$BTCUSD SOPR, BFX Longs and Shorts, Greed, Liquidations.
This is one of the multi-chart evolving dashboards I use daily for crypto trading. This dashboard attempts to distill a broad scope of data and sentiment into glance value charts. The goal with such dashboards is to seek to stack probabilities to be on the right side of the percentages in every trade.
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The top panel chart shows the SOPR (Spent Output Profit Ratio, (grey line, using the symbol $BTC_SOPR) overlay vs $BTCUSDT (Binance, in blue). The SOPR is a very simple indicator. It is the spent outputs expressed as a ratio and shown as an oscillator on the chart. The Bitcoin SOPR is the realised dollar value divided by the dollar value at creation of the output. Or simply: price sold divided by price paid.
SOPR showing under value 1 means that the on chain data has recorded a net realised loss for "spent" Bitcoin. SOPR showing over value 1 means net profit. Renato Shirakashi appears to be the inventor of SOPR for BTC, and he writes about SOPR: "In this analysis two important psychological turning points that significantly change the supply of bitcoin are going to be described by introducing a new oscillating indicator that signals when these major supply changes occur, using blockchain data." I interpret this reference to the psychology of "weak hands" getting flushed out of the market by selling at a loss as shown when SOPR sits below 1 for extended periods of time (bear), and when all the weak hands have left the market, we find a bottom.
Because I am an impatient learner, I needed further examples to understand fully. If someone sells you 1 Bitcoin at $50,000USD, that transaction is recorded on the blockchain. If you then sell it for $25,000USD, that is now a spent output which is obviously a negative 0.5 ratio, and would contribute to a SOPR lower than the value 1. Interestingly the SOPR tends to be very close to the value 1 nearly always. Which means that the aggregated data of all spent outputs is nowhere near as extreme as the example I gave (although I'm sure there are plenty of retail traders who bought the high and sold the bottom at a 50% loss).
If we rewind to extended periods of low points in the SOPR ratio, extended negative ratio periods coincide with low points. In the past 5 years the lowest ratio was around 0.88, which was December 2018, when the price of Bitcoin was heading lower than $4k USD. That particularly brutal bear market lasted 18 months and you can see that the SOPR was below value 1 for nearly the entire time, indicating that there was a long tail of weak hands realising losses the entire time.
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Also present on the top chart is a brilliant little free indicator called Liq.Levels , wtf is all I can say, this a masterpiece of long/short liquidation data based on market maker behaviour in this case Binance's perpetual BTC/USDT leveraged futures (one of the most active retail leverage platforms). On this layout I have hidden all but the 25x liquidation points both short and long as it captures the widest spread and for the simplest visual as this is a glance-dashboard, on a single panel layout you can view the 50x and 100x which are tighter spreads. Liq.Levels also filters for a minimum of one million USD, so this is real value the market makers are getting out of bed for, essentially these levels are where the market maker really wants to push the price to. If you're new to leverage (don't do it! just buy at spot!), the reason they do this is to hunt the longs and the shorts and cause maximum liquidations (are you still trading with leverage?!).
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The second panel is the famous Bitfinex Longs (green) and Shorts (red) . You can see currently the longs, since around the $39000 level went parabolic. The shorts are just tiny in comparison. The data from Bitfinex seems less erratic than those from other exchanges, so if you find looking at longs and shorts ratios useful, I'd suggest also looking at other websites to see the other major exchange long and short activity, liquidations, and ratios.
This info is used to monitor large moves by leveraged traders. While Bitfinex is not the best measure here (ideally you would want all major exchanges aggregated longs vs shorts, but I have not found such indicators on TV, only Bitfinex), you can check the data by comparing it to another exchange, for example Binance you can see that parabolic move the Longs made from the 11th of July to around the 14th of July (while the BTC price fell off a cliff from $30k to $20k), where the ratio of Longs vs Shorts on Binance also skewed heavily to the Long side.
This is another way to stack a probability. As the Longs level off and get flushed out (usually by mass liquidation!), this is another variable to find support or resistance. For example you can see the levelling off around 12 May 2022, Bitcoin's price found a short term bottom at $29k. Similarly and most recently you can see as the Longs levelled off from a hectic run up in the mid June 2022 selloff, the price found a short term bottom around $20k. You could say that recently or commonly this is a contrarian indicator, assuming that smart money is seeking to liquidate the maximum possible leveraged positions, so we can assume that generally these leveraged retail traders will largely make incorrect bets most of the time, hence historically as soon as Shorts leave the market, the price spikes up, and vice versa. So, another thing to watch.
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Next we have a Crypto Fear & Greed Index , which as you can see nearly always oscillates in a tight rhythm with Bitcoin's price action. Above 75 (green dotted line) is extreme greed, below 25 (red dotted line) extreme fear. There are quite a few websites that attempt to measure crypto Fear & Greed, and even a variety of different indicators on TradingView, but this was the clearest visually I could find here. The inputs on this version according to the coder are stable coin flows (flight to safety), coin momentum (top 18 coin price relative to 30 day averages), and top 18 coin price high over the previous 90 days. So, it's interesting that despite this being at face value a rather complicated set of data with many inputs, that it just looks like a carbon copy of the Bitcoin chart. Bitcoin has a gravity that is inescapable for all things crypto right now.
The difference between looking at this indicator and simply looking at Bitcoin's chart is that it flattens out the action and has a set floor and a ceiling. You can see historically that the best buy times were when fear was at its "height" (where the yellow line is at its lowest). Another way to stack probabilities. At time of writing, is this a great time to buy? Fear appears to be leaving the market, we haven't had a commensurate price move up, so I'd be cautious. Like all these indicators, you can just overlay Bitcoin's price line and backtest the correlation in a few seconds. Buying when fear is at a maximum is usually easier said than done, though!
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Lastly we have Liquidations by Volume , as per the coder this "shows actual liquidations on a per-candle basis by using the difference in volume between spot and futures markets." Blue line is futures volumes, yellow are spot volumes. The code for this indicator shows that it is the same BTCUSDT Perpetual Future's contract from Binance that we have in the Liq.Levels indicator, perfect.
Worth noting is that the community of coders at TradingView is a trader's dream. These sorts of customisable dashboards you can build are high value. Having worked for the largest international institutions I find many of these indicators are institutional grade and they have just a few hundred users sometimes, pretty crazy how early in the adoption curve we are with this. If you haven't experienced the "other side" of trading, compared to regular equities forex futures etc the TradingView tools and the crypto data and exchanges are just lightyears ahead.
Back to why look at liquidations? As institutions come into the market, and retail wallets on exchanges like Binance and many others continue to use leverage, the action in the derivative (in this case $BTCUSDTPERP) can and often does drive the price of the underlying. Market makers hunt the maximum liquidations, always. The market context is highly relevant here. During volatile periods it is a swinging contrarian indicator. If there has been massive green bars showing short liquidations pushing the price up, then we could be forming/hitting resistance levels and can see reversal/selloffs, and vice versa if there are massive red bars showing long liquidations pushing the price down, this can be hammering out support levels and we look to bounce. The longs and the shorts really do seem to be taking turns getting liquidated right now.
Also of relevance is the price action relative to the liquidations. Obviously if an institutional candle pushes the price up or down, there will be mass liquidations. But another scenario that occurs is when are light volumes on the derivatives such as $BTCUSDTPERP we have under the microscope here, but we have large Bitcoin price movements, then the reasons for the move can be understood differently, and we can use this and other contexts to draw conclusions such as for example a scenario where price goes up with light liquidations and derivative action, which could be interpreted as much stronger hands holding coins rather than simply margin calls.
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Good luck!
Trading Tools
📈 The Trailing Stop Loss📍 What Is a Trailing Stop?
A trailing stop is a modification of a typical stop order that can be set at a defined percentage or dollar amount away from a security's current market price. For a long position, an investor places a trailing stop loss below the current market price. For a short position, an investor places the trailing stop above the current market price.
A trailing stop is designed to protect gains by enabling a trade to remain open and continue to profit as long as the price is moving in the investor’s favor. The order closes the trade if the price changes direction by a specified percentage or dollar amount.
📍Important Takeaways
🔹 A trailing stop is an order type designed to lock in profits or limit losses as a trade moves favorably.
🔹 Trailing stops only move if the price moves favorably. Once it moves to lock in a profit or reduce a loss, it does not move back in the other direction.
🔹 A trailing stop is a stop order and has the additional option of being a limit order or a market order.
🔹 One of the most important considerations for a trailing stop order is whether it will be a percentage or fixed-dollar amount and by how much it will trail the price.
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📅 Daily Ideas about market update, psychology & indicators
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Trader ⚔️VS⚔️ Analyst !!!(Differences)Hi, everyone👋.
Do you like surfing or guiding surfers?
In this article, I will talk about how analysis differs from trading. A good analyst is not necessarily a good trader📉. Do you know what the point is❗️❓
The point is that analysts talk about all aspects, so they always tell the truth and explain what really happens on the market, but the traders ride the waves. Financial markets include high and low waves, so if a trader makes a mistake in measuring its depth, speed, and height may drown in the sea. If you are a trader, don’t be proud of yourself because the financial market sea is very cruel or a beast.
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There are four trading keys in financial markets:
Trading Strategy
Capital Management
Market Psychology
Trader Psychology
These keys are like four legs of a chair🪑 which should be sat on carefully and calmly. Although by removing one of the legs, it’s possible to sit on the chair, safety has to be considered.
I’ll explain all the trading keys in the market in other posts later, but for now, let me dig into the differences between Analysis📈 and Trading💰 .
What is considered in the analysis are the price targets in both rising🟢 and falling🔴 markets, the probability of its occurrence and non-occurrence, and the necessary conditions for both.
Considering the subtlety of an analyst's words and the mentality of the people studying - who are mainly looking for confirmation of their position - generally, the analyst will always be right unless he has declared only one direction decisively, which is not an analysis, but a signal and prediction.
Declaring an upward↗️ or downward↘️ trend in only one direction is not an analysis but a prediction. It’s noted that any prediction can be wrong. But in the comprehensive analysis of both sides, the necessary conditions for their occurrence and their probability are stated, so whatever happens, the analyst is right, and you will hear the famous saying "as predicted."
🔷 A successful trader can take the following steps:
Comprehensive analysis of the market situation in which he wants to trade:
The technical analysis must be prepared before opening a trade position. A wrong analysis does not always lead to a wrong trade, and vice versa, a correct analysis does not lead to a correct trade because you have to see whether the position trigger is activated or not.
Find useful trading strategies to achieve profitable trading:
A trading strategy can be a system that includes a combination of different indicators and oscillators, which can finally indicate the entry and exit points as well as profit and stop loss while trading. This system makes you behave like a robot; after understanding and analyzing the market, you’ll wait for the entry and exit points to appear. Trusting this trading strategy is one of the critical keys to successful trading.
All the points mentioned so far are related to the technical analysis aspects; otherwise, in the Fundamental field, a daily checklist of various factors affecting the market is needed, which is vital for Fundamental analysis.
Find your own timeframe:
Chart analysis and trading can be viewed from the 1-second time frame(short-term) to several years(long-term), but every trader should have his own time frame based on his trading strategy.
The time frame is important because:
The trading strategy should help traders find the entry and exit signals in the same time frame.
The Stop Loss(SL) should be determined based on entry points in the same time frame.
The time required to reach profitability is estimated based on the same time frame. You can't analyze on a daily time frame and expect to get a very good profit immediately after entering the position.
After determining the time frame and with the help of the trading strategy, the following tasks should be done.
Studying market analysis to identify market trends, the state of market movement waves, and daily, weekly, and monthly support and resistance zones.
Determining the Entry Points(EP) based on the strategy
Determining the Stop Loss(SL) based on the strategy
Determining the Take Profits(TP) based on the strategy
All the above must be done before entering the market, and the only thing done after entering the market is the last step—changing the exit point based on the variable stop loss to increase profit.
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🔷 Conclusion:
According to the explanations given, it can be understood that analysis and trading have a significant differences. It should be noted that every wrong analysis published on social networks does not indicate that the analyst does not trade well and vice versa. So, to profit from the financial markets, you must be trained in the first step. Become an analyst and then trade. For this, you have to go step by step, don't be greedy, don't rush, so that you can stay in the financial markets and earn profit every day until you get a continuous profit one day.
Why 90% Of Traders Lose Money?
Trading is a tough business and most people who start in the business lose money.
And these numbers aren't small at all, really. In fact, they might even be scary to look at. Therefore, in this article, we will look at some of the most popular reasons why more than 90% of new traders will lose their money in trading.
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The most common reason why many traders lose money is simply that they want to become professional traders without learning more about it first. They trade without even learning the differences between assets and how trading works. Other people start trading after seeing the hyped stories of millionaire traders on television.
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Some traders just follow the recommendations of others and do not conduct technical analyses of their own.
Traders should review the prices, analyze the volume, check the prior trends and analyze other technical indicators before placing their intraday orders.
Rushing just to place buy or sell orders is one of the biggest mistakes intraday traders make.
One should conduct proper technical analysis and then start trading.
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The phrase- “Trend is your best friend” always works in the market. Not following the trend is another biggest mistake that day traders make.
Unless a trader has many years of experience and understanding of the market, traders should try to avoid going against the trend.
If the market is in a strong uptrend, then one should try to trade in the up direction only unless there is any strong resistance or chart pattern breakout.
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Some traders follow rumors and recommendations which are spread by the media houses and brokers.
This is another big mistake that intraday traders make. One should not blindly follow the intraday trading tips and rumors without their own analysis.
Going by these recommendations without conducting your own analysis can cause huge losses.
As we have discussed above traders should conduct proper research before following any recommendations or intraday tips. As we all know that the intraday trading is a mixed bag of losses and gains. Not every trade goes right or is profitable. Thus traders should put a stop loss of their trades when doing intraday trading to protect their capital from losses.
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Chebyshev vs. Butterworth Chebyshev vs. Butterworth Filters: Speed, Quality Factor, and Making the Right Choice
Introduction:
When it comes to selecting a filter for signal processing, Chebyshev and Butterworth filters are two of the most popular options. Both filters have their unique strengths and weaknesses, and choosing the right one can greatly impact the effectiveness of your signal processing. In this post, we'll explore why the Chebyshev filter is faster than the Butterworth filter and delve into the trade-offs associated with the quality factor of the Chebyshev filter. We'll also provide an explanation of the quality factor to help you make an informed decision.
Quality Factor: A Brief Overview
The quality factor, also known as the Q-factor, is a dimensionless parameter that represents the "sharpness" of a filter's frequency response. In other words, it measures how well a filter can separate signals with close frequencies. A higher Q-factor indicates a more selective filter, with a steeper roll-off between the passband and the stopband. A lower Q-factor, on the other hand, results in a smoother transition between the passband and the stopband.
Chebyshev vs. Butterworth: Speed and Performance
The Chebyshev filter is generally faster than the Butterworth filter due to its equiripple frequency response. This equiripple response allows the Chebyshev filter to achieve a steeper roll-off between the passband and the stopband with fewer filter coefficients. Consequently, the filter requires fewer calculations, resulting in faster signal processing.
The Butterworth filter, in contrast, is characterized by a maximally flat frequency response in the passband, which results in a slower roll-off between the passband and the stopband. This means that more filter coefficients are required to achieve the desired level of attenuation, leading to slower signal processing.
Trade-offs: Quality Factor and Filter Performance
The primary trade-off between the Chebyshev and Butterworth filters lies in the balance between the quality factor and the filter's performance. The Chebyshev filter boasts a higher quality factor, which translates to a steeper roll-off and better selectivity. However, this comes at the expense of ripples in the frequency response, which can introduce distortion or signal artifacts.
The Butterworth filter, with its maximally flat passband, provides a smoother frequency response with no ripples. This results in lower distortion and signal artifacts but a lower quality factor, which means the filter may struggle to separate closely spaced frequencies.
Is the Trade-off Worth It?
Deciding whether the trade-off between the quality factor and filter performance is worth it ultimately depends on your specific application and signal processing requirements. If your primary concern is speed and selectivity, the Chebyshev filter may be the better choice. Its higher quality factor and faster signal processing make it an excellent option for applications where steep roll-offs and rapid response times are critical.
However, if minimizing signal distortion and artifacts is more important, the Butterworth filter may be more suitable. Its smooth, ripple-free frequency response ensures a cleaner output signal, even if it comes at the cost of a slower roll-off and reduced selectivity.
Conclusion:
When choosing between the Chebyshev and Butterworth filters, it's essential to consider the balance between speed, quality factor, and filter performance. The Chebyshev filter offers a faster response and a higher quality factor, making it ideal for applications where selectivity and rapid response are crucial. However, its equiripple frequency response can introduce distortion, which may not be suitable for all applications. On the other hand, the Butterworth filter provides a smoother, ripple-free frequency response, but with a lower quality factor and slower roll-off.
Ultimately, selecting the right filter for your trading strategy depends on your specific needs and goals. In the world of trading, making timely and accurate decisions is crucial, and the filter you choose plays a significant role in achieving this. Carefully consider the trade-offs between the speed, quality factor, and filter performance when deciding between the Chebyshev and Butterworth filters. By understanding the strengths and weaknesses of each filter type, you can choose the one that best suits your trading requirements and achieve the desired results in your market analysis. Remember that the best filter choice might vary from one trading strategy to another, so always be prepared to reassess your decision based on the unique demands of each trading approach and market conditions.
TRADING OR A JOB? DEEP DIVE❗️
Are you torn between choosing a job and getting into trading? Both have their advantages and pitfalls, but by combining the two, you can reap the rewards of both worlds.
🚷Firstly, let's consider a traditional job. A job offers security, stability, and a predictable income. You work for a set number of hours, and you receive a paycheck. You have employer benefits such as healthcare, 401k matching, and paid time off.
On the downside, you are limited to your salary, which may not always reflect your hard work and dedication. You may feel stuck in your role as there are usually limited opportunities for career advancement. And if you lose your job, you lose that source of income.
💹Now let's consider trading. Trading offers the potential for uncapped income, flexibility, and the autonomy to make your decisions. You can trade anywhere with an internet connection, and there are many different markets to choose from, such as forex, stocks, and commodities. You have complete control over your financial destiny.
However, trading is not for everyone. It requires a lot of time, effort, and discipline to become successful. There are risks involved, and you can lose money if you do not know what you are doing. It can also be a lonely profession as you may be working alone most of the time.
💡Now, what if we combine the two? This is where the concept of "side hustles" comes into play. You can keep your job for the stability and security, but you can also trade on the side to increase your income and diversify your portfolio.
By trading on the side, you can use the abundance of time outside of your job to learn, practice, and implement trading strategies. Gradually, you may earn enough money from trading to eventually quit your job and become a full-time trader.
However, the combination of the two must be approached with caution. Trading can be time-consuming, and you do not want to sacrifice the quality of your work at your job. It is also essential to practice risk management and not invest money that you cannot afford to lose.
⚖️In conclusion, both a job and trading have their advantages and disadvantages. Combining the two is an excellent way to increase your income, diversify your portfolio, and potentially become a full-time trader. But proceeding with caution, discipline, and good money management is key to success. Remember, the goal is to build a better future for yourself, and with the right balance between a job and trading, you can achieve it.
Thanks for reading bro, you are the best☺️
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Position Size Calculation with Fees - Handle any LeverageExample:
The account size is $4500.
We risk 2%, 90 cash, for this 2R trade.
If the trade idea is a success
we would now have 4678 cash in our account
a profit of: 178 cash
And if loss, a total of 4410 cash, 90 cash loss)
Is this correct?
Explanation:
The example seems correct but only without the fees in calculation.
Even small fees like e.g. 0.04% Taker (market orders) and 0.02% Maker (limit orders) add up a lot. A lot!
The example does need a position size of $56250 , which would be $22.5 in fees just to open the position and the same amount again when the stop loss (market order) triggers or $11.25 when exit with a limit order.
The example does clearly need a leverage of 15 or higher to open that position size.
- Tradeable balance with 15x leverage: 4500 * 15 = 67500
- And to get a loss of 90 cash within 0.16 %: 56250 / 100 * 0.16 = 90
See Image on Chart: Calculation without fees
We will be fine with any kind of Leverage if we calculate it like that on every trade. The PnL is calculated from the real account balance. So we are on the right track to not blow our account.
If we calculate it with the Fees in mind, the example with 0.04% fees for open and close, then the position size would be $28125
See Image on Chart: Calculation with fees
The calculations show, even when it hits the Profit Target, the real Risk Reward lowers by a large amount . (The Example uses the same taker fee for open and close)
I personally recommend to automate those ever recurring calculations and set the orders via an API. Relative easy to code in e.g. Python.
I'm not allowed to link any external links here but some tools can be found on my Twitter (I'm not really active there otherwise):
- Some link to a Microsoft Excel sheet, which was used for the calculation images. It may be useful for some, just make a copy.
- And a public open source API Trade App can be found on my GitHub, link in the same Twitter feed.
No other funny links else.
And as last goodie: A small snippet example used in my automated strategies in PineScript, strategy.equity represents the account balance:
//Example 0.001 is minumum order
varip input_mathround = input(3, 'Decimal Math Round Size')
varip pnllosspercent = input(2, 'Dynamic PnL Loss - Percent of Balance')
getLongSizeDynamic(_entry, _sl) =>
pnl = strategy.equity / 100 * pnllosspercent
sl_percent = (_entry - _sl)/_entry
size_cash = pnl / (sl_percent*100) * 100
size_r = 1 / _entry * size_cash
size = math.round(size_r, input_mathround)
size
There are for sure different ways to optimise the math for the own liking.
This 'tutorial' is meant to give small insight into a proper position sizing, that you may too will not fear the leverage as useful tool when used correct.
With the calculations above, no matter if 10, 50, 100 or even crazy 1000x Leverage shall not blow our accounts! Still always keep the fees in mind, they take our money!
Cutting Expenses and Increasing Income
There are steps you can take to get a handle on your finances – and your financial stress. The very first step is to figure out if your income covers all of your current expenses. An increase in expenses or a drop in income usually means a change in lifestyle. The sooner you look at your household budget, the more options you have and the better off you will be in the long run. Once you have a better understanding of where your money is going, it’s time to look at ways to make the best use of your hard-earned dollar.
Cutting Expenses
If you find that your expenses are more than your income, you can take steps to develop a spending plan and move toward balancing your budget.
Begin by listing your expenses, starting with expenses that provide basic needs for living. Some of these are fixed, such as rent or mortgage payments, car payments, or installment loan payments. Some are variable, such as clothing or consumer goods. These expenses have some flexibility.
It is important to know what you are currently spending to find ways to reduce spending and balance your budget.
After you have your list, the next step is think about what can be reduced or completely cut out. Think about how a repeating weekly or daily expense will add up over an entire year.
How can you save more?
Buy gently used clothing. Instead of spending BMV:60 or more on name brand jeans with holes, your teenager may find “cool” jeans for $6.
Save on energy costs. Turn down the thermostat 5 degrees. Turn off lights or a television when no one is in the room to save money on the electric bill.
Deferring on a repair or doing it yourself. If you don’t have the skills or the tools, perhaps there is a neighbor or friend that can help.
It is essential to stick to your spending plan. With less income, each spending decision is critical. Finding ways to pinch pennies can add up to dollars you can use to make ends meet
Even in good economic times, financial experts recommend a spending plan for effective money management. But good financial planning is an even more essential tool in tough times. Setting priorities for spending is a necessary step in finding a way to balance your budget-especially when you have less money available to spend.
What do you want to learn in the next post?
How to use Volume and Volatility to improve your tradesVolume and volatility are two important factors that can affect your trading performance. Volume measures the number of shares or contracts traded in a given period, while volatility measures the degree of price fluctuations. Understanding how these two factors interact can help you identify trading opportunities, manage risk, and optimize your entry and exit points.
In this article, we will explain how to use volume and volatility to improve your trades in four steps:
1. Analyze the volume and volatility patterns of the market or instrument you are trading. Different markets and instruments have different volume and volatility profiles, depending on factors such as liquidity, supply and demand, news events, and market sentiment. For example, some markets may have higher volume and volatility during certain hours of the day, while others may have lower volume and volatility during holidays or weekends. You can use tools such as volume bars, volume indicators, average true range (ATR), and historical volatility to analyze the volume and volatility patterns of your chosen market or instrument.
2. Identify the volume and volatility signals that indicate a potential trade setup. Volume and volatility signals can help you confirm the strength and direction of a trend, spot reversals and breakouts, and gauge the momentum and interest of the market participants. For example, some common volume and volatility signals are:
- High volume and high volatility indicate strong conviction and participation in a trend or a breakout. This can be a sign of a continuation or an acceleration of the price movement.
- Low volume and low volatility indicate weak conviction and participation in a trend or a breakout. This can be a sign of a consolidation or a slowdown of the price movement.
- Rising volume and rising volatility indicate increasing interest and activity in the market. This can be a sign of a potential reversal or breakout from a consolidation or a range.
- Falling volume and falling volatility indicate decreasing interest and activity in the market. This can be a sign of a potential exhaustion or continuation of a trend.
3. Choose the appropriate trading strategy based on the volume and volatility conditions. Depending on the volume and volatility signals you observe, you can choose different trading strategies to suit the market conditions. For example, some possible trading strategies are:
- Trend following: This strategy involves following the direction of the dominant trend, using volume and volatility to confirm the trend strength and identify entry and exit points. You can use trend indicators, such as moving averages, to define the trend direction, and use volume indicators, such as on-balance volume (OBV), to measure the buying and selling pressure behind the trend. You can also use volatility indicators, such as Bollinger bands, to identify periods of high or low volatility within the trend.
- Reversal trading: This strategy involves identifying potential turning points in the market, using volume and volatility to confirm the reversal signals. You can use reversal patterns, such as double tops or bottoms, head and shoulders, or candlestick patterns, to spot potential reversals, and use volume indicators, such as volume profile or accumulation/distribution line (ADL), to measure the distribution or accumulation of shares or contracts at different price levels. You can also use volatility indicators, such as standard deviation or Keltner channels, to identify periods of overbought or oversold conditions that may precede a reversal.
- Breakout trading: This strategy involves trading when the price breaks out of a consolidation or a range, using volume and volatility to confirm the breakout validity and direction. You can use support and resistance levels, such as horizontal lines, trend lines, or Fibonacci retracements, to define the boundaries of the consolidation or range, and use volume indicators, such as volume breakout or Chaikin money flow (CMF), to measure the inflow or outflow of money during the breakout. You can also use volatility indicators, such as average directional index (ADX) or Donchian channels, to measure the strength or weakness of the breakout.
4. Manage your risk and reward based on the volume and volatility expectations. Volume and volatility can also help you determine your risk-reward ratio, position size, stop-loss level, and profit target for each trade. Generally speaking,
- Higher volume and higher volatility imply higher risk and higher reward potential. You may need to use wider stop-losses and profit targets to account for the larger price fluctuations. You may also need to reduce your position size to limit your exposure to the market.
- Lower volume and lower volatility imply lower risk and lower reward potential. You may need to use tighter stop-losses and profit targets to account for the smaller price fluctuations. You may also need to increase your position size to enhance your returns from the market.
By following these four steps, you can use volume and volatility to improve your trades in any market or instrument. Volume and volatility are dynamic factors that reflect the supply and demand forces in the market.
Celebrating 50 Years of Equity Options TradingAmid serious pushback, Chicago Board of Options Exchange (CBOE) went live on 26th April 1973. Options are now a standard tool for portfolio risk management. Not so, back then. They were seen as gambling instruments for reckless speculators.
Shortly after CBOE launch, Fischer Black, Myron Scholes, and Robert Merton provided a mathematical model for computing options prices.
This Nobel Prize winning model allowed options to be priced theoretically for the first time. It was a key driver in making options markets sophisticated, more efficient and much larger.
The Black Scholes Merton model ("BSM") forms the fundamental basis of options pricing. It allows traders to compute a theoretical price to options based on the underlying asset’s expected volatility.
Expected volatility is referred to as implied volatility (IV). Why implied? Because it is the volatility implied from an options price given other parameters from the BSM model.
COMPREHENDING BSM & BLACK76
Options have existed since the 17th Century. Option were limited to speculation and gambling in the absence of a sound and suitable pricing model such as BSM.
BSM offers a mathematically sound framework to compute theoretical price of European options using five inputs:
1. Underlying Asset Price
2. Implied Volatility (IV) of the Underlying Asset
3. Interest rates
4. Exercise (Strike) Price of the option
5. Time to expiry
A variant of the BSM for pricing options on futures, bond options, and swaptions is the Black Model (also known as Black76) which forms the basis of pricing options on commodity futures.
BSM is far from perfect. For starters, it makes unrealistic assumptions. Such as that stock prices follow a log-normal distribution and are continuous. That future volatility is known and remains constant. BSM assumes no transaction costs or taxes, no dividends from the stocks, and a constant risk-free rate.
Even though these assumptions are impractical, the BSM provides a useful approximation. In fact, the model is so commonly used that options prices are often quoted as IV. On the assumption that given IV, options price can be computed using BSM.
Actual options prices vary from theoretical ones based on supply-demand dynamics and with reality being different from the assumptions baked into BSM.
For instance, actual prices for the same expiry and at different strike prices have been observed to have different IV. Primarily given a higher likelihood of a downside plunge relative to upside rally. This difference in IVs across different strikes is referred to as volatility skew.
OPTIONS IN SUMMARY
Options involve two parties whereby one party acquires a right to buy or sell a pre-agreed fixed quantity of a stock/commodity at a pre-agreed price (the strike or the exercise price) at or before a pre-agreed future date (Expiry Date).
One party acquires the right (Option Buyer or Option Holder) and the other party takes on the obligation (Option Seller).
In consideration for granting the right, the Option Seller collects a premium (Option Price) from the Option Buyer.
To ensure that the Seller keeps up their promise to trade, such Sellers are required to post margins with the Clearing House.
Once buyers pay premium upfront, they are not required to post any additional margins with the Clearing House.
Where the Option Holder secures a right to buy, it is known as a Call Option. However, if the Option Holder acquires the right to sell, such an option is referred to as Put Option.
Where the Option Holder can exercise their right at or before any time before expiry, such Options are referred to as American Options.
Options that can be exercised only at expiry are referred to as European Options. While exercising is permitted at expiry, these European options positions can be closed out before expiry by selling out a long position or by buying back a short position.
Premiums for European options are typically lower than premiums compared to American options.
COMPREHENDING WALLSTREET’S FEAR GUAGE, FADING VIX, AND VIX1D
The CBOE Volatility Index (famously referred to as VIX and is also knows as fear gauge) is a real time index measuring the implied volatility of the S&P 500 for the next 30 days based on SPX Index options prices for options expiring in 23 to 37 days.
There are a range of financial products based on the VIX index allowing investors to hedge volatility risk in their portfolios.
In recent months, VIX has been fading into insignificance. Despite huge price moves in the S&P 500, VIX has remained staid. Why such inertia? Primarily because options markets have started to shift towards shorter expiries. Zero-Days-To-Expiry (0DTE) options now account for more than 40% of overall S&P options market volumes.
These very short-dated options allow traders to express views around specific events such as monetary policy meetings and economic releases. Their popularity has increased dramatically over the past few years, with volumes today nearly 4x that of 2020.
To account for this shift in market behaviour, the CBOE has launched the VIX1D i.e., the One-Day VIX. This index tracks the expected volatility over the upcoming day as determined by zero-day options prices.
More on Options Greeks and Risk Management using Options in a future paper.
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.
How To Trade Like The BanksTrading with the market maker strategy in forex involves taking advantage of the liquidity and pricing advantages offered by market makers. Here are some key steps you can follow to implement this strategy:
Understand the role of market makers: Market makers provide liquidity to the forex market and facilitate trades between buyers and sellers. They also set bid and ask prices, which can influence the market price of currency pairs. Knowing how market makers operate and the impact they can have on the market is crucial for developing a successful trading strategy.
Identify key market maker levels: Tier-1 banks are the most influential market makers in the forex market, as they have the largest trading volumes and deepest liquidity. Example: www.tradingview.com
Tier-2 and Tier-3 market makers are also important, but may have less impact on the market. Understanding the behavior and trading activity of market makers at each level can help you make informed trading decisions.
Monitor market conditions: Keep an eye on news and events that can affect the forex market, such as economic reports, central bank announcements, and geopolitical developments. Market makers are sensitive to changes in market conditions, so being aware of these changes can help you anticipate their behavior and make profitable trades.
Use technical analysis: Use technical indicators and chart patterns to identify potential trading opportunities. Technical analysis can help you identify key levels of support and resistance, as well as entry and exit points for trades.
Manage risk: Like any trading strategy, market maker trading carries risks. Use appropriate risk management techniques, such as setting stop-loss orders and taking profits, to limit your losses and protect your profits.
In conclusion, trading with the market maker strategy in forex requires a deep understanding of market maker behavior and market conditions, as well as the use of technical analysis and risk management techniques. By following these steps, you can potentially take advantage of the pricing and liquidity advantages offered by market makers and make profitable trades in the forex market.
What is Trading Plan? Detailed Example
A short ⚠️disclaimer before we start:
the rules that will be discussed in this post are applicable only for technicians - traders that are relying on price action/structure/etc.
Also, we assume that structure levels do work and for us, key levels are considered to be the safest trading zones/points.
In order to increase the accuracy of your predictions analyzing different financial markets, you must learn to identify the direction of the market.📈
The identification of the market trend must be based on strict & reliable & testable rules.
It can be based on technical indicators or price action
Personally, I prefer to rely on price action.
There are three main types of market trends:
Bullish Trend
Bearish Trend
Sideways Market
Depending on the current direction of the market, on the chart, I drew a flow chart✔️ that will help you to act safely.
➡️Sideways market signifies consolidation & indecision. Usually being in such a state the market tends to coil in horizontal ranges.
To trade such a market safely, the best option for you will be to wait for a breakout of the range & wait for the initiation of the trend.
➡️Once you spotted a bullish market, do not rush to buy.
Your task will be to identify the closest strong structure support .
You must be patient enough to let the price reach that support first (and by the way, there is no guarantee that it will happen) and then you must wait for a certain confirmation.
Only once you get the needed confirmation you can buy the market.
➡️The same strategy will be applicable to a bearish market.
Spotting a short rally it is way early to just sell the asset from a random point.
You must find the closest strong structure resistance and wait for the moment when the price will approach that.
Then your task will be to wait for a confirmation and only when you got the reliable trigger you short the market.
🦉Try to rely on this flow chart and I promise you that you will see a dramatic increase in your trading performance.
And even though it may appear to you that this flow chart is TOO SIMPLE, in practice, even such a set of rules requires iron discipline and patience.
Thank you so much for reading this article,
I hope you enjoy it!
Let me know, traders, what do you want to learn in the next educational post?
Arthur Hayes USD Liquidity IndexFormula constructed based on Arthur Hayes post, 'Teach Me Daddy'.
USD Liquidity Conditions Index = The Fed’s Balance Sheet — NY Fed Total Amount of Accepted Reverse Repo Bids — US Treasury General Account Balance Held at NY Fed
USD Liquidity — Number Go Up:
Fed Balance Sheet — Increases
RRP Balances — Decreases
TGA — Decreases
USD Liquidity — Number Go Down:
Fed Balance Sheet — Decreases
RRP Balances — Increases
TGA — Increases
♦️BAD MINDSET IS YOUR ENEMY♦️
♦️Forex trading is one of the most exciting and lucrative ventures that anyone can undertake. With the right mindset and tools, one can make a lot of money by trading currencies. However, the opposite is also true. A bad mindset can lead to disastrous consequences in forex trading. It is, therefore, important for traders to understand the effects of a bad mindset and avoid them at all costs.
♦️One of the most common effects of a bad mindset in forex trading is overthinking. When traders overthink, they become too analytical and too cautious. This can lead to missed opportunities and bad trading decisions. Overthinking can also lead to indecision and second-guessing, which can be harmful in a fast-paced and dynamic market like forex.
♦️Another effect of a bad mindset is emotional trading. Emotions like fear, greed, and impatience can lead to irrational trading decisions. For example, a trader may hold onto a losing position for too long in the hope that it will eventually turn profitable. This can lead to bigger losses and a further deterioration of the trader’s mindset. Similarly, greed can lead to taking on too much risk, which can also lead to disastrous consequences.
♦️A bad mindset can also cause traders to be too dependent on their trading strategies. While having a good trading strategy is important, it is equally important to be flexible and open-minded. A trader who is too reliant on their strategy may miss out on profitable opportunities that do not fit their style. This can lead to missed profits and frustration.
♦️Lastly, a bad mindset can lead to overconfidence. Traders who are overconfident may take on too much risk or ignore important market signals. This can lead to catastrophic losses and a severe blow to the trader’s ego. Overconfidence can also lead to ignoring basic risk management principles, which is a recipe for disaster.
♦️In conclusion, a bad mindset can have a significant impact on forex trading success. Traders who are too analytical, too emotional, too dependent, or too overconfident may make bad trading decisions that can result in losses. It is, therefore, important for traders to stay calm, flexible, and open-minded in their approach to forex trading. A winning mindset can help traders achieve success and make profitable trades in the dynamic and exciting forex market.
Thanks for reading bro, you are the best☺️
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Diversification using TradingView ToolsHow to diversify your portfolio and trade across different markets and asset classes using Tradingview's data and charts
Diversifying your portfolio is one of the most important strategies for reducing risk and increasing returns in the long term. By investing in different markets and asset classes, you can benefit from the different performance cycles and correlations of each asset, and avoid putting all your eggs in one basket.
However, diversifying your portfolio can also be challenging, especially if you are not familiar with the different markets and asset classes available. How do you know which assets to choose, how much to allocate to each one, and how to monitor their performance over time?
This is where TradingView can help you. TradingView is a powerful platform that provides you with data and charts for thousands of assets across various markets and asset classes, such as stocks, forex, cryptocurrencies, commodities, indices, futures, options, and more. You can use TradingView to research, analyze, and trade these assets with ease and convenience.
In this article, we will show you how to diversify your portfolio and trade across different markets and asset classes using TradingView's data and charts. We will cover the following topics:
- How to access data and charts for different markets and asset classes on TradingView
- How to use TradingView's tools and features to research and analyze different assets
- How to use TradingView's indicators and strategies to identify trading opportunities and signals
- How to use TradingView's brokers and trading platforms to execute trades on different assets
- How to use TradingView's portfolio and watchlist tools to monitor and manage your diversified portfolio
By the end of this article, you will have a better understanding of how to diversify your portfolio and trade across different markets and asset classes using TradingView's data and charts. Let's get started!
One of the benefits of diversifying your portfolio is that you can take advantage of the different performance cycles and correlations of different markets and asset classes. For example, stocks tend to perform well during periods of economic growth and expansion, while bonds tend to perform well during periods of economic slowdown and contraction. Similarly, commodities tend to perform well during periods of inflation and supply shocks, while cryptocurrencies tend to perform well during periods of innovation and disruption.
However, to diversify your portfolio effectively, you need to have access to data and charts for different markets and asset classes. This is where TradingView can help you. TradingView is a platform that provides you with data and charts for thousands of assets across various markets and asset classes, such as stocks, forex, cryptocurrencies, commodities, indices, futures, options, and more. You can use TradingView to research, analyze, and trade these assets with ease and convenience.
To access data and charts for different markets and asset classes on TradingView, you can use the search bar at the top of the page. You can type in the name or symbol of the asset you want to view, or you can browse through the categories and subcategories on the left side of the page. For example, if you want to view data and charts for stocks, you can click on the "Stocks" category on the left side of the page, and then choose from the subcategories such as "US Stocks", "UK Stocks", "Canadian Stocks", etc. You can also filter by sectors, industries, market cap, dividends, earnings, etc.
Once you select an asset, you will see its data and chart on the main page. You can customize the chart by changing the time frame, adding indicators, drawing tools, annotations, etc. You can also compare the performance of different assets by adding them to the same chart. For example, if you want to compare the performance of gold and bitcoin over the last year, you can add them to the same chart by typing in their symbols in the search bar (XAUUSD for gold and BTCUSD for bitcoin) and clicking on "Compare". You will see their data and charts overlaid on each other.
You can also use TradingView's tools and features to research and analyze different assets. For example, you can use TradingView's screener tool to scan for assets that meet your criteria based on various fundamental and technical factors. You can also use TradingView's news feed to stay updated on the latest developments and events that affect different markets and asset classes. You can also use TradingView's social network to interact with other traders and investors who share their ideas and opinions on different assets.
TradingView also provides you with indicators and strategies that can help you identify trading opportunities and signals for different assets. Indicators are mathematical calculations that are applied to the price or volume data of an asset to generate signals or patterns that indicate the direction or strength of a trend or a reversal. Strategies are sets of rules that define when to enter and exit a trade based on certain conditions or criteria. TradingView has hundreds of indicators and strategies that you can use or create your own using TradingView's Pine Script language.
To use TradingView's indicators and strategies, you can click on the "Indicators" button at the top of the chart. You will see a list of categories such as "Trend", "Momentum", "Volatility", etc. You can choose from the built-in indicators or search for custom indicators created by other users or yourself. You can also click on the "Strategies" button at the top of the chart to see a list of categories such as "Long", "Short", "Scalping", etc. You can choose from the built-in strategies or search for custom strategies created by other users or yourself.
Once you select an indicator or a strategy, you will see it applied to your chart. You can adjust its settings by clicking on its name at the top of the chart. You will see its parameters such as inputs, outputs, alerts, etc. You can change these parameters according to your preferences or needs. You will also see its performance report that shows its statistics such as net profit, win rate, drawdown, etc. You can use this report to evaluate its effectiveness and suitability for your trading style and goals.
TradingView also allows you to execute trades on different assets using its brokers and trading platforms. Brokers are intermediaries that connect you with the markets and allow you to buy and sell assets for a fee or commission. Trading platforms are software applications that enable you to place orders, manage your positions, monitor your account balance, etc. TradingView has partnered with several brokers and trading platforms that offer access to various markets and asset classes.
To start trading on TradingView, you need to connect your broker account or trading platform to your TradingView account. TradingView supports many popular brokers and platforms, such as Oanda, FXCM, Coinbase, Binance, Interactive Brokers, and more. You can find the full list of supported brokers and platforms here: www.tradingview.com To connect your broker account or platform, go to the Trading Panel at the bottom of your chart, click on the Select Broker button, and choose your broker or platform from the list. Then follow the instructions to log in and authorize TradingView to access your account.
Once you have connected your broker account or platform, you can start executing trades on different assets directly from your TradingView charts. To open a trade, click on the Buy/Sell button on the Trading Panel, select the asset you want to trade, enter the quantity, price, stop loss, and take profit levels, and click on Confirm. You can also use the One-Click Trading feature to open trades with one click on the chart. To enable One-Click Trading, go to the Settings menu on the top right corner of your chart, click on Trading Settings, and check the One-Click Trading box. Then you can click on the Bid or Ask price on the chart to open a buy or sell trade respectively.
To monitor and manage your open trades, you can use the Orders and Positions tabs on the Trading Panel. Here you can see your order history, current positions, profit and loss, margin level, and account balance. You can also modify or close your orders and positions by clicking on the Edit or Close buttons. You can also use the Trade Manager tool to manage your trades more efficiently. The Trade Manager tool allows you to set multiple targets and stop losses for each trade, as well as trailing stops and break-even levels. To access the Trade Manager tool, right-click on your position on the chart and select Trade Manager.
To monitor and manage your diversified portfolio across different brokers and platforms, you can use TradingView's portfolio and watchlist tools. The portfolio tool allows you to see your total portfolio value, asset allocation, performance, risk metrics, and more. You can also compare your portfolio with various benchmarks and indices. To access the portfolio tool, go to www.tradingview.com The watchlist tool allows you to create custom lists of assets that you want to track and analyze. You can add any asset that is available on TradingView to your watchlist, such as stocks, forex pairs, cryptocurrencies, commodities, indices, etc. You can also sort, filter, group, and customize your watchlist columns according to your preferences. To access the watchlist tool, go to www.tradingview.com
TradingView's brokers and trading platforms integration and portfolio and watchlist tools are powerful features that can help you execute trades on different assets and monitor and manage your diversified portfolio more effectively. We hope this article has given you a clear overview of how to use these features. Happy trading!
Fundamentals & Technical AnalysisHow to apply fundamental analysis and macroeconomic trends to complement your technical analysis and trading strategy
Fundamental analysis and macroeconomic trends are important tools for traders who want to understand the underlying forces that drive the market. Technical analysis, on the other hand, focuses on the price action and patterns of the market. By combining both approaches, traders can gain a more comprehensive and balanced perspective on the market and improve their trading strategy.
Fundamental analysis of the macroeconomic environment involves studying the economic, political, and social factors that affect the supply and demand of an asset. Some of the most relevant fundamental indicators are:
- Gross domestic product (GDP): This measures the total value of goods and services produced by a country in a given period. It reflects the economic growth and health of a country. A higher GDP indicates a stronger economy and a higher demand for its currency and assets.
- Inflation: This measures the change in the average price level of goods and services over time. It affects the purchasing power of money and the interest rates. A moderate inflation indicates a healthy economy with stable growth. A high inflation indicates an overheated economy with excessive money supply and a lower demand for its currency and assets.
- Interest rates: This measures the cost of borrowing money. It affects the profitability of investments and the exchange rates. A higher interest rate indicates a tighter monetary policy and a higher demand for its currency and assets. A lower interest rate indicates a looser monetary policy and a lower demand for its currency and assets.
- Trade balance: This measures the difference between a country's exports and imports. It reflects the competitiveness and demand for a country's goods and services in the global market. A positive trade balance indicates a trade surplus and a higher demand for its currency and assets. A negative trade balance indicates a trade deficit and a lower demand for its currency and assets.
To complement technical analysis and trading strategy, traders can use fundamental analysis and macroeconomic trends to identify the long-term direction and strength of the market, as well as potential opportunities and risks. For example, suppose a trader wants to trade EUR/USD, which is the exchange rate between the euro and the US dollar. The trader can use technical analysis to identify the support and resistance levels, trend lines, chart patterns, indicators, and signals on different time frames. The trader can also use fundamental analysis to assess the economic conditions and outlook of both the eurozone and the US, as well as their relative interest rates, inflation rates, trade balances, and other factors that affect their currencies.
Suppose the trader observes that the eurozone has a higher GDP growth rate, lower inflation rate, positive trade balance, and stable interest rate than the US. The trader can infer that the eurozone has a stronger economy than the US, which implies a higher demand for the euro than the US dollar. The trader can also observe that the EUR/USD is in an uptrend on the daily chart, with higher highs and higher lows, supported by a rising moving average. The trader can conclude that the fundamental analysis confirms the technical analysis, which suggests that EUR/USD is likely to continue to rise in the long term.
The trader can then use technical analysis to find an optimal entry point to buy EUR/USD. For example, suppose the trader sees that EUR/USD is retracing from a recent high to test a support level at 1.2000, which coincides with a 50% Fibonacci retracement level and a rising trend line. The trader can also see that there is bullish divergence between the price and an oscillator indicator such as RSI or MACD, which indicates that the downward momentum is weakening. The trader can decide to buy EUR/USD at 1.2000, with a stop loss below 1.1900 and a target at 1.2200.
By applying fundamental analysis and macroeconomic trends to complement technical analysis and trading strategy, traders can gain a deeper understanding of the market dynamics and enhance their trading performance.
If you are stock trading, you should consider the following fundamental indicators which are all readily available as trends on the TradingView platform:
- ROE (Return on Equity): This indicator measures how effective a company is in generating profits for its shareholders. It is calculated by dividing the net income by the shareholders' equity. A high ROE indicates that the company is using its resources efficiently and creating value for its owners.
- EPS (Earnings Per Share): This indicator measures how much profit a company makes per share of its common stock. It is calculated by dividing the net income by the number of outstanding shares. A high EPS indicates that the company is profitable and can potentially pay dividends or reinvest in its growth.
- DYR (Dividend Yield Ratio): This indicator measures how much dividend a company pays per share of its common stock relative to its earnings. It is calculated by dividing the total dividends by the net income or the dividend per share by the earnings per share. A high DYR indicates that the company is rewarding its shareholders with a steady income stream and has confidence in its future prospects.
- FCF (Free Cash Flow): This indicator measures how much cash a company generates from its operations after deducting capital expenditures. It is calculated by subtracting the capital expenditures from the operating cash flow. A high FCF indicates that the company has enough cash to pay its debts, invest in new projects, or return money to its shareholders.
- PEG (Projected Earnings Growth): This indicator measures how fast a company's earnings are expected to grow in the future relative to its current price. It is calculated by dividing the price-to-earnings ratio by the annual earnings growth rate. A low PEG indicates that the company is undervalued and has strong growth potential.
These fundamental indicators can help traders to identify stocks that are overvalued, undervalued, or fairly priced based on their financial performance and future prospects. They can also help traders to compare different stocks within the same industry or across different industries and sectors.
Investment Risk Scale
When investing funds in any format, you need to understand the
investment approach and risk involved in the planning you undertake.
Example investment risk categories when investing capital or income are as follows:
1-2
Lowest Risk
Very Cautious Risk
You are not prepared to accept any exposure to investment loss although you
are aware that any investment has some possibility of loss, for example if a bank
holding your money was to collapse. The value of your money may also fall in
real terms if inflation exceeds the return that your investment achieves. You
accept that the returns from your investments are likely to be low compared to
the potential returns from investments that have a higher risk rating.
3-4
Cautious Risk
You are prepared to accept a higher risk of capital loss in return for the
opportunity to earn more than from deposits and low risk type investments but
do not wish to take as much risk as with a medium risk strategy. While there can
be no guarantee, investments in this category are not likely to fluctuate in value
as sharply or as quickly as a portfolio largely made up of equity investments.
5-6
Balanced Risk
You are prepared to accept that the value of your investments will fluctuate
with the aim of achieving higher returns in the medium to long term. You accept
that there is an increased risk of capital loss over investing in more low risk
investments. Medium risk investments can fluctuate in value more rapidly and
quickly over a short periods of time than more low risk investments.
7-8
Adventurous Risk
You are prepared to accept fairly high levels of risk with your investments,
with the aim of achieving higher investment returns in the longer term. You
accept that this may mean that the value of your investments may fluctuate
considerably over a short periods of time and that there is an increased risk of
capital loss compared with a lower risk investment strategy.
Therefore, you may consider investments mainly in equities/shares and is likely
to involve investment in various overseas markets as well as UK markets. This
increases risk because of currency fluctuations as well as investment risk. Risk
can be reduced by diversifying your investments across sectors and markets
9-10
Highest Risk
Very Adventurous
Risk
You are prepared to accept high levels of risk with your investments, with the
aim of achieving higher investment returns in the longer term. You accept that
this may mean that the value of your investments may fluctuate significantly
over a very short periods of time and you could lose a significant proportion
(possibly all) of your investment.
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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.
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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.
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❗️CONFIRMATION BIAS IS YOUR ENEMY❗️
🏛As traders, we are constantly bombarded with information on the global economic landscape, market trends, and potential investments. With so much information at our fingertips, it is easy to fall victim to a cognitive bias known as confirmation bias.
🏛Confirmation bias, also known as selective perception, is the tendency for individuals to seek out and interpret information in a way that confirms their existing beliefs or hypotheses. In the world of trading, confirmation bias can be particularly dangerous, as it can lead traders to make decisions based on incomplete or biased information.
🏛For example, imagine you hold a strong belief that apple stocks are going to rise in the coming months. You begin to search for information to support this belief - perhaps you read articles, listen to news broadcasts, and consult financial websites that all confirm your hypothesis. Meanwhile, you are dismissing any information that contradicts your belief, such as negative earnings reports, changes in the market, or negative press.
🏛The problem with this type of thinking is that it can lead traders to ignore crucial signs that could indicate a shift in the market. Confirmation bias can cloud our judgment and hinder our ability to make objective, data-driven decisions.
🏛To avoid confirmation bias, traders need to actively seek out and consider evidence that contradicts their established beliefs. By doing so, traders can obtain a more comprehensive view of the market and make informed decisions based on all available information.
🏛Furthermore, it is essential to rely on multiple sources of information, including information from trusted analysts, financial experts, and data-driven research. Traders must be able to evaluate information objectively and dispose of preconceived notions that may color their decision-making process.
🏛In conclusion, confirmation bias is a cognitive bias that can significantly impair traders' abilities to make sound decisions in the market. Traders must be cognizant of this bias and actively work to identify and address it by seeking out multiple sources of information, analyzing data objectively, and challenging their preconceived beliefs. Only by doing so can traders ensure that their decisions are based on informed and rational conclusions, rather than biased opinions or incomplete information.
Thanks for reading bro, you are the best☺️
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The Benefits of Keeping a Trading Journal for Your PsychologyTrading can be a challenging and emotional endeavor. As traders, we must navigate through various market conditions, deal with losses, and manage our emotions. It's not surprising that many traders struggle with maintaining their psychological balance. However, one tool that can help traders keep their emotions in check and improve their trading is a trading journal.
A trading journal is a document or software that traders use to track their trades, analyze their performance, and record their thoughts and emotions during the trading process. Here are some of the benefits of keeping a trading journal for your psychology:
Self-Awareness
Keeping a trading journal helps traders become more self-aware of their thoughts, emotions, and behaviors while trading. By recording their trades and reviewing them, traders can identify patterns in their behavior, emotions, and decision-making. This self-awareness can help traders recognize their strengths and weaknesses, and develop strategies to improve their trading.
Improved Decision-Making
A trading journal can also help traders make better decisions. By analyzing their trades, traders can identify mistakes they made and learn from them. They can also identify successful trades and analyze what they did right. This process can help traders develop a more effective trading strategy and improve their decision-making skills.
Accountability
A trading journal can help traders hold themselves accountable for their trading decisions. By recording their trades and emotions, traders can see where they went wrong and take responsibility for their mistakes. This accountability can help traders learn from their mistakes and avoid making the same ones in the future.
Stress Management
Trading can be a stressful activity. By keeping a trading journal, traders can vent their emotions and reduce their stress levels. Writing down their thoughts and emotions during trading can help traders release their negative emotions and feel more relaxed. This stress management technique can help traders maintain a healthy psychological state while trading.
Goal Setting
Keeping a trading journal can help traders set and achieve their goals. By recording their trades and analyzing their performance, traders can identify areas where they need to improve and set goals to achieve those improvements. These goals can be related to profitability, risk management, or any other aspect of trading. Setting and achieving these goals can help traders feel a sense of accomplishment and increase their motivation.
In conclusion, keeping a trading journal is an excellent tool for traders to improve their psychological state while trading. By increasing self-awareness, improving decision-making, holding oneself accountable, managing stress, and setting goals, traders can improve their overall trading performance. Therefore, it's highly recommended for traders to keep a trading journal to improve their trading psychology.
One Trade Does Not Define Your Trading Performance...
Hey traders,
👨🏻💻I am trading forex for more than 8 years.
During the last 5 years, I am actively posting my analysis & trades on TradingView.
Growing my audience, it was very peculiar for me to contemplate the reaction of my followers to my trading performance.
(by the way, we must say thanks to tradingview where the posting system does not allow to delete the posted trades so that each and every author is easily backtestable).
👩👩👧👧👨👨👧👧Those who follow me at least a half a year know that occasionally I have winning streaks when 9 out of 10 of my forecasts play out nicely. Sometimes, however, I face the drawdowns and catch a sequence of losing trades.
And sometimes the performance is mixed with the probabilities being on my side slightly.
🥇While the reaction to winning streaks is quite predictable:
I am praised by the members and get nice tips.
The reaction to losing streaks is worth discussing in detail.
It turned out that quite a huge portion of a trading community has a completely wrong understanding of a trading nature.
🤬The single loss is considered by them to be a failure, a mistake.
Facing the sequence of losses, they quickly become negatively biased to the person that they have just recently praised.
With the continuation of a drawdown, they blame the analyst and launch a barrage of criticism towards him.
🔍Then they are in a search again. They are looking for a trader that will be constantly right. Catching the new one during a winning streak, the cycle repeats.
At some moment such people become disappointed in trading and drop this business...
❗️Losses, losing streaks and negative days/weeks/months are inevitable. If you want to become a full-time trader, you must be prepared for the fact that trading won't give you a stable income.
Your equity curve will be in constant fluctuation.
Your goal in this game is simply to lose less than you make.
You must become disciplined enough to keep following the rules of your trading strategy no matter what.
You must learn to be consistent in your actions.
You should learn to perceive losing trades not as a failure but simply as the moment when the market takes its share.
Feeding you, giving you the opportunity to make money out of thin air,
the market definitely has a right to claim its dividends from you.
⭐️Change your mindset, learn to lose and the magic thing will happen.
Let me know, traders, what do you want to learn in the next educational post?
MACD Indicator | How Does It Work? | Definition & Examples
MACD is a technical indicator designed to help investors identify price trends, measure trend momentum, and identify acceleration points to fine-tune market entry timing (whether you’re buying or selling).
How does MACD work?
The MACD indicator has many moving parts and functions, but it’s made up of three general components: the MACD line, which is the difference between two moving averages; a signal line, which is a moving average of the MACD line; and a histogram.
MACD takes the moving average concept a step further. It’s one thing to compare a fast and a slow moving average, but for MACD, that’s only the beginning.
First, the MACD line is calculated by subtracting the 26-day exponential moving average (EMA) from the 12-day EMA (i.e., fast minus slow). Why? The calculation is designed to show the relationship between the two averages, and it does so in a way that places emphasis on more recent price data.
The signal line is a 9-day (or 9-period) EMA of the MACD line. In other words, it’s a moving average of the difference between two moving averages, or a “slower” version of the difference between a fast and a slow moving average.
Why use a moving average of two other moving averages? The signal line calculation “smooths out” the MACD line, creating an even slower moving average that serves as the faster MACD line’s counterpart.
How do you read the MACD?
Pay attention to the moving averages—the MACD and the signal line—and their relation to the histogram.
Note that when the MACD line (the faster moving average) is above the signal line, the bars in the histogram are above the zero line, which is a bullish signal. When the MACD line is below the signal line, the histogram bars are below the zero line, which is generally bearish.
What do you want to learn in the next post?
How can AI help to improve algorithmic trading strategies?AI is transforming the field of algorithmic trading, which involves using computer programs to execute trades based on predefined rules and strategies. AI can help to improve algorithmic trading performance and efficiency by providing advanced data analysis, predictive modeling, and optimization techniques. In this article, we will explore some of the ways that AI can enhance algorithmic trading and some of the challenges and opportunities that lie ahead.
One of the main advantages of AI in algorithmic trading is its ability to process and interpret large and complex data sets in real-time. AI algorithms can leverage various sources of data, such as market prices, volumes, news, social media, sentiment, and historical trends, to identify patterns, correlations, and anomalies that may indicate trading opportunities. AI can also use natural language processing (NLP) and computer vision to extract relevant information from unstructured data, such as text, images, and videos.
Another benefit of AI in algorithmic trading is its ability to learn from data and adapt to changing market conditions. AI algorithms can use machine learning (ML) and deep learning (DL) techniques to train on historical and live data and generate predictive models that can forecast future market movements and outcomes. AI can also use reinforcement learning (RL) techniques to learn from its own actions and feedback and optimize its trading strategies over time.
A further aspect of AI in algorithmic trading is its ability to optimize trading performance and reduce costs. AI algorithms can use mathematical optimization methods to find the optimal combination of parameters, such as entry and exit points, order size, timing, and risk management, that can maximize profits and minimize losses. AI can also use high-frequency trading (HFT) techniques to execute trades at high speeds and volumes, taking advantage of small price fluctuations and arbitrage opportunities. AI can also help to reduce transaction costs, such as commissions, fees, slippage, and market impact, by using smart order routing and execution algorithms that can find the best available prices and liquidity across multiple venues.
However, AI in algorithmic trading also faces some challenges and limitations that need to be addressed. One of the main challenges is the quality and reliability of data. AI algorithms depend on accurate and timely data to perform well, but data sources may be incomplete, inconsistent, noisy, or outdated. Data may also be subject to manipulation or hacking by malicious actors who may try to influence or deceive the algorithms. Therefore, AI algorithms need to have robust data validation, verification, and security mechanisms to ensure data integrity and trustworthiness.
Another challenge is the complexity and interpretability of AI algorithms. AI algorithms may use sophisticated and nonlinear models that are difficult to understand and explain. This may pose a problem for traders who need to monitor and control their algorithms and regulators who need to oversee and audit their activities. Moreover, AI algorithms may exhibit unexpected or undesirable behaviors or outcomes that may harm the traders or the market stability. Therefore, AI algorithms need to have transparent and explainable methods that can provide clear and meaningful insights into their logic and decisions.
However, there are also ethical and social implications of AI in algorithmic trading. AI algorithms may have an impact on the market efficiency, fairness, and inclusiveness. For example, AI algorithms may create or amplify market inefficiencies or distortions by exploiting information asymmetries or creating feedback loops or cascades. AI algorithms may also create or exacerbate market inequalities or exclusions by favoring certain groups or individuals over others or by creating barriers to entry or access for new or small players. Therefore, AI algorithms need to have ethical and social principles that can ensure their alignment with human values and interests.
In conclusion, AI is a powerful tool that can help to improve algorithmic trading strategies and performance by providing advanced data analysis, predictive modeling, and optimization techniques. However, AI also poses some challenges and risks that need to be addressed by ensuring data quality and reliability, algorithm complexity and interpretability, and ethical and social implications. By doing so, AI can create a more efficient, effective, and equitable algorithmic trading environment for all stakeholders.
