Introduction to Reversal Bar Patterns: Part 1: Over the next few posts, we plan on reviewing single and multi-bar reversal bar structures. In proper context these are among the most important and informative of all tape features. They often mark important turns in the prevailing trend or the completion of a trading range. More practically, they can be utilized to position trades and stops against. These patterns represent easily recognizable change in a market’s supply/demand dynamic and signal that “something important just occurred!” In this piece, we cover the basics of reversal patterns. In coming installments, we will cover key reversals, selling climaxes, springs and upthrusts, and several other common reversal patterns.
There are two kinds of reversal patterns that draw my interest. The first is the reversal bar or pattern that occurs at or near the culmination of a long term trend. This category includes single bar patterns like buying and selling climaxes, and outside key reversal bars. These patterns are more reliable when traded in the context of overbought or oversold markets and mature trends.
The second is either a one or two bar reversal that occurs at the culmination of a pattern, particularly a trading range. Springs and upthrusts fall into this category. Springs and upthrusts are typically shorter term patterns that can mark new trends but are generally more informative to shorter term trades. All these patterns lose their efficacy in dull, low volatility / trendless markets except as an upthrust or spring to a very well defined lateral range.
There are also many common reversal / hook patterns that occur often in almost every trend. Generally, they occur on non-remarkable volume, do not occur near support or resistance confluences, and fail to display the range extension or volume expansion common to more reliable patterns. I tend to ignore these other than for their potential to set up potential short term trading opportunities.
The most reliable reversal bars and structures are characterized by: A significantly wider than normal price range, an open and close near the extreme of the bar/bars and significantly higher than normal volume in the context of the recent past.
Reversals often occur as a response to news that is in harmony with the prevailing trend. In other words, a bearish reversal in a bullish trend often occurs in conjunction with bullish news. The inability to continue the trend despite supportive fundamental news is a clear sign that the trend is in danger.
Most reversal extremes occur against an emotional backdrop. The fear of missing out (FOMO) entices breakout buyers and late trend followers to enter the market at non-advantageous prices. These late adapting weak handed entrants are less committed and generally have less capital than longer term strong handed early adopting entrants. As a result, their willingness to hold their trade is low, their stops are generally tight and vulnerable.
But the more important driver is traders stopping out of painful losing positions. The final convulsive wash out exhausts the available buying/selling power and allows a significant reversal of the existing trend. Important highs are not made until bad positions are flushed.
Oftentimes, the reversal from these structures is dramatic as the last needful buyer/seller has been forced out. But to be trusted, the structure needs to be tested. One of the hardest patterns in the world to trade is the V top or bottom where no test occurs.
Importantly for traders, reversal bar extremes mark a point beyond which the market should not trade. Initial stops placed just beyond the extreme of the reversal bar and moved higher or lower as the market progresses are generally secure. Reversal bars that occur outside a strong support or resistance are far less reliable than those occurring at or near a strong resistance zone or confluence.
The wider the price spread and higher the volume, the more reliable the signal. The best signals generally occur after prolonged trends.
In my experience, the earlier in the day the reversal pattern occurs, the better.
These patterns are fractal. They appear on charts of all perspectives.
The higher the perspective of the structure, the more important it is. In other words, a buying climax on the weekly chart is incrementally more important than the same structure on the daily.
Finally, like anything else, judgement needs to be developed around the patterns. There is no substitute for staring at thousands of charts. Very few patterns set up as they would in the textbook or in my examples, but the principles are generally consistent.
In our next post we will cover the specifics of Key Reversal patterns.
Good Trading:
Stewart Taylor, CMT
Chartered Market Technician
Shared content and posted charts are intended to be used for informational and educational purposes only. The CMT Association does not offer, and this information shall not be understood or construed as, financial advice or investment recommendations. The information provided is not a substitute for advice from an investment professional. The CMT Association does not accept liability for any financial loss or damage our audience may incur.
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History: A Brief History Of Candlesticks Introduction:
An important tool in financial analysis, the candlestick chart has a long, illustrious history that dates back several centuries. Candlestick charts, which have their roots in Japan, have developed into a popular way to visualize price changes and market patterns. Lets explore the intriguing history of candlestick charts, with special attention paid to their development, importance, and ongoing relevance in contemporary finance.
Origins in Japan:
Candlestick charts have their origins in Japan, specifically the Edo era in the 18th century. This novel approach to charting price changes is credited to a Japanese rice dealer by the name of Munehisa Homma. The "God of Markets," Homma, used candlestick charts to study and anticipate changes in the price of rice. His ideas and methods were recorded in a book titled "Sakata Rules," which served as the basis for this distinctive graphic display of market data.
Munehisa Homma below
Candlestick Chart Components:
Individual "candles," each of which represents a distinct time period (such as a day, week, or month) in the market, make up the basic building blocks of a candlestick chart. The open, high, low, and close prices are the four main elements that each candle is made up of. The upper and lower wicks or shadows of the candle indicate the peak and low prices that were experienced during the specified time period, while the body of the candle symbolizes the price range between open and close.
Popularization and Spread:
Candlestick charts were mostly exclusive to Japan up until the 19th century, when a British trader by the name of Charles Dow worked to bring them to the attention of the West. During his tour to Japan, Dow, the co-founder of Dow Jones & Company and architect of the Dow Jones Industrial Average, learned about candlestick charts. He translated Homma's findings and added candlestick analysis to his own technical analysis techniques after seeing their potential.
Charles Dow below
Further Development and Modern Application:
In terms of pattern recognition and interpretation, candlestick charts have improved and expanded over time. Steve Nison, an American trader who popularized candlestick analysis on Western financial markets, deserves most of the credit for this development. Nison carefully researched and built upon Munehisa Homma's studies, adding new candlestick patterns and improving the way they were interpreted. His 1991 publication of "Japanese Candlestick Charting Techniques," which is now considered a classic, popularized candlestick charts among Western investors.
Steve Nison below
Today, traders, investors, and technical analysts utilize candlestick charts extensively across a variety of financial markets, including stocks, commodities, and currency. The visual depiction of price patterns and trends aids in spotting potential trend reversals, continuations, and market emotion, offering insightful information for making decisions.
Conclusion:
The development of candlestick charts is proof positive of the value of visual aids in financial analysis. Candlestick charts, which have its roots in Japan from the 18th century, have developed into a widely used and essential instrument in the world of trading and investment. These charts have been improved and adjusted for contemporary markets thanks to the work of pioneers like Munehisa Homma, Charles Dow, and Steve Nison, giving traders a thorough perspective of price movements and insightful knowledge about market dynamics. Candlestick charts are expected to keep guiding traders and assisting them in making educated judgments in the complex world of finance as time goes on.
Stop Losses: A Trader's Best DefenseIn a perfect world, every trade would go our way, but alas this is usually not the case. A stop loss is a risk management tool used by traders and investors to minimize their losses when trading. It is a predetermined price level at which a trader's position will automatically exit the market, causing the loss to be realized. Stop losses are crucial to any trading strategy, as they help traders limit their losses and stay disciplined. In this blog, we will look at what stop losses are, why they are important, how to set realistic stop losses, and five different examples of stop losses with a description of how to set the stop loss.
What are Stop Losses?
A stop loss is an order to sell a security when it reaches a particular price. It is a predetermined price level at which a trader's position will automatically exit the market, causing the loss to be realized. This means that if the price of the security falls to the stop loss level, the trader's position is automatically closed, and any losses incurred are limited to that level. Stop losses are essential because they help traders limit their losses and stay disciplined.
Why are Stop Losses Important?
Stop losses are important because they help traders limit their losses and stay disciplined. In trading, it is easy to become emotional and let your losses run. Stop losses help traders avoid this situation by automatically exiting the market when the price reaches a predetermined level. This ensures that losses are limited, and traders can move on to the next trade without being emotionally affected by the previous loss.
Setting Realistic Stop Losses
Setting realistic stop losses is crucial to any trading strategy. A trader needs to consider the volatility of the security, the trading style, and the risk-reward ratio when setting stop losses. The stop loss should be set at a level where the loss is acceptable but not too close to the current price level, as this may result in the stop loss being triggered prematurely. A stop loss should also not be set too far away from the current price level, as this may result in the trader losing more than they are willing to risk.
Stop Loss Examples
Below we will list five examples of setting effective stop losses. For consistency, we are going to use the same long stop loss example, but these same examples can be set for stop losses for short positions as well.
Percentage-Based Stop Loss: A percentage-based stop loss is a stop loss that is set at a specific percentage below the purchase price. For example, if a trader wants to place a long at $0.088602 and sets a 0.5% stop loss, the stop loss would be triggered at $0.88160. For a short stop loss at 0.5%, you would add the value instead and have a 0.89035 stop loss. To set a percentage-based stop loss, the trader needs to determine the percentage they are willing to risk and place the stop loss order at that level.
ATR-Based Stop Loss: An ATR-based stop loss is a stop loss that is set based on the average true range of the security. The average true range is a measure of volatility and is calculated by taking the average of the high and low prices for a particular period. To set an ATR-based stop loss, the trader needs to determine the number of ATRs they are willing to risk and place the stop loss order at that level. For a long stop loss, you would subtract the ATR times its multiplier from the current price. For a short-stop loss, you would add the ATR times its multiplier to the current price. The unique upside to this stop-loss style is the ATR accounts for market volatility which can aid your risk management and help set more appropriate stop losses.
Using Moving Averages or Super Trend: Moving averages and super trend are technical indicators that can be used to set stop losses. Moving averages are calculated by taking the average price over a specific period, while the super trend is a trend-following indicator that uses the average true range to calculate the stop loss level. To set a stop loss using moving averages or super trend, the trader needs to identify the period and place the stop loss order at the appropriate level. The Moving Average or Supertrend can then act as a moving stop loss as it trails the price.
1. Moving Average:
2. SuperTrend:
Donchian Channels: Donchian channels are a technical indicator that can be used to set stop losses. Donchian channels are created by taking the highest high and lowest low over a specific period and plotting them on a chart. To set a stop loss using Donchian channels, the trader needs to identify the period and place the stop loss order at the appropriate level. In the example below we use a more standard 20-period Donchian level to identify areas of lowest low interest that would be a good place for a stop loss. If we were setting a short order we would look to recent highest highs as potential stop-loss areas
Conclusion
Stop losses are crucial to any trading strategy, as they help traders limit their losses and stay disciplined. When setting stop losses, traders need to consider the volatility of the security, the trading style, and the risk-reward ratio. Stop losses can be set using many different techniques, including percentage-based, ATR-based, using moving averages or super trend, and Donchian channels. By setting realistic stop losses, traders can minimize their losses and stay disciplined, which is essential for long-term success in trading.
📊 Volume Profile: IndicatorsThere’s a reason why trading volume has been a standard indicator on every piece of charting software over the last 30 years… it provides a crucial edge.
Volume provides you with logical insight into the activity of market participants at varying price levels. Volume analysis helps traders to become more reactionary to price movements rather than trying to predict where price will go next, as is the case with most technical indicators.
📍Key takeaways about volume
Key takeaways about the normal volume indicator plotted on the X-axis in trading:
🔹Volume Indicator: The normal volume indicator measures the total number of shares or contracts traded during a given time period. It is commonly displayed as a histogram or line chart, with the X-axis representing time.
🔹Liquidity: Volume is a crucial metric as it provides insights into the liquidity of a security. Higher volume generally indicates greater market participation and liquidity, making it easier to buy or sell the asset without significantly impacting its price.
🔹Confirmation: Volume can confirm the validity of price movements. In an uptrend, increasing volume supports the bullish move, suggesting strength and conviction among buyers. Conversely, declining volume during an uptrend may signal weakness or lack of interest. The same principles apply to downtrends.
🔹 Breakouts and Reversals: Volume analysis is often used to identify breakouts and potential trend reversals. A significant increase in volume during a breakout suggests a higher probability of a sustained move, while decreasing volume near a support or resistance level might indicate a potential reversal.
🔹Divergence: Volume can reveal divergence between price and market sentiment. For example, if prices are rising but volume is decreasing, it could suggest that the rally is losing steam and a reversal may be imminent. Similarly, increasing volume during a price decline might indicate selling pressure and further downside potential.
🔹Confirmation of Patterns: Volume can provide confirmation or invalidation of chart patterns such as triangles, head and shoulders, or double tops/bottoms. Higher volume during pattern formations enhances their reliability, while low volume can cast doubt on the pattern's significance.
🔹Watch for Extreme Volume: Abnormal spikes in volume can indicate significant market events, such as earnings releases, news announcements, or institutional buying/selling. Unusual volume can lead to increased volatility and potentially offer trading opportunities.
🔹Relative Volume: Comparing current volume to historical average volume helps gauge the significance of the current trading activity. Higher volume relative to the average may imply increased interest, while lower volume might suggest a lack of conviction or reduced market participation.
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DOW THEORY OR HOW TECHNICAL ANALYSIS EVOLVEDSometimes it's useful to go back to the basics in order to fully comprehend the progress achieved. Today technical analysis is taken for granted, and very few people think about what is really behind the well-known market terms. The Dow Theory, and Charles Dow himself in particular, we can say, were at those very basics. In this case, at the present moment the postulates of the theory have not lost their relevance. How they can be applied in practical work on the market, particularly in Forex, is presented in today's post.
Dow Theory and Technical Analysis
At the beginning of the formation of financial markets there were no suitable automatic tools, and most of the work on the analysis was done manually for a long time. That's why you can notice a great attention to detail in the description of the theory, when nowadays many details are usually omitted.
A brief biography of Charles Dow
Dow's first job in the financial environment was as a reporter for the Wall Street news bureau. It was there that he met his partner, Edward Jones. Unlike most other journalists, their work was characterized by straightforwardness - Doe and his partner did not take bribes as a matter of principle. In 1882 Doe and Jones felt the need for a separate publication. So, they founded their own company, Dow Jones & Company, which at first issued daily financial reports.
Later the two-page booklet grew into a full-fledged newspaper, The Wall Street Journal, which is now one of the most authoritative publications in the financial environment. The publication's slogan stated that its main purpose was to tell the news, but not opinions. By 1893, there were many mergers taking place, which increased the proportion of speculation in the markets. At this time Dow saw the need for some indicator of market activity. Thus, he created the Dow Jones Industrial Average, which at that time was a simple arithmetic average of the prices of 12 companies (it now included the 30 largest U.S. companies). Dow drew attention to the fact that prices capture much more information than many people assume. That is, by analyzing prices alone, we can predict their future behavior with great probability, which eventually became the basis of his theory.
Principles of the Dow Theory
The Market Discounts Everything
Of course, the market cannot take into account events which, by definition, cannot be predicted. However, the price takes into account the emotions of participants, economic data of some companies and states, including inflation and interest rates, and even possible risks in case of unforeseen developments. This does not mean that the market or its participants know everything, even future events. This only means that all what has happened has already been recorded in the price, and any new information will also be taken into account.
On this basis, a huge number of technical indicators have been created, and today you can find an indicator for the analysis of literally anything. But while indicators are often used thoughtlessly, Dow analyzed the entire market, relying on the natural segmentation of market players.
An extreme reflection of his work is the industry and transportation indices. The very composition of the index plays an important role. It is not fixed and is periodically reconsidered taking into account changes of the situation on the markets. The essence is that shares of enterprises working in one field are analyzed. As a result, the index is in some way a closed system, where the major part of funds is distributed between the participants and does not go beyond the portfolio.
Three Market Trends
A straight-line market movement is a science fiction. In fact, price almost always moves in a zigzag pattern, forming characteristic ascending/descending highs/minimums. In other words, forming an uptrend or a downtrend. There is a major initial trend in the market. It is the most important to find out, because the basic trend reflects the real price movement direction, when all the lower trend levels depend on the basic one. The duration of the initial trend is from 1 to 3 years.
The most important thing is to determine the direction of the initial trend and trade in accordance with it. The trend remains in force, as long as there was no confirmation of its reversal. The price closing below the previous extremum, for example, can be a prerequisite for trend reversal.
So, the initial trend determines the main market direction. In turn, the secondary trend moves in the direction opposite to the main trend. In fact, it is a correction to the main trend. The secondary trend has one interesting characteristic - its volatility is usually higher than the initial movement.
The last, the smallest trend is nothing more than a secondary trend pullback. Such movement lasts no longer than one week. The classical representation pays the least attention to it. It is considered that there is too much price noise on this time period, and fixation on the smallest movements can lead to irrational trade decisions.
Trend phases
The next principle of the theory of Dow the phases of the trend formation:
The first phase is usually characterized by price consolidation. This is a period of market indecision, when the previous trend is at exhaustion. In other words, this period is marked by the accumulation of forces before the spurt and is also the most attractive entry point (although risky). As soon as the new direction is confirmed, the participation phase begins. This is the main trend phase, the longest of the three, which is also marked by a large price movement.
When the motivating conditions have been exhausted, the saturation phase begins. During this period, savvy players begin to exit positions as soon as there are signs of instability, such as increased corrections. This phase can be described as "irrational optimism", when the price may continue to rise by inertia, despite the lack of clear prerequisites.
Identification of trend movements
In order to identify both trends and reversals on a chart, it is necessary to understand the techniques used by Dow. The main technique in identifying reversals a sequential analysis of extremes. For example, in the picture, points 2, 4, and 6 mark the maximum of the upward movement, while points 1, 3, and 5 mark the minimum. An uptrend is formed when each successive top and trough is higher than the previous one.
A downtrend, on the contrary, is characterized by descending highs/minimums.
The Dow Theory states that until we get a clear signal for a reversal, the trend remains in force. Here we can draw a parallel with Newton's law of inertia, where a moving object tends to move in the intended direction until another force interrupts its movement. The formation of a lower minimum (5) within the upward movement is an obvious signal of the coming reversal.
In the case when the trend is directed downward, the situation is the opposite. If the price failed to form a lower low and still closed above the current high, it means that the market is influenced by a force opposite to the original movement.
Conclusion
The Dow Theory, as many hope, does not answer the question "how to enter the market at the stage of trend formation?" It is a long-term reversal strategy aimed at minimal risk. Nevertheless, the theory helps us better understand technical analysis in general, and why it works at all because price and is a derivative of all the factors affecting it.
Choosing Your Channel: Bollinger, Donchian, or Keltner?When it comes to trading financial instruments, traders have a plethora of technical indicators to choose from. Among these, Bollinger Bands, Donchian Channels, and Keltner Channels stand out as popular tools for analyzing price movements and identifying potential trading opportunities. Each of these channels has its advantages and unique methods of application. This blog will compare these three channels and provide examples of how each can be used, helping you decide which one is right for you.
I. Bollinger Bands
Understanding Bollinger Bands
Bollinger Bands, developed by John Bollinger in the 1980s, is a volatility-based indicator that measures the standard deviation of price movements. It consists of three lines: a simple moving average (SMA) and two bands that are typically set at two standard deviations above and below the SMA. The distance between the bands adjusts as volatility increases or decreases.
Using Bollinger Bands
Bollinger Bands are useful for identifying price movements and potential reversals. When the bands contract, it indicates low volatility, and when they expand, it signals high volatility. A common strategy is to look for a breakout or breakdown when the bands contract.
Example: If a stock's price has been trading within a narrow range, and the Bollinger Bands contract, a trader might anticipate a breakout or breakdown. If the price breaks above the upper band, it could signal a bullish trend, while a break below the lower band suggests a bearish trend. This breakout should be confirmed with other indicators such as the MACD or RSI.
II. Donchian Channels
Understanding Donchian Channels
Donchian Channels, developed by Richard Donchian in the 1960s, is a trend-following indicator that measures the highest high and lowest low over a set number of periods, typically 20 periods. It consists of three lines: the upper channel line, the lower channel line, and the middle line, which is the average of the upper and lower lines.
Using Donchian Channels
Donchian Channels are primarily used to identify potential breakouts and breakdowns. Traders often use the channels to assess the strength of a trend and determine entry and exit points. The Donchian cloud can be a great tool for establishing lines of support and resistance as the price makes higher highs and lower lows and conversely lower highs or lower lows.
Example: If a stock's price is consistently hitting highs, a trader might use the Donchian Channels to identify a possible breakout. If the price breaks above the upper channel line, it could signal a continuation of the bullish trend. Conversely, if the price breaks below the lower channel line, it may indicate a potential trend reversal. I typically look for a secondary lower high or higher lower to confirm a reversal and then confirm the breakout with an oscillator as seen in the example below.
III. Keltner Channels
Understanding Keltner Channels
Keltner Channels, developed by Chester Keltner in the 1960s and later modified by Linda Raschke, is a volatility-based indicator that uses the average true range (ATR) to measure price movements. It consists of three lines: an exponential moving average (EMA) and two bands set at a multiple of the ATR above and below the EMA.
Using Keltner Channels
Keltner Channels are effective for identifying potential trading opportunities during trending markets and can be used in conjunction with other indicators to confirm price movements. The Keltner Channel is a great tool for identifying overbought/ oversold conditions in a trend. This can help traders find better points of entry for a trade.
Example: A trader might use Keltner Channels to identify potential pullbacks in a trending market. If the price moves above the upper channel line during an uptrend, it could signal an overbought condition, and the trader might wait for the price to pull back toward the EMA before entering a long position. Similarly, if the price falls below the lower channel line during a downtrend, it might indicate an oversold condition, and the trader could wait for a bounce back toward the EMA before entering a short position. The trader should also verify the bounce with other indicators as shown below.
IV. BONUS: Keltner/Bollinger Bands Squeeze Strategy
Channels do not have to be exclusively used on their own. The Keltner/Bollinger Bands Squeeze Strategy is a powerful technique that combines the strengths of both Keltner Channels and Bollinger Bands to identify potential trading opportunities. By understanding the nuances of this strategy, traders can significantly enhance their trading arsenal and make more informed decisions in the market.
The Squeeze: A Sign of Consolidation and Potential Breakout s
The Keltner/Bollinger Bands Squeeze occurs when the Bollinger Bands contract within the Keltner Channels, indicating a period of low volatility or consolidation in the market. This "squeeze" can serve as a precursor to significant price breakouts, either on the upside or downside. By closely monitoring this pattern, traders can identify periods of market consolidation and prepare to capitalize on potential breakouts.
How to Implement the Keltner/Bollinger Bands Squeeze Strategy
To implement this strategy, traders should follow these steps:
Overlay the Keltner Channels and Bollinger Bands on your chart: Start by adding both Keltner Channels and Bollinger Bands to your preferred trading platform's chart. Ensure that the settings of both indicators are adjusted to your desired values.
Identify the Squeeze: Look for periods when the Bollinger Bands contract within the Keltner Channels. This signifies a "squeeze" and acts as a sign that the market is experiencing low volatility or consolidation.
Monitor for Breakouts: Keep a close eye on the price action during the squeeze. When the Bollinger Bands expand outside of the Keltner Channels, this indicates a potential breakout from the consolidation period. The direction of the breakout (upwards or downwards) will depend on the overall market trend and price action.
Enter the Trade: The Keltner/Bollinger Bands Squeeze Strategy can be further enhanced by combining it with other technical indicators, such as the Relative Strength Index, or Moving Average Convergence Divergence. These complementary indicators can provide additional confirmation of potential breakouts and help traders better gauge market conditions. Once a breakout is confirmed, traders can enter a trade in the direction of the breakout. It's essential to use stop-loss orders and manage risk appropriately since false breakouts can also occur.
Exit the Trade: Traders should establish a price target and exit strategy based on their analysis and risk tolerance. This can include setting a specific profit target, using trailing stops, or leveraging other technical indicators to determine when to exit the trade.
Conclusion
Bollinger Bands, Donchian Channels, and Keltner Channels are all valuable technical indicators for analyzing price movements and identifying potential trading opportunities. When deciding which one is right for you, consider your trading style, preferred timeframes, and the specific characteristics of the markets you trade. It's essential to familiarize yourself with each indicator and practice using them in combination with other tools to enhance your trading strategy. We have even shown that these channels can complement each other to form a more comprehensive strategy. Remember, no single indicator is perfect, and incorporating multiple tools can help you gain a more comprehensive understanding of market dynamics. Good luck and happy trading!
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100 Laws of Trading My experience.
I started trading futures over two years ago. During this time, I went through all the circles of trading hell. I searched for myself, selected my trading style, put together a trading system bit by bit. Merged. I accumulated personal experience, bit by bit collected information in books in order to get even a millimeter closer to understanding the market. Often came close to giving up.
But I did not give up and was rewarded.
All this time I have been collecting trading advice in a notebook, which sounded from the best professionals in the world, met in classical literature and was confirmed over and over again by my personal experience.
Over time, there were about a hundred such laws, and I decided to call the notebook in which I wrote them down - the Trader's Bible.
For a professional, these are banal and obvious things. For a beginner - a lifeline. Rope to grab onto. Road signs on a busy highway. What I missed so much in the beginning. How much money, time and nerves I would save if I had this notebook two years ago ...
Today I want to share this experience and give you some motivation if you almost gave up. You will definitely succeed.
“It doesn't really matter if you're right or wrong. What matters is how much money you make when you're right and how much money you lose when you're wrong."
J.Soros.
Law 1: Never average a losing trade.
Even if it looks like it's about to unfold. Even if the deposit allows. Even if nine times averaged and earned. One day, the tenth time will come and take all your money. He will definitely come.
Law 2. Cut losses short. It's better to log in again.
Law 3. Never enter a trade without a stop loss. If you are a beginner, do not rely on your endurance and reaction. This habit will save you more than once, trust me.
Law 4. A professional differs from a beginner in the ability to wait for a favorable alignment. Do not rush. There is an endless stream of chances ahead, some of which will be quite obvious.
Law 5. Do not trade on quiet days and low volumes. Leave this time for rest and self-education. You don't have to trade every day.
Law 6. Do not rely on media forecasts, bloggers and "traders" in the comments. This is either manipulation, or outdated information, or personal interpretation of events. Observe information hygiene and learn to think for yourself. Believe me, those who really have significant information do not shoot videos on YouTube and do not argue in chats.
Law 7. To make money in the market, it is not necessary to know what will happen next. Anything can happen. This is the hardest thing to understand, but it is this kind of thinking that will lead to the result.
Law 8. All you need to make money on the stock exchange is one working model. Do not spray on a hundred techniques and systems. It's not about quantity. Find your working pattern and hone it. He will ensure your old age.
Law 9. The result of each individual transaction is random. No matter how good your analysis is, it guarantees absolutely nothing. Get into the habit of uncertainty. You can be wrong ten trades in a row even with the right analysis. And it shouldn't ruin you.
Law 10. The market can stay irrational longer than you can pay. Get out of your head the desire to deceive the market. Martingales and other “grails” shake generations of traders out of their pants. You won't be an exception, don't even check.
Law 11. After a losing trade, do not dare to recoup. Treat trading like a business, not like playing cards with a friend. Controlled loss is part of this business. Upset, angry? Turn off the exchange, go to the gym - bring the body to exhaustion. Tomorrow there will be new opportunities.
Law 12. Madness is doing the same thing over and over again in the hope of a different result. Don't repeat the same mistake twice. Write it down. Analyze. Draw conclusions.
Law 13. Do not count and do not look forward to profit in advance. Better think about how much you can lose on this trade, it's sobering. Don't count money in trading at all. All analysis is carried out as a percentage of the deposit. This will relieve stress and distract from unnecessary reflection.
Law 14. To begin to succeed, one must almost despair. Almost. But take one more step.
To be continued.
The other side of the tradeTrading has this stigma attached to it, everyone thinks they can come and make their millions. The reality is, 90% of new traders lose 90% of their funds in 90 days.
I've talked for years about the negative side of trading (trust me, I've done this over 20 years) Trading is often perceived as a wonderful, fabulous lifestyle. Cars, yachts, jets and women! Probably fueled by films like the Wolf of Wall Street. But not many people like admitting to the other side of the traders lifestyle. Of course, it's nowhere near as glamorous - it sure as hell won't get social media likes or follows. But it's there and it's real!
There are a couple of main points that I want to touch on, especially for you newer traders coming to find your fortunes.
1) Trading can be boring! Yes, boring as shait. If you are used to having a 9-5, you do not realise the effects (good and bad) on having human interaction throughout the day. You might have a partner you live with, the family. But what about when they go to work or school? You are left with your own thoughts. Yes, this can be dangerous!!!
The issues can include lack of motivation, uncertainty in what to do, overthinking. On your bad days, you have nobody to comfort you and on your good days, you have nobody to share the excitement with! Joining communities can be a good fix here, providing you find a good one. This doesn't have to effect your trading, your strategy or anything else - but interaction could save you from the loneliness.
The solitary nature of trading can sometimes lead to feelings of isolation and loneliness. Without the support and camaraderie of others in a similar field, it can be challenging to share experiences, discuss strategies, or seek advice. Additionally, the pressure and stress of making high-stakes financial decisions can further contribute to a sense of isolation.
2) STRESS - Stress is a huge factor for a trader. Stress could also stem from the loneliness, stress when dealing with finance is an area where a lot of people suffer, traders and non traders alike. The issue is for traders, stress is often self inflicted.
Most new traders come to the market with a view of it's easy, fast paced, exciting and therefore have the perception of making it big.
If it was this easy, people wouldn't spend 7 years becoming doctors or lawyers. Instead they would follow the money! Come on, who wouldn't - Yachts n all.
It's this popular belief that usually drives traders into the stressful state which becomes the norm until they give up!
To counter the loneliness and try to make it big, traders (probably you) I know I did! look at indicators, try to take on as much info as possible! Which takes you down this path.
Indicators. there must be a holy grail, a silver bullet? 100% winning strategy? People waste so much time on retail indicators thinking they will be the one to find the edge. You would be better off having a trip to Vegas and playing the first slot machine you spot!
The next issue is - too much data or the attempt to obtain too much of it! I remember when my setup matched this below (if not more screens)
This is like trying to read 9 books at the same time whilst writing essays in 6 different languages. All of these factors will 100% add to your stress.
You might have anxiety when executing a trade, or feel the burden of stress whilst in a trade. Scared to see the numbers go red and too eager when they go green?! Yup been there, done that. So has every trader out there.
Stop feeling like this.
Creation of a strategy...
All you need to help combat these types of stresses, is find an edge. The edge could be very simple - from reading books, stepping away from the charts, viewing higher time frames, moving away from social media influencers. All the way through to mastering one instrument.
When you see indicators like the image above, what happens if two are in one direction and the rest in another? You start to argue with yourself, you miss good trades and you end up taking bad ones. This leads to stress and then you realise, yup your lonely!
What a cycle to be trapped in!
Now how about you flip the thinking here? Less charts to stare at, less indicators to confuse, more time to read, exercise or simply go play golf. Your edge does not need to be technical, fancy or shown on 48 screens.
I talked about this in the Tradingview live show the other evening.
Here's the link: www.tradingview.com
Sometimes less is more and this can combat the stress and golf is always a winner for loneliness.
Disclaimer
This idea does not constitute as financial advice. It is for educational purposes only, our principle trader has over 20 years’ experience in stocks, ETF’s, and Forex. Hence each trade setup might have different hold times, entry or exit conditions, and will vary from the post/idea shared here. You can use the information from this post to make your own trading plan for the instrument discussed. Trading carries a risk; a high percentage of retail traders lose money. Please keep this in mind when entering any trade. Stay safe.
HOW TO IDENTIFY ORDER BLOCKSHello traders! Today we are going to look at the pattern Order Blocks, what this pattern means and how to trade it.
✳️ What is Order Block?
The largest (from open to close) closest bearish candle to support before a strong impulsive bullish move (last sell candle before the buy candle). The last falling candle before the impulse growth. The high of this candle must be broken by the next candle to confirm it is an order block.
The largest (from open to close) closest bullish candle to resistance before a strong impulsive bearish move (the last buy candle before the sell candle). The last rising candle before the impulsive decline. The low of this candlestick must be broken by the next candlestick to confirm that it is an order block. Order blocks are those areas/zones where financial institutions have manipulated the price and where some of their orders are in drawdown. This "footprint" they are leaving is clearly visible in the order block. Price will usually return to these areas and we will react to this in some way. Order block is a sign of big players in the market.
✳️ The idea behind the pattern and why it works
The movements triggered by big players leave open positions which must be closed. And in order to do that, the price has to test those levels.
Smart money works according to certain algorithms, and we are trying to make money on this. Behind these candlesticks are financial institutions: they deliberately move the market, themselves falling into a drawdown, so they need to return the price to the order block with an imbalance, to reduce losses (to return their open positions to breakeven levels).
Why not close manipulative positions earlier? There is no one to cover them.
When we close large positions, the price automatically moves in the direction of the order block, and it is convenient for the large capital to close the previous manipulated positions, which causes a bounce which we want to jump into. In other words, we find a liquidity gathering point and wait for the return to it.
Order Block is a level to enter or exit.
✳️ Order Block Trading Strategy
Mitigation is a test of a supply/demand area. In our case a block of orders. Closing of old manipulative positions.
1) We are looking for a block of orders.
2) Were the stops pulled out (collecting liquidity, breaking through the obvious highs and lows)? If no, then it is not an order block, let it go. You are not sure? Do not enter.
3) If yes, we consider entering.
A bullish block of orders:
We enter - on price returning to this candle (at least to the high).
Stop - for low.
Take - the nearest level.
A bearish block of orders:
Entry - on the return of the price to this candle (at least to the low).
Stop - behind the high.
Take - the nearest level.
Each Order block can be tested only once.
Trading with the ADX: Identifying Entry and Exit PointsIn the previous post, we discussed the basics of the Average Directional Index (ADX), a popular technical indicator used by traders to determine the strength of a market trend. In this continuation, we will dive deeper into the ADX and explore various strategies for identifying entry and exit points in a trade. By understanding these tactics, you can enhance your trading skills and make more informed decisions.
1. Using ADX and DI lines crossover
One effective way to trade using the ADX indicator is to observe the crossover of the Directional Indicator (DI) lines. The DI lines consist of the Positive Directional Indicator (+DI) and the Negative Directional Indicator (-DI). When the +DI line crosses above the -DI line, it signals a potential buying opportunity. Conversely, when the -DI line crosses above the +DI line, it indicates a possible selling opportunity.
It's essential to remember that the ADX only measures the strength of the trend, not its direction. Therefore, traders should combine the ADX and DI lines to make better trading decisions.
2. ADX level and trend strength
The ADX level can help traders determine the strength of a trend. Generally, an ADX value below 20 indicates a weak or non-existent trend, while a value above 20 suggests a strong trend. When the ADX rises above 20, it may be an opportune time to enter a trade in the direction of the prevailing trend. Conversely, when the ADX falls below 20, traders should consider exiting their positions as the trend weakens.
3. ADX slope and momentum
Another useful aspect of the ADX indicator is its slope. A rising ADX slope indicates that the trend is gaining momentum, offering a potentially favorable entry point. On the other hand, a declining ADX slope suggests that the trend is losing momentum, signaling a possible exit point.
To trade using the ADX slope, traders can apply a moving average to the ADX line. When the ADX line crosses above the moving average, it signifies increasing momentum and a potential entry point. Conversely, when the ADX line crosses below the moving average, it indicates decreasing momentum and a possible exit point.
4. Combining ADX with other technical indicators
The ADX works best when paired with other technical indicators, such as moving averages, Bollinger Bands, or Relative Strength Index (RSI). By combining these tools, traders can gain a more comprehensive understanding of market conditions and make more informed decisions.
For example, traders can use moving averages to determine the trend's direction and the ADX to gauge its strength. If the price is above the moving average and the ADX is above 20, traders might consider entering a long position. Conversely, if the price is below the moving average and the ADX is above 20, traders may consider a short position.
Conclusion
The ADX is an invaluable tool for traders, helping them identify the strength of market trends and potential entry and exit points. By understanding the various strategies discussed in this post, traders can enhance their trading decisions and potentially increase their success rate.
Remember that no single indicator guarantees success, and it's essential to combine the ADX with other technical analysis tools and sound risk management practices. With proper application and a disciplined approach, the ADX can become an indispensable part of your trading toolbox.
Tradingview Volume toolsI've been using Tradingview for just over 8 years now. When I initially started using it I was transitioning from using Footprint tools. I would use techniques that in essence allowed you to see inside a candle. Coupled with techniques such as "DOM" Depth of Market and Cumulative Delta. After a while you get to see some of this stuff without the need of indicators.
Tradingview have steadily added various tools to the platform and with a little help from being able to code your own tools it's made it an interesting space to play.
So here's a quick overview on the abilities, encase you have yet to explore. This is not a lesson on volume as such, just educating you as to what the possibilities can be.
Most would have seen or at least know about the volume on the X axis.
This simply gives an idea of the happening of that particular candle, of course things can alter or yield different results based on settings and time frames.
we've taken the time to incorporate this simple volume in one of our own indicators. Which is coupled with a Stochastic and a few other bits.
It can also be used standalone for spotting divergence for example. You can see how the volume up and price up yet in the third price move up, volume has lowered.
There are also various styles of showing this volume data - one such tool is Weiss waves.
These are great in conjunction with techniques such as Elliott Waves and Wyckoff. I've shown this over the last two years here on TradingView and both of these techniques have been very useful on Bitcoin during this time.
I mentioned CVD the cumulative Volume Delta, here you can see this under the Weiss Wave indicator. Like I said, have a play around with these on your own charts. You will spot some interesting things once you get to know them. Try various instruments as well as timeframes.
More recently I posted a video on using Chat GPT to build a pinescript indicator. Here's the link to that post.
Well, I've taken that a few steps further.
What started as an idea in terms of using Footprint, X axis volume and then what's called periodic volume profile. I personally like to turn the bars/candles off when I got this on.
Here's another view - this is the session volume profile and periodic volume combined without the candles being visible.
This new indicator extracts various pieces of data and paints key levels based on my old trading style. As you can see today, this is showing like a magnet where the key levels in Bitcoin are likely to be. There's a bit more to it than that but in essence, its what I am showing here.
To finish with you have two other tools here on Tradingview - one which is fixed range volume, just as it says on the tin. You can see volume inside a range you determine.
I have used a low and a high here to find the PoC - Point of Control.
Then finally, you have visible range; this I tend to use less personally, but I know many people like it. This allows you to view the volume profile based on what you have visible on the chart. As you can imagine, as you zoom in n out, it can change.
Like I said, this is not a lesson on each tool - it's an intro to, for you to spend the time to play around with these tools. Feel free to ask questions below.
Enjoy the rest of the week!
Disclaimer
This idea does not constitute as financial advice. It is for educational purposes only, our principle trader has over 20 years’ experience in stocks, ETF’s, and Forex. Hence each trade setup might have different hold times, entry or exit conditions, and will vary from the post/idea shared here. You can use the information from this post to make your own trading plan for the instrument discussed. Trading carries a risk; a high percentage of retail traders lose money. Please keep this in mind when entering any trade. Stay safe.
How Much Gold Does Your Portfolio Need?Economists make forecasts to make weathermen look good. Trying to forecast trends in complex systems is never easy. As with weather, financial markets are influenced by a myriad of factors which can make prediction akin to gambling. Time in the market beats timing the market so a far safer bet is building a diversified and informed portfolio.
As mentioned in our previous paper , gold is a crucial addition to any well-diversified portfolio. Gold offers investors the benefits of resilience during crises, diversification, and low volatility while also being a good hedge against inflation.
With crisis ever-present, from pandemics and geo-political conflict to financial instability and recession, uncertainty is on everyone’s lips, including central banks which bought a record 1,135 tonnes of gold last year. Central Banks have shown no signs of slowdown going into 2023, buying 74t in Jan and 52t in Feb, the strongest start to central bank buying since 2010. It is clear why, with rising global inflation due to 2 years of unprecedented QE. A decade of cheap money has its costs which are coming back to bite both consumers and central banks.
This is now being played with collapsing banks and crumbling businesses. Though governments may term these exceptions, they’re the inevitable consequence of hiking rates too fast. And even though inflation has now started to cool, it is proving stubborn and the risk of recession looms. In crisis, institutions and individuals rush to gold.
It’s no wonder then that gold prices spiked in March nearing an All-Time-High above USD 2,000/oz. Gold continues to trade above the key 2000 level even in April. Even now crises show no sign of slowing. Recession talks have become commonplace and phantoms of 2008 haunt with bank collapses. The world is increasingly moving towards reshoring and friendshoring, and de-dollarization is talked about more and more. It is almost inevitable that gold will break its all-time-high soon.
But, buying gold is the easy part, in fact, our previous paper covered 6 Ways to Invest in Gold. Managing gold as part of a larger portfolio is more nuanced. Allocating the right amount, finding the right entry, and knowing when to cash out are all critical.
This paper aims to address two questions –
1. What are the key drivers of gold prices in this decade
2. How should investors use gold in balancing portfolios to navigate turbulent times?
What Propels Gold After Its All Time High?
SVB and Credit Suisse pushed it to its brink. In fact, spot prices in India, Australia, and the UK sailed even above their All-Time-High. But what propels gold now?
Financial Instability
Was Credit Suisse the End?
“The current crisis is not yet over, and even when it is behind us, there will be repercussions from it for years to come.” - Jamie Dimon
Unfortunately, Credit Suisse was likely just a symptom of the larger problem. 2-years of near-free money has inevitably led others to make risky bets which catch up to them during periods of QT.
Additionally, Credit Suisse and SVB’s collapse were both set off by an unprecedentedly aggressive rate hiking cycle. Fed is stuck between a rock and a hard place as they try to control runaway inflation with aggressive rate hikes. Higher rates for longer increase the risks of financial instability.
Stubborn Inflation and Recession Risks
Stubborn inflation? Wasn’t inflation on its way down after almost a year?
Yes and No. Although yearly inflation has definitely cooled in most countries from their peak last year, inflation continues to tick up month-by-month above the targets that central banks have set for themselves. It is not expected to reach below their targets even before 2025 in many countries.
This is because although energy and commodity prices have cooled with demand waning, core inflation continues to remain stubbornly high. Additionally, food and energy prices are still volatile.
On the back of this, recession risks remain high. Recently released FOMC meeting minutes showed that officials expect a recession in the second half of the year. A recession in many countries now seems inevitable. Gold shines during recession and high-inflation environments.
High Interest Rates
Wasn’t the Fed done hiking?
Currently, CME’s FedWatch tool shows a ~72% chance of another 25bps hike next month despite the surprisingly low US CPI print.
Does another 25bps matter?
What’s more important is that 25bps is the peak rate and most central banks are calling this summit a pause and not a pivot. As such, rates will likely remain high for the remainder of 2023. Gold tends to perform well during high interest rate and risk-off environments.
Escalating Tensions, Friendshoring, and De-Dollarization
Last but definitely not least are central banks and their gold-buying binge. Though some of this can be explained by the ultra-high inflation. It is undeniably also driven by rising political tensions. The conflict in Ukraine continues to rage and the US extend its trade war against China with the CHIPS act. This is driving many of the largest economies to reshore and friendshore key supply chains.
This also means relying less on the USD which can be weaponized by the US. De-dollarization has been underway for the last 23 years as the share of USD holdings in foreign exchange reserves has declined from 71.5% to 58.3% over the past 23 years. Current conditions make it more likely that the trend will accelerate. Gold inevitably benefits from all of this as it is one of the only assets that no other central bank can print or freeze.
All of these factors will likely drive gold in the coming decade. But instead of setting a price target, investors can be prudent and methodical by properly allocating it as part of a larger portfolio.
Using Gold in a Portfolio
From 2000 until now, the following portfolios would deliver:
Since 2000, gold has been the best performing asset out of the 3 main components of a basic portfolio – Large Cap stocks (SPY), Treasury Bonds (10Y), and Gold. Gold price has risen 609% compared to SPY at +193%. Investing in 10-year maturity treasury bonds would have netted investors 110% during these 23 years.
As such, larger portfolio allocation towards gold would have yielded investors far more during this period. However, this comes at the downside of higher volatility. Gold has had an average 12-month rolling volatility of 15.8% over the last 23 years, slightly higher than SPY’s 14%.
Still, not all volatility is bad, especially if the returns outweigh the risk. Volatility to the upside can be beneficial to investors. In order to measure the returns from the portfolio after accounting for higher volatility-associated risk, investors can measure the risk-adjusted returns using the Sharpe Ratio and Sortino Ratio.
Sharpe Ratio measures the amount of excess return generated by taking on additional volatility-related risk. The higher the Sharpe Ratio, the better the portfolio is performing relative to its risk. The figure below contains the Sharpe Ratio for each of the portfolios across the last 23 years.
Since each year had a different risk-free rate due to changing monetary policy, the Sharpe ratios vary for every year and there are periods during which gold-heavy portfolios have highest Sharpe ratios and others where it has the lowest. This highlights gold's sensitivity to changes in monetary policy.
Sortino Ratio also measures risk-adjusted returns like the Sharpe Ratio however it only considers the risk of downside volatility. In other words, it measures return for every unit of downside risk. The figure below contains the Sortino Ratio for each of the portfolios.
A key difference between the Sharpe and Sortino Ratios can be seen in the readings for 2009. Sharpe Ratio for a gold-heavy portfolio is the lowest in 2009 due to high volatility in gold prices. However, since this was volatility to the upside, the Sortino Ratio for a gold-heavy portfolio in 2009 is the highest.
In 2023, a Gold heavy portfolio has performed the best and has the highest Sharpe and Sortino Ratio due to gold's relative overperformance amid the banking crisis.
DISCLAIMER
This case study is for educational purposes only and does not constitute investment recommendations or advice. Nor are they used to promote any specific products, or services.
Trading or investment ideas cited here are for illustration only, as an integral part of a case study to demonstrate the fundamental concepts in risk management or trading under the market scenarios being discussed. Please read the FULL DISCLAIMER the link to which is provided in our profile description.
Unpopular trading advice: fall in LOVE with one pair ONLYIn a world where you can love anyone and anything your heart desires, fall in love with ONE currency pair ONLY.
The notion of "the more pairs I trade, the more money I will make" is false. If you wanna be a consistently profitable trader, it is more beneficial to focus on a small selection of securities and master them, and there is a concrete reason for that. Concentrating on one or two currency pairs instead of trading every single major, minor, and exotic pair will be more efficient, less confusing, and more profitable. When you study every single movement of any given pair, you get more experienced at trading it and you make more rational decisions and analyses.
Looking at the chart illustration, we might observe the trading log of all transactions we executed in April and May so far. With 8 trade entries and all of them being EUR/GBP, a total return of +9.6% has been generated constituting an approximate win rate percentage of 70%. Obviously, not every trade resulted in being profitable as we encountered 2 losses and a breakeven closure. Nevertheless, as we always indicate, trading is a game of big numbers and probabilities. Instead of trading 10 securities, we have only been focusing on one single currency pair recently.
One crucial thing that needs to be noted is the following: not always will the one specific currency pair of your choice provide you with clear swing opportunities as the example of EUR/GBP portrayed on the graph. Periods of long and dull consolidations, indecisions, and some other moments will take place and make a derivative unlikeable and less efficient to trade for a period of time.
Therefore, always have one or two other trades on the radar to eventually monitor and analyse along with the currency pair of your preference.
Love will save the world.
Investroy.
From A to D:How to Use the ABCD Pattern to Forecast Market MovesAre you familiar with the ABCD trading pattern?
In this article, I will provide a comprehensive explanation of the ABCD trading pattern, including its characteristics, how to identify it, and how to use it in trading. So, sit back, relax, and enjoy the information provided in this article.
The ABCD ( AB=CD ) pattern , It's a harmonic pattern that is easily recognizable on a price chart and is composed of four points. This pattern follows a specific sequence of market movements that traders can use to predict potential price swings in the future. The ABCD pattern can be applied in various market conditions, including both bullish and bearish markets, and can be used to speculate on the movement of different forex pairs by simultaneously selling one currency and buying another. However, it's important to keep in mind that the ABCD pattern should not be the sole basis for making trading decisions. It should be used as a tool to inform your decisions.
The first step in opening a position using the ABCD pattern is to identify the pattern on a price chart. Multiday charts can provide insight into the behavior of forex markets over an extended period. You can use daily, hourly, or minute-by-minute charts to spot the pattern, but it's crucial to choose a time horizon that aligns with your goals. For instance, traders looking to hold positions for days or weeks may prefer daily charts instead of minute charts.
Once you have selected the appropriate chart type, you can search for the ABCD pattern to identify bullish or bearish signals.
Let's now take a closer look at how the AB=CD pattern forms and how to spot it:
When identifying the ABCD pattern, traders focus on the legs or moves between points. The moves in the direction of the overall trend are denoted as AB and CD, while BC represents the retracement.
Once you think you have identified an ABCD pattern on a price chart, the next step is to use Fibonacci ratios to validate it. This process can also help you pinpoint where the pattern may complete and where to consider opening your position.
The "classic" ABCD pattern follows a specific sequence of market movements, with the following rules:
In a "classic" ABCD pattern, the BC line should ideally be 61.8% or 78.6% of AB. To determine this, traders often use the Fibonacci retracement tool on the initial move from point A to point B. The BC line should end at either the 61.8% or 78.6% Fibonacci retracement level of AB. This helps confirm the validity of the ABCD pattern and gives an idea of where to potentially open a position.
Once the BC leg of the pattern is complete, traders would typically look for the CD leg to reach the 127.2% or 161.8% extension of the BC leg. At this point, traders might consider entering a sell position if the pattern is bearish or a buy position if the pattern is bullish.
The ABCD pattern extension occurs when the CD leg extends beyond the typical 127.2% and reaches 161.8%. This indicates that the price trend may continue in the same direction for a longer period, providing a potentially profitable trading opportunity for traders who have correctly identified the pattern. It's important to note that this extension is not always reliable and should be used in conjunction with other technical analysis tools to confirm the validity of the trade.
Note: In strongly trending markets, the retracement (BC) may not reach the usual 61.8% or 78.6% of AB, but only 38.2% or 50%. It's important to adapt to market conditions and adjust your analysis accordingly.
Moreover:
During the move from A to B, the market should not exceed either A or B.
During the move from B to C, the market should not exceed either B or C.
During the move from C to D, the market should not exceed either C or D.
For a bullish ABCD, point C must be lower than A, and D must be lower than B.
For a bearish ABCD, point C must be higher than A, and D must be higher than B.
To identify an ABCD pattern on your TradingView trading chart, follow these six steps:
1 ) Log in to your TradingView trading account and open a market chart.
2 ) Locate the AB line. Remember that this move should be completely contained within points A and B.
3 ) Locate the BC retracement. This should reach either the 61.8% or 78.6% level of the move from A to B.
4 ) Draw the CD line. Using the AB and BC lines, you should be able to predict where point D will fall. CD will generally be equivalent to AB and either 127.8% or 161.8% of BC in both price and time.
5 ) Keep an eye out for price gaps and wide-ranging bars in the CD leg. These can indicate that an extension is forming, implying that CD may be longer than AB.
6 ) Trade the possible retracement at point D. If you've identified a bearish ABCD pattern, consider opening a sell position. On the other hand, if you've found a bullish one, consider buying.
And here are a couple of examples:
I hope you found this guide on identifying the ABCD pattern useful. Let me know your thoughts in the comments section below, and don't forget to like and follow me if you found this guide helpful.
May the Fourth Be With You - And your Stop losses!Star Wars has been around since 1977 which was written and directed by George Lucas.
During that time, there have been phenomenal quotes, lessons and adventures that have been shared.
Instead of telling you different lessons Star Wars can teach you about trading.
How about I share some quotes and how you can apply them?
Here are the ones I find are the most applicable.
#1: "I find your lack of faith disturbing."
Use this as a reminder to stay confident in your trades, even when the market is unpredictable. Have faith in your strategy. Have faith in your commitment. Have faith in your strong mindset.
#2: "Your focus determines your reality."
Stay focused on your trading goals and strategy. It’s not about what others see. It’s not about what others feel. It’s about you in your own work station, planning, preparing and executing accordingly.
#3: "Do or do not, there is no try."
Commit fully to your trades, rather than hesitating or second-guessing. When it’s lined up, ACTION.
When you see a trade setups, write them down and prepare for execution. Don’t try… DO!
#4: "Fear is the path to the dark side."
Stay level-headed and not let fear or panic drive your trading decisions. Fear doesn’t exist. Only danger does. We are fearful most times in our head when there is no apparent danger. Remember this when you feel fear.
#5: "In my experience, there's no such thing as luck."
Successful trading is based on skill, probabilities and strategy, not luck.
#"6: The Force will be with you, always."
Here’s a reminder that your skills and strategy will guide you through both good and bad trading times. In this case the force is your proven strategy, your will, your commitment and your strong mind.
#7: "You must unlearn what you have learned."
Be open-minded and flexible when it comes to adapting your trading strategy. We learn as sheeple to buy low sell high. While I have gone against the idea and instead BUY HIGH, SELL HIGHER.
Also, when everyone buys, is normally where the Smart Money offloads theirs. And when retail dumb money sells, that’s where Smart money BUYS.
Did you find these useful?
Which one resonated the most with you?
When Less is MoreLet’s say you are trying to make a tough decision, you know like everyone did in their life. You've got loads of information at your fingertips, but how do you know what's most important? Should you spend hours analyzing every detail, using all the information, flooding your brain with the information or should you trust your gut and take a leap of faith?
It turns out this is a classic problem that experts have been studying for years. Their findings might surprise you.
You might think that more information is always better, I once felt the same. But that's not necessarily true. In fact, having too much information can actually lead to worse decisions and overconfidence in your abilities or simply just make your head hurt.
Let's look at a study where 25 experienced bookmakers were asked to predict the top five horses in 45 races. The bookmakers were given a list of 88 variables commonly found on a past performance chart of a racehorse, and they had to rank the importance of each one. Then, they were given past data on the races in increments of 5, 10, 20, and 40 variables, which they had previously selected as the most important.
What did the study find? Well, when the bookmakers only had five pieces of information, their accuracy and confidence were closely related. But as they received more information, their accuracy plateaued, and their confidence skyrocketed.
With 40 pieces of information, the bookmakers' confidence was over 30%, even though their accuracy remained the same. In other words, more information doesn't lead to more accuracy; it just leads to higher overconfidence.
A similar study looked at the ability of college football fans to predict the outcomes of 15 NCAA games. Participants had to demonstrate their knowledge of football before the study, and they were given a range of statistics, such as fumbles, turnover margin, and yards gained, to help them make their predictions.
The computer model was given the same data to see if more information would lead to better predictions.
So how did it go? The computer model's accuracy increased as more information was added, but the human experts' accuracy did not improve with more information. In fact, their accuracy remained about the same, regardless of whether they had six or 30 pieces of information. But just like the bookmakers, their confidence increased with the amount of information available, even though it didn't actually make them more accurate.
Related to stock analysis, a study was conducted where financial analysts were given the task to forecast fourth-quarter earnings in 45 cases. The information was presented in three different formats.
The first format consisted of the past three quarters of EPS, net sales, and stock price, which is the baseline data.
The second format included baseline data plus redundant or irrelevant information
The third format included baseline data plus non redundant information that should have improved forecasting ability, such as the fact that the dividend was increased.
The analysts were asked to provide their forecast and their confidence in their forecast.
Interestingly, both the redundant and nonredundant information significantly increased the forecast error, meaning that more information did not lead to better accuracy.
However, the analysts' self-reported confidence ratings for each of their forecasts increased significantly with the amount of information available. This suggests that more information did not help the analysts make better forecasts, but it did make them more overconfident in their predictions.
So what does all this mean? Well, it suggests that sometimes, less is more. When it comes to decision-making in trading or investing, it's important to consider the quality of the information you have, not just the quantity.
This reminds me of Joel Greenblatt, a prominent American investor and hedge fund manager, who has shown that when it comes to picking stocks, less is often more.
In fact, Greenblatt's strategy is refreshingly simple: he focuses on only two metrics - return on capital employed (ROCE) and earnings yield - to identify undervalued companies that have the potential to deliver strong returns.
While this may seem like an overly simplistic approach in today's world of big data and complex algorithms, Greenblatt's track record speaks for itself.
His investment firm, Gotham Capital, reportedly generated an average annualized return of 40% from 1985 to 2005, a remarkable feat that many attribute to his disciplined use of these two key metrics.
In a world where we are bombarded with endless amounts of data and information, it's refreshing to see that sometimes the simplest approach can be the most effective.
CBOT Soybean Complex: An IntroductionCBOT: Soybean ( CBOT:ZS1! ), Soybean Meal ( CBOT:ZM1! ), Soybean Oil ( CBOT:ZL1! )
Today, I am starting a new series on CBOT soybeans, one of the most liquid commodities contracts in the world. In March 2023, Soybean, Soybean Meal, and Soybean Oil together traded 14.0 million lots, contributing to 42.6% of CME Group agricultural futures and options volume, and 2.0% of overall Exchange monthly volume.
Soybean Market Fundamentals
Soybeans are the world’s largest source of animal protein feed and the second largest source of vegetable oil. Soybeans are the most-traded agricultural commodities, comprising more than 10% of the total value of global agriculture trade.
According to the World Agricultural Supply and Demand Estimates (WASDE), global soybean production for 2022/2023 crop year is 369.6 million metric tons. Let’s visualize this: If we were to distribute the entire crops to the world population evenly, each person would get approximately 46 kilograms of soybeans.
The U.S., Brazil and Argentina are the largest soybean producers, accounting for 80% of the global production. The U.S. is the single largest soybean producer and exporter, harvesting 4.3 billion bushels a year and exporting 47% of it, according to the WASDE.
The heart of U.S. soybean production is the Midwest. In the main part of the soybean belt, planting takes place from late April through June, with harvest beginning in late September and ending in late November.
About two thirds of the total soybean crop is processed, or crushed, into soybean oil and soybean meal. The term “crush” refers to the physical process of converting soybeans into its oil and meal byproducts.
The crush spread refers to the difference between the value of soybean meal and oil and the price of soybeans. It represents the gross processing margin from crushing soybeans.
When a bushel of soybeans weighing 60 pounds is crushed, the typical results are:
• 11 pounds of soybean oil (18%)
• 44 pounds of soybean meal (73%)
• 4 pounds of hulls (6%)
• 1 pound of waste (2%)
Soybean meal is used by feed manufacturers as a prime ingredient in high-protein animal feed for poultry and livestock. It is further processed into human foods, such as soy grits and flour, and is a key component in meat or dairy substitutes, like soymilk and tofu.
After initial processing, soybean oil is further refined and used in cooking oils, margarines, mayonnaise and salad dressings and industrial chemicals. Soybean oil may also be left unprocessed and used in the production of biodiesel fuels.
Exports are big business for U.S. soybean farmers. According to the data from U.S. Bureau of Economic Analysis, soybean exports totaled $6.9 billion in the first two months of 2023, contributing to 1.4% of all U.S. exports of goods and services. Soybean exports have increased dramatically since 2000 as the demand for meat and poultry grew in Europe and Asia, particularly in China.
CBOT Soybeans Futures and Options
Soybean futures began trading at the Chicago Board of Trade in 1932, followed by futures on its byproducts: Soybean Oil in 1946 and Soybean Meal in 1947.
Soybean (ZS) futures are physically delivered contracts based on No. 2 yellow soybeans. Each contract has a notional value of 5,000 bushels, equivalent to 136 metric tons. Soybean contracts are listed for the months of Nov., Jan., Mar., May, Jul., Aug., and Sep., projecting out about 3.5 years in the future.
You may have heard of the terms “New Crop” and “Old Crop”. The former refers to crops that have not been harvested. For soybeans, it’s Nov. contract (ZSX3), which coincides with the harvest season. For contract months May, Jul., Aug., and Sep. 2023, soybeans available for sales are from the previous crop year, hence the name “Old Crop”.
Soybean options (OZS) have a contract unit of 1 ZS futures contract. It is deliverable by the corresponding futures contract, with the last trading day set at one month prior to futures expiration month.
Soybean Meal (ZM) futures are also physically delivered contracts. Each contract has a notional value of 100 short tons, equivalent to 91 metric tons. Soybean Meal contracts are listed for the months of Jan., Mar., May., Jul., Aug., Sep., Oct., and Dec. A total of 25 contracts are listed simultaneously. Because of the use of soybean meal for animal feed, its demand is closely aligned with the livestock and poultry industry. For the export market, instead of soybean meal, buyers usually buy soybeans and process them in their home country.
Soybean Meal options (OZM) have a contract unit of 1 ZM futures contract and are deliverable by the corresponding futures contract.
Soybean Oil (ZL) futures are physically delivered contracts. Each contract has a notional value of 60,000 pounds, equivalent to 27.2 metric tons. Soybean Oil contracts are listed for the months of Jan., Mar., May., Jul., Aug., Sep., Oct., and Dec. A total of 27 contracts are listed simultaneously. While soybean oil is a leading ingredient for edible oil, oilseeds also include rapeseed, sunflower, sesame, groundnut, mustard, coconut, cotton seeds and palm oil. Whenever one of them becomes too expensive, food companies would substitute it with a cheaper ingredient. Hence, soybean oil price is highly correlated with the other oilseed products.
Use Cases for CBOT Soybeans Contracts
At every stage of the soybean production chain, from planting, growing and harvest, to exporting and processing, market participants face the risk of adverse price movements. Prices of soybean and its byproducts continuously fluctuate, largely determined by crop production cycles, weather, livestock production cycles, and ongoing shifts in global market demand.
In this section, I will illustrate how producer, storer, processor and soybean user could use CBOT soybeans futures and options to hedge market risks.
Soybean Farmer (Producer)
When a US soybean farmer plants the crops in April, he is said to have a Long Cash position. The farmer is exposed to the risk of falling soybean price during the November harvest season. To hedge the price risk, our farmer could enter a Short Futures position now, and buy back and offset the futures when he is ready to sell the crops.
Since the cash market and futures market are highly correlated, loss or gain in the cash market will be largely offset by the gain or loss in the futures market. The farmer is left with basis risk, which is adverse changes of the cash-futures spread. It is usually much smaller than the outright price risk. In the context of futures trading, notably commodities, basis refers to the difference between the spot (cash) price of a commodity and the price of a futures contract for that same commodity.
Grain Elevator (Storer)
After the crop is harvested, farmer or merchandiser would usually store the soybeans in a grain elevator and wait for the right time and price to sell. Soybeans could be stored for a year but would incur monthly storage costs. The decision to store depends on whether expected future price gains outweigh the storage costs.
The merchandizer is exposed to the risk of falling soybean price, which would cause his soybean inventory (old crop) to decline in value. To hedge the price risks, he could establish a Short Futures position for the expected period of storage and buy it back when he is ready to sell.
Oilseed Processor
For soybean processing mill, crush spread represents the gross processing margin from crushing soybeans. It is exposed to the risk of rising soybean price where meal and oil prices fail to catch up.
Soybeans trade in bushels, soybean meal trades in short tons and soybean oil trades in pounds. The prices of the three commodities need to be converted to a common unit for an accurate calculation. A bushel of soybeans produces about 44 pounds of soybean meal. Since Soybean Meal futures are priced per ton, multiplying the meal price by 0.022 represents the meal price per 44 pounds. That same bushel of soybeans also produces 11 pounds of soybean oil. Since Soybean Oil futures are priced per pound, multiplying the soybean oil price by 0.11 represents the oil price per 11 pounds. (www.cmegroup.com)
Processor could lock in the crush margin by a crush spread trade. To ease the difficulty of constructing and executing the spread, CME Group facilitates the board crush that consists of a total of 30 contracts; 10 Soybean, 11 Soybean Meal, and 9 Soybean Oil.
Livestock Farmer (User)
Large-scale farms usually buy corn, soybean meal and other ingredients to produce their own feed. Farmers are exposed to the risk of rising ingredient costs. They could hedge the price risk by establishing long positions in CBOT corn and soybean meal futures.
For hog farmers, gross production profit is represented by the Hog Crush Margin. It is defined by the value of lean hog (LH) less the cost of weaned pig (WP), corn (C) and soybean meal (SBM). In the futures market, traders could replicate the economic hog crush margin with a Hog Feeding Spread involving CME lean hog (HE), CBOT Corn (ZC) and CBOT Soybean Meal (ZM). There is no futures contract for weaned pig (piglet).
If you expect hog margin to grow, Long the feeding spread: Buy lean hog, sell corn and soybean meal. For a shrinking margin, Short the spread: Sell hog, buy corn and meal.
This concludes Part 1 of our introduction to CBOT Soybean complex. In Part 2, I plan to discuss major reports that move the soybean markets:
• World Agricultural Supply and Demand Estimates (WASDE)
• USDA Prospective Plantings Report
• USDA Grain Stocks Report
• CFTC Commitment of Traders Report
Happy Trading.
(To be continued)
Disclaimers
*Trade ideas cited above are for illustration only, as an integral part of a case study to demonstrate the fundamental concepts in risk management under the market scenarios being discussed. They shall not be construed as investment recommendations or advice. Nor are they used to promote any specific products, or services.
CME Real-time Market Data help identify trading set-ups and express my market views. If you have futures in your trading portfolio, you can check out on CME Group data plans available that suit your trading needs www.tradingview.com
Quick Guide to Understanding Support and ResistanceHello dear @TradingView community!
Have you ever heard of the concept of "support and resistance" in trading? It's actually one of the most widely used concepts in trading! However, it's interesting to note that everyone seems to have their own idea of how to measure support and resistance.
So, let's go back to basics. Imagine a zigzag pattern that's moving up - this is known as a "bull market." When the price moves up and then pulls back, the highest point reached before it pulled back becomes resistance. Resistance levels indicate where there will be a surplus of sellers.
On the other hand, when the price continues up again, the lowest point reached before it started back is now support. Support levels indicate where there will be a surplus of buyers. In this way, resistance and support are continually formed as the price moves up and down over time.
You might be wondering how to actually trade using support and resistance. One way is to "trade the bounce" - meaning to buy when the price falls towards support, and sell when the price rises towards resistance. Another way is to "trade the break" - buy when the price breaks up through resistance, and sell when the price breaks down through support.
But how do you know when support and resistance levels have actually been broken? It's important to note that support and resistance levels are not exact numbers. Often times, you will see a support or resistance level that appears broken, but soon after find out that the market was just testing it.
To filter out false breakouts, it's helpful to think of support and resistance more as "zones" rather than concrete numbers. One way to find these zones is to plot support and resistance on a line chart rather than a candlestick chart. This helps you focus on intentional movements of the market rather than its reflexes.
There are also some interesting tidbits about support and resistance - for example, when the price passes through resistance, that resistance could potentially become support.
And the more often price tests a level of resistance or support without breaking it, the stronger the area of resistance or support becomes.
So there you have it - a quick and easy guide to understanding support and resistance in crypto trading!
VIX/VIX3M: Tricks for Reading the VIX Part IIPRIMARY CHART: S&P 500 (SPX) with VIX/VIX3M ratio in subgraph on a weekly time frame
Tricks for Reading the VIX Part I
SquishTrade's original 2022 article on VIX entitled "Tricks for Reading the VIX" covered the basic concepts of the CBOE's Volatility Index (VIX) to aid in understanding and interpreting VIX and its behavior relative to the S&P 500 ( SP:SPX ). It also explained generally how VIX values are derived, reviewed a few historical examples, and identified the historical mean (20 VIX) as well as some outliers.
Furthermore, the original piece delved into the usual inverse relationship between VIX and SPX. But in its later sections, it explained how divergences from this usual inverse relationship between VIX and SPX may distinguish lasting market bottoms from interim trading lows. If interested, the following link provides the original article on VIX.
A couple of points from this original article on VIX may be beneficial to readers who are less familiar with VIX. VIX is a measure of implied volatility for SPX derived from the pricing of a wide range of options prices with approximately 30 days to expiration. Specifically, only SPX options with more than 23 days and less than 37 days to expiration are included. CBOE introduced the VIX in 1993 to measure the options market's expectation of implied volatility from at-the-money SPX index options (where strikes of the options are at or very close to where the underlying index price is trading). But ten years later (2003), CBOE updated the VIX formula to track not only at-the-money options, but a wide range of SPX options focusing now on out-of-the-money strikes.
CBOE's website contains a helpful FAQ on VIX here . A relevant excerpt with more detail on how VIX is calculated is available in a footnote (FN 1) at the end of this post.
The last two concepts for this introduction are important. SPX implied volatility, which is what VIX is intended to measure, and realized volatility should be distinguished as they are not the same. And VIX index values tend toward mean-reversion in the long term rather than trending action. But trends within VIX can nevertheless be identified within the broader context of its mean-reverting character. SPY_Master has an excellent chart covering a recent VIX trend shown as Supplementary Chart A:
Supplementary Chart A
VIX/VIX3M: Tricks for Reading the VIX Part II
In this sequel to the original post, SquishTrade will cover the VIX/VIX3M ratio. To understand this ratio, it is important to understand basic concepts about VIX, its interpretation, and its inverse relationship as well as excepts to that relationship, which topics are covered in the prior article or elsewhere on trustworthy financial websites including CBOE's.
VIX3M Basics
Furthermore, VIX3M is vital to understanding the VIX/VIX3M ratio. VIX3M is essentially a 3-month forward implied volatility index for SPX. CBOE's brief description of VIX3M index follows:
"The Cboe 3-Month Volatility IndexSM (VIX3M) is designed to be a constant measure of 3-month implied volatility of the S&P 500® (SPX) Index options. (On September 18, 2017 the ticker symbol for the Cboe 3-Month Volatility Index was changed from “VXV” to “VIX3M”).The VIX3M Index has tended to be less volatile than the Cboe Volatility Index® (VIX®), which measures one-month implied volatility. Using the VIX3M and VIX indexes together provides useful insight into the term structure of S&P 500 (SPX) option implied volatility."
The term-structure of implied volatility (IV) means the relationship, or comparison, between different implied-volatility measures based on different terms (time periods) for measuring implied volatility such as a one-month period, three-month period, six-month period, or one-year period. Term structure can be also understood by remembering that this term is used to describe the yield curve, varying interest rates on risk-free government bonds (same type of security) with different maturities ranging from short term to long term.
In short, the ratio of VIX/VIX3M allows insight into the shorter end of the IV term structure by allowing investors and traders to see both the 30-day (one-month) and the 90-day (three-month) outlook for expected volatility for SPX based on its index options premiums.
VIX and VIX3M Comparison
VIX3M and VIX can be distinguished based on the time frame as discussed in the prior paragraphs. One is a constant measure of approximately 30-day IV for SPX, and the other is a constant measure of approximately 3-month IV for SPX.
VIX3M tends to have higher values than VIX. This is because VIX3M considers longer-dated option prices than VIX considers. The exception occurs at significant SPX lows, including interm trading lows both in bull-market retracements and in bear markets, and in more lasting bear-market lows.
VIX tends to be more volatile than VIX3M. This is true even though VIX3M tends to have slightly higher values.
The final point of comparison between VIX and VIX3M is that two indices are highly correlated as one might expect. This can be seen from placing them both on a chart together. Try placing them both on a chart together in TradingView, which may help some visualize and remember the close relationship between VIX and VIX3M by working with the symbols themselves. It's relatively easy to do in a couple steps. Load a chart of VIX. Then click the plus symbol next to the ticker symbol on the left upper corner of the TradingView chart screen, ad then add VIX3M to the chart. Be sure to click "New Price Scale" option when selecting VIX3M as the new symbol to be compared.
VIX/VIX3M Ratio Interpretation
The Primary Chart above shows the VIX/VIX3M ratio over the past six years of market history. This ratio is included in the subgraph below the SPX price chart. This chart uses a weekly time frame to ensure the data can be viewed over several years with ease. Notice how peaks in this ratio correlate to some extent with lows in SPX.
Interestingly, peaks were higher in the left half of the chart between 2018 and 2020. Peaks in the current bear market have been lower relative to prior peaks in this ratio. Many peaks have been labeled on the Primary Chart for ease of reference.
As discussed, VIX3M tends to have higher values than VIX. This is because VIX3M considers longer-dated option prices than VIX considers. To understand the VIX/VIX3M ratio, it helps to focus on the exception to the general rule that VIX3M tends to have higher values than VIX. The exception occurs typically when an SPX selloff causes a spike higher in VIX relative to VIX3M.
Why does VIX spike higher on a relative basis, causing the ratio to rise above 1.00 / 1.10? When short-term panic occurs in markets around trading lows (or final lows as well), VIX outperforms VIX3M because VIX focuses on 30-day IV and VIX3M focuses on 90-day IV (longer-term on the IV term structure). This causes the term structure to invert briefly when VIX rises above VIX3M (which is the same as VIX3M trading at a discount to VIX).
When VIX spikes above VIX3M even briefly, it shows that the market expects IV farther out on the term structure at three months to be lower than current implied volatility levels. In plain English, this means the market expects volatility to fall in several months relative to current 30-day forward levels (based on SPX options prices 23 to 37 days until expiration). And when the IV term structure normalizes as it always does after an inversion, meaning that short-term vol is lower than longer-term vol generally, this means that VIX has to fall relative to VIX3M. And remember that when VIX falls, SPX rises given the usual inverse relationship between the two. Don't forget that exceptions to this usual inverse relationship occur when VIX and SPX move in tandem, and such aberrations in the normal VIX-SPX relationship are crucial to notice as discussed in the original 2022 article on VIX.
Finally, here is a chart showing a close-up view of the bear market starting in January 2022 with VIX/VIX3M shown simultaneously. The highs in this ratio were lower than prior highs at market lows over the prior decade or two. Highs have been approximately 1.05 to 1.11. Does this mean vol sellers are more opportunistic and effective? Or does it mean that we haven't seen a capitulatory low? Either way, it helps to see the current bear market levels. Enjoy!
Supplementary Chart B
Please see footnote 2 (FN 2) for this section on interpreting VIX/VIX3M.
FOOTNOTES
FN 1
Note that the formula is complicated and most likely accessible only to those still in higher-level math concentrations in their education, or those working continuously in a math field. The rest of us who have seen a few years pass since our math education must rely on the detailed verbal explanation of the formula. The formula, moreover, is unnecessary to reading and interpreting VIX values, trends, and mean reversion.
CBOE's FAQ on VIX, linked above, contains the following helpful and detailed information about how the VIX Index is calculated:
"Cboe Options Exchange® (Cboe Options®) calculates the VIX Index using standard SPX options and weekly SPX options that are listed for trading on Cboe Options. Standard SPX options expire on the third Friday of each month and weekly SPX options expire on all other Fridays. Only SPX options with Friday expirations are used to calculate the VIX Index.* Only SPX options with more than 23 days and less than 37 days to the Friday SPX expiration are used to calculate the VIX Index. These SPX options are then weighted to yield a constant maturity 30-day measure of the expected volatility of the S&P 500 Index.
Cboe Options lists SPX options that expire on days other than Fridays. Non-Friday SPX expirations are not used to calculate the VIX Index.
Intraday VIX Index values are based on snapshots of SPX option bid/ask quotes every 15 seconds and are intended to provide an indication of the fair market price of expected volatility at particular points in time. As such, these VIX Index values are often referred to as "indicative" or "spot" values. Cboe Options currently calculates VIX Index spot values between 3:15 a.m. ET and 9:15 a.m. ET (Cboe GTH session), and between 9:30 a.m. ET and 4:15 p.m. ET (Cboe RTH session) according to the VIX Index formula that is set forth in the White Paper."
FN 2
The source for some of the key concepts in this section was a January 2018 article on CBOE's website blog on the VIX / Trader Talk, and the article referenced was "Vol 411 Follow Up: More on the VIX3M / VIX Ratio." This article appears to no longer be available.
________________________________________
Author's Comment: Thank you for reviewing this post and considering its charts and analysis. The author welcomes comments, discussion and debate (respectfully presented) in the comment section. Shared charts are especially helpful to support any opposing or alternative view. This article is intended to present an unbiased, technical view of the security or tradable risk asset discussed.
Please note further that this technical-analysis viewpoint is short-term in nature. This is not a trade recommendation but a technical-analysis overview and commentary with levels to watch for the near term. This technical-analysis viewpoint could change at a moment's notice should price move beyond a level of invalidation. Further, proper risk-management techniques are vital to trading success. And countertrend or mean-reversion trading, e.g., trading a rally in a bear market, is lower probability and is tricky and challenging even for the most experienced traders.
DISCLAIMER: This post contains commentary published solely for educational and informational purposes. This post's content (and any content available through links in this post) and its views do not constitute financial advice or an investment or trading recommendation, and they do not account for readers' personal financial circumstances, or their investing or trading objectives, time frame, and risk tolerance. Readers should perform their own due diligence, and consult a qualified financial adviser or other investment / financial professional before entering any trade, investment or other transaction.
Thank you for reading. If this post added clarity or prompted additional thoughts on the technicals of SPY, please comment below!
How to Use Fibonacci ExtensionsHave you ever noticed that market movements often seem to occur in repeatable patterns? Well, that’s where Fibonacci extensions come into play. Join us in this article as we dive into the world of Fibonacci extensions and discover how they can be a strong addition to your trading arsenal.
A Primer on Fibonacci Ratios
Fibonacci ratios are derived from the Fibonacci sequence, where each number is the sum of the two preceding numbers. The sequence begins with 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, and so on.
The primary Fibonacci ratio of 1.618, sometimes called the Golden Ratio, is found by dividing one number by the previous. 34 divided by 21, for example, roughly equals 1.619. As the sequence progresses, the ratio becomes more precise and closer to 1.618. Dividing a number by the next, such as if we divide 13 by 21, will give us a ratio of 0.618 (0.619 in the case of 13/21), also commonly used in Fibonacci retracements.
Further calculations produce the Fibonacci extension levels we’re interested in: 1, 1.382, 2, 2.618, and 4.236. In trading, they’re typically expressed as percentages, like 100%, 138.2%, 200%, 261.8%, and 423.6%.
What are Fibonacci Extensions?
Fibonacci extensions (also known as Fibonacci expansions or Fib extensions) are a technical analysis tool that allows traders to determine potential levels of support and resistance for an asset’s price. Like regular support and resistance levels, they should be considered as areas of interest rather than where price will turn with pinpoint precision. They’re most frequently used to set profit targets, although they can also be used to find entries.
Fibonacci extensions can be applied to any market, including forex, commodities, stocks, cryptocurrencies*, and more, and work across all timeframes. While not foolproof, using the Fibonacci extension tool combined with other forms of technical analysis can be an effective way to spot potential reversal points in financial markets.
Fibonacci Retracements vs Extensions
Both Fibonacci retracements and extensions are based on the Fibonacci sequence and the Golden Ratio, but they are used to measure different things in the market. Fibonacci retracements show support and resistance levels during a pullback from a larger move. On the other hand, Fibonacci extensions measure the potential levels of support and resistance for an asset's price after a pullback has occurred.
As shown in the chart above, the Fibonacci retracement tool can be applied to identify where price may pull back to – 50% in this scenario. Then, the Fibonacci extension tool is used to plot where price could end up beyond this pullback. The 100% and 161.8% levels posed significant resistance, causing the price to reverse.
It’s easy to see how both tools can be used in conjunction to build an effective strategy. Generally speaking, traders tend to enter on a pullback to one of the key retracement levels, then take profits at the extension levels. However, either tool can be used to find areas suitable for entries and exits.
Fib Extensions: How to Use
If you’re wondering how to use Fib extensions in your own trading, here are the steps you need to follow.
1. Click to set the first point at a major swing low if expecting bullishness or swing high if expecting bearishness. Using the Magnet mode on TickTrader may help you set it with precision.
2. Place the second point at a swing in the opposite direction.
3. Put the third point at the low of the pullback if a bullish move is expected or the high if a bearish move is expected.
That’s it! You now have an idea of where price may reverse as the trend progresses, allowing you to set profit targets or plan entries. You can also double-click the tool to adjust it to your preferences, like removing certain levels and changing colours.
Bullish Example
In this example, we have a swing low (1) followed by a swing high (2) that makes a retracement (3). These three points are all we need to plot a Fibonacci extension. Notice that the 138.2% level didn’t hold, showing that price isn’t always guaranteed to reverse in these areas. However, the wicks and sustained moves lower at the 100% and 161.8% areas gave traders confirmation that a reversal might be inbound.
Bearish Example
Here, we can see that each of the three areas prompted a pullback. Some traders might not consider the 138.2% area valid to trade since it never fully hit the level. However, the easiest way to get around this is to look for confirmation with a break of the trend, as denoted by the first dotted line. Once price gets beyond that swing high (intermittently breaking the downtrend), traders have confirmation that what they’re looking at is likely the start of a reversal.
Some traders subscribe to the belief that if price closes beyond a level, it’ll continue progressing to the next area. While this can sometimes be the case, it can just as easily reverse. Here, price briefly closed below the 161.8% level before continuing much higher.
Making the Most of Fibonacci Extensions
By now, you may have a decent understanding of what Fib extensions are and how to use them. But how do you make the most out of Fibonacci extensions? Here are two tips to maximise your chances of success.
1. Look for confirmation: Instead of blindly setting orders at extension levels, you can look for price action confirmation that price is starting to reverse at the area before taking profits or entering a position. You could do this by looking for breaks in the trend, as discussed in the example above.
2. Find confluence: Similarly, you can use other technical analysis tools like trendlines, indicators like moving averages, or even multiple Fibonacci extensions, to give you a better idea of how price will likely react at a level.
Your Next Steps
Now, it’s time to put your understanding to the test. Spend some time practising how to use Fibonacci extensions and try backtesting a few setups to see how you could’ve gotten involved in a trade. Once you feel you have a solid strategy, you can open an FXOpen account to start using your skills in the live market. In the meantime, why not try exploring other Fibonacci-related concepts, like Fibonacci retracements and harmonic patterns ?
*At FXOpen UK and FXOpen AU, Cryptocurrency CFDs are only available for trading by those clients categorised as Professional clients under FCA Rules and Professional clients under ASIC Rules, respectively. They are not available for trading by Retail clients.
This article represents FXOpen Companies’ opinion only, it should not be construed as an offer, solicitation, or recommendation with respect to FXOpen Companies’ products and services or as financial advice.
Turtle Power: Experiment Turns Novices into MillionairesHi and welcome back! As a trader, you have probably at one time heard about the Turtle Traders, right? But what was it, and what can we learn from it?
Let me take you on a journey into the fascinating world of the Turtle trading strategy! 🐢💰
This legendary trading experiment, conceived by two master traders, Richard Dennis and William Eckhardt, in the 1980s, showcases the power of a well-designed system and the right mindset.
Dennis believed anyone could be trained to trade successfully, while Eckhardt argued that trading skills were innate. To settle the debate, they devised the Turtle trading experiment. They selected a diverse group of 23 individuals, known as the "Turtles," and taught them a trend-following trading system focused on trading commodities and currencies. The core principles of this system were:
Follow the trend : The Turtles used Donchian Channels, tracking 20-day and 55-day price channels, to identify breakouts and breakdowns. When the market price broke above the 20-day high, it was a buy signal. When it broke below the 20-day low, it was a sell signal.
Cut losses short : The Turtles followed a 2% rule, never risking more than 2% of their account on any single trade. They calculated position sizes using the N value, the 20-day average true range (ATR), dividing the 2% risk amount by the N value.
Position sizing and pyramiding : The Turtles adjusted their position sizes based on market volatility and employed pyramiding, adding more contracts at specific increments up to a maximum limit as the market trended in their favor.
Stop Losses : They used a stop-loss order equal to 2N for every trade, exiting the trade to minimize losses if the market moved against their position by twice the N value.
Diversification : The Turtles traded a diversified portfolio of markets, spreading risk and enhancing returns.
Scaling Out : They used a two-tiered exit strategy, exiting a portion of their position when the market retraced by 10-day low/high and the remaining position when the market retraced by 20-day low/high.
With these principles, the Turtles were handed real money to trade. Over the next four years, they collectively made more than $100 million , proving that trading success could be taught. The Turtle trading experiment demonstrated the power of a disciplined, trend-following system combined with the right mindset.
In conclusion, the Turtle trading strategy is an extraordinary tale of how a simple, yet effective, trading system can lead to remarkable results when executed with discipline and consistency . As you venture into the world of trading, remember that the strategy in itself is not as important as the lessons of the Turtles: stay disciplined, follow the trend, and manage your risk . You might just be the next trading success story! 🌊📈
Want to become a Turtle?
💡 Curious about the Turtle trading strategy? Dive into TradingView's Public Indicator library, where you'll find a collection of Turtle-related scripts crafted by the Pine Script™ community. Just open a chart, click "Indicators," and search "Turtle" to access a variety of indicators that'll give you a feel for this legendary system. Happy exploring!
💡 The Original Turtle Rules (PDF): This free eBook, written by Curtis M. Faith, one of the original Turtles, contains the original Turtle trading rules and guidelines.
Link: www.trendfollowing.com
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