Trading BTC : Dunning Kruger Effect 🐸Hi Traders, Investors and Speculators 📈📉
Ev here. Been trading crypto since 2017 and later got into stocks. I have 3 board exams on financial markets and studied economics from a top tier university for a year. Daytime job - Math Teacher. 👩🏫
Have you ever wondered what it takes to be a good and profitable trader? Have you wondered how long it will take before you would have mastered the art f trading? Myself and Dunning Kruger will let you in on a little secret - the journey of pretty much every person that has ever started trading is explained in the chart above.
The Dunning-Kruger effect, in psychology, is a cognitive bias whereby people with limited knowledge (in a given intellectual or social domain) greatly overestimate their own knowledge or competence in that domain relative to objective criteria or to the performance of their peers or of people in general. This happens in trading all the time. In fact, we probably all started there if we're being honest .
So - What causes the Dunning-Kruger effect? Confidence is so highly prized that many people would rather pretend to be smart or skilled than risk looking inadequate and losing face. Even smart people can be affected by the Dunning-Kruger effect because having intelligence isn’t the same thing as learning and developing a specific skill. Many individuals mistakenly believe that their experience and skills in one particular area are transferable to another. Many people would describe themselves as above average in intelligence, humor, and a variety of skills. They can’t accurately judge their own competence, because they lack metacognition, or the ability to step back and examine oneself objectively. In fact, those who are the least skilled are also the most likely to overestimate their abilities. This also relates to their ability to judge how well they are doing their work, hobbies, etc.
The Dunning-Kruger effect results in what’s known as a double curse : Not only do people perform poorly, but they are not self-aware enough to judge themselves accurately—and are thus unlikely to learn and grow. So how can we prevent ourselves from falling into this trap? Here's a few things to keep in mind: To avoid falling prey to the Dunning-Kruger effect, you should honestly and routinely question your knowledge base and the conclusions you draw, rather than blindly accepting them. As David Dunning proposes, people can be their own devil’s advocates, by challenging themselves to probe how they might possibly be wrong. Individuals could also escape the trap by seeking others whose expertise can help cover their own blind spots, such as turning to a colleague or friend for advice or constructive criticism. Continuing to study a specific subject will also bring one’s capacity into a clearer focus.
💭Practice these habits to ultimately escape the double curse:
- Continuous learning. This will keep your mindset open to new possibilities, whilst increasing your knowledge over time.
- Pay attention to who's talking about what. Is the accountant talking about bodybuilding?
- Don't be overconfident. This is self explanatory.
I hope you enjoyed this post today! Please give us a thumbs up 👌
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CryptoCheck
Fundamental Analysis
Never trade on news. Everything is hidden in the price action !Everyone was looking for ETF confirmation to get long. But the market turned red!
US SEC grants approval for spot bitcoin ETFs - RTRS but the market moved against expectations.
This is why we say never trade with fundamental news.
Everything is hidden in the price action.
Bitcoin had reached the ceiling of the channel and also our indicator had given a short signal. So, contrary to all positions, we opened the shorts and had fun!
Understanding Leveraged Shares A day ago, I released the " Leveraged Share Decay " indicator for those who trade or invest in leveraged shares. What the indicator does is it tracks the consistency of returns and the rate of decay of a leveraged share against its benchmark. Leveraged shares tend to be seen as "risky" and grouped into the "option-esque" category of trading. From my experience trading them, I would greatly disagree with that notion, as I find it much easier and more enjoyable to trade leveraged shares than to trade options. However, in this post, I want to outline some of the facts of trading leveraged shares and how they work. So, let's get started!
What is a leveraged share?
A leveraged share or leveraged ETF is an ETF that aims to increase exposure to a specific underlying asset. For example, UPRO aims to return 3 times the amount of the S&P. So, in theory, if the S&P were to return 10%, UPRO should return 30% (3 x 10).
How it does this is by using instruments such as options and futures contracts to leverage the exposure to the underlying asset. Of course, this comes with some risks, such as if the ticker goes against you as well as the costs involved in the management and labor of such a task.
Let's take a deeper look at how leveraged shares work by looking at UPRO:
UPRO is the 3x bull leveraged share of the S&P 500. Compared to SPY, it tracks it very well. The average drift (the amount the share may vary in cost compared to the underlying) is about $1 after 10 days, but peaks at a max of around $3 after 252 (1 trading year) days. This means the decay you can expect to experience holding UPRO for 1 year is about a $3 decay per share.
Let's say you entered a UPRO position on January 9th, 2023. At the time, UPRO was about $34.62. Let's say you bought 100 shares at $34.62, for a total entry cost of $3,462. As of today, you would be up 59.28%, or a net P&L of $1,965. If you had bought SPY, you would be up 21.91%.
So let's do the comparison. UPRO is 3X leverage, so we would expect our returns to be 3 X 21.91%. To do this, we simply convert the percentages into a decimal place by dividing by 100, then add. So here is the math:
21.91% / 100 = 0.2191 59.28% / 100 = 0.5928
Assuming that UPRO is 3X spy, we would need to multiply SPY by 3:
0.2191 x 3 = 0.6573 Now convert that back into a percentage by multiplying it by 100:
0.6573 x 100 = 65.73%
So, our expected return should have been 65.73%. However, owing to the decay, it was around 59.28%, with a loss of around 6.45%. This 6.45% is equal to about a $223.30 loss of our initial investment ($3,462 x 6.45% = $223.30). Considering we bought 100 shares, that would be about $2.23 per share, well within the indicator’s prediction of decay.
Now, it's unfair to view this as a loss or "decay" in some circumstances because you are essentially paying for a firm to manage the exposure of the share to the S&P. So this "cost amount" can actually be viewed as a cost of labor, no different than paying a management firm to manage your portfolio for you.
That said, leveraged shares, as investment mechanisms, are only good as investment mechanisms when the markets are good. Let’s take a look at what would have happened if we would have invested in UPRO on March 14th, 2022, during the 2022 bear market decline:
This would be a total of 457 trading days, or roughly 2 trading years.
At the time, UPRO was $52.06. If we did 100 shares at $5,206, we would just be recovering now, vs. us having bought SPY, we would be up 11.90% now:
So what happened here?
Volatility. And this is why, I think, people draw the comparison between options and leveraged shares, because if the trade goes against you for a prolonged period of time and a very dramatic fall, the share is going to decay like mad. What causes this is often referred to as “Beta Slippage.” It is a compounding effect of daily rebalancing in leveraged exchange-traded funds. This happens because, as indicated before, in order to gain the exposure they do, leveraged shares hold derivatives such as options and futures contracts to increase their exposure to the underlying asset.
To understand Beta Slippage, let’s use a made-up example. We have share X, at a value of $40, which has a 2X leveraged bull share, Y, at a value of $8. You buy 100 shares of Y for a total of $800. The next day, X goes up 10%, and your position goes up 20% (2 x Bull). You now have $160 in profit, for a total value of $960. You don’t sell because you believe it will go up an additional 20%. However, over the coming days, X falls about 9.5%. This would translate to a 19% fall on Y (9.5 x 2). If we do the math:
$960 x 19% = $182.4
960 – $182.4 = $777.6
You now have $777.6, which is less than your initial investment. This is the compounding effect.
What if you just invested in the underlying?
$40 x 20% = $48
$48 x 9.5% = $43.44
So, had you invested in 100 shares of the actual underlying, you would still be up $3.44 per share.
The bright side:
The bright side to this is, beta slippage is much easier to account for, track, and calculate with leveraged shares vs options. The phenomenon happens with both instruments, but it's much more nuanced to calculate with options.
When does Slippage show up?
It can show up as soon as the same day if the decline or rise happens starkly and fast enough, but in general, if you are picking a stable ETF like UPRO, it tends to be noticeable at 30 to 50 days:
In the example above, I picked a period consisting of 30 days where SPY was whipsawing like mad. For the most part, UPRO remained fairly stable until day 30 when you can start to see slippage appear. For example, SPY was able to fill the gap (first blue circle) at $447.71, but UPRO failed to fill its gap. SPY then broke above the immediate resistance at $448.71; however, this same resistance on UPRO was not broken.
If we look at the decay tracker indicator, we can see as time passes, not only does the drift in price variation increase but also the slippage increases:
A mention of inverse leveraged shares
I think it’s important to mention inverse leveraged shares. They are viewed, generally, as riskier than bull leveraged shares, and, to an extent, this is true, but not for the reasons you may be thinking. Inverse leveraged shares are victims of the same mathematical and compounding faults as their bullish counterparts, no more and no less. The main risk associated with inverse leveraged shares is the perma-bull thesis, i.e., stocks only go up. And this thesis has proved pretty factual, especially towards the end of 2023.
That said, I have personally held inverse leveraged shares (specifically, SPXS) for roughly 6 months, from April till September during the 2022 decline when I was targeting 350 on SPY. The end result? Some decay resulted, but I still gained just over 40%. There was a little stint where, despite SPY not going up as high as it did before, my position still went red (see chart below):
But quickly recovered. This actually was a wakeup call to always set a trailing stop and take profits when you’re up! I was too confident there. But besides that point, you can see that it did work out holding it a bit longer term.
That said, if we look at SPY vs SPXS using the decay tracker, here are the results:
We can see that there is substantially more slippage on SPXS vs UPRO. Why? Because of the compounding factor. SPY has been in a massive uptrend since October, constantly pushing up and up. This compounds the losses on an inverse leveraged share and increases the slippage with the wild up moves followed by very little pullback. And that is the danger of inverse leveraged shares because you are fighting against a predominant market mantra, ONLY UP, NEVER DOWN.
Alternatives to Leveraged Shares
The only alternative to leveraged shares is for those who are non-citizens of the country whose stock they want to trade (in this case, the USA) who can invest in US equities via CFDs and other currency-hedged stocks. For example, I myself am currently holding MSFT CAD Hedged (TSX:MSFT), S&P 500 Equal weight (TSX:EQL), and NASDAQ 100 (TSX:QQEQ.F). I also have holdings in the US equivalents, but as I build the position, I add to the CAD hedged as it permits me to increase my size owing to the cost difference. These exist in many other countries and do the same thing. However, if you are in the US, they are not available because of tax regulations, so your option is to do the underlying or the leveraged shares.
Let’s just look at MSFT (NYSE) vs MSFT (TSX) using the leveraged share indicator:
Not too shabby, huh?
To find which other countries have a currency-hedged version, simply type the ticker into Tradingview’s search bar, and it will come up with the country flag:
Conclusion:
So, are leveraged shares right for you? Well, that’s a personal question, but I hope that you learned how to assess whether or not a leveraged share is right for you with the information provided.
In general, these are the things you should absolutely, 100% think about before investing (key word is investing, not day trading; investing implies holding for greater than 2 to 3 months) in leveraged shares:
1. The overall decay that has historically happened with the leveraged share; you can use the indicator I released to help you figure that out, as well as some of the calculations I employed in the post (mind you, the indicator does it all for you ;).
2. The expected volatility of the market. You can gauge this by looking at historical volatility indicators and also the VIX. The fear and greed index are also helpful as well.
3. Whether your entry price is good or bad. This is something that comes with time and experience as a trader, but I can give you an example of a bad entry for me and why I chose to invest in MSFT CAD hedged as opposed to the leveraged counterpart NYSE:MSFU:
I entered on that candle. You may think it’s a good entry and perhaps it's not the worst entry, but the fact is, things are pretty over-extended on tech and it could go bad really quickly. A more ideal entry would have been:
There. But alas, you have to work with what is given when it comes to investments most times. Though I can’t complain since I am still holding MSFT shares I bought in 2022 at around $242 haha.
Not all leveraged shares are created equal, some are awful *cough* BOIL *cough*, others are great (i.e. UPRO). Make sure you are checking its historic performance, I cannot stress this enough!!
Also, if you are interested in a deeper look on this subject, @SpyMasterTrades did an excellent video explanation of the dangers of leveraged shares, you can view it below:
And those are my thoughts! Hope you enjoyed; leave your comments/questions below and, as always, safe trades!
How To Make Money With Crypto Trading BotsWe are at the beginning of a huge crypto bull run when it is possible to make millions of dollars with strong altcoins. So how is it possible to know if an altcoin strong or it is weak?
Look at the community around the altcoin you want to profit with. I prefer to count the traffic which comes to its official website first. Is the traffic rising or it is falling?
Also look at the altcoin's twitter and discord. How people react to the news. Do they write many comments or not?
But the most important thing is which funds have invested into the altcoin.
Lets look at the biggest gainers from the previous bull run. I remember Solana, THETA, Polkadot, Cosmos etc.
I prefer altcoins which were funded by Tier 1 funds. At least one or two (there are only 22 Tier 1 funds in the market now).
After that I look at the chart. I don't want to buy altcoins that are already overpriced.
One of the best examples of altcoins I have found for accumulation for the future bull run is APTos. It is not very expensive, have the great community, valuable traffic to its official website and so on.
We will need to find 10 - 15 altcoins like APTos to make our millions of dollars. And I will help you to find the most profitable ones.
The best way to accumulate an altcoin I have found is starting a position with a grid trading bot. It is the most simple yet very powerful tool you can use to get as much altcoins as possible before it is not too late.
Why I prefer to use grid trading bots? Because these bots can accumulate literally "free" altcoins for me. Here is how I use grid trading bots.
First I need to define the range for trading and second - how many orders will trading bot have.
And with APTos the low price for the trading is $ 3 and the high one is $ 25.
The number of open orders are 100. And the profit is 0.72% ~ 7.16% per grid.
So what is the goal? The trading bot should return to me all the money I invested and also it should give me a certain number of APT coins before I close it.
After that I can start a new trading bot position with the USD the bot have made for me and keep APT coins for the bull market to sell at the best price.
Do you like the strategy I use to accumulate strong alcoins for the crypto bull run?
WHAT ARE Fakeouts, Shakeouts and Whipsaws?YOUR QUESTION ANSWERED!
What on earth are Fake outs, Shake outs and Whipsaws?
After this you will know…
Fake-out:
(When the price makes a false breakout of a chart pattern)
A fake-out occurs when the price of a market appears to break out of a certain chart pattern.
This could be a trendline, support, or resistance level.
But then quickly reverses and retreats back within the pattern.
Shake-out:
(Where the market is highly volatile and the price moves to levels that hits their stop losses and gets traders out of their trades)
A shake-out is a scenario where the market becomes highly volatile and the price moves rapidly to levels that trigger the stop-loss orders of many traders.
Stop-loss orders are pre-set risk levels at which traders automatically exit their positions to limit their losses.
A shake-out is designed to “shake out” weak or inexperienced traders from the market.
When stop-loss orders are triggered, it can create a temporary spike in the opposite direction of the prevailing trend.
Once these traders are “shaken out,” the market might resume its original trend.
You’ll see this most commonly with low liquid, high volatile markets like Penny Stocks or Penny Cryptos.
Whipsaw:
(This is where the market will change its most prominent direction within the day).
Whipsaw refers to a situation where the market quickly changes its direction within a relatively short period, often during a single trading day.
This can cause confusion and losses for traders who are caught off-guard.
Whipsaws can occur due to various factors, such as sudden news releases, economic data surprises, or changes in sentiment.
They are characterized by sharp price movements that can make it difficult to make accurate trading decisions.
Whipsaws are especially common during periods of high market uncertainty or when there’s a lack of a clear trend.
Let’s create a quick summary of the three:
Fake-out:
(When the price makes a false breakout of a chart pattern)
Shake-out:
(where the market is highly volatile and the price moves to levels that hits their stop losses and gets traders out of their trades)
Whipsaw:
(This is where the market will change its most prominent direction within the day).
If you have any trading question let me know in the comments
The Role of Geopolitical Risks in Forex TradingIn the complex world of forex trading, a myriad of factors contribute to the ever-shifting landscape of exchange rates. Among these, geopolitical risks stand out as potent catalysts capable of triggering significant fluctuations in currency values. This article delves into the intricate relationship between geopolitical events and forex markets, exploring how political instability, conflicts, and trade disputes can impact exchange rates.
What Are Geopolitical Risks?
Geopolitical risks encompass a broad spectrum of factors that have the potential to disrupt the global economic order. From political instability and armed conflicts to trade disputes and diplomatic tensions, these risks can send shockwaves through financial markets. Traders navigating the forex landscape must grapple with the uncertainty emanating from geopolitical hotspots worldwide, which means understanding profoundly how geopolitical risks impact forex markets.
Geopolitical Impact on Forex
The primary conduit through which geopolitical events influence currency fluctuations is the introduction of uncertainty. This uncertainty, in turn, triggers a surge in market volatility. Effective forex trading with geopolitical risks means not only reacting to these events but also anticipating and positioning strategically, leveraging the volatility to a competitive advantage.
Reactions of Different Currencies to Geopolitical Events
Various types of geopolitical events affect forex currencies differently.
Currencies of nations heavily reliant on commodity exports, such as the Australian dollar and the Canadian dollar, can be particularly sensitive to disruptions in global trade or commodity markets as such events may lead to supply chain issues and, respectively, to currency depreciation.
Emerging market currencies often exhibit heightened sensitivity to geopolitical events because traders view these currencies as riskier assets and respond to geopolitical uncertainties by divesting from them. Consequently, geopolitical tensions may lead to depreciations in the currencies of emerging markets.
Currencies within the Eurozone are influenced not only by global geopolitical events but also by dynamics within the European Union (EU). Political developments affecting EU member countries may impact the euro, requiring traders to consider both global and regional factors when assessing potential currency movements.
You can visit FXOpen and try trading the forex markets on our free TickTrader trading platform.
Safe-Haven Currencies and Geopolitical Uncertainty
In the turbulent waters of geopolitical uncertainty, certain currencies emerge as beacons of stability and safety. These so-called safe-haven currencies play a crucial role as investors restructure their portfolios.
The US dollar, often considered to be the quintessential safe-haven currency, tends to strengthen during periods of heightened geopolitical uncertainty. The global economic influence of the United States, coupled with the widespread use of the US dollar in international trade and finance, positions it as a go-to currency for investors seeking stability.
The Japanese yen is another currency that historically attracts investors during geopolitical turmoil. Japan's reputation for economic stability and the predictable monetary policy of its central bank, coupled with its current account surplus, makes the yen an appealing asset.
The Swiss franc also stands for financial stability and neutrality. Switzerland's commitment to maintaining a stable and resilient financial system positions the franc as an attractive choice for investors seeking shelter during geopolitical storms. The Swiss franc typically experiences appreciation when global uncertainty rises.
Market Sentiment Impact
How geopolitical risks affect forex also has a lot to do with the way market sentiment and risk appetite play out in the aftermath of major geopolitical news. For example, the resolution of a trade dispute or political stability in a previously uncertain region may make traders more optimistic. This optimistic outlook translates into increased confidence in riskier assets. This renewed risk appetite often leads to a surge in demand for higher-yielding currencies, such as emerging market currencies or those linked to commodities. As a result, these higher-yielding currencies may appreciate. Conversely, negative geopolitical news has the opposite effect, triggering a flight to safety among investors.
Historical Examples of the Relation Between Geopolitical Events and Forex Markets
Let’s examine several historical examples of major currencies being affected by geopolitical events and decisions.
Brexit: The Unravelling of the European Union
The United Kingdom's decision to exit the European Union, commonly known as Brexit, unleashed a wave of uncertainty about the British pound (GBP). In the lead-up to the referendum and its aftermath, the GBP/USD currency pair witnessed significant swings, dropping sharply on the day on which it became clear that the majority of Britains opted to leave the European Union. The uncertainty surrounding the terms of the exit and the potential economic consequences for the UK led to a depreciation of the British pound.
US-China Trade Tensions: A Global Economic Flashpoint
The protracted trade tensions between the United States and China, characterised by ongoing negotiations, tariff changes, and trade restrictions, had a profound impact on forex markets. The Chinese yuan bore a direct impact, particularly during the period from mid-2018 to early 2020. During this timeframe, the trade tensions between the United States and China escalated significantly, marked by the imposition of tariffs and retaliatory measures, leading to the depreciation of the USD/CNH pair, as seen on the chart.
Middle East Conflicts: Geopolitical Turmoil and Regional Currencies
Geopolitical conflicts in the Middle East have historically contributed to volatility in regional currencies. One illustrative example is the Syrian Civil War (the Syrian conflict) and its devastating impact on the Turkish lira (TRY). The uncertainties arising from the conflict, coupled with the influx of refugees and economic challenges in the region, contributed to considerable fluctuations, while the intense phases of the Syrian conflict in 2015 initiated an ongoing depreciation for TRY against the US dollar.
Conclusion
Geopolitical risks are inherent in the modern world, and their influence on financial markets is undeniable; therefore, traders need to stay aware of the potential impact of these significant events and learn how to trade with geopolitical risks. Already have a promising trading strategy? You can open an FXOpen account and try out new trading possibilities.
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.
VOLATILITY IN THE FOREX MARKETHello Forex traders. Today we are going to talk about the concept of Volatility in the Forex market. We will talk about what it is, what volatility depends on, and most importantly how we can use this data to build and improve our own trading strategies and, as a result, get more profit from trading.
What Is Volatility?
Volatility is the range of price changes from high to low during a trading day, week, or month. The higher the volatility, the higher the range during the trading time period. This is considered to be a higher risk for your positions, but it gives you more opportunities to earn money. Volatility can be measured over different time periods. If we open a daily chart and measure the distance from high to low, we will get the volatility of the day:
It turns out that on the chart above, it was 121 pips.
We can also measure on another timeframe, for example, weekly chart. The distance from the high point to the low point was 162 pips. The total volatility during the week was 162 points. Volatility can be measured within a trading session or within a trading hour. This allows us to conclude that it is a fractal value.
As a rule, the average volatility for the last candles is taken into account. If we take daily charts, the average volatility is usually considered for the last 10 days. Roughly speaking, the last 10 candles are summarized and divided by 10.
What Does Volatility Depend On?
It depends on the number of trades in the market, players, trading sessions, the general state of the economy of a currency, and, of course, on speculation. It depends on how speculative the market is about a given currency. Note that volatility can be measured both in points and in percent. But it should be noted that most often, the volatility of stocks is measured in percent. In forex, it is more usual to measure in pips. If you are told that the average price change of EURUSD is 0.7%, you can easily convert it into pips. And vice versa, you can calculate percentages from points if you need them for any research. Now let's move on to the most important question.
How To Apply Volatility Data For Profit?
It's actually quite simple. As they say, everyone knows about it, but no one applies it. This is especially true for intraday trading. Nobody wants to apply the simplest rule.
Suppose you know that the average volatility of GBPUSD is 120 pips. Question: if the price has moved up 100 pips from the beginning of the day, should you open a buy position? The answer is obvious, we should not. Because the probability that the price will go up another number of pips is too low. Therefore, we should not open a buy position and on the contrary, we should focus on bearish positions. But for some reason people forget about this simple technique and follow their system. I believe that it is absolutely necessary to include volatility, at least on intraday strategies, in your checklist for market entry.
The same can be done with higher timeframes. Let's imagine that we know that GBPUSD has an average weekly volatility of 200 pips. If the pair has moved 50 pips since Monday, we can expect that if the price continues to move down, there is a potential of about 150 pips. Of course, there are days when some movements become bigger or smaller, but we try to rely on statistics. With its help we can calculate the sizes of stops and take-outs. If we decided to be guided by the volatility data and open a sale on the pound, then we would try not to put a large (relative to the weekly timeframe) take profit. Because our expectation within the week is 150 pips.
If the average volatility of a pair is 200 pips, it is silly to expect 1000 pips move. At least within a week. Thus, volatility can also be used for risk calculations. If you have opened many positions on different pairs, you can calculate what will happen if all stop-losses are triggered. Of course, the market is not obliged to obey your calculations, but it gives some support for your convenience and trading.
Volatility-based Indicator
The first indicator is ATR
Average True Range indicator invented in 1972. It shows the average volatility and it is used most often to set targets and stop losses. The value of the indicator is multiplied by a multiplier and thus calculate the stop loss or and/or take profit. The calculations will automatically change depending on the current volatility.
Volatility is higher, take profit becomes higher. Volatility is smaller and take profit becomes smaller.
The next indicator is the CCI
It is based on average price and moving average data. It is used as an oscillator, that is, when it is in the oversold zone, it is recommended to buy. And when it is in the overbought zone, it is recommended to sell.
Another indicator, which is known to everyone, is Bollinger Bands
They consist of a standard moving average and a moving average plus and minus standard deviation, which is calculated based on price. These bands are used most often to determine the limits of movement from the standard average. We can draw conclusions based on this indicator about the end of the movement, correction, etc.
Conclusion
In this article I have tried to give you an understanding of what volatility is in the forex market and most importantly how we can apply it in our trading. I hope that it will help you in developing and adjusting your own trading systems.
Traders, If you liked this educational post🎓, give it a boost 🚀 and drop a comment
How to find Crypto Winners?I list here historical performance of major cryptos againts BTC, not many performing well against BTC. So the question: how to find crypto winners and is the past performance quarantee about the future? How do you approach with rising number of new coins?
INTUITION IN TRADINGWhy is it that when you feel that you should buy and you buy, the price goes down, and when you feel that you should sell, but do not open an order, the price immediately and sharply goes down? Murphy's Law? What should I do with my inner voice? Should I tell it to shut up or listen to it?
In various sources, one can often find completely opposite opinions about the role of intuition in trading. Some say that only a systematic approach can bring success, while others, on the contrary, claim that it is impossible to achieve significant results without a "sixth sense".
Who is right? Many people are interested in this question and we can make the most adequate conclusion: "Intuition is worth using, but only after you have gained experience of more or less successful trading within a year or two".
Let's think for a second. How can a person who has no experience as a construction worker take a look at a house and immediately realize that there is "something wrong" with it? You can't. The person simply does not have enough experience, he is too poorly informed about the subject to make any judgments.
There is a wonderful book by Malcolm Gladwell called Blink: The Power of Thinking Without Thinking. It deals in great detail with the "Thin-slicing Theory", what we call Intuition. I suggest you read it. So how to apply intuition in trading? The answer is simple.
At first, gain experience by trading according to a mechanical system, without using any judgments like "I feel it, we are about to fall" or something like that. And only then, when you have an insight, be sure to check it with the help of technical analysis. Having found confirmation of your intuitive guess, you can already take some actions.
In fact, there is even a book written on this topic, it is called "Trading from Your Gut". It is written by one of the "Turtles", Curtis Faiths. There is not so much information in this book specifically on the use of intuition, but there are a couple of useful thoughts.
The less fear, the better intuition works.
Perhaps this is the reason why it is so easy to make thousands of dollars on a demo account and so difficult on a real one. When trading on a demo, we release the full potential of our brain, because nothing limits our freedom, because the money is virtual and there is no fear of losing it.
As Inflation Retreats, How Will Equities Perform in 2024?During the 1990s and again in the 2010s, equity and bond investors celebrated a goldilocks economy. GDP and employment growth were solid and core inflation remained comfortably around 2% per year despite increasingly tight labor markets. That scenario was occasionally interrupted, notably by the tech wreck recession in 2001, the 2008 global financial crisis, and most recently by the pandemic-era surge in inflation. But by late 2023, inflation appeared to be coming down globally. Comparing the annualized inflation rates during the six months from December 2022 to May 2023, and the six months from June to November 2023, inflation rates have fallen sharply in every major economy (Figure 1).
Figure 1: Core inflation rates are falling rapidly worldwide
Source: Bloomberg Professional (CPI XYOY, CACPTYOY, UKHCA9IC, CPIEXEMUY, JPCNEFEY, ACPMXVLY, NOCPULLY, CPEXSEYY, SZEXIYOY, NZCPIYOY)
Granted, things still don’t feel great for consumers, who appear to be less sensitive to the rate of change in prices than they are to level of prices which remain high and are still climbing, albeit at a slower pace than before.
Nevertheless, it appears that the main drivers of inflation -- supply chain disruptions (Figure 2) and surging government spending (Figure 3) -- subsided long ago. Supply chain disruptions sent the prices of manufactured goods soaring beginning in late 2020. Depressed pandemic-era services prices initially masked the surge in inflation, but services prices began soaring as the world reopened in 2021 and 2022 driven by surging government spending, which created new demand but no new supply of goods and services.
Since then, however, supply chain disruptions have faded despite Russia’s invasion of Ukraine, and with little impact thus far from the conflict between Israel and Hamas. Moreover, government spending has rapidly contracted as pandemic-era support programs have expired despite some increases in spending related to infrastructure and the military. As such, not even the low levels of unemployment prevailing in Europe, U.S. and elsewhere appear to be sustaining the rates of inflation witnessed in 2021 and 2022.
Figure 2: Supply chain disruptions drove inflation in manufactured goods in 2020 and 2021.
Source: Bloomberg Professional (WCIDLASH and WDCISHLA)
Figure 3: U.S. government spending has fallen from 35% to 22.6% of GDP
Source: Bloomberg Professional (FFSTCORP, FFSTIND, FFSTEMPL, FFSTEXC, FFSTEST, FFSTCUST, FFSTOTHR, GDP CUR$, FDSSD), CME Group Economic Research Calculations
U.S. core CPI is still running at 4% year on year but its annualized pace slowed to 2.9%. What’s more is that in the U.S. most of the increase in CPI has come from one component: owners’ equivalent rent, which imputes a rent that homeowners theoretically pay themselves based off actual rents on nearby properties. Outside of owners’ equivalent rent, inflation in the U.S. is back to 2%, its pre-pandemic norm (Figure 4).
Figure 4: U.S. inflation is much lower when excluding home rental
Source: Bureau of Labor Statistics, Bloomberg Professional (CPI YoY and CPI XYOY)
Moreover, inflation in China has been running close to zero in recent months and has sometimes even shown year-on-year declines. In China, real estate grew to be as much as 28% of GDP, and the sector is now rapidly contracting. China’s year-on-year pace of growth for 2023 looks solid at around 5%, but that’s not too impressive given than the year-on-year growth rate compares to 2022, when the country spent much of the year in COVID lockdowns. By the end of 2023, China’s manufacturing and services sectors were both in a mild contraction, according to the country’s purchasing manager index data. If growth doesn’t improve in 2024, China may export deflationary pressures to the rest of the world.
That doesn’t mean that the are no upward risks to prices. If the Israel-Hamas war broadens and interrupts oil supplies through the Suez Canal, that could reignite inflation. Moreover, green infrastructure spending, rising military spending, near-shoring as well as demographic trends in places like South Korea, Japan, China and Europe that limit the number of new entrants in the global labor market could potentially keep upward pressure on inflation. For the moment, however, any inflationary impacts from geopolitical or demographic factors appear to be overwhelmed by the usual set of factors keeping inflation contained including technological advancement and large labor cost differentials among nations.
So, what does this mean for investors? As we begin 2024, fixed income investors are pricing about 200 basis points (bps) of rate cuts by the Federal Reserve over the next 24 months, and the S&P 500 is trading close to a record high. Be warned, however, interest rate expectations have been extremely volatile over the past 12 months, oscillating between expecting rate hikes to rate cuts by as many as 200 bps or more (Figure 5). If we continue to see strong employment and consumer spending numbers combined with weakening inflation numbers, this may keep rate expectations caught in a volatile crosscurrent.
Figure 5: Investors price steep Fed cuts but rate expectations are extremely volatile
Source: Bloomberg Professional (FDTRMID, FFZ15...FFZ25), CME Economic Research Calculations
Moreover, while equities did well in 2023, their rally was narrow, driven by only a handful of large tech and consumer discretionary stocks, while most other stocks including small caps were largely left behind. Finally, the stock market itself isn’t cheap. The S&P 500 is trading at 23.37x earnings and the Nasdaq 100 at 59x earnings. As a percentage of GDP, the S&P 500’s market is still close to historic highs. Finally, even with 2023’s rally, the indexes are trading at basically the same levels at which they ended 2021 (Figure 6). Part of the reason stocks did so well in the 1990s and 2010s is that they started out those decades cheap. The same cannot be said of the starting values for 2024 (Figure 7).
Figure 6: Nasdaq and S&P 500 are near end of 2021 levels but the Russell 2000 lags behind
Source: Bloomberg Professional (SPX, NDX and RTY)
Figure 7: Going into 2024, equities aren’t cheap like they were in 1994 or 2014
Source: Bloomberg Professional (SPX, GDP CUR$, USGG10YR).
If you have futures in your trading portfolio, you can check out on CME Group data plans available that suit your trading needs www.tradingview.com
By Erik Norland, Executive Director and Senior Economist, CME Group
*CME Group futures are not suitable for all investors and involve the risk of loss. Copyright © 2023 CME Group Inc.
**All examples in this report are hypothetical interpretations of situations and are used for explanation purposes only. The views in this report reflect solely those of the author and not necessarily those of CME Group or its affiliated institutions. This report and the information herein should not be considered investment advice or the results of actual market experience.
Understanding Technical IndicatorsTrading indicators are essential tools for traders and investors to analyze and interpret financial market data. These indicators, derived from mathematical calculations based on price, volume, or open interest, etc, aid in visualizing market trends, momentum, and potential reversals. They serve as an additional layer of analysis, offering a structured and objective way to understand market dynamics.
Understanding Trading Indicators
1.1 Definition : Trading indicators are graphical tools derived from price, volume, or open interest data. They help in identifying market trends, momentum, volatility, and possible trend reversals.
1.2 Types of Trading Indicators :
Trend Indicators : These indicators, such as Moving Averages (MA), Moving Average Convergence Divergence (MACD), and Ichimoku Cloud, help in determining the direction and strength of market trends.
Oscillators : Tools like the Relative Strength Index (RSI), Stochastic Oscillator, and Commodity Channel Index (CCI) measure overbought and oversold market conditions.
Volume Indicators : Indicators such as On-Balance Volume (OBV) and Volume Weighted Average Price (VWAP) use trading volume data to confirm price movements.
Volatility Indicators : These, including Bollinger Bands and Average True Range (ATR), assess the degree of price fluctuation in the market.
Utilizing Trading Indicators
2.1 Trend Following Strategy : This approach involves capitalizing on the continuation of established market trends. Indicators like the Fourier Smoothed Stochastic (FSTOCH) help detect and follow these trends, providing smoother signals and filtering market noise for more accurate decision-making.
2.2 Mean Reversion Strategy : Contrary to trend following, mean reversion strategy focuses on price corrections when they deviate significantly from historical averages. The Bollinger Bands Percentile (BBPct) is a mean reversion indicator that uses Bollinger Bands to identify potential price reversals, indicating when an asset is overbought or oversold.
Comparing Trend Following and Mean Reversion
3.1 Key Differences :
Direction : Trend following identifies and exploits established trends, whereas mean reversion focuses on price reversals.
Risk Profile : Trend following is typically higher risk due to the challenge of timing, while mean reversion is considered less risky as it banks on imminent price corrections.
Market Conditions : Trend following excels in trending markets, while mean reversion is more effective in range-bound or sideways markets.
3.2 Combining Strategies : Using both strategies together can provide a more comprehensive market view and reduce reliance on a single approach. Mean reversion indicators can confirm trend reversals identified by trend-following indicators, while the latter can help avoid premature exits in mean reversion trades.
Binary and Discrete Indicators
4.1 Binary Indicators : These indicators, like the Alpha Schaff, offer clear, binary (yes-or-no) signals. They are ideal for straightforward decision-making, indicating when to buy or sell.
4.2 Discrete Indicators : Unlike binary indicators, discrete indicators, such as the Average-True-Range, provide a range of values, offering more nuanced insights into market conditions.
The Importance of Using Both Types of Indicators
Combining binary and discrete indicators equips traders with a broader perspective on market conditions. While binary indicators provide clear entry and exit points, discrete indicators offer detailed insights into the strength of market trends and potential turning points. This combination enhances decision-making by enabling traders to cross-reference signals and identify high-probability trading opportunities.
Conclusion :
In the dynamic world of finance, trading indicators are invaluable for providing insights into market trends, momentum, and conditions. Utilizing a combination of trend following, mean reversion strategies, and both binary and discrete indicators, traders can develop a comprehensive and effective toolkit for navigating financial markets successfully.
Happy New Year 2024| Learn Our Methods | Read Description|Happy New Year Everyone 2024:
Let's first talk about CHFJPY then we will talk about how you can improve and learn some tips.
CHFJPY in last six or seven months price overbought heavily due to JPY poor performance and government's zero intention to interfere in the market. However, many reports suggests that JPY will likely to be rebound in first quarter of 2024 in this case we can see a strong shift in price characteristics. Our first entry indicates, that we should expect price to continue the bearish momentum and drop from current area of the price. However, as we will having NFP in the first week of the month, it is likely to see some unexpected movement in the market. Second entry, is when price fill the gaps in the market and then drop smoothly, we will keep you updated.
We want all of you to succeed in the forex or commodities trading.
Here how you can improve:
Firstly find one or two pairs that suits you: meaning if you focus on every single instruments available to trade in the market, you will never succeed instead focus on one or two pairs and master them, know how and when these pairs move, what factors influence them in the market and trade swing highs and lows.
Secondly, use longer time frames to have a better vision, have a longer vision which will help you catch the big moves, yes, it is time consuming but if you are beginner then focus first in this and then along the way you will learn intraday trading.
Lastly, learn more about consolidation, accumulation and distribution: before the big reversal, price first will consolidate then accumulate and distribute, you should be looking to enter in phase of accumulation and take every enter when price consolidate which leads to a breakout.
If you learn above information in details and practice, your chances of becoming a successful trade increase. There is no overnight success, it is all hard work, if you believe in your self and focus on above things you will one day be proud of yourself.
Happy New Year and Trade Safe 2024.
We wish all of you all the best.
Team Setupsfx_
Definitive guide to starting day tradingIntroduction:
Day trading is a controversial modality that involves short-term operations on the stock market. Many people are interested in this way of investing, but they do not know that it requires a very rigorous behavior and discipline. In addition, there are several myths and truths about day trading that need to be clarified. One of them is that large corporations do not make intra-day trades. Does that mean that day trading does not work?
To answer this question, it is necessary to understand a little about how the financial market works. There are different types of markets, such as the derivatives market and the spot market.
Spot market: It is the most popular among stock market investors, working in a relatively simpler way than other markets. The spot market represents the operations of buying and selling shares at the prices determined by the supply and demand of the moment.
Derivatives market: Derivatives are financial instruments whose prices are linked to another instrument that serves as their reference. For example, the oil futures market is a type of derivative whose price depends on the transactions carried out in the spot oil market, its reference instrument.
Within the derivatives market, we have:
Futures market: It is the environment where futures contracts are traded, a type of derivative. In a few words, futures contracts represent the commitment to buy or sell a certain amount of a certain good on a future date and at a pre-defined price.
Forward market : Is a negotiation in which two parties - buyer and seller - assume a long-term commitment. Thus, it is determined that today a number X of shares (for example) will be bought, and that the payment will take place on a future date.
Options market: Are investments that guarantee the investor the right, for a determined period, to buy or sell an asset - usually shares - for a pre-determined value on a specific date in the future. It is a type of derivative, because the price of the options varies according to the price of the assets to which they are linked.
The futures market is one where contracts are traded that establish the price and the date of delivery of a certain asset in the future. For example, a coffee producer can sell a coffee futures contract to guarantee their profit and protect themselves from price fluctuations in the spot market. The spot market is one where assets are traded now, such as the shares of a company. The futures market is one of the best markets for day trading, as it offers higher liquidity, leverage and volatility.
Large corporations, however, do not usually do day trading in the futures market, as they have other goals and strategies. They use the futures market to hedge, that is, to protect themselves from the risks of the spot market. They also have a very large volume of operations, making it difficult to enter and exit the market quickly. In addition, they need to follow rules and regulations that limit their investment possibilities.
This does not mean that day trading does not work for large corporations. They can do day trading in other ways, such as using the high-frequency market. This market is based on algorithms and automated systems that perform thousands of operations in fractions of seconds. This way, they can take advantage of the opportunities and fluctuations of the market with greater efficiency and speed.
Therefore, day trading is a modality that works for different profiles of investors, as long as they know how to use the appropriate tools and methods. Day trading is not an investment, but rather a form of speculating in the financial market. It involves risks, but it can also bring good results for those who have knowledge, discipline and emotional control. In a centralized market, all offers to buy and sell securities are directed to the same trading channel. In this system, the observable prices of different assets are the only prices available to the public. A notable example is the New York Stock Exchange (NYSE), where all buy orders are matched with sell orders in a central exchange. This provides greater security to market participants, as transactions are carried out in an organized and regulated environment.
Let’s first understand how the centralized market works :
The centralized market is a way of organizing financial transactions in a single trading channel, where the prices of the assets are public and regulated. This type of market offers greater security to investors, by having various defense mechanisms that prevent fraud, defaults and extreme fluctuations. In this text, I explain how the centralized market works and what are some examples of defense mechanisms in the main stock exchanges in the world.
What is the centralized market and how does it differ from other types of market?
In a centralized market, all offers to buy and sell securities are directed to the same trading channel. In it, the offers related to the same asset are exposed to acceptance and competition by all parties authorized to trade in the system. In other words, in the centralized market of the stock exchange, the observable prices of different assets are the only prices available to the public. A well-known example is the New York Stock Exchange (NYSE), where all bids (buy orders) are matched with sales (sell orders) in a central exchange. This provides greater security to market participants, as transactions are carried out in an organized and regulated environment.
A centralized market differs from other types of market, such as the decentralized market or the over-the-counter market. In a decentralized market, there is no single trading channel, but rather several locations where offers can be made. For example, the foreign exchange market (forex) is a decentralized market, where participants can trade currencies among themselves on different platforms, banks or brokers. In an over-the-counter market, transactions are made directly between the parties, without the intervention of an exchange or an intermediary. For example, the derivatives market is an over-the-counter market, where participants can trade customized contracts that are not standardized or regulated. These types of market can offer greater flexibility and privacy, but also involve higher risks and costs.
What are some examples of defense mechanisms in stock exchanges?
Stock exchanges are institutions that manage the centralized market and that establish the rules and procedures for trading. They are also responsible for ensuring the security and efficiency of transactions, using various defense mechanisms that protect investors from possible losses. Some of these mechanisms are:
Central Clearing: Or clearing House is an intermediary entity that acts between buyers and sellers in the financial market. Its role is to facilitate trading and ensure the integrity of transactions. It records, clears, manages risk and settlement of operations, requiring participants to deposit margins (guarantees) to cover possible losses. This reduces systemic risk. An example of an exchange that uses central clearing is the CME Futures (Chicago Mercantile Exchange), which trades futures and options contracts on commodities, indices, currencies and other assets.
Price Limits: Are maximum and minimum ranges that asset prices can vary in a given period. They prevent extreme fluctuations that harm investors or the functioning of the market. If the price of an asset reaches the upper or lower limit, trading is suspended or limited until the price returns to an acceptable level. An example of an exchange that uses price limits is the CME Futures, which sets daily limits for the prices of futures contracts.
Circuit Breakers: Are mechanisms that temporarily interrupt trading in case of excessive volatility. They aim to avoid situations of panic, manipulation or imbalance in the market, giving time for investors to reassess their positions and make more rational decisions. Circuit breakers can be triggered by different criteria, such as the fall or rise of an index, an asset or a sector. An example of an exchange that uses circuit breakers is the NYSE, which suspends trading if the S&P 500 index falls or rises more than a certain percentage in a day.
Opening and Closing Auctions: Are moments when operations start and end on the stock exchange. They help to stabilize the prices of the assets, by concentrating the demand and supply in a short time interval. During the auctions, buy and sell orders are recorded, but not executed, until a balance price is found that satisfies the largest number of participants. An example of an exchange that uses opening and closing auctions is the NYSE, which holds the auctions at 9:30 am and 4 pm (New York time).
Market Makers: Market makers (or market makers) are agents who commit to buy and sell certain assets at any time, providing liquidity and continuity to the market. They make money from the difference between the buy and sell prices (spread) and from the commissions they receive. They also help to reduce volatility and improve price formation. An example of an exchange that uses market makers is the NASDAQ, which is fully electronic and has more than 500 market makers who trade more than 3,000 stocks.
Electronic System: The electronic system is a way of carrying out financial transactions through digital platforms, without the need for a physical location or a human intermediary. This allows greater speed and efficiency in operations, as well as reducing costs and errors. The electronic system also facilitates access and participation of different types of investors, from institutional to individual. An example of an exchange that uses the electronic system is the NASDAQ, which was the first stock exchange to operate fully online, since 1971.
Margins : are values deposited by participants to cover possible losses in futures contracts. They help to reduce the risk of default and ensure the integrity of the market. The CME futures contracts have specific guarantees, which vary according to the traded asset, I will explain more later.
The price limits are maximum and minimum ranges that the prices of the assets can vary in a given period. They prevent extreme fluctuations that harm investors or the functioning of the market. If the price of an asset reaches the upper or lower limit, trading is suspended or limited until the price returns to an acceptable level. The CME establishes two types of price limits: Daily Price Fluctuation Limit: Prevents offers with prices that vary too much in relation to the previous day’s settlement price. Each contract has an upper (high) and a lower (low) limit. Fluctuation Limit: At the opening, there are fluctuation limits for each expiration month. If exceeded, trading is temporarily suspended. These mechanisms protect price formation and prevent extreme movements.
The New York Stock Exchange does not use margins like the CME futures contracts. On the spot market, assets are not subject to price limits. Instead, it uses a "circuit breaker", which temporarily suspends trading when prices fall. The circuit breaker is based on the S&P 500 spot index.
It also uses opening and closing auctions, times when trading begins and ends on the exchange. These help stabilize security prices by concentrating demand and supply in a short period of time. During the auctions, buy and sell orders are registered, but not executed, until an equilibrium price is found that satisfies the largest number of participants. Auctions take place at 9.30am and 4pm (New York time).
The technology exchange mainly brings together shares in technology companies. It has no daily price limits, but uses other mechanisms to safeguard the individual behavior of securities, such as auction tunnels and rejection.
It is completely electronic and has more than 500 market makers trading more than 3,000 shares. Market makers are agents who commit to buying and selling certain securities at any time, providing liquidity and continuity to the market. They make money from the difference between the buying and selling prices (spread) and from the commissions they receive. They also help to reduce volatility and improve price formation.
Explaining the stock exchange auctions
The stock auction is a protection mechanism of the Stock Exchange that occurs when there is a sudden change in the price of an asset. It aims to prevent large fluctuations in prices, protecting investors. In this text, I will explain how the stock auction works and what are its benefits and challenges.
What is the stock auction and how does it work?
The stock auction is a process that happens when the price of an asset undergoes a significant change in relation to its previous value. This change can be caused by various factors, such as news, events, rumors or speculations. During the auction, the shares leave the traditional trading floor and continue to be traded in a closed system of buy and sell offers. In this system, the orders are recorded, but not executed, until a balance price is found that satisfies the largest number of participants. The auction lasts a few minutes, but can be extended if there is a lot of demand or supply. The auction ends when the balance price is found or when the time limit is reached.
The stock auction is also important because it allows investors to have time to evaluate their decisions and trade their assets with more confidence. It also prevents the prices from being manipulated or distorted by malicious agents, or by irrational movements of the market. In addition, it ensures that transactions are carried out in a transparent and secure manner, following the rules and norms of the Stock Exchange.
What are the main types of auctions on the Stock Exchange?
There are three main types of auctions on the Stock Exchange, which occur at different times of the trading session. They are:
Extraordinary Auction: Activated in case of appreciation or depreciation from 10% in relation to the closing price of the previous day, or to the opening price of the day. This type of auction is used to protect investors from sudden changes in the prices of the assets, which can be caused by external or internal factors. For example, if a company announces a financial result much above or below the expected, the price of its share can rise or fall very quickly, generating an extraordinary auction.
Pre-Opening Auction : It happens 15 minutes before the opening of the trading session. This type of auction is used to test the prices and the formation of the assets at the beginning of the trading session, considering the information and expectations of the market. For example, if there is relevant news about the economy or politics, the price of the assets can change before the opening of the trading session, generating a pre-opening auction.
Closing Auction: In the last five minutes of the trading session. This type of auction is used to determine the closing price of the assets, used as a reference for the next day. Only the shares that are part of some index of the Stock Exchange can participate in this auction. For example, if a share is part of the S&P 500, it participates in the closing auction, which defines its final price of the day.
You already know how the centralized market works, where all buy and sell offers are directed to the same trading channel. This prevents the large participants from manipulating the prices of the assets as they please. This is because the market dynamics ensure that the game is fair to everyone.
But how to understand this market dynamics? How to know what other participants are doing and how it affects the prices of the assets? For this, you need to know the market microstructure, which is the study of the interactions between buyers and sellers, influencing the price formation of the assets. For traders, especially scalpers, understanding the microstructure is essential.
Here are the main points about the market microstructure:
Efficient Market: The efficient market theory suggests that all available information about assets is already reflected in the prices. This hypothesis does not consider human complexity and subjective interpretation of information. In practice, some participants have privileged access to information and use specific techniques. This creates momentary imbalances in supply/demand, generating price movements.
Market Reality: To understand the market reality, you need to observe three essential tools: the order book, the aggressive volume and the times and sales. We explain what they are and how they relate to the market microstructure.
Why are they so important?
To understand the dynamics of the financial market, you need to know three essential tools: the order book, the DOM (Depth of Market) and the volume of the trade history. We explain what these tools are, how they work and how they can help you in your operations.
Order Book: Is a record of all buy and sell orders of a financial asset at a given time. It allows you to track the liquidity of the market, that is, the ease of buying or selling a share. The order book shows information such as the name of the asset, the best buy and sell price, and the traded volume. Each asset has its own book, updated as new orders arrive. The order book helps to identify the supply and demand of the asset, as well as the support and resistance levels. For example, if there are many buy orders at a certain price, this means there is a strong demand for the asset, which can make the price rise. The opposite also applies to sell orders. The order book is essential for Tape Reading, which is a technique that analyzes the flow of aggression and liquidity in the market.
DOM (Depth of Market): Is an advanced version of the order book. It shows the depth of the orders at each price level, that is, how many orders there are in each price range. It allows you to visualize the available liquidity and the aggressors, the participants who execute the orders in the market. The DOM helps to identify the trend and the strength of the market. For example, if there are more aggressive buyers than sellers, this means there is a positive flow of money, which can make the price rise. The opposite also applies to aggressive sellers.
Volume of Trade History : Is the record of all transactions carried out on the stock exchange for a given asset. It shows the price, quantity, time and direction of each transaction. The volume of trade history helps to understand the dynamics of the market, as it reveals the intensity and speed of trading. It can also reveal important patterns and trends, such as breakouts, reversals and consolidations.
These tools are crucial for traders and investors who want to have a broader and deeper view of the financial market. They allow you to track the liquidity, supply, demand, trend and intensity of the market, as well as identify opportunities and risks in your operations. With them, you can make more informed and assertive decisions, increasing your chances of success.
bid/ask is the difference between the offer price and the sale price of the asset.
The ESZ22 is a derivative of the S&P 500 index that expires in December 2022. The order book of the ESZ22 is a record of all buy and sell orders for this future operation at a given time. Each value level in the book represents a buy or sell offer for a certain number of derivatives.
but before we understand how the futures contract works: the expiration letters
ES= asset code, Z expiration month letter and 22= 2022
Example of the expiration months of the contracts:
January (F)
February (G)
March (H)
April (J)
May (K)
June (M)
July (N)
August (Q)
September(U)
October (V)
November (X)
December (Z).
The S&P futures contract uses only 4 months, having a duration of 3 months each contract, using the letters H, M, U and Z
and between one expiration and another there is something called liquidity rollover:
Why does this happen?
This happens because large corporations are always building positions in futures contracts, since the main objective of a futures contract is hedging, so consequently there are large positions being made in these futures markets.
Imagine that you have a portfolio of stocks or cryptocurrencies, but unlike the futures market, these assets do not expire, they stay there until you get rid of them, now imagine that you paid a price for these assets, then your position will be where your participation in that paper was made. Unlike you, large corporations, investment banks, insiders in large companies have large buy or sell positions in papers, and also in futures contracts, but these futures contracts expire every 3 months in the American market. Every expiration happens always on Friday of the third week of the month of the letter that is in force, but the dismantling of positions takes a week due to the number of participants or the number of lots that are positioned.
In the example of the S&P the ESZ2 (for rithimic data) or EPZ22 (for CQG Continuum data) are this week migrating the positions, opportunities during the rollover are bad due to the toxic flow that enters these 2 contracts, since the 2 are in operations, what happens is that for sure you will lose money, energy or time.
The liquidity rollover in the American assets affects the world so much that European assets such as Dax and euro stoxx 50 futures contracts roll over the liquidity at the same time, which can harm operations even in markets that are not to expire like ibovespa futures or dollar futures.(excerpt from my article on liquidity rollover that is written in Portuguese), usually the recommended is to stay away from this week:
Margin and construction of the current order book
Each tick is the smallest possible variation in the value of the derivative. In the case of the ESZ2, each tick is equal to 0.25 points, equivalent to 12.50 dollars per derivative.
The volume consumption occurs when an order is executed in the market. When a buy order is executed, it consumes the volume of the sell offers in the book.
example of a scenario where the market was with spread 4571.75/4571.50 and walked to 4570.50 displacing consuming all price levels that follow. the lot consumed becomes volume and goes to the trade history. That is, it becomes volume in the market.
The Time and Sales is a record of all the transactions performed on a given financial asset at a given time. It is used in technical analysis to understand the market behavior. It can be accessed through a trading platform displayed in a separate window. The window shows a list of all the transactions performed for a given asset in a tabular format. Each main component of the Time and Sales is organized into columns, such as date/time, value/change and volume. The data lines are often color-coded to indicate whether the transaction occurred on the bid or ask.
Margin and construction of the current order book
The bid-ask spread of a financial asset is the difference between the offer price and the sale price. The first is the maximum value that a buyer pays for an asset, while the second is the minimum value that a seller accepts to sell the same asset. This information is very important in the price table, as it indicates how close or far the prices are. The smaller the bid-ask spread, the more trades occur and the orders are executed faster.
The way the market is made and developed is the reason why large players do not do day trading, because, in fact, they do not need to do that, because their priority is others.
We will understand what priority would be:
Priority is a term that refers to something that has more importance or relevance than another. In the area of medicine, priority is a situation that requires preferential or anticipatory attention. For example, heart attack, stroke and trauma are considered priority situations. On the other hand, emergency is when there is a critical situation, with the occurrence of great danger and can become an urgency if not properly attended. Dislocations, sprains, severe fractures and dengue are considered emergencies.
The order book is a record of all buy and sell orders for a given financial asset at a given time. Each value level in the book represents a buy or sell offer for a certain number of derivatives. Each tick is the smallest possible variation in the value of the derivative. In the case of the ESZ2, each tick is equal to 0.25 points, equivalent to 12.50 dollars per derivative. The volume consumption occurs when an order is executed in the market.
When a buy order is executed, it consumes the liquidity of the sell offers in the book. Likewise, when a sell order is executed, it consumes the liquidity of the buy offers in the book. The Time and Sales is a record of all transactions performed on a given financial asset at a given time.
It allows investors to track the liquidity of the market and the need for a large company to lock their positions on the stock exchange is usually based on factors such as volatility, movement and investment strategy. When an event or catastrophe occurs, the need can increase significantly, depending on the nature of the event and the impact it can have on the stock exchange.
For example, a natural disaster can affect the production of a company, which can lead to a drop in the value of the shares. In this case, a large company may need to act quickly to protect their positions on the stock exchange.
And within this need, it has to adapt to the limitations of the exchange's security mechanisms.
Knowing your place in the stock market:
My size and the size of a large corporation in the stock market are totally different, because I can at any time open my terminal and execute a transaction in the current bid/ask spread, but a large player cannot do that and if he, for example, needs to act with 5000 S&P 500 contracts he would need to move the value until he completes all his necessary transactions. The comparison of a price maker and a common investor is like comparing an Antonov plane with a person.
Price makers and market makers may face limitations when entering the bid/ask due to their size. When a large investor enters the exchange, he can have a significant impact on the value of the financial asset. The Commodity Futures Trading Commission (CFTC) of the United States has strict regulations to prevent manipulation of the exchange. The CFTC closely monitors the activities of the exchange and can take legal action against anyone who violates its rules. Imagine the difficulty of a giant aircraft carrier passing through a canal, everyone will notice that he is there, so if he wanted to hide it would be difficult to go unnoticed. That’s how a giant in the market is.
Price makers and market makers use various strategies to enter the stock market without facing legal issues of price manipulation. One of the most common strategies is trade distribution, which involves splitting a large trade into several smaller trades and distributing these trades at different price levels in the order book. This helps to avoid the price of the financial asset being significantly affected by a single trade.
Another common strategy is algorithmic trading, which involves using algorithms to execute trades automatically based on specific conditions of the stock market. These algorithms can be programmed to execute trades at specific times or in response to certain events of the stock market.
Moreover, big players can also use other strategies, such as high-frequency trading and statistical arbitrage, to enter the stock market without attracting much attention.
Trade distribution is a strategy used by price makers and market makers to avoid significant impacts on the price of the financial asset. It involves splitting a large trade into several smaller trades and distributing these trades at different price levels in the order book. This helps to avoid the price of the financial asset being significantly affected by a single order.
Another common strategy is the use of iceberg trades , which are large trades split into several smaller and hidden trades, usually by using an automated program, aiming to conceal the actual amount of the trade. The term “iceberg” comes from the fact that the visible parts are only the “tip of the iceberg” given the larger amount of limit trades ready to be placed. They are also sometimes referred to as reserve trades.
Big player is can also use other strategies, such as algorithmic trading, high-frequency trading and statistical arbitrage, to enter the financial activity without attracting much attention.
Price makers and market makers can do day trading, but they usually focus on long-term investment strategies. This is because day trading involves buying and selling financial assets in a short period, usually within the same day. As big players usually trade large volumes of capital, they may have difficulty entering and exiting the activity quickly without significantly affecting the valuation of the financial asset.
Why long term?
Precisely due to the limitations that exist in the activity. The stock activity is already more attractive for long-term positioning, as it has many lots per valuation levels, but the protection auctions in the NYSE stock market are a mechanism that aims to prevent the valuations of the stocks from suffering excessive variations in a short period. They are triggered when the stocks reach a fluctuation limit, being a maximum or minimum variation in relation to the closing valuation of the previous day. When this happens, the negotiations are suspended for a few minutes and the transactions are grouped into an auction, which determines the new equilibrium valuation of the stocks. This process aims to protect investors from sudden movements of the activity and ensure the liquidity and transparency of the operations.
The maximum fluctuation of a paper per day depends on the type and liquidity of the stock. The NYSE establishes different levels of fluctuation limits for each stock, which can vary from 5% to 20%. These limits are adjusted periodically according to the conditions of the activity. You can consult the values of the fluctuation limits on the NYSE website or in the file “Daily Trading Fluctuation”.
So the fluctuation ceases to be a concern for the big players where they focus on the long term, thus ceasing to worry about the microstructure of activity to worry about more complex issues such as macroeconomics, and macro-founded information.
In addition, day trading has become competitive every day that passes, as big players in addition to the long term also manage to benefit from day trading using high-frequency algorithms entering and exiting the operation quickly.
Why is the complexity of Day trading so high?
We understand that today it involves several variables that we need to understand before we can start working with it. The first of these variables is a number of participants, of the market, these participants are divided into some profiles.
They are classified between:
Individual investors are ordinary people who allocate their own money in the market. They can buy papers, bonds and other financial products through intermediaries of values.
Legal entity investors are companies that allocate their money in the market. They can buy papers, bonds and other financial products through intermediaries of values.
Investment funds are groups of investors who pool their money to buy papers, bonds and other financial products. They are managed by professionals from the financial market and charge a fee for the services provided.
Investment clubs are groups formed by individuals who join together to invest jointly in the market. They are managed by their own club members with a maximum limit of 150 participants.
Investment robots are software that use algorithms to make investment decisions in the market. They are created by companies specialized in financial technology and can be used by individuals or legal entities.
In other words, there is not just one type of profile that is behind the market.
Now imagine
NYSE: according to B3, the Brazilian trading, in 2022 there were about 5 million individual investors in Brazil, representing 1.4% of the total investors in the NYSE. Assuming that the proportion of individual investors in the NYSE was similar to that of Brazil, it estimated that the total number of investors in the NYSE was about 357 million. Of this total, about 74% were institutional (funds, clubs, companies, etc.) and 26% were individual (individuals and legal entities). Therefore, it estimated that the number of institutional investors in the NYSE was about 264 million and the number of individual investors was about 93 million.
Nasdaq: in 2022 there were about 4,000 companies listed on the trading, with a total market value of more than 17 trillion dollars. It did not find specific data on the number of investors by type in the Nasdaq, but according to an from CNN Brasil, in 2020 about 55% of adults in the United States invested in the stock market. Considering that the adult population of the United States was about 209 million in 2020, it estimated that the number of individual investors in the Nasdaq was about 115 million. It did not find data on the participation of institutional investors in the Nasdaq, but assumed that it was similar to that of the NYSE, and estimated that the number of institutional investors in the Nasdaq was about 230 million.
CME Group: In 2022 there were more than 10,000 products traded on the trading, with an average daily volume of more than 19 million contracts. It did not find specific data on the number of investors by type in the CME Group, but according to a from the own trading, in 2020 about 35% of the traded volume came from North America, 28% from Europe, Middle East and Africa, 25% from Asia-Pacific and 12% from Latin America. Estimating that the total number of investors in the CME Group was about 54 million, being about 19 million in North America, 15 million in Europe, Middle East and Africa, 13 million in Asia-Pacific and 6 million in Latin America.
That is, there are several participants with different types of decision making.
Fundamental analysis: is a way of evaluating the financial health and growth potential of a company, using indicators such as profit, revenue, debt, equity, etc. This study will identify the intrinsic value of a stock and compare it with its market price, to find buying or selling opportunities1. P/E, ROE, revenue: are some of the indicators used in fundamental analysis.
P/E/ROE: P/E is the acronym for price/earnings, which represents the ratio between the price of the stock and the earnings per share. ROE is the acronym for return on equity, which represents the profitability of the investment in a company. Revenue is the total value of the sales of a company in a given period. Correlation: is a statistical measure that indicates the degree of relationship between two variables. In the financial market, correlation can be used to analyze the dependence between two assets, such as stocks, currencies, commodities, etc. Correlation ranges from -1 to 1, where -1 indicates a perfect inverse relationship, 0 indicates a null relationship and 1 indicates a perfect direct relationship.
Hedge: is a strategy that consists of performing a financial operation that aims to protect an asset or a liability against the variations of quotation, interest rate, exchange rate, etc. The hedge works as an insurance, that reduces the risk of losses in case of adverse fluctuations of the market.
Arbitrage: is a strategy that consists of taking advantage of the differences in quotation of the same asset or of equivalent assets in different markets, or moments. Arbitrage aims to obtain profits without risk, buying the cheaper asset and selling the more expensive one simultaneously. Lock: is a strategy that consists of setting up a combination of operations with options, aiming to limit the risk and the return of the operation. A lock can be bullish or bearish, depending on the expectation of the investor about the variation of the quotation of the underlying asset.
Based on greeks options: is a strategy that consists of using the greeks of the options to evaluate the risks and the opportunities of the operations with options. The greeks are measures derived from the pricing model of the options, that indicate the sensitivity of the options to the variables of the market, such as quotation of the underlying asset, time until expiration, volatility, interest rate, etc. The main greeks are delta, gamma, theta, vega and rho.
Technical analysis (trend follower Elliot): is a method of studying the behavior of the quotations of the stocks, using graphical and statistical tools. This method aims to identify patterns, trends, supports, resistances and other signals that indicate the future movements of the market. One of the techniques of this method is the Elliot wave theory, which proposes that the movements of the quotations follow a fractal pattern composed of impulsive and corrective waves.
Technical analysis (with indicators): is a way of analyzing the behavior of the stock prices, using graphical and statistical tools. This way aims to identify patterns, trends, supports, resistances and other signals that indicate the future movements of the market. One of the features of this way are the technical indicators, being mathematical formulas applied to the prices or the volumes of the stocks. Some examples of technical indicators are moving averages, Bollinger bands, MACD, RSI, stochastic, etc.
Technical analysis (mean reversion): is a way of studying the behavior of the stock prices, using graphical and statistical tools. This way aims to identify patterns, trends, supports, resistances and other signals that indicate the future movements of the market. One of the strategies of this way is the mean reversion, which consists of using the moving averages as a reference to identify entry and exit points of the operations. The idea is that the prices tend to return to the mean after moving away from it.
Technical analysis (price action): is a way of studying the behavior of the prices of the stocks, using graphical and statistical tools. This approach will identify patterns, trends, supports, resistences and other signals that indicate the future movements of the market. One of the techniques of this analysis is the price action, which consists of using only the prices as a source of information, without resorting to technical or fundamental indicators. The price action is based on the reading of the candles, being graphical representations of the opening, closing, high and low prices of each period. For example, a bullish candle indicates that the price closed above the opening price, showing the strength of the buyers.
Technical analysis (patterns of nature) is the use of numerical or geometrical sequences inspired by nature, such as the Fibonacci sequence, being a series of numbers that follows the rule that each term is the sum of the previous two. The Fibonacci sequence can be used to draw retracement and extension levels of the prices, which can work as reversal or continuation points of the trends. For example, if the price of a stock falls from R$ 100 to R$ 80, and then rises to R$ 89, it is making a retracement of 50% of the previous movement, which is one of the Fibonacci levels.
Besides the techniques based on charts, there are other ways of analyzing the financial market, such as the patterns and the seasonal behavior. These phenomena affect the fluctuation of the values of the stocks, related to the periodicity or the seasonality of some economic, social or natural factors.
They are repetitive and predictable movements of these assets, with variable durations, from daily to annual. The seasonal variation is the fluctuation of them according to seasonal factors, such as weather, holidays, events, etc. For example, some may perform better in the summer than in the winter, or in certain months of the year. A famous case is the January effect, being the tendency of the stocks to rise more in that month than in the others.
Cycles and seasonality: is the agricultural market, which trades agricultural commodities, such as grains, coffee, sugar, cotton, etc. The agricultural market is influenced by several factors, such as supply and demand, weather, pests, public policies, exchange rate, etc. Investors can operate in the agricultural market through futures contracts or options of these commodities. For example, if the investor believes that the price of coffee will rise in the next month, he can buy a coffee futures contract and profit from the difference between the purchase price and the sale price.
Quantitative analysis: is a way of evaluating the performance and risk of the financial assets, using mathematical and statistical models. Quantitative analysis aims to identify patterns and anomalies in the historical or current data of the assets, to create investment strategies based on algorithms. Quantitative analysis can involve the use of artificial intelligence, machine learning or big data. For example, a quantitative analyst can use a linear regression model to estimate the relationship between the price of a stock and its earnings per share, and use this information to decide whether it is worth buying or selling that stock.
Tape reading: is a way of following the flow of orders of the financial market in real time, using tools such as the order book and the times and trades. The tape reading aims to identify the intentions of the big players of the market, such as banks, funds and financial institutions, to follow the same direction or anticipate the changes of trend. For example, if the tape reading shows a large volume of buy orders of a stock at a certain price, this may indicate that there is a strong demand for that stock, and that its price tends to rise.
Macroeconomic analysis: is a way of analyzing the national and international economic scenarios, using indicators such as GDP, inflation, interest rate, exchange rate, trade balance, etc. Macroeconomic analysis aims to understand the impacts of economic policies and geopolitical events on the financial market and the sectors of the economy. For example, if the interest rate rises, this can negatively affect consumption, investment and economic growth, and consequently, the performance of the stocks of companies linked to these sectors.
Conclusion:
The financial market is not for amateurs, nor for aspirants. There is no point in taking away the merit of those who operate and do day trading, because that does not make you better than them. Those who are consistent in the stock market are because they understand the participants, the microstructure and the variables of the market. Because all this is only 10% of the trader’s formation in the financial market, because he still needs to combine all this with an intelligent decision making where he divides it into
Traders are athletes of the mind, who need to have discipline and psychological strength to operate and work with this every day. That’s why nature selects only the best, and they don’t have time to waste. Do you want to be one of them? Study, seek knowledge, learn the environment in which you operate, practice. A market professional takes years to evolve, that’s why day trading will never have pity on you. If the great minds of the world are in the market with the best technology available, why would you, who are a beginner, overcome them all?
With time, the trader will have gone through psychological evolutions over time, so keep firm and always seek knowledge.
For this, you need to know your size, know that you don’t move the price, know your place in the market. Also know that the market changes, and you should always swim towards the market and never against it.
Market Algo or pain tradesI was reading another trading book today and much like watching the dumb money movie the other day, it prompted me to write another post.
So, you may have heard the expression "the market is an Algorithm" whilst this is somewhat true, it's actually more a sequence, Ralph Elliott, Richard Wyckoff and Edward Jones knew this.
In simple terms, the larger operators or what's known as sophisticated money - chase liquidity pools that are often areas Dumb Money have taken entries or placed stops. Now if it was as simple as this, you could simply write an indicator or be on the winning side 100% of the time. Unfortunately, there's a lot more to it!
When I say the smart kids are taking the dinner money of the dumb kids, you need to appreciate the fact that winning whilst playing against retail traders is like putting the Patriots against your local under 12's side. Or like having the New Zealand All Blacks play against an old people's home in Pakistan. (I am not sure if Pakistan even have a 1st team in rugby).
To gain some understanding, you need to appreciate there's such a thing as "pain trading".
A "pain trade" refers to a situation in financial markets where a significant number of investors or traders find themselves on the wrong side of the market, leading to losses or discomfort. In other words, it describes a scenario in which the market moves in a way that causes the most amount of pain or financial losses to the largest number of participants.
For example, if a majority of traders are positioned for a market to go up, a pain trade would be a sharp and unexpected decline in prices, catching those traders off guard and causing them losses. The term reflects the idea that markets often move in ways that inflict the most damage on the greatest number of participants.
Understanding pain trades is important for investors and traders, as it highlights the potential risks of crowded trades and the importance of risk management strategies to mitigate unexpected market movements. Investors and traders often use various indicators, market sentiment analysis, and risk management techniques to try to avoid being caught on the wrong side of a pain trade.
(Thanks ChatGPT for the summary).
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So take a company like Carvana for example...
This type of move happens over and over again - creating cycles (But not always the same).
In this image above you can see it's likely to have swept long stop losses and then rallied hard.
You probably know about the Gamestop Saga.
I wrote a post on that film recently.
I talked about being on the wrong side - I can't get over how someone could be up $500,000 and still go broke? But it's all in the mindset. Liquidity is the name of the game.
How do these things fit together?
Well, Bitcoin is a prime example - retail mindset is "HODL, Buy the Dip, Diamond hands & Lambo" - whilst as a professional trader, it's enjoying your profits and buying/selling at the expense of the dumb money. These moves are shown as the last post, buy momentum.
Here is the summary image from that post.
Since we had a move up - retail seem to think it's up only, they seem to put all the eggs in the hope Blackrock and a halving will make them rich...
I have read articles like this recently.
After watching the Dumb Money film - you know where following the crowd goes.
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Why is this an important lesson?
It's all to do with pain, where is the maximum pain? Retail sentiment would suggest pain comes in the form of little movement, grinding prices in up moves and fast aggressive drops.
Some context from Blackrock themselves: What is Blackrocks Biggest ETF?
So again, let's add a little logic. Where is liquidity sitting?
If and it's a big if - Blackrock get an ETF approved and it's half the size of their biggest ETF to date, let's then assume Retail flood in and match it dollar for dollar. That market cap would still put us roughly at the current ATH, given coins in circulation.
This again just amplifies, why we are simply - NOT READY, YET!!!
The move I didn't want in 2022, looks to be the biggest liquidity grab we are likely to see in the Bitcoin chart.
We are very, very likely still in an A-B move up for the slow pain of coming back to build sustainable momentum.
Have a Happy New Year all!
Stay safe and see you in 2024!
Disclaimer
This idea does not constitute as financial advice. It is for educational purposes only, our principle trader has over 20 years’ experience in stocks, ETF’s, and Forex. Hence each trade setup might have different hold times, entry or exit conditions, and will vary from the post/idea shared here. You can use the information from this post to make your own trading plan for the instrument discussed. Trading carries a risk; a high percentage of retail traders lose money. Please keep this in mind when entering any trade. Stay safe.
How to succeed in trading ✅From the experience I have in trading I have identified 3 pillars on which my success is based. I can't say that one is less important than another, so I try to combine all of them:
1) Psychology - is one of the most difficult aspects to master, which requires a lot of theoretical and practical knowledge, so I recommend first of all to study yourself, after you have managed to identify what kind of person you are, you will gain knowledge from books, videos, trainings that will help you control your emotions when trading. At the same time, this aspect can help you in your daily life.
2) Risk management - due to proper risk management, I managed to become funded. I also understood that in trading it is more important to tend to have a small risk, than a high profit, because greed for money can bring you into a less pleasant situation. I managed to take the account with a risk of 1% per trade and with an RR of at least 1: 2, which therefore showed me that even if I take 6 sls for 10 trades, I still remain profitable.
3) Trading plan - this is the aspect that motivates me to progress, once I have made a trading plan with well-defined goals, I tend to fulfill them. In addition to the purposes, a trading plan should contain the strategy applied, as well as the rules for entering / managing / exiting the transaction.
CHOCH vs BOS ‼️WHAT IS BOS ?
BOS - break of strucuture. I will use market structure bullish or bearish to understand if the institutions are buying or selling a financial asset.
To spot a bullish / bearish market structure we should see a higher highs and higher lows and viceversa, to spot the continuation of the bullish market structure we should see bullish price action above the last old high in the structure this is the BOS.
BOS for me is a confirmation that price will go higher after the retracement and we are still in a bullish move
WHAT IS CHOCH?
CHOCH - change of character. Also known as reversal, when the price fails to make a new higher high or lower low, then the price broke the structure and continue in other direction.
What is Confluence❓✅ Confluence refers to any circumstance where you see multiple trade signals lining up on your charts and telling you to take a trade. Usually these are technical indicators, though sometimes they may be price patterns. It all depends on what you use to plan your trades. A lot of traders fill their charts with dozens of indicators for this reason. They want to find confluence — but oftentimes the result is conflicting signals. This can cause a lapse of confidence and a great deal of confusion. Some traders add more and more signals the less confident they get, and continue to make the problem worse for themselves.
✅ Confluence is very important to increase the chances of winning trades, a trader needs to have at least two factors of confluence to open a trade. When the confluence exists, the trader becomes more confident on his negotiations.
✅ The Factors Of Confluence Are:
Higher Time Frame Analysis;
Trade during London Open;
Trade during New York Open;
Refine Higher Time Frame key levels in Lower
Time Frame entries;
Combine setups;
Trade during High Impact News Events.
✅ Refine HTF key levels in LTF entries or setups for confirmation that the HTF analysis will hold the price.
HTF Key Levels Are:
HTF Order Blocks;
HTF Liquidity Pools;
HTF Market Structure.
Market Structure Identification ✅Hello traders!
I want to share with you some educational content.
✅ MARKET STRUCTURE .
Today we will talk about market structure in the financial markets, market structure is basically the understading where the institutional traders/investors are positioned are they short or long on certain financial asset, it is very important to be positioned your trading opportunities with the trend as the saying says trend is your friend follow the trend when you are taking trades that are alligned with the strucutre you have a better probability of them closing in profit.
✅ Types of Market Structure
Bearish Market Structure - institutions are positioned LONG, look only to enter long/buy trades, we are spotingt the bullish market strucutre if price is making higher highs (hh) and higher lows (hl)
Bullish Market Structure - institutions are positioned SHORT, look only to enter short/sell trades, we are spoting the bearish market strucutre when price is making lower highs (lh) and lower lows (ll)
Range Market Structure - the volumes on short/long trades are equall instiutions dont have a clear direction we are spoting this strucutre if we see price making equal highs and equal lows and is accumulating .
I hope I was clear enough so you can understand this very important trading concept, remember its not in the number its in the quality of the trades and to have a better quality try to allign every trading idea with the actual structure
HOW TO IDENTIFY AN ASCENDING WEDGE AND A DESCENDING WEDGEThe wedge pattern is a popular chart formation that traders use to identify potential reversals in the markets. This pattern is formed from a series of higher highs and higher lows in an ascending wedge or lower highs and lower lows in a descending wedge. As the pattern narrows, the price action becomes more compressed, eventually leading to a breakout that can result in a significant move in the opposite direction. In this article, we will look at how to identify and trade this pattern.
How to identify an ascending wedge and a descending wedge
Rising wedge
An ascending wedge is a bullish pattern that forms when price is sandwiched between an uptrend line and a horizontal or slightly upward sloping resistance line.
To identify an ascending wedge:
a. Draw a trend line connecting the lower lows.
b. Draw a resistance line connecting the upper highs.
c. The wedge should look like a symmetrical or slightly expanding formation.
Downward wedge
A descending wedge is a bearish pattern that forms when price is sandwiched between a falling trend line and a horizontal or slightly downward sloping support line.
To identify a descending wedge:
a. Draw a trend line connecting the upper highs.
b. Draw a support line connecting the lower lows.
c. The wedge should look like a symmetrical or slightly expanding formation.
How to trade a wedge
Rising Wedge
When trading a rising wedge pattern:
a. Place a buy stop order above the upper resistance line, aiming for a return to or beyond the initial point of the wedge.
b. Place a stop loss below the lower trend line to minimize potential losses.
c. Exit the trade when price reaches the target or when the pattern does not move beyond it as expected.
Downward wedge
When trading a descending wedge:
a. Place a sell stop order below the lower support line, aiming for a return to or beyond the initial point of the wedge.
b. Place a stop loss above the upper trend line to minimize potential losses.
c. Exit the trade when price reaches the target or when the pattern does not break as expected.
Risk Management
Trading wedge patterns can be profitable, but it is important to manage risk effectively. Consider using a fixed percentage of your account for each trade and set strict stop loss orders to protect your capital. Also, remember that no pattern is foolproof and the market can sometimes give false breakouts.
Conclusion
When properly identified and traded, wedge patterns can provide valuable trading opportunities. By following the steps outlined in this article, you can improve your ability to identify these patterns and capitalize on them. However, always remember that trading involves risk, and a thorough understanding of market dynamics and risk management is essential for success.
SIX HABITS TO ADOPT IN 2024Trading in the financial markets can be both rewarding and challenging. However, it's essential to recognize and overcome certain bad habits that can hinder your success and well-being. In this article, we will discuss six common habits that traders should avoid and provide actionable steps to improve their mindset, performance, and overall happiness.
1. Quit Complaining – Embrace a Positive Attitude
Successful traders do not wallow in self-pity or exaggerate their problems. If you find yourself complaining about your trading issues, seek help from a mentor or support group to resolve your concerns. A positive attitude will not only improve your trading results but also create a more positive atmosphere around you.
2. Monitor Your Vices and Indulgences
Traders often resort to unhealthy habits, such as excessive alcohol consumption or overeating, as a way to cope with stress and disappointment. Be mindful of your weaknesses and replace harmful habits with healthier alternatives that promote well-being and mental clarity.
3. Focus on the Present Moment – Avoid Future-Tripping
Fear often stems from worrying about the future. To avoid this trap, concentrate on the tasks and decisions at hand. Focusing on the present moment will give you a sense of calm, security, and fulfillment that will ultimately improve your trading performance.
4. Continue Learning and Growing
Once you achieve success in trading, don't become complacent or stop learning. Continue developing your skills and exploring new trading strategies. Learning new techniques or refining existing ones will keep you engaged, motivated, and adaptable in an ever-changing market environment.
5. Cultivate Strong Social Connections
As a full-time trader, it's easy to become isolated and withdrawn from social interactions. Make an effort to maintain and build meaningful relationships with family, friends, and colleagues. Strong social connections will provide emotional support, reduce stress, and contribute to your overall happiness and well-being.
6. Practice Gratitude and Kindness
Traders who experience negative emotions, such as envy or resentment, can benefit from practicing gratitude and acts of kindness. By expressing gratitude, volunteering, or offering compliments, you will improve your own happiness while fostering a positive atmosphere around you.
Conclusion
By recognizing and overcoming these six common bad habits, traders can significantly improve their well-being, trading performance, and overall happiness. Embrace a positive mindset, maintain healthy habits, focus on the present moment, continue learning and growing, cultivate strong social connections, and practice gratitude and kindness. By doing so, you will be well on your way to achieving success in the financial markets and leading a fulfilling life.
In 2024, may traders who have yet to find success in the market be blessed with the wisdom to learn from their mistakes and the courage to embrace new strategies. May they cultivate a growth mindset, forging strong connections, and practicing gratitude and kindness. As the year unfolds, let their resilience and determination guide them towards a prosperous and fulfilling future in the world of trading.
Traders, If you liked this educational post🎓, give it a boost 🚀 and drop a comment
THE ESSENCE OF WYCKOFF'S METHODRichard Demille Wyckoff is a trader whose career coincided with the famous traders of the time: Jesse Livermore, Charles Dow and JP Morgan, W. Gann and others. All of these men are widely recognized for their terrific trading books. Wyckoff became famous for his insight, his trading method. Wyckoff has been involved with the financial markets since he was a teenager, and this is what gave him an understanding of how the market works.
To become a successful trader, it is not enough to have good theoretical knowledge. Experience is the key to your success. That is why Wyckoff recommended to follow the tape for weeks to intuitively understand what is happening on the market.
THE ESSENCE OF THE WYCKOFF METHOD
The essence of Richard Wyckoff's idea is that in order to gain a large position in the market and not to move the price with large orders, a professional market maker needs to balance supply and demand. The equilibrium is observed when the price is in a narrow range of consolidation. After a position is gained, the price is pushed out of the trading range.
WYCKOFF'S THREE LAWS
The trading method is based on three laws:
Supply and Demand. Wyckoff believed that the price of each asset goes up or down only by an overabundance of one thing. For example, the price goes up if demand exceeds supply. Simply put, if a whole city decides to buy 10 tons of apple, and the apple is in limited supply from the suppliers, they will start to raise the price because of the high demand.
Cause and Effect. When an asset starts to rise in price - this is the consequence, and the previous news or a small price range this is the cause. When the price is between support and resistance zones for the X amount of time (cause), then a trend will start in the short term (effect).
Effort vs. Result. A large volume traded, for example, during one day is an effort, while a price change is a result. Example: If a large player has spent a lot of money buying up most of the sell orders, and the price is still standing, it means that the effort spent did not bring the expected results.
ACCUMULATION AND DISTRIBUTION
The basic principle of trading is to see the equilibrium of supply and demand in time. Consolidation (also called range, zone, rectangle, sidewall, etc.) is a trading range of prices where accumulation or distribution takes place. Wyckoff's method is the use of accumulation and distribution phases.
Accumulation is the formation of a trading zone where orders for further movement (price reversal) are accumulated within a certain time. Here "smart" money keeps the price at approximately the same level, where they buy up most of the market orders in order to sell (distribute) them at a higher price.
Distribution is the formation of a trading zone where orders are distributed for further movement (price reversal) within a certain time. Similarly, to accumulation, smart money sells out all its previously accumulated assets in order to benefit from it.
Consolidation is the place where the previous movement with the outweighing force of demand or supply stops and relative equilibrium finally occurs. This trading zone is a great time to make money, because it is the place where preparation for an explosive bull rally or bearish fall takes place. Consolidation can be considered as a place of refueling for a car, if not refueled, there will be nothing to drive on - it is the accumulated force, the reason that creates the subsequent movement. The longer the refueling takes place, the farther one can go. Therefore, after a long trading range, we should expect an equally long upward or downward movement.
On the way to move from one zone to the opposite zone, the price does not fall in one go, it always makes pullbacks and stops, which are called accumulation.
After his death, Wyckoff left trading methods for such zones. The principle is quite simple: Before the formation of a sideways trading range, sales peak and the accumulation phase begins. During the whole time the price is in this range, a large player buys up most of the sell orders. The price goes beyond the support and resistance zones, then reverses and the growth phase begins. At the end of the growth phase, the buying peaks. Then it is the same for the distribution phase.
ACCUMULATION
In the accumulation phase, professional traders buy up sell orders from uninformed traders. Usually it happens on the news, from all channels they say that shares of some company will fall, it is waiting for almost bankruptcy, everything is bad, etc. In Forex, various negative news on unemployment and similar. At this moment people start to get rid of long positions, and traders start to short the instrument. Wyckoff supporters realize that it is worth waiting for the price drop to stop and they should get ready to look for an entry point to buy the asset.
Phase A and phase E are trend price movements, the phases between them are the trading range, which is analyzed by the Wyckoff trading method. Horizontal lines are support (at the bottom) and resistance (at the top) of the trading range. Do not consider them as exact lines, they are approximate ranges, in which the big one turns the price back to sideways.
DISTRIBUTION
Everything is similar to buying in the accumulation phase, only now those assets bought earlier should be sold off. This is just the basis, the main rules of trading according to the Wyckoff method in trading. Richard Wyckoff himself applied it on stocks and on daily charts (although he did not use charts, only tape). But nowadays, the time of algorithms, you can trade on any timeframe and any instruments. The method works well on the minute. It should be understood that there can be many phase patterns, the trading range can be different, the culmination with large candles and small, the volume is high and not very high, tests after the exit from the zone may or may not be. It all depends on who the big player is, when the accumulation or distribution occurs, what instrument you are watching and what timeframe is on the chart.
Trading will be quite successful if you strictly follow your trading strategy according to the Wyckoff method, written on paper, competently determine the level of risk and position size. Observe the chart, find consolidations, see what happened inside and where the price went. You need to analyze every step, every movement. Big money thinks everything through, every price action on the chart is not accidental. And remember that whatever the big money does, it always leaves its traces.
Good luck in trading!
How to Become a Professional Trader!The Triad of Successful Trading:
Strategies, Psychology, and Risk Management.
Introduction:
In the dynamic world of trading, achieving success is a multifaceted challenge that requires a comprehensive approach. While many enthusiasts focus primarily on trading strategies, it is crucial to recognize that a holistic approach, incorporating trading psychology and risk management, is indispensable for sustained success. This article delves into the three pillars of successful trading: trading strategies, psychology, and risk management.
Trading Strategies (25 Marks):
A robust trading strategy serves as the foundation of a trader's success. This section explores the importance of having a well-defined and tested trading strategy. Investors must understand that possessing the same strategy as others does not guarantee success; execution and adherence are key. Points will be awarded based on the clarity and effectiveness of the chosen strategy, as well as the ability to adapt to changing market conditions.
Trading Psychology (35 Marks):
Trading psychology plays a pivotal role in determining success or failure in the financial markets. This section emphasizes the significance of maintaining a disciplined and rational mindset. Factors such as emotional control, patience, and the ability to handle losses are crucial components of a trader's psychological makeup. The article will explore techniques to cultivate a resilient mindset, addressing the common pitfalls that novice traders often encounter.
Risk Management (40 Marks):
Arguably the most critical aspect of successful trading, risk management deserves the lion's share of consideration. This section delves into the methodologies and practices that traders should adopt to protect their capital. Key areas of discussion include position sizing, setting stop-loss orders, and diversification. The article will emphasize the importance of preserving capital and preventing catastrophic losses, assigning points based on the thoroughness and effectiveness of the risk management approach.
Conclusion:
In conclusion, the path to becoming a successful trader hinges on the harmonious integration of trading strategies, psychology, and risk management. While a strong trading strategy provides direction, a disciplined mindset ensures adherence to the plan, and prudent risk management safeguards against significant setbacks. Traders must recognize that neglecting any one of these pillars compromises the overall structure of their trading endeavors. By assigning marks to each component, this article underscores the balanced significance of these three elements and emphasizes their collective role in achieving success in the complex world of trading.
I'm Shaw, a seasoned forex trader with 14+ years of success. Whether you're new or experienced,
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The Phenomenon of Black Swans in ForexIn becoming a successful forex trader, understanding the impact of Black Swans in 2023 and beyond becomes crucial. Black Swan events, unpredictable and with significant repercussions, constantly reshape the financial landscape. This article delves into the essence of these phenomena, offering insights into their historical occurrences in forex and strategies to mitigate their unforeseen effects.
Explaining Black Swan Events
The Black Swan phenomenon refers to an event in financial markets that is completely unexpected, carries a major impact, and, only after it has occurred, is often inappropriately rationalised as predictable. Originating from Nassim Nicholas Taleb's work, this concept has since become a cornerstone in understanding market dynamics. In the realm of forex, just like in the stock market, these events shake the very foundations of trading strategies and economic forecasts.
A Black Swan event in the stock market, for instance, could be a sudden geopolitical crisis or an unexpected economic policy shift that dramatically alters market values. These events are characterised by their rarity, extreme impact, and the widespread insistence that they were, in fact, predictable in hindsight. This phenomenon underscores the limitations of traditional market predictions and risk assessments.
In essence, the Black Swan's meaning in the stock market and other types of markets extends beyond just defining unforeseen events. It encapsulates the human tendency to find simplistic explanations for these occurrences after the fact. This hindsight bias often overlooks the true complexity and randomness inherent in market systems.
Historical Perspective of Black Swans in Forex
The history of forex trading is marked by several Black Swan events, each reshaping traders' perspectives and strategies. To see how these events unfold, head over to FXOpen’s free TickTrader platform to access historical chart data.
The 2008 financial crisis serves as a prime example, showcasing how unforeseen events can have far-reaching impacts. Triggered by the collapse of major financial institutions in the US, the crisis led to a massive flight to safety. This period was marked by extreme volatility and unpredictability in currency values, catching many traders and investors off guard.
Another significant Black Swan event occurred in 2015 with the Swiss franc. The Swiss National Bank unexpectedly removed the cap on the franc's value against the euro, which had been in place to prevent excessive appreciation. This decision resulted in an unprecedented surge in the value of the Swiss franc, leading to substantial losses for traders who had positions betting against it. The rapidity and magnitude of this movement were unforeseen, making it a textbook example of a Black Swan in forex.
Characteristics of Black Swan Events
Black Swan events in the financial world are defined by three key characteristics: unpredictability, severe impact, and retrospective predictability. Firstly, these events are unforeseeable, arising from circumstances that lie outside the realm of regular expectations. No amount of historical data or market analysis can accurately predict their occurrence, making them a blind spot in investment strategies.
The impact of a Black Swan on a portfolio can be profound. These events typically result in drastic changes in market dynamics, often leading to significant financial losses or gains. For instance, after a Black Swan, stock prices can collapse, catching investors off guard and leading to a swift devaluation of their portfolio.
Finally, in hindsight, Black Swan events often appear predictable. After the fact, analysts and traders may claim that signs and signals were evident, as many did post-2008, leading to a false sense of understanding. This retrospective predictability, however, is misleading, as it ignores the inherent randomness and unpredictability of such events, underscoring the complexity of managing risks in financial markets.
Risk Management Strategies in the Face of Black Swans
In forex trading, effective risk management strategies are vital, especially in the context of Black Swan event trading. These strategies focus on minimising potential losses without hindering the opportunity for gains.
Diversification is one of the key strategies to mitigate the impact of Black Swans. By spreading investments across various currencies and financial instruments, traders can reduce their exposure to any single market shock. This approach helps in cushioning the portfolio against unforeseen market movements.
Setting stop-loss orders is another crucial tactic. In the event of a Black Swan, these orders can limit losses by automatically closing positions once a certain price level is hit. It's essential to set these orders at levels that balance between avoiding unnecessary triggers from normal market volatility and protecting from severe downturns.
Hedging, using instruments like options and futures, can also provide a buffer against Black Swans. For example, purchasing options can help manage the risk of adverse price movements, providing a form of insurance against extreme events.
Utilising a conservative leverage ratio is advisable. High leverage can amplify gains, but it can also magnify losses, especially during Black Swan events. Maintaining a lower leverage ratio can prevent the wiping out of capital when unexpected market swings occur.
Finally, maintaining an emergency fund or reserve capital can be a lifesaver during market turmoil. This fund provides a financial cushion, allowing traders to weather the storm without liquidating positions at a loss.
These strategies, while not foolproof, offer traders in the forex market a more resilient stance against the unpredictability and potential havoc wrought by Black Swan events.
The Bottom Line
In essence, Black Swan events serve as reminders of the importance of vigilance and adaptability. By understanding their characteristics and impact, traders can better navigate these tumultuous waters. For those looking to apply this knowledge practically, opening an FXOpen account can be a strategic step towards managing the unforeseen, offering diversification opportunities with hundreds of tradable markets.
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.
