7 Expert Risk Management Techniques for TradingRisk management refers to the techniques used to identify, evaluate, and mitigate the potential risks associated with trading and investing. Whether you are a day trader, swing trader, or scalper, effective risk management can help you minimize losses and protect your hard earned money all while maximizing potential profits.
Let's take a look at the top 7 risk management techniques for trading! 👌
Have a Trading Plan
Many traders jump into the market without a thorough understanding of how it works and what it takes to be successful. You should have a detailed trading plan in place before making any trades. A well-designed trading plan is an essential tool for effective risk management.
A trading plan acts as a roadmap, laying out a set of guidelines/rules that can help traders avoid impulsive decisions. It is crucial because it requires you to think deeply about your approach before you begin risking real money. Having a plan can help you stay calm under stress as your plan will have specific steps to take for anything the market throws at you.
It is essential to clearly define your trading goals and objectives. Are you aiming for short-term gains or long-term wealth generation? Are you focused on a specific asset class or trading strategy? Setting specific and measurable goals helps you stay focused and evaluate your progress.
Another important part is to describe the trading strategy you will employ to enter and exit trades. This includes the types of analysis you will employ (technical, fundamental, or a combination), indicators or patterns you will rely on, and any specific rules for trade execution. Determine your risk tolerance, set appropriate position sizing rules, and establish stop-loss levels to limit potential losses.
The Risk/reward ratio
When you are planning to open a trade, you should analyze beforehand how much money you are risking in that particular trade and what the expected positive outcome is. Here is a useful chart with some examples to understand this concept:
As you can see from the data above, a trader with a higher RR (risk-reward ratio) and a low win rate can still be profitable.
Let’s examine this a little more by looking at a profitable example with a 20% success rate, a RR ratio of 1:5, and capital of $500. In this example, you would have 1 winning trade with a profit of $500. The losses on the other 4 trades would be a total of $400. So the profit would be $100.
An unprofitable RR ratio would be to risk, for example, $500 with a success rate of 20% and a risk/reward ratio of 1:1. That is, only 1 out of 5 trades would be successful. So you would make $100 in 1 winning trade but in the other 4 you would have lost a total of -$400.
As a trader, you need to find the perfect balance between how much money you’re willing to risk, the profits you’ll attempt to make, and the losses you’ll accept. This is not an easy task, but it is the foundation of risk management and the Long & Short Position Tools are essential.
You can use our 'Long Position' and 'Short Position' drawing tools in the Forecasting and measurement tools to determine this ratio.
Stop Loss/Take Profit orders
Stop Loss and Take Profit work differently depending on whether you are a day trader, swing trader or long term trader and the type of asset. The most important thing is not to deviate from your strategy as long as you have a good trading strategy. For example, one of the biggest mistakes here is to change your stop loss thinking that the losses will recover... and often they never do. The same thing happens with take profits, you may see that the asset is "going to the moon" and you decide to modify your take profit, but the thing about markets is that there are moments of overvaluation and then the price moves sharply against the last trend.
There is an alternative strategy to this, which is to use exit partials, that is closing half of your position in order to reduce the risk of your losses, or to take some profits during an outstanding run. Also remember that each asset has a different volatility, so while a stop loss of -3% is normal for a swing trading move in one asset, in other more volatile assets the stop loss would be -10%. You do not want to get caught in the middle of a regular price movement.
Finally, you can use a trailing stop, which essentially secures some profits while still having the potential to capture better performance.
Trade with TP, SL and Trailing Stop
Selection of Assets and Time intervals
Choosing the right assets involves careful consideration of various factors such as accessibility, liquidity, volatility, correlation, and your preference in terms of time zones and expertise. Each asset possesses distinct characteristics and behaviors, and understanding these nuances is vital. It is essential to conduct thorough research and analysis to identify assets that align with your trading strategy and risk appetite.
Equally important is selecting the appropriate time intervals for your trading. Time intervals refer to the duration of your trades, which can span from short-term intraday trades to long-term investments. Each time interval has its own advantages and disadvantages, depending on your trading style and objectives.
Shorter time intervals, such as minutes or hours, are often associated with more frequent trades and higher volatility. Traders who prefer these intervals are typically looking to capitalize on short-term price fluctuations and execute quick trades. Conversely, longer time intervals, such as days, weeks, or months, prove more suitable for investors and swing traders aiming to capture broader market trends and significant price movements.
Take into account factors such as your time availability for trading, risk tolerance, and preferred analysis methods. Technical traders often utilize shorter time intervals, focusing on charts, indicators, and patterns, while fundamental investors may opt for longer intervals to account for macroeconomic trends and company fundamentals.
For example, If you are a swing trader with a low knack for volatility, then you can trade in assets such as stocks or Gold and ditch highly volatile assets such as crypto.
Remember that there is no one-size-fits-all approach, and your choices should align with your trading style, goals, and risk management strategy.
Here is a chart of Tesla from the perspective of a day trader, a swing trader, and an investor:
Backtesting
Backtesting plays a crucial role in risk management by enabling traders to assess the effectiveness of their trading strategies using historical market data. It involves the application of predefined rules and indicators to past price data, allowing traders to simulate how their trading strategies would have performed in the past.
During the backtesting process, traders analyze various performance metrics of their strategies, such as profitability, risk-adjusted returns, drawdowns, and win rates. This analysis helps identify the strengths and weaknesses of the strategies, allowing traders to refine them and make necessary adjustments based on the insights gained from the backtesting results.
The primary objective of backtesting is to evaluate the profitability and feasibility of a trading strategy before implementing it in live market conditions. By utilizing historical data, traders can gain valuable insights into the potential risks and rewards associated with their strategies, enabling them to manage their risk accordingly.
However, it's important to note the limitations of backtesting. While historical data provides valuable information, it cannot guarantee future performance, as market conditions are subject to change. Market dynamics, liquidity, and unforeseen events can significantly impact the actual performance of a strategy.
There are plenty of ways to backtest a strategy. You can run a manual test using Bar Replay to trade historical market events or Paper Trading to trade real examples. Those with coding skills can create a strategy using Pine Script and run automated tests on TradingView.
Here is an example of the Moving Averages Crossover strategy using Pine Script:
Margin allocation
We are not fortune tellers, so we cannot predict how assets will be affected by sudden major events. If the worst happens to us and we have all of our capital in a particular trade, the game is over. There are classic rules such as the maximum allocation percentage of 1% per trade (e.g. in a $20,000 portfolio this means that it cannot be risked +$200 per trade). This can vary depending on your trading strategy, but it will definitely help you manage the risk in your portfolio.
Diversification and hedging
It is very important not to put all your eggs in one basket. Something you learn over the years in the financial markets is that the unexpected can always happen. Yes, you can make +1000% in one particular trade, but then you can lose everything in the next trade. One way to avoid the cold sweats of panic is to diversify and hedge. Some stock traders buy commodities that are negatively correlated with stocks, others have a portfolio of +30 stocks from different sectors with bonds and hedge their stocks during downtrends, others buy an ETF of the S&P 500 and the top 10 market cap cryptos... There are unlimited possible combinations when diversifying your portfolio. At the end of the day, the most important thing to understand is that you need to protect your capital and using the assets available to you a trader can hedge and/or diversify to avoid letting one trade ruin an entire portfolio.
Thank you for reading this idea on risk management! We hope it helps new traders plan and prepare for the long run. If you're an expert trader, we hope this was a reminder about the basics. Join the conversation and leave your comments below with your favorite risk management technique! 🙌
- TradingView Team
TradingView Tips
Stock Heatmap: The Ultimate Guide for Beginners (2023)How to use the Stock Heatmap on TradingView to find new investment opportunities across global equity markets including US stocks, European stocks, and more.
Step 1 - Open the Stock Heatmap
Click on the "Products" section, located at the top center when you open the platform. Then click on "Screeners" and “Stock” under the Heatmap section. Members who use the TradingView app on PC or Mac can also click on the "+" symbol at the top of the screen and then on "Heatmap - stocks".
Step 2 - Create a Heatmap with specific stocks
Once the Heatmap is open, you have the capabilities to create a Heatmap based on a number of different global equity markets including S&P 500, Nasdaq 100, European Union stocks, and more. To load these indices, you must click on the name of the current selected index, located at the top left corner of the screen. In this example, we have the S&P 500 heatmap loaded, but you can load any index of your choice by opening the search menu and looking for the index of your choice.
Step 3 - Customize the Stock Heatmap
Traders can configure their Heatmap to create highly custom visualizations that’ll help discover new stocks, insights, and data. In this section, we’ll show you how to do that. Keep on reading!
The SIZE BY: Button changes the way companies are sized on the chart. If we click on "Market Cap" in the top left corner of the Heatmap, we can see the different ways to configure the heatmap and how the stocks are sized. By default, "Market Cap" is selected with the companies, which means a company with a larger market capitalization will appear bigger than companies with smaller market capitalizations. Let’s look into the other options available!
Number of employees: It measures the size of the squares based on the number of employees in the company. The larger the square size, the more employees it has relative to the rest of the companies. For example, in the S&P 500, Walmart has the largest size with 2.3 million employees. If we compare it to McDonalds, which has 200,000 employees, we can see that Walmart's square size is 11 times larger than McDonalds. This data is usually updated on an annual basis.
Dividend Yield, %: If you choose this option, you will have the size of the squares arranged according to the annual percentage dividend offered by the companies. The higher the dividend, the larger the size of the square. It is important to note that companies with no dividend will not appear in the heatmap when you have chosen to arrange the size by Dividend Yield, %.
Price to earnings ratio (P/E): It is a calculation that divides the share price with the net profit divided by the number of shares of the company. Normally the P/E of a company is compared with others in its own sector, i.e. its competitors, and is used to find undervalued investment opportunities or, on the contrary, to see companies that are overvalued in the market. Oftentimes a high P/E ratios indicate that the market reflects good future expectations for these companies and, conversely, low P/E ratios indicate low growth expectations. Going back to heatmaps, it will give a larger square size to those companies with higher P/E ratio over the last 12 months. Companies that are in losses will not appear in the heatmap as they have an undetermined P/E.
Price to sale ratio: The P/S compares the price of a company's shares with its revenue. It is an indicator of the value that the financial markets have placed on a company's earnings. It is calculated by dividing the share price by sales per share. A low ratio usually indicates that the company is undervalued, while a high ratio indicates that it is overvalued. This indicator is compared, like the P/E ratio, to companies in the same sector and is also measured over the most recent fiscal year. A high P/S indicates higher earnings expectations for the company and therefore could also be considered overvalued, and vice versa, companies with a lower P/S than their competitors could be considered undervalued.
Price to book ratio: The P/B value measures the stock price divided by the book value of its assets, although it does not count elements such as intellectual property, brand value or patents. A value of 1 indicates that the share price is in line with the value of the company. High values indicate an overvaluation of the company and below, oversold. Again, as in the P/E and P/S Ratio, it is recommended to compare them with companies of the same sector. Regarding the heatmaps, organizing the size of the squares by P/B gives greater size to companies with high values and it is measured by the most recent fiscal year.
Volume (1h, 4h, D, S, M): This measures the number of shares traded according to the chosen time interval. Within the heatmaps comes by default the daily volume, but you can choose another one depending on whether your strategy is intraday, swing trading or long term. It is important to note that companies with a large number of shares outstanding will get a higher trading volume on a regular basis.
Volume*Price (1h, 4h, D, S, M): Volume by price adjusts the volume to the share price, i.e. multiplying its volume by the current share price. It is a more reliable indicator than volume as some small-cap stocks or penny stocks with a large number of shares would not appear in the list among those with the highest traded volume. Also available in 1-hour, 4-hour, daily, weekly and monthly time intervals.
COLOR BY:
In this area we will be able to configure how individual stocks are colored on the Heatmap. If you’re wondering why some stocks are more red or green than others, don’t fret, as we’ll show you how it works. For example, click on the top left of the Heatmap where it says "Performance D, %" and you’ll see the following options:
Performance 1h/4h/D/S/M/3M/6M/YTD/Year (Y), %: This option is the most commonly used, where we choose the intensity of the colors based on the performance change per hour, 4 hours, daily, weekly, monthly, in 3 or 6 months, in the current year, and in the last 12 months (Y). Tip: this feature works in unison with the heat multiplier located at the top right of the Heatmap. By default, x1 comes with 3 intensity levels for both stocks in positive and negative, as well as one in gray for stocks that do not show a significant change in price. This takes as a reference values below -3%/-2%/-1% for stocks in negative or above +1%/+2%/+3% for stocks in positive and each of the levels can be turned on or off independently.
As for how to configure this parameter, you can use the following settings according to the chosen intervals. For 1h/4h intervals, multipliers of: x0.1/x0.2/x0.25/x0.5 are recommended.
For daily heat maps, the default multiplier would be x1. And finally, for weekly, monthly, 3 or 6 months and yearly intervals, it is recommended to increase the multiplier to x2/x3/x5/x10.
Pre-market/post-market change, %: When this option is selected, you can monitor the changes before the market opens and the after hours trading (this feature is not available in all countries). For example, if we select the Nasdaq 100 pre-market session change, we will see the day's movements between 4 a.m. and 9:30 a.m. (EST time zone). Or, if we prefer to analyze the Nasdaq 100 post-market, we will have to choose that option; this would cover the 4 p.m. to 8 p.m. time zone. For heatmaps in after-hours trading we recommend using very low heat multipliers (x0.1; x0.2; x0.25; x0.5).
Relative volume: This indicator measures the current trading volume compared to the trading volume in the past during a given period and it measures the level of activity of a stock. When a stock is traded more than usual, its relative volume increases. Consequently, liquidity increases, spreads are usually reduced, there are usually levels where buyers and sellers are fighting intensely and where an important trend can occur. The possible strategies are diverse. There are traders who prefer to enter the stock at very high relative volume peaks, and others who prefer to enter at low peaks, where movements tend to be less parabolic in the short term. In the stock heatmap, relative volume is identified in blue colors. Heat multipliers of x1, x2 or x3 are usually the most common for analyzing the relative volume of stocks. Let's do an example: Imagine that we want to see the most unusual movements in today's Nasdaq 100 after the market close. We select the color by Relative Volume and apply a default heat multiplier of x1. Then, in order to be able to see only those stocks that stand out the most, we uncheck the numbers 0; 0.5; 1 at the top right of the screen. After this, we will have reduced the number of stocks to a smaller group, where we will be able to see chart by chart what has happened in them and if there is an interesting opportunity for trading.
Volatility D, %: It measures the amount of uncertainty, risk and fluctuation of changes during the day, i.e., the frequency and intensity with which the price of an asset changes. A stock is usually referred to as volatile when it represents a very high volatility compared to the rest of the chosen index. Volatility is usually synonymous with risk, since the price fluctuation is greater. For example, we want to invest in a stock with dividends on the US market, but we are somewhat averse to risk. To do so, we decide to look for a stock with a high dividend yield with low volatility. We select the index source "S&P 500 Index", then size by "Dividend yield, %" and color by "Volatility D, %". Now, we deactivate the heat intensity levels higher than 2%, but higher than 0% (those that do not suffer movement, usually have low liquidity). From the list obtained, we would analyze the charts of the 10 companies that offer us the best dividend.
Gap, %: This option measures the percentage gap between the previous day's closing candle and the current day's opening candle, i.e. the difference in percentage from when the market closes to when it opens again.
GROUP BY:
Here you can enable or disable the group mode. By default all stocks are grouped by sector, but if you select ‘No group’, you will see the whole list of companies in the selected index as if it were a single sector. It is ideal for viewing opportunities at a general level, you can sort directly by dividend percentage and see the companies in the index with the best dividend from highest to lowest or, for example, the best yielding stocks by market capitalization size.
Another important note is that when you have chosen to group stocks by sector, you can zoom in on a specific sector by clicking on the sector name. Doing so, you will be able to analyze the assets of that sector in more depth.
TOGGLE MONO SIZE:
Here you can split all the stocks in the selected index completely equally in size, while still respecting the order of the chosen configuration. That is, if we have toggled the mono size by market cap, all the stocks will have the same square size with the first ones being the ones with the largest capitalization, from largest to smallest.
FILTERS:
One of the most interesting settings, where it allows you to filter certain data to eliminate "noise" and have a selection of interesting stocks according to the chosen criteria. It is important to note that in filters we can see in each of the parameters where most of the stocks are located by vertical lines of blue color. It is especially useful in indexes where all stocks of a certain country are included, for example, the index of all US companies. Making a good filter will help you find companies in a heatmap with very specific criteria. The parameters are the same as those found in the SIZE BY section, i.e. market cap, number of employees, dividend yield, price to earnings ratio, price to sales ratio, price to book ratio, and volume (1h/4h/D/W/M).
Primary listing: When you work on an index with stocks that may be, for example, from another country or not traded within the main market, they will be categorized outside the primary listing.
STYLE SETTINGS:
Here you can change the content of the inner part of the heatmap squares:
Title: The company symbol or ticker (e.g., AAPL - Apple Inc.).
Logo: The company logo.
First value: Shows you the value you have chosen in the COLOR BY section (performance 1h/4h/D/S/3M/6M/YTD/Y, pre-market and post-market change, relative volume, volatility D, and gap).
Second value: You can choose between the current price of the asset or its market cap.
These values are also available when you hover your mouse over one of the stocks and hold it over its square for a few seconds.
SHARE:
On TradingView, we can easily share our trading analysis and our heatmaps! You can download your Heatmap as images or you can copy the link to share it across social networks like Facebook,Twitter, and more.
If you made it this far, thanks for reading! We look forward to seeing how you master the Heatmap and all it has to offer. We also want to hear your feedback!
Leave us your comments below! 👇
- TradingView Team
How To Follow Market News Like a ProAs a member of TradingView, you have access to more than 100 news providers. Our excellent news providers cover every asset class. Learning how to manage market news is an important informational edge that takes time and practice - always know the latest stories about your favorite symbols and be in the know about what traders are talking about.
In this post, we want to share a few tips for managing your news flow. 🗞️🎯
Before we get started, let us remind everyone how we recently enhanced our news by giving our members access to one of the world's preeminent news organizations - Dow Jones Newswire including the Wall Street Journal, Marketwatch, Barron's, Dow Jones Commodity Trader, and more.
Where To Find News On TradingView 📰
To get started with news, first make sure you're logged into your account. Once you're logged in, there are several ways to access news. Let's take a look at each method.
- Symbol pages have dedicated news sections that cover that symbol in great detail. For example, here's every important story about Apple and here's the latest breaking news about Tesla . Go to any symbol page of your choice, click News, and start reading.
- Check out our global news flow page that brings all of our sources to one place. Once you've arrived, filter by the asset class of your choice.
- Our corporate news page brings insider buying & selling, company press releases, and official financial filings all to one page. As an equity trader or investor, this page will keep you updated about key events happening in the corporate world.
How To Find News On The Chart 📈
News can also be accessed directly from the chart. As everyone knows, breaking news can impact markets in a variety of ways. Open the chart and watch price, volume, and news all at once. This is an effective combination of tools that combines the biggest headlines with real trading activity. Here's how to get started:
- Open your watchlist, select a symbol, and then look for the latest news headline as demonstrated in the image below. Click the headline to open a dedicated news feed for that symbol. And just like that you'll have markets news and the chart open at once:
- Another way to add news to your chart is to open the Settings menu, click Events, and then check the box that says "Latest news." This box will display the latest market news directly on the chart you have open. Follow the instructions shown on the image below to get started.
Go Deeper With Specific News For Your Needs 🌐
Depending on your style of trading or desired asset class, there are additional news resources for you to harness. Check out the list below for more pages where market news can be found:
- Bond market news
- Futures market news
- Global market news
Read News From Anywhere With Our App 📱
The official TradingView mobile app for iOS and Android is free to download and market news is available to all members. Once downloaded, you can follow global market news or news about your favorite symbols. The app allows you to sort by top stories, asset class, and the world economy.
If you still don't have our app, get it here!
Thanks for reading!
We hope this post helps you become a market master for following the latest news. Please let us know if you have any questions or comments.
5 Tips For Managing Losing Trades (It Happens To Everyone)Losing trades happen. They are apart of the journey. There is simply no such thing as a trader or investor who wins all the time. All the famous investors or traders you know have LOST many times in their career. It is perfectly normal. Did you know the famed hedge fund manager Ray Dalio lost everything in his 30s? He went broke. He had to start over from scratch.
This post will address what losing trades really mean and how to deal with it.
Before we begin, let us state the obvious:
- Be careful of people who claim they don't lose.
- Avoid people who flaunt win rates or success rates that are simply not possible.
- Losing trades happen to everyone! You are not alone.
Now, let's talk about what bad trades mean and 5 tips for managing them:
Number 1: A losing trade is different from a bad trade
The most experienced traders are well aware of their risk before they ever place a trade. Each losing trade is a small component of a bigger process that relates to a system, plan or strategy that has been thoroughly tested and studied. A losing trade is a calculated event for experienced traders. They defined their risk, position size, stop loss, and profit target. 🎯
A bad trade is very different. A bad trade implies someone risked their hard earned money with no plan or process. A bad trade is reckless and indiscriminate trading. This often happens to new investors or traders who do not yet understand the time, studying, and research that goes into making a rock solid plan. Be sure to remember the difference between a calculated losing trade and a bad trade with no plan or process.
TradingView Tip: there are several ways to get started with a plan, system or process. Paper trading, backtesting and/or working with proficient traders who give valuable feedback are all ways to get started. Don't risk your money without first doing research.
Number 2: Every losing trade provides data to get better
As we've mentioned several times now, losing trades happen to everyone. But remember, losing trades are also filled with insightful information and data. You can learn a lot from analyzing losing trades. 🔍
At the end of each trading day, week or month, experienced traders will analyze their losing trades in detail. What patterns are appearing? What do they share in common? Why did they happen? With this information, a trader or investor can adjust their strategy based on what they've uncovered.
Number 3: Do not let losing trades impact your health
Your mental and physical health are just as important as your financial health. Do not let losing trades impact either of those.
If your system is breaking down or several losing trades are starting to impact your emotions, step away from the computer or phone. Turn everything off and walk away. The markets have been open for hundreds of years and are not going away. When you're ready to come back, they'll be there.
Get up, get some fresh air, and get back in the arena when you're ready.
Number 4: Share your experiences with others
Traders and investors across the globe want to learn from your stories and losing trades. These are invaluable experiences that we all share in common. Social networks allow you to chat, share, and meet people who are going through similar things. We can all learn from each other.
Sure, the temptation to share your winners or act like the best trader who ever existed is tempting 😜 - but it's clear we learn together and get better when we share lessons from the loses. This is where the deepest insights are found, and together, it's where we can grow as a community of traders all trying to outperform the market.
Share and ask for constructive feedback!
Number 5: Keep Going
Markets are a game of learning, relearning, and progressing forward. New themes, trends, and stories appear and disappear daily. The journey is long and it never stops. When implementing your trading plan or investing plan, it's important to do it with the long-term in mind. One or two losing trades in a single day or week is a small fraction of what's to come many months and years down the road. 🌎
Keep going. Keep building. Keep refining your plan. Study the data.
We hope you enjoyed this post!
We hope you learned something new or informative!
Please leave any comments below and our team will read them.
- TradingView ❤️
5 Things To Remember About Bull MarketsHey everyone! 👋
Bull markets are a time of optimism and growth, and they can be a great opportunity for making substantial gains. However, it's important to remember that bull markets don't last forever, and it's crucial to approach them with a healthy dose of caution while keeping your eye on your long-term goals. 🙂
Here are a few things to keep in mind when trading and investing in bull markets:
🚨 Don't get caught up in the speculative frenzy
It's important to remain level-headed and avoid making impulsive decisions based on short-term gains. Take time to thoroughly research any trades you're considering. It’s always good to focus on ideas with strong fundamentals as well as technicals.
📚 Keep an eye on valuations
In a bull market, it's common for prices to rise, sometimes to levels that may not be justified by a the underlying fundamentals. For investors, it can be important to keep an eye on supply and demand, valuation, and more to make sure the assets you're positioned in are reasonably priced.
🔔 Be prepared for reversals
Like all good things, the Bull markets too eventually come to an end. Hence, it's essential to be prepared for a downturn. It’s always good to manage risk exposure by employing techniques such as diversification, hedging and more.
💸 Control your risk
It's natural to want to hold on to the positions that are performing well, but it's important to remember that bull markets eventually come to an end.
If you've made substantial gains, trailing may be a good option to lock in profits should things change quickly. Letting the winners ride by continually trailing your positions is a particularly good strategy for improving a trade’s Risk-Reward ratio.
📈 Keep a long-term perspective
Trading is a marathon, not a sprint. Bull markets can be a great opportunity for gains, but it's important to keep a long-term perspective about your goals. Did you miss the big moves? Don’t get angry and make bad decisions. There will be more opportunities down the road to apply what you’ve learned.
Bull markets can provide excellent opportunities, however, they must be approached with caution and with defined personal goals. Consider the risks and rewards of each investment, keep an eye on valuations, and always be prepared for a downturn.
We hope you enjoyed this post! Please feel free to write any additional tips or pieces of advice in the comments section below.
– Team TradingView ❤️
The Top 10 Trades of 2022 🥳Hey everyone! 👋
This week, we're counting down the top 10 trades from a tumultuous 2022. In what was a historic bear market in almost all global asset classes - stocks, crypto, bonds, and just about everything else was down - the majority of these trades are on the short side.
Energy was one of the few sectors that actually had a good year. Another outperformer was the US Dollar. Let’s recap it all below including charts you have to see, stats about each trade, and key takeaways heading into 2023.
1.) Short Luna
When UST - the flawed stablecoin at the center of the Terra ecosystem - depegged in May this year, it led to a $60 billion wipe out and the complete collapse of one of the largest hedge funds in the crypto space: 3 Arrows Capital. Luna, the Layer 1 token at the center of the ecosystem ended up dropping from $86 to ~$0 in just under a week. This event had contagion effects that affected the whole industry, and led to hundreds of high profile bankruptcies, insolvencies, suspended withdrawals, and more.
CHART:
2.) Long ExxonMobil
ExxonMobil and other major oil companies benefited from higher oil prices in 2022, as chronic global underinvestment in extraction & processing facilities in the last few years led to a spike in prices as post-pandemic demand for energy recovered more quickly than many expected. The sanctions on Russia earlier this year have also exacerbated global supply shortages and led to soaring profits for ExxonMobil and its peers.
CHART:
3.) Long U.S. Dollars
The dollar saw one of its strongest years ever as the Fed was the first major central bank to begin tackling the pesky problem of persistent inflation. As the federal funds rate was hiked over the course of 2022, USD interest rates became more and more attractive vs. global counterparts, leading to a massive shift in global capital, and massive outperformance for USD holders.
USD/JPY CHART #1:
EUR/USD CHART #2:
GBP/USD CHART #3:
4.) Short FTT
FTT investors have had a rough year. Throughout most of 2022, the general crypto malaise hurt the token as reduced trading volumes and profits from FTX led to lower buy-and-burn numbers. Then, in early November, whispers began that FTX wouldn’t be able to back withdrawals for users. Over the course of the next week and a half, FTT dropped over 90% as it became clear that FTX had loaned out user deposits to other SBF related ventures, using FTT (its own token) to backstop user funds. As the price fell, the house of cards came tumbling down, rendering FTT ostensibly worthless.
CHART:
5.) Short ARKK
As monetary tightening continued throughout 2022, many growth stocks got hit as the present value of their future profits shrank inversely with increasing risk-free interest rates. This was doubly true for high growth companies that had no profits to speak of, like many of the holdings found within Cathie Wood’s flagship ARKK Innovation ETF. Her fund, famous for its early bet on Tesla and massive outperformance in 2020 and 2021, is currently sitting down over 60% on the year.
CHART:
6.) Long Natural Gas
Natural Gas has seen a similar supply and demand situation to oil, which was discussed earlier. Heightened demand coupled with stable supply led to gains for the commodity early in the year. However, with the advent of conflict in Ukraine and sanctions on Russia, shortages, especially in Europe, led to skyrocketing prices as members of the EU scrambled to figure out how they were going to provide energy to their citizens in the coming winter. The Nord Stream 2 pipeline shutdown and explosion also put further stress on supplies.
CHART:
7.) Short Meta
Meta, formerly known as Facebook, has had a transformational year. Late in 2021 the company announced its rebrand to Meta, meant to underscore its business shift to Augmented and Virtual Reality. This new focus meant billions of dollars into R&D, and an uphill fight convincing the public that the Metaverse really is the next big thing. Investors haven’t taken the news well, dumping the stock from more than $300 per share, to, at its lows, $88. Also hurting performance; declining user numbers for its legacy products, and rising interest rates.
CHART:
8.) Short Treasuries / Long Yield
As the Fed continued to raise rates in 2022, government bond yields rose in kind. And, as bond yields rise, bond prices fall. TLT, one of the biggest ETFs for long-dated government bonds, is down more than 28% on the year so far, underscoring one of the worst years for bonds on record.
2 YEAR RATES CHART:
TLT CHART:
9.) Short Coinbase
Coinbase IPO’d in April of 2021 at around $380 a share, making the premiere U.S.-based crypto exchange one of the most valuable financial companies in the world. Fast forward to 2022, and it’s been a completely different story. Crypto’s total market cap topped in November of 2021 as the Federal Reserve began hiking interest rates, and 2022 has been nothing short of disastrous for the asset class. The biggest crypto assets - Bitcoin and Ethereum - are sitting down more than 60% on the year, and the high trading volumes that defined the speculative frenzy in 2021 are nowhere to be seen. Not to mention the Luna & FTX blowups which had far reaching consequences across the ecosystem. Coinbase is still kicking, but with a stock that’s down more than 80% on the year.
CHART:
10.) Short Beyond Meat
Shares in Beyond Meat had a rough 2022, sitting down nearly 80% on the year. The fake meat behemoth’s losses have widened, and investors have questioned the basic unit economics of the company. As a result, the big brand’s market cap has suffered.
CHART:
And there you have it! The top 10 trades from this crazy and historical year. Did you manage to join in on any of these? Think we missed any? Let us know below in the comments.
Here's to a healthy, happy, prosperous 2023!
- Team TradingView ❤️❤️❤️
Introducing Minds! 5 Things you need to know.Social media has evolved to become an essential tool for traders and investors. Staying up to date with market narratives, sharing and reading top ideas, and directly collaborating with others all serve to make the medium an extremely important part of the research process. That’s why today we’re thrilled to announce the next step in that evolution - Minds!
In today’s post, we’re going to highlight a few ways to use Minds to improve the way you follow, share, and chat about your favorite symbols. After all, in markets, information is everything and this is another tool to build into your workflow:
1.) Think of Minds as a feed created by your peers – full of their opinions, notes, and shared news topics, all relevant to whatever ticker you’re currently looking at.
2.) Minds can be used to quickly measure the general sentiment for any symbol. Ask yourself what people are talking about and if it’s bullish or bearish.
3.) Accessible from any symbol page, or from the right rail (with the thought bubble icon), this unique format allows you to chat with other members of the community alongside your chart. Watch the chart and social conversation at the same time.
4.) Want feedback about a specific symbol? Head to the Minds feed for that symbol and share your questions or comments . Other traders will eventually see your posts on the Minds feed. They can then comment, upvote and downvote to let you know what their initial reaction is. This feedback can be used to improve your understanding of a symbol.
5.) Minds can be used to quickly catch up on all the news about your favorite symbols. Head to a Minds feed and examine what people are saying. Is there breaking news? Links? Charts? Something else? Over time these feeds will become essential newsfeeds for you.
Minds is currently in beta, so please send us any feedback you have! Know that we are working diligently to improve it.
Finally - while Minds is open to all users to read, follow, and vote, only paying members (Pro, Pro+, and Premium) can currently post to the Minds feed and leave comments, similar to the other social tools on our site.
Let us know how you like it, and get out there and post your first Mind today!
Happy Holidays! 😎🌲
-Team TradingView ❤️❤️
ADX: How to use this under-the-radar tool.Hey everyone! 👋👋
In this video, we're taking a look at the ADX Indicator. We break down how it works, how to interpret its output, common uses for it, and ways that it can help you find and screen for opportunities you like.
Feel free to drop some questions below in the comments!
Remember - nothing in this video constitutes advice, our only goal is to educate you about the markets and how to use our platform more broadly.
Cheers!
-Team TradingView ❤️❤️
Check out more information about the ADX in our help center here .
10 reasons most traders lose moneyHey everyone!👋
Trading & investing is not easy. If it were, everyone would be rich.
Here’s a couple time-honored reasons that traders lose money, and some tips to help you get back to basics.
Lack of knowledge 📘
Many traders jump into the market without a thorough understanding of how it works and what it takes to be successful. As a result, they make costly mistakes and quickly lose money.
Poor risk management 🚨
Risk is an inherent part of trading, and it's important to manage it effectively in order to protect your capital and maximize your chances of success. However, many traders don't have a clear risk management strategy in place, and as a result, they are more vulnerable to outsized losses.
Emotional decision-making 😞
It's easy to feel strong emotions while trading. However, making decisions based on emotions rather than rational analysis can be a recipe for disaster. Many traders make poor decisions when they are feeling overwhelmed, greedy, or fearful and this can lead to significant losses.
Lack of discipline 🧘♂️
Successful trading requires discipline, but many traders struggle to stick to their plan. This can be especially challenging when the market is volatile or when a trader is going through a drawdown. Create a system for yourself that's easy to stay compliant with!
Over-trading 📊
Many traders make the mistake of over-trading, which means they take on too many trades and don't allow their trades to play out properly. This leads to increased risk, higher brokerage costs, and a greater likelihood of making losses. Clearly articulating setups you like can help separate good opportunities from the chaff.
Lack of a trading plan 📝
A trading plan provides a clear set of rules and guidelines to follow when taking trades. Without a plan, traders may make impulsive decisions, which can be dangerous and often lead to losses.
Not keeping up with important data and information ⏰
The market and its common narratives are constantly evolving, and it's important for traders to stay up-to-date with the latest developments in order to make informed decisions.
Not cutting losses quickly ✂️
No trader can avoid making losses completely, but the key is to minimize their impact on your account. One of the best ways to do this is to cut your losses quickly when a trade goes against you. However, many traders hold onto losing trades for too long, hoping that they will recover, and this can lead to larger than expected losses.
Not maximizing winners 💸
Just as it's important to cut your losses quickly, it's also important to maximize your winners. Many traders fail to do this, either because they don’t have a plan in place, telling them when and how to exit a trade. As a result, they may leave money on the table and miss out on potential profits.
Not Adapting 📚
Adapting to changing market conditions is paramount to success in the financial markets. Regimes change, trading edge disappears and reappears, and the systems underpinning everything are constantly in flux. One day a trading strategy is producing consistent profits, the next, it isn't. Traders need to adapt in order to make money over the long term, or they risk getting phased out of the market.
Overall, the majority of traders make losses because they fail to prepare for the challenges of the market. By educating themselves, developing a solid trading plan, and planning out decisions beforehand, traders can improve their chances of success and avoid common pitfalls.
We hope you enjoyed! Please feel free to write any additional tips or pieces of advice in the comments section below!
See you all next week. 🙂
– Team TradingView
Alerts: 3 reasons they can make you a better traderHey Everyone! 👋
We hope you’re enjoying Black Friday week and have helped yourself to some of the great discounts we are offering. We only do this once a year, so it really is the best time to get a plan!
Now, let’s jump into today’s topic: Alerts .
While alerts have a ton of potential applications when it comes to trading, they are often underutilized because it can take some time and ingenuity to build a system where they can work well. Let's take a look at some reasons that that investment is well worth it .
1. They can help build good habits 💪
Stop us if this sounds familiar: you hear an awesome investment story, and then immediately go out in the market and purchase the asset, with no plan in place.
While this can work, it’s not a great strategy for long term success, because in reality it can be extremely hard to sit in that position without a plan and trade it efficiently. You may choose to exit the position based on nothing more than momentary greed or fear, and moves like that can prevent consistency and long-term profitability.
Alerts are great because they can take out the guesswork of entering and exiting a position. Simply set alerts for the prices you would like, then place a trade if, and only if, the conditions are met. Then, let the market do its thing and let the probabilities work in your favor.
Alerts can turn the experience of trading from a constant search for ideas - and always feeling behind - into a relaxing job of waiting for your own pre-approved conditions to trigger before taking action. In short, alerts can make you much more well prepared for the market’s ups and downs.
2. They increase freedom and reduce anxiety 🧘
There is a well-known maxim in trading and in life that states that negative emotions are felt twice as strongly as positive emotions. This factoid has lots of applications, but it can be especially useful to understand as a trader.
Consider the following investors:
A dentist who checks quarterly reports from his brokerage
A position trader who checks his positions once a month
A swing trader who checks his positions once a week
A Day trader who checks his positions once a day, if not more
Given the natural volatility that markets experience, which market participant is least likely to be mad or upset? The dentist. Why? Because he is receiving less data points from the market. Even world class day traders are exposed to tens or hundreds of negative situations in their positions on a day-to-day basis as a result of volatility, which they cannot control. This level of negative stimulation can reduce mental health and trading effectiveness.
Alerts allow well prepared traders with some edge to step back from the markets and allow the trades to come to them.
3. Our alerts don’t let anything fall through the cracks ✅
While the previous two points are benefits when it comes to price alerts, our alerts also step the game up considerably when it comes to user utility. Once you have setups that you like to trade, you can set alerts on trendlines, technical indicators, customizable scripts, and so much more, so you can ensure that your favorite setups aren’t being missed.
This can be as simple as a long-term investor setting RSI alerts on Dow 30 stocks, in order to buy dips in strong names, to as complex as an intraday futures spread scalper setting alerts for pricing inefficiencies within his top 40 contracts.
Our customizable alerts can really allow well organized traders to capture every opportunity as they see it.
And there you have it! 3 reasons to take advantage of alerts, and all of the awesome benefits they bring.
Thanks for reading and stay well!
Love,
Team TradingView ❤️❤️
4 tips on surviving Black Swan eventsHey everyone! 👋
Considering the events from the last few days, we thought it would be a good time to re-visit some of the best things you can do, as a trader and as a human being, to insulate yourself from Black Swan events. While a massive crypto exchange going insolvent is only the most recent example of a Black Swan, Black Swans can exist across all different realms - personal, political, environmental, and more. Because of that, we're going to walk you through some tips discussing how you can insure your future against unexpected calamity.
1.) Don't keep all your eggs in the same basket. 🪺
This one is glaringly self-evident following FTX's recent troubles, but spreading your assets out among custody providers is an excellent hedge in case any of them have solvency issues. That way, you're always protected against single-provider risk. Various global governments have tried to take steps to mitigate this (FDIC insurance, financial regulation), but nobody looks out for your interests like you do. Make sure you're in a good spot.
Never keeping your assets in one place also applies to asset class and geography. Own a lot of property in a single region? You're suddenly exposed to natural disasters that could hit the area, drastic political changes, and more. Only own a single asset class? Maybe the macro situation just changed against you quickly and it's all worth a lot less than you thought.
Diversity is the name of the game, not only from a position perspective, but from a total risk perspective. Where are you vulnerable?
2.) Keep some cash on hand 💵
This one is also self-evident for those who are currently unable to access their funds as a result of the recent turmoil, but keeping cash on hand in order to cover short term expenses is a life saver should you ever need it. To some, getting laid off is a great example of a personal black swan event, and something that could set someone back years in their personal finances. Make sure you're in a position that you're not financially stressed if something abnormal happens to your regular, everyday life.
3.) Carry no liabilities 🏦
While some purchases in our lives often necessitate the use of debt, the strongest-positioned people during a crisis are those who are not beholden to others financially. Considering that most Black Swans often cause all sorts of financial damage to their victims, having liabilities can cause undue additional stress that removes options from people who would otherwise be able to take advantage of the conditions. Also, those with a strong financial position are often those best able to improve their own standing when bad situations strike, buying up assets at prices that would normally never be available. Debt can prevent this level of flexibility, and therefore in order to reduce risk, you shouldn't carry any.
4.) Keep some assets on hand, in person. 🪙
This tip is for broader, more macro-scale black swan events like extended power outages, communications network failures, meteor strikes, war, and other things that would typically fall into that category.
But, in a broader regional or global societal collapse, having assets on hand is the best thing you do for yourself. In a situation where you're unable to access the broader societal infrastructure to which we all buy in, having a backup on hand where you live is really the ultimate insurance blanket. Whether this is cash, gold, seeds or food, don't get caught without a plan.
We realize this isn't the most fun topic to talk about, but if you follow these tips, it's likely you're much better insulated against all of the disasters and misfortunes the world can throw at you.
Stay safe out there!
-Team TradingView ❤️❤️
10 things to remember about bear markets, volatility, and panicTrading & investing is not easy. If it were, everyone would be rich.
One of the most difficult moments for all traders, and especially investors, is when markets are abnormally bearish, trending downward or in a direction that goes against their positions. Adding to that difficulty is when volatility is rising and when uncertainty is high. These events have occurred throughout market history and should be expected. Every trader or investor should remember a simple truth: markets will go against you at some point. Be prepared.
Learning to trade or invest in bearish and volatile markets requires great skill, experience, and composure. The last 12 months has demonstrated that. Stocks, bonds, forex, crypto, and futures have seen heightened volatility over the last 12 months. So what should we do? What now?
Let's revisit the basics - the skills, traits, and mindset that are required to survive these moments.
1. Plan ahead 🗺
Plan your trade, trade your plan. Every trade, every investment, should have an underlying plan. Write out the basic questions before you buy or sell. For example, what is your desired entry price? What is your desired exit price? What is your stop loss? How much money are you risking? Why are you making this trade or investment in the first place? In times of volatility, these questions matter more than ever. Get back to the basics.
2. Don't rush 🧘♂️
Volatility, and especially market panic, cause people to make quick reactions. The pressure, the fast price action, often forces people to act without a moment to revisit their original plan. Don't do this! Take your time. Stay composed and deal with the hand you have been dealt.
3. Be patient with entries 🎯
Many traders & investors speak of buying dips, but this phrase does explain the steps required. You don't buy dips without a plan. You plan out your strategy, you wait for the perfect entry, and you let the market come to you. When the market is in a downtrend, and volatility is high, it is paramount that you remain patient, waiting for the perfect entry. Use limit orders wisely.
4. Know your timeframe ⏰
Are you trading for one day? One month? Or 5 years? These basic questions will remind you of what you're trying to accomplish and how rushed or patient you should really be. They will also remind you about the chart you should be looking at, whether you should be zoomed in to a 30-minute chart or zoomed out to a weekly chart, showing years of price histort.
5. Have an exit strategy 🚨
An exit strategy means that no matter what happens, you know where your stop loss is and you know where your profit target is. No matter what happens, up or down or sideways, you have an exit plan. Do not leave any entry or exit up to chance. Create your exit strategy before you place the trade and follow it.
6. Tighten position size 💪
Added volatility and uncertainty needs to be factored into your game plan before it begins in the first place. However, many new investors and traders forget to do this. If that's you, it's time to adjust your strategy, your plan, for larger trading ranges, volatility. The year-long trends that defined a previous market are now less valid.
7. Zoom out for historical context 🔎
Zoom out on your charts. Then keep zooming out. And now zoom out some more. Circle the latest candle, line or price movement and let it serve as a reminder about where price is today vs. where it came from. There's a saying: when in doubt, zoom out. Do not to get lost in the moment, looking only at the day or week, but instead go research the entire history of price. Learn about what has happened in the past.
8. Cash is a position 💸
Want to dollar cost average into a trade? Want to buy more? Want to trade more? You need cash to do that. There is comfort in being able to participate in the volatility whenever you want. Cash is a position and guarantees this.
9. Avoid panic, FUD, and FOMO 😳
When emotions are running high, some of the biggest psychological mistakes can occur. FUD stands for fear, uncertainty, and doom. FOMO stands for fear of missing out. These are two common emotions in crashing markets. On one hand, everyone thinks the end is near and then on the other hand every little up move is the next bull run. Do not let these emotions take you.
10. Take a break 😀
Sometimes it helps to step away. Log out, close your apps, get outside and get some exercise. Come back to the markets when you're ready. Your mind will also be well rested now.
We hope you enjoyed this post and we hope it helps you as you navigate the markets.
Please feel free to write any additional tips or pieces of advice in the comments section below!
Traders gaining momentum: Fall edition!Hey everyone! 👋
Grab your beverage of choice: it's time to sit back, relax, and take a look at some of the hottest up and coming authors on TradingView. All of these folks deserve a follow, so be sure to show them some love! ❤️❤️
If you think we’re missing someone, be sure to make it known below in the comments. Also, we’ll be doing these roundups from time to time so be sure follow us so you don’t miss any of them!
Let’s jump in.
We’ve sorted each Author by the asset class they focus on. Click on their profile and see if you like the ideas they're putting out!
Multi-Asset:
Trade_Journal
TrendLINEBoys
NoFomoCharts
ZenMode
Valerus_Forex
Vixtine
SquishTrade
LupaCapital
Stocks & Indices:
dpuleo19
nuggetrouble
rossgivens
MarthaStokesCMT-TechniTrader
Crypto:
decklyndubs
natef1
Currencies:
jamison_fx
DemoDiaryFX_Trading
CarterKyleCapital
Lightwork_
WallStreetIntelligence
And there you have it! Our roundup. As we mentioned before, don’t forget to follow TradingView for regular educational content :)
Think we missed any up-and-coming accounts? Point them out in the comments! Obviously, don’t shill yourself. 😉
Cheers!
-
Please remember Editors' Picks and all the authors we mention are our attempt to show undiscovered traders, unique market insights, and interesting educational material.
Anyone can be featured in Editors' Picks or in posts like this. All it takes is publishing an idea from your account. We try to be as fair as possible, following many of you, and reading all the different ideas published daily.
That's it! High quality content, consistency, clarity, and the will to help others is what we look for.
You can read all of our guidelines below:
www.tradingview.com
www.tradingview.com
www.tradingview.com
How to build a top-tier trading planHey everyone! 👋
Today, we will be looking at how to build an unstoppable trading plan in a few short steps.
While many successful traders often use different ‘variables’ when it comes to identifying trades, the core decision making process of all good trading plans remains mostly the same. Therefore, we’re going to go over a few key things that you shouldn’t be missing out on in your very own trading plan. Let’s get started 👇
Asset Selection 🏦🏦
All good trading plans need to define how they will select what assets they will be trading. For Futures and FX traders, this is a relatively straightforward process, as the universe of tradable symbols is small. However, for Equities and Crypto traders, the universe of tradable symbols is massive. How will you figure out which symbols present the most opportunity and the best risk/reward? Having a defined set of criteria for finding opportunities you’d like to trade is absolutely essential for maximizing your strategy’s expected value.
For example, a stock day trader might search for stocks gapping overnight more than 4%, on more than X amount of volume/shares traded. Or, a crypto swing trader might search for liquid cryptocurrencies with oversold or overbought conditions that could present a mean reversion opportunity.
No matter what the asset though, for traders, generally there are two key things to ensure you’re looking for:
Volatility ✅
Liquidity ✅
If an asset doesn’t have enough liquidity, then it will be hard to scale in and out of bigger positions over time.
If an asset doesn’t have enough volatility, then it will be hard to generate absolute returns from the small trading range. This isn’t always the case, as a few options strategies look to profit off of low volatility, but for spot traders, it is absolutely essential.
Execution Logic 🧠🧠
Once you know what asset you’re looking to trade, the next step is to define what actually counts as a trading opportunity. Almost all assets move every day - what “setups” can you define for yourself that offer the best risk/reward?
The best trading plans have logic that reads like a decision tree, so the trader doesn’t have to think too hard in the moment about the process - all of the hard decisions have been made prior to the in-the-moment situation.
These decision trees can become infinitely complex, but as long as you create and are comfortable with your own execution logic, then you can follow it and improve it over time.
There are two important elements to account for when creating decision logic:
Direction ✅
Execution ✅
While some traders are comfortable taking trades in either direction, many traders are only comfortable with taking trades in one direction, because it can be easier to simplify what you’re looking for in a trade. Because of this, most funds and traders will look to come up with a “view” first.
For example: “I will only look for long trades when the asset is above its 20d moving average.”
OR
“If the ISM PMI is greater than 50, then I will only look to buy stocks.”
Then, once you know what direction you’re trading in (it can be both!), actually figuring out PRECISELY what gets you into and out of a trade becomes necessary.
For example: “If I am looking for a long entry in a trending asset, I will only buy at a 30d high, while setting my stop at a 30d low.”
Having both direction and execution helps to clarify exactly what counts as a trading opportunity, and what is simply a pattern that only exists in your head. It's also key to controlling your risk and getting you out of bad situations should they arise.
Cash Management 💵💵
Finding assets to trade and trading them according to a high-quality plan matters little if you lose everything in a single trade you were sized too large in. Because of this, the best trading plans account for risk and drawdown by planning for the worst-case scenario.
Common strategies to control risk center around sizing trades (to risk no more than 1-5% of your capital at any one time, for example) using theme limits, sector limits, and more. Risk is a decision you make on the way in, not on the way out.
When placing a trade, know ~exactly what you are risking, and how that fits into your overarching position management strategy. See this article for more details.
So, there you have it! 3 quick steps to building an unassailable trading plan ready for the punches the markets will throw your way.
Well, what are you waiting for? Get to work 😉
-Team TradingView ❤️
How to improve your trading by looking at interest rates: Part 4Hey everyone! 👋
This month, we wanted to explore the topic of interest rates; what they are, why they are important, and how you can use interest rate information in your trading. This is a topic that new traders typically gloss over when starting out, so we hope this is a helpful and actionable series for new people looking to learn more about macroeconomics and fundamental analysis!
You can think of rates markets in three dimensions.
1.) Absolute
2.) Relative
3.) Through Time
In other words;
1.) How are rates traded on an absolute basis? AKA, do they offer an attractive risk/reward for investors?
2.) How are rates traded on a relative basis? AKA, what separates bond prices between different countries?
3.) How are rates traded through time? AKA, what is the "Yield Curve"?
In our first post , we took a look at how to find interest rate information on TradingView, and how rates fluctuate in the open market. In our second post , we took a look at some of the decision making that investors have to make when it comes to investing in bonds (rates) vs. other assets. In our third post , we took a look at rates on a relative basis between countries.
In today's final post, we'll be looking at how rates are traded through time - in other words, the Yield Curve. What information can you glean from looking at the Yield Curve? How can it help your trading plan? Let's jump in and find out!
For reference, let's first get a look at the Yield Curve:
This chart contains a couple different assets, so let's break them down quickly.
The white/blue area is the rate of interest you receive for 2 year bonds when you buy them
The orange line is the rate of interest you receive for 5 year government bonds when you buy them
The teal line is the rate of interest you receive for 7 year government bonds when you buy them
The yellow line is the rate of interest you receive for 10 year government bonds when you buy them
The purple line is the rate of interest you receive for 30 year government bonds when you buy them
As you can see, differing maturities for bonds pay different yields over time.
If you purchased a 2 year bond in early 2021, you'd be earning 0.15% yield PER YEAR.
At the same time, if you purchased a 30 year bond in early 2021, you'd be earning 1.85% yield PER YEAR.
The situation has changed since then. Currently:
If you purchase a 2 year bond, you're earning 3.56% yield PER YEAR.
if you purchase a 30 year bond, you're earning 3.45% yield PER YEAR.
In other words, the situation has completely flipped.
Why did this happen?
There are a few reasons, linked to many of the topics we discussed in the last few posts. Let's break them down.
1.) Central Bank Funds Rate risk
2.) Inflation Risk
3.) Credit Risk
4.) Market Risk
To start, from early 2021 to now, the central bank has raised the funds rate materially. This means that government bonds must see their yield increase. Why lend money to the government if you get more sticking your cash in a savings account?
Secondly, inflation has picked up. This has been a result of supply shocks across the globe for commodities & services. As shortages have cropped up and demand has been steady or increasing, increases in the price of everyday goods has led short term bonds to "Catch up" to the yields of longer maturity bonds.
Thirdly, as GDP has shrunk over the last two quarters, the risk that the U.S. government will be unable to pay back its debt through tax receipts and bond issuance rises.
Finally, as we said in the second post:
When stocks are outperforming bonds, institutional demand for stocks is higher, indicating that people are feeling good and want to take risk. When bonds are outperforming stocks, it can be indicative that people would prefer to hold 'risk free' interest payment vehicles as opposed to equity in companies with worsening economic prospects.
This demand for bonds plays out across the Yield Curve. Demand for 'risk free' assets increases as the economic outlook worsens, meaning that the Yield Curve is indicative of how market participants think the market situation will play out over a given period of time. If the yield for 2 year bonds is higher than 10 year bonds, then market participants through their purchases and sales are articulating that they expect the next two years to have more economic risk than the next ten. In other words, they expect some sort of economic slowdown.
This is extremely useful for multiple types of traders:
Equities are tied to the economy - if rates are saying something about economic prospects, then it's smart to pay attention, as it may inform your asset selection process / trading style
FX is intimately tied with rates - if rates are moving, FX is sure to be impacted.
Crypto has shown a high inverse correlation historically with the "ease of money" index. If rates are going up, then non-interest paying crypto becomes less attractive.
Anyway, that's all for our series on Interest Rates!
Thanks so much for reading and have a great rest of your weekend.
- Team TradingView ❤️
How to improve your trading by looking at interest rates: Part 3Hey everyone! 👋
This month, we wanted to explore the topic of interest rates; what they are, why they are important, and how you can use interest rate information in your trading. This is a topic that new traders typically gloss over when starting out, so we hope this is a helpful and actionable series for new people looking to learn more about macroeconomics and fundamental analysis!
In our first post, we took a look at how to find interest rate information on TradingView, and how rates fluctuate in the open market. In our second post , we took a look at some of the decision making that investors have to make when it comes to investing in bonds (rates) vs. other assets.
Today, we'll be taking a look at how global investors understand interest rates, using three concrete examples.
Let's dive in!
As we mentioned last time, when it comes to understanding interest rates in any region, there are three main things to take a look at:
1.) Central Bank Funds Rate risk
2.) Inflation Risk
3.) Credit Risk
First, let's take a look at Credit Risk. 💥💥
Credit risk is something that happens when there is a risk that you may not get back the money you loan to a certain entity. For this series, since we're only looking at government bonds, this means the risk that the government won't pay you back.
Lesson: All things being equal, the more an entity (Company, Country) has to pay to borrow money, the less 'stable' they are in the eyes of investors.
Next, let's take a look at Inflation Risk. 💸💸
Inflation Risk is something that happens when there is a risk that your principal may lose buying power over time, faster than the interest rate, due to the rate of inflation.
For example, check out this chart:
In the Blue/White, you can see Turkish 1 year bond yields. In the green, you can see U.S. 1 year bond yields. Notice the difference in interest rates - the Turkish bonds pay 14%, and the U.S. bonds pay 3%. While the U.S. is a larger and more developed economy (and therefore runs a lower "credit" risk), some of the difference in yield comes down to the drastically different rates of inflation within the economy.
In the red, you can see the rate of inflation in the United States, and in the yellow you can see the rate of inflation in Turkey. Assuming a steady exchange rate, as Turkish Lira buy relatively less and less goods and services over time vs. The U.S. Dollar, investors will demand more yield to prevent against the loss in buying power.
Lesson: the direction of Interest rates tells you how investors think inflation might develop over a certain time horizon.
Finally, let's take a look at Central Bank Funds Risk. 🏦🏦
Central bank funds risk is something that happens when the Central Bank may move base funding rates adversely to your position.
Check out this chart:
It's the same chart as last time, but instead of the inflation rates superimposed on the interest rates, we've added the current Central Bank rates to the chart.
Remember, the Central Bank rate is the rate you get from the bank without "locking up" your money into a loan to the government.
Central Bank rate risk plays the biggest part in bond pricing, as you can see that interest rates and yields move together rather closely, especially as these are only 1 year bonds (we will look at the yield curve next week).
That said, given that Central Banks across the world are typically mandated to try and create stable prices for consumers, their actions are often dancing with inflation. Sometimes banks will raise rates too much and create deflation. Sometimes banks will raise rates too little and will be "behind" inflation (as many believe is currently the case).
Lesson: Interest rates are indicative of Central Bank policy, which is informed by several factors and varies from region to region. In other words - interest rates can describe the health of an economy. Too "High", and the Central Bank may have lost control. Too "Low", and the economy may be stagnant. These are generalizations, but they are a nice place to begin comparing regions on a relative basis.
And there you have it! Some concrete examples and lessons to be learned from looking at live moves in the market. Understanding these dynamics can be really helpful to building out a more comprehensive trading strategy. In other words, if you're trading FX, it's incredibly important to know interest rate differentials between countries, along with the underlying drivers of rates. Similarly, if you're looking at investing in a company, looking at that company's bond yields can tell you how much risk investors think the company has of defaulting on obligations.
Next week, we'll take a look at the Yield Curve, and include some more lessons about how you can use that information to begin forecasting prices and the overall economy.
- Team TradingView ❤️❤️
How to improve your trading by looking at interest rates: Part 2Hey everyone! 👋
This month, we wanted to explore the topic of interest rates; what they are, why they are important, and how you can use interest rate information in your trading. This is a topic that new traders typically gloss over when starting out, so we hope this is a helpful and actionable series for new people looking to learn more about macroeconomics and fundamental analysis!
Last week we took a look at how to find bond prices on our platform, as well as a few quick tips for understanding how and why interest rates move. If you'd like a quick refresher, click the link at the bottom of this post. This week, let's take a look at why understanding interest rates is important to your trading, and how you can use this info to your advantage.
You can think of rates markets in three dimensions.
1.) Absolute
2.) Relative
3.) Through Time
In other words;
1.) How are rates traded on an absolute basis? AKA, do they offer an attractive risk/reward for investors?
2.) How are rates traded on a relative basis? AKA, what separates bond prices between different countries?
3.) How are rates traded through time? AKA, what is the "Yield Curve"?
It's worth taking a little bit of a deeper look at each of these dimensions and how they work. This week we will begin by looking at interest rates from an 'Absolute' standpoint . 🏦
When it comes to looking at bonds as an investment vehicle on this straightforward basis, investors in the broader market will typically look at how attractive bonds are from a yield / total return perspective vs. other asset classes, like equities, commodities, and cryptocurrencies.
When it comes to gauging this total return question, the three main risks are important to know about:
1.) Central Bank Funds Rate risk
2.) Inflation Risk
3.) Credit Risk
In other words;
1.) Will the central bank rate move in such a way that makes the interest rate I'm receiving on a bond uncompetitive?
2.) Bonds are loans with timers. Will inflation eat away at my principal in terms of buying power faster than I'm being compensated?
3.) Can my counterparty make me whole when the bond comes due?
For the United States, the third question is typically "ignored" as lending money to the U.S. government is oftentimes viewed as "risk free", but in all scenarios understanding the attractiveness of bond yields over given time horizons vs. interest rates and inflation is a huge question.
In addition to that, absolute risk/reward for rates needs to be compared to other asset classes. If the S&P 500 is yielding 2%, paid out from the earnings of the biggest companies in the country, then how does the risk of holding equities compare to the risks of holding bonds? Understanding how institutions are judging this decision can often be gauged by looking at the movement of interest rates in the open market. When stocks are outperforming bonds, institutional demand for stocks is higher, indicating that people are feeling good and want to take risk. When bonds are outperforming stocks, it can be indicative that people would prefer to hold 'risk free' interest payment vehicles as opposed to equity in companies with worsening economic prospects.
This is the most straightforward way of looking at interest rates - how do they compare to the absolute risks in the market, and how do they compare to other "yield" streams? Do they make sense from a risk/reward perspective?
One final thing - If interest rates are rising, then the amount of return needed to "compensate" for taking risk needs to get higher and higher, or other assets like equities begin to look uncompetitive. Additionally, higher interest rates mean that future cashflows are worth less, given that most valuation calculations rely on the "risk free rate".
As an example, this implosion happened late last year, as people began selling bonds and interest rates began to rise. As interest rates rose, stocks that had a good chunk of their "value" priced into the future got hit the hardest, as the value of those cash flows in real terms dropped.
Interest rates can help a lot for putting the big moves in the market into perspective. 😀
That's all for this week! Next week, we will take a look at how credit risk and FX risk plays into relative bond pricing, and how different sovereign bonds may or may not appear attractive to one another on a relative basis. Our final week will look at the yield curve, and how risk over time affects demand for rates.
Cheers!
-Team TradingView
Here's last week's post if you're not caught up:
How to improve your trading by looking at interest rates: Part 1Hey everyone! 👋
This month, we wanted to explore the topic of interest rates; what they are, why they are important, and how you can use interest rate information in your trading. This is a topic that new traders typically gloss over when starting out, so we hope this is a helpful and actionable series for new people looking to learn more about macroeconomics and fundamental analysis!
The first question when dealing with interest rates is how to see the information on TradingView. While you can always click the "Bonds" tab under "Markets" and navigate to the "Rates" table, an even easier way to view interest rates across the globe is by using the 'search' terminal and typing in "10Y". Then, click "Economy", and you should be able to see all of the global 10 year interest rates markets:
This configuration will get you "10 year" rates, but you can get different maturity bonds by using other tickers. For example, you can see United States 3 month rates by typing "US03M", or Brazilian 10 year rates by typing "BR10Y". All of the rates markets in our system follow this ticker standard. Try one! It's easy.
For people who aren't familiar, here's the lowdown on how interest rates work.
Interest rates fluctuate in the open market just like stocks or cryptocurrency; they move inversely to government bond prices. In this way, you can simply look at government bond prices to get a sense of how interest rates are doing -> they will be moving in the opposite direction.
The reason behind this is that when bonds are issued, they are issued with a "par value" and a "coupon rate". Let's say that the par value for a government bond is $1,000, and the coupon rate is 2%. This means that every year, the bond issuer will pay the bond owner $20.
The thing is, after bonds are issued, they can be traded freely in the open market. Let's say that the $1,000 bond increases in value and begins trading at $1,030 because there is significant demand for some reason. Because the $20 paid to the bondholder is fixed, the actual "interest rate" that buyers get when they pay $1,030 for the bond a bit lower than 2% -> 1.94% to be exact.
Thus, changes in bond prices change the real time "interest rates" in the market!
One thing to note: Government bond rates are different than the Government-set "funds" rate, which is decided on by a country's central bank.
Next week in part 2, we'll take a look what drives supply and demand for government bonds / interest rates, and how monetary policy influences all the assets you trade. Plus, how you can use this information to your advantage!
See you next week!
- Team TradingView ❤️❤️
Trading Performance Psychology: Part 1The greater the difficulty, the more glory in surmounting it. Skillful pilots gain their reputation from storms and tempests.
- Epictetus.
Hey everyone! 👋
This week, we thought it would be interesting to dive into a less-commonly discussed topic: performance psychology - and discuss how it relates to Trading. Specifically, we're going to look at the following question: What actually drives outperformance from one trader to the next?
From a process standpoint, there are lots of things that aspiring traders can take from other performance disciplines (like sports) in order to better understand the necessary steps to get where they would like to be. Let's jump in!
Time is the common element to expertise ⏰
Mastery is built over time. First through exploration, then knowledge building, then well-structured practice.
To invest the great amounts of time and effort required for mastery, an individual typically bonds emotionally with the field, creating a long-term relationship.
Present in almost all extremely high performing traders is an inherent, intrinsic love of trading itself. This means a love for analyzing charts, working on strategies, looking at markets, and trying to fit the pieces together in one's head. In this frame - Trading isn't a job, it's a CRAFT . If you just love the status, the lifestyle, or the income, then it's likely that you won't reach the true heights of the profession. The highest performing traders spend hours and hours working on their trading; not because they WANT to, but because they LOVE to.
Finding a niche ❤️
The greats do not become great by working hard; they work hard because they find a great niche: a field that captures their talents, interests, and imagination. The best pitcher in the world might make a terrible hitter.
If you're early on in your journey (or lost), something to consider is trying to find a niche that you truly resonate with. A great deal of importance is placed on niches in other professions and institutionally within finance, as hospitals and banks have rotational programs to expose newcomers to different types of experiences.
Why then, don't individual traders do this? A great way to center your thinking is by constructing a rotational program for yourself. Here's a list of the most popular asset classes & trading styles. Give each a google, or look for ideas here on TradingView, and see what you resonate with most strongly. Set yourself up for long term mastery by actually finding something you love doing day in and day out.
Liquid Asset Classes:
-Stocks
-Currencies
-Cryptocurrencies
-Futures
-Fixed Income
-Volatility
Styles (Timeframe):
-Intraday - holding time is seconds to hours
-Swing - holding time is days to weeks
-Position - holding time is weeks to months
Which holding style fits with your temperament? What topics do you like learning about?
The Learning Process ✅
In trading and in life, we often hear that "Practice makes perfect". A better saying may be "Perfect practice makes perfect". How practice time is structured makes the difference between a performer who has five years of experience and someone who has one year of experience repeated five times over. So; how should you structure your practice?
In performance psychology, there's a concept known as a "learning loop". It has three parts.
Performance -> Feedback -> Learning (repeated).
This is crucial, because feedback is the key to improvement. Trading is a solo sport, which means that figuring out how to incorporate a feedback process that allows for reflection is absolutely critical.
P/L is feedback, but there can be some problems with it singularly as your feedback mechanism. Even the best traders who execute the best looking trades can be on the opposite side of variance on given days. Process is king. Get feedback from your performance that doesn't have to do with P/L so you can track the inputs to your decision making. Some traders take copious notes, some record their screens, and some record data points that aren't P/L related (hours slept, hydration, mood, etc).
(we have a notes feature built into the charts you can use for this purpose.)
If you gather up all of these items together to create a long term blueprint for building mastery, it should look something like this:
1.) Find out what you truly love about trading
2.) Explore it more deeply
3.) Stick with it through time and allow your intrinsic enjoyment motivate you through the ups and downs
4.) Structure your performance through that time in such a way that you can generate feedback for yourself
5.) Incorporate that feedback to continually improve your process. Allow learning loops to be your engine of long term performance.
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Hope you enjoyed reading, and stay safe out there!
- Team TradingView
What makes a good trader?Hey everyone! 👋
What makes a good trader?
The eternal question.
Is it character? Intelligence? EQ? Dumb luck? Something nobody's yet mentioned?
Newbies and pros alike have long argued about this topic, and today, we want to hear from the TradingView community.
Using just one word, in the comments below, tell us your opinion. What separates a good trader from a bad trader? Besides profit ;)
If your comment contains more than one word, you're disqualified!
To get the ball rolling, we'll give the users behind top two comments a pack of our new, 2nd edition TradingView Tarot cards. The contest ends tomorrow, Monday June 6th, at the New York open at 9:30 am.
Have fun, and enjoy the rest of your weekend!
- Team TradingView
How to fail as a traderHey Everyone! 👋
Over the last few weeks, we've looked at a couple of the best ways to improve your trading, including learning to adjust to market conditions , building a proper trading mindset , and more. Today, we thought it would be fun to do the opposite. Instead of trying to help the community build up solid, professional trading practices - let's try to design a losing trader from the ground up! What attributes/decisions will we have to encourage to get a losing result?
Theoretically, the market is just a game of probabilities. How can we guarantee that our trader will lose? As it turns out, there are a couple easy behaviors we can combine to ensure that a losing outcome is a foregone conclusion.
Number 1: They never define risk 🤷🏼♂️
In trading, people often say things about "Risk management", "Defining your risk" or "Defining your out", but it can sometimes be difficult to determine, as a new trader, what the heck people are talking about. Define my risk? How? What are you talking about? What does this actually mean?
Put simply, defining your risk is a process of figuring out *where* you are wrong on a trade/investment.
For active traders, it can be as simple as picking a recent low or high, and saying "If this price is hit, then I'm exiting the trade. The short term read I had on this asset is no longer valid. I don't think I know what's going to happen next." For someone who is more of a position trader, it can be as simple as saying "I don't want to lose more than 10% (or some percent) of my capital at any point when I am in this position. I think that I have selected my entry well enough that a 10% drop (or x%) would mean that, for some reason or another, my thesis is no longer valid."
From a cash management / portfolio management perspective, defining your risk has another dimension: How much of your total capital do you want to potentially lose in a worst case scenario? Should each trade risk 50% of your capital? 20%? 5%? 1%? How much of your total bankroll will you lose before you stop?
In order to ensure that we have a losing trader, it's important that they doesn't have a plan for position sizing, setting stop losses, or setting account stop losses. This way, they won't have any consistency and will inevitably take a few big losses that knock the out of the game forever.
Number 2: They use lots of leverage 🍋
When combined with Number 1, using lots of leverage is a great way to accelerate the process of losing money. Given that a strategy that wins 50% of the time will statistically face a 7 trade losing streak in the next 100 trades, sizing up and using leverage is a great way to ensure that when a rough patch strikes, you lose all your capital. Letting trades go past how much you expected to lose is a great way to speed this process, because with the addition of leverage, things only need to go against you 50%, 20%, 10%, etc, before you're wiped out. You can't risk to zero.
Considering that the most aggressive hedge funds in the world typically don't use an excess of 5-8x leverage, even in FX trading, we will need our losing trader to use at least 10-20x leverage in order to speed up their demise.
Number 3: They hop from strategy to strategy 🐰
Bruce lee once said, “I fear not the man who has practiced 10,000 kicks once, but I fear the man who has practiced one kick 10,000 times.”
In this example, sticking to one strategy, even if suboptimal, is the man who has practiced one kick many many times. The trader who strategy hops is the one who has tried almost every kick out there, but mastered none. In order to ensure that our trader is a losing trader, we need to ensure that they never develop any mastery and keep switching from strategy to strategy. We need to constantly dangle a new strategy, indicator, or trading style constantly in front of our trader. Thus, no matter what strategy the trader picks, they will lack the hours necessary to have anything but suboptimal trade execution, poor overall market sense, and a general lack of nuance & understanding.
Combined with number 1 and number 2, it's going to be nearly impossible for this trader to be profitable.
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So there you have it; 3 ways to ensure that the trader will fail. Recognize any of them?
Our hope in writing this is not to discourage anyone from getting involved in the markets, but rather to continually shine a light on some of the bad habits we can get in when starting out. Avoiding rookie mistakes and bad practices that can stunt a career as a trader & create bad habits - no bueno! Let us know if you enjoyed, and we will continue to make more of these posts that go through some trading "best practices".
Have a great week!
-Team TradingView ❤️
4 things to remember about bear marketsHey Everyone! 👋
Whew, what a week. Assets across the board got smoked, and the Nasdaq officially ended the week in bear market territory. For crypto traders, Bitcoin, Ethereum, and some other crypto assets have been cut in half, or more. Despite the S&P 500 being down only 13-14% from highs, only 25% of all listed stocks are above their 200 day moving average. It's safe to say that after the massive bull run in nearly everything we've seen over the last two years, we are now officially in a bear market.
Because this may be the first bear market experienced by many in our community, we thought it would be helpful to put out a little guide of key things to remember about bear markets, to help people navigate this new market regime.
Let's jump in!
1.) Volatility makes your positions feel bigger in P/L terms 💥
Bear markets typically bring about more volatility in asset prices than bull markets. Over the last 20 days, we've seen an average daily move in the indices of about 3%, which is much larger than the rolling 20 day average in 2021 of about 0.9%. With the same amount of capital, this pickup in average range means that in $$ terms, your P/L moves have likely gotten much bigger than "normal". In March 2020, the average daily range in the S&P 500 was over 5%!
This is important to remember, because P/L can have a huge impact on trader psychology. Lots of professional money managers and hedge funds control for this factor, reducing exposure to keep daily portfolio volatility close to their target. Some funds are mandated to do this. While you're free to do what you like in following your trading plan, this is a key expectation to hold! Expect bigger moves than normal.
2.) The average bear market lasts about 2 years 📉
The 2 year number mostly refers to how long the average *stock* bear market lasts. So far in Crypto, the average bear market has lasted about 9 months. For comparison, in stocks, the average bull market lasts more than 6 years. So, while bear markets tend to be much quicker than periods of growth in equities, they also tend to be more memorable.
Recently, bear markets have been getting shorter and shorter - the last bear market in 2020 lasted barely a few months. Some attribute this to the Fed stepping in more and more, while others often claim that the better communications infrastructure we now enjoy in the 21st century is allowing information to be priced in much faster. While the trend is certainly towards shorter and shorter bear markets, they can still oftentimes last much longer than one expects. Adjust expectations accordingly!
3.) Cash is a position 💵
While USD inflation is currently high, running at about 7-10% (depending on which numbers you're looking at), the buying power of one U.S. Dollar doesn't actually change that much, day to day. The buying power of one share of SPY changes MUCH more rapidly, per day, and, recently, it's been losing buying power a LOT quicker. The most important thing to remember for bear markets is that staying alive is *THE* most important thing. As long as you don't blow up, you can live to fight another day. Fleeing poorly performing assets for cash is an option.
This has been happening recently. If you look at the major asset classes, people seem to be fleeing to cash. Bonds, Stocks, Gold, Crypto - it's all getting sold for cash. In a "Risk off" environment, typically conservative players will rotate from risk assets like stocks into "safer" stuff like Treasury bonds. That said, with the fed hiking and inflation running high, it seems people are skipping the 3% yield they can get in a bond in favor of the total flexibility you get with cash. Another option for hedging is to sell short assets you think will underperform, or buy puts on your portfolio (if available). You can directly see the price of sleeping well in the options market.
4.) Bottom picking is hard 🎣
While it is our job as traders to find opportunities that have a positive expected value, bottom picking has been historically very challenging. In the crash of 2020, many prominent hedge funds were under-hedged going into the crash, and over-hedged coming out of it. Effectively, some of the smartest people in the world did a poor job of picking where the likely bottom was.
Unless you have a very long term strategy that allows for consistent deployment of capital over time (DCA), trying to pick bottoms in downtrending markets can be a very low bat rate% strategy.
Well. That's it. 4 things to remember for newbies to bear markets. As we mentioned, the most important thing to do in a more difficult market is to stay alive! 🐻
Have a great weekend! 😄
-Team TradingView
3 tips for building a professional trading mindset 🎯Hey Everyone! 👋
Today, we're going to be talking about building a professional trading mindset. While this topic has been the subject of countless books and trading literature over the years, we thought it would be cool to break down a few of the most important takeaways for the TradingView community. Let's jump in!
1.) Start thinking in Probabilities 🔢
Let's take a quick look at one of the most important concepts in Trading and in life: Expected Value.
Expected Value is simply a number which indicates, based on probabilities, the value of executing a certain action. It can be positive or negative. Will this trade make money? Should I change careers? Should I marry my partner? It all comes down to Expected Value. Now - What makes up Expected Value? 2 things: Bat Rate% and Win / Loss.
Bat rate is the percentage of wins vs total outcomes. Win / Loss is the size of the average winner divided by the size of the average loser. In other words; What is the chance this works? How big is a win? How big is a loss? When you combine these numbers, you can much more clearly understand whether or not it makes sense to take a certain action.
Let's say, for example, that a certain trade idea has a 50% chance of working. A win earns you $2, while a loss loses you $1. Should you take the trade?
Let's find out. In this example, you take this trade 100 times. 50 times, you win $2, and 50 times you lose $1. You'd end up with a total profit of $50! ((50x2)-(50x1)). Clearly, this trade has positive expected value! So, even if you take the trade and end up with a loss, you still made the right decision, from an EV standpoint .
The tricky business with Expected Value is that Bat Rate and Win / Loss aren't hard numbers. They are estimates. Thus, building a feel for the likelihood of something happening, and building an understanding of the amplitude of wins and losses is a key skill to build for trading and life. An easy way to better calibrate your antennae for this is simply making a note of what you expect to happen in your trading journal. Over lots of repetitions, your ability to guess outcomes should improve.
2.) Self awareness 😵💫
In trading, actions of all market participants at all times are driven by 2 fears: The fear of missing out and the fear of loss . In other words, fear and greed. The thing is, depending on your brain chemistry and life experience, it's likely that one of these fears impacts you more strongly than the other.
Think of the following scenario: You put on a trade, and the position begins moving in your direction. The asset then begins trading sideways. Let's examine two ways this could go:
a - you close your position. Then, the asset begins ripping in your direction once more, tripling in price. You've missed this extra move, now that you've taken your position off for a small gain.
b - you don't take the position off, and the asset round trips back down to your stop loss, and you take an L on the trade.
Which of these scenarios is more painful to you? There's no *right* or *wrong* answer, but it's important to know which fear has a stronger hold on the decision making complex in your brain. If you find that you're more prone to FOMO, then try to figure out a strategy where you can squeeze every last drop of a winning trade. If you're more prone to the fear of losing, then try to figure out a strategy where the possibility of taking big or consistent losses is much less likely.
3.) Strategy fit is extremely important ✅
This tip piggybacks off of the last tip about self awareness, and really underscores the importance of consistency in interacting with the markets.
When you interact with the markets, having a written out, well understood trading plan is key to success. The biggest and most elite hedge funds in the world have clearly defined investment mandates, best practices, and business plans. What makes you think you don't need a plan?
That said, not all trading plans are created equal, and even the best laid plans of mice and men...etc.
When designing a trading plan, many new or intermediate traders focus solely on the money making aspect. As in, 'which strategy is going to earn me the highest amount of profit over a given period of time.' How can I gain some edge? Typically backtests, fundamental research, vision, and more play a part in helping define the criteria for a profitable strategy.
However, expert traders know that there's something even more important than defining your edge; ensuring consistency .
For example, let's say that you come up with a perfect trading strategy that should, in theory, in the future, allow you to trade extremely efficiently. The plan lays out a perfect set of criteria for buying market bottoms, and selling market tops. For newbies, this is the holy grail. However, just because you *understand* a strategy doesn't mean that you will be able to *execute* the strategy.
You could test this perfect strategy in real life, and if you're unable to execute the set of rules you've laid out for yourself in the heat of the moment due to your psychological makeup, then it doesn't matter how much edge the strategy has. You can't execute.
Thus, finding a strategy you can will yourself to execute with consistency, no matter what is happening in the markets, is of paramount importance.
In terms of expected value and self awareness, having a strategy that's 30% efficient but you can execute with 100% certainty is much more valuable than a strategy that's 70% efficient that you can only execute accurately about 40% of the time.
Not being stressed from a loss is the real flex. Design around preventing mistakes, not losses.
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Anyway, thanks again for reading, and have a great weekend! Let us know with a comment below if you learned anything, and we'll consider doing a full series on applied trading psychology.
Cheers!
- Team TradingView
