Does weakness in Chinese stocks spell trouble for the U.S. ones?A while ago, we drew attention to the intriguing correlation between the Chinese and U.S. stock markets. In fact, we presumed that if the Chinese economy and stock market were doing well (following the reopening after Covid-19), it would be inherently positive for the U.S. stock market and could postpone a recession to later. From around October 2022, both indices were rising in tandem. However, in March 2023, the positive correlation between the two started to weaken, and the U.S. stock market kept rising while Chinese stocks began to move increasingly sideways, finding resistance above 20,000 HKD. We find this development interesting as specific U.S. stock titles are reaching highly overbought levels, and the general theme in the media continues to be that of “soft landing” and that we have nothing to worry about. Seemingly everyone seems to forget that regional banks started to implode in 1Q23, and without the FED stepping in and providing more liquidity to the market, the situation would have been much worse. Then, on top of that, the FED keeps hiking into a slowing economy with many subtle signs of a recession already presenting themselves. We believe that if the Chinese stock market continues to roll over, then it can potentially lead to the spillover effect.
Illustration 1.01
Illustration 1.01 shows the correlation between the SPX and HSI (Hang Seng Index). It can be easily observed that both indices trended down from October 2021 until October 2022. After that, both indices trended together to the upside until late March 2023, when SPX kept increasing, but HSI began finding resistance above 20,000 HKD.
Illustration 1.02
Illustration 1.02 displays the daily chart of HSI and the resistance area.
Technical analysis gauge
Daily time frame = Neutral
Weekly time frame = Bullish
*The gauge does not necessarily indicate where the market will head. Instead, it reflects the constellation of RSI, MACD, Stochastic, DM+-, ADX, and moving averages.
Please feel free to express your ideas and thoughts in the comment section.
DISCLAIMER: This analysis is not intended to encourage any buying or selling of any particular securities. Furthermore, it should not be a basis for taking any trade action by an individual investor. Therefore, your own due diligence is highly advised before entering a trade.
Community ideas
CCI Made Easy:Comprehensive Guide on the Commodity Channel IndexHello TradingView Community, it’s Ben with LeafAlgo! Today we will explore a popular indicator with commodity traders - the Commodity Channel Index (CCI). The CCI is a powerful tool that has earned its place among traders due to its ability to identify potential trend reversals, overbought or oversold conditions, and price extremes. In this comprehensive guide, we will delve into the origins of the Commodity Channel Index, explain its components, outline its applications in commodity trading, and provide real-life examples. By the end of this article, you will have a solid understanding of how to leverage the CCI effectively in your trading endeavors. Let's dive in!
Origin of the Commodity Channel Index (CCI)
Developed by Donald Lambert in 1980s, the Commodity Channel Index was initially designed to analyze commodities. However, over time, its application expanded to various financial markets. The CCI is a momentum oscillator, that measures the relationship between an asset's price and its statistical average. The indicator's ability to detect market conditions beyond standard price trends has made it popular among traders of all levels.
Components of the Commodity Channel Index
The Commodity Channel Index consists of four main components:
Typical Price: The Typical Price is calculated as the average of the high, low, and closing prices of the asset over a specified period.
Simple Moving Average (SMA): The SMA is a moving average of the Typical Price over the chosen number of periods. The most common period used is 20.
Mean Deviation: The Mean Deviation measures the average deviation of the Typical Price from the SMA over the selected period.
Commodity Channel Index (CCI): Finally, the CCI itself is calculated using the formula:
CCI = (Typical Price - SMA) / (0.015 * Mean Deviation).
The standard period for the Commodity Channel Index is 20, but traders can adjust this parameter to suit their trading preferences and timeframes.
Interpreting the Commodity Channel Index
The Commodity Channel Index fluctuates around a zero line, which acts as a reference point for identifying overbought and oversold conditions. Positive CCI values indicate that the asset's price is above the average, signaling potential overbought conditions. Conversely, negative CCI values suggest that the price is below the average, indicating potentially oversold conditions.
Applications of the Commodity Channel Index in Commodity Trading
1. Identifying Overbought and Oversold Conditions
The Commodity Channel Index excels in spotting overbought and oversold conditions, making it valuable for commodity traders. When the CCI climbs above +100, it indicates overbought territory, suggesting that the asset's price may be due for a pullback or reversal. On the other hand, a CCI reading below -100 suggests oversold conditions, hinting at a potential bounce or reversal in the upward direction.
2. Divergence and Trend Reversals
Divergence occurs when the price of the asset moves in the opposite direction of the CCI. Bullish divergence is when the price forms lower lows while the CCI makes higher lows. This can indicate a potential trend reversal to the upside. Conversely, a bearish divergence occurs when the price forms higher highs while the CCI makes lower highs, signaling a possible trend reversal to the downside. Divergence can provide early signals of trend changes and potential entry points for traders.
Bearish Example:
Bullish example:
3. Commodity Channel Index as a Trend-Following Tool
The Commodity Channel Index can also be employed as a trend-following indicator. Traders can look for long opportunities when the CCI crosses above zero and short opportunities when the CCI crosses below zero. However, to avoid false signals, it is advisable to combine the CCI with other technical indicators or trend confirmation tools.
4. CCI and Price Extremes
The Commodity Channel Index can highlight price extremes by measuring how far the asset's price deviates from its average. A high positive CCI value indicates an exceptionally strong uptrend, while a low negative CCI value indicates a substantial downtrend. Traders can use these extreme readings to assess the strength of the prevailing trend and potential exhaustion points.
Utilizing the CCI with Other Indicators
Combining the Commodity Channel Index with other indicators can enhance its effectiveness and provide traders with more robust trading signals. By using complementary indicators, traders can confirm CCI signals and gain deeper insights into market conditions. Here are a few indicators that work well with the CCI:
1. Moving Averages (MA): Moving averages can be powerful tools when used alongside the CCI. By adding a simple moving average to the price chart, traders can identify the overall trend direction. When the CCI provides a signal, such as overbought or oversold conditions, traders can cross-reference it with the moving average to confirm the prevailing trend. For instance, in an uptrend, traders may focus on CCI readings below -100 as potential entry points for long positions when the price is above the moving average.
2. Relative Strength Index (RSI): The RSI is another popular momentum oscillator that can complement the CCI. When used together, these indicators can provide stronger signals and reduce the risk of false positives. If both the CCI and RSI signal overbought or oversold conditions while simultaneously diverging, it can increase confidence in a potential market reversal.
3. Moving Average Convergence Divergence (MACD): The MACD is a trend-following indicator that also incorporates momentum analysis. When combined with the CCI, traders can get a more comprehensive view of trend strength and potential trend changes. For example, if the CCI shows overbought conditions, traders may wait for the MACD to generate a bearish signal before considering a long trade.
4. Bollinger Bands: Bollinger Bands are volatility-based bands that expand and contract around a simple moving average. When the CCI reaches extreme values outside the Bollinger Bands, it can signal potential price reversals. Traders may look for price action confirming these signals, such as candlestick patterns or divergences, before making a trading decision.
Conclusion
Incorporating the Commodity Channel Index (CCI) with other indicators can significantly enhance its effectiveness in trading. By cross-referencing CCI signals with confirmation from other indicators, traders can improve the accuracy of their trading decisions. However, it is crucial to avoid overcrowding the chart with too many indicators, as this can lead to analysis paralysis. Instead, focus on a select few indicators that complement the CCI and align with your trading strategy. Remember, continuous learning and practice are key to mastering the art of using technical indicators effectively in your commodity trading journey. Happy trading! :)
Cisco Pulls Back After JumpingThe Dow Jones Industrial Average has been moving lately, and today we’ll consider index member Cisco Systems.
The networking giant spent about a year trapped below the $52 area. That zone marked a top in April, June and early this month. However CSCO broke above it on July 19 and ran to a new 52-week high. It retreated on Friday to hold the earlier peak. Old resistance may have become new support.
Second, the pullback brought CSCO back to its 21-day exponential moving average (EMA). The 8-day EMA remains also remains above the 21-day EMA. Those points may suggest its recent short-term uptrend remains in effect.
Finally, the stock rallied after its last two earnings reports. Will that positive history provide a tailwind for the shares with the next set of numbers due on August 16?
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EURUSD - Breaking Down Buying Opportunities for the Week AheadHere's a look at the FX:EURUSD & the potential buying opportunities that I have on my radar for the week ahead.
More specifically what I'm looking at is a potential Bat Pattern with multiple points of confluence that can be used as a strictly in & out type of countertrend trade or an entry into a longer-term continuation setup depending on your big picture view.
As always if you have any questions, comments or just want to share you views on the EURUSD please leave them below & please remember to hit that ROCKET SHIP button before you leave to show me some love.
Akil
As we approach new highs, what's the bear case?Historically, a rebound of this magnitude has almost always indicated that the bear market is over and that we've entered a new bull market. And there's plenty of reason to be optimistic right now. With the US dollar down, US manufacturing numbers have been coming in above expectations (PMI of 49 in July, vs. 46.7 estimate). Consumer confidence and home prices were also stronger than expected this week. The liquidity crisis for regional banks seems to have resolved itself, and the uptick in continuing jobless claims (USCJC) seems to have stabilized, at least for now. The ECRI weekly leading index is forecasting positive US growth. Yesterday, the Fed said it's no longer forecasting a recession. Preliminarily, it kinda seems like the magnitude of stimulus and interest rate hikes were in the right ballpark to actually stick a soft landing this cycle (with a big assist from the AI productivity boom).
But as the market pushes toward new highs, let's consider what might be the bear case. Because markets love to surprise, and I do think there are some worrying signs.
1. Inflation could come roaring back, forcing the Fed to keep interest rates high.
A few weeks ago, interest rate futures were forecasting a 99% probability that rates would be lower by this time next year. But now it's only 87%, with a 2% chance that rates will actually be higher next July. Why are rate futures getting more hawkish? Basically because housing costs have been slow to correct and commodities prices have been climbing since May, which points to the possibility that inflation may continue to run hot.
Why might housing prices and commodities stay hot? Well, for housing, it's basically because there's a shortage . We've got more real estate agents than houses for sale, by a wide margin. I do think housing prices will gradually come down, but it may take quite a while to normalize without a supply-side fix.
And for commodities? Well, there are basically two problems.
First, geopolitics are extremely ugly right now. You've got active insurgencies in huge swaths of Africa and the Middle East, and you've got Russia threatening to blockade food shipments on the Black Sea. That all drives commodity prices up.
And second, you've got a six-sigma temperature anomaly that's destroying crops. Global warming seems to be running ahead of forecasts, which raises the worrying possibility that we've hit some kind of climate change tipping point and the North Atlantic Current might collapse sooner rather than later. That would be not only very inflationary for food prices, but also very bearish for equities in Europe and the US. Something to keep an eye on, for sure.
2. Expectations may be too high, especially for tech.
Investors have been throwing money at tech companies because of the AI boom, on the assumption that these companies will be the main beneficiaries of it. But the reality, in my opinion, is that AI greatly erodes the value of their intellectual properties. For instance, ChatGPT has dramatically reduced the cost for me spin up a competitor product or even an open-source version of any major enterprise SaaS. The big software firms are going to have to throw a lot of money and people at AI in order to keep their edge. So far, only Microsoft is doing a really good job.
And what about semiconductors? The AI boom is good for semis, because all that AI requires a lot of GPUs. But you know what? With rapid advances in the field, the compute demands have come down a lot . I can train a LLaMa model on a Colab notebook now, which is insane. Meanwhile, there's a semiconductor inventory glut on a scale not seen since 2001. Chips have been an extremely good bet for decades, and investors have rightly thrown a lot of money at them. But it's possible that we may now be late-cycle for the industry.
Overall, I think the expectations for the S&P 500, and especially for Big Tech, may just be too high. We've got P/E above 26 at a time when profit margins are in a slide. My models point to a P/E in the 21–23 range as more appropriate for the current rates of interest and inflation. So it may be that there's not much room left for multiple expansion to lift the market higher here, so productivity gains will have to do a lot of work.
3. Liquidity remains a concern.
In addition to raising interest rates, the Fed is continuing to shrink its balance sheet. Liquidity from the Fed has driven a lot of the market gains over the last decade, so a shrinking balance sheet is a headwind for stocks. There's also some reason to think consumers and small businesses have some cash flow issues right now. Last month, the Fed published a report showing an unusually high level of commercial financial distress. Auto loan delinquencies also hit a high last month. As long as money and jobs don't get any tighter than they already are, we probably won't see anything break. But if inflation rises again and we see more interest rate hikes, then there may still be some systemic risk.
Conclusion
I'm definitely not betting on a major bear market here. But this close to a major resistance level, it's worth looking parking some money in cash or bonds or putting on a hedge. S&P 500 puts are somewhat cheap right now, so it's not a terrible time to buy protection. And long-term bonds are on the cheap end of the range they've been trading in since last November, so it's also not a terrible time to put on bonds. I'm basically just thinking in terms of modest rotation and rebalancing here.
How To Add Drawings To Your ChartIn this Tradingview basics video I'm going to show you how to add drawings to your chart using the options available on the left-side rail.
We'll look at not only what the options are, but the benefits of using "stay in drawing mode" as well as how labeling specific tools as "favorites" can save you time when marking up the charts.
If you have any question, comments, or subjects for future "Tradingview Basics" videos please leave them below.
Until next time, "Plan Your Trade, Trade Your Plan"
Akil
Levels and support in Crypto (Part 1)Hey folks! My friends ask me how to work with support and resistance zones. And I decided to write a few articles about it. It is the first part of the post about that theme.
One of the most important knowledge I use is identifying support and resistance levels. These zones on a chart give me a clear edge in developing a winning trading strategy.
Crypto Resistance Level Meaning:
Resistance levels indicate prices where selling pressure may stall an uptrend temporarily. Traders watch these levels for signs of breaking through, which could lead to further price increases.
Identifying Resistance Level:
To spot resistance levels, I analyze the price chart and connect previous price peaks with horizontal lines. Breaking through resistance often leads to a new support level forming.
A support level is a price that traders believe a cryptocurrency is unlikely to drop below. It's backed by strong demand and buying activity as traders see the asset as undervalued. This creates a floor, making it an attractive buying opportunity or a safe zone for holding.
Finding Support Level:
The easiest support levels to spot are those that have held in the past. Past data gives insights into potential future support. I also zoom out to look at the bigger picture, considering overall trends and historical price action.
Support and Resistance Trend Lines:
These are horizontal price levels drawn at previous market peaks and troughs. They help identify potential support and resistance levels for a cryptocurrency. I usually trade it in scalping.
How to draw support and demand levels? Here is the example
To sketch support and resistance zones, simply draw a horizontal line through each meaningful trough (support) or peak (resistance).
Draw these lines through the bar lows (for support) or bar highs (for resistance) or the closing price, as most traders eye the close. Stretch these lines into the past to see if earlier price drops halted at the same level.
What methods can you use for the day trading with levels?
I apply breakouts in a low-volume market and breakouts during high volatility. I also trade along inclined trend lines in line with the trend.
Want to learn more about working with levels? Write in the post below, and I'll tell you more about it! As always, I'll appreciate your subscription and likes.
EUR/USD Short and NZD/CAD ShortEUR/USD Short
• If price corrects and a larger one hour flag forms, then I'll be looking to get short with a risk entry within it.
• If my entry requirements are not met then I will simply wait until another setup which meets my plan materialises.
• If there's any ambiguity then I will not place a trade on this pair.
NZD/CAD Short
• If price pushes up to and ideally just above our area of value, then regardless of how it does so I'll be waiting for a convincing impulse back down followed by a tight flag and then I'll be looking to get short with either a reduced risk entry on the break of the flag or a risk entry within it.
• If my entry requirements are not met then I will simply wait until another setup which meets my plan materialises.
• If there's any ambiguity then I will not place a trade on this pair.
📈Investing vs. Speculating: Understanding the Key Differences📉Navigating the Financial Landscape: Investing vs. Speculating for Smart Financial Growth
In the intricate world of stock trading, distinguishing between an investor and a speculator is vital, despite their mutual interest in market analysis. Each follows distinct approaches and objectives, and understanding these differences is paramount before venturing into the stock market. With diverse individuals seeking to capitalize on opportunities and make profits, this article delves into the contrasting methods and goals of investors and speculators, shedding light on their unique strategies.
Understanding the Distinction: Investor vs. Speculator
At first glance, differentiating between an investor and a speculator might seem challenging. After all, both activities involve buying and selling stocks and require initial market analysis. However, the nature of these two approaches varies significantly.
Before delving into the world of stock markets, grasping the difference between investing and speculation is essential. Each day, the stock exchange witnesses countless transactions, leading to continuous price fluctuations. Behind each trade lies an individual with their own motivations, strategies, and rules, all driven by the common desire to make money. However, their approaches diverge; some choose to invest, while others opt for speculation.
Let's explore the dissimilarities. Who exactly is an investor?
Investing involves purchasing stocks of companies at their intrinsic value, with the expectation of long-term growth and subsequent profitability. As the definition suggests, patience is required, as companies do not experience substantial growth within mere weeks. Investors build portfolios of stocks with a focus on the years ahead. Moreover, investors can generate income through means other than price appreciation alone. By becoming shareholders, stock buyers become co-owners of the company. They can participate in general meetings organized by the company and receive dividends, which are a portion of the company's profits shared with its investors. This way, investors receive periodic returns.
Investing necessitates comprehensive analysis of the company whose stock one intends to acquire. The objective is to enhance the value of the acquired assets over the long term. Evaluating the prospects of a specific sector and the company itself entails reading recommendations, staying informed about market trends, and skillfully combining relevant information. Proficient investors are capable of constructing portfolios that yield consistent profits year after year.
On the other hand, a speculator approaches the stock market differently. Speculation involves buying and selling stocks with the anticipation of profiting from short-term price fluctuations. Speculators typically focus on quick gains and may not be concerned about the company's long-term prospects. Their decisions are often driven by technical analysis and market trends, aiming to capitalize on short-term price movements.
While both investors and speculators participate in the stock market, understanding their differing approaches and objectives is critical for making informed choices and achieving financial growth.
Meet the Speculator: Focused on Profits and Market Swings
Speculators are individuals whose primary focus is on making profits in the stock market. Unlike investors who carefully analyze the specific stocks they buy and the performance of the underlying companies, speculators are more concerned with the high volatility of prices that offers potential for quick gains. They may not be as concerned about the long-term prospects of a company; what matters most to them is the opportunity to capitalize on price movements, whether upward or downward.
Unlike investors who prefer to hold stocks for the long term, speculators aim to quickly buy and resell stocks to profit from short-term price fluctuations. They may even utilize financial instruments such as contracts to benefit from falling prices. For speculators, the direction of price movement becomes inconsequential; they can make gains regardless of whether stock prices rise or fall.
One instance of speculation occurred during the aftermath of the Brexit referendum when stock prices plummeted. Speculators saw an opportunity to acquire stocks at low prices, and many stocks rebounded in the following days. By investing in undervalued companies and taking advantage of people's tendency to overreact, speculators made significant profits within a short period.
Unlike investors who focus on a company's financial performance and long-term growth prospects, speculators rely more on charts and market sentiment. They are sensitive to emotions in the market, such as fear during potential financial crises or uncertainties surrounding elections, which can significantly influence price swings. Speculators thrive on exploiting these rapid price movements, finding ample opportunities for their trading activities.
However, it's important to note that speculating in the stock market involves heightened stress and risks due to the significant price fluctuations. As prices can change rapidly, speculators need to be prepared for the potential downsides and be well-versed in managing risks effectively.
Timing Matters: The Distinct Approach of Traders and Speculators
Distinguishing between traders and speculators becomes evident when considering the time factor in the world of stock trading. Investing in stocks requires patience, relying on a company's future growth, financial results, and potential dividends. Successful investing often involves waiting for several years to achieve substantial growth, surpassing the performance of other instruments like funds.
On the other hand, speculation hinges on understanding short-term market sentiment and making quick decisions. Swift reactions to market changes are necessary as the stock market is prone to significant sell-offs followed by potential reversals. Speculators closely monitor the market and wait patiently for opportune moments to capitalize on rapid price movements.
The paradox of speculation lies in the contrasting time frames involved: speculation itself is brief, but speculators invest considerable time observing charts compared to traders who simply maintain open positions.
Combining Investment and Speculation
In principle, one doesn't have to exclusively choose between investing and speculating. However, effectively combining an equity portfolio with a speculative portfolio demands substantial experience and time. It's essential to bear in mind that speculation carries significantly higher risks compared to investing.
A seasoned investor can gradually construct a small speculative portfolio while allocating the majority of funds to long-term investments in stocks. The stock portfolio consistently builds capital, while the speculative portion can potentially yield an additional "bonus" when favorable market opportunities arise.
Investor Sleeps Well: The Patient Approach of Investors
While speculators engage in the challenging pursuit of profiting from daily price fluctuations, investors adopt a different approach. Investors carefully select stocks for their portfolios and patiently wait, exercising risk control. This approach enables them to focus on their professions or businesses while allowing their savings to grow through capital appreciation.
One notable example of this investment strategy is Warren Buffett. Buffett has dedicated years to constructing portfolios by choosing shares of reliable companies that consistently share profits with their shareholders through dividend payments. This straightforward strategy, employed for decades, surpasses the performance of speculators and aggressive mutual funds.
Success in investing relies on an investor's knowledge and understanding of prevailing market conditions. While the latter remains beyond anyone's control, the former depends solely on the experience gained with each subsequent trade. Investing is a gradual process, and as experience accumulates, positive results are more likely to emerge. Patience, discipline, and a long-term perspective are key traits of successful investors.
The Best Approach: Investment or Speculation?
The question of whether to invest or speculate ultimately depends on your individual goals, risk tolerance, and time horizon. Both strategies have their merits and cater to different types of traders.
Investing is a long-term strategy that involves buying stocks of companies at their intrinsic value with the expectation of long-term growth and profits. Patient investors hold onto their stocks for years, conducting thorough analyses of company prospects and making informed decisions based on research and market information. They can also benefit from dividends as co-owners of the company, providing a steady income stream. Investing requires a disciplined approach to constructing portfolios that generate systematic profits over time.
On the other hand, speculation is a short-term strategy driven by the desire for quick profits. Speculators are primarily motivated by profit and take advantage of high volatility in stock prices. They may not necessarily focus on a company's financial performance or the overall state of the economy. Speculators need to react swiftly to market changes, capitalizing on price swings. However, this approach involves higher stress and risk. Speculators can profit from both rising and falling prices, and their success relies heavily on understanding short-term market sentiment.
While both investment and speculation have their merits, it's essential to note that speculation is generally riskier and requires a deep understanding of market dynamics. Combining an equity portfolio with speculative positions can be challenging and time-consuming. Most investors prioritize investing in stocks for long-term growth and stability while allocating a smaller portion for speculative opportunities.
Ultimately, investors tend to have a more relaxed approach as they carefully choose stocks for their portfolio and patiently wait for their investments to appreciate over time. This approach allows investors to focus on their other commitments while still profiting from capital appreciation. Warren Buffett, a renowned investor, exemplifies this strategy by building portfolios of reliable companies that consistently share profits with shareholders. Investing is a continual learning process, and success depends on the investor's knowledge, experience, and ability to adapt to market conditions. So, the best approach boils down to aligning your trading style with your financial goals and risk tolerance.
In the dynamic world of financial markets, the choice between investing and speculating is deeply personal, guided by individual goals, risk tolerance, and time horizon. Investors embrace a patient, long-term strategy, seeking gradual growth and sustained profits through careful analysis and informed decisions. On the other hand, speculators chase short-term gains, leveraging market volatility to capitalize on rapid price swings. While a combination of both approaches is possible, it demands expertise, time, and experience.
It is crucial to recognize that speculation involves higher risks, making it essential for traders to approach it with caution and a deep understanding of market dynamics. For most investors, allocating a smaller portion of funds to speculative opportunities while predominantly focusing on long-term stock investments offers a balanced approach.
In the end, regardless of the chosen path, success in financial markets requires a thoughtful and disciplined approach. Armed with knowledge, experience, and a clear strategy, traders can navigate the complexities of the market and work towards achieving long-term financial prosperity.
PRICE ACTION: ENGULFING PATTERNIn this post we will analyze the Price Action engulfing pattern, one of the main candlestick patterns, which traders appreciate for its reliability and high percentage of success rate. Confirmed by other factors (key levels, indicator signals, fundamental preconditions), the engulfing pattern can become an effective tool for gaining profit.
✴️ What Does This Pattern Tell Us?
The engulfing pattern (outside bar) is mostly a reversal pattern (although in most cases it can also indicate a trend continuation). It looks like two candles, the first of which is small in size, and the second is a large candle with a body larger than the entire previous candle and directed in the opposite direction.
From the point of view of the crowd movement, this pattern means that the strength of the current trend is running out (as evidenced by the small size of the first candle being engulfed). The crowd does not know in what direction to move and, figuratively speaking, is treading on the spot. The appearance of a powerful candle, which absorbed the previous one and closed in the opposite direction, marks the beginning of a new, strong trend.
The example above shows that the bears, having failed to find support, stopped the downward movement, after which the bulls, having organized an impulse in the price growth, collected stop losses of traders who opened positions on the downside, when the price was still moving downward by inertia at the beginning of the reversal candle formation. After the reversal and knocking these traders out of the market, the bulls finally strengthen and a powerful uptrend is formed.
There are several mandatory conditions that a pattern must meet in order for its signal to provide the maximum probability of working out:
1. There must be a downtrend or uptrend in the market before the pattern itself. The movement can be small, but its presence is necessary.
2. The body of the second candle must be of a different color and direction (bearish after bullish and bullish after bearish). Shadows may not be engulfed, but then the signal is considered weaker.
3. The body of the second candle should have a contrasting color to the body of the first candle. The exception is when the body of the first candle is very small (doji).
In addition to the basic rules of determining the pattern of the outside bar, there are other important nuances, taking into account which traders are more likely to increase the efficiency of their trading. It is worth avoiding trading in flat conditions. In a sideways movement, engulfing patterns are quite common, and if you trade each of them, you can get a lot of losing trades. A reversal pattern implies the presence of a trend. If you open a position on the signal of the outside bar only after a clear movement, the number of false entries into the market will be significantly reduced, respectively, the overall percentage of profitability of trading will increase. It is necessary to take into consideration the overall market situation before opening a trade, it is necessary to evaluate what happened to the price of the asset earlier.
✴️ Trading Engulfing Pattern
If all conditions are met and the signal is strong enough, you can enter the market. Let's consider how exactly trading on the outside bar is conducted. It is better to enter a trade on the engulfing pattern by a pending stop order. It is placed a few points above the maximum of the bullish signal candle, or a few points below the minimum of the bearish candle. The breakout of the signal candle will confirm the market reversal and the validity of the open position.
✴️ Setting Stop Loss
There are two ways of placing stop losses when trading the pattern. At the extreme of the signal candle (a few pips above the high of a bearish candle or below the low of a bullish candle). On the ATR indicator (the indicator value is multiplied by 2 and the stop loss is placed on the received number of points from the pending order). Setting a stop on the ATR is considered optimal, although it often coincides with the extremum of the signal candle.
✴️ Take Profit
There are also several variants of take profit setting:
By the ratio of 3:1 or more to the stop loss;
By key levels. The ratio of 3:1 provides a positive mathematical expectation, but this method has no connection to the real market situation, and therefore is less effective. Taking a take profits at levels is optimal, because in this case the probability of price reaching the target and profit fixation increases. When placing a TP on a key level, a take/stop ratio of less than 3:1, but not less than 1:1 is acceptable.
✴️ Examples of Trading by Engulfing Pattern
For an example, let's consider a trade on the 4-hourly chart of USDCHF. After a bullish trend, engulfing pattern was formed at the confluence level: a bullish candle engulfed the last small bearish candle, and the signal bar itself was larger than the previous ones. On this signal a buy stop order was placed to buy above the maximum of the engulfing candle. Stop Loss was set by ATR indicator (parameter 0.0010) at 20 pips from the order, TP was set near the key level at 30 pips from the order (the R:R ratio is almost 2:1). The pending order was activated by the next candle, and the price went up. A few hours later the trade was closed at take profit.
The next trade was opened to buy EURUSD, also on 4-hourly. All conditions were met: we had bullish trend, a powerful full-body bullish candle that engulfed and closed above previous candles. A pending buy stop order was placed couple of pips above the candles high. Stop Loss was set the candle low, take profit at the nearest psychological level. The R:R ratio turned out to be 2:1, which is good.
✴️ Conclusions
There are several factors to consider when trading Price Action. Candlestick patterns provide a guide to action, but the main trend and price levels should not be overlooked. The pattern itself should always have a support point. Such a comprehensive assessment will help to avoid knowingly false entries, and the habit of a calculated approach is only for the better.
How To Take Advantage of Big Tech Earnings Using FuturesNASDAQ:MSFT & NASDAQ:GOOG reported earnings after the market close today, but there isn't much that most stock or options traders can do about it until the market reopens tomorrow morning.
However, the futures markets, specifically the Micro Nasdaq Futures ( CME_MINI:MNQ1! ), provide opportunities to participate in earnings directional movement hours before stock traders can do anything,
Learn more in this video idea.
How To Customize The Look & Feel Of Your ChartA brief tutorial on how to build out a custom chart here on Tradingview.
In this video we'll take a look at changing your theme, customizing your background & candlesticks along with adding relevant information & removing what's not needed from your trading chart.
If you have any questions or comments about anything mentioned in the video please feel free to leave them below.
Akil
The Implications of Nasdaq 100 RebalancingCME: Micro Nasdaq 100 Futures ( CME_MINI:MNQ1! ), E-Mini S&P Technology Select Sector Futures ( CME_MINI:XAK1! )
The Nasdaq 100 index tracks the 100 largest non-financial stocks listed on the Nasdaq stock exchange. Since its inception over 38 years ago, it has become the world’s preeminent large-cap growth index.
So far in 2023, Nasdaq 100 has surged 42%, far outpacing the 18.7% gain from the S&P 500 and the 6.4% return by the Dow Jones Industrial Average. This big rally has prompted the Nasdaq to implement an index "Special Rebalance". What’s going on here?
Nasdaq-100: Market-cap weighted Index with a Twist
In the world of stock market indices, the two most common construction methodologies are equal-weighted and market-cap-weighted. The Nasdaq 100 is market-cap weighted, meaning the weight of each component is based on its market cap as a percentage of the aggregate market cap of the index. The higher the market cap, the bigger the weight.
Nasdaq performs regular quarterly weight adjustments in March, June, September, and December. To prevent the index from becoming too top-heavy and unbalanced, Nasdaq imposes weight limits in its Nasdaq Index Weight Adjustment Guidelines.
• No security weight may exceed 14% of the index.
• If the aggregate weight of the five largest market capitalizations is more than 40%, they will be adjusted to 38.5%.
• No security outside the largest five market cap companies may have a final index weight exceeding 4.4%.
The list below shows index weight as of June 30th, the last quarterly adjustment, and the most recent market cap as of July 21st, for the top ten companies in Nasdaq 100:
• No. 1, Microsoft (MSFT): market cap $2,556bn, index weight 12.92%
• No. 2, Apple (AAPL): $3,019bn (12.57%)
• No. 3, Nvidia (NVDA): $1,094bn (6.94%)
• No. 4, Amazon (AMZN): $1,334bn (6.85%)
• No. 5, Tesla (TSLA): $830bn (4.25%)
• No. 6, Meta (META): $756bn (4.22%)
• No. 7, Alphabet Class A (GOOGL): $1,560bn (3.71%)
• No. 8, Alphabet Class C (GOOGL): $1,599bn (3.64%)
• No. 9, Broadcom (AVGO): $373bn (2.40%)
• No. 10, PepsiCo (PEP): $263bn (1.70%)
• Top-5: market cap $8,833bn, index weight: 43.53%
• Top-10: market cap $13,384bn, index weight: 59.20%
• Nasdaq 100 (^NDX): aggregate market cap $25,990bn
The Top-5 has already breached the 40% mark and will be brought down to 38.5% in the “Special Rebalance” to address the concerns of over-concentration:
“A Special Rebalance may be conducted at any time based on the weighting restrictions described in the Index Rebalance Procedure if it is determined to be necessary to maintain the integrity of the Index.”
How will this Rebalancing Impact Investors?
According to the Nasdaq, over $500 billion in exchange traded funds (ETF) are tied to the Nasdaq-100, including Invesco QQQ ETF, iShares Nasdaq-100 UCITS ETF and ProShares UltraPro QQQ, just to name a few. If each fund tracks the Nasdaq 100 closely and responds to the rebalancing immediately, the Top-5 stocks in the portfolio will be reduced by 5% (from 43.5% to 38.5%). This would create short-term selling pressure in tens of billions of dollars.
To put the figures in context: although the Top-5 companies have an aggregate market cap of nearly $9 trillion, they have a modest daily float. Based on my calculation, the average daily transaction value over the past three months was only $77 billion, less than 1% of their market valuation, with 337 million shares changing hands.
Leading up to the rebalancing, we are seeing larger trade volume and higher volatility:
• On July 21st, Microsoft had a trade volume of 69.3 million shares, vs. its 3-month average volume of 29.3 million shares;
• Nvidia: trade volume 96.2m vs. 3-mo average 49.3m
• Alphabet: trade volume 55.5m vs. 3-mo average 26.4m
• Amazon: trade volume 69.5m vs. 3-mo average 63.6m
Since peaking at 15,932 on July 19th, Nasdaq 100 has trended down in the last three trading sessions, currently trading at 15,455 on the morning of July 24th.
Arbitrage Opportunity between Technology Indexes
The Nasdaq 100 rebalancing is a unique issue with the Nasdaq 100 index. It has nothing to do with the fundamentals of these companies and has no impact on other Tech sector stock indexes which also include the same component companies.
The S&P Technology Select Sector (XAK) has over 90% correlation with Nasdaq 100 (MNQ) historically. The former includes Apple, Microsoft and Nvidia, but not Alphabet or Amazon.
In the past five years, XAK outperformed MNQ by 40%. In the past five trading days, MNQ underperformed XAK by 1%, likely due to the impact of the Nasdaq-100 rebalancing.
In the long run, Nasdaq 100 rebalance will dilute the impact of the largest stocks in the index. Strong growth in Big Tech will be fully represented in XAK but capped in MNQ. This, in my opinion, would result in a widening spread between XAK and MNQ.
XAK futures contract is based on $100 x S&P Select Sector Technology Index. At 1,786.6, each XAK contract has a notional value of $178,660 on July 21st. CME requires an initial margin of $9,500.
MNQ contract is based on $2 x Nasdaq 100 Index. At 15,555, each MNQ has a notional value of $31,110. CME requires an initial margin of $1,680.
Based on the relative notional values, someone bullish on the spread could establish a trade with 1 long XAK and 6 short MNQ.
Using the last five days as an example:
• If XAK increases by 1%, the long end of the trade would show a gain of $1,787 (17.9 x 100). If, during the same period, MNQ is flat, the short end would have no gain or loss. This spread combination would have a net gain of $1,787.
• Using initial margins of $19,580 as a cost base, this equates to a one-week return of +9.1%.
For comparison, if a trader invests in a Nasdaq 100 ETF and the index gains 1%, the return would also be 1%. Trading in futures comes with a leverage that would supercharge the gain if you were on the right direction.
The spread trade would loss money if MNQ has a stronger performance than XAK.
Happy Trading.
Disclaimers
*Trade ideas cited above are for illustration only, as an integral part of a case study to demonstrate the fundamental concepts in risk management under the market scenarios being discussed. They shall not be construed as investment recommendations or advice. Nor are they used to promote any specific products, or services.
CME Real-time Market Data help identify trading set-ups and express my market views. 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
"Uh Oh" Strategies No amount of math, TA or fundamental analysis is sufficient in the world of the market. No matter how much effort, time and energy you put into analyzing charts, doing calculations and reading SEC filings, you are bound to stop out. And unfortunately, if you are a day trader, this can compound pretty quickly in an off-week where the market decides to behave…… let’s say.. interestingly.
When I day trade, I do make best efforts to hold and trail positions to high probability targets. Sometimes this works fantastically, other times it backfires horrendously. As such, I have a few sure and true methods I have and use to offset those times where my plan and targets backfire on me when I am day trading.
I am going to show you 2 of my tried and true emergency strategies. I term them “Uh Oh” strategies because I only ever resort to them when I am in trouble (really red on the day). Before we get into them, I need to set the stage of when they should be used and what they are intended to do. So let’s go over some basic rules on these strategies:
1. They are intended ONLY for choppy days. At least for me, most of my stop outs come from choppy days, so that is why I have them. Using them on trend days won’t work.
2. These can be pretty high risk if not managed appropriately. You need to be careful with your position size and set your stop out VERY tight using these strategies.
3. These aren’t intended to be a “let’s get cute and trail” strategy. The purpose of this strategy is to play only the price action, ignore the bigger picture and provide a quick 1 to 5 minute scalp with a relatively hefty size to offset losses. While you should always let your winners run, if you are using this as a last ditch effort to salvage your day, please don’t get cute with it.
4. If you are using these as a last ditch effort on the day, before resorting to it, you need to step away and consider whether it is really worth it. Overtrading can be even more harmful to your psychology and can block you, despite having the best entries. Always be mindful of how you are feeling and how your feelings and emotions are translating to your trading. As such, I generally will resort to these strategies if I have 2 failed day trades and I keep it at one trade using one of these. If I also have a stop out using this, I just call it quits on the day period.
Alright, on with the strategies!
Strategy: The EMA 21 with Standard Deviation Strategy
Basic Info:
Indicator: EMA 21 that has the EMA 21 standard deviation bands (you can use my ultimate customizable EMA indicator to achieve this, or any other EMA indicator you have that permits the SD bands to be added, I will link my indicator below).
Chart Timeframe: 1 or 5 minute. I use the 1 minute but the 5 minute works actually better. I will show both below.
When to use: NEVER use this strategy in the first 30 minutes of the trading day or the last 30 minutes of the trading day. The volatility makes this strategy pretty unreliable.
Procedure:
The image above shows the ticker AMEX:SPY on the 1 minute timeframe with the EMA 21 and 21 standard deviation bands overlayed. In this example, I am using my own indicator available here .
Step 1: Identify the short term trend on the 1 minute timeframe using Tradingview’s trendline tools (see the example below):
You can confirm the trend by simply looking for higher highs and higher lows:
Step 2: Go with the trend. If its in a short term uptrend, you are looking for longs, if it’s a short term downtrend, you are looking for shorts. What you are waiting for is a pullback below the opposing standard deviation band. Here is the example using our uptrend:
Above is an example of a long entry. Once you have established you are in a short term uptrend, you wait for it to touch and break into the lower SD band on the EMA indicator, then you long it to the top of the bands, as shown in the image above. The candle should start pushing back below the EMA band to confirm that it has not “broken out”. Here are examples of breakouts vs continuation signals:
And for short entries, you do the inverse. See the example below:
If you want to use the 5 minute, here is an example of 5 minute entries and exits, following the same rules:
The green represents entries and red exits.
If you are doing this strategy on the 5 minute, the biggest difference is that you can pay less attention to whether you are in a short term uptrend or downtrend. The moves tend to be better on the 5 minute, the only downside is by using the 5 minute you are extending the duration of the trade from 1 to 5 minutes to an average of 20 to 30 minutes.
Strategy 2: Previous Hour High/Low Average
Basic Info:
Indicator: You need an indicator that can display the previous hourly high and low average. My baseline indicator can achieve this if you don’t already have one, available here .
Optional indicator: EMA 21
Chart Timeframe: Can be 1 through 5, you are using the last hour so timeframe is not all that important.
When to use: ONLY works on choppy days. You will be able to tell if the day is truly choppy using the previous hour average. Choppy days have alternating high and low averages (see the chart below):
In the chart above, you can see that each average alternates between being higher, then lower, then higher again. This is a confirmation of a choppy day and that this strategy is appropriate. Inversely, trend days appear as a “staircase” pattern on the averages (see below):
Step 1: Confirm it is a choppy day. See the example charts above. Once you have confirmed it is indeed a choppy day, then go on to step 2.
Step 2: Identify your setup. In general, on a choppy day, if you open below the previous 1 hour average, the stock will retrace this average. You can use the ema 21 or ema 9/21 to plan your entry on a crossover, or just gauge the PA itself (see below for example):
You can see in each instance the stock retraced its previous average. This strategy is amazing but you have to be EXTREMELY careful that it is in fact a choppy day and not a trend day. Some days may start off choppy and then turn into a trend (see image below):
This is why it can also be helpful to combine the EMA 21 with this strategy.
Conclusion:
And that is it! Those are my 2 "Uh Oh" strategies.
Hopefully you found this informative and helpful. Let me know your questions and comments below!
Safe trades everyone!
AUDNZD LONDON OPEN SHORT (SIGNALS)📉AUDNZD SELL 📉
💰Take Profit 1 - 1.0832
💰Take Profit 2 - 1.0782
💰Take Profit 3 - 1.0732
❌ Stop loss - 1.1012
Here is my analysis of AUDNZD:
The AUDNZD pair has been in a bearish trend for the past few weeks, and it is currently trading near the bottom of its range. The current spot rate is 1.0912, and a sell entry point of 1.0912 is just above the recent low of 1.0892.
There are a few reasons why AUDNZD could continue to fall in the near term. First, the AUD is generally seen as a commodity currency, and it has been weakening against the NZD in recent weeks as commodity prices have fallen. Second, the Reserve Bank of Australia is expected to raise interest rates more slowly than the Reserve Bank of New Zealand, which could weaken the AUD against the NZD. Finally, the NZD has been supported by the recent decline in risk appetite.
However, there are also some risks to consider before entering a trade on AUDNZD. The forex market is volatile, and there is always the risk of a reversal. Additionally, the economic outlook for Australia and New Zealand is uncertain, which could impact the price of AUDNZD.
Overall, I think AUDNZD is a good pair to trade for those who are looking for a short-term bearish trend. However, it is important to remember that the forex market is volatile, and there is always the risk of a reversal.
Here are some additional factors that you may want to consider before entering a trade on AUDNZD:
The economic outlook for Australia and New Zealand.
The level of volatility in the forex market.
The price of commodities, such as oil and gold.
SOFR: Farewell to LIBORCME: SOFR ( CME:SR31! )
On June 30th, SEC Chairman Gary Gensler posted a 3-minute short video on Twitter. In this educational piece titled RIP LIBOR, he explains what the London Interbank Offered Rate (LIBOR) is, and why its passing away is actually a good thing for consumers.
As CFTC Chairman in 2009-2014 and SEC Chairman since 2021, Mr. Gensler oversaw the investigation of the 2012 LIBOR scandal and its replacement by the Secured Overnight Financing Rate (SOFR) in 2021 as the benchmark interest rate for US dollar.
Eurodollar and LIBOR
Offshore Dollar, the US currency deposited in banks outside of the United States, is commonly known as Eurodollar. Traditionally, offshore dollars were traded mainly among European banks. The name sticks to these days and applies to funds in non-European banks as well.
A key advantage of trading Eurodollar is the fact that it is subject to fewer regulations by the Fed, being outside of the US jurisdiction. London is the largest trading hub for Eurodollar.
The London Interbank Offered Rate came into being in the 1970s as a reference interest rate in the Eurodollar markets. By 1986, the British Bankers' Association (BBA) began publishing the US Dollar LIBOR daily. The BBA Libor was calculated based on interest rates reported by 17 member banks who together represented the bulk of Eurodollar transactions. Libor has been widely used as a reference rate for many financial instruments, including:
• Forward rate agreements
• Interest rate futures, e.g., CME Eurodollar futures
• Interest rate swaps and swaptions
• Interest rate options, Interest rate cap and floor
• Floating rate notes and Floating rate certificates of deposit
• Syndicated loans
• Variable rate mortgages and Term loans
• Range accrual notes and Step-up callable notes
• Target redemption notes and Hybrid perpetual notes
• Collateralized mortgage obligations and Collateralized debt obligations
How important was Libor? It is a reference rate in the documentation by private trade association International Swaps and Derivatives Association (ISDA), which sets global market standard for OTC derivative transactions.
In 2008, 60% of prime adjustable-rate mortgages and nearly all subprime mortgages were indexed to the USD Libor in the US. Furthermore, American cities borrowed 75% of their money through financial products that were linked to the Libor.
Libor has been the indispensable global benchmark for pricing everything from credit card debt to mortgages, auto loans, corporate loans, and complex derivatives.
CME Eurodollar Futures
In 1981, the Chicago Mercantile Exchange launched Eurodollar futures, the first ever cash-settled futures contract. It quickly became the most liquid contract by CME. At its peak, over 1,500 traders and clerks worked at the Eurodollar pit on CME trading floor.
Not to be confused with the Euro currency, Eurodollar futures contracts are derivatives on the interest rate paid on a notional or "face value" of $1,000,000 time deposit at a bank outside of the United. It uses the 3-month USD Libor rate as its settlement index. The late Fred D. Arditti, CME economist, is credited as the brain behind Eurodollar futures.
Eurodollar futures are priced as a Money Market instrument. The CME IMM index is used to convert a coupon-bearing instrument such as bank deposit, into a discounted instrument that does not make regular interest payments.
For instance, a futures price of 95.00 implies an interest rate of 100.00 - 95.00, or 5%. The settlement price of a Eurodollar futures contract is defined to be 100.00 minus the official BBA fixing of 3-month Libor on the day the contract is settled.
The 2012 LIBOR Scandal
The LIBOR Scandal was a highly publicized scheme in which bankers at major financial institutions colluded with each other to manipulate the Libor rate. As the scandal came to light in 2012, investigators found that the banks had been submitting false information about their borrowing costs to manipulate the Libor rate. This allowed the banks to profit from trades based on the artificially low or high rates.
A dozen big banks were implicated in the scandal. It led to lawsuits and regulatory actions. After the rate-fixing scandal, LIBOR's validity as a credible benchmark was over. As a result, regulators decided that Libor would be phased out and replaced.
If you want to learn more about the LIBOR scandal, feel free to check out the 2017 bestseller by David Enrich: “The Spider Network: The Wild Story of a Math Genius, a Gang of Backstabbing Bankers, and One of the Greatest Scams in Financial History”.
What is the SOFR
In 2017, the Federal Reserve assembled the Alternative Reference Rate Committee to select a Libor replacement. The committee chose the Secured Overnight Financing Rate as the new benchmark for dollar-denominated contracts.
The daily SOFR is based on transactions in the Treasury repurchase market, where firms offer overnight or short-term loans to banks collateralized by their bond assets ,similar to pawn shops.
Unlike LIBOR, there’s extensive trading in the Treasury repo market, estimated at $4.8 trillion in June 2023. This theoretically makes it a more accurate indicator of borrowing costs. Moreover, SOFR is based on data from observable transactions rather than on estimated borrowing rates, as was the case with LIBOR.
The Federal Reserve Bank of New York began publishing the SOFR in April 2018. By 2021, SOFR has replaced most of the LIBOR-linked contracts. The LIBOR committee officially folded up on June 30, 2023. Chairman Gensler apparently chose this day to post his RIP LIBOR video to mark the end of an era.
The difference between Fed Funds Rate and SOFR
Fed Funds Rate is set by the Fed’s FOMC meeting, and SOFR is published by the NY Fed. However, they are very different.
• Fed Funds Rate is considered a risk-free interest rate, and only member banks have access to this ultra-low rate through the Fed’s discount window.
• SOFR is a commercial interest rate where banks charge each other. The NY Fed publishes the rate based on transactions in the US Treasury repurchase market.
SOFR is similar to LIBOR because they are both commercial interest rate benchmarks. On the other hand, Fed Funds Rate is a policy rate set by the US central bank.
CME SOFR Futures and Options
CME Group launched the 3-month SOFR futures and options contracts in May 2018. The contracts were based on the SOFR Index, published daily by the New York Fed.
SOFR futures contracts are notional at $2,500 x contract-grade International Monetary Market (IMM) Index, where the IMM Index = 100 minus SOFR. At a 5.215 IMM, for example, each contract has a notional value of $13,037.50. CME requires a $550 margin per contract. An interest rate move by a minimum tick of 0.25 basis point would result in a gain or loss of $6.25.
At the beginning, SOFR contracts traded side-by-side with the Eurodollar contracts. By 2021, Eurodollar liquidity has transitioned to SOFR contracts. By April 2023, All Eurodollar contracts were delisted, and the transition was completed.
For all intended purposes, you could think of the SOFR futures as the same as the legacy Eurodollar contracts, with the only notable exception being the settlement index switched from LIBOR to SOFR.
On June 30th, the daily trading volume and Open Interest of SOFR contracts were 4,443,245 and 9,310,433 contracts, respectively. On the same date, CME Group total volume and OI were 23,769,103 and 104,221,083, respectively.
On the latest trade day, SOFR accounts for 18.7% of CME Group’s trade volume and 8.9% of its total open interest. Indeed, SOFR has successfully replaced Eurodollar as new No. 1 contract at CME and is arguably the most liquid derivatives contract in the world.
Where We Are at the SOFR Market
On June 30th, the JUN SOFR contract (SR3M3) expired and settled at 94.785. This translates to the JUN SOFR rate of 5.215 (100-94.785).
SEP 2023 (SR3U3) is now the new lead contract. It settled at 94.595 and implied a forward SOFR rate at 5.405 (100-94.595). This shows that the futures market expects a rate increase in the next Fed meeting.
Like Eurodollar futures, rising futures price will confer to declining SOFR rate, as rate is equal to 100 minus futures price. Similarly, a decline in futures price equates to a rising SOFR rate.
Happy Trading.
Disclaimers
*Trade ideas cited above are for illustration only, as an integral part of a case study to demonstrate the fundamental concepts in risk management under the market scenarios being discussed. They shall not be construed as investment recommendations or advice. Nor are they used to promote any specific products, or services.
CME Real-time Market Data help identify trading set-ups and express my market views. 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
Tesla's Q2 2023:Accelerating into the Future with Record RevenueIn the recently released Q2 2023 earnings report, Tesla Inc. presented a record quarter on multiple fronts, showcasing its resilience and innovation in a challenging macroeconomic environment. The electric vehicle and clean energy company reported a 9.6% operating margin, GAAP operating income of $2.4 billion, GAAP net income of $2.7 billion, and non-GAAP net income of $3.1 billion.
Despite price reductions in Q1 and early Q2, Tesla's operating margin remained robust, reflecting the company's ongoing cost reduction efforts, successful production ramp-ups in Berlin and Texas, and strong performance in the Energy and Services & Other sectors. The company's cash and investments increased by $0.7 billion in Q2, reaching a total of $23.1 billion.
Tesla's Cybertruck factory tooling is progressing as planned, with the company currently producing RC (release candidates) builds. The Model Y, one of Tesla's most popular models, became the best-selling vehicle globally in Q1, demonstrating the company's growing market dominance.
The company's total automotive revenues reached $21,268 million, marking a year-over-year (YoY) increase of 46%. The Energy generation and storage sector also saw significant growth, with revenues of $1,509 million, a YoY increase of 74%. Services and other revenue rose by 47% YoY to $2,150 million. Overall, Tesla's total revenues for Q2 2023 were $24,927 million, a 47% YoY increase.
In terms of production, Tesla manufactured 19,489 Model S/X vehicles and 460,211 Model 3/Y vehicles in Q2 2023, representing YoY increases of 19% and 90% respectively. The total deliveries of Model S/X were 19,225, a YoY increase of 19%. The total deliveries of Model 3/Y were 446,915, a YoY increase of 87%.
Tesla's installed annual vehicle capacity continues to expand. In California, the capacity for Model S/X is 100,000, and for Model 3/Y it's 550,000. In Shanghai, the capacity for Model 3/Y is over 750,000. In Berlin, the capacity for Model Y is 375,000. In Texas, the capacity for Model Y is over 250,000.
The company also highlighted its commitment to AI development, with the production of Dojo training computers commencing. This development is expected to satisfy Tesla's immense neural net training needs using in-house designed Dojo hardware, which will enable faster and cheaper neural net training.
For new Model 3 or Y customers, Tesla launched the "Get To Know Your Tesla" experience. This initiative allows users to adjust their seats, mirrors, and steering wheel, set up the phone key, and learn about topics such as regenerative braking.
In conclusion , Tesla's Q2 2023 shareholder deck paints a picture of a company that continues to innovate and grow despite external challenges. With a focus on cost reduction, new product development, investments in R&D, continuous product improvement, and the generation of free cash flow, Tesla is well-positioned for long-term success.
Read more in the comment section...
3 Best Market Trading Opportunities to Maximize Profit Potential
Hey traders,
In the today's article, we will discuss 3 types of incredibly accurate setups that you can apply for trading financial markets.
1. Trend Line Breakout and Retest
The first setup is a classic trend line breakout.
Please, note that such a setup will be accurate if the trend line is based on at least 3 consequent bullish or bearish moves.
If the market bounces from a trend line, it is a vertical support.
If the market drops from a trend line, it is a vertical resistance.
The breakout of the trend line - vertical support is a candle close below that. After a breakout, it turns into a safe point to sell the market from.
The breakout of the trend line - vertical resistance is a candle close above that. After a breakout, it turns into a safe point to buy the market from.
Take a look at the example. On GBPJPY, the market was growing steadily, respecting a rising trend line that was a vertical support.
A candle close below that confirmed its bearish violation.
It turned into a vertical resistance.
Its retest was a perfect point to sell the market from.
2. Horizontal Structure Breakout and Retest
The second setup is a breakout of a horizontal key level.
The breakout of a horizontal support and a candle close below that is a strong bearish signal. After a breakout, a support turns into a resistance.
Its retest is a safe point to sell the market from.
The breakout of a horizontal resistance and a candle close above that is a strong bullish signal. After a breakout, a resistance turns into a support.
Its retest if a safe point to buy the market from.
Here is the example. WTI Crude Oil broke a key daily structure resistance. A candle close above confirmed the violation.
After a breakout, the broken resistance turned into a support.
Its test was a perfect point to buy the market from.
3. Buying / Selling the Market After Pullbacks
The third option is to trade the market after pullbacks.
However, remember that the market should be strictly in a trend.
In a bullish trend, the market corrects itself after it sets new higher highs. The higher lows usually respect the rising trend lines.
Buying the market from such a trend line, you open a safe trend-following trade.
In a bearish trend, after the price sets lower lows, the correctional movements initiate. The lower highs quite often respect the falling trend lines.
Selling the market from such a trend line, you open a safe trend-following trade.
On the chart above, we can see EURAUD pair trading in a bullish trend.
After the price sets new highs, it retraces to a rising trend line.
Once the trend line is reached, trend-following movements initiate.
What I like about these 3 setups is the fact that they work on every market and on every time frame. So no matter what you trade and what is your trading style, you can apply them for making nice profits.
Good luck!
Market Direction - Trend StrengthThe strength of a trend can be a key factor in predicting future price movements. This post will specifically cover how to identify trends, how to determine trend strength, and how to use it to your advantage when trading the markets.
Characteristics of a Trending Market
To begin, let us understand how to identify a trending market.
A trending market is a market that is either making higher highs followed by higher lows (UPTREND) or lower lows followed by lower highs (DOWNTREND).
What does this typically look like? Let's see:
Uptrend
Downtrend
Now that we understand how to identify uptrends and downtrends, let's delve further and discuss how to use trend strength to your advantage when trading the markets.
Fibonacci Retracement Tool
The Fibonacci retracement tool is used in trending markets to determine how strong the trend is. It uses natural numbers to determine the high-probability price levels that the market will hit and continue in its initial direction. This method will use four Fibonacci levels: 38.2%, 50%, 61.8%, and 78.6%.
One thing to mention is that in a trending market, the chart is made up of two waves: impulsive and retracement. After an impulsive wave, a retracement wave will usually form; after a retracement wave, the impulsive wave will usually form.
The impulsive wave represents the strong momentum of buyers and sellers. The retracement wave shows the weakness of buyers and sellers.
Therefore, we must look at the retracement wave when it comes to deciding the strength of a trend. For example, in an uptrend, the impulsive wave will be bullish; therefore, the retracement wave will be bearish. In a downtrend, the impulsive wave will be bearish; therefore, the retracement wave will be bullish.
The retracement wave shows the strength of the opposite side of the market. For example, if the impulsive wave is bullish, buyers are stronger. Then, in the retracement wave, sellers will try to dominate the buyers.
Therefore, the deeper the retracement goes, the stronger sellers will be than buyers, and the weaker the bullish trend strength will be.
With the Fibonacci retracement tool, there are three scenarios to determine trend strength:
Strong Trend Strength: 38.2% Fibonacci Retracement
Moderate Trend Strength: 50%–61.8% Fibonacci Retracement
Weak Trend Strength: 78.6% Fibonacci Retracement
The above examples show why the Fibonacci retracement tool can be extremely effective in determining not only how strong a trend is, but also how likely it is to continue past the beginning of the impulsive wave.
Bollinger Bands
Bollinger Bands are very effective in reading trend strength. Bollinger Bands are based on price volatility, which means that they expand when the market is trending and there are big prices, and they contract during sideways consolidations when the market ranges.
Bollinger Bands consist of two outer bands (top and bottom bands) on each side and a moving average in the centre between the outer bands (middle band).
One of the main reasons Bollinger Bands are so effective in reading trend strength is that they do not lag as much as other indicators because they always change automatically with the price.
Three important points to note when using Bollinger Bands to read trend strength:
If price pulls away from the outer band and heads towards the middle band as the trend continues, this is a key indication that the trend strength may be weakening.
During strong trends, prices stay close to the outer band and significantly away from the middle band.
Repeated pushes into the outer bands that do not actually reach the band indicate a lack of trend strength.
Let's see a chart example of Bollinger Bands reading trend strength:
As you can see, using Bollinger Bands can provide traders with very useful information about trend strength and the balance between bulls and bears.
Price Rejection
We do not always need indicators or tools to read trend strength; it is possible to do this just by looking at a naked chart. The way rejected continuations or reversals happen on charts can be a huge indicator of being able to read trend strength. Before understanding the price rejection, it is important to know about the wick or shadow of the candlestick.
Upper wick
The upper shadow shows that the price went up and then came down again. This indicates that buyers wanted to increase the price, but sellers dominated the buyers to push the price back down.
Lower wick
The lower shadow represents that the price went down and then came back up. This indicates that sellers wanted to lower the price, but buyers dominated the sellers to push the price back up.
Identifying price rejection
Traders should first wait for the price to reach a strong support or resistance level. Then, at the support or resistance level, candlesticks will likely make wicks opposite the trend due to the strength of the level. For example, wicks or shadows will form on the upper side at the resistance zone, while at the support zone, wicks or shadows will form on the lower side of the candlesticks.
These wicks or shadows are identified as price rejections in the market.
Price rejections are very important, especially in identifying trend strength, because they accept or reject the identification of key levels in the market. For example, if you are unsure whether a support zone will hold or break, you can see whether price rejection will occur at that level.
Let's see a chart example of price rejection and how you can use it to identify trend strength:
The chart above is proof alone that trend strength can be identified by just looking at the price action of a chart.
Understanding the strength of a trend does not have to be complex. Trend strength can be identified simply by using the three different techniques we have covered in this educational post.
The best thing we can all do as traders is to be simplistic and not overcomplicate things; this becomes especially easier when you accept that nothing in the market is certain.
Each market has its own unique market conditions and will not trade rationally all of the time. Therefore, when a trade does not go your way even though your trend strength signals were high and you followed the market, understand that it is just one trade and that the market is completely neutral. It is neither personally on your side nor personally against you.
Trade safely and responsibly.
BluetonaFX
Trading Breakouts with Donchian ChannelsBreakout trading is a popular strategy among traders seeking to capitalize on significant price moves that occur when the price breaks out of a well-defined range. It involves identifying key levels of support and resistance and entering trades when the price breaks above resistance or below support. By catching these breakout movements early, traders aim to capture potential profits as the price continues to move in the breakout direction.
Donchian Channels are constructed by plotting three lines on a price chart: the upper band, the lower band, and the middle line. The upper band represents the highest high over a specified period, while the lower band represents the lowest low. The middle line, also known as the median line, is the average of the upper and lower bands.
The interpretation of Donchian Channels is relatively straightforward. When the price breaks above the upper band, it signals a potential bullish breakout, suggesting that the price may continue to rise. Conversely, when the price breaks below the lower band, it indicates a potential bearish breakout, suggesting that the price may continue to decline. The width between the upper and lower bands represents the volatility of the asset.
Understanding Donchian Channels
A. Explanation of Donchian Channels and their construction:
Donchian Channels are constructed using historical price data and provide traders with a visual representation of market volatility and potential breakout opportunities. To calculate Donchian Channels, traders select a specific lookback period, which determines the number of bars or candles used in the calculation. This lookback period can be adjusted based on the desired trading timeframe and market conditions.
The upper band of the Donchian Channels represents the highest high over the selected period, while the lower band represents the lowest low. The middle line, also known as the median line, is calculated as the average of the upper and lower bands. By plotting these lines on a price chart, traders can visualize the range within which the price has been oscillating over the selected period.
It is important to note that the choice of the lookback period will impact the sensitivity of the Donchian Channels. A shorter lookback period will result in narrower channels, capturing more recent price movements, while a longer lookback period will yield wider channels, incorporating a broader range of historical price data.
B. Components of Donchian Channels:
– Upper band : The upper band of the Donchian Channels represents the highest high over the selected period. It serves as a potential resistance level and provides traders with a reference point for potential breakout opportunities above this level.
– Lower band : The lower band represents the lowest low over the selected period and acts as a potential support level. Traders monitor the price's behavior in relation to the lower band to identify potential breakout opportunities below this level.
– Middle line : The middle line, often referred to as the median line, is calculated as the average of the upper and lower bands. It serves as a midpoint between the two bands and provides traders with a reference point for the mean or average price within the selected period. The middle line can act as a potential dynamic support or resistance level, depending on the direction of the price movement.
C. Interpretation of Donchian Channels:
Donchian Channels provide valuable insights into market volatility and potential breakout opportunities. Traders can interpret Donchian Channels in the following ways:
– Market volatility : The width of the Donchian Channels reflects the level of market volatility. Wider channels indicate higher volatility, suggesting larger price swings and potentially stronger breakout opportunities. Narrower channels, on the other hand, indicate lower volatility and may suggest a period of consolidation or low trading activity.
– Breakout opportunities : Traders monitor the price's behavior in relation to the upper and lower bands of the Donchian Channels to identify potential breakout opportunities. A breakout occurs when the price breaks above the upper band or below the lower band. A breakout above the upper band suggests a potential bullish opportunity, while a breakout below the lower band indicates a potential bearish opportunity. Traders may consider entering a trade when a breakout occurs, anticipating further price movement in the breakout direction.
– Squeezing Donchian Channels: When the width between the upper and lower bands narrows significantly, it is referred to as a "squeeze." A squeeze indicates low volatility and a potential upcoming breakout. Traders watch for a breakout in either direction when the Donchian Channels squeeze, as it suggests that the market is likely to enter a period of increased volatility and directional movement.
Identifying Breakout Opportunities with Donchian Channels
A. Breakout above the upper band:
A breakout occurs when the price crosses above the upper band of the Donchian Channels, indicating a potential bullish opportunity. Traders can use different entry strategies to capitalize on breakouts above the upper band:
– Buying on the close above the upper band : Traders may choose to enter a long position when the price closes above the upper band. This approach confirms the breakout and provides confirmation that the upward momentum is sustained.
– Percentage deviation from the upper band : Another approach is to wait for a specific percentage deviation from the upper band before entering a trade. For example, a trader might enter a long position if the price moves a certain percentage, such as 1% or 2%, above the upper band. This method allows for a more flexible entry and can help filter out minor price fluctuations.
It is important to consider other technical indicators, such as volume or momentum oscillators, to confirm the strength of the breakout and assess potential price targets or exit points. Traders may also incorporate stop-loss orders to manage risk and protect against potential false breakouts.
B. Breakout below the lower band:
A breakdown occurs when the price crosses below the lower band of the Donchian Channels, signaling a potential bearish opportunity. Traders can use various entry strategies to take advantage of breakouts below the lower band:
Selling on the close below the lower band: Traders may choose to enter a short position when the price closes below the lower band, confirming the breakdown and indicating a potential downtrend.
Percentage deviation from the lower band: Alternatively, traders can wait for a specific percentage deviation from the lower band before entering a trade. For instance, they might enter a short position if the price moves a certain percentage below the lower band. This approach adds a level of confirmation and helps filter out minor price fluctuations.
Similar to breakouts above the upper band, traders should consider additional technical indicators to confirm the breakdown and identify suitable price targets or exit points. Stop-loss orders are essential to manage risk and limit potential losses if the breakout turns out to be a false signal.
It is worth noting that not all breakouts or breakdowns lead to sustained price movements. Traders should exercise caution and conduct thorough analysis, considering market conditions, overall trend, and other relevant factors. Using Donchian Channels as a tool for identifying breakout opportunities provides a structured approach to entering trades and enhances decision-making in breakout trading strategies.
Confirmation Techniques with Volume
Volume plays a crucial role in confirming breakouts and validating the strength of price movements. Higher volume during a breakout suggests greater market participation and increases the likelihood of a sustained move. Traders can use volume indicators in conjunction with Donchian Channels to confirm breakouts:
– On-Balance Volume (OBV) : OBV is a popular volume indicator that measures buying and selling pressure. Traders can compare the OBV trend with the breakout in Donchian Channels to assess whether volume supports the breakout movement. If OBV shows a positive trend alongside a breakout above the upper band or below the lower band, it provides additional confirmation.
– Volume Weighted Average Price (VWAP) : VWAP is another useful volume-based indicator that calculates the average price weighted by trading volume. Traders can compare the current price with the VWAP to determine if volume supports the breakout. If the price moves above the upper band accompanied by a surge in volume and a deviation from the VWAP, it strengthens the breakout signal.
Managing Risk in Donchian Channel Breakout Trading
A. Setting stop-loss orders:
Stop-loss orders serve as a protective mechanism to limit potential losses if the breakout trade fails. By defining a predetermined level at which to exit the trade, traders can control and manage their risk effectively. Traders can use various techniques to determine the placement of stop-loss orders. One approach is to place the stop-loss below the breakout candle or below the lower band of Donchian Channels. This ensures that if the price reverses and breaks back into the channel, the trade is exited to minimize potential losses.
B. Implementing position sizing:
Position sizing is the process of determining the number of contracts or shares to trade based on individual risk tolerance. Traders should consider their risk appetite and financial objectives when determining position size. Common methods for position sizing include the fixed percentage method (risking a certain percentage of capital per trade) or the fixed dollar amount method (risking a specific dollar amount per trade).
Volatility and the characteristics of the breakout can influence position sizing. Traders may opt for smaller position sizes in more volatile markets to manage risk effectively. Additionally, if the breakout signal exhibits higher confidence, such as a wide breakout range or strong confirmation signals, traders may consider increasing their position size to capitalize on potential larger moves.
Fine-tuning Donchian Channel Breakout Strategies
While Donchian Channels provide valuable insights into breakouts, combining them with trend-following indicators can enhance the effectiveness of the strategy. Trend indicators, such as moving averages or trendlines, can help traders identify the direction of the prevailing trend. By aligning the breakout trades with the trend direction, traders can increase the probability of successful trades.
Momentum oscillators can be used alongside Donchian Channels to provide additional confirmation of breakout signals. Indicators like the Relative Strength Index (RSI) or the Stochastic Oscillator can help traders assess overbought or oversold conditions and gauge the strength of the breakout. Combining the signals from these oscillators with Donchian Channel breakouts can offer a more comprehensive view of market dynamics.
Different timeframes can have varying impacts on the frequency and reliability of Donchian Channel breakouts. Shorter timeframes, such as intraday charts, may generate more frequent but potentially smaller breakouts. Conversely, longer timeframes, such as daily or weekly charts, may produce fewer but more significant breakouts. Traders should consider their trading style, available time, and risk tolerance when selecting the timeframe for breakout trading.
Backtesting is a crucial step in fine-tuning Donchian Channel breakout strategies. By applying historical data to the strategy on various timeframes, traders can assess the performance and identify optimal parameters. Through backtesting, traders can refine their entry and exit rules, determine the most suitable lookback periods, and validate the strategy's effectiveness across different market conditions.
Limitations and Considerations
A. False breakouts and whipsaws:
Despite the effectiveness of Donchian Channel breakout strategies, false breakouts can occur, leading to potential losses. False breakouts happen when the price briefly moves beyond the channel but quickly reverses back into the range. Traders must be aware of this possibility and implement risk management techniques to mitigate potential losses. To minimize the impact of false breakouts, traders can employ confirmation techniques, such as volume analysis or candlestick patterns. These tools can provide additional validation before entering a trade, reducing the risk of being caught in false breakout scenarios.
By layering Donchian Channels of varying lengths over each other, range-bound or trending markets can become clearer and reduce the potential for trading a false breakout. Here we have channel lengths of 25, 50, 100, 150, and 200 overlaid to help determine the state of the market and identify take profit and stop loss levels:
B. Market conditions affecting breakout trading:
During periods of low volatility, price movements can become sluggish, resulting in fewer and less significant breakouts. Traders should be mindful of market conditions and adjust their expectations and strategies accordingly. It may be necessary to explore alternative trading approaches or consider other indicators that perform better in low volatility conditions.
Donchian Channel breakout strategies work best in trending markets where price movements exhibit clear directional biases. In ranging markets, where prices oscillate within a defined range, breakouts may be less frequent and less reliable. Traders should exercise caution and consider alternative strategies when faced with prolonged ranging market conditions.
C. Psychology and discipline in breakout trading:
Breakout trading requires discipline and emotional control. Traders must be prepared for periods of drawdowns, missed opportunities, and potential losses. Maintaining a disciplined mindset, sticking to predetermined rules, and avoiding impulsive decisions are essential for long-term success in breakout trading. Successful breakout traders understand the importance of patience and following their predefined rules. It is crucial to wait for confirmed breakouts and not chase every potential trade. Adhering to risk management strategies, position sizing rules, and maintaining a consistent approach are key to managing emotions and maintaining discipline in breakout trading.
Conclusion
Donchian Channel breakout trading strategies hold immense potential for traders. By effectively utilizing Donchian Channels and incorporating appropriate risk management and confirmation techniques, traders can enhance their trading decisions and potentially realize substantial profits. The systematic approach offered by Donchian Channels enables traders to spot breakouts early and participate in significant price moves.
To fully harness the power of Donchian Channels in breakout trading, it is essential for readers to engage in further exploration and practice. Backtesting historical data, paper trading, and implementing real-time trades based on Donchian Channel breakout strategies can provide valuable insights and hands-on experience. Continuous learning and refining of strategies will pave the way for improved trading outcomes.
By understanding the construction and interpretation of Donchian Channels, incorporating confirmation techniques, managing risk effectively, and honing their skills through practice, traders can unlock the potential for consistent profits. Embrace the power of Donchian Channels, continue to explore, and adapt your strategies to evolving market conditions. May your journey with Donchian Channel breakout trading be filled with success and prosperity.
Happy Trading,
Tyler
