Diversification: What It Is, Why It Matters & How to Do ItDiversification is a market strategy that enables you to spread your money across a variety of assets and investments in pursuit of uncorrelated returns, hedging, and risk control.
Table of Contents
What is portfolio diversification?
Brief history of the modern portfolio theory
Why is diversification important?
An example of diversification at work
How to diversify your portfolio
Components of a diversified portfolio
Build wealth through diversification
Diversification vs concentration
Summary
📍 What is portfolio diversification?
Portfolio diversification is the strategy of spreading your money across diverse investments in order to mitigate risk, hedge and balance your exposure in pursuit of uncorrelated returns. While it may sound complex at first, portfolio diversification could be your greatest strength when you set out to trade and invest in the financial markets.
As a matter of fact, once you immerse yourself into the markets, you will be overwhelmed by the wide horizons waiting for you. That’s when you’ll need to know about diversification.
There are thousands of stocks available for trading, dozens of indices, and a sea of cryptocurrencies. Choosing your investments will invariably lead to relying on diversification in order to protect and grow your money.
Diversifying well will enable you to go into different sectors, markets and asset classes. Together, all of these will build up your diversified portfolio.
📍 Brief history of the modern portfolio theory
“ Diversification is both observed and sensible; a rule of behavior which does not imply the superiority of diversification must be rejected both as a hypothesis and as a maxim. ” These are the words of the father of the modern portfolio theory, Harry Markowitz.
His paper on diversification called “Portfolio Selection” was published in The Journal of Finance in 1952. The theory, which helped Mr. Markowitz win a Nobel prize in 1990, posits that a rational investor should aim to maximize their returns relative to risk.
The most significant feature from the modern portfolio theory was the discovery that you can reduce volatility without sacrificing returns. In other words, Mr. Markowitz argued that a well-diverse portfolio would still hold volatile assets. But relative to each other, their volatility would balance out because they all comprise one portfolio.
Therefore, the volatility of a single asset, Mr. Markowitz discovered, is not as significant as the contribution it makes to the volatility of the entire portfolio.
Let’s dive in and see how this works.
📍 Why is diversification important?
Diversification is important for any trader and investor because it builds out a mix of assets working together to yield returns. In practice, all assets contained in your portfolio will play a role in shaping the total performance of your portfolio.
However, these same assets out there in the market may or may not be correlated. The interrelationship of those assets within your portfolio is what will allow you to reduce your overall risk profile.
With this in mind, the total return of your investments will depend on the performance of all assets in your portfolio. Let’s give an example.
📍 An example of diversification at work
Say you want to own two different stocks, Apple (ticker: AAPL ) and Coca-Cola (ticker: KO ). In order to easily track your performance, you invest an equal amount of funds into each one—$500.
While you expect to reap handsome profits from both investments, Coca-Cola happens to deliver a disappointing earnings report and shares go down 5%. Your investment is now worth $475, provided no leverage is used.
Apple, on the other hand, posts a blowout report for the last quarter and its stock soars 10%. This move would propel your investment to a valuation of $550 thanks to $50 added as profits.
So, how does your portfolio look now? In total, your investment of $1000 is now $1,025, or a gain of 2.5% to your capital. You have taken a loss in Coca-Cola but your profit in Apple has compensated for it.
The more assets you add to your portfolio, the more complex the correlation would be between them. In practice, you could be diversifying to infinity. But beyond a certain point, diversification would be more likely to water down your portfolio instead of helping you get more returns.
📍 How to diversify your portfolio
The way to diversify your portfolio is to add a variety of different assets from different markets and see how they perform relative to one another. A single asset in your portfolio would mean that you rely on it entirely and how it performs will define your total investment result.
If you diversify, however, you will have a broader exposure to financial markets and ultimately enjoy more probabilities for winning trades, increased returns and decreased overall risks.
You can optimize your asset choices by going into different asset classes. Let’s check some of the most popular ones.
📍 Components of a diversified portfolio
Stocks
A great way to add diversification to your portfolio is to include world stocks , also called equities. You can look virtually anywhere—US stocks such as technology giants , the world’s biggest car manufacturers , and even Reddit’s favorite meme darlings .
Stock selection is among the most difficult and demanding tasks in trading and investing. But if you do it well, you will reap hefty profits.
Every stock sector is fashionable in different times. Your job as an investor (or day trader) is to analyze market sentiment and increase your probabilities of being in the right stock at the right time.
Currencies
The forex market , short for foreign exchange, is the market for currency pairs floating against each other. Trading currencies and having them sit in your portfolio is another way to add diversification to your market exposure.
Forex is the world’s biggest marketplace with more than $7.5 trillion in daily volume traded between participants.
Unlike stock markets that have specific trading hours, the forex market operates 24 hours a day, five days a week. Continuous trading allows for more opportunities for price fluctuations as events occurring in different time zones can impact currency values at any given moment.
Cryptocurrencies
A relatively new (but booming) market, the cryptocurrency space is quickly gaining traction. As digital assets become increasingly more mainstream, newcomers enter the space and the Big Dogs on Wall Street join too , improving the odds of growth and adoption.
Adding crypto assets to your portfolio is a great way to diversify and shoot for long-term returns. There’s incentive in there for day traders as well. Crypto coins are notorious for their aggressive swings even on a daily basis. It’s not unusual for a crypto asset to skyrocket 20% or even double in size in a matter of hours.
But that inherent volatility holds sharpened risks, so make sure to always do your research before you decide to YOLO in any particular token.
Commodities
Commodities, the likes of gold ( XAU/USD ) and silver ( XAG/USD ) bring technicolor to any portfolio in need of diversification. Unlike traditional stocks, commodities provide a hedge against inflation as their values tend to rise with increasing prices.
Commodities exhibit low correlation with other asset classes, too, thereby enhancing portfolio diversification and reducing overall risk.
Incorporating commodities into a diversified portfolio can help mitigate risk, enhance returns, and preserve purchasing power in the face of inflationary pressures, geopolitical uncertainty and other macroeconomic risks.
ETFs
ETFs , short for exchange-traded funds, are investment vehicles which offer a convenient and cost-effective way to gain exposure to a number of assets all packaged in the same instrument. These funds pull a bunch of similar stocks, commodities and—more recently— crypto assets , into the same bundle and launch it out there in the public markets. Owning an ETF means owning everything inside it, or whatever it’s made of.
ETFs typically have lower expense ratios compared to mutual funds, making them affordable investment options.
Whether you seek broad market exposure, niche sectors, or thematic investing opportunities, ETFs are a convenient way to build a diversified portfolio tailored to your investment objectives and risk preferences.
Bonds
Bonds are fixed-income investments available through various issuers with the most common one being the US government. Bonds are a fairly complex financial product but at the same time are considered a no-brainer for investors pursuing the path of least risk.
Bonds have different rates of creditworthiness and maturity terms, allowing investors to pick what fits their style best. Bonds with longer maturity—10 to 30 years—generally offer a better yield than short-term bonds.
Government bonds offer stability and low risk because they’re backed by the government and the risk of bankruptcy is low.
Cash
Cash may seem like a strange allocation asset but it’s actually a relatively safe bet when it comes to managing your own money. Sitting in cash is among the best things you can do when stocks are falling and valuations are coming down to earth.
And vice versa—when you have cash on-hand, you can be ready to scoop up attractive shares when they’ve bottomed out and are ready to fire up again (if only it was that easy, right?).
Finally, cash on its own is a risk-free investment in a high interest-rate environment. If you shove it into a high-yield savings account, you can easily generate passive income (yield) and withdraw if you need cash quickly.
📍 Build wealth through diversification
In the current context of market events, elevated interest rates and looming uncertainty, you need to be careful in your market approach. To this end, many experts advise that the best strategy you could go with in order to build wealth is to have a well-diversified portfolio.
“ Diversifying well is the most important thing you need to do in order to invest well ,” says Ray Dalio , founder of the world’s biggest hedge fund Bridgewater Associates.
“ This is true because 1) in the markets, that which is unknown is much greater than that which can be known (relative to what is already discounted in the markets), and 2) diversification can improve your expected return-to-risk ratio by more than anything else you can do. ”
📍 Diversification vs concentration
The opposite of portfolio diversification is portfolio concentration. Think about diversification as “ don’t put your eggs in one basket. ” Concentration, on the flip side, is “ put all your eggs in one basket, and watch it carefully. ”
In practice, concentration is focusing your investment into a single financial asset. Or having a few large bets that would assume higher risk but higher, or quicker, return.
While diversification is a recommended investment strategy for all seasons, concentration comes with bigger risks and is not always the right approach. Still, at times when you have a high conviction on a trade and have thoroughly analyzed the market, you may decide to bet heavily, thus concentrating your investment.
However, you need to be careful with concentrated bets as they can turn against your portfolio and wreck it if you’re overexposed and underprepared. Diversification, however, promises to cushion your overall risk by a carefully balanced approach to various financial assets.
📍 Summary
A diversified portfolio is essentially your best bet for coordinated and sustainable returns over the long term. Choosing a mix of various types of investments, such as stocks, ETFs, currencies, and crypto assets, would spread your exposure and provide different avenues for growth potential. Not only that, but it would also protect you from outsized risks, sudden economic shocks, or unforeseen events.
While you decrease your risk tolerance, you raise your probability of having winning positions. Regardless of your style and approach to markets, diversifying well will increase your chances of being right. You can be a trader and bet on currencies and gold for the short term. Or you can be an investor and allocate funds to stocks and crypto assets for years ahead.
Potential sources of diversification are everywhere in the financial markets. Ultimately, diversifying gives you thousands of opportunities to balance your portfolio and position yourself for risk-adjusted returns.
🙋🏾♂️ FAQ
❔ What is portfolio diversification?
► Portfolio diversification is the strategy of spreading your money across diverse investments in order to mitigate risk, hedge and balance your exposure in pursuit of uncorrelated returns.
❔ Why is diversification important?
► Diversification is important for any trader and investor because it creates a mix of assets working together to yield high, uncorrelated returns.
❔ How to diversify your portfolio?
► The way to diversify your portfolio is to add a variety of different assets and see how they perform relative to one another. If you diversify, you will have a broader exposure to financial markets and ultimately enjoy more probabilities for winning trades, increased returns, and decreased overall risks.
Do you diversify? What is your strategy? Do you rebalance? Let us know in the comments.
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Strategy!
Stock Market Logic Series #7Options Spreads strategy, let us talk about it.
If you want to buy high-probability spreads, there are specific places where you have the advantage.
And, there are other specific places where it is just pure gambling.
And, we don't gamble, EVER.
We take calculated risks, where the probability of success is much higher than the probability of loss.
--------------------------
In spread options, what matters the most is where the price will be at the expiration date.
WHY?
Because your profit can only be realized near the expiration date unless the price moves dramatically into your favor and far away from the spread strikes.
So, if what matters is where the price is at the expiration date, you want that in this future date, the price of the stock to be away from it, with HIGH PROBABILITY.
As you can see from the drawing on the chart,
the blue channel signifies the probability area of where the price should be in the future.
So if in the future, you are in the probable zone, as seen in the RED spreads, at the expiration date, the price could be below or above your strikes, and thus be successful or not successful, so your odds are more 50-50.
since the price can just stall there, and oscillate in this area, since it is the probable area where the price should be.
But if you look carefully at historical data, you can see that in the GREEN (MONEY ZONES), the price gets immediately rejected...
WITH THE HELP OF T-I-M-E
And when you buy spreads, you want TIME to be on your side...
So now you can easily see... how to make TIME which is a HUGE factor in spreads, on your side!
The trend is your friend... IF... you let it TIME to help you...
When you use options, and trading options in general you need to know which strategy fits which scenario, and where your HIGH probability trade waiting for you.
Just in case you don't know what options spreads are...
In simple words...
You choose 2 prices of the stock (aka strikes):
------$100
------$90
and you speculate that
if the price in a month will be above $100, you profit 1 point.
and if the price in a month will be below $90, you lose 1 point.
So it is a 1:1 risk-to-reward strategy.
So your advantage comes from knowing where are the pivot points.
But not all pivot points have the same advantage...
As I just showed you in this post...
How to use call option buy or sell indicatorHello Traders,
Exciting news! We've just released a detailed video guide on how to harness the full potential of Chobotaru Brothers Option Indicators. In this short tutorial, we cover everything you need to know to use the indicator, specifically focusing on out-of-the-money call options.
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Learn the simple steps to seamlessly integrate Chobotaru Brothers Option Indicator into your trading view for a clear and concise analysis.
2. Finding Option Parameters:
Navigate through your broker's option chain on platforms such as Interactive Brokers to locate all the essential parameters needed for effective trading decisions.
3. SEE the Lines of Profit:
Gain a deep understanding of the meaning behind each line of profit displayed by the indicator, empowering you to make informed choices based on market movements.
4. Utilizing Lower Timeframes (Example of 5m and 30m):
Explore the versatility of Chobotaru Brothers Option Indicator by discovering how it can be effectively applied to lower timeframes like 5 minutes and 30 minutes.
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Follow along with our real-time example using an out-of-the-money call option, providing practical insights into how EASY is the indicator's functionality and application in a live trading scenario.
We've designed this tutorial to be beginner-friendly, ensuring that traders of all levels can seamlessly integrate Chobotaru Brothers Option Indicators into their trading arsenal. Watch the video, enhance your trading skills, and unlock the potential for greater success in the options market.
If you find the video helpful, don't forget to like, follow, and share it with your fellow traders. Happy trading, and may your profits soar!
Best regards,
Chobotaru Brothers
How to Find a High Probability Trade in an Uptrend Hey Traders,
We'll show you how you can find an easy trade with a high risk-to-reward ratio using some basic concepts.
- Step One: Spot an uptrend where you have higher highs and higher lows.
- Step two: Spot the last break of structure.
- Step three: Use the Fibonacci tool and connect it from the recent lows to the recent highs.
- Step Four: Watch prices coming back to the broken structure that lines up with any Fibonacci level. ( Focus on the 50% - 61.8% - 78.6% Levels )
- Step Five: Wait for a clear bullish candle and then enter with stoploss structure
- Step Six: Take partial profits at the recent highs and the Fibonacci extensions ( - 0.27 & -0.618 )
The most subjective facet of my decision-making systemIn the previous publication I started talking about my decision-making system. I use it when investing in stocks. This system allows me to answer three questions:
- which stocks to choose?
- at what price to make a trade?
- and in what quantity?
In this post, I will continue to answer the question Which stocks to pick? and tell you about another facet of my crystal.
As you can see, my decision-making system is quite formalized. What do I mean? It has clear criteria for which a company must be checked before investing in its stocks. If we go deeper into this idea, we can say that the state of affairs in any public company can be assessed using numbers from its statements and stock exchange prices for its stocks. All this can be visualized, put into a form that is readable for the investor, and accelerate the decision-making process many times over.
However, there is an area with information that hovers around the companies, directly or indirectly influences it, but is poorly formalized: this is News . News can be called a message related to a company and distributed through its website, media, and social networks. This message triggers an almost knee-jerk reaction among stock investors (and traders). They will try to interpret the information received, make a forecast, and in some cases even make a trade. It is for this reason that the moment the news is published is often accompanied by a sharp movement in the stock price and an increase in trading volume. The order book now has a lot more players than before. These are traders excited by the news, confident of what will happen next.
Here I can’t help but recall the allegory about Crazy Mister Market from Benjamin Graham. It presents the market as a partner who is constantly knocking on your door and offering you crazy ideas (stock prices). Where does this mister get his madness from? My answer is simple — from the news. Despite this, I cannot help but pay attention to the news, I cannot help but interpret it, to build predictions in my head. This happens reflexively, as a reaction to boiling water hitting my skin. However, will I make a trade under the influence of this information? We'll talk about this at the end of the post.
Let's find out what news is available and where to find it. In this publication, I will only consider matters relevant to the stock market. That is information that can directly or indirectly affect the state of affairs in the companies. As I work, I divide the news flow into two categories: macro-event and corp-event .
A macro-event is something that can indirectly impact the state of affairs in a company since it impacts the external environment in which it lives.
For example:
1. In the third quarter, US GDP grew by 4.9% year-on-year, which was better than expected (*).
GDP Dynamics are a general economic indicator of economic growth in a particular country. This event only indirectly affects the business of the US companies. In other words, a company can be unprofitable even if the GDP in the country of its business is growing.
(*) In the news, you will often see the following wording:
- better than expected
- worse than expected
- as expected
These are significant clarifications since it is believed that the exchange price already considers expectations for future events. Therefore, the coincidence with expectations will most likely be perceived calmly by market participants. Conversely, price fluctuations can be significant if the news can be qualified as a “surprise”.
2. The EPA is setting rules for a proposed “methane fee” on waste generated by oil and gas companies.
This news also refers to macro events, as it impacts an entire industry: the oil and gas business. Moreover, please note that methane fee is only suggested. That is, it is not at all a fact that it will ultimately be implemented.
Unlike macro events, a corp-event directly affects the state of affairs in the companies. Let's look at some of them.
For example:
3. Hilton's (HLT) 3rd quarter Profit was in line with revenue forecasts.
The news contains information about Hilton's financial results for the 3rd quarter. Of course, this directly impacts investors’ assessment of the company's prospects, and therefore the volume of investment in it.
4. Devastating wildfires have forced California's largest utility, Pacific Gas and Electric Company, to plan the sale of gas assets.
Based on the news headline, we can conclude that the company is considering selling a significant part of its business (since the word “gas” even appears in the company name) to compensate for the damage from the devastating fires. Of course, this directly points to the difficult situation in the companies.
Well, we figured out which news is considered a macro-event and which is a corporate event. Now let's find them where we need to. First, let's look at the event calendars that are available on TradingView. They are convenient because they inform us in advance what event to expect on the date in question.
Let's start with the Economic calendar . You can find it in the main TradingView Products menu (Products -> Economic calendar ). This calendar shows upcoming publications of key macroeconomic indicators such as GDP, interest rate, unemployment, and inflation. It will also reflect national events — for example, presidential elections. Thus, you will only see macro events in it.
Click on globe and select the country you are interested in, a group of countries, or the whole world: this way you will filter events by geography. If you are interested in tracking only important events, there is a special button for this High importance . There is also a three-column importance indicator next to each event. If all are shaded, the event is of maximum importance. You can expand any event, read information about it, view statistics, and even add it to your personal calendar.
In terms of importance, the higher the importance of the event, the stronger the market reaction may be after the information is released. Furthermore, the strength of the reaction will depend on how much reality diverges from expectations for this event (with the forecast). Please note that the current value published is published to the left of the forecast, and the value for the previous period is published to the right. This allows you to evaluate the released metric over time.
So, my standard set of filters for the economic calendar is:
- Geography: all over the world;
- High importance;
- This week;
- All categories.
The economic calendar has been set up. There is another calendar on TradingView: this is Earnings calendar . It is located in the interface for working with Supercharts and, of course, is intended for analyzing corporate events. Once you go to the chart, click on the calendar icon in the menu on the right, and the events panel will open in front of you.
The Earnings calendar will contain the names of the companies, their next reporting date, and analysts' estimates of earnings per share: EPS. In its meaning, this estimate is an average expectation or forecast. Therefore, any strong discrepancy between current data and the forecast value can greatly change the value of the company's stocks. By the way, you can check this simply by clicking on the company's name in the calendar: the window with the stock price chart will update instantly. The released earnings per share value can be viewed both on the chart itself and in the company's information (the top menu button on the right). The current value will be marked with either a red circle (below the forecast) or a green circle (above the forecast). The gray circle indicates the forecast itself.
Calendars are convenient because they present us with the main essence of the news in a compressed, digitized form. The description of such news is not as important as the value of the key indicator. However, if you want to read classic text news about a related company, simply click on the lightning bolt icon on your chart.
You can also find news grouped by asset class, region, news agency, etc. in the main menu of the TradingView site's root page. Of the groups presented, I most often use News Flow to get a general context of what is happening.
Returning to my decision-making system, there is news (let's call it critical ) that can trigger the closure of a position or non-opening of a position in the shares of a particular company, even though the main indicators do not suggest this.
To determine such news, I ask myself three questions:
1. Do I trust this news source?
We are surrounded by many sources of news: social networks, news sites, television, etc. It’s easy to check everyone’s reputation on the Internet. Therefore, to take the news into account, you must trust its source. If you see significant news about a company, but it is not in reputable media resources and/or on the company's website, this is a reason to think whether the source is trying to increase its popularity through a loud headline and unverified content.
2. Does this news describe an accomplished fact?
Even in reputable publications, you can find publications with versions of events, forecasts, and opinions. This is good food for thought. However, when deciding, I constantly try to separate the standpoint from the fact confirmed by a reliable source. Only facts can be considered when deciding.
3. Is an accomplished fact capable of leading the company to bankruptcy?
This is a difficult question that requires an assessment of the company's economic damage, and its comparison with the level of total debt to creditors and current assets. Even if a company is facing bankruptcy, it can be saved by providing assistance from the government or other businesses. Answering this question, I can listen to the opinions of analysts and my intuition. Therefore, this is the most subjective facet of my decision-making system. I just have to tell myself: “Yes, this fact can lead the company to bankruptcy” or vice versa: “No, this news is bad, but it does not pose a critical threat to the business.”
So, if I answer “yes” to all three questions, then I can close a position in the shares of a particular company or not open it, guided simply by my “yes, this should be done.” The fact is that critical news comes out now, and reporting on a specific date in the future: there is a time gap between these events. Therefore, I find myself in a situation where I just need to decide and evaluate it later, in the future, based on published reports. It is similar to flying an airplane that fails during transit. The pilot may not fully understand what happened, but the choice must be made right now. If I answer “no” to any of the three questions, then I continue to use other facets of my “crystal” in standard mode, and leave the news “just for my information.”
In future publications, I will continue to elaborate on my decision-making system and share my approach to choosing the price and quantity of a stock trade.
The 9 Rules of Successful Investors The world of investing can be a daunting place, especially for beginners . With so many factors to consider and the potential for significant losses, it can be difficult to know where to start. However, there are a few basic rules that all successful investors follow. By following these rules, you can increase your chances of success and avoid costly mistakes.
1. Be prepared to lose money.
This is the first and most important rule of investing. No matter how much research you do or how experienced you are, there is always the possibility of losing money. This is why it is important to only invest money that you can afford to lose.
2. Calculate your risk before opening a trade, not during.
Before you open any trade, you should always calculate your risk. This means determining how much money you are willing to lose on the trade. You should also set a stop-loss order to automatically close the trade if it reaches a certain price level.
3. Be in a cold state of mind (without the influence of emotions).
Emotions can be a major enemy of successful investing. When you are trading, it is important to stay calm and rational. Do not let your emotions get the best of you, as this can lead to making bad decisions.
4. Open positions only in the direction of the trend.
One of the best ways to increase your chances of success in trading is to trade in the direction of the trend. This means identifying the overall trend of the market and then trading in line with that trend.
5. Keep a trading journal with a detailed description of each trade.
A trading journal is a great way to track your progress and identify areas where you can improve. In your trading journal, you should record details of each trade, such as the date, time, entry price, exit price, and profit or loss.
6. Regularly analyze your trades.
Once you have a few trades under your belt, it is important to take some time to analyze them. This will help you identify what you are doing right and what you need to improve on.
7. Constantly improve yourself.
The world of trading is constantly evolving, so it is important to keep up with the latest trends and strategies. There are many resources available to help you learn more about trading, such as books, websites, and courses.
8. Give yourself time to rest from trading.
Trading can be a stressful activity, so it is important to give yourself time to rest and recharge. Taking breaks from trading will help you stay focused and avoid making emotional decisions.
9. Profit is only what you have taken and have in your pocket (conditionally), not what the open P&L in the position shows, because it is floating and not fixed profit.
This is a reminder that profit is not real until you have taken it out of the market. Do not get too attached to your profits, as they can quickly disappear if the market moves against you.
Additional Tips for Successful Investing
In addition to the 9 rules listed above, there are a few other things you can do to increase your chances of success as an investor:
Do your research. Before you invest in any asset, it is important to do your research and understand the risks involved. This includes understanding the asset's fundamentals, as well as the overall market conditions.
Diversify your portfolio. Don't put all your eggs in one basket. By diversifying your portfolio, you can reduce your risk and increase your chances of success.
Invest for the long term. The stock market is volatile in the short term, but it has historically trended upwards over the long term.
By investing for the long term, you can ride out the short-term fluctuations and maximize your returns.
Don't panic sell. When the market takes a downturn, it is important to stay calm and avoid panic selling. Selling when the market is down will only lock in your losses. Instead, focus on the long term and ride out the storm.
By following these tips, you can increase your chances of success as an investor. However, it is important to remember that there is no guarantee of success. Even the best investors in the world lose money sometimes. The key is to learn from your mistakes and keep moving forward.
Simple management is easier on your mindhi, just wanted to share a couple of thought on management, mainly for new members.
in my eyes, there are two categories of management: simple (fixed RR) and more complex (variations of trailing).
Both have positive and negative sides.
In my eyes, as a very very subjective opinion, simple fixed RR system will be better for most people. Or ok, I'll not speak for most, but for me definitely.
Why so:
incredible simplicity, cause you just need to test to see how much your trades usually run + create b.e. rule, and you're good to go
3-5RR are usually best for fixed RR systems
do not underrestimate the energy that goes into making decisions while managing and waiting, watching for the trade to develop into higher RR's. With fixed you don't have this - you just go b.e. and then you can close the terminal, and go away if needed. However yes, advanced experienced consistent traders would trail almost with no extra emotions, cause it's usually more mechanical. With that said, for many relatevely new traders, trailing could be extra emotional.
with fixed, you'll have less chances to become emotional, because of many reasons, for me personally fixed RR system gives a sense of accomplishment on every trade, while with managing I'm constantly thinking how can I manage longer better etc. So I'm rarely satisfied when I'm getting stopped out on trail, cause I'm still "stopped out", while on fixed I have a sense of good work done. I know it's weird, but it's personal experience
I could continue, but I guess the general guideline is there.
My main message is that TP can be a very simple fixed 3 or 4RR and that would be more than enough and easier for most people's mind
have a good weekend.
Smart Money Orderflow M15 ApproachIn this context, we define an intelligent order flow, which is a convergence of flows, in this case, downwards, leading the price to create congestions, i.e., internal breaks, and then consolidation phases, i.e., external breaks, which bring the price into the demand zone, where we should consider opening a long position subsequently. The pattern is clear: demand zone on H4 after a defined structural change with the main consolidation phase, and then we expect a retest in the demand zone, where it is highly likely that the price may reverse its direction, especially when analyzing the market from an M15 perspective. I remain available for further clarifications, greetings, and happy studying to all.
Mitigation + BOS M15 Setup In this scenario, we examine a very common approach: trend continuation. The particular aspect of viewing it in this light compared to simply looking at trendlines is how we can identify demand zones and structural changes called BOS. Prices always tend to retrace in these zones before continuing. Personally, I identify demand or supply zones at H4, and once the price retraces, I look for rebounds at M15. In that timeframe, I aim to identify a structural change to the upside if I'm looking for a long position. Sometimes during an uptrend, it's very common to identify inefficiencies or FVG, which in turn support the price during retracement. Best wishes and happy trading to all.
Pullback After Breakout Entry M15 ApproachIn this model, we define an approach that I personally use a lot, namely the creation of a demand or supply zone on the H4. In this case, we are observing a demand zone. Once the zone has been plotted on the chart, we wait for a retracement on the M15, and as soon as the market shows a structural change, in this case to the upside during the three London, pre-NY, and NY sessions, always considering to have the midnight open behind us, we can enter the market. The target will be the nearest swing high level, always considering to have at least a risk/reward ratio of 1.5. Best regards and have a good day everyone.
Equal High & Low SweepToday I wanted to talk about two scenarios concerning market structure: the equal high for a bullish structure and the low sweep for a bearish structure. The crucial point of each setup, as always, is to identify a structural change called BOS. From there, I start looking for a demand or supply zone in the market where we should pay attention to observe the price return. This price return should occur as indicated in the setup, with the market starting to consolidate and form a double bottom or top of momentum. It is also important to consider the presence of a liquidity zone, as this will be our primary target zone, followed by the minimum or maximum of the structure. I wish everyone happy trading and remain available for further discussions on the matter.
The Best Entry on the MarketIn this model, we will examine a tactical approach to achieve high-performance entry. It all starts with an uptrend characterized by continuous structural changes. In fact, there are continuous directional changes until the retest of the supply zone on M30. Subsequently, the market reacts to this zone by pushing downwards and generating a CHoCH. Here, switching to a 1-minute timeframe, it will be possible to wait for a retest of the supply zone before entering. The trade will target the session or daily low. Greetings and happy trading to all.
New Approach on Forex: Inducement LowIn my analysis model, I focus on a bearish structure, where I identify the so-called "false demand zones" (SM Trap). It all starts with a supply zone, where the price begins to decline, creating a liquidity zone with a double bottom. Subsequently, the price retests the supply zone, declines again, and breaks the false demand zone, generating another one. Then, the market starts forming decreasing lows and highs, clear signals of the ongoing bearish trend. This is where I pay attention, as it constitutes a clear signal of the developing trend.
To enter the market, I prefer identifying an FVG M15, targeting weekly, daily lows, or the H4 timeframe, in line with my trading plan. I find it crucial to observe the evolution of lows and highs, as their decrease further confirms the bearish trend.
I wish everyone happy trading and success in their operations.
The Best Strategy of 2024: Reversal Entry ModelGood morning, today I would like to draw your attention to a model that I am integrating into my analyses for this year. In this model, we define simple structural changes either downwards or upwards, in this context downwards using two BOS. Subsequently, we define the main demand zone where the price retests. After the retest, the price breaks upwards the structure creating a CHOCH, or an internal breakout. Afterwards, the price will move into a lateral phase accumulating a lot of liquidity, and as it is known, as soon as the price absorbs liquidity above or below a range, it then moves in the opposite direction of the filled liquidity. In this case, liquidity is absorbed below in the order block zone and the price moves upwards. I recommend supplementing charts with this model and identifying these setups starting from an H4 timeframe which can be simpler compared to smaller timeframes. Best regards and happy trading to everyone.
The Ultimate Strategy | ChoCh + InducementThis strategy is based on identifying a market structure, which can be bullish or bearish. In this specific case, a bullish structure characterized by rising highs and lows is considered. The expectation is for the market to change direction, creating a shock. Subsequently, the formation of a liquidity block is observed during a market consolidation phase, followed by entering a demand zone where the imbalance dictates, and the response is a downward movement, as anticipated. The target of this movement is defined graphically. Greetings and happy trading to everyone.
High probability setupThis is what I'm going to be looking in the market for the next long term journey, this is a special setup based on patience, strategy and price action, high probabilities and high R:R, works better in high timeframes, we have just wait for the firt confirmation which is:
1. Shift of structure, after watching that we have to look for:
2. A good RESISTANCE/SUPPORT zone where the price is rejecting in Daily of 4H and search for a:
3. Chart pattern which can be a HEAD AND SHOULDERS OR DOUBLE BOTTOM, DOUBLE TOP..., if we have these confirmations, we can look for the last which is:
4. Candlestick pattern: in the shift of the structure which can be an engulfing, an evening/morning star or marubozu, also can be a doji with the wick for our direction
Each one of these confirmations are 22% probabilities for our strategy, after getting all them we can enter the trade, put the stop loss a bit above or below the last structure point and take a 1:3 risk reward and the most important part is:
SET THE TRADE AND FORGET, Allow the price to go where it has to go, don't change the T.P, don't change the S.L, accept the risk of the trade and take a loss if is the case or take a win if the market allows that, and continue with the plan, IT'S IMPOSSIBLE TO HAVE A 100% CHANCES, so even if you have all this confirmation, you can lose and you have to ACCEPT IT, for that:
Stick to the RISK MANAGEMENT thinking in percentage, I recommend to use a 1%-2% per trade, and that's all
BE PATIENT AND SMART, THINK IN LONG TERM
Remember: "The market is a mechanism for transferring money from the impatient to the patient"
15M Pro OrderFlow | A Unique and Profitable StrategyIn this approach, we will outline one of the best entry points on M15. The model involves quickly assessing a potential demand area by identifying a liquidity zone formed during the Fibonacci retracement at the .62-0.78 level. From this zone, the market initiates a physiological uptrend before retracing downward, creating a sharp movement with an internal break, followed by a bounce in the demand area. It is at this moment that a precise entry will be executed, aiming to reach the structure's peak. It is important to note that this model is also applicable to H1, H4, and Daily time frames. Greetings to everyone and happy trading.
SMC Sell Setup: High Probability EntryGood morning everyone, today we will explore a short entry model using the concepts of smart money. This model involves entering the market in a short position after a series of specific patterns. Firstly, we start with a bearish structure where the price breaks a significant low, creating a BOS. Subsequently, we will identify the SMC zone, which is a trap zone to avoid. In this zone, the price makes a false descent before rising, creating the most important peak that we will use to evaluate a short entry.
After identifying this peak, the market begins to decline, forming a CHOCH, representing an internal break. This will signal our sell point, and we could define our sell zone indicated by the POI on the chart. Once the price enters this zone, we may consider opening a short position on the security. Greetings to everyone.
Perfect ChoCh : Entry + SetupWith this trading model, I aim to share with the community a particularly significant approach that has revolutionized my way of operating in the markets, especially on shorter timeframes such as 1, 5, and 15 minutes. This model involves defining a clear structure before entering the market, specifically a demand zone already present in the market. A price that reaches this zone through a double structural break (BOS) before rallying and creating an internal break (ChoCh) before returning to the demand zone. Subsequently, the price will surpass the previous high, thereby defining a new demand zone. One will then await the price to reach this zone, and once there, enter the market with the aim of reaching the supply zone depicted on the chart.
5 Steps Smart Money Concept Model5 STEPS SMART MONEY CONCEPT MODEL
Break of Structure (BOS):
Definition: A Break of Structure occurs when the market provides the initial indication that the price is likely to reverse. For example, a new lower low and lower high signal a disrupted market structure, indicating a forthcoming reversal to the downside.
Trading Approach: Traders typically align their trades with the Higher Time Frame (HTF) BOS, especially when the price closes above/below a swing high/low.
Change in Character (CHOCH):
Definition: A CHOCH represents an initial shift that can signal a short- or long-term price reversal. It is considered a reversal pattern, utilized by SMC traders on higher time frames for market direction and on lower time frames for trade opportunities.
Implementation: SMC traders use CHOCHs on various time frames to gauge market direction and identify intraday reversals or reactions to Points of Interest (POIs).
Fair Value Gap (FVG):
Definition: Fair Value Gaps highlight market inefficiencies or imbalances, where buying and selling are not equal. These gaps become magnets for price, resolving the inefficiency as resting orders are filled.
Utilization: Traders use FVG information to target these gaps, identifying potential entry points for long or short positions. Fair Value Gaps are considered valuable Points of Interest (POIs) in price action trading.
2024 US Recession | Key Factors2000 DOT-COM CRISIS
The dot-com crisis, also known as the "dot-com bubble" or "dot-com crash," was a period of economic turbulence that affected the technology and telecommunications sectors in the late 1990s and early 2000s. Here are some key points:
Euphoria Phase: In the 1990s, there was a boom in the technology and dot-com industry fueled by irrational investor euphoria. Many companies secured significant funding, even if they had weak or nonexistent business models.
Excessive Valuations: Valuations of technology companies skyrocketed, often based on exaggerated growth projections and unrealistic expectations. This led to rampant speculation in financial markets.
Bubble and Collapse: In 2000, the dot-com bubble began to burst. Many investors realized that numerous technology companies were unable to generate profits in the short term. This triggered a massive sell-off of stocks and a collapse in tech stock prices.
Economic Impacts: The crisis had widespread economic impacts, with the loss of value in many technology stocks and the bankruptcy of numerous companies. Investors suffered heavy losses, and this had repercussions on the entire stock market.
Economic Lessons: The dot-com crisis led to a reassessment of investment practices and taught lessons about the importance of carefully analyzing companies' fundamentals and avoiding investments based solely on speculative expectations.
Following this crisis, the technology sector experienced a correction but also contributed to shaping the industry in a more sustainable way. Many companies that survived the crisis implemented more realistic and sustainable strategies, contributing to the subsequent growth and development of the technology sector.
2007-2008 FINANCIAL CRISIS
The 2007-2008 financial crisis was a widespread event that had a significant impact on the global economy. Here are some key points:
Origins in the Subprime Mortgage Crisis: The crisis originated in the U.S. real estate sector, particularly in subprime mortgages (high-risk). An increase in mortgage defaults led to severe losses for financial institutions holding securities tied to these loans.
Spread of Financial Problems: Losses in the mortgage sector spread globally, involving international financial institutions. Lack of transparency in complex financial products contributed to the crisis's diffusion.
Bank Failures and Government Bailouts: Several major financial institutions either failed or were on the brink of failure. Government interventions, including bailouts and nationalizations, were necessary to prevent the collapse of the financial system.
Stock Market Crashes: Global stock markets experienced significant crashes. Investors lost confidence in financial institutions, leading to a flight from risk and an economic contraction.
Impact on the Real Economy: The financial crisis directly impacted the real economy. The ensuing global recession resulted in the loss of millions of jobs, decreased industrial production, and a contraction in consumer spending.
Financial Sector Reforms: The crisis prompted a reevaluation of financial regulations. In response, many nations implemented reforms to enhance financial oversight and mitigate systemic risks.
Lessons Learned: The financial crisis underscored the need for more effective risk management, increased transparency in financial markets, and better monitoring of financial institutions.
The 2007-2008 financial crisis had a lasting impact on the approach to economic and financial policies, leading to greater awareness of systemic risks and the adoption of measures to prevent future crises.
2019 PRE COVID
In 2019, I closely observed a significant event in the financial markets: the inversion of the yield curve, with 3-month yields surpassing those at 2, 5, and 10 years. This phenomenon, known as an inverted yield curve, is generally considered an advanced signal of a potential economic recession and has often been linked to various financial crises in the past. The inversion of the yield curve occurred when short-term government bond yields, such as those at 3 months, exceeded those at long-term, like 2, 5, and 10 years. This situation raised concerns among investors and analysts, as historically, similar inversions have been followed by periods of economic contraction. Subsequently, in 2020, the COVID-19 pandemic occurred, originating in late 2019 in the city of Wuhan, Hubei province, China. The virus was identified as a new strain of coronavirus, known as SARS-CoV-2. The global spread of the virus was rapid throughout 2020, causing a worldwide pandemic. Countries worldwide implemented lockdown and social distancing measures to contain the virus's spread. The economic impact of the pandemic was significant globally, with sectors such as tourism, aviation, and hospitality particularly affected, leading to business closures and job losses. Efforts to develop a vaccine for COVID-19 were intense, and in 2020, several vaccines were approved, contributing to efforts to contain the virus's spread. In 2021, the Delta variant of the virus emerged as a highly transmissible variant, leading to new increases in cases in many regions worldwide. Subsequent variants continued to impact pandemic management. Government and health authorities' responses varied from country to country, with measures ranging from lockdowns and mass vaccinations to specific crisis management strategies. The pandemic highlighted the need for international cooperation, robust healthcare systems, and global preparedness to address future pandemics. In summary, the observation of the yield curve inversion in 2019 served as a predictive element, suggesting imminent economic challenges, and the subsequent pandemic confirmed the complexity and interconnectedness of factors influencing global economic health.
2024 Outlook
The outlook for 2024 presents significant economic challenges, outlined by a series of critical indicators. At the core of these dynamics are the interest rates, which have reached exceptionally high levels, fueling an atmosphere of uncertainty and impacting access to credit and spending by businesses and consumers. One of the primary concerns is the inversion of the yield curve, manifested between July and September 2022. This phenomenon, often associated with periods of economic recession, has heightened alarm about the stability of the economic environment. The upward break of the 3-month curve compared to the 2, 5, 10, and 30-year curves has raised questions about the future trajectory of the economy. Simultaneously, housing prices in the United States have reached historic highs, raising concerns about a potential real estate bubble. This situation prompts questions about the sustainability of the real estate market and the risks associated with a potential collapse in housing prices. Geopolitical instability further contributes to the complexity of the economic landscape. With ongoing conflicts in Russia, the Red Sea, Palestine, and escalating tensions in Taiwan, investors are compelled to assess the potential impact of these events on global economic stability. The S&P/Experian Consumer Credit Default Composite Index, showing an upward trend since December 2021, suggests an increase in financial difficulties among consumers. Similarly, the charge-off rate on credit card loans for all commercial banks, increasing since the first quarter of 2022, reflects growing financial pressure on consumers and the banking sector. In this context, it is essential to adopt a prudent approach based on a detailed analysis of economic and financial data. The ability to adapt to changing market conditions becomes crucial for individuals, businesses, and financial institutions. Continuous monitoring of the evolution of economic and geopolitical indicators will be decisive in understanding and addressing the challenges that 2024 may bring.
Forex Fundamentals: Building Winning StrategiesForex trading success hinges on a well-defined strategy, as it sets a clear direction and methodology, whether it be scalping, day trading, or another approach. Key to this is understanding the market conditions under which your strategy thrives, as different strategies perform variably across market environments. Employing technical indicators is crucial in providing insights and aiding in decision-making, but they must align with your overall strategy for coherence and effectiveness.
The core of any trading strategy lies in its entry and exit criteria. These criteria ensure disciplined and non-impulsive trading decisions, allowing for entry and exit from the market at the most opportune times. Equally vital is stringent risk management, which protects your capital by defining the risk per trade and setting maximum drawdown limits. In tandem with this, appropriate position sizing mitigates the risk of substantial losses and maintains the health of your trading account.
Backtesting the strategy against historical data is indispensable for understanding its potential effectiveness and challenges. This, followed by forward testing in real-time conditions, often in a demo environment, allows for fine-tuning and adaptation to current market dynamics. Constant adjustments and optimization of your strategy are necessary as financial markets are ever-evolving, and a static strategy is often a recipe for failure.
However, the strategy itself is only part of the equation. The psychological aspect of trading – maintaining discipline and managing emotional responses – is equally critical. Regular performance evaluations and reviews provide insights into the strategy's effectiveness and areas that require improvement, fostering a cycle of continuous learning and adaptation.
In the realm of Forex trading, patience and consistency are not just virtues but necessities. The development, implementation, and refinement of a trading strategy is a meticulous and ongoing process. Success in trading emerges from a disciplined approach, a willingness to learn continuously, and an adaptability to evolving market conditions. It's a journey where each step, from understanding market conditions to psychological resilience, plays a pivotal role in shaping a trader's path to achievement.
The best trading setup with Entry!In this model, we observe a market that begins to consolidate before a sharp decline, during which liquidity is created with an imbalance. Immediately after, there is an upward movement with rising highs and lows, forming a bullish liquidity trendline. When the price reaches a point where it starts to consolidate, dual liquidity is generated on the buy side in the upper part of the consolidation. Subsequently, a false upward movement occurs, during which the price gains liquidity from the previous order block created by the initial sharp decline. This creates an excellent opportunity to enter a short position, with the aim of reaching the minimum of the main decline. Updates will be provided with an example applied in a real case study. Greetings and happy trading to everyone from Nicola.