Wait always for a retest!Waiting for a retest is necessary when we talk about patterns. As you can see in this scenario, the price tried to break the pattern, but it just created fake-outs. Waiting for a retest will save you many stop losses!
Commodities
Importance of resistance and long-term chartsI just had to pop this chart on here this morning – it is the CBOT monthly wheat chart. It demonstrates that no matter what your time frame that it is important to look at long term charts and it also demonstrates the importance of resistance.
There are two resistance points to mention on here – the first is the 1349 2008 high and the second is the shallow parallel line I have drawn, which connects the 1977 low and the 2000 low. I shifted this line up to connect to the 1349 2008 high and this provided resistance at 1373. The market tested these twin perils in March and failed miserably. The mid-point of this range is about 810 and this where I suspect the market will head.
Disclaimer:
The information posted on Trading View is for informative purposes and is not intended to constitute advice in any form, including but not limited to investment, accounting, tax, legal or regulatory advice. The information therefore has no regard to the specific investment objectives, financial situation or particular needs of any specific recipient. Opinions expressed are our current opinions as of the date appearing on Trading View only. All illustrations, forecasts or hypothetical data are for illustrative purposes only. The Society of Technical Analysts Ltd does not make representation that the information provided is appropriate for use in all jurisdictions or by all Investors or other potential Investors. Parties are therefore responsible for compliance with applicable local laws and regulations. The Society of Technical Analysts will not be held liable for any loss or damage resulting directly or indirectly from the use of any information on this site.
3 Types of Charts You Must Know 📈
Hey traders,
In this post, we will discuss 3 most popular types of charts.
We will discuss the advantages and disadvantages of each one, and you will decide what type is the most appropriate for you.
📈Line Chart.
Line chart is the most common chart applied by analysts. Reading financial articles in different news outlets, I noticed that most of the time the authors apply line chart for the data representation.
On a price chart, the only parameter that the one can set is a time period.
Time period will define a time of a security closing price. The security closing prices overtime will serve as data points.
These points will be connected with a continuous line.
Line charts are applied for displaying an asset's price history, reducing the noise from less volatile times.
Being simplistic, they can provide a general picture and market sentiment. However, they are considered to be insufficient for pattern recognition and in depth analysis.
📏Range Bar Chart.
In contrast to a line chart, a range bar chart does not consider time horizon. The only parameter that the one can set is a price range.
By the range, I mean a price interval where the price moves. A new bar will be formed only once the prices passes the desired range.
Such a chart allows to completely ignore time variable focusing only on price movement and hence reducing the market noise.
The chart will plot new bars only when the market is volatile, and it will stagnate while the market is weak and consolidating.
Accurately setting a desired price range, one can get multiple insights analyzing a range bar chart.
🕯Candlestick Chart.
The most popular chart among technicians and my personal favorite.
With just one single parameter - time period, the chart plots candlesticks.
Each candlestick is formed as a desired time period passes.
It contains an information about the opening price level, closing price, high and low of a selected time period.
Candlestick chart is applied for pattern recognition and in-depth analysis. Its study unveils the behavior of the market participants and their actions at a desired time period.
Of course, each chart has its own pluses and minuses. Choosing its type, you should know exactly what information do you want to derive from the chart.
What chart type do you prefer?
❤️If you have any questions, please, ask me in the comment section.
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CUP & HANDLE. How the pattern works☕️
✅This pattern is not as popular among traders as "Head and Shoulders", "Double Top" and other classic patterns of technical analysis. However, this does not mean that it is not so effective. In fact, the "Cup & Handle" pattern is in no way inferior to the above patterns in its reliability and, if used correctly, can bring considerable benefits to the trader.
✅Below we will look at how the "Cup & handle" is formed, what are the signs of authenticity of the formed pattern, and the trading strategy for it.
⚠️How the "Cup & Handle" formation is formed
The formation of this pattern occurs on an uptrend and is a sure sign of its continuation (subject to the conditions of authenticity of the pattern). In essence, it is a cup - an uptrend correction. The price reaches a strong resistance level, cannot overcome it, and smoothly rolls back, forming the left wall of the cup. Then it smoothly unfolds along the bottom and rises to test the level again. Having reached the level, it rolls back down again. This rollback should be much smaller than the previous one, and it forms a handle. The handle of the cup is very often formed in the form of a "Flag" pattern.
The "Cup & handle" pattern is considered fully formed when the price, having formed a "handle", returns up and breaks through the resistance level from which the pattern formation began
⚠️Confirmation of the truth of the "Cup & handle" pattern
There are several conditions, without which the formed pattern cannot be considered true. These are the conditions:
1️⃣To begin with, as mentioned above, for the formation of this pattern, it is necessary to have an uptrend. Without a trend, there is no point in looking for this formation on the price chart, because even if you find a drawing of an ideal cup with a handle, it will be just a drawing that has no meaning.
2️⃣The depth of the forming cup should not exceed 2/3 of the height of the previous uptrend. The optimal depth of the cup is within 1/3 - 2/3 of this value.
The depth of the forming handle should not exceed a value equal to ½ of the depth of the cup.
3️⃣The most reliable is the "Cup & Handle" pattern formed on daily or weekly timeframes. Of course, it can also be formed on hourly charts, but where the probability of its triggering is somewhat lower.
4️⃣The "Cup & handle" pattern should be confirmed by the indicators of the volume indicator. Volumes should grow at a time when the price is moving in the direction of an uptrend and fall when it decreases. Also, a sharp surge in volume should accompany the moment of breaking through the price level at the end of the formation of the figure.
🟢Trading strategy based on the "Cup & handle"
The entry into the position is carried out after the completion of the formation of the figure. It is recommended to wait for the price to close above the resistance line. To do this, you must constantly monitor the schedule in anticipation of the right moment.
There is also a strategy for opening a position on a pending order, in which case there is no
need to sit and wait for the completion of the figure. A pending order is placed at a level slightly above the resistance level (approximately 10 points) and is triggered if the figure is completed.
The target level for this pattern is the height of the cup, laid up from the resistance level. Therefore, we set the profit-taking level of TAKE PROFIT either at the target level or 10-15 points below it.
As for the STOP LOSS limit order, it should be placed at the level of the bottom of the handle (or slightly lower).
❗️In conclusion, I will say once again how important it is to correctly identify the "Cup and Handle" formation before you start trading on it. Carefully re-read the rules confirming this pattern. Try not to mess with the patterns formed on small timeframes. Take your time, be patient, and remember that the absence of open positions can also be considered an excellent position.
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A good trendline should touch 3 timesJust wanted to highlight for you this morning the importance of trendlines. Good trendlines are like a good wine – the older they are the better they become! A 3-month trendline is more important than a 3-week trendline for example. They also help to enforce discipline; they can act as entry or exit zones and they can help with timing.
This one on the Crude Oil continuation chart is an excellent one, it underpins the bull move so far this year and connects 3 points (very important) and is located circa 106.50. Success or failure at the trendline is likely to prove pretty directional for the market and given price action over the past week, to my practiced eye – it looks vulnerable. Failure we suspect would initiate a sell-off towards the 50% retracement (of the move seen this year) circa 96.50.
Shocking Truths about Trading no one talks about EP1.After 5 years of self-educating myself in the art of trading while undergoing brutal consistent losses, these are the truths that set me on the path of surprising consistency after internalizing them.....I hope it will for you guys and give more inspiration to the already consistent ones.
Shocking Truths no one talks about in trading:
1. You may have the best strategy, signal provider or learned everything about trading, but what counts is what happens to that knowledge 5 seconds before pressing the buy/sell button.
2. What is Mathematically optimal is Psychologically impossible.
If you have a strategy that gets wins of 25R but has like 12 losses in a row, DUMP IT.
Mathematically, you will make money at the end, Psychologically you will quit before you take trade 13.
3. You start winning in trading when you believe you can lose (Trading Paradox).
Consistently profitable traders have one thing in common: they place their next trade like it was already a loser.
4. Extremely good analysts are most often bad traders....you can be right about the direction but fail in the critically important aspect of Entry timing and still lose the trade.
5. IT IS THE SIMPLE THINGS THAT WORK!.
Most people will tell you to look for complex strategies that look for "Random walk algorithmic discrepancies that rhyme with Chaos theories....and all that blah..." But I have been on that path and I hate to break it to you that a guy/girl using only support and resistance and simple moving average crossovers with a verified and bactested edge and discipline will most likely be more profitable.
5. THE MORE OBVIOUS A TRADE IS THE GREATER THE CHANCES YOU LOSE IT.
Most people think that if a trade has soooo many confluences it is more likely to work....well that might be true to an extent after which it is a blatant fallacy. From historical data and my own personal LIVE trading results, the probability of a trade working out reduces DRASTICALLY when the number of confluences crosses 5.
I theorize that this happens because market makers will see all the orders placed at that point is soo much(cause everyone will see the opportunity with their different approaches) and take them all out.
6. No one can sell a money printer, cause it has no price.
If someone offers to sell you a robot or STRATEGY that triples your money every month, laugh and pass, if you don't and end up buying that....you deserved to be scammed.
Think about it the person can just take $100 and apply his/her magic to it and print out Elon Musk's networth in lower than 3 years using compounding......and he/she will sell you that for $2000?, you must be kidding me!.
7. Your consistency has nothing to do with your strategy but your mind.
I can bet you my life's earnings, that there is someone out there, using your exact entry and exit rules but is profitable and you are not.
A better strategy brings in more profit, but any random edge with the right mindset and risk management MUST be profitable.
8. Almost everything in life is a pyramid-scheme, & survival of the fittest and trading is not left out.
No matter how much we desire to the contrary, it is IMPERATIVE THAT TRADING HAS MORE LOSERS THAN WINNERS.
The winners in trading have to be relatively fewer cause they win a lot and hence they need soo many losers to give them that money.
There is no bank that hands at money to you when you win, your job as a trader is to outsmart some other fellow and TAKE his/her money and once you come to terms that every dollar lost by you trading, is a dollar gained by someone else in this zero-sum game, you will realize only YOU has got your own back.
9. You can NEVER completely eliminate emotions in trading but you can set rules that allow you trade only when you are at your optimal state, and gives you a day or two vacation when you are down.
10. Reading this article will definitely NOT HELP YOU, it is remembering it the moment before you place your next trade that will.
Pls LIKE and Subscribe, I want to know what you think about this article and which point you agree with the most or disagree with.
Tell me whether it helped you in any way and if we get 50 likes and 20 comments I will consider making the next episode.
BID AND ASK BASICS📚
🔴In all markets, there is a price at which a market participant is willing to buy an asset and a price that suits the seller. At the same time, traders intend to carry out a purchase and sale transaction only within the amount that is profitable for them.
⚠️In the foreign exchange market, the ask line is the cost of buying an asset or the price that is set by the broker in the Buy order.
⚠️Bid - accordingly, the cost at which the broker opens a sell order when accepting an application for the sale of currency from a trader.
❗️The spread is the difference between ask and bid prices. To be more precise, the spread is the difference between the best bid and ask offers for a specific asset over a certain period. Thus, the spread is dynamic, changing over time. The spread value is formed by the initial value set by the broker, as well as due to the volatility of the currency. The spread can vary from 0.1 to 100 points.
✅In the market of physical goods, a similar example can be given: a seller and a buyer, haggling, narrow the difference between prices that satisfy them, bringing them to one at which they make a deal.
✅In the foreign exchange market, the spread between prices is the commission charged by the broker. It should be borne in mind that the broker takes a commission regardless of the volume of the transaction and its result.
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COMPOUND INTEREST | Time is on your side📚
❗️As it turned out, not all traders are familiar with such an important concept as compound interest. Meanwhile, the use of compound interest in trading can be a very effective tool for making a profit. In short, compound interest is the accrual of interest on interest, and if in detail, then read on.
✅The formula for calculating compound interest has the form:
Compound percentage = (P (1 + g)^ n) – P, where
P – the amount originally invested;
r – interest rate;
n is the investment period.
Let's say you invested an amount of $ 10,000, every year the interest received is added to the principal amount, and new interest is accrued for a larger amount. If the investment period is 5 years, and the interest rate is 10% per annum , then after the specified period, taking into account the compound interest, you will receive a profit in the amount of:
(10000(1+0.10)^5)-10000=6105.1$
And without taking into account the compound interest, the profit for the same period will be:
1000050,10-10000=5000$
As you can see, using compound interest (or in other words reinvesting profits) brought additional income in the amount of: 6105.1-5000 = 1105.1 $.
✅It seems that the figures presented above are not impressive, but the use of compound interest in trading can truly work wonders. In what way? Let's take another look at the compound interest formula described above. It is obvious from the formula that you can increase profit by increasing any of its components. Let's not touch the amount originally invested, but play with the value of the investment period and the interest rate.
To begin with, let's imagine that we will reinvest the profit not every year, but every month. Then the investment period will be 12 5 = 60 months. The interest rate corresponding to this investment period will be equal to: 10%/12=0.833%. Let's substitute these values into the formula for calculating the compound percentage:
(10000(1+0.00833)^60)-10000=6449,8$
As you can see, under the same conditions, but with monthly reinvestment of profits, the income will already be $ 6449.8- $6105.1 =$344.7 more.
Well, if the trader's income is not 0.833% per month, but, for example, 5% monthly, then under the same conditions and for the same period, the profit will already be:
(10000(1+0. 05 )^60)-10000=176791,86$
Felt the difference, impressive, isn't it? And what if you reinvest profits not monthly, but daily? Let's figure it out. With an average yield of 5% per month, the average daily yield will be 5%/21= 0.238% (here 21 is the number of working days in a month). The investment period will be 5360=1800 days. Let's substitute the data into the compound interest formula:
(10000(1+0.00238)^1800)-10000=711617,5$
This is already 711617.5-176791.86 = 534826 $ more than with monthly reinvestment of profits. More than half a million dollars (and this with an initial investment of only ten thousand)! That's impressive. That's what compound interest is in action.
⚠️This is about theory. In practice, it is impossible to achieve a constant percentage of profit every day. Some days a trader inevitably ends up with a loss, some with a profit, and the size of these losses and profits is always different. So it is unlikely to substitute the value of the percentage of profit per day in the above formula. However, the very essence of compound interest, clearly shown above in figures, gives the trader a fairly powerful tool for earning. A trader can and should use compound interest when creating his own money management system.
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How To Make Your Trading Plan In 7 Steps !How To Make Your Trading Plan In 7 Steps !
➡️ Choose The Correct Time Frame
All traders know what time frames are, but few know that each time frame has a specific way of working. Time frames from 15 minutes to 60 minutes fall under the name of day trading, meaning that all deals will be closed on the same day, whether with profit or loss, and traders call it the name "Scalping"
On the other hand, there is a time frame from 4 hours to the daily frame, which are considered long deals and traders call them “swing”
Time frames higher than the daily are considered investment centers and are not suitable for small capitals
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➡️ Risk Management
Most traders make a fatal mistake, which is not choosing a risk ratio for each trade, and this exposes the entire account to a loss. The best traders in the world believe that the reasonable risk ratio is between 1% to 3% for each trade.
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➡️ Conditions
You Must Choose Between " Ranging " Or " Trending "
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➡️ Markets
In Stock Markets We Have 4 Market ,,
- First One Is Option
Option or binary options is a currency, commodities and stock market that simulates the same conditions as the real markets, but you can set a time for the transaction and bet on the direction within a minute or two and you can win up to 90% of the bet amount, but in the event of a loss, you lose the entire bet amount and some believe that The option market has a lot of suspicions and scams
- Second Type Is Equity
- Third Type Is Futures
- Forth Type Is Forex
- Fifth Market Is Crypto Currency
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➡️ Type Of Your Entries
- Pull Back
- Break Out
- Cross Over
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➡️ How To Put Your Stop And Targets ?
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Print It And Don't Forget Any One From The 7 Steps To Be Successful Trader ❤️❤️
Most Popular Types Of Candles How to Read Candlestick charts?
Candlestick charts were originated in Japan over 100 years before the West had developed the bar charts and point-and-figure charts. In the 1700s, a Japanese man known as Homma discovered that as there was a link between price and the supply and demand of rice, the markets also were strongly influenced by the emotions of traders.
A daily candlestick charts shows the security’s open, high, low, and close price for the day. The candlestick’s wide or rectangle part is called the “real body” which shows the link between opening and closing prices.
This real body shows the price range between the open and close of that day’s trading.
When the real body is filled, black or red then it means that the close is lower than the open and is known as the bearish candle. It shows that the prices opened, the bears pushed the prices down and closed lower than the opening price.
If the real body is empty, white or green then it means that the close was higher than the open known as the bullish candle. It shows that the prices opened, the bulls pushed the prices up and closed higher than the opening price.
The thin vertical lines above and below the real body is knowns as the wicks or shadows which represents the high and low prices of the trading session.
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1- Hammer Candle
Hammer is a single candlestick pattern that is formed at the end of a downtrend and signals a bullish reversal.
The real body of this candle is small and is located at the top with a lower shadow which should be more than twice the real body. This candlestick chart pattern has no or little upper shadow.
The psychology behind this candle formation is that the prices opened, and sellers pushed down the prices.
Suddenly the buyers came into the market and pushed the prices up and closed the trading session more than the opening price.
This resulted in the formation of bullish pattern and signifies that buyers are back in the market and downtrend may end.
Traders can enter a long position if next day a bullish candle is formed and can place a stop-loss at the low of Hammer.
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2- Hanging Man
Hanging Man is a single candlestick pattern which is formed at the end of an uptrend and signals bearish reversal.
The real body of this candle is small and is located at the top with a lower shadow which should be more than the twice of the real body. This candlestick pattern has no or little upper shadow.
The psychology behind this candle formation is that the prices opened and seller pushed down the prices.
Suddenly the buyers came into the market and pushed the prices up but were unsuccessful in doing so as the prices closed below the opening price.
This resulted in the formation of bearish pattern and signifies that seller are back in the market and uptrend may end.
Traders can enter a short position if next day a bearish candle is formed and can place a stop-loss at the high of Hanging Man.
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3- Three White Soldiers
The Three White Soldiers is a multiple candlestick pattern that is formed after a downtrend indicating a bullish reversal.
These candlestick charts are made of three long bullish bodies which do not have long shadows and are open within the real body of the previous candle in the pattern.
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4- Inverted Hammer
An Inverted Hammer is formed at the end of the downtrend and gives a bullish reversal signal.
In this candlestick, the real body is located at the end and there is a long upper shadow. It is the inverse of the Hammer Candlestick pattern.
This pattern is formed when the opening and closing prices are near to each other and the upper shadow should be more than twice the real body.
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5- Piercing Pattern
Piercing pattern is a multiple candlestick chart pattern formed after a downtrend indicating a bullish reversal.
Two candles form it, the first candle being a bearish candle which indicates the continuation of the downtrend.
The second candle is a bullish candle which opens the gap down but closes more than 50% of the real body of the previous candle, which shows that the bulls are back in the market and a bullish reversal is going to take place.
Traders can enter a long position if the next day a bullish candle is formed and can place a stop-loss at the low of the second candle.
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6- White Marubozu
The White Marubozu is a single candlestick pattern that is formed after a downtrend indicating a bullish reversal.
This candlestick has a long bullish body with no upper or lower shadows which shows that the bulls are exerting buying pressure and the markets may turn bullish.
At the formation of this candle, the sellers should be caution and close their shorting position.
Don't Forget To Like And Follow To Next Part
Less Liquidity In Summer Months Could Lead To More VolatilityThe Memorial Day weekend is the start of the summer season. In many markets, seasonal factors can impact prices. The old saying, “sell in May and go away,” may not be applicable in the stock market as stocks have been on a rocky path lower in 2022. In commodities, gasoline, meats, grains, and other raw material prices often increase as demand peaks. Heating oil and other winter commodities often move to the downside. However, 2022 is anything but an ordinary year in markets.
Thin markets are more volatile than liquid markets
Market participants are tired and frustrated in 2022
Lockdowns over the past years could lead to extended summer vacations
Lots of head-fake moves on the horizon
Expect the unexpected- Volatility leads to opportunity
Over the past two years, the global pandemic distorted prices. Stocks rose as artificially low interest rates made the stock market the only alternative with fixed income yields at historical lows. Rates are rising in 2022, with a hawkish Fed and falling bond market. Supply chain bottlenecks continue to plague commodities, and the war in Ukraine has only exacerbated pricing and availability issues. Mid-term elections in the US, and a Presidential contest in Brazil, a leading commodity-producing country, are on the horizon later this year. The geopolitical bifurcation between nuclear powers is another issue facing markets that reflect the economic and geopolitical landscapes.
Market participants are exhausted as 2022 has brought a new set of concerns. We could see liquidity in markets dry up over the coming weeks and months as the summer has arrived, and vacations will limit participation in markets across all asset classes.
Thin markets are more volatile than liquid markets
Liquidity is a critical ingredient for smooth-running markets. Liquidity tends to reduce price variance as more market participants increase buying and selling interests at various levels.
Commodities tend to be more volatile than other assets, sans cryptocurrencies, but some raw material markets experience far more volatility than others. Lumber and crude oil are two highly volatile commodities, but one has minimal liquidity while the other experiences far more participation.
The daily chart of CME lumber futures shows that daily volume tends to be well below 500 contracts. Open interest at 2,293 contracts makes lumber an illiquid market. Daily historical volatility at over 62% is a function of the lack of volume and open interest, leading to price gaps and limit-up and limit-down price moves where buying disappears during bearish periods and selling evaporates when the price moves higher.
Meanwhile, on a typical trading session, NYMEX crude oil futures trade well over 400,000 contracts, with open interest at above 1.81 million contracts on June 2. Daily historical volatility at below 20% reflects that the highly liquid oil market has buyers and sellers at all price levels.
The bid-offer spreads in liquid markets are far tighter than in illiquid markets. As liquidity declines, markets tend to experience far more price variance.
Market participants are tired and frustrated in 2022
In early 2022, market participants were breathing sighs of relief as the global pandemic was beginning to fade in the rearview mirror. Health concerns may have declined, but financial woes increased with prices.
Monetary and fiscal policies planted inflationary seeds that have caused prices to explode higher, while supply chain bottlenecks continue to exacerbate inflationary pressures. Meanwhile, the Russian invasion of Ukraine is another crisis following on the heels of two years of pandemic panic. Sanctions and Russian retaliation exacerbate inflation. Moreover, Russia’s “no-limits” cooperation with China creates a geopolitical bifurcation of the world’s nuclear powers.
We live in interesting and exhausting times, with people tired and frustrated with the events since 2020.
Lockdowns over the past years could lead to extended summer vacations
Lockdowns ended in the US as vaccines went into arms. People have returned to work and school. In China, the COVID-19 restrictions appear to be easing. In early June 2022, the coming summer months offer the opportunity to rest, relax and recharge internal batteries for the second half of 2022. The demand for travel, hotel rooms, and other vacation-related consumer products has soared. Inflation and supply chain bottlenecks have only increased prices, but the demand is robust.
As market participants take a few weeks off over the coming months, they are likely to turn off their screens and ignore the market action that could interfere with good times with friends and family. Increased vacations may bolster earnings for travel-related businesses, but it will reduce market liquidity as a vacation for many includes a rest period from watching or participating in markets across all asset classes.
Lots of head-fake moves on the horizon
As liquidity declines because of a lack of participation, markets will likely become a lot bumpier over the coming weeks and months. Selling could lead to downdrafts and buying may create rip-your-face-off rallies. These events cause head-fake moves that can cause even the most experienced traders and investors more than a bit of indigestion.
A decline in liquidity could dramatically increase price variance. The geopolitical and economic landscapes will not take any vacation during the summer of 2022.
Expect the unexpected- Volatility leads to opportunity
Expecting the unexpected will reduce the stress-related with sudden market volatility. Moreover, higher price variance increases opportunities for nimble traders and investors with their fingers on the pulse of markets.
Approach markets with a sold risk-reward plan that avoids open-ended risks. Even though declining liquidity can cause markets to rise or fall to irrational price levels, always remember the current price is always the correct price because it is the level where buyers and sellers meet in a transparent environment, the marketplace. Do not be afraid to take small losses and remember to take those profits or adjust risk levels to protect them when markets reach targets. Trading or investing with a plan and sticking to it avoids the ego-related mistakes that cause us to believe we are always right, and the market is wrong. The market price is never wrong.
Meanwhile, combinations of put and call options can protect the downside, hedging portfolios while allowing for upside participation that will enable you to enjoy your time off from the daily grind. Enjoy the summer but keep your eyes open for opportunities. Adjust your mindset to expect the unexpected and embrace the higher volatility that comes alongside lower liquidity. Price variance is a nightmare for the passive, but it creates a world of opportunity for the dynamic.
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Trading advice given in this communication, if any, is based on information taken from trades and statistical services and other sources that we believe are reliable. The author does not guarantee that such information is accurate or complete and it should not be relied upon as such. Trading advice reflects the author’s good faith judgment at a specific time and is subject to change without notice. There is no guarantee that the advice the author provides will result in profitable trades. There is risk of loss in all futures and options trading. Any investment involves substantial risks, including, but not limited to, pricing volatility, inadequate liquidity, and the potential complete loss of principal. This article does not in any way constitute an offer or solicitation of an offer to buy or sell any investment, security, or commodity discussed herein, or any security in any jurisdiction in which such an offer would be unlawful under the securities laws of such jurisdiction.
Negative Divergences Often Warn of Declines: Bitcoin & Gold Negative Divergences Often Warn of Impending Declines: Bitcoin Highlighted…. Is Gold Next?
OTC:GBTC
COMEX:GC1!
INDEX:BTCUSD
The CMT Association is proud to publish this guest post from Louise Yamada CMT. Louise was a Managing Director and Head of Technical Research for Smith Barney (Citigroup), and while there, was a perennial leader in the Institutional Investor poll and the top-ranked market technician in 2001, 2002, 2003 and 2004. Louise was the 2016 recipient of the CMT Association’s Lifetime Achievement Award.
In these examples we use the moving average convergence divergence (MACD) indicator to illustrate the concept of divergence, to forensically evaluate Bitcoin and to make some forward looking observations on the gold market.
Divergences:
• Negative momentum divergences often warn of impending price consolidations or declines.
• Divergence forms as price moves to a new high while the oscillator fails at a lower high, creating a negative divergence between the oscillator and price.
• Divergences of this type suggest that the underlying momentum may be waning.
Divergences carry different implications depending upon their time frame.
• Daily perspective divergences suggest either a consolidation, or a pullback in an ongoing uptrend.
• Weekly perspective divergences suggest a more sustained consolidation or even a reversal of trend, particularly if important support is violated.
• Monthly divergences have the potential to result in a more sustained decline or even to reverse an uptrend.
MACD sell signals give validity to divergences.
• Monthly signals have much more weight than weekly and daily.
• Monthly divergences don’t always occur prior to monthly MACD sell signals
• But when a sell signal does occur it offers a structural warning.
Graystone Bitcoin Trust (GBTC) Weekly:
• The March 2021 high (A) was followed by a roughly equal price high (B). However, the MACD momentum peaked at a significantly lower high (Line A1-B1), forming a classic divergence that suggested that upward momentum was fading.
• At point C, the weekly MACD moved onto a sell signal (the fast moving average crossed below the slower moving average) strongly suggesting that positions should be either lightened or sold.
• After the sell signal was generated, price declined from 50 to 24.
• A weekly MACD buy signal was then generated at point D. The subsequent rally carried price near the prior high.
• The failure of the MACD to match its prior high warned of potential weakness.
• The MACD generated another sell signal at point E, suggesting lightening or selling positions. Price offered another decline from 50 to 24.
• After a multi-week consolidation in March-April 2022, price broke below the support @24 (S1-S2).
• MACD continues to decline, suggesting that the price decline may not be over, notwithstanding interim rallies.
• Before considering a new long, evidence of stabilization at a low and the gradual reversal of the daily, weekly and eventually, monthly MACDs would be required.
Grayscale Bitcoin Trust (GBTC) Daily
• On the daily perspective chart that there is a divergence from price (A-B) and the MACD (C-D)
• The divergence warned of the possibility of bearish developments spreading to the weekly and monthly.
Graystone Bitcoin Trust (GBTC) Monthly:
• The monthly chart also shows a divergence at points MD1 and MD2 and on the histogram at MD3 and MD4.
• At the second price high (B), MACD hadn’t yet generated a sell signal, but it was beginning to flatten and roll over.
• One can also see the falling histogram, as the MACD narrows (blue arrow), and the divergence progressed, until it finally generated a clear sell.
• Price lingered above the support at 24 (S2) for several months providing ample time to adjust positions before the May 2022 price breakdown.
Momentum is still declining, suggesting that it’s too soon to consider re-entry, notwithstanding interim rallies, which can carry into resistance, formerly support.
Graystone Bitcoin Trust (GBTC) relative to SPX Weekly:
• One can also note a similar warning in the weekly Relative Strength (RS) negative divergence.
• In this case the RS for BITCOIN/SPX was also suggesting a change from a period of relative overperformance to one of relative underperformance.
Is Gold Next?
Gold is displaying many of the same long term MACD warning behaviors evident in the GBTC chart.
COMEX Gold Daily:
• Despite the May 2020 (R1) and 2022 (R2) price peaks being roughly equal, the MACD (R3 & R4) peaked at a much lower level.
• A MACD Sell signal occurred after the 2020 peak (R3), alerting to the possible price decline, which eventually carried to the March 2021 low near 1,700 (S1).
• The lower March 2022 MACD peak (R4) also registered a sell signal, suggesting one might lighten positions.
COMEX Gold Monthly:
• There is a monthly multi-year MACD negative divergence between the 2012 (R1) and 2022 (R2) price peaks.
• In 2012, the monthly MACD structural sell signal (R3) was very effective as price collapsed toward 1,100 on the sell signal.
• In March 2022, the MACD, registered another major monthly sell (R4), and then subsequently rallied to test the high (R2) without generating a new buy signal (A), a sign of weakness.
• The MACD has remained negative and appears poised to perhaps continue down.
• This suggests that Gold may be in danger of a potentially large decline, especially if support at 1,700 is broken.
• Such a breach could easily find support at the breakout level from the 2013 to 2019 basing pattern at 1400.
• It is possible, however, that although GOLD has broken out in many other currencies, the extraordinary current strength in the US dollar may be contributing to the Gold disappointment.
Louise Yamada CMT
LYAdvisors LLC
wheat & oil, 50 years channelIf you have access to historical data, you see correlation in commodities macro trends and especially same time cycles.
this chart is a small sample (which now affects the whole world) and we see same channel, same time sycle, same macro trends and same target for this trend...
ENGULFING CANDLE | powerful price reversal📚
✅The engulfing model (external bar) is mainly a reversal pattern (although in rare cases it may indicate a continuation of the trend). It looks like two candles, the first of which is small, and the second is large, with a body larger than the entire previous candle, and directed in the opposite direction.
✅From the point of view of crowd movement, such a pattern means that the strength of the current trend is drying up (this is evidenced by the small size of the first engulfing candle). The crowd does not know in which direction to move and, figuratively speaking, is marking time. The appearance of a powerful candle that absorbed the previous one and closed in the opposite direction marks the beginning of a new, strong trend.
⚠️There are several mandatory conditions that the pattern must meet in order for its signal to provide the maximum probability of working out:
1️⃣Before the pattern itself, there must be a downtrend or an uptrend in the market. The movement may be small, but its presence is mandatory;
2️⃣The body of the second candle should be of a different color and orientation (bearish after bullish and bullish after bearish). Shadows may not be absorbed, but then the signal is considered weaker;
3️⃣The body of the second candle should have a contrasting color with respect to the body of the first. The exception is when the body of the first candle is very small (doji or close to it).
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Why Shorting support & Longing resistance gets traders REKT!INDEX:BTCUSD INDEX:ETHUSD FXOPEN:XAUUSD FRED:SP500 NASDAQ:NDX
I see this time and time again - no matter if you are trading, cryptocurrency, commodities, indices or stocks, the principle remains the same:
Shorting at support and longing at resistance is GENERALLY not a good idea.
I show you examples in the video and explain why.
There is however a good time to short at support - i.e. When it has flipped into resistance after the retest, changing the market structure - and the inverse is true for longs.
If this video helped you, please consider leaving a thumbs up and a comment if you have any questions!
Learn, learn and then learn some more!
Not financial advice. DYOR. Papertrade before using real money
Austrailian Dollar Seasonal PatternsHey traders today I wanted to go over the best Seasonal Patterns in the Austrailian Dollar Futures Market. The Austrailian Dollar futures and forex follow an annual seasonal pattern with is also correlated with Gold during the year . Knowing when to find these seasonal patterns on your charts can really benefit us in our trading of the Austrailian Dollar.
Enjoy!
Trade Well,
Clifford
Candlestick Action | How Candles Are Formed🕯
❗️Japanese candlesticks as a technical analysis tool were invented earlier than others, but they were not widely used immediately. By the name, it is easy to guess that Japan became the "homeland": local rice traders used this method already in the 18th century. However, due to the geographical remoteness and closeness of the country from external "visitors", this type of chart gained popularity much later, when exchange life was already actively boiling in Europe and the USA.
✅What is hidden behind the candlestick chart?
🟢A candle is formed from 4 prices: opening, closing, high and low for a certain period of time. If we take a timeframe of a minute, then each candle will indicate the price movement within this minute, if an hour is inside an hour, if a day is inside a day. The distance between the opening and closing price is the "body" of the candle, and the tails show to what lows and highs the price reached. If the opening price was higher than the closing price, then the candle will be black; and vice versa: if the opening price is lower than the closing price, then the candle will be white. It turns out that candles are, in fact, the psychology of the market, they most accurately reflect the fears and hopes of its participants.
🟢The charts of Japanese candlesticks themselves are valuable for analysis: the resulting models are interpreted as models of reversal or continuation of the trend. It is also important to understand: each individual candle or a combination of candles is just a way of depicting the actions and moods of all bidders for the period we have chosen (day/week/ month, etc.). The fact is that human behavior is quite formulaic in the same situations, and that is why various methods of chart analysis are so popular with investors and traders.
🟢Looking at only one or several candlesticks, a "savvy" viewer can easily understand whether the market is set to rise or fall, change the current trend or its continuation, increase the momentum of movement or its attenuation.
⚠️It is important to understand that the behavior of individual bidders develops into a general market movement, which can be "read" using charts of Japanese candlesticks and their basic models. Therefore, your optimal investment decisions will be supported by the most effective moments of entry or exit from the position, which will significantly improve the financial result.
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Your strategy will inevitably go through a Drawdown!Your strategy will inevitably go through a Drawdown. And there's nothing you can do about it to stop that. However, you can learn how to survive it!
Today I will give you actionable steps, that you can use for the next time the market hit your strategy and you feel that everything is going wrong.
Let's start with an idea of what a drawdown is, and why drawdowns happen.
There are an infinite amount of trading strategies and tools that people use to trade and take advantage of specific market conditions.
Some traders are better in trending markets, they trade breakouts. Other traders feel more comfortable in ranging markets, where they trade quick reversals on key levels.
The Math is simple here. Trending strategies will have a poor performance on ranging markets, while reversal strategies will have a poor performance on trending markets.
Detecting the beginning and end of trending cycles or ranging cycles, is blurry. So, if you agree with that, as I do, you can expect your strategy to start failing at some point. And that's the beginning of the drawdown. (This is true for the best traders in the world, as for the worst traders in the world. Nobody scape drawdowns, the quickest you accept this, the faster you can learn how to handle them properly)
So let's start by saying that drawdowns are situations where your strategy experiences a lasting decline in performance, even if you are doing everything perfectly. Drawdowns, happen because strategies are made to take advantage of specific anomalies that can be found in one part of the market cycle, and when that market cycle finishes, or changes, your strategies become less accurate.
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It's important that you become aware of the Psychological consequences of Draw Downs , so you can have a countermeasure for this. Let's take a look at the most common ones:
1) Decrease in confidence (constant negative thoughts about your system)
2) Fear of entering the next trade.
3) Thinking about changing things in your strategy (deviations from the original plan)
4) Thinking about modifying the risk you are using to cover losses quicker.
5) Ceasing your trading execution, and looking for a new strategy.
ALL THESE ITEMS, are the main situations you may start feeling when going through a drawdown. IF you are going through that, it's important that you understand that you are under a delicate emotional state, where your confidence is low, and you are prone to make more emotional decisions that 99% of the time, tend to increase the drawdown.
So the way we handle drawdowns is by having logical and systematic processes in place instead of emotional ones.
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Here you have actionable steps to handle drawdowns:
STEP 1 : You handle drawdowns by getting ready before they happen, not when they are happening.
This is true for almost all disciplines, not only for trading. Airplanes have clear plans in case things start going wrong, instead of figuring out the problem at the moment, pilots go to the manual book, and use the template for this situation, plus the fact that they trained those situations several times in simulations.
So, if you want to understand what a drawdown situation looks like in your strategy, you MUST go into the past, and when I say this, I'm not saying making a 3 week backtest. You need to go as far as you can in the past, to find that exact moment where your strategy is not working as expected.
How many consecutive stop losses do I have? 3? 5? 15? 20?
How long does this period last until everything goes on track again? 1 month? 3 months? or a year?
These are the kind of answers you are trying to solve. When doing a backtest you are trying to understand two things. The first one is if your strategy has an edge. The second one is how hard you get hit when things go wrong!
STEP 2: Work your risk management around the stats of your system. Imagine we reach the following conclusion "I have a system, that executes 10 setups per month" and the worst-case scenario I have found is 20 consecutive stop losses during 2 months. What I would personally assume is that 20 consecutive stop losses can be 30. So how much capital percentage should I risk on this system so I don't get knocked out if this TERRIBLE scenario happens.
The answer for me would be 1% per setup. Under the assumption of this unique scenario, I would be 30% down, which is something acceptable, compared to the drawdown of conventional investment vehicles like S&P500 where we observed those kinds of declines, in the last years. The main point here is that you need to adapt the risk you are using on the strategy, to the stats of it, and your risk tolerance.
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Let's recap the key aspects of this post.
1) Drawdowns are inevitable, your strategy will be hit by this scenario eventually.
2) Drawdowns cause an emotional disturbance and are the main reason why people make really bad decisions.
3) We handle drawdowns by getting ready in advance. Through backtest, we can understand the edge of our strategy and the worst-case scenarios.
4) We adapt the risk of our strategy, by considering a terrible scenario, like 30 consecutive losses.
This will not eliminate the feeling during this period, but it will bring you a work frame to make logical decisions based on data, instead of emotions. Implementing this type of thinking will make your strategy more robust, it will help you go through these situations, and most importantly it will protect you from making stupid things with a strategy that has an edge, and actually works!
Thanks for reading!
Emotional Responses are Dangerous in this EnvironmentMarkets across all asset classes hate uncertainty because it causes traders, investors, and all market participants more than a bit of indigestion. Fear and greed are emotions that drive impulsive behaviors. Effective decision-making depends on a rational, logical, and reasonable approach to problem-solving.
The Fed finally addresses inflation
Recessionary risks are rising
Stagflation creates the worst of both worlds
Tools impact the demand side- The supply side is a challenge
Tools and rules for keeping emotions in check during scary times
Reducing impulsive, emotional responses is a lot easier said than done. While it is easy to mitigate emotion during calm periods, they take over and trigger fear or greed-based actions in the heat of the moment.
In mid-May 2022, the markets face a crossroads. The current market correction is a function of rising interest rates, the potential for an economic decline, a rising dollar, the war in Europe, supply chain issues, geopolitical tensions between nuclear powers, and a host of other domestic and foreign factors.
It is now the most critical period in decades to take an emotional inventory that will avoid catastrophic, impulse-based mistakes. Wide price variance in all markets could accelerate, and those with a plan are the most likely to succeed and protect their hard-earned capital.
The Fed finally addresses inflation
The US central bank had an epiphany after mistakenly believing that rising inflationary pressures were “transitory” in 2021. The Fed woke up smelling the blooming inflationary environment late last year when CPI and PPI data showed the economic condition rose to the highest level in over four decades.
At the May 4 meeting, the central bank hiked the Fed Funds Rate by 50 basis points to 75 to 100 basis points. The central bank told markets to expect 25 or 50-basis point hikes at each meeting for the rest of 2022 and into 2023. The Fed also laid out its plans to reduce its swollen balance sheet, allowing government and debt securities to roll off at maturity. While the Fed has switched to a hawkish monetary approach, it remains behind the inflationary curve. Last week, April CPI came in at 8.3% with PPI at 11%, meaning real short-term interest rates remain negative, fueling inflation. While wages are rising, they are lagging behind inflation. Consumers may be earning more but spend even more on goods and services each month.
Recessionary risks are rising
The US first quarter 2022 GDP data showed a 1.4% decline or economic contraction. The war in Russia, sanctions and retaliation, supply chain bottlenecks, deteriorating relations with China, political divisiveness in the US, and many other issues weigh on the US economy. Meanwhile, rising US interest rates have put upward pressure on the US dollar, pushing the dollar index to a multi-year high.
As the chart shows, the dollar index rose to 105.065 last week, a two-decade high. A rising dollar is a function of increasing US rates, but it makes US multinational companies less competitive in foreign markets.
The falling GDP in Q1 2022 increases the threat of a recession, defined as a GDP decline in two successive quarters, putting pressure on the Q2 data this summer.
Stagflation creates the worst of both worlds
Recession and inflation create stagflation, the worst of all worlds for central bankers seeking stable markets and full employment. The most recent economic data has put the US economy on the road towards stagflation as rising prices and a sluggish economy require competing monetary policy tools.
The Fed is addressing inflation with higher interest rates and quantitative tightening, but recession requires stimulus, the opposite of the current hawkish monetary policy path. The central bank must decide on which economic condition threatens the economy more. The Fed seems to have chosen inflation, but it is more than a reluctant choice. Tightening credit treats the inflationary symptoms, but it can exacerbate recessionary pressures as higher rates choke economic growth. Stagflation is an ugly economic beast.
Tools impact the demand side- The supply side is a challenge
Meanwhile, the US and other central banks have deep toolboxes that address demand-side economic issues. While inflation and recession require different tools, the Fed faces other compelling factors from the global economy’s demand side.
The war in Ukraine is distorting prices as sanctions on Russia and Russian retaliation distort commodity prices. Moreover, the “no-limits” alliance between China and Russia creates a geopolitical bifurcation with the US and Europe. With nuclear powers on each side of the ideological divide, economic ramifications impact the economy’s supply side. China is the world’s leading commodity consumer, and Russia is an influential and dominant raw materials producer. Energy and food prices are the battlegrounds.
Central banks have few tools to deal with supply-side shocks and changes, which can create extreme volatility in the prices of goods and services. The Chinese-Russian alliance transforms globalism with a deep divide. Global dependence on Chinese demand and Russian supplies distorts raw material’s supply and demand fundamentals. While the US Fed faces a challenge balancing inflation and the potential for a recession, the supply side issues only complicate the economic landscape, increasing market volatility across all asset classes.
Tools and rules for keeping emotions in check during scary times
The best advice for dealing with anxiety came from US President Franklin Delano Roosevelt, who said, “the only thing to fear is fear itself.” Conquering fear requires a plan that mitigates emotions no matter the market conditions.
The Fed’s toolbox is bare in the current environment, creating a volatile landscape. Chasing inflation and dealing with a recession in the face of supply-side shocks is a potent cocktail for price variance. Investors and traders need to change their orientation to markets to adapt to the current conditions. The following tools and rules can assist in mitigating the human impulses that lead market participants to make significant financial mistakes:
Hedge portfolios using market tools to protect the downside and allow for upside participation. Hedging reduces the impulse to liquidate portfolios because of fear.
Since volatility creates opportunities, approach markets with a clear plan for risk versus reward.
Remember that the market price is always the correct price. A risk-reward plan only works when risk levels are respected. Markets are never wrong, while traders and investors are often wrong.
A long or short position should constantly be monitored at the current price, not the original execution price. Positions are long or short at the last tick.
Adjust risk and reward levels based on current market prices.
Follow trends, not news, “experts,” or pundits. Trends reflect the crowd’s wisdom, and collective wisdom reflects the sentiment that drives prices higher or lower.
Never attempt to pick the top or the bottom in a market, let the price trends do that for you.
The rules are simple, but emotions are tricky. The emotions that trigger impulsive behavior cause market participants to ignore the rules. The critical factor for success in markets is discipline, defined as “the practice of training people to obey rules or a code of behavior, using punishment to correct disobedience.” When it comes to our hard-earned savings and portfolios, the punishment is losses.
Tuck those emotions away and face the volatile market landscape with a plan. Hedge your nest egg, and you will sleep better each night. Remind yourself that fear is the only factor you should fear.
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Trading advice given in this communication, if any, is based on information taken from trades and statistical services and other sources that we believe are reliable. The author does not guarantee that such information is accurate or complete and it should not be relied upon as such. Trading advice reflects the author’s good faith judgment at a specific time and is subject to change without notice. There is no guarantee that the advice the author provides will result in profitable trades. There is risk of loss in all futures and options trading. Any investment involves substantial risks, including, but not limited to, pricing volatility , inadequate liquidity, and the potential complete loss of principal. This article does not in any way constitute an offer or solicitation of an offer to buy or sell any investment, security, or commodity discussed herein, or any security in any jurisdiction in which such an offer would be unlawful under the securities laws of such jurisdiction.
Inflation is high, Why gold price falling?As traders, of course.. We know that when inflation is too high, safe haven prices such as gold will soar. But that only applies before 2009. Before bitcoin was launched for the first time.
Not many traders know, that market participants such as banks, big institutions, fund managers, and big companies trust bitcoin as a safe-haven, which actually competes with gold. When inflation is too high, market participants will move their money between bitcoin and gold.
So this is one of the reasons why gold falls when inflation is too high. We can clearly see from the short-term chart above, that gold is bearish but bitcoin is bullish, and vice versa, the unidirectional correlation between bitcoin and gold. However, when the USD is optimistic about strengthening, both will be equally bearish. It can be concluded that both are the same as hedging asset. Also, we can use COT data from CFTC and LME to know gold and crypto sentiment and correlation. Coinbase and JPMorgan can also be considered. But I'll discuss this separately in the next explanation.
Hopefully this can help anyone, so that it can be considered for trading in gold and bitcoin.
Practicing how to understand market behavior is much better than just understanding.
Morning Star Pattern: how to trade?🌟
❗️The Morning Star pattern is a market reversal pattern consisting of three candlesticks that indicate bullish superiority. This pattern warns us about the weakness of the ongoing downtrend, which, in turn, suggests the beginning of an uptrend.
⚠️Traders observe the formation of the "Morning Star" pattern on the price chart, and then confirm with the help of other technical tools on the Forex currency market.
✅Morning Star pattern: Three forming candles
⏺Big Bearish Candle
⏺A small bullish or bearish candle
⏺Big Bullish Candle
The most important thing to remember is always that the market must be in a downtrend in order to trade according to the "Morning Star" pattern.
In order to confirm the downtrend, mark the lowest lows and the lowest highs.
1️⃣The big bearish candle is the first part of the Morning Star reversal pattern. This candle indicates that the bears are in full control of the market, which means that sellers continue to pressure the market.
At the moment, you should only look for sale deals, since there are no signs of a reversal yet. Here the Morning Star pattern is just beginning its formation.
2️⃣A small bullish/bearish candle is the second candle that starts with a bearish gap down. This candle indicates that sellers are unable to lower the price, despite very great efforts.
The price action ends with the formation of a rather small bullish/bearish candle (Doji candle).
If this candle is bullish, then we have an early sign of a trend reversal.
3️⃣A large bullish candle is the third candle that has the greatest significance, because here the real pressure of buyers is manifested. If the candle starts with a break, and buyers can push prices up by closing the candle even above the first red candle, this is a clear sign of a trend reversal.
✅Morning star: how to trade this pattern on Forex?
As we already know, the Morning Star pattern is a reversal pattern. As a rule, it indicates that bulls are capturing the trend, and bears are losing control.
Most beginners trade using the "Morning Star" pattern on their own, without using technical tools, or at least tips from more professional traders.
We do not recommend doing this — it is not as reliable as it may seem. Always connect this pattern with other reliable indicators, support and resistance levels, as well as trend lines.
So, in this strategy, we combined the Morning Star pattern with volume. Volume plays an important role in the formation of the model.
If the first red candle shows a low volume, then this is a good sign for us. Then, if the second candle is green and the volume is growing, this indicates buyer pressure.
After all, the volume of the third long green candle should be high. The large volume of the last candle indicates the confirmation of the upcoming trend and the entrances to purchase transactions.
If the third bullish candle has a low volume, do not pay attention to the fact that the Morning Star is forming. This volume does not indicate a bullish reversal.
To sum up: do you observe the closing of the third candle with a large volume? Open buy positions and move along with the uptrend until there are signs of a reversal.
✅Morning Star pattern: entry, take profit and stop loss
We have to open a deal when the next green candle closes. There are many ways to lock in profits.
We can close a position in any resistance zone or supply-demand zone. In this deal, we hold our positions because we have opened a deal since the beginning of a new trend.
You can also close your positions when the price approaches a significant resistance level on the higher timeframe.
⚠️Combining this pattern with volumes makes trading more reliable. Therefore, you need to place a stop loss just below the second candle.
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How to determine the real value of the national currency?The National Regulator openly manipulates the exchange rate to the benefit of the economy, undervaluing it when there is a trade deficit, thereby helping exports, and overvaluing it when there is a surplus, so that citizens and businesses can buy more imported goods.
The real exchange rate of a nation's currency is determined by its purchasing power abroad. In theory, it is calculated through a sample of identical goods. It is enough to estimate how much a certain conditional consumer basket costs in the home country, and compare the amount spent in another country.
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Why do we need to know the exchange rate regime and the real value of the national currencies?
If a country has a fixed or transitional exchange rate, a currency trader can determine the entry points with a guaranteed profit.
For example, the yuan is strictly "locked" in the corridor of 2% on the stock exchange, which allows you to enter at the maximum deviations, knowing exactly what intervention of the People's Bank will soon follow. The peculiarities of such trading are described in our article about USDCNH trading.
Knowing the pricing mode, you can determine the entry strategy on the border of the basket value. Examples of trading such currency pairs using currency corridors are presented below.
Trading on the Boundaries of the Nominal Value of National Currencies in Fixed and Transition Modes
UAE Dirham (AED)
The USDAED currency pair is the easiest to trade because of its strongest peg to the dollar - the national central bank kept the exchange rate at 3.6725 dirham even during the 2008 crisis.
As a result the UAE national currency chart looks like a series of candles with long tails, above and below which pending orders should be placed.
The figure shows a weekly candlestick chart, where you can see the possible deal levels at a glance, but there are some subtleties in this kind of trading. Firstly, there are only two brokers who are ready to provide access to the USDAED pair; secondly, they ask for a minimum deposit of $10,000; thirdly, the maximum leverage for this currency is 1 to 5.
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Models for determining the real exchange rate
There is no single ideal model in the Forex market that works out 100% of the signals for the differences between the nominal value of the currency. Just like any indicators, the presented formulas need a historical check, they are suitable for certain currency pairs with different accuracy and work in combination with each other. This is why we will try to examine the basic models and theories of exchange rates.
The purchasing power of the national currency against any other currency is determined in four ways, which we will talk about below.
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The law of one price - comparing the cost of the same good in different countries
The current price of a commodity in national currency units = The exchange rate of the currency pair* The current price of a commodity in a foreign currency.
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Absolute Purchasing Power Parity
In the formula of absolute parity instead of the price of one product, the average price level of the same basket of goods for different countries is used as expressed in national currencies or minimum subsistence values.
For example, in Australia the living wage was 600 AUD for 2017, while in the European Union it is equal to: in Germany - 1240 euros, in France - 1254, in Italy - 855.
The euro is a common currency for 26 states, so the three largest EU economies were chosen to use the average value of (1240+1255+855)/3= 1117 in the formula.
If 1117 is the average EU living wage and 600 is Australia's living wage, then solving this expression, we get 1117/600 = 1.86.
In 2017, the EURAUD exchange rate was 1.38. As you can see from the graph of the currency pair, the arbitrage correctly predicted the trend of strengthening of the euro.
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Relative trade parity.
Economists in their calculations use economic indicators that show the relative change in consumer prices. The difference between the current indicator value from the economic calendar and previous data is substituted into the formula.
For example, the U.S. Consumer Price Index was 119.4 in 2012 and rose to 121 by 2013. During this period, the EU CPI showed values of 118.3 and 120.1. The EURUSD exchange rate changed from 1.30 to 1.36.
Using the formula, let's calculate the real euro exchange rate by taking the 2012 value of 1.30, successively multiplying it by a fraction of the relative values of the U.S. CPI 121/119.4 and the European CPI 120.1/118.3:
1,3* (121/119,4) *(120,1/118,3) = 1,3374.
As you can see from the formula, the euro was undervalued, which led to the collapse in 2014, where parity was equalized due to monetary measures taken by the ECB and the Fed.
The consumer price index is essentially an indicator of inflation, which is the primary focus of central banks when making decisions on the size of the discount rate. In economic statistics, it is rare to see this indicator published in relative units; everywhere there is a percentage change, which can also be used in another model.
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Relative Inflation Parity
When calculating the real value of national money relative to the currency of another country, a slightly modified formula is used.
The current rate of a currency pair can be represented as equal to (1 + annual inflation of one country/1 + annual inflation of another country) * the current rate of the pair at the Forex market.
Let's calculate the EURUSD exchange rate in 2015. At the end of that period, U.S. inflation was 0.73%, while in the Eurozone it was 0.08%.
The real EURUSD exchange rate at the end of 2015 = (1 +0.0083)/(1+0.073)*1.0565= 0.992.
EURUSD quotes at the beginning of 2016 were undervalued, and the rate hike policy adopted by the Fed did not immediately save the situation - the market saw values close to 1.02 before the value of the European currency began to rise.
This formula can be used to forecast the exchange rate by fitting it with the future inflation that central banks calculate in the reports they publish at every monthly meeting.
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Sincerely R. Linda!
Support & Resistance Levels | Trading Basis📚
❗️The concepts of support and resistance are fundamental concepts of technical analysis of financial markets. They are applicable to almost any market, be it stocks, Forex, gold or cryptocurrency.
❗️And although these concepts are easy to understand, in practice they are quite difficult to master, since the definition of levels is completely subjective, and their behavior depends on many conditions. So first of all it is important to learn to distinguish their types. To do this, you will have to familiarize yourself with a lot of graphs, and this guide will help you.
✅What is support and resistance?
🟢At the most basic level, support and resistance are simple concepts. To determine them, the maximum and minimum price indicators are displayed, acting as a kind of barrier. At the same time, the lower values of the chart represent the support level, and the upper values represent the resistance level. In fact, the level of support can be viewed from the point of view of demand, and the level of resistance – from the point of view of supply.
🟢Despite the fact that support and resistance levels are usually denoted by lines, in reality they usually look different. It should be borne in mind that markets are not governed by any physical law that does not allow indicators to go beyond a certain level. Therefore, it is more appropriate to consider support and resistance levels as areas. You can imagine these areas as ranges on the price chart, the approach to which is likely to cause increased activity of traders.
✅How Traders Use Support and Resistance levels
🟢Technical analysts use support and resistance levels to identify areas of interest on the price chart. At these levels, the main trend is likely to change its direction.
🟢Market psychology plays an important role in the formation of support and resistance levels. Traders and investors are guided by price levels that previously caused increased interest and trading activity. These areas will contribute to increased liquidity as many traders will be tracking the same price levels. Often, support and resistance zones create ideal conditions for entry or exit from a position for large traders.
🟢The concepts of support and resistance levels are key to effective risk management. Your trading opportunities may depend on your ability to consistently identify these zones. Usually, after the price reaches the support or resistance area, two possible events are possible. It either bounces off this area, or breaks through it and continues moving in the direction of the trend to the next potential support or resistance area.
🟢It is best to enter a trade when the price is near the support or resistance level, mainly because of its relative proximity to the cancellation point, where a stop loss order is usually placed. In case of a breakthrough of the area and invalidation of the transaction, traders will be able to reduce their losses, because the further the entry is from the supply or demand zone, the further the point of invalidation of the transaction.
🟢At the same time, you need to understand how these levels will change depending on changes in the situation on the chart. As a rule, a breakdown in the support area can turn it into a resistance area. Conversely, a broken resistance area may turn into a support area when it is retested. This pattern is called the support-resistance flip.
⚠️How to draw support levels correctly?
⏺Reduce the timeframe of your charts so that you can see the bigger picture.
⏺Draw the most obvious levels that tend to have the strongest price bounces.
⏺Adjust your levels to get the maximum number of touches.
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