US Dollar for the last nine straight weeks. As a result, the Eurozone interest rates are historical highs.
Currencies desire nothing more than higher rates. The Euro should have popped but instead it flopped after the ECB’s rate hiking decision last Thursday. That says something about the underlying economy and the expectations for interest rates ahead.
This note puts forth data backed arguments that macroeconomic fundamentals in Europe is visibly weak. In sharp contrast, the robust economic fundamentals in the US provide strong tailwinds to the US dollar.
Consequently, the Fed has great monetary manoeuvring space which will impose bearish pressure on the Euro. Having cranked up rates to a peak unseen before, the ECB’s hands are tied with little room for further hikes despite its hawkish tone.
This paper posits a short position in CME Micro EUR/USD Futures expiring in Dec 2023. To seize opportunity from a weakening Euro, a short position with an entry at 1.071 combined with a target at 1.035 and hedged by a stop at 1.1025 will deliver an expected reward-to-risk ratio of 1.14x.
MONETARY POLICY TRANSMISSION TAKES TIME
Over the last year, the ECB has increased interest rates, an unprecedented ten times to combat surging inflation. That is a full 450 basis points.
Yet inflation remains sticky and persistent. Why? One obvious reason is monetary policy transmission.
Monetary policy transmission is the process through which a Central Bank’s monetary decisions impact the economy and the price levels.
The mechanism is characterised by long, variable, and indefinite time lags. As a result, it is difficult to predict the precise timing of monetary policy actions on economy and inflation.
DATAPOINTS SIGNAL WEAKENING ECONOMY
Selected data from the minutes of the Monetary Policy Meeting of ECB Governing Council held in July points to growing weakness in Europe.
1. Yield Curve Inversion Deepening: Together with negative euro area data, the inversion has reignited recession concerns. For now, the Euro area’s equity & credit markets remain resilient, hoping for a soft landing.
2. Sharp Contraction in Euro Area: Euro Area Composite PMI has been declining since April 2023 and in July it has fallen below 50. The dynamics are consistent with a weak GDP performance for the second and third quarters of the year. Housing and business investments are estimated to have declined.
3. Shrinking Demand for Loans: The latest bank lending survey signals further tightening of credit standards and sharp drop in loan demand in Q2 across businesses and households.
The reported demand for loans among corporations had fallen to an all-time low since the start of the survey in 2003 and, for the first time, was lower than at the height of the global financial crisis.
4. Growth could stall due to over correction: Growth could slow far more sharply if effects of monetary policy were more forceful than expected, or if the world economy weakens dampening demand for euro area exports.
AFTER UNPRECEDENTED RATE HIKES, WHAT’S NEXT?
As evident from weakening signals cited above, the ECBs hands are tied. ECB President Lagarde has little option other than maintaining a hawkish tone to manage expectations.
When the ECB regroups again in December, the likelihood of rate hike is thin.
Hawkish pause? Maybe.
As Katie Martin writes in her weekly opinion piece for the Financial Times, “few truly believe the central bank really would raise rates further, especially while the region’s economy feels the strain from the tighter policy enacted so far and from the impact of weaker Chinese demand on German manufacturing.”
ECB’s euro area growth forecasts are on the decline. The central bank expects 0.7% growth for this year (down from 0.9% as previously estimated). For 2024, the ECB now forecasts 1% growth (compared to 1.5% growth projected previously).
Forecasting the future is hard. It is evident from a survey of economists (see chart below) conducted by Bloomberg earlier this month. The market expectations are for rates to stay flat at 4% for now with rate reductions from Q2 next year. When these expectations become consensus, Euro weakening will accelerate.
DOLLAR CONTINUED STRENGTH AGAINST THE EURO
The Euro has shed more than 5% against the greenback since mid-July. Shaky fundamentals and an elevated risk of recession have raised questions on ECB’s ability to continue hiking.
Contrast this against the conditions in the US. The US economy has been marvellously resilient and set to have one of its best years yet. This backdrop emboldens the US Fed to take on an aggressive monetary posture.
TRADE SET UP
Interest rates at record elevated levels combined with weakening economy and feeble prospects, collectively pushes recession risks higher in the eurozone. This will corner the ECB into a pause or even cause it to hint at rate cuts during the December meeting. As a result, the Euro will be pressured lower against the US dollar.
To ride on the opportunities from a weakening Euro, this paper posits a hypothetical short position in CME Micro EUR/USD Futures expiring in Dec 2023 (M6EZ2023) with an entry at 1.071 combined with a target at 1.035 and hedged by a stop at 1.1025, delivering an expected reward-to-risk ratio of 1.14x.
Each lot of CME Micro Euro Futures contract provides exposure to 12,500 Euros. It is quoted in USD per Euro increment. Each pip i.e., 0.0001 per Euro delivers a P&L of USD 1.25.
• Entry: 1.071
• Target: 1.035
• Stop: 1.1025
• Profit at Target (hypothetical): USD 450 ( = 0.036; 360 pips; 360 x 1.25 = 450)
• Loss at Stop (hypothetical): USD 393.75 ( = -0.0315; -315 pips; -315 x 1.25 = -393.75)
• Reward-to-Risk (hypothetical): 1.14x
MARKET DATA
CME Real-time Market Data helps identify trading set-ups and express market views better. 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
DISCLAIMER
This case study is for educational purposes only and does not constitute investment recommendations or advice. Nor are they used to promote any specific products, or services.
Trading or investment ideas cited here are for illustration only, as an integral part of a case study to demonstrate the fundamental concepts in risk management or trading under the market scenarios being discussed. Please read the FULL DISCLAIMER the link to which is provided in our profile description.
Crude Oil versus Stock PricesDrops in crude oil have an impact on stocks in a positive way.
The important point to remember is that falling crude oil prices have a lagged effect on the overall equity market. How long is that lag? It changes over time but it is approximately 6 months.
When oil prices rise, it too has a lagged effect on the market by a variable amount of time. Of course, it depends on many factors, regulatory and global risks constantly change. I am not covering the risk of rising oil price with this chart, only reinforcing the positive impacts of falling oil prices.
Oil prices are the most-watched price since we see them on gas station signs everywhere we drive and yet it doesn't have instant impact on the economy.
Look at the history of the price of crude oil and the price of stocks. They are related as you can see when I plot the large drops in crude and the price level of stocks when that drop occurred.
Tim 9/18/2023 10:19AM EST
Big Citibank Opportunity Citibank Opportunity - NYSE:C
Company Market Cap: $82.2 billion
Share Price Today: $42.68
Dividend: 0.53c per quarter (Annual Dividend of c.$2.06)
Annual Dividend Yield: 4.82%
Next Earnings Report: Friday 13th October 2023
Citibank (Citigroup) is the 20th largest bank in the world & a member of Global Systemically Important Financial Institutions (G-SIFIs) meaning it has stricter prudential regulation such as higher capital requirements and extra surcharges and more stringent stress tests. under the scheme deposits can be 100% guaranteed in the event of a crisis, which is not the case for smaller banks that are not considered systemically important. This additional security can add weight to a longer term hold for Citibank combined with a good 4.82% dividend yield.
Citibank has recently been in the headlines with negative news for completing a management re-org with substantial lay-offs. Whilst the news is interpreted as negative, the chart appears to reaching a point of exhaustion after 31 months of downward price pressure and a roughly 50% reduction in price from $81 down to $42. We may be forming a 3rd higher price cluster or price launch pad here at $42.
Earnings release is in a 4 and half weeks on 13thOctober and after 13 quarters of positive earnings the trend is green. Its worth noting that upon earnings release, the price can capitulate or ascend aggressively (historically this has been the way), this is why it is important to be placing bids or positions well in advance of the release (now) and on the day of the release we should be nimble and on our toes to capitalize or reduce risk with stop losses. Obviously for long term position players this is not all that important, we have our long term target and stop loss on the chart.
There is a long term trade opportunity with a stop loss at BASE 2 at $34.37. As you can see the trade has a Risk/Reward of 4:1. People who want to play it even safer could wait for a bounce off BASE 2 but for me a retracement this low could mean lower price momentum and a break of the RSI resistance. This is why I am inclined to take a position now off this base well in advance of the earnings release.
This is not my typical style of trade however I could not pass up the chart given the mid-term 31 month 50% reduction and exhaustion in price combined with the higher bases on the longer term trajectory, and to be honest the negative news really got me the contrarian in me rustled. If you look hard enough you can see a potential long term ascending triangle forming out into the 5 year time horizon. As a cherry to the trade, the dividend yield is considerably high at 4.82% for a systemically important institution – to big to fail.
In Summary
- Citigroup is one of the top 20 banks in the world
and is considered systemically important.
- Citigroup share price has been declining 31 months
with an approx. 50% reduction in price.
- Three Price Bases establishing higher lows are
reinforced by a rising RSI support line.
- To fully take advantage of the earnings release on
13th October 2023 positions need to be placed now
as the stock is extremely volatile on the day of
release.
- If the RSI support line fails to hold this could be a
warning signal of a break down into STRONG
SUPPORT ZONE (Red).
- The dividend yield is considerably high at 4.82% for
a systemically important institution offering a little
incentive for a longer term hold.
TradingView Masterclass: How To Use The Top ToolbarIn this guide, you’ll learn about all the different tools that are available to you on the chart. Specifically, we’ll be looking at the toolbars that are located at the top, bottom, left and right of the chart:
To summarize the chart above, the breakdown looks like this:
Top toolbar: Chart tools
Left-side toolbar: Drawing tools
Right-side toolbar: Community tools
Bottom toolbar: Advanced tools
Now, let’s dive into each one starting with the top toolbar where you’ll find many of the most important chart tools for all your research needs. Keep in mind that we’ve ordered each item below as if we are moving from the furthest point at the top left to the furthest point to the top right. Let’s begin!
Symbol Search (Keyboard shortcut: type the ticker)
Open the symbol search at the top left-hand corner to access over 100,000 global assets across equities, forex, crypto, futures, and more. You can find them by their ticker (e.g., type NVDA for NVIDIA Corporation) or by their description names (e.g., type the name Apple to find AAPL stock). It’s also possible to find your favorite symbols with partial searches, that is, to write part of the ticker or description name and then select the corresponding asset in the search results. If you want to filter by asset type, you can select one of the following: Stocks, Funds, Futures, Forex, Crypto, Indices, Bonds and Economy (economic indicators).
Time Intervals (Keyboard shortcut: press ,)
Select the time interval for the chart. For instance, say you’re looking at a candlestick chart and you choose a daily chart. That means each trading day will be represented by 1 candle. The most common time intervals are: 1m, 5m, 30m (intraday setups) 1h, 4h (swing trading setups) and 1D, 1W and 1M (long-term trading setups). Traders can create custom intervals as well by clicking on the Time Interval arrow and then selecting the specific parameters needed. Don’t forget to add it to your favorites if you want it to be featured in the Quick Access toolbar.
Chart types
We have more than 15 chart types available to analyze all price movements, including the new HLC area, Line with markers and Step line. Most traders prefer to use Bars, Candles and Area charts, but everyone has a different approach to markets. Be sure to find the chart type that fits your style.
Indicators, Strategies, and Metrics (Keyboard shortcut: press /)
Indicators, Strategies, and Metrics are designed to provide additional insight and information that may otherwise be difficult to see. We have over 200 technical and financial indicators while also supporting over 100,000 custom scripts coded by our community. The best way to get started here is to start exploring the Indicators, Strategies, and Metrics menu as soon as possible.
Indicator Templates
Here, you can save your custom indicator setups so that you can load them at any point in time. This tool is essential if you utilize different forms of analysis. For example, if you chart technicals and fundamentals, you can make two separate templates that can be loaded at any point depending on your need.
Alert (Keyboard shortcut: Alt + A)
Alerts are used to create custom price alerts. Instead of watching markets 24/7, go ahead and create an alert at a precise level and then wait for that alert to trigger. Let our alerts do the heavy lifting. They’re always watching markets for you. It is also possible to configure them different notifications so that you can be alerted through email, our free app or with a webhook.
Bar Replay
Bar Replay is a powerful, yet simple tool for backtesting. All experience levels can use Bar Replay for backtesting, practicing or learning about price history. To get started, click the Bar Replay button and then select a historical moment to rewind the chart backward to that point in time. Then, you can press play or pause, and retrade that moment to see how your strategy performs.
Undo/Redo Scroll (Keyboard shortcut: Ctrl + Z / Ctrl + Y)
Any changes made to the charts such as drawings or indicators can be deleted or recreated. This works just like a Word document you might create on Microsoft or Google. Use the keyboard shortcuts to quickly undo or redo specific actions.
Multi-chart Layout
If you have an Essential, Plus, Premium, or Ultimate plan, you can analyze multiple charts on your screen at the same time. Simply choose one of the available layouts from the menu to get started. You can also synchronize symbols, intervals, crosshairs, time and data ranges with the selected layout.
Manage Layouts
Create, rename and load all the layouts that you save. You can also share your layout and enable the autosave option, which is very handy so that all of your work is saved automatically. Managing your layouts is an essential part of your analytical process because it enables multiple different chart layouts to be accessed as quickly and easily as possible.
Quick Search
Need to find a function or tool on your chart? Open and use Quick Search to do that. The name of the tool is just as it can be used: quickly search for the things you need to edit, add or remove on your chart, and do it in a flash.
Chart Settings
This is where you can customize all of the fine details about your chart. The Chart Settings menu has everything from the chart color, to the gridlines and labels, the text of the scales, and more.
Fullscreen Mode (Shift + F)
When this is enabled, you will see only the chart. To exit Full screen mode, click ‘Esc’.
Snapshot and Publish
Here you can download your charts as images, copy links, share tweets, publish ideas, create live streaming video content, and comment on assets with our latest feature Minds. If you want to share your expert analysis or get feedback from others, you’ll surely want to learn how these social tools work. Go ahead and give it a try - join our community of traders.
Thanks for reading and we hope this post helps all traders and investors. Whether you’re an experienced professional or someone just getting started, we plan to create more guides like this to ensure you know how to maximize the features on our platform.
Next week, we’ll share part two of this series, and cover the drawing tools menu on the left-side of the chart.
- Team TradingView
Oil Reserves Plummet to 40-year LowThe Biden Administration is treading on dangerous ground as it continues to deplete the Strategic Petroleum Reserve (SPR) to levels not seen in decades, as geopolitical tensions flare and as global crude prices remain high.
The chart above shows that the Strategic Petroleum Reserve has declined to levels not seen since the early 1980s.
The SPR is a tool used to alleviate the market impacts of both domestic and international disruptions, caused by among other things: weather, natural disasters, labor strikes, technical failures/accidents, or geopolitical conflicts.
Source: U.S. Department of Energy. Office of Cybersecurity, Energy Security, and Emergency Response. This image is in the public domain.
Since the start of 2023, the SPR has drained by another 6.5% or 24 million barrels.
Source: U.S. Department of Energy. Office of Cybersecurity, Energy Security, and Emergency Response. This image is in the public domain.
The SPR is comprised of 60 caverns, each one of which can fit the Willis Tower, one of the world's tallest skyscrapers.
Source: U.S. Department of Energy. Office of Cybersecurity, Energy Security, and Emergency Response. This image is in the public domain.
The decision to withdraw crude oil from the SPR in the event of an energy emergency is made by the President under the authority of the Energy Policy and Conservation Act (EPCA) and done through competitive sale.
Perhaps what is so remarkable is that over the past 2 years, the Biden Administration has released nearly 300 million barrels of crude oil from the SPR, concurrent with the Federal Reserve undertaking the most extreme pace of monetary tightening on record in its attempt to maintain price stability, and yet crude oil prices have barely subsided.
In fact, in recent months, crude oil prices have surged, as shown in the chart below.
The global crude benchmark, TVC:UKOIL has been on an upward trajectory in recent months, soaring nearly 30% since June.
On the higher timeframe chart, we can see that crude oil prices show strong upward momentum. As soon as the Federal Reserve pivots back to monetary easing crude oil prices will likely resurge.
A log-linear regression channel is applied to the quarterly (3-month) chart of NYSE:OXY Petroleum, showing the current bull rally could just be the first leg of a multi-year upward trend. The red line in the middle represents the mean price and each gray line represents one standard deviation from the mean.
Perhaps the tendency of crude oil to rise in price over the coming years is why the Oracle of Omaha , Warren Buffet, began purchasing a large number of NYSE:OXY Petroleum shares in 2022, accumulating more than a 25% ownership stake in the company by mid-2023.
Some financial experts are sounding the alarm about the SPR depletion. The founder of The Bear Traps Report , Larry McDonald, has indicated that the drastic decline in U.S. oil stockpiles, a critical asset in times of conflict, undermines America's energy security.
McDonald is warning that diminishing domestic oil reserves heighten America's dependence on imports, potentially exposing the nation to severe supply disruptions and extreme price volatility in the international oil market. Each time the price of crude oil subsides, petroleum exporting countries, including Saudi Arabia and Russia, cut production to keep prices higher for longer.
To some, it may seem that these production cuts are a gray zone tactic meant to deplete an adversary of its strategic oil reserves before engaging them in a conflict.
There is also collateral damage occurring to the U.S. dollar. The petrodollar system, which emerged in the 1970s when the U.S. abandoned the last vestiges of its gold standard, was a series of agreements between the U.S. and petroleum exporting countries to use the U.S. dollar for cross-border oil transactions. Since almost every country needed to import or export some amount of petroleum, the petrodollar system was a means of ensuring a perpetual global demand for U.S. dollars despite the currency not being redeemable at the Federal Reserve for anything of value.
As crude oil prices continue to surge, despite the Federal Reserve tightening monetary conditions at the fastest pace on record, a crisis is unfolding for developing countries that lack access to dollars. These countries are on the precipice of hyperinflation. In essence, by tightening the supply of dollars the Federal Reserve is exporting inflation abroad, especially to those that lack easy access to dollars. Consequently, countries at the periphery of the dollar access hierarchy are being incentivized, now more than ever, to turn to alternative currencies, thereby accelerating de-dollarization.
As oil prices continue their relentless march upward, the scenario continues to exacerbate inflationary pressures in the U.S., and even more so, abroad. Higher prices could compel the Federal Reserve to maintain higher interest rates for much longer than anticipated, even in the face of deteriorating economic conditions and rising unemployment, resulting in stagflation. Exacerbating the situation further are global climate change policy objectives, which act as a disincentive for countries to increase domestic oil production.
If a major geopolitical conflict occurs when petroleum reserves are depleted and production is constrained, the outcome could result in severe stagflation, as prices spiral higher even though economic growth stagnates in the face of a fragmenting world.
* * *
Important Disclaimer
Nothing in this post should be considered financial advice. Trading and investing always involve risks and one should carefully review all such risks before making a trade or investment decision. Do not buy or sell any security based on anything in this post. Please consult with a financial advisor before making any financial decisions. This post is for educational purposes only.
The Cash BubbleHistory repeats itself, and we should learn from it, however sometimes history is so far away that it spans generations before we're able to grasp the experience first hand.
We hear about 1929, but we can't imagine what it was to survive the struggle, we hear about the pandemics during the 20's, same deal, we have heard about recessions, and those who went through the big recession of 2008 triggered by the immobiliary crisis know better, some veterans from the dot com bubble, others from the Black monday in 87, and probably very few from earlier crisis. But I don't think anybody has gone through a halt in the economy due to a pandemic at the level we witnessed in 2020.
Let's put it in context, 2020 was an election year, the incumbent government was losing the battle against the pandemic and the halt in the economy. He had the support of the congress and the wallet at his will, the former President Trump flooded the market with freshly printed dollars in an attempt to reignite the economy as soon as possible, and let's say, it worked for the purpose of reactivating the economy and not having to wait for a painful period of a lengthy recovery, however this created an unprecedented scenario, a huge flood of dollars to the market. The biggest cash inflow ever in the history of the world. The M1 metric went to $7.2T, to put it in perspective, since the 60's this has been oscillating in the $480B to $580B in the 70's when Nixon cancelled the convertibility of the Gold and Paul Volcker had to apply unprecedented meassures to fight the stagflation that followed after the dollar became fiat currency. The M1 increased 120% from its 60's level, the increase after the housing bubble burst went from $668B to $1.5T, approximately 225%. After the COVID halt it went from $1.5T to $7.25 T, an increase of 485%, inedit scenario in the history of the United States.
The crisis sent the price of oil in the market of futures to a negative value, something that has never been seen, the unemployment reached record levels, the SP500 index fell to a range close to that when Trump became president, wiping off the rally that started shortly after that event, the inflation didn't react immediately, since this is a lagging indicator that reacts to the economy growth, and the access to currency.
The amount of printed fiat currency flooding the market created the immediate wanted effect, the economy jumpstart that put everybody to work and reignited the economic machinery, the unemployment started to go down, the inflation ticked up, still within range, the price of gold ticked up, the price of oil started to recover, also within range. However we witnessed shortly after that the inflation was not stabilizing, we witnessed the traffic jam at the ports of entry to the United States, lines and lines of cargo ships waiting to unload at the ports of entry, stuck there just idling. The news blamed the Evergreen ship that blocked the Suez Canal, and affected the distribution lines, but the truth was an excessive demand of products from the Pacific producers that overwhelmed the existing port infrastructure. This was the root reason that affected the production lines in the US and contributed to a galloping inflation. Also, during the recovery cycle, let's remember that one commodity in high demand is oil, since the world moves on it. We saw unprecedented gas prices at the pump. Presidents don't have the power to increase or decrease the prices of gas, that is pure supply/demand, but they can be blamed for increases or take the credit for decreases. In a high demand environment, oil goes along the demand cycle, that is why in a recovery environment the oil prices go higher. Let's remember in the 70's during the stagflation period oil was a highly valued commodity and people were making large lines to load gas. The prices were upticking fast and the media blamed the arab world for it, but it was mere propaganda, what really happened it was just an economy running freely on cash and jacking up the prices.
The Trump administration was at the peak of the economic cycle that started in 2009, with low inflation, full employment, low gas prices. After the pandemic the variables changed, the economy went to a sudden halt world wide, and in a desperate attempt to keep the presidency the administration authorized the humongous cash flow in an attempt to prevent the negative effects of the economy to affect the election. At the end Trump lost the election. The economy continued its extremely fast paced recovery path and it overshoot. The Fed chairman was purposely in "Denial" regarding inflation, neglecting it and calling it "transitory", which was more of a Greenspan "laissez faire" economic policy, let the wild animals in their "irrational exuberance" take over and later on we'll pick up the pieces and start the recovery process. This is how we got here now.
Where do we go from here?, that is an interesting question, the flood of cash should have been made in a way that there was a recovery but not a rampant inflation, however this would have taken longer and the previous administration was not willing to wait. We have an amount of cash that the economy hasn't been able to absorb. Money is supported basically by the productivity, the working force, the commercial transactions, but there must be a correspondence so the economic variables are kept in check. The GDP vs the M1 is still at an outstanding level. The inflation is heading to the 2-2.5% goal, we're still at full employment, which basically puts us in what the fed have been calling a "soft landing". Will it be?? I suppose initially it will, but we risk facing the same scenario that happened during the stagflation in the 70's, Paul Volcker had a big dilemma, he increased the interest rates, but the inflation was completely out of control, people noticed they could buy an asset and basically turn around and sell it at a higher price, and they still found a buyer. Houses were on the rise, the agriculture also participated of the inflation benefits, farmers could buy a tractor, use it and resell it at a higher price. People in New York City were waiting in line before the jewelries opened so they could buy gold, and sell it later at a higher price. When Volcker decreased the interest rates after the message he sent was of stability and it backfired and inflation was reignited.
Taking a look at the CBOE:SPX in the long run, we see there is a negative momentum divergence forming after it reached the All Time High (ATH). The indicators signal a downturn, that could possibly happen after the interest rates reach its pivot, the inflation is at the Fed Goals, unemployment goes beyond the full employment level and the economy shows signs of stalling.
Bubbles happen all the time, we enjoy the ride until they burst. We're in a new bubble, the Cash Bubble. The cash should be enough to allow the economy to support it having a healthy inflation level of 2%, as defined by the Fed targets. If there is too much cash and the economy is not able to support it, it will dilute automatically until the economy growth catches up. For decades the ratio of M1 to GDP has been between 9% and 18% as we can see in the chart. After the cash flood it peaked to 85% and currently it is at 68%. I don't think the problem is far from over, even if we reach the 2% inflation target. The challenge for the Fed now is to keep the interest rates low for longer without stalling the economy. It is rumored that the Fed will pause the interest rate hike for their September FOMC meeting. It is expected considering the recent increases have been in the 1/4 of a point followed by a pause. If the pause is prolonged, the inflation reaches its 2-2.5% target and the unemployment is kept within the 4-5% range then the fed can call it a "Soft Landing" up to this point which could be a telegraphed signal to start reducing the interest rates, and the financial market may anticipate this pivot to create a bear market and shake the tree to dislocate and reallocate assets at a discount using all the big cash flood out there. Next year is a presidential election year, and not making it a priority has happened before. During the Volcker's period, he didn't mind pulling the rug on Carter. The Fed does what it has to do.
"What has happened before will happen again. What has been done before will be done again. There is nothing new in the whole world."
~ Ecclesiastes 1:9
Patterns repeat because human nature hasn't changed for thousands of years.
~ Jesse Livermore.
References
Secrets of the Temple: How the Federal Reserve Runs the Country.
William Greider. January, 1989
How the economic machinery works. by Ray Dalio. youtu.be
Principles for Dealing with the Changing World Order by Ray Dalio. youtu.be
Boost Your Trading Game With Bollinger BandsIf you understand the market environment, you'll be a better trader. I've been using Bollinger Bands to identify the market environment for over 20 years. In today's video, I'll explain how to use them to identify a two-way tape, when a market will keep trending, and when it will revert back to the trend.
Role of Risk Management in Trading and How to calculate riskThe Foundations of Solid Risk Management 🛡️📊:
Risk management in trading involves a series of strategic decisions aimed at minimizing potential losses. It revolves around understanding the risks associated with each trade and employing measures to mitigate them. Whether you're a novice or an experienced trader, risk management remains a non-negotiable aspect of sustainable trading.
👍 Pros of Effective Risk Management:
Shields your trading capital from significant losses.
Provides a structured framework for decision-making.
Fosters discipline and rationality in the face of market fluctuations.
👎 Cons of Neglecting Risk Management:
Exposes your portfolio to undue risks that can lead to substantial losses.
Increases the likelihood of emotional decision-making driven by fear and greed.
The Emotional and Financial Benefits of Risk Management 🧘♂️❤️:
Effective risk management isn't just about preserving your financial resources; it's also about maintaining emotional equilibrium. When traders implement robust risk management strategies, they reduce the psychological stress and anxiety that often accompany trading. This enables traders to make more logical decisions, avoiding impulsive actions triggered by heightened emotions.
Calculating Position Size and Setting Stop Losses 📈🛑:
Two key elements of risk management are calculating the appropriate position size and setting stop-loss levels. These practices are integral to controlling the amount of capital at risk in each trade. By determining the position size based on a percentage of your capital and setting stop-loss orders to limit potential losses, traders ensure that no single trade can significantly erode their account balance.
Comparing Potential Losses and Gains for Different Risk Management Scenarios 💹📉:
Let's explore how the 2% rule affects potential outcomes for different risk management scenarios:
Risking 2% of a $1000 Deposit:
Maximum Risk per Trade: $20 (2% of $1000)
Potential Loss: Limited to $20 per trade
Potential Gain: Can vary, but the focus is on maintaining risk control
Risking 5% of a $1000 Deposit:
Maximum Risk per Trade: $50 (5% of $1000)
Potential Loss: Larger at $50 per trade
Potential Gain: Higher, but the risk of significant losses is elevated
Risking 10% of a $1000 Deposit:
Maximum Risk per Trade: $100 (10% of $1000)
Potential Loss: Considerably larger at $100 per trade
Potential Gain: Higher compared to 2% risk, but risk of capital depletion is significant
How to calculate your position size ?
You can easily calculate risk directly in TradingView using the built-in calculator!
Choose the direction of your position - long or short.
The next step is to set up according to your deposit and risk per trade.
After that, simply drag it onto the chart in line with your stop loss and take profit (more on this in the upcoming article), and it will automatically calculate the position size for you!
Natural Gas from Pipelines to PortfoliosNatural gas was once considered a byproduct of oil production. It is now becoming increasingly important as one of the cleanest burning fossil fuels and a key piece of the clean energy transition. Today, it forms the backbone of global energy production.
This paper delves into the supply and demand factors affecting natural gas prices and proposes a long position in Henry Hub Natural Gas Futures (NG1!) to harness gains from seasonal price trends with an entry of 2.484 with a target of 3.099 and a stop loss at 2.172 delivering risk/reward ratio of 2x.
Natural Gas Supply and Demand
Supply
Largest producers and exporters of Natural Gas are US, Russia, Iran, China, Canada, Qatar, Australia, Norway, and Saudi Arabia.
The standout in the list is Russia. Following the conflict in Ukraine, gas exports from Russia plummeted 58% in 2022. This led to price shocks in EU natural gas (TTF). US supply is unable to adequately bridge this deficit as transporting natural gas using ships requires converting it to Liquified Natural Gas (LNG) and using special refrigerated vessels which is not economical for large quantities of natural gas.
This is also why the spread between EU and US natural gas is much wider than EU and US oil.
Notably, US shale reserves have a high concentration of natural gas. Along with newly developed fracking techniques, this has led to increasing gas production in the US. Moreover, natural gas is also obtained in the process of oil extraction, which means gas production is linked to oil production.
This has interesting ramifications when looking at present supply. Despite low natural gas prices over the past few months, production in the US has remained high as a result of high oil production. Similarly, higher prices do not readily translate to higher production. This suggests that Natural Gas price-supply relationship is inelastic.
Demand
Demand for Natural Gas comes from:
• Energy Production – Natural Gas is used in power plants to generate electricity. Natural Gas electricity production has been rising over the last decade as it replaces Coal. Notably, manufacturers using natural gas as an energy source can switch to other energy sources during price spike, which provides some elasticity to demand.
• Commercial and Residential Heating – Natural Gas is used for heating homes in winter. This can lead to a seasonal demand during winter months in the Northern Hemisphere.
• Industrial Use – Natural Gas is used as a raw material for industrial products such as plastics, ammonia, and methanol.
Natural gas demand is heavily affected by weather. Unusually warm summers in the Northern Hemisphere drive higher energy usage from air conditioners while colder winters drive higher demand for heating.
Inventories
Gas can be injected into storage facilities and stored for later use. These inventory levels play a major role in balancing supply-demand. Summer months (April-October) are referred to as injection periods while winter months (November-March) are withdrawal periods. Inventory levels help even out the surge in winter demand.
However, natural gas is much harder to store than oil as it is less dense. This means the inventory effect is not as apparent which explains the larger seasonal variation in natural gas prices as compared to oil prices.
Seasonality in Natural Gas Prices
Seasonal price action of Natural Gas shows two distinct price rallies. A large rally during winter in the US and EU driven by surge in supply for heating in winters, during this period, prices peak in early-December before declining. The other, smaller spike is during summers in the US and EU when demand for electricity rises, during this period, prices peak in early-June before declining.
Further, prices show the highest deviation from the seasonal trend in late-September.
Over the past five years, the winter rally has become wider, with prices staying elevated from August to early-December.
Additionally, seasonal trend points to a price appreciation of +11% between September and December.
However, investors should note that past seasonal trends are not representative of current or future market performance.
Henry Hub Futures
Henry Hub is the most prominent gas trading hub in the world. It is located at the intersection of major on-shore and off-shore production regions and connected by an extensive pipeline network. This is also where US natural gas exports are dispatched.
CME’s benchmark Natural Gas futures (NG) deliver to Henry Hub and is the largest gas futures contract in the world. Other notable Natural Gas futures contracts are TTF (EU) and JKM (Asia). Futures from both regions are also available for trading on CME.
Asset Managers are Bullish
Commercial traders are heavily net short on Natural Gas futures, short positioning in July was at its highest level since 2021 but has since reduced. Overall, net short commercial positioning points to bullish sentiment.
Asset managers have switched positioning in Natural Gas futures from net short to net long since May. Last week net long positioning reached its highest level since May 2022.
Options markets OI points to a neutral market view on natural gas with Put/Call ratio close to 1. Options P/C has stayed close to 1 for the past 3 months.
At the same time, Implied Volatility on Natural Gas options has been rising in August. A rally last week failed to break past a key support level but vols remain elevated suggesting that price may retest that level again.
Henry Hub Gas Dynamics with European Gas
Last week, EU Natural Gas futures (TTF1!) spiked by almost 28% due to a strike at Australia’s second largest LNG plant, still the rally soon retraced almost entirely.
LNG supply disruption, especially at the key transition to the winter season can lead to volatility spikes. Though, EU gas inventories are 90% full, supply disruptions like this can still have a major effect on gas prices but especially on volatility.
Over the past few years, higher flexibility and capacity in the global LNG supply chain has led to the various global natural gas benchmarks tracking each other more closely. This means that Henry Hub natural gas futures are exposed not just to US and Canada Natural Gas production but also to disruptions in global supply.
However, the effect is comparatively limited due to ample supply in the US. This can be seen in the price action of Henry Hub natural gas futures which rose by 6% on the same day.
Recent Trend in Natural Gas Inventories
As per the EIA, Natural Gas supply fell 0.1% WoW last week. At the same time demand rose by 0.3% WoW. Note that working natural gas in underground storage has started to flatten over the past 4 weeks, rising by just 94 billion cubic feet (BCf) compared to the 5Y average increase of 140 BCf during the same period.
Still, inventory levels are close to the top of their 5-year maximum, elevated by high US gas production during the summer driven by higher oil production. EIA forecasts that the depletion season will end with inventories 7% higher than their 5-year average.
EIA expects production to remain flat for the remainder of the year, so watching weekly consumption reports could point to early indicators of seasonal inventory depletion. However, due to elevated inventory levels, the seasonal effect may not be as strong as prior years.
In a longer-term trend, gas rigs in the US have started to decline this year after surging over the past year. This will likely lead to lower production over the next year.
Trade Setup
With options markets pointing bullish and seasonal trends suggesting price appreciation during this period, a long position in Natural Gas futures expiring in October (NGV) allows investors to benefit from an increase in Natural Gas prices.
Each contract of CME Henry Hub Natural Gas Futures provide exposure to 10,000 MMBtu of Natural Gas while the October contract has maintenance margin of USD 5,070 for a long position. A USD 0.001 MMBtu change in quoted price per MMBtu leads to a PnL change of USD 10 in one Henry Hub Natural Gas Futures.
Entry: 2.484
Target: 3.099
Stop Loss: 2.172
Profit at Target: USD 6,150
Loss at Stop: USD 3,120
Reward/Risk: 2x
MARKET DATA
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Are Chips Losing Their Edge to Software Stocks?Semiconductor stocks have surged this year, thanks in large part to NASDAQ:NVDA Nvidia. But they could be losing relative strength to software makers within the technology sector.
Today’s main chart focuses on the NASDAQ:SMH VanEck Semiconductor ETF, which closely tracks the NASDAQ:SOX Philadelphia Semiconductor Index. It recently slipped below the 50-day simple moving average (SMA), which may signal weakness over the intermediate term.
The lower study shows its relative strength versus the NASDAQ:NDX Nasdaq-100. Notice how it’s mostly lagged the broader index since late June.
Next, consider the same chart and studies for the AMEX:IGV iShares Software ETF. It’s shown the opposite patterns. Price is above the 50-day SMA and relative strength against the Nasdaq-100 has recently improved.
The last chart compares these two ETFs as a ratio (IGV/SMH). It uses monthly candles to provide a long-term view. Software could be turning up from a 17-year low, which may also suggest relative strength is shifting between these two major groups within the key technology sector.
Standardized Performances for ETF mentioned above:
VanEck Semiconductor ETF (SMH):
1-year: +45.61%
5-years: +186.80%
10-years: +741.25%
iShares Expanded Tech Software ETF (IGV):
1-year: +28%
5-years: +79.25%
10-years: +390.50%
(As of August 31, 2023)
Performance data shown reflects past performance and is no guarantee of future performance. The information provided is not meant to predict or project the performance of a specific investment or investment strategy and current performance may be lower or higher than the performance data shown. Accordingly, this information should not be relied upon when making an investment decision.
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