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Short Dated Options to Deftly Manage Oil Market Shocks"Volatility gets you in the gut. When prices are jumping around, you feel different from when they are stable" quipped Peter L Bernstein, an American financial historian, investor, economist, and an educator. Crude oil prices are influenced by a variety of macro drivers. Oil market shocks are not rare events. They appear to recur at a tight frequency. From negative prices to sharp spikes in volatility, crude oil market participants "enjoy" daily free roller-coaster rides. Precisely for this reason, crude oil derivatives are among the most liquid and sophisticated markets globally. This paper delves specifically into weekly CME Crude Oil Weekly Options and is set out in three parts. First, what’s unique about short-dated options? Second, tools enabling investors to better navigate crude oil market dynamics. Third, a case study illustrating the usage of weekly crude oil options. PART 1: WHAT’S UNIQUE ABOUT CME CRUDE OIL WEEKLY OPTIONS? Macro announcements such as US CPI, China CPI, Fed rate decisions, Oil inventory changes and OPEC meetings drive oil price volatility. Sharp price movements can lead to premature stop-loss triggers. When prices gap up or gap down at open, stop orders perform poorly leading to substantial margin calls. Weekly options enable hedging against these risks with limited downside and substantial upside. Closer to expiration, options prices are sensitive to changes in the prices of the underlying. Small underlying price moves can have outsized value creation through short-dated options. Hedging with weekly options allows investors to enjoy large upside potential. Short duration vastly reduces the options premium burden. This high risk-reward ratio has made short-dated options popular among both buyers and sellers. The daily traded notional value of Zero-DTE options (Zero Days-To-Expiry, 0DTE) have grown to USD 1 Trillion. Among S&P 500 options, 0DTE options comprise 53% of the average daily volume (ADV), up from 19% a year ago. In 2020, CME launched Weekly WTI options with Friday expiry (LO1-5), offering robust, round-the-clock liquidity and enabling precise event exposure management at minimal cost. These weekly options are now the fastest growing energy products at CME with ADV growing 69% YoY with June 2023 ADV up 136% YoY. Building on rising demand, CME added weekly options expiring Monday and Wednesday. At any time, the four nearest weeks of each option are available for trading. Weekly options settle to the latest benchmark CL contract and like other CME WTI products, they are physically deliverable ensuring price integrity. Each weekly WTI options contract provides exposure to 1,000 barrels. Every USD 0.01 change per barrel change in WTI represents a P&L change of USD 10 in premium per contract. PART 2: EIGHT TOOLS TO BETTER NAVIGATE CRUDE OIL MARKET DYNAMICS Highlighted below are eight critical tools across TradingView and CME enabling investors to better navigate oil market dynamics. 1. OPEC+ Watch OPEC+ Watch charts the probability of different outcomes from OPEC+ meetings. Probabilities are derived from actual market data & represent a condensed consensus market view of forthcoming meetings. 2. News Flow TradingView’s News section collates the key market developments impacting crude oil. 3. Forward Curve TradingView maps crude oil prices across the forward curve exhibiting oil’s term structure. Augmenting the forward curve chart is a table CL contracts across various expiries with technical signals embedded in them enabling investors to spot calendar spread trading opportunities. 4. TradingView Scripts Supported by a vibrant community of script creators, TradingView has curated scripts catering to the specific needs of crude oil traders. OIL WTI/Brent Spread by MarcoValente: Shows the spread between WTI and Brent crude. This spread is growing in importance with growth in US oil exports. Seasonality Indicator by tradeforopp: Presents seasonal price trends along with key pivot points to guide traders. 5. Economic Calendars TradingView’s economic calendar highlights upcoming economic events segmented by dates and with countdown timers to help traders better manage their portfolios. Augmenting, TradingView’s calendar is CME’s Economic Events Analyzer which lists key events specifically impacting energy markets and highlights the relevant weekly options contract. 6. Options Expiration Calendar CME’s Options Expiration Calendar is a comprehensive yet condensed view of upcoming expiration dates of WTI options, even those that are not listed yet. 7. Daily/Weekly Options Report CME’s Daily/Weekly Options Report profiles volumes and OI by strike price for weekly options supplying key stats such as Put/Call ratio and key strike levels at a glance. 8. Strategy Simulator CME’s strategy simulator allows investors to simulate diverse options strategies. Selecting the relevant instruments and adding each component of the overall position automatically calculates the payoff while still allowing modification of key statistics such as volatility based on user inputs. The below shows the payoff of an ATM straddle position for the upcoming Monday weekly option. It also allows simulating various market conditions. Selecting price trends such as up fast, up slow, flat, down slow, down fast can simulate the changes in P&L. PART 3: ILLUSTRATING USAGE OF WEEKLY CRUDE OIL OPTIONS Why does CME list weekly options expiring on Monday, Wednesday, and Friday? Each of these address specific macro events. OPEC meeting outcomes are typically announced over the weekend leading to gaps in prices on Monday. EIA weekly crude oil inventory data are released on Wednesdays. Key US economic data such as CPI and Non-farm payrolls are released on Fridays. Use Case for Options expiring on Monday These can be used to hedge against downside risk associated with weekend events. For instance, in April, OPEC+ announced major supply cuts at their meeting on Sunday. This led to WTI price spiking 4% at market open. This can lead to “gap risk.” Gap risk refers to the risk that markets may open sharply above or below their previous close. Since, price never passes the levels in between, stop loss orders fail to trigger at set levels resulting in more-than-anticipated realised losses. Such gap risks from weekend news can be managed through Monday weekly options which provides a predictable and resilient payoff with limited downside risk. Use Case for Options expiring on Wednesday Oil inventory reports by EIA (U.S. Energy Information Administration) and API (American Petroleum Institute) are released every week on Tuesday and Wednesday respectively. Major misses/beats against expectations for these releases can result in large price moves. Wednesday options come in handy to better manage volatility stemming from these shocks or surprises. Weekly options provide superior ROI on small moves when compared to futures. Favourable price moves deliver larger payoffs from position in weekly options than futures and shorter expiries allow for much lower premium than monthly options. Illustrating with Back tested Results On June 14th, Crude price fell by 1.7% (USD 1.2) to USD 68.7/barrel upon release of inventory data that showed a larger than expected inventory build-up. In the lead up to this data release, a crude oil participant could either (a) Short Crude Oil Futures, or (b) Long Weekly Crude Oil Put Option. Summary outcomes from these two strategies are tabulated and charted below. The results speak for themselves. Short dated long put option is capital efficient, prudent, and credible as a risk management tool. That said, participants must evaluate the risk return profile taking into consideration market liquidity and volatility levels, among others, when choosing between instruments. KEY TAKEAWAYS In summary, 1) Weekly Options can be cleverly deployed to hedge against shocks in oil markets. 2) TradingView & CME provide a rich suite of tools to deftly navigate the oil market dynamics. 3) Weekly options expiring on (a) Monday helps manoeuvre developments over the weekend, (b) Wednesday helps to manage inventory data linked shocks, and (c) Friday enables investors to trade and hedge around key US economic data. MARKET DATA CME Real-time Market Data helps identify trading set-ups and express market views better. If you have futures in your trading portfolio, you can check out on CME Group data plans available that suit your trading needs www.tradingview.com 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.
NYMEX:CL1!Education
by mintdotfinance
6
Trade Discipline - Improving Your Entries How many times have you been stopped out of a great trading idea you noticed just because you missed your original entry and decided to enter at a worse price? This was most likely due to the fear of missing out (FOMO) and lack of discipline that got you into the trade. You were right on the market direction, but due to FOMO and your lack of discipline, the trade entry was bad, and you ended up being stopped out, only to then painfully watch the market go your way. Do not feel bad, as this has happened to the best of us, so this post will discuss methods on how to improve your entries and discipline to ensure that you do not get stopped out again because of a bad entry. Never chase missed entries. Let’s say the market is in a nice healthy trend, making a series of higher highs and higher lows. And when you overlay the 20-day moving average over it, you notice the market bounce off the moving average quite a few times. You then get a buy signal near the moving average, but unfortunately, you missed the entry and are just watching the market go up without making any money from it. Now, when you look at the chart, the market is very far away from the 20-day moving average. So even though the market is currently in an uptrend, ideally you don’t want to be buying now because, from looking at your analysis, the market tends to pull back to the 20-day moving average. If you impulsively buy when the price is very far away from the 20-day moving average, when the price is overstretched and the market has been overbought, there’s a high probability the market will reverse or pullback, and you will most likely get stopped out. We all miss entries and opportunities; it is completely normal to do so, and sometimes the market can give you a second chance to enter by coming back to your original level. If it does not and you completely miss the move, do not dwell on it; dust it off and move on. The markets are not going anywhere, and plenty more opportunities will come your way. You can see in the above image why it is a bad idea to chase missed entries. When the impulsive move has happened and you missed the initial move, leave the market alone at that current time. Either wait for a pullback to trade the continuation, or if your analysis is suggesting a possible market reversal, then wait for a confirmation signal and trade the reversal at a good entry price. Be Proactive. Many traders, especially beginners, do not place enough importance on entries when trying to get consistent profits in the markets. The reason why entries are important is due to market noise and the limited funds that traders have. Let me explain further: Traders are buying and selling constantly; therefore, all markets have ups and downs (market noise). This means that markets rarely go up and down in a straight line, so when you put your hard-earned capital at risk in a trade, due to the up and down ticks, your capital will float up and down as the market moves up and down. So if your entry is bad, then you are more likely to get stopped out due to market noise. If you want to see consistency in your trading, it is crucial to work on your timing and discipline. The best thing you can do to improve the entries in your trades is to be proactive, not reactive. Being proactive means planning ahead for your trade entry. You must do your homework to anticipate and predict the key levels in the markets to help you get the best entries. Setting up trades after the market closes or during quiet hours is one effective way to be proactive and help improve your entry. You will not second-guess yourself as compared to being a reactive trader because you are prepared. The reactive trader, as the name suggests, reacts to the constant ebb and flow of market prices, always working in "the now." More often than not, reactive traders will end up jumping into momentum plays that will reverse on them, leaving this type of trader frustrated and confused. Use Limit Orders to improve trade entry. When using a limit order, you place a limit on how much you're willing to pay to buy or sell a specific product. Limit orders allow traders to enter the market at the best possible price. For example, if you have a specific setup with a good entry level that the market may reach, you can place a limit order at that specific price to buy or sell. Limit orders are very helpful in giving traders the patience and discipline to wait for their entry prices instead of spontaneously entering the market at random levels that will most likely stop them out. The main disadvantage of a limit order is that there are no guarantees that the order will actually go through. The product price must meet the limit order specifications to execute properly; however, even with this disadvantage, it is still better to have better control by entering at a price you want instead of entering at a price you are not comfortable with. Support and Resistance levels. Support and Resistance levels are in the markets for a reason, and you should use them to help with your entries. One of the worst things you could do is think the market is going up and end up buying it at a resistance level before it heads down to stop you out, only for it to go back up again. Always look at your charts, and get into the habit of looking to the left. Why? Because looking to the left will give you information on historical price movements, and with those movements, you will see consistent areas where the market bounced off (Support) and consistent areas where the market pulled back (Resistance). When you really understand this and grasp how support and resistance levels work, you will instinctively understand these levels and will actually notice the market moving towards them to test them. So the next time you think the market is going up, try to enter near or at a support level, and if you think the market is going down, try to enter near or at a resistance level. The image above shows support and resistance levels in the market. Can you notice how the market is always drawn to these levels? You can see the numerous times the market has traded around these areas. These areas are often good entry points for your trades, and you should always take the time to look at your charts for these levels. Use additional timeframes. Using one or more additional timeframes to double-check a trend can help improve your entries. For example, if you’re using a four-hour chart as your main timeframe to look for opportunities on a specific product and you spot a pullback from a bull run that has the potential of a big reversal, you could confirm the broader move by taking a look at a daily chart to confirm how long the trend has lasted or identify some support and resistance levels in its wider trend. Alternatively, you could hop over to an hourly chart or 30-minute chart and see what is happening on a smaller timeframe. By doing this, you can also check whether buyers or sellers are in charge during the current trading period. What you want to avoid doing, though, is adding too many different charts to your analysis and moving between them at random to find opportunities. Instead, stick to a ‘base chart’ that you use to trade, with one or two others for confirming moves. As you can see in the image above, there are three charts. On the main time frame, a potential reversal signal was spotted, and there may be a possible pullback to the bull run. By looking at both the longer time frame and the shorter time frame to help support the analysis, this will help improve your entry because, for example, if all timeframes clash with each other or show conflicting signals, this may help the trader second guess their original analysis and may decide to wait for clearer confirmation signs on all time frames before deciding to enter the market. The goal of every trader is to be successful in achieving consistent profits, and entries play a big part in this. You can correctly call the market and still lose money due to bad entries. The more you understand key market levels and have the discipline to wait and trade around them, the more probability you will have of trades going your way. Though it is still possible to lose trades on good entries, trading is a probabilistic outcome with no guarantees, so why would you want to enter at a bad entry price to give yourself a disadvantage in the markets before the trade has even started? Trade safely and responsibly. BluetonaFX     
Education
by BluetonaFX
75
5 Best Momentum Indicators for TradingWant to master the art of momentum trading? Look no further. In this FXOpen guide, we’ll explore how to use momentum indicators, the signals they generate, and five of the best momentum indicators for trading. What Is a Momentum Indicator? Momentum indicators are technical analysis tools that help traders gauge the force behind and direction of trends. These indicators can show traders optimal entry and exit points and provide valuable insight into whether a trend is likely to continue or reverse. While there are many ways to represent momentum in technical analysis, all momentum indicators analyse an asset’s price movement and the speed of that movement. They are called momentum indicators because they measure the force behind price moves, similar to how we calculate speed and momentum in physics. Types of Momentum Indicators Momentum indicators can be categorised into three main types based on the price movements they focus on. Closing Price Compared to the Previous Close Indicators in this category compare the closing price of an asset to its previous closing price, which can help traders identify markets that are potentially overbought or oversold. These types of leading momentum indicators can be beneficial for short-term trading strategies since they can pinpoint areas that may lead to quick reversals. Examples here include the relative strength index (RSI) and Momentum. Closing Price Compared to Range This type of indicator compares an asset’s current price action to how it behaved over a specified period, typically accounting for highs, lows, opens, and closes. This period could be a set number of candles or a single candle. These indicators gauge market strength and can help traders identify potential reversals, trends, and breakouts. Examples are the average directional index (ADX) and the commodity channel index (CCI). Closing Price Compared to Moving Average Lastly, these indicators can show traders how fast or slow price action is moving relative to its moving average(s). Because they rely on moving averages, these indicators are considered lagging and often used to confirm trends and reversals. One of the most notable examples is the moving average convergence divergence (MACD) indicator. The Significance of Momentum Technical Indicators Momentum indicators play a crucial role in providing insights into the strength, direction, and potential reversal points of market trends. They’re able to quantify and represent hidden clues about the future market direction in an easily interpretable way. By learning how to read momentum indicators, traders can develop more effective trading strategies, identify potential profit opportunities, and manage risk more efficiently. Momentum indicators produce a range of signals that offer traders an edge over the markets. Let’s take a look at some of the most common momentum signals. Overbought and Oversold Signals These signals indicate when an asset's price has moved too far in one direction and is likely to reverse. For example, RSI generates overbought signals when the reading rises above 70 and signals oversold conditions when the reading falls below 30. Divergence Signals Divergence signals occur when the price of an asset moves in the opposite direction of the momentum indicator, suggesting that the current trend may be weakening. For instance, when the price is making higher highs, but RSI is making lower highs, this indicates a bearish divergence that increases the likelihood of a downward move. Crossover Signals These signals are generated when the indicator's lines cross each other or cross a certain threshold. A common example is in the MACD, where traders look for crossovers between the fast MACD line and the slower signal line to spot potential entry and exit points. Top Five List of Momentum Indicators for Technical Analysis Now that we understand the types of signals that momentum indicators produce, let’s break down five of the most popular indicators. If you’d like to experiment with them yourself, you’ll find each indicator waiting for you in the free TickTrader platform. 1. Relative Strength Index (RSI) The RSI is one of the most popular and well-documented momentum indicators. It measures the speed and change of price movements by comparing the average gain to the average loss over a specified period, usually 14. RSI is an oscillator, moving between 0 and 100. Values above 70 are considered overbought, while values below 30 indicate oversold conditions. When the RSI moves out of overbought or oversold territory, many traders interpret this as a reversal confirmation. Sustained movements above or below the midpoint (50) can also be used to confirm a bullish or bearish trend, respectively. Moreover, traders look for divergence between the RSI and price to identify weakening trends and possible reversals. 2. Average Directional Index (ADX) The ADX is a momentum indicator used to determine a trend’s strength. Unlike most other momentum indicators, its reading doesn’t move according to the direction of price action, i.e. it doesn’t move up if bullish or down when bearish. Instead, it ranges from 0 to 100, with values above 25 indicating a strong trend and below 20 suggesting a weak or non-trending market. The formula for ADX is relatively complicated, taking an average of the negative directional indicator (-DI) and positive directional indicator (+DI). These lines compare the current highs and lows to the previous highs and lows, smoothed and divided by the average true range (ATR). ADX is commonly used in combination with other indicators, as it simply confirms the trendiness of a market. For example, traders might use a leading indicator like RSI to anticipate bullishness and confirm the trend when ADX crosses over 25. 3. Commodity Channel Index (CCI) The CCI is a versatile momentum indicator that measures an asset's price deviation from its average price, relative to its mean deviation. It uses a constant in its calculation to ensure that 75% of values fall between +/- 100, with moves outside of the range generally indicating a trend breakout or continuation. It can also show extreme overbought or oversold conditions when its value exceeds +/- 200. The CCI requires a more nuanced approach than other indicators and is typically used as a tool to confirm a trader’s directional bias and to identify potential ‘buy the dip’ opportunities. For instance, a visually identifiable bullish trend can be confirmed by looking at the CCI. If its value is skewed toward 100+, traders can be confident in their observation. When the market cools off, CCI will fall below 100. Traders can then confirm a pullback entry with a move back into the +/- 100 range. 4. Moving Average Convergence Divergence (MACD) The MACD is a highly regarded trend-following momentum indicator that shows the relationship between two moving averages of an asset's price. It subtracts a longer exponential moving average (EMA) – usually 26 periods – from a shorter EMA – typically 12 periods – to produce the MACD line. It then uses a 9-period EMA of the MACD line to plot the signal line. MACD also commonly features a histogram that shows the distance between the MACD and signal lines. Traders use crossovers between the MACD and signal lines as potential entry and exit signals. Additionally, when the MACD histogram crosses above or below the zero line, it can indicate bullish or bearish momentum in the market. Lastly, it’s also possible to spot divergences between price and the indicator’s peaks and troughs, similar to how divergences are identified with RSI. 5. Momentum The Momentum indicator is a simple yet effective tool that measures the rate of change in an asset's price over a specific period. It compares the current closing price to the closing price a specified period ago (usually 14 or 30). The value of the Momentum depends on the market it’s applied to. For example, using the Momentum indicator in stocks will result in a fluctuating value typically between +/- 20, depending on the stock’s price. For forex pairs, its range may look more like +/- 0.02. The common feature across all markets, however, is the zero line. Generally speaking, positive Momentum values indicate upward price movement, while negative values suggest downward movement. It can also show overbought and oversold conditions, but its lack of defined boundaries means this can be tricky. However, Momentum is especially useful for identifying divergences. Things to Consider When Trading Momentum Indicators While momentum indicators can be an effective addition to any trader’s arsenal, there are a few things to be aware of that can increase your chances of success. Trade with the Trend: Trends often last longer than you may think, and constantly looking for trend reversals will only end in frustration. Look for bullish signals during an uptrend and bearish signals in a downtrend. Use Multiple Indicators: Relying on a single indicator can lead to false signals. Many traders find success by combining a lagging indicator, like MACD, with a leading indicator, like RSI. Combining two or three indicators can help confirm signals and improve your accuracy. Beware of False Signals: Momentum indicators can sometimes generate false signals, especially in sideways or choppy markets. Being patient and waiting for an ideal setup before entering a trade is vital. Relying Too Heavily on Indicators: While momentum indicators can be helpful, relying solely on them without considering price action, market structure, or other technical aspects can lead to poor trading decisions. Use these indicators alongside other tools for a higher probability momentum indicator strategy. Final Thoughts Now that you have a comprehensive overview of momentum indicators and the signals they produce, it’s time to put your knowledge into practice. After experimenting with a few indicators and settling on your favourites, you can open an FXOpen account. You’ll be able to trade over 600+ markets with low costs and ultra-fast execution speeds while partnering with one of the world’s fastest-growing forex brokers. Good luck! This article represents the opinion of the Companies operating under the FXOpen brand only. It is not to be construed as an offer, solicitation, or recommendation with respect to products and services provided by the Companies operating under the FXOpen brand, nor is it to be considered financial advice.
FXOPEN:XAUUSDEducation
by FXOpen
18
The 4 Tips Often Overlooked by BeginnersGreetings, esteemed members of the @TradingView community and all Vesties out there! Let's explore four timeless pieces of advice that beginners tend to overlook and why we should give them closer attention. 1. Manage your expectations. Some newcomers fall into the trap of unrealistic expectations, drawn in by "get rich quick" schemes that initially sparked their interest in trading. Beginner traders may anticipate similar returns to those promised in trendy strategies or TikTok videos, often without fully grasping the methods to achieve those profits. Consistently profitable traders understand that success in trading requires more than just blindly following "profitable" traders on social media. It takes time, discipline, and dedication to develop a trading system that suits your personality and the ability to adapt it to varying market conditions. 2. Simplicity is key. Discovering a multitude of user-friendly education websites (with none better than TradingView, of course) can be enticing, especially when they offer a variety of indicators and trading systems. Novice traders may find comfort in using fancy indicators and systems, ones that seem to be favored by the "pros," but without proper testing or practice, these technical tools can lead to mixed signals and confusion. A wise approach is to start with price action and gradually incorporate indicators as you become more comfortable with their functionality. 3. Prioritize risk management. Both beginners and experienced traders might envy those who achieve substantial gains, often overlooking the complexities behind their success. While certain trading techniques can yield significant profits, they also carry the risk of wiping out an account in an instant. Remember, even a good trade idea can turn sour if risk and trade management are neglected. Proper risk management is crucial for maintaining longevity in the trading game and acquiring the skills needed to become consistently profitable. 4. Stick to your plan. Trading novices are particularly susceptible to the psychological stresses of the market. Without trading confidence, they are more likely to deviate from their trading plans, even if the odds seem favorable. Consistency is key in this aspect. After all, what you don't measure, you can't manage or improve upon. Without consistency: • The trader won't learn how to adapt their system to changing market conditions. • The trader won't cultivate the right mindset to handle losses, stay focused, and prevent emotional reactions. • Inconsistent execution can skew the system's expected outcomes, leading to potentially worse results. Don't hesitate to seek help and learn from a community of traders to avoid repeating the mistakes made by those who have walked your path before. We would greatly appreciate your feedback on the article! Please feel free to share your thoughts and opinions in the comments section below.
INDEX:ETHUSDEducation
by Vestinda
8
What's the Best Trading Advice You've Ever Heard?In the comments below, share the best trading advice that you've ever heard. This could be an intelligent quote you heard or read. It could also be a piece of advice given to you by a family member or friend. Let's create a collection together! We'll also be gifting exclusive and limited edition TradingView shirts to 5 lucky comments! Please keep in mind that these shirts are only for members based in the US or Canada. If you're from another country, and you're randomly selected, we'll gift you some TradingView Coins. We look forward to reading all the comments below 🔥
NASDAQ:NDXEducation
by TradingView
555
CCI Made Easy:Comprehensive Guide on the Commodity Channel IndexHello TradingView Community, it’s Ben with LeafAlgo! Today we will explore a popular indicator with commodity traders - the Commodity Channel Index (CCI). The CCI is a powerful tool that has earned its place among traders due to its ability to identify potential trend reversals, overbought or oversold conditions, and price extremes. In this comprehensive guide, we will delve into the origins of the Commodity Channel Index, explain its components, outline its applications in commodity trading, and provide real-life examples. By the end of this article, you will have a solid understanding of how to leverage the CCI effectively in your trading endeavors. Let's dive in! Origin of the Commodity Channel Index (CCI) Developed by Donald Lambert in 1980s, the Commodity Channel Index was initially designed to analyze commodities. However, over time, its application expanded to various financial markets. The CCI is a momentum oscillator, that measures the relationship between an asset's price and its statistical average. The indicator's ability to detect market conditions beyond standard price trends has made it popular among traders of all levels. Components of the Commodity Channel Index The Commodity Channel Index consists of four main components: Typical Price: The Typical Price is calculated as the average of the high, low, and closing prices of the asset over a specified period. Simple Moving Average (SMA): The SMA is a moving average of the Typical Price over the chosen number of periods. The most common period used is 20. Mean Deviation: The Mean Deviation measures the average deviation of the Typical Price from the SMA over the selected period. Commodity Channel Index (CCI): Finally, the CCI itself is calculated using the formula: CCI = (Typical Price - SMA) / (0.015 * Mean Deviation). The standard period for the Commodity Channel Index is 20, but traders can adjust this parameter to suit their trading preferences and timeframes. Interpreting the Commodity Channel Index The Commodity Channel Index fluctuates around a zero line, which acts as a reference point for identifying overbought and oversold conditions. Positive CCI values indicate that the asset's price is above the average, signaling potential overbought conditions. Conversely, negative CCI values suggest that the price is below the average, indicating potentially oversold conditions. Applications of the Commodity Channel Index in Commodity Trading 1. Identifying Overbought and Oversold Conditions The Commodity Channel Index excels in spotting overbought and oversold conditions, making it valuable for commodity traders. When the CCI climbs above +100, it indicates overbought territory, suggesting that the asset's price may be due for a pullback or reversal. On the other hand, a CCI reading below -100 suggests oversold conditions, hinting at a potential bounce or reversal in the upward direction. 2. Divergence and Trend Reversals Divergence occurs when the price of the asset moves in the opposite direction of the CCI. Bullish divergence is when the price forms lower lows while the CCI makes higher lows. This can indicate a potential trend reversal to the upside. Conversely, a bearish divergence occurs when the price forms higher highs while the CCI makes lower highs, signaling a possible trend reversal to the downside. Divergence can provide early signals of trend changes and potential entry points for traders. Bearish Example: Bullish example: 3. Commodity Channel Index as a Trend-Following Tool The Commodity Channel Index can also be employed as a trend-following indicator. Traders can look for long opportunities when the CCI crosses above zero and short opportunities when the CCI crosses below zero. However, to avoid false signals, it is advisable to combine the CCI with other technical indicators or trend confirmation tools. 4. CCI and Price Extremes The Commodity Channel Index can highlight price extremes by measuring how far the asset's price deviates from its average. A high positive CCI value indicates an exceptionally strong uptrend, while a low negative CCI value indicates a substantial downtrend. Traders can use these extreme readings to assess the strength of the prevailing trend and potential exhaustion points. Utilizing the CCI with Other Indicators Combining the Commodity Channel Index with other indicators can enhance its effectiveness and provide traders with more robust trading signals. By using complementary indicators, traders can confirm CCI signals and gain deeper insights into market conditions. Here are a few indicators that work well with the CCI: 1. Moving Averages (MA): Moving averages can be powerful tools when used alongside the CCI. By adding a simple moving average to the price chart, traders can identify the overall trend direction. When the CCI provides a signal, such as overbought or oversold conditions, traders can cross-reference it with the moving average to confirm the prevailing trend. For instance, in an uptrend, traders may focus on CCI readings below -100 as potential entry points for long positions when the price is above the moving average. 2. Relative Strength Index (RSI): The RSI is another popular momentum oscillator that can complement the CCI. When used together, these indicators can provide stronger signals and reduce the risk of false positives. If both the CCI and RSI signal overbought or oversold conditions while simultaneously diverging, it can increase confidence in a potential market reversal. 3. Moving Average Convergence Divergence (MACD): The MACD is a trend-following indicator that also incorporates momentum analysis. When combined with the CCI, traders can get a more comprehensive view of trend strength and potential trend changes. For example, if the CCI shows overbought conditions, traders may wait for the MACD to generate a bearish signal before considering a long trade. 4. Bollinger Bands: Bollinger Bands are volatility-based bands that expand and contract around a simple moving average. When the CCI reaches extreme values outside the Bollinger Bands, it can signal potential price reversals. Traders may look for price action confirming these signals, such as candlestick patterns or divergences, before making a trading decision. Conclusion Incorporating the Commodity Channel Index (CCI) with other indicators can significantly enhance its effectiveness in trading. By cross-referencing CCI signals with confirmation from other indicators, traders can improve the accuracy of their trading decisions. However, it is crucial to avoid overcrowding the chart with too many indicators, as this can lead to analysis paralysis. Instead, focus on a select few indicators that complement the CCI and align with your trading strategy. Remember, continuous learning and practice are key to mastering the art of using technical indicators effectively in your commodity trading journey. Happy trading! :)
COINBASE:ETHUSDEducation
by LeafAlgo
11
How To Add Drawings To Your ChartIn this Tradingview basics video I'm going to show you how to add drawings to your chart using the options available on the left-side rail. We'll look at not only what the options are, but the benefits of using "stay in drawing mode" as well as how labeling specific tools as "favorites" can save you time when marking up the charts. If you have any question, comments, or subjects for future "Tradingview Basics" videos please leave them below. Until next time, "Plan Your Trade, Trade Your Plan" Akil
NASDAQ:MSFTEducation
by Akil_Stokes
26
Levels and support in Crypto (Part 1)Hey folks! My friends ask me how to work with support and resistance zones. And I decided to write a few articles about it. It is the first part of the post about that theme. One of the most important knowledge I use is identifying support and resistance levels. These zones on a chart give me a clear edge in developing a winning trading strategy. Crypto Resistance Level Meaning: Resistance levels indicate prices where selling pressure may stall an uptrend temporarily. Traders watch these levels for signs of breaking through, which could lead to further price increases. Identifying Resistance Level: To spot resistance levels, I analyze the price chart and connect previous price peaks with horizontal lines. Breaking through resistance often leads to a new support level forming. A support level is a price that traders believe a cryptocurrency is unlikely to drop below. It's backed by strong demand and buying activity as traders see the asset as undervalued. This creates a floor, making it an attractive buying opportunity or a safe zone for holding. Finding Support Level: The easiest support levels to spot are those that have held in the past. Past data gives insights into potential future support. I also zoom out to look at the bigger picture, considering overall trends and historical price action. Support and Resistance Trend Lines: These are horizontal price levels drawn at previous market peaks and troughs. They help identify potential support and resistance levels for a cryptocurrency. I usually trade it in scalping. How to draw support and demand levels? Here is the example To sketch support and resistance zones, simply draw a horizontal line through each meaningful trough (support) or peak (resistance). Draw these lines through the bar lows (for support) or bar highs (for resistance) or the closing price, as most traders eye the close. Stretch these lines into the past to see if earlier price drops halted at the same level. What methods can you use for the day trading with levels? I apply breakouts in a low-volume market and breakouts during high volatility. I also trade along inclined trend lines in line with the trend. Want to learn more about working with levels? Write in the post below, and I'll tell you more about it! As always, I'll appreciate your subscription and likes.
Education
by Ingwina
16
📈Investing vs. Speculating: Understanding the Key Differences📉Navigating the Financial Landscape: Investing vs. Speculating for Smart Financial Growth In the intricate world of stock trading, distinguishing between an investor and a speculator is vital, despite their mutual interest in market analysis. Each follows distinct approaches and objectives, and understanding these differences is paramount before venturing into the stock market. With diverse individuals seeking to capitalize on opportunities and make profits, this article delves into the contrasting methods and goals of investors and speculators, shedding light on their unique strategies. Understanding the Distinction: Investor vs. Speculator At first glance, differentiating between an investor and a speculator might seem challenging. After all, both activities involve buying and selling stocks and require initial market analysis. However, the nature of these two approaches varies significantly. Before delving into the world of stock markets, grasping the difference between investing and speculation is essential. Each day, the stock exchange witnesses countless transactions, leading to continuous price fluctuations. Behind each trade lies an individual with their own motivations, strategies, and rules, all driven by the common desire to make money. However, their approaches diverge; some choose to invest, while others opt for speculation. Let's explore the dissimilarities. Who exactly is an investor? Investing involves purchasing stocks of companies at their intrinsic value, with the expectation of long-term growth and subsequent profitability. As the definition suggests, patience is required, as companies do not experience substantial growth within mere weeks. Investors build portfolios of stocks with a focus on the years ahead. Moreover, investors can generate income through means other than price appreciation alone. By becoming shareholders, stock buyers become co-owners of the company. They can participate in general meetings organized by the company and receive dividends, which are a portion of the company's profits shared with its investors. This way, investors receive periodic returns. Investing necessitates comprehensive analysis of the company whose stock one intends to acquire. The objective is to enhance the value of the acquired assets over the long term. Evaluating the prospects of a specific sector and the company itself entails reading recommendations, staying informed about market trends, and skillfully combining relevant information. Proficient investors are capable of constructing portfolios that yield consistent profits year after year. On the other hand, a speculator approaches the stock market differently. Speculation involves buying and selling stocks with the anticipation of profiting from short-term price fluctuations. Speculators typically focus on quick gains and may not be concerned about the company's long-term prospects. Their decisions are often driven by technical analysis and market trends, aiming to capitalize on short-term price movements. While both investors and speculators participate in the stock market, understanding their differing approaches and objectives is critical for making informed choices and achieving financial growth. Meet the Speculator: Focused on Profits and Market Swings Speculators are individuals whose primary focus is on making profits in the stock market. Unlike investors who carefully analyze the specific stocks they buy and the performance of the underlying companies, speculators are more concerned with the high volatility of prices that offers potential for quick gains. They may not be as concerned about the long-term prospects of a company; what matters most to them is the opportunity to capitalize on price movements, whether upward or downward. Unlike investors who prefer to hold stocks for the long term, speculators aim to quickly buy and resell stocks to profit from short-term price fluctuations. They may even utilize financial instruments such as contracts to benefit from falling prices. For speculators, the direction of price movement becomes inconsequential; they can make gains regardless of whether stock prices rise or fall. One instance of speculation occurred during the aftermath of the Brexit referendum when stock prices plummeted. Speculators saw an opportunity to acquire stocks at low prices, and many stocks rebounded in the following days. By investing in undervalued companies and taking advantage of people's tendency to overreact, speculators made significant profits within a short period. Unlike investors who focus on a company's financial performance and long-term growth prospects, speculators rely more on charts and market sentiment. They are sensitive to emotions in the market, such as fear during potential financial crises or uncertainties surrounding elections, which can significantly influence price swings. Speculators thrive on exploiting these rapid price movements, finding ample opportunities for their trading activities. However, it's important to note that speculating in the stock market involves heightened stress and risks due to the significant price fluctuations. As prices can change rapidly, speculators need to be prepared for the potential downsides and be well-versed in managing risks effectively. Timing Matters: The Distinct Approach of Traders and Speculators Distinguishing between traders and speculators becomes evident when considering the time factor in the world of stock trading. Investing in stocks requires patience, relying on a company's future growth, financial results, and potential dividends. Successful investing often involves waiting for several years to achieve substantial growth, surpassing the performance of other instruments like funds. On the other hand, speculation hinges on understanding short-term market sentiment and making quick decisions. Swift reactions to market changes are necessary as the stock market is prone to significant sell-offs followed by potential reversals. Speculators closely monitor the market and wait patiently for opportune moments to capitalize on rapid price movements. The paradox of speculation lies in the contrasting time frames involved: speculation itself is brief, but speculators invest considerable time observing charts compared to traders who simply maintain open positions. Combining Investment and Speculation In principle, one doesn't have to exclusively choose between investing and speculating. However, effectively combining an equity portfolio with a speculative portfolio demands substantial experience and time. It's essential to bear in mind that speculation carries significantly higher risks compared to investing. A seasoned investor can gradually construct a small speculative portfolio while allocating the majority of funds to long-term investments in stocks. The stock portfolio consistently builds capital, while the speculative portion can potentially yield an additional "bonus" when favorable market opportunities arise. Investor Sleeps Well: The Patient Approach of Investors While speculators engage in the challenging pursuit of profiting from daily price fluctuations, investors adopt a different approach. Investors carefully select stocks for their portfolios and patiently wait, exercising risk control. This approach enables them to focus on their professions or businesses while allowing their savings to grow through capital appreciation. One notable example of this investment strategy is Warren Buffett. Buffett has dedicated years to constructing portfolios by choosing shares of reliable companies that consistently share profits with their shareholders through dividend payments. This straightforward strategy, employed for decades, surpasses the performance of speculators and aggressive mutual funds. Success in investing relies on an investor's knowledge and understanding of prevailing market conditions. While the latter remains beyond anyone's control, the former depends solely on the experience gained with each subsequent trade. Investing is a gradual process, and as experience accumulates, positive results are more likely to emerge. Patience, discipline, and a long-term perspective are key traits of successful investors. The Best Approach: Investment or Speculation? The question of whether to invest or speculate ultimately depends on your individual goals, risk tolerance, and time horizon. Both strategies have their merits and cater to different types of traders. Investing is a long-term strategy that involves buying stocks of companies at their intrinsic value with the expectation of long-term growth and profits. Patient investors hold onto their stocks for years, conducting thorough analyses of company prospects and making informed decisions based on research and market information. They can also benefit from dividends as co-owners of the company, providing a steady income stream. Investing requires a disciplined approach to constructing portfolios that generate systematic profits over time. On the other hand, speculation is a short-term strategy driven by the desire for quick profits. Speculators are primarily motivated by profit and take advantage of high volatility in stock prices. They may not necessarily focus on a company's financial performance or the overall state of the economy. Speculators need to react swiftly to market changes, capitalizing on price swings. However, this approach involves higher stress and risk. Speculators can profit from both rising and falling prices, and their success relies heavily on understanding short-term market sentiment. While both investment and speculation have their merits, it's essential to note that speculation is generally riskier and requires a deep understanding of market dynamics. Combining an equity portfolio with speculative positions can be challenging and time-consuming. Most investors prioritize investing in stocks for long-term growth and stability while allocating a smaller portion for speculative opportunities. Ultimately, investors tend to have a more relaxed approach as they carefully choose stocks for their portfolio and patiently wait for their investments to appreciate over time. This approach allows investors to focus on their other commitments while still profiting from capital appreciation. Warren Buffett, a renowned investor, exemplifies this strategy by building portfolios of reliable companies that consistently share profits with shareholders. Investing is a continual learning process, and success depends on the investor's knowledge, experience, and ability to adapt to market conditions. So, the best approach boils down to aligning your trading style with your financial goals and risk tolerance. In the dynamic world of financial markets, the choice between investing and speculating is deeply personal, guided by individual goals, risk tolerance, and time horizon. Investors embrace a patient, long-term strategy, seeking gradual growth and sustained profits through careful analysis and informed decisions. On the other hand, speculators chase short-term gains, leveraging market volatility to capitalize on rapid price swings. While a combination of both approaches is possible, it demands expertise, time, and experience. It is crucial to recognize that speculation involves higher risks, making it essential for traders to approach it with caution and a deep understanding of market dynamics. For most investors, allocating a smaller portion of funds to speculative opportunities while predominantly focusing on long-term stock investments offers a balanced approach. In the end, regardless of the chosen path, success in financial markets requires a thoughtful and disciplined approach. Armed with knowledge, experience, and a clear strategy, traders can navigate the complexities of the market and work towards achieving long-term financial prosperity.
OANDA:XAUUSDEducation
by FOREXN1
27
PRICE ACTION: ENGULFING PATTERNIn this post we will analyze the Price Action engulfing pattern, one of the main candlestick patterns, which traders appreciate for its reliability and high percentage of success rate. Confirmed by other factors (key levels, indicator signals, fundamental preconditions), the engulfing pattern can become an effective tool for gaining profit. ✴️ What Does This Pattern Tell Us? The engulfing pattern (outside bar) is mostly a reversal pattern (although in most cases it can also indicate a trend continuation). It looks like two candles, the first of which is small in size, and the second is a large candle with a body larger than the entire previous candle and directed in the opposite direction. From the point of view of the crowd movement, this pattern means that the strength of the current trend is running out (as evidenced by the small size of the first candle being engulfed). The crowd does not know in what direction to move and, figuratively speaking, is treading on the spot. The appearance of a powerful candle, which absorbed the previous one and closed in the opposite direction, marks the beginning of a new, strong trend. The example above shows that the bears, having failed to find support, stopped the downward movement, after which the bulls, having organized an impulse in the price growth, collected stop losses of traders who opened positions on the downside, when the price was still moving downward by inertia at the beginning of the reversal candle formation. After the reversal and knocking these traders out of the market, the bulls finally strengthen and a powerful uptrend is formed. There are several mandatory conditions that a pattern must meet in order for its signal to provide the maximum probability of working out: 1. There must be a downtrend or uptrend in the market before the pattern itself. The movement can be small, but its presence is necessary. 2. The body of the second candle must be of a different color and direction (bearish after bullish and bullish after bearish). Shadows may not be engulfed, but then the signal is considered weaker. 3. The body of the second candle should have a contrasting color to the body of the first candle. The exception is when the body of the first candle is very small (doji). In addition to the basic rules of determining the pattern of the outside bar, there are other important nuances, taking into account which traders are more likely to increase the efficiency of their trading. It is worth avoiding trading in flat conditions. In a sideways movement, engulfing patterns are quite common, and if you trade each of them, you can get a lot of losing trades. A reversal pattern implies the presence of a trend. If you open a position on the signal of the outside bar only after a clear movement, the number of false entries into the market will be significantly reduced, respectively, the overall percentage of profitability of trading will increase. It is necessary to take into consideration the overall market situation before opening a trade, it is necessary to evaluate what happened to the price of the asset earlier. ✴️ Trading Engulfing Pattern If all conditions are met and the signal is strong enough, you can enter the market. Let's consider how exactly trading on the outside bar is conducted. It is better to enter a trade on the engulfing pattern by a pending stop order. It is placed a few points above the maximum of the bullish signal candle, or a few points below the minimum of the bearish candle. The breakout of the signal candle will confirm the market reversal and the validity of the open position. ✴️ Setting Stop Loss There are two ways of placing stop losses when trading the pattern. At the extreme of the signal candle (a few pips above the high of a bearish candle or below the low of a bullish candle). On the ATR indicator (the indicator value is multiplied by 2 and the stop loss is placed on the received number of points from the pending order). Setting a stop on the ATR is considered optimal, although it often coincides with the extremum of the signal candle. ✴️ Take Profit There are also several variants of take profit setting: By the ratio of 3:1 or more to the stop loss; By key levels. The ratio of 3:1 provides a positive mathematical expectation, but this method has no connection to the real market situation, and therefore is less effective. Taking a take profits at levels is optimal, because in this case the probability of price reaching the target and profit fixation increases. When placing a TP on a key level, a take/stop ratio of less than 3:1, but not less than 1:1 is acceptable. ✴️ Examples of Trading by Engulfing Pattern For an example, let's consider a trade on the 4-hourly chart of USDCHF. After a bullish trend, engulfing pattern was formed at the confluence level: a bullish candle engulfed the last small bearish candle, and the signal bar itself was larger than the previous ones. On this signal a buy stop order was placed to buy above the maximum of the engulfing candle. Stop Loss was set by ATR indicator (parameter 0.0010) at 20 pips from the order, TP was set near the key level at 30 pips from the order (the R:R ratio is almost 2:1). The pending order was activated by the next candle, and the price went up. A few hours later the trade was closed at take profit. The next trade was opened to buy EURUSD, also on 4-hourly. All conditions were met: we had bullish trend, a powerful full-body bullish candle that engulfed and closed above previous candles. A pending buy stop order was placed couple of pips above the candles high. Stop Loss was set the candle low, take profit at the nearest psychological level. The R:R ratio turned out to be 2:1, which is good. ✴️ Conclusions There are several factors to consider when trading Price Action. Candlestick patterns provide a guide to action, but the main trend and price levels should not be overlooked. The pattern itself should always have a support point. Such a comprehensive assessment will help to avoid knowingly false entries, and the habit of a calculated approach is only for the better.
Education
by DeGRAM
20
How To Take Advantage of Big Tech Earnings Using FuturesNASDAQ:MSFT & NASDAQ:GOOG reported earnings after the market close today, but there isn't much that most stock or options traders can do about it until the market reopens tomorrow morning. However, the futures markets, specifically the Micro Nasdaq Futures ( CME_MINI:MNQ1! ), provide opportunities to participate in earnings directional movement hours before stock traders can do anything, Learn more in this video idea.
CME_MINI:MNQU2023Education
by RodCasilli
3
"Uh Oh" Strategies No amount of math, TA or fundamental analysis is sufficient in the world of the market. No matter how much effort, time and energy you put into analyzing charts, doing calculations and reading SEC filings, you are bound to stop out. And unfortunately, if you are a day trader, this can compound pretty quickly in an off-week where the market decides to behave…… let’s say.. interestingly. When I day trade, I do make best efforts to hold and trail positions to high probability targets. Sometimes this works fantastically, other times it backfires horrendously. As such, I have a few sure and true methods I have and use to offset those times where my plan and targets backfire on me when I am day trading. I am going to show you 2 of my tried and true emergency strategies. I term them “Uh Oh” strategies because I only ever resort to them when I am in trouble (really red on the day). Before we get into them, I need to set the stage of when they should be used and what they are intended to do. So let’s go over some basic rules on these strategies: 1. They are intended ONLY for choppy days. At least for me, most of my stop outs come from choppy days, so that is why I have them. Using them on trend days won’t work. 2. These can be pretty high risk if not managed appropriately. You need to be careful with your position size and set your stop out VERY tight using these strategies. 3. These aren’t intended to be a “let’s get cute and trail” strategy. The purpose of this strategy is to play only the price action, ignore the bigger picture and provide a quick 1 to 5 minute scalp with a relatively hefty size to offset losses. While you should always let your winners run, if you are using this as a last ditch effort to salvage your day, please don’t get cute with it. 4. If you are using these as a last ditch effort on the day, before resorting to it, you need to step away and consider whether it is really worth it. Overtrading can be even more harmful to your psychology and can block you, despite having the best entries. Always be mindful of how you are feeling and how your feelings and emotions are translating to your trading. As such, I generally will resort to these strategies if I have 2 failed day trades and I keep it at one trade using one of these. If I also have a stop out using this, I just call it quits on the day period. Alright, on with the strategies! Strategy: The EMA 21 with Standard Deviation Strategy Basic Info: Indicator: EMA 21 that has the EMA 21 standard deviation bands (you can use my ultimate customizable EMA indicator to achieve this, or any other EMA indicator you have that permits the SD bands to be added, I will link my indicator below). Chart Timeframe: 1 or 5 minute. I use the 1 minute but the 5 minute works actually better. I will show both below. When to use: NEVER use this strategy in the first 30 minutes of the trading day or the last 30 minutes of the trading day. The volatility makes this strategy pretty unreliable. Procedure: The image above shows the ticker AMEX:SPY on the 1 minute timeframe with the EMA 21 and 21 standard deviation bands overlayed. In this example, I am using my own indicator available here . Step 1: Identify the short term trend on the 1 minute timeframe using Tradingview’s trendline tools (see the example below): You can confirm the trend by simply looking for higher highs and higher lows: Step 2: Go with the trend. If its in a short term uptrend, you are looking for longs, if it’s a short term downtrend, you are looking for shorts. What you are waiting for is a pullback below the opposing standard deviation band. Here is the example using our uptrend: Above is an example of a long entry. Once you have established you are in a short term uptrend, you wait for it to touch and break into the lower SD band on the EMA indicator, then you long it to the top of the bands, as shown in the image above. The candle should start pushing back below the EMA band to confirm that it has not “broken out”. Here are examples of breakouts vs continuation signals: And for short entries, you do the inverse. See the example below: If you want to use the 5 minute, here is an example of 5 minute entries and exits, following the same rules: The green represents entries and red exits. If you are doing this strategy on the 5 minute, the biggest difference is that you can pay less attention to whether you are in a short term uptrend or downtrend. The moves tend to be better on the 5 minute, the only downside is by using the 5 minute you are extending the duration of the trade from 1 to 5 minutes to an average of 20 to 30 minutes. Strategy 2: Previous Hour High/Low Average Basic Info: Indicator: You need an indicator that can display the previous hourly high and low average. My baseline indicator can achieve this if you don’t already have one, available here . Optional indicator: EMA 21 Chart Timeframe: Can be 1 through 5, you are using the last hour so timeframe is not all that important. When to use: ONLY works on choppy days. You will be able to tell if the day is truly choppy using the previous hour average. Choppy days have alternating high and low averages (see the chart below): In the chart above, you can see that each average alternates between being higher, then lower, then higher again. This is a confirmation of a choppy day and that this strategy is appropriate. Inversely, trend days appear as a “staircase” pattern on the averages (see below): Step 1: Confirm it is a choppy day. See the example charts above. Once you have confirmed it is indeed a choppy day, then go on to step 2. Step 2: Identify your setup. In general, on a choppy day, if you open below the previous 1 hour average, the stock will retrace this average. You can use the ema 21 or ema 9/21 to plan your entry on a crossover, or just gauge the PA itself (see below for example): You can see in each instance the stock retraced its previous average. This strategy is amazing but you have to be EXTREMELY careful that it is in fact a choppy day and not a trend day. Some days may start off choppy and then turn into a trend (see image below): This is why it can also be helpful to combine the EMA 21 with this strategy. Conclusion: And that is it! Those are my 2 "Uh Oh" strategies. Hopefully you found this informative and helpful. Let me know your questions and comments below! Safe trades everyone!
CME_MINI:NQ1!Education
by Steversteves
22
SOFR: Farewell to LIBORCME: SOFR ( CME:SR31! ) On June 30th, SEC Chairman Gary Gensler posted a 3-minute short video on Twitter. In this educational piece titled RIP LIBOR, he explains what the London Interbank Offered Rate (LIBOR) is, and why its passing away is actually a good thing for consumers. As CFTC Chairman in 2009-2014 and SEC Chairman since 2021, Mr. Gensler oversaw the investigation of the 2012 LIBOR scandal and its replacement by the Secured Overnight Financing Rate (SOFR) in 2021 as the benchmark interest rate for US dollar. Eurodollar and LIBOR Offshore Dollar, the US currency deposited in banks outside of the United States, is commonly known as Eurodollar. Traditionally, offshore dollars were traded mainly among European banks. The name sticks to these days and applies to funds in non-European banks as well. A key advantage of trading Eurodollar is the fact that it is subject to fewer regulations by the Fed, being outside of the US jurisdiction. London is the largest trading hub for Eurodollar. The London Interbank Offered Rate came into being in the 1970s as a reference interest rate in the Eurodollar markets. By 1986, the British Bankers' Association (BBA) began publishing the US Dollar LIBOR daily. The BBA Libor was calculated based on interest rates reported by 17 member banks who together represented the bulk of Eurodollar transactions. Libor has been widely used as a reference rate for many financial instruments, including: • Forward rate agreements • Interest rate futures, e.g., CME Eurodollar futures • Interest rate swaps and swaptions • Interest rate options, Interest rate cap and floor • Floating rate notes and Floating rate certificates of deposit • Syndicated loans • Variable rate mortgages and Term loans • Range accrual notes and Step-up callable notes • Target redemption notes and Hybrid perpetual notes • Collateralized mortgage obligations and Collateralized debt obligations How important was Libor? It is a reference rate in the documentation by private trade association International Swaps and Derivatives Association (ISDA), which sets global market standard for OTC derivative transactions. In 2008, 60% of prime adjustable-rate mortgages and nearly all subprime mortgages were indexed to the USD Libor in the US. Furthermore, American cities borrowed 75% of their money through financial products that were linked to the Libor. Libor has been the indispensable global benchmark for pricing everything from credit card debt to mortgages, auto loans, corporate loans, and complex derivatives. CME Eurodollar Futures In 1981, the Chicago Mercantile Exchange launched Eurodollar futures, the first ever cash-settled futures contract. It quickly became the most liquid contract by CME. At its peak, over 1,500 traders and clerks worked at the Eurodollar pit on CME trading floor. Not to be confused with the Euro currency, Eurodollar futures contracts are derivatives on the interest rate paid on a notional or "face value" of $1,000,000 time deposit at a bank outside of the United. It uses the 3-month USD Libor rate as its settlement index. The late Fred D. Arditti, CME economist, is credited as the brain behind Eurodollar futures. Eurodollar futures are priced as a Money Market instrument. The CME IMM index is used to convert a coupon-bearing instrument such as bank deposit, into a discounted instrument that does not make regular interest payments. For instance, a futures price of 95.00 implies an interest rate of 100.00 - 95.00, or 5%. The settlement price of a Eurodollar futures contract is defined to be 100.00 minus the official BBA fixing of 3-month Libor on the day the contract is settled. The 2012 LIBOR Scandal The LIBOR Scandal was a highly publicized scheme in which bankers at major financial institutions colluded with each other to manipulate the Libor rate. As the scandal came to light in 2012, investigators found that the banks had been submitting false information about their borrowing costs to manipulate the Libor rate. This allowed the banks to profit from trades based on the artificially low or high rates. A dozen big banks were implicated in the scandal. It led to lawsuits and regulatory actions. After the rate-fixing scandal, LIBOR's validity as a credible benchmark was over. As a result, regulators decided that Libor would be phased out and replaced. If you want to learn more about the LIBOR scandal, feel free to check out the 2017 bestseller by David Enrich: “The Spider Network: The Wild Story of a Math Genius, a Gang of Backstabbing Bankers, and One of the Greatest Scams in Financial History”. What is the SOFR In 2017, the Federal Reserve assembled the Alternative Reference Rate Committee to select a Libor replacement. The committee chose the Secured Overnight Financing Rate as the new benchmark for dollar-denominated contracts. The daily SOFR is based on transactions in the Treasury repurchase market, where firms offer overnight or short-term loans to banks collateralized by their bond assets ,similar to pawn shops. Unlike LIBOR, there’s extensive trading in the Treasury repo market, estimated at $4.8 trillion in June 2023. This theoretically makes it a more accurate indicator of borrowing costs. Moreover, SOFR is based on data from observable transactions rather than on estimated borrowing rates, as was the case with LIBOR. The Federal Reserve Bank of New York began publishing the SOFR in April 2018. By 2021, SOFR has replaced most of the LIBOR-linked contracts. The LIBOR committee officially folded up on June 30, 2023. Chairman Gensler apparently chose this day to post his RIP LIBOR video to mark the end of an era. The difference between Fed Funds Rate and SOFR Fed Funds Rate is set by the Fed’s FOMC meeting, and SOFR is published by the NY Fed. However, they are very different. • Fed Funds Rate is considered a risk-free interest rate, and only member banks have access to this ultra-low rate through the Fed’s discount window. • SOFR is a commercial interest rate where banks charge each other. The NY Fed publishes the rate based on transactions in the US Treasury repurchase market. SOFR is similar to LIBOR because they are both commercial interest rate benchmarks. On the other hand, Fed Funds Rate is a policy rate set by the US central bank. CME SOFR Futures and Options CME Group launched the 3-month SOFR futures and options contracts in May 2018. The contracts were based on the SOFR Index, published daily by the New York Fed. SOFR futures contracts are notional at $2,500 x contract-grade International Monetary Market (IMM) Index, where the IMM Index = 100 minus SOFR. At a 5.215 IMM, for example, each contract has a notional value of $13,037.50. CME requires a $550 margin per contract. An interest rate move by a minimum tick of 0.25 basis point would result in a gain or loss of $6.25. At the beginning, SOFR contracts traded side-by-side with the Eurodollar contracts. By 2021, Eurodollar liquidity has transitioned to SOFR contracts. By April 2023, All Eurodollar contracts were delisted, and the transition was completed. For all intended purposes, you could think of the SOFR futures as the same as the legacy Eurodollar contracts, with the only notable exception being the settlement index switched from LIBOR to SOFR. On June 30th, the daily trading volume and Open Interest of SOFR contracts were 4,443,245 and 9,310,433 contracts, respectively. On the same date, CME Group total volume and OI were 23,769,103 and 104,221,083, respectively. On the latest trade day, SOFR accounts for 18.7% of CME Group’s trade volume and 8.9% of its total open interest. Indeed, SOFR has successfully replaced Eurodollar as new No. 1 contract at CME and is arguably the most liquid derivatives contract in the world. Where We Are at the SOFR Market On June 30th, the JUN SOFR contract (SR3M3) expired and settled at 94.785. This translates to the JUN SOFR rate of 5.215 (100-94.785). SEP 2023 (SR3U3) is now the new lead contract. It settled at 94.595 and implied a forward SOFR rate at 5.405 (100-94.595). This shows that the futures market expects a rate increase in the next Fed meeting. Like Eurodollar futures, rising futures price will confer to declining SOFR rate, as rate is equal to 100 minus futures price. Similarly, a decline in futures price equates to a rising SOFR rate. Happy Trading. Disclaimers *Trade ideas cited above are for illustration only, as an integral part of a case study to demonstrate the fundamental concepts in risk management under the market scenarios being discussed. They shall not be construed as investment recommendations or advice. Nor are they used to promote any specific products, or services. CME Real-time Market Data help identify trading set-ups and express my market views. If you have futures in your trading portfolio, you can check out on CME Group data plans available that suit your trading needs www.tradingview.com
CME:SR31!Education
by JimHuangChicago
9
3 Best Market Trading Opportunities to Maximize Profit Potential Hey traders, In the today's article, we will discuss 3 types of incredibly accurate setups that you can apply for trading financial markets. 1. Trend Line Breakout and Retest The first setup is a classic trend line breakout. Please, note that such a setup will be accurate if the trend line is based on at least 3 consequent bullish or bearish moves. If the market bounces from a trend line, it is a vertical support. If the market drops from a trend line, it is a vertical resistance. The breakout of the trend line - vertical support is a candle close below that. After a breakout, it turns into a safe point to sell the market from. The breakout of the trend line - vertical resistance is a candle close above that. After a breakout, it turns into a safe point to buy the market from. Take a look at the example. On GBPJPY, the market was growing steadily, respecting a rising trend line that was a vertical support. A candle close below that confirmed its bearish violation. It turned into a vertical resistance. Its retest was a perfect point to sell the market from. 2. Horizontal Structure Breakout and Retest The second setup is a breakout of a horizontal key level. The breakout of a horizontal support and a candle close below that is a strong bearish signal. After a breakout, a support turns into a resistance. Its retest is a safe point to sell the market from. The breakout of a horizontal resistance and a candle close above that is a strong bullish signal. After a breakout, a resistance turns into a support. Its retest if a safe point to buy the market from. Here is the example. WTI Crude Oil broke a key daily structure resistance. A candle close above confirmed the violation. After a breakout, the broken resistance turned into a support. Its test was a perfect point to buy the market from. 3. Buying / Selling the Market After Pullbacks The third option is to trade the market after pullbacks. However, remember that the market should be strictly in a trend. In a bullish trend, the market corrects itself after it sets new higher highs. The higher lows usually respect the rising trend lines. Buying the market from such a trend line, you open a safe trend-following trade. In a bearish trend, after the price sets lower lows, the correctional movements initiate. The lower highs quite often respect the falling trend lines. Selling the market from such a trend line, you open a safe trend-following trade. On the chart above, we can see EURAUD pair trading in a bullish trend. After the price sets new highs, it retraces to a rising trend line. Once the trend line is reached, trend-following movements initiate. What I like about these 3 setups is the fact that they work on every market and on every time frame. So no matter what you trade and what is your trading style, you can apply them for making nice profits. Good luck!
OANDA:XAUUSDEducation
by VasilyTrader
34
Market Direction - Trend StrengthThe strength of a trend can be a key factor in predicting future price movements. This post will specifically cover how to identify trends, how to determine trend strength, and how to use it to your advantage when trading the markets. Characteristics of a Trending Market To begin, let us understand how to identify a trending market. A trending market is a market that is either making higher highs followed by higher lows (UPTREND) or lower lows followed by lower highs (DOWNTREND). What does this typically look like? Let's see: Uptrend Downtrend Now that we understand how to identify uptrends and downtrends, let's delve further and discuss how to use trend strength to your advantage when trading the markets. Fibonacci Retracement Tool The Fibonacci retracement tool is used in trending markets to determine how strong the trend is. It uses natural numbers to determine the high-probability price levels that the market will hit and continue in its initial direction. This method will use four Fibonacci levels: 38.2%, 50%, 61.8%, and 78.6%. One thing to mention is that in a trending market, the chart is made up of two waves: impulsive and retracement. After an impulsive wave, a retracement wave will usually form; after a retracement wave, the impulsive wave will usually form. The impulsive wave represents the strong momentum of buyers and sellers. The retracement wave shows the weakness of buyers and sellers. Therefore, we must look at the retracement wave when it comes to deciding the strength of a trend. For example, in an uptrend, the impulsive wave will be bullish; therefore, the retracement wave will be bearish. In a downtrend, the impulsive wave will be bearish; therefore, the retracement wave will be bullish. The retracement wave shows the strength of the opposite side of the market. For example, if the impulsive wave is bullish, buyers are stronger. Then, in the retracement wave, sellers will try to dominate the buyers. Therefore, the deeper the retracement goes, the stronger sellers will be than buyers, and the weaker the bullish trend strength will be. With the Fibonacci retracement tool, there are three scenarios to determine trend strength: Strong Trend Strength: 38.2% Fibonacci Retracement Moderate Trend Strength: 50%–61.8% Fibonacci Retracement Weak Trend Strength: 78.6% Fibonacci Retracement The above examples show why the Fibonacci retracement tool can be extremely effective in determining not only how strong a trend is, but also how likely it is to continue past the beginning of the impulsive wave. Bollinger Bands Bollinger Bands are very effective in reading trend strength. Bollinger Bands are based on price volatility, which means that they expand when the market is trending and there are big prices, and they contract during sideways consolidations when the market ranges. Bollinger Bands consist of two outer bands (top and bottom bands) on each side and a moving average in the centre between the outer bands (middle band). One of the main reasons Bollinger Bands are so effective in reading trend strength is that they do not lag as much as other indicators because they always change automatically with the price. Three important points to note when using Bollinger Bands to read trend strength: If price pulls away from the outer band and heads towards the middle band as the trend continues, this is a key indication that the trend strength may be weakening. During strong trends, prices stay close to the outer band and significantly away from the middle band. Repeated pushes into the outer bands that do not actually reach the band indicate a lack of trend strength. Let's see a chart example of Bollinger Bands reading trend strength: As you can see, using Bollinger Bands can provide traders with very useful information about trend strength and the balance between bulls and bears. Price Rejection We do not always need indicators or tools to read trend strength; it is possible to do this just by looking at a naked chart. The way rejected continuations or reversals happen on charts can be a huge indicator of being able to read trend strength. Before understanding the price rejection, it is important to know about the wick or shadow of the candlestick. Upper wick The upper shadow shows that the price went up and then came down again. This indicates that buyers wanted to increase the price, but sellers dominated the buyers to push the price back down. Lower wick The lower shadow represents that the price went down and then came back up. This indicates that sellers wanted to lower the price, but buyers dominated the sellers to push the price back up. Identifying price rejection Traders should first wait for the price to reach a strong support or resistance level. Then, at the support or resistance level, candlesticks will likely make wicks opposite the trend due to the strength of the level. For example, wicks or shadows will form on the upper side at the resistance zone, while at the support zone, wicks or shadows will form on the lower side of the candlesticks. These wicks or shadows are identified as price rejections in the market. Price rejections are very important, especially in identifying trend strength, because they accept or reject the identification of key levels in the market. For example, if you are unsure whether a support zone will hold or break, you can see whether price rejection will occur at that level. Let's see a chart example of price rejection and how you can use it to identify trend strength: The chart above is proof alone that trend strength can be identified by just looking at the price action of a chart. Understanding the strength of a trend does not have to be complex. Trend strength can be identified simply by using the three different techniques we have covered in this educational post. The best thing we can all do as traders is to be simplistic and not overcomplicate things; this becomes especially easier when you accept that nothing in the market is certain. Each market has its own unique market conditions and will not trade rationally all of the time. Therefore, when a trade does not go your way even though your trend strength signals were high and you followed the market, understand that it is just one trade and that the market is completely neutral. It is neither personally on your side nor personally against you. Trade safely and responsibly. BluetonaFX
Education
by BluetonaFX
37
Trading Breakouts with Donchian ChannelsBreakout trading is a popular strategy among traders seeking to capitalize on significant price moves that occur when the price breaks out of a well-defined range. It involves identifying key levels of support and resistance and entering trades when the price breaks above resistance or below support. By catching these breakout movements early, traders aim to capture potential profits as the price continues to move in the breakout direction. Donchian Channels are constructed by plotting three lines on a price chart: the upper band, the lower band, and the middle line. The upper band represents the highest high over a specified period, while the lower band represents the lowest low. The middle line, also known as the median line, is the average of the upper and lower bands. The interpretation of Donchian Channels is relatively straightforward. When the price breaks above the upper band, it signals a potential bullish breakout, suggesting that the price may continue to rise. Conversely, when the price breaks below the lower band, it indicates a potential bearish breakout, suggesting that the price may continue to decline. The width between the upper and lower bands represents the volatility of the asset. Understanding Donchian Channels A. Explanation of Donchian Channels and their construction: Donchian Channels are constructed using historical price data and provide traders with a visual representation of market volatility and potential breakout opportunities. To calculate Donchian Channels, traders select a specific lookback period, which determines the number of bars or candles used in the calculation. This lookback period can be adjusted based on the desired trading timeframe and market conditions. The upper band of the Donchian Channels represents the highest high over the selected period, while the lower band represents the lowest low. The middle line, also known as the median line, is calculated as the average of the upper and lower bands. By plotting these lines on a price chart, traders can visualize the range within which the price has been oscillating over the selected period. It is important to note that the choice of the lookback period will impact the sensitivity of the Donchian Channels. A shorter lookback period will result in narrower channels, capturing more recent price movements, while a longer lookback period will yield wider channels, incorporating a broader range of historical price data. B. Components of Donchian Channels: – Upper band : The upper band of the Donchian Channels represents the highest high over the selected period. It serves as a potential resistance level and provides traders with a reference point for potential breakout opportunities above this level. – Lower band : The lower band represents the lowest low over the selected period and acts as a potential support level. Traders monitor the price's behavior in relation to the lower band to identify potential breakout opportunities below this level. – Middle line : The middle line, often referred to as the median line, is calculated as the average of the upper and lower bands. It serves as a midpoint between the two bands and provides traders with a reference point for the mean or average price within the selected period. The middle line can act as a potential dynamic support or resistance level, depending on the direction of the price movement. C. Interpretation of Donchian Channels: Donchian Channels provide valuable insights into market volatility and potential breakout opportunities. Traders can interpret Donchian Channels in the following ways: – Market volatility : The width of the Donchian Channels reflects the level of market volatility. Wider channels indicate higher volatility, suggesting larger price swings and potentially stronger breakout opportunities. Narrower channels, on the other hand, indicate lower volatility and may suggest a period of consolidation or low trading activity. – Breakout opportunities : Traders monitor the price's behavior in relation to the upper and lower bands of the Donchian Channels to identify potential breakout opportunities. A breakout occurs when the price breaks above the upper band or below the lower band. A breakout above the upper band suggests a potential bullish opportunity, while a breakout below the lower band indicates a potential bearish opportunity. Traders may consider entering a trade when a breakout occurs, anticipating further price movement in the breakout direction. – Squeezing Donchian Channels: When the width between the upper and lower bands narrows significantly, it is referred to as a "squeeze." A squeeze indicates low volatility and a potential upcoming breakout. Traders watch for a breakout in either direction when the Donchian Channels squeeze, as it suggests that the market is likely to enter a period of increased volatility and directional movement. Identifying Breakout Opportunities with Donchian Channels A. Breakout above the upper band: A breakout occurs when the price crosses above the upper band of the Donchian Channels, indicating a potential bullish opportunity. Traders can use different entry strategies to capitalize on breakouts above the upper band: – Buying on the close above the upper band : Traders may choose to enter a long position when the price closes above the upper band. This approach confirms the breakout and provides confirmation that the upward momentum is sustained. – Percentage deviation from the upper band : Another approach is to wait for a specific percentage deviation from the upper band before entering a trade. For example, a trader might enter a long position if the price moves a certain percentage, such as 1% or 2%, above the upper band. This method allows for a more flexible entry and can help filter out minor price fluctuations. It is important to consider other technical indicators, such as volume or momentum oscillators, to confirm the strength of the breakout and assess potential price targets or exit points. Traders may also incorporate stop-loss orders to manage risk and protect against potential false breakouts. B. Breakout below the lower band: A breakdown occurs when the price crosses below the lower band of the Donchian Channels, signaling a potential bearish opportunity. Traders can use various entry strategies to take advantage of breakouts below the lower band: Selling on the close below the lower band: Traders may choose to enter a short position when the price closes below the lower band, confirming the breakdown and indicating a potential downtrend. Percentage deviation from the lower band: Alternatively, traders can wait for a specific percentage deviation from the lower band before entering a trade. For instance, they might enter a short position if the price moves a certain percentage below the lower band. This approach adds a level of confirmation and helps filter out minor price fluctuations. Similar to breakouts above the upper band, traders should consider additional technical indicators to confirm the breakdown and identify suitable price targets or exit points. Stop-loss orders are essential to manage risk and limit potential losses if the breakout turns out to be a false signal. It is worth noting that not all breakouts or breakdowns lead to sustained price movements. Traders should exercise caution and conduct thorough analysis, considering market conditions, overall trend, and other relevant factors. Using Donchian Channels as a tool for identifying breakout opportunities provides a structured approach to entering trades and enhances decision-making in breakout trading strategies. Confirmation Techniques with Volume Volume plays a crucial role in confirming breakouts and validating the strength of price movements. Higher volume during a breakout suggests greater market participation and increases the likelihood of a sustained move. Traders can use volume indicators in conjunction with Donchian Channels to confirm breakouts: – On-Balance Volume (OBV) : OBV is a popular volume indicator that measures buying and selling pressure. Traders can compare the OBV trend with the breakout in Donchian Channels to assess whether volume supports the breakout movement. If OBV shows a positive trend alongside a breakout above the upper band or below the lower band, it provides additional confirmation. – Volume Weighted Average Price (VWAP) : VWAP is another useful volume-based indicator that calculates the average price weighted by trading volume. Traders can compare the current price with the VWAP to determine if volume supports the breakout. If the price moves above the upper band accompanied by a surge in volume and a deviation from the VWAP, it strengthens the breakout signal. Managing Risk in Donchian Channel Breakout Trading A. Setting stop-loss orders: Stop-loss orders serve as a protective mechanism to limit potential losses if the breakout trade fails. By defining a predetermined level at which to exit the trade, traders can control and manage their risk effectively. Traders can use various techniques to determine the placement of stop-loss orders. One approach is to place the stop-loss below the breakout candle or below the lower band of Donchian Channels. This ensures that if the price reverses and breaks back into the channel, the trade is exited to minimize potential losses. B. Implementing position sizing: Position sizing is the process of determining the number of contracts or shares to trade based on individual risk tolerance. Traders should consider their risk appetite and financial objectives when determining position size. Common methods for position sizing include the fixed percentage method (risking a certain percentage of capital per trade) or the fixed dollar amount method (risking a specific dollar amount per trade). Volatility and the characteristics of the breakout can influence position sizing. Traders may opt for smaller position sizes in more volatile markets to manage risk effectively. Additionally, if the breakout signal exhibits higher confidence, such as a wide breakout range or strong confirmation signals, traders may consider increasing their position size to capitalize on potential larger moves. Fine-tuning Donchian Channel Breakout Strategies While Donchian Channels provide valuable insights into breakouts, combining them with trend-following indicators can enhance the effectiveness of the strategy. Trend indicators, such as moving averages or trendlines, can help traders identify the direction of the prevailing trend. By aligning the breakout trades with the trend direction, traders can increase the probability of successful trades. Momentum oscillators can be used alongside Donchian Channels to provide additional confirmation of breakout signals. Indicators like the Relative Strength Index (RSI) or the Stochastic Oscillator can help traders assess overbought or oversold conditions and gauge the strength of the breakout. Combining the signals from these oscillators with Donchian Channel breakouts can offer a more comprehensive view of market dynamics. Different timeframes can have varying impacts on the frequency and reliability of Donchian Channel breakouts. Shorter timeframes, such as intraday charts, may generate more frequent but potentially smaller breakouts. Conversely, longer timeframes, such as daily or weekly charts, may produce fewer but more significant breakouts. Traders should consider their trading style, available time, and risk tolerance when selecting the timeframe for breakout trading. Backtesting is a crucial step in fine-tuning Donchian Channel breakout strategies. By applying historical data to the strategy on various timeframes, traders can assess the performance and identify optimal parameters. Through backtesting, traders can refine their entry and exit rules, determine the most suitable lookback periods, and validate the strategy's effectiveness across different market conditions. Limitations and Considerations A. False breakouts and whipsaws: Despite the effectiveness of Donchian Channel breakout strategies, false breakouts can occur, leading to potential losses. False breakouts happen when the price briefly moves beyond the channel but quickly reverses back into the range. Traders must be aware of this possibility and implement risk management techniques to mitigate potential losses. To minimize the impact of false breakouts, traders can employ confirmation techniques, such as volume analysis or candlestick patterns. These tools can provide additional validation before entering a trade, reducing the risk of being caught in false breakout scenarios. By layering Donchian Channels of varying lengths over each other, range-bound or trending markets can become clearer and reduce the potential for trading a false breakout. Here we have channel lengths of 25, 50, 100, 150, and 200 overlaid to help determine the state of the market and identify take profit and stop loss levels: B. Market conditions affecting breakout trading: During periods of low volatility, price movements can become sluggish, resulting in fewer and less significant breakouts. Traders should be mindful of market conditions and adjust their expectations and strategies accordingly. It may be necessary to explore alternative trading approaches or consider other indicators that perform better in low volatility conditions. Donchian Channel breakout strategies work best in trending markets where price movements exhibit clear directional biases. In ranging markets, where prices oscillate within a defined range, breakouts may be less frequent and less reliable. Traders should exercise caution and consider alternative strategies when faced with prolonged ranging market conditions. C. Psychology and discipline in breakout trading: Breakout trading requires discipline and emotional control. Traders must be prepared for periods of drawdowns, missed opportunities, and potential losses. Maintaining a disciplined mindset, sticking to predetermined rules, and avoiding impulsive decisions are essential for long-term success in breakout trading. Successful breakout traders understand the importance of patience and following their predefined rules. It is crucial to wait for confirmed breakouts and not chase every potential trade. Adhering to risk management strategies, position sizing rules, and maintaining a consistent approach are key to managing emotions and maintaining discipline in breakout trading. Conclusion Donchian Channel breakout trading strategies hold immense potential for traders. By effectively utilizing Donchian Channels and incorporating appropriate risk management and confirmation techniques, traders can enhance their trading decisions and potentially realize substantial profits. The systematic approach offered by Donchian Channels enables traders to spot breakouts early and participate in significant price moves. To fully harness the power of Donchian Channels in breakout trading, it is essential for readers to engage in further exploration and practice. Backtesting historical data, paper trading, and implementing real-time trades based on Donchian Channel breakout strategies can provide valuable insights and hands-on experience. Continuous learning and refining of strategies will pave the way for improved trading outcomes. By understanding the construction and interpretation of Donchian Channels, incorporating confirmation techniques, managing risk effectively, and honing their skills through practice, traders can unlock the potential for consistent profits. Embrace the power of Donchian Channels, continue to explore, and adapt your strategies to evolving market conditions. May your journey with Donchian Channel breakout trading be filled with success and prosperity. Happy Trading, Tyler
Education
by LeafAlgo
18
Four of the Best Strategies for Swing TradingSwing trading is a style employed by many traders looking to combine the intensity of day trading with the strategic planning of long-term investing. In this article, we’ll be taking an in-depth look at four of the best strategies for swing trading, offering information on entry criteria, stop-loss placements, and taking profits. What Is Swing Trading? Swing trading is a style of trading that aims to profit from market movements over the course of a few days to several weeks. Unlike day trading, where positions are almost always opened and closed within the same day, swing traders hold positions for more than one day. They can be thought of as a happy medium between short-term day traders and long-term position traders/investors. Generally speaking, swing traders will attempt to capture the bulk of short-term fluctuations within a broader trend. In other words, they attempt to buy an asset at the bottom of a “swing” and sell at the top, capitalising on temporary changes in price. One of the main benefits of using swing trading techniques is the potential for significant returns over a relatively short period. The extended holding period, compared to shorter-term styles, allows for larger price movements to play out. Moreover, because swing traders typically pay the most attention to the 1-hour, 4-hour, daily, and weekly charts, they can manage their trades without needing to constantly monitor the market. However, swing trading methods aren’t without their disadvantages. The extended holding period exposes swing traders to overnight and weekend market events, which could lead to potential losses or even a “gap” up or down that doesn’t trigger the trader’s stop loss. Additionally, the importance of technical analysis in swing trading can’t be understated; accurately predicting price swings is crucial for success, so there may be a steeper learning curve associated with this form of trading. Four Simple Swing Trading Strategies Now that we’ve taken a brief look at the basics of swing trading let’s move on to four swing trading setups you can get started with right away. While we’ve applied these strategies to the commodities and forex markets, they can also be used as stock market swing trading setups. Want to follow along? You can open up FXOpen’s free TickTrader platform to find each of the following tools ready to help you create your own swing trading stock strategy. Fibonacci Retracement Pullback The Fibonacci retracement tool has long been favoured by swing traders for its ability to highlight specific areas of support/resistance where possible reversals might occur. The most significant levels are 38.2%, 50%, and 61.8%. Swing traders use this tool to anticipate potential pullbacks within a larger trend. In an uptrend, for instance, traders will look for the price to pull back to a Fibonacci level before resuming its upward move. Conversely, in a downtrend, they'll anticipate a bounce back up to a Fibonacci level before the trend continues. To use this strategy, we need to set up a Fibonacci retracement. First, traders identify the broader trend that exists on their preferred timeframe. Then, they mark the most recent significant high and low in the trend. If they are looking at an uptrend, they apply the first point to the high and the second to the low and do the opposite for a downtrend. When the price begins to approach the 38.2%, 50%, or 61.8% levels, we wait for signs of a reversal. As a simple swing trading strategy, we’ll just look for the hammer and shooting star candlestick patterns, but you can include whichever reversal patterns you prefer. When the candle closes and confirms the pattern, we can enter. Stop losses can either be set just beyond the entry level, the next level, or the high/low of the entire tool, depending on the risk tolerance. Traders often begin taking profits at the high/low of the retracement or at the next significant support/resistance level. Bollinger Bands with an Impulsive Candle Bollinger Bands are a valuable tool that helps traders identify volatility and areas where the price may be overbought or oversold. They’re composed of three lines: the middle line being a simple moving average (SMA) and the other two representing standard deviations of price. For this strategy, the default settings of the Bollinger Bands are suitable. For reference, the length of the SMA should be 20, while the multiplier should be 2. The crux of this strategy involves watching for reactions when the price touches or crosses a band, then waiting for an impulse (engulfing) candle through the SMA to confirm a change in direction and likely trend continuation. It’s best to look for this candle to close near its high/low, effectively printing a large, solid candle. Once we see this impulse candle, we enter as the candle closes. We can set stop losses either above/below the impulse candle or just beyond the Bollinger Bands. Traders typically close the position when the price closes back above/below the SMA. RSI Divergence The relative strength index (RSI) is a momentum oscillator that quantifies the speed and change of an asset’s movements. It oscillates between 0 and 100, and traditionally, a level above 70 indicates overbought conditions, while a level below 30 indicates oversold conditions. When RSI moves into these areas, the likelihood of a reversal increases. Divergences are identified when the price of an asset contrasts with the direction of the RSI. For instance, if the price is making higher highs while the RSI is making lower highs, this is considered a bearish divergence. Conversely, a bullish divergence occurs when the price makes lower lows while the RSI makes higher lows. Candlestick patterns such as the hammer and shooting star can further validate these signals. For this swing trade system, we will need the RSI indicator with its default setting of 14. We will wait for RSI to move beyond 30 or 70, then watch for a divergence to appear. This will commonly occur in areas of support or resistance. Once we spot the divergence, we will wait for a hammer or shooting star to appear. When the candle closes, we can enter the position. Unlike the previous two strategies, there’s no defined area to place a stop loss here. However, a stop just beyond the entry candle should suffice. The theory states that profits can be taken at a nearby support/resistance level or when RSI moves into overbought/oversold conditions, depending on the direction of the trade. Keltner Channel Breakout The Keltner Channels is a volatility-based indicator that’s closely related to Bollinger Bands. However, instead of plotting standard deviations of price, it uses the average true range (ATR) to measure volatility. It’s made up of three lines: the middle line is an exponential average, while the upper and lower lines are multiples of the price’s ATR. The Keltner Channels indicator is effective at helping swing traders jump on trends. After identifying a broader trend, we can look for certain signals from the channels to find suitable entry points. To start, we will initialise the indicator with an ATR length of 20 and a multiplier of 2. Then, we will look for two consecutive closes outside of the channel. Once these closes are observed, we can wait for a retracement back to the EMA and enter as soon as it touches it. In other words, we are identifying a potential breakout and waiting for a pullback to enter. Stop losses can be placed just beyond the opposing line. Profits may be taken at nearby support/resistance levels, or we can simply trail our stop above/below the opposing line if we’re unsure of a suitable profit target. Final Thoughts In conclusion, swing trading offers a balanced approach, sitting between intraday and position trading styles. Short-term swing trading allows traders to take a more active approach, while long-term swing trading enables them to benefit from market trends without getting caught up in daily volatility. Either way, you’re now equipped with four potent strategies that can be used to create your own comprehensive swing trading plan. Feeling ready to put your newfound knowledge to the test? You can open an FXOpen account to apply these strategies across 600+ markets and benefit from lightning-fast execution, tight spreads, and the advanced TickTrader platform. Good luck! This article represents the opinion of the Companies operating under the FXOpen brand only. It is not to be construed as an offer, solicitation, or recommendation with respect to products and services provided by the Companies operating under the FXOpen brand, nor is it to be considered financial advice.
FXOPEN:XAUUSDEducation
by FXOpen
11
7 Expert Risk Management Techniques for TradingRisk management refers to the techniques used to identify, evaluate, and mitigate the potential risks associated with trading and investing. Whether you are a day trader, swing trader, or scalper, effective risk management can help you minimize losses and protect your hard earned money all while maximizing potential profits. Let's take a look at the top 7 risk management techniques for trading! 👌 Have a Trading Plan Many traders jump into the market without a thorough understanding of how it works and what it takes to be successful. You should have a detailed trading plan in place before making any trades. A well-designed trading plan is an essential tool for effective risk management. A trading plan acts as a roadmap, laying out a set of guidelines/rules that can help traders avoid impulsive decisions. It is crucial because it requires you to think deeply about your approach before you begin risking real money. Having a plan can help you stay calm under stress as your plan will have specific steps to take for anything the market throws at you. It is essential to clearly define your trading goals and objectives. Are you aiming for short-term gains or long-term wealth generation? Are you focused on a specific asset class or trading strategy? Setting specific and measurable goals helps you stay focused and evaluate your progress. Another important part is to describe the trading strategy you will employ to enter and exit trades. This includes the types of analysis you will employ (technical, fundamental, or a combination), indicators or patterns you will rely on, and any specific rules for trade execution. Determine your risk tolerance, set appropriate position sizing rules, and establish stop-loss levels to limit potential losses. The Risk/reward ratio When you are planning to open a trade, you should analyze beforehand how much money you are risking in that particular trade and what the expected positive outcome is. Here is a useful chart with some examples to understand this concept: As you can see from the data above, a trader with a higher RR (risk-reward ratio) and a low win rate can still be profitable. Let’s examine this a little more by looking at a profitable example with a 20% success rate, a RR ratio of 1:5, and capital of $500. In this example, you would have 1 winning trade with a profit of $500. The losses on the other 4 trades would be a total of $400. So the profit would be $100. An unprofitable RR ratio would be to risk, for example, $500 with a success rate of 20% and a risk/reward ratio of 1:1. That is, only 1 out of 5 trades would be successful. So you would make $100 in 1 winning trade but in the other 4 you would have lost a total of -$400. As a trader, you need to find the perfect balance between how much money you’re willing to risk, the profits you’ll attempt to make, and the losses you’ll accept. This is not an easy task, but it is the foundation of risk management and the Long & Short Position Tools are essential. You can use our 'Long Position' and 'Short Position' drawing tools in the Forecasting and measurement tools to determine this ratio. Stop Loss/Take Profit orders Stop Loss and Take Profit work differently depending on whether you are a day trader, swing trader or long term trader and the type of asset. The most important thing is not to deviate from your strategy as long as you have a good trading strategy. For example, one of the biggest mistakes here is to change your stop loss thinking that the losses will recover... and often they never do. The same thing happens with take profits, you may see that the asset is "going to the moon" and you decide to modify your take profit, but the thing about markets is that there are moments of overvaluation and then the price moves sharply against the last trend. There is an alternative strategy to this, which is to use exit partials, that is closing half of your position in order to reduce the risk of your losses, or to take some profits during an outstanding run. Also remember that each asset has a different volatility, so while a stop loss of -3% is normal for a swing trading move in one asset, in other more volatile assets the stop loss would be -10%. You do not want to get caught in the middle of a regular price movement. Finally, you can use a trailing stop, which essentially secures some profits while still having the potential to capture better performance. Trade with TP, SL and Trailing Stop Selection of Assets and Time intervals Choosing the right assets involves careful consideration of various factors such as accessibility, liquidity, volatility, correlation, and your preference in terms of time zones and expertise. Each asset possesses distinct characteristics and behaviors, and understanding these nuances is vital. It is essential to conduct thorough research and analysis to identify assets that align with your trading strategy and risk appetite. Equally important is selecting the appropriate time intervals for your trading. Time intervals refer to the duration of your trades, which can span from short-term intraday trades to long-term investments. Each time interval has its own advantages and disadvantages, depending on your trading style and objectives. Shorter time intervals, such as minutes or hours, are often associated with more frequent trades and higher volatility. Traders who prefer these intervals are typically looking to capitalize on short-term price fluctuations and execute quick trades. Conversely, longer time intervals, such as days, weeks, or months, prove more suitable for investors and swing traders aiming to capture broader market trends and significant price movements. Take into account factors such as your time availability for trading, risk tolerance, and preferred analysis methods. Technical traders often utilize shorter time intervals, focusing on charts, indicators, and patterns, while fundamental investors may opt for longer intervals to account for macroeconomic trends and company fundamentals. For example, If you are a swing trader with a low knack for volatility, then you can trade in assets such as stocks or Gold and ditch highly volatile assets such as crypto. Remember that there is no one-size-fits-all approach, and your choices should align with your trading style, goals, and risk management strategy. Here is a chart of Tesla from the perspective of a day trader, a swing trader, and an investor: Backtesting Backtesting plays a crucial role in risk management by enabling traders to assess the effectiveness of their trading strategies using historical market data. It involves the application of predefined rules and indicators to past price data, allowing traders to simulate how their trading strategies would have performed in the past. During the backtesting process, traders analyze various performance metrics of their strategies, such as profitability, risk-adjusted returns, drawdowns, and win rates. This analysis helps identify the strengths and weaknesses of the strategies, allowing traders to refine them and make necessary adjustments based on the insights gained from the backtesting results. The primary objective of backtesting is to evaluate the profitability and feasibility of a trading strategy before implementing it in live market conditions. By utilizing historical data, traders can gain valuable insights into the potential risks and rewards associated with their strategies, enabling them to manage their risk accordingly. However, it's important to note the limitations of backtesting. While historical data provides valuable information, it cannot guarantee future performance, as market conditions are subject to change. Market dynamics, liquidity, and unforeseen events can significantly impact the actual performance of a strategy. There are plenty of ways to backtest a strategy. You can run a manual test using Bar Replay to trade historical market events or Paper Trading to trade real examples. Those with coding skills can create a strategy using Pine Script and run automated tests on TradingView. Here is an example of the Moving Averages Crossover strategy using Pine Script: Margin allocation We are not fortune tellers, so we cannot predict how assets will be affected by sudden major events. If the worst happens to us and we have all of our capital in a particular trade, the game is over. There are classic rules such as the maximum allocation percentage of 1% per trade (e.g. in a $20,000 portfolio this means that it cannot be risked +$200 per trade). This can vary depending on your trading strategy, but it will definitely help you manage the risk in your portfolio. Diversification and hedging It is very important not to put all your eggs in one basket. Something you learn over the years in the financial markets is that the unexpected can always happen. Yes, you can make +1000% in one particular trade, but then you can lose everything in the next trade. One way to avoid the cold sweats of panic is to diversify and hedge. Some stock traders buy commodities that are negatively correlated with stocks, others have a portfolio of +30 stocks from different sectors with bonds and hedge their stocks during downtrends, others buy an ETF of the S&P 500 and the top 10 market cap cryptos... There are unlimited possible combinations when diversifying your portfolio. At the end of the day, the most important thing to understand is that you need to protect your capital and using the assets available to you a trader can hedge and/or diversify to avoid letting one trade ruin an entire portfolio. Thank you for reading this idea on risk management! We hope it helps new traders plan and prepare for the long run. If you're an expert trader, we hope this was a reminder about the basics. Join the conversation and leave your comments below with your favorite risk management technique! 🙌 - TradingView Team
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