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Riskaversion

How Prospect Theory and the Disposition Effect Influence Prices█ Prospect theory, the disposition effect, and asset prices In the research paper "Prospect Theory, the Disposition Effect, and Asset Prices," authors Yan Li and Liyan Yang delve into the implications of prospect theory on asset pricing and trading volume through the lens of the disposition effect. The disposition effect, a tendency to sell assets that have increased in value while holding onto assets that have declined, is a well-documented behavioral bias among investors. Results: The study finds that diminishing sensitivity predicts a disposition effect, price momentum, reduced return volatility, and a positive return-volume correlation. Conversely, loss aversion generally predicts opposite outcomes. █ Background and Theory ⚪ Agency theory examines the relationship between principals (owners) and agents (managers), focusing on aligning their interests through contracts and incentives. ⚪ Prospect theory , introduced by Kahneman and Tversky (1979), is a behavioral model that describes how people make decisions involving risk and uncertainty. Unlike traditional utility theory, prospect theory suggests that people value gains and losses differently, leading to risk-averse behavior for gains and risk-seeking behavior for losses. Explanation of Risk Aversion and Loss Aversion Risk aversion is the tendency to prefer certainty over a gamble with a higher or equal expected value. In contrast, loss aversion implies that losses loom larger than gains, making individuals more sensitive to potential losses than to equivalent gains. This phenomenon is captured by the S-shaped value function in prospect theory, which is concave for gains and convex for losses. █ Methodology The research uses a comprehensive model to understand how psychological factors like fear of losses and changing sensitivity to gains and losses affect trading and market behavior. This model looks at both diminishing sensitivity (caring less about bigger changes) and loss aversion (fear of losing money) together. The study's data comes from traders and managers at four big investment banks, including people with different levels of experience and jobs. This gives a broad view of how trading behavior works at these banks. █ Findings Disposition Effect What's Happening: Investors tend to sell stocks that have gone up in value and hold onto stocks that have gone down. Why: Because they are highly sensitive to gains but less sensitive to losses. Evidence: The study shows that people are about 15% more likely to sell stocks that have gone up than those that have gone down. Price Momentum What's Happening: Because of the disposition effect, stock prices keep moving in the same direction for a while before correcting. Why: Investors sell winning stocks quickly and hold onto losing ones, so prices don’t adjust immediately to new information. Evidence: Stocks that performed well continue to do better than those that performed poorly, by about 1% per month over six months to a year. Higher Equity Premium What's Happening: Investors demand higher returns for holding riskier stocks due to fear of losses. Why: Loss aversion makes them want more return to compensate for the risk. Evidence: Historically, stocks have returned about 6% more per year than risk-free assets, which is known as the equity premium puzzle. █ Practical Implications for Retail Traders Retail traders can derive several practical applications from these findings to improve their trading strategies: Risk Management: Understanding that loss aversion may lead to holding losing stocks longer, traders should implement strict stop-loss policies to mitigate this bias. Profit-Taking Strategies: Recognizing the reversed disposition effect, traders should establish clear profit-taking rules to avoid prematurely selling winning stocks. Market Volatility Awareness: Being aware that market volatility can exacerbate loss aversion effects, traders should seek higher returns to compensate for perceived risks. █ Applying Knowledge from the Study Retail traders can apply the knowledge from this study in several effective ways: Implementing Stop-Loss Orders: Setting automatic stop-loss orders helps circumvent the emotional impact of loss aversion, ensuring losses are capped at predetermined levels. Regular Review of Holdings: Periodic reassessment of stock holdings can help overcome the inertia caused by loss aversion, enabling more rational decision-making. Diversification: Diversifying the portfolio can mitigate the impact of loss aversion on individual stock performance, reducing overall portfolio risk. Education on Cognitive Biases: Educating themselves about cognitive biases like loss aversion and the disposition effect can help traders recognize and counteract these biases in their trading behavior. █ Reference Li, Y., & Yang, L. (2013). Prospect theory, the disposition effect, and asset prices. Journal of Financial Economics, 107(3), 715-739. doi:10.1016/j.jfineco.2012.11.002 ----------------- Disclaimer This is an educational study for entertainment purposes only. The information in my Scripts/Indicators/Ideas/Algos/Systems does not constitute financial advice or a solicitation to buy or sell securities. I will not accept liability for any loss or damage, including without limitation any loss of profit, which may arise directly or indirectly from the use of or reliance on such information. All investments involve risk, and the past performance of a security, industry, sector, market, financial product, trading strategy, backtest, or individual's trading does not guarantee future results or returns. Investors are fully responsible for any investment decisions they make. Such decisions should be based solely on evaluating their financial circumstances, investment objectives, risk tolerance, and liquidity needs. My Scripts/Indicators/Ideas/Algos/Systems are only for educational purposes!
OANDA:DE30EUREducation
by Zeiierman
Traders, managers and loss aversion in investment banking█  Traders, managers and loss aversion in investment banking In investment banking institutions, traders and managers exert immense pressure to maximize gains while minimizing losses. In fact, loss aversion, the tendency to prefer avoiding losses over acquiring equivalent gains, is what influences most of their decision-making. If not managed effectively, this bias can lead to suboptimal trading decisions and significantly impact the overall performance of financial institutions. This comprehensive field study by Willmana et al., "Traders, Managers, and Loss Aversion in Investment Banking," examines how loss aversion manifests among traders and managers in four major investment banks. The study integrates insights from agency theory and prospect theory to explore the risk management strategies employed by both groups. █  Background and Theory Two critical theories, agency theory, and prospect theory, help explain how individuals within these institutions make decisions. Agency Theory: This theory deals with the relationship between principals (e.g., shareholders) and agents (e.g., managers and traders). It posits that agents employed to make decisions on behalf of principals may not always act in the principal's best interests due to differing goals and risk appetites. For instance, if you're a trader, you might engage in riskier behavior to maximize your bonuses. At the same time, your managers might prioritize stability and risk mitigation to protect their positions. Prospect Theory: Introduced by Daniel Kahneman and Amos Tversky, prospect theory describes how people choose between probabilistic alternatives that involve risk. It highlights two main biases: loss aversion and the framing effect. Loss aversion is the tendency to prefer avoiding losses over acquiring equivalent gains, and the framing effect shows that the way a problem or decision is presented can significantly impact choices. █  Explanation of Risk Aversion and Loss Aversion Risk Aversion: It is the preference for certainty over uncertainty. In the context of trading, risk-averse individuals prefer investments with lower risk and potentially lower returns over those with higher risk and higher potential returns. Loss Aversion: A central component of prospect theory, loss aversion suggests that the pain of losing is psychologically about twice as powerful as the pleasure of gaining. This bias can lead traders to hold onto losing positions longer than is rational and to sell winning positions too quickly, seeking to lock in gains and avoid realizing losses. █  Methodology The study by Willmana et al. utilizes a qualitative research approach, focusing on detailed interviews to gather insights into the behaviors and attitudes of traders and managers in investment banking. The researchers interviewed 118 traders and managers across four leading investment banks. These interviews included questions about motivations, emotions, trading strategies, organizational culture, and experiences with gains and losses. Additionally, 10 senior managers participated in the management interview section, providing a broader perspective on organizational practices and controls. █  Key Findings Managers are primarily concerned with mitigating losses rather than maximizing gains. Position holders tend to intervene more aggressively when traders experience losses, emphasizing the need to cut losing positions quickly to prevent further deterioration. The study found that managers used veto power primarily to reduce risk. As one manager said, "My veto works only one way—to reduce risk." Managers frequently highlighted the importance of controlling downside risk. One manager noted, "My role as a manager is to cover the downside rather than the upside. I try to enforce the discipline of cutting losses rather than pushing them to add to positions." ⚪ Differences in Risk Management Strategies The study revealed traders often operate with significant autonomy and tend to take on more risk, particularly in pursuing higher bonuses. Conversely, managers focus on ensuring that risk levels remain within acceptable limits, stepping in mainly to curtail losses. The research showed that managers are generally ex-traders who understand the technical complexities of trading. However, their managerial role shifts their focus towards risk containment. One trader mentioned, "95% of the time, managers are traders who have been in the business a long time and they have no real management skills." Traders have a strong ethos of autonomy, with managers intervening only when necessary. A manager noted, "I consider I have a veto on any positions my traders take, even when they are within their limits. But, to give you an idea, I think last year I used it once, the year before twice, and this year, not at all." ⚪ Impact of Bonus Structures and Incentive Systems The study found that these systems often drive traders to take on higher risks to achieve performance targets, especially as the year-end approaches. Over half of the traders in the sample earned over £300,000 per annum, with bonuses constituting a significant portion of their total compensation. The direction of risk-bearing behavior varied among traders toward the end of the compensation year. Some traders became risk-averse to protect their gains, while others increased their risk tolerance. One trader stated, "Risk tolerance becomes infinite at the end of the year because we don't have any personal exposure to our results in the last couple of months; we can almost become less discriminating in the trades we put on." █ Practical Implications for Retail Traders Retail traders can draw several practical implications from the findings of this study: ⚪ Awareness of Loss Aversion: Retail traders should recognize their own tendencies towards loss aversion and implement strategies to manage this bias. This might include setting predefined stop-loss limits and adhering to them strictly to avoid letting losses run. ⚪ Structured Risk Management: Just as investment bank managers focus on controlling downside risk, retail traders should establish clear risk management frameworks. This includes setting risk limits for each trade and not deviating from these limits based on emotional responses. ⚪ Balanced Focus on Gains and Losses: While avoiding losses is crucial, retail traders should also develop strategies to maximize gains. This involves identifying opportunities for larger positions when the probability of success is high, without succumbing to undue caution after achieving small gains. ⚪ Bonus and Reward Systems: Retail traders should design their own reward systems to align with their trading goals. For instance, setting incremental performance targets and rewarding themselves upon achieving these can help maintain motivation and discipline. ⚪ Continuous Learning and Adaptation: Managers in investment banks often act as mentors, providing guidance based on their experience. Retail traders should seek out mentorship or peer support to learn from more experienced traders. Participating in trading communities and continuous education can help improve trading performance over time. █ Applying Knowledge from the Study Retail traders can apply the knowledge derived from this study in several ways: ⚪ Develop a Trading Plan: Create a comprehensive trading plan that includes risk management rules, entry and exit strategies, and guidelines for handling losses. Regularly review and update this plan based on trading performance and market conditions. ⚪ Implement Risk Controls: Use tools such as stop-loss orders, position sizing strategies, and diversification to manage risk effectively. Ensure that these controls are strictly followed to prevent emotional trading decisions. ⚪ Monitor Performance and Adjust: Regularly review trading performance to identify patterns of loss aversion or risk-seeking behavior. Use this analysis to adjust trading strategies and improve decision-making processes. ⚪ Seek Continuous Improvement: Engage in ongoing education through books, courses, and trading simulations. Stay updated on market trends and behavioral finance insights to refine trading strategies continuously. By understanding the dynamics of loss aversion and the importance of structured risk management, retail traders can enhance their trading discipline and improve their chances of long-term success. █  Reference Willman, P., Fenton-O’Creevy, M., Nicholson, N., & Soane, E. (2002). Traders, managers and loss aversion in investment banking: A field study. Accounting, Organizations and Society, 27(1-2), 85-98. doi:10.1016/S0361-3682(01)00029-0. ----------------- Disclaimer This is an educational study for entertainment purposes only. The information in my Scripts/Indicators/Ideas/Algos/Systems does not constitute financial advice or a solicitation to buy or sell securities. I will not accept liability for any loss or damage, including without limitation any loss of profit, which may arise directly or indirectly from the use of or reliance on such information. All investments involve risk, and the past performance of a security, industry, sector, market, financial product, trading strategy, backtest, or individual's trading does not guarantee future results or returns. Investors are fully responsible for any investment decisions they make. Such decisions should be based solely on evaluating their financial circumstances, investment objectives, risk tolerance, and liquidity needs. My Scripts/Indicators/Ideas/Algos/Systems are only for educational purposes!
OANDA:BCOUSDEducation
by Zeiierman
A Trading Plan MUST Include A Sound Risk Management StrategyOne of the biggest mistakes a trader can make is to neglect the aspect of risk management. In this video, I divulge the most pivotal lesson I’ve gleaned from my experience in trading. During the initial years of my trading journey, I disregarded the importance of risk management, which proved to be detrimental in a significant way. The watershed moment of my trading career came after incurring substantial financial losses. This experience was a stark revelation of the imperative nature of a robust risk management strategy for trading success. It was an excruciatingly costly lesson. Should you have bypassed dedicating time to understand risk management, you might be on the brink of a potential calamity. By watching this video, I hope you can sidestep the blunder I once made in the nascent stage of my trading endeavors.
Education
by fxtraderanthony
Gold Jumps As Credit Suisse Bank Sparks Contagion Fears Gold prices extended gains on Wednesday as risk aversion hit markets amid fears the U.S. banking crisis spreading into the Old Continent, with Credit Suisse shares plummeting. Against this backdrop, global government yields have fallen sharply, favoring gold's advance. At the time of writing, the spot price, XAU/USD, is trading at the $1,935 area, up 1.7% on the day and accumulating more than a $100 gain from last week's low. Following the Silicon Valley Bank (SVB) collapse in the United States, fears were reignited on Wednesday after shares of Credit Suisse – Switzerland's second-largest bank – lost nearly 30% in Zurich. The slump came after the top shareholder said it could not provide further support. Trading was temporarily halted in Credit Suisse and other European banks, such as France's Société Générale and Italy's UniCredit. The yellow metal benefited, given its safe-haven status and was further underpinned by government yields falling on both sides of the Atlantic. U.S. 10-year note rate dropped over 7% to 3.43%, while the 10-year German Bund yield tumbled 13% to 2.13% on Wednesday. From a technical standpoint, the XAU/USD pair holds the short-term bullish perspective according to indicators on the daily chart, while the price continues to print higher highs above its main moving averages. Still, the RSI is approaching overbought territory, suggesting a corrective move might occur before another leg higher. On the upside, if the yellow metal advances above $1,935, the following resistance levels could be faced at the February high of $1,960 and the $2,000 area. On the flip side, short-term supports are seen at the $1,890 zone, followed by the 20- and 100-day SMAs at $1,845 and $1,815, respectively.
OANDA:XAUUSD
by Alex_Boltyan_FXAnalyst
Rising real yields are driving the stock market selloffInflation expectations (T10YIE, red line) have been on the rise since Q1 2020. Nominal yields (US10Y, turquoise line) bottomed as gold (XAUUSD, yellow line) topped in Aug 2020 after the Fed marked the end of stimulus expansion, shifting speculation to timing the eventual tightening. However, stocks (ESH2022, S&P 500 future, purple line) did not turn lower until Dec'21-Jan'22 as *real* interest rates (DFII10, orange line) started to rise. This is as the markets began to believe the Fed's hawkish rhetoric, so inflation expectations came down while nominal yields pushed upward. Higher real yields drive portfolio de-risking. Investors are able to achieve a comparatively lower risk profile given a level of expected return, so assets toward the "risk-on" side of the spectrum suffer relative to anti-risk alternatives.
FX_IDC:XAUUSD
by IlyaSpivak
1
Because people think a pyramid scheme is a safe havenWorldwide investors eager to finance the US programs are making a comeback? I think it's mostly short term. The USD rally won't go far imo. Patterns used to work, but now they don't. Why? I might have the explanation: It's as if casuals heard about GME early on. Melvin capital liquidation price was at say $125. Casuals buy at 40 then get excited and sell at 50, either when they see a green candle, or when the prices has a small pullback getting close to their entry: RISK AVERSION = they do not want to give back profit. Add to that all the retail indicator traders fighting the trend. And the price would never have reached Melvin liquidation, and there would have been no enormous short squeeze. The fact that few mainstream people heard about this allowed it to keep going up. Seriously watch this: Now that they FOMO'ed at the top and the price is below their entries, there is a long prolonged bear market as they have LOSS AVERSION and are desperate for the price to get back to their entry so they can breakeven. In FX not sure how the hedgers trade they don't do all of this do they? They're just dodging fluctuations not trying to profit from them. I do not have a clear picture of who trades it all, but I know that some people are buying the usdollar. And they're all the same regardless of who they are. That's it, that's the idea. An avalanche. Works everytime 60% of the time (not factual numbers, I provide no customer service). People that shorted the USD predicting inflation (wow what an edge you figured that out yourself?) because "muh fundamentals" are going to fuel this rally because "muh risk & loss aversion" is greater than "muh fundamentals" :) They would rather make $10 or even zero than risk losing $1000 (after being in the green) for a chance of making $500,000.
Short
by MrRenev
12
The weak hands have been shaken out. Prepare for the explosion.Price barely dips and I'm seing a truckload of short ideas, and bears calling for zero. "This is it coinbase is exit scamming". They will never learn. It's always the same story. I always hear the same things over and over, endlessly. Not trying to brag, this is why I knew for a fact this 2019 pump was most definitely NOT the "return of the bull market". The relieved risk averse & loss averse bad unskilled traders sighed in relief and laughed at me for "denying the bull market which is clearly back". And then the high winrate average down gamblers sold at the bottom when the price went back down. And missed the bull market. And now that: - The LOSS AVERSE bears are desperate and close to vomiting everything - The RISK AVERSE bulls that recently bought and were preventing the price from going up got wiped out, especially the high leverage ones (doesn't take a lot of capital to affect the market if they all go 10X) Well not much stopping the price now is there? We also are seeing, just like in Q4 2017 & June 2019, the braggers. They all arrive at the same time. When we enter euphoria. I go "Let me guess your goal is to make 10 million and retire?" "Yes how did you know?" Wow didn't see that coming... They are all clones. They brag, having no idea how close they came from being another suicide story. UK polls... what was it again? 1/3 of citizens said they missed the boat on crypto? I've heard that so many times. And many end breaking. "I am watching sidelines". 2 months later "ALL IN". The market finds their breaking point, when regret gets too intense and they can't take it anymore. I remember a bragger that reached the bitmex leaderboard, that didn't last long... They always seem to mistake luck for genius and double down. No one ever goes "ok I made my money I am taking my profits and leaving the table" naaah they always come back and lose it all. It's all so repetitive. Regret, Fomo, Braggers (I am the master a legend I made that much), Hopers (I will scalp my way to making 10 million and becoming a parasite to society), and the constant loss aversion & risk aversion. To imagine there are weirdos out there that buy at 10k then the price makes it to 60 and they leave a stop at 10k "free trade". Makes so much sense. Literally this means they are willing to sell when down 85%. They'd risk the first 55,000 but certainly not the last 10! It really all is about NOT LOSING. Prey instinct. Makes sense, losing = dying. I prefer to be the hunter and focus on WINNING (BIG) rather. Muskrats, toads and crayfish do not interest me, I'm going for the big game. And if it gets away, I'll hunt another one and will have forgotten about "my loss" the next day. This price man it spent 2 months around my entry zzzz. I am so sick of these useless regulators I could have just been in my position since 12k and just progressively added if they did not ban crypto to "help". Useless hindsight clowns as usual. But after a long 2 month wait this I think is it, finally. Lots of chopiness like a mini bear market, ending in wiping out the weak hands holding the price down. Now we just need for bears to capitulate and braggers to do their magic. Especially 18 year old Erik Finmans that give investing seminars. Braggers are like early victims of a ponzi, they are the ones that get all excited and scream "I LOOOOOOOOVE BITCONNNECCCT", attracting new victims. I am very confident Bitcoin skyrockets to 250k. Possibly by june even. I bought more on this dip.
INDEX:BTCUSDLong
by MrRenev
12
Irrational behavior: Victim mentality, risk & loss aversionPeople that call themselves neuro-economists make all sorts of experiments, the ABCD questions are from Kahneman and Tversky from 40 years ago, I found these examples on stanford website. There was another similar study, or series of studies in Lyon, France. They got people to speculate and when they dangled the carrot in front of them they basically created Bitcoin: Some researchers looked at institution traders and found the ones taking the most risks had the highest male hormones. I wonder how it is for the girls? They sometimes take big risks I'm sure, and let's ignore the dumb gambling mentality ones that's not who I mean. Maybe they rather get into bonds and stick to small risks safe returns? Any degen out there? All the big losing (famous) rogue traders are boys, so maybe there is something here, still I think the main reason is they hold bags and add to them. Nick Lesson is a legend, a superhero, he turned a 20 thousand loss into an 800 million one, why aren't people fighting to hire him? Can I hire the guy? Going to take his valuable advice and do the opposite. 20k into 800,000k! Another legend is Karen the supertrader, I don't think her high T made her lose millions. Just loss aversion and being a complete psychopath. I guess at some point it's not risk taking but loss aversion, technically/logically they are taking enormous risks out of fear of losing, but they are not logical so... Markets have been around 4000 years and derivatives at least 10,000. And people still don't get why. It is a place for risk averse persons yes, but they are the end user, the "client", the markets help out people get rid of their risk at a price. Once again, 0 logic: It makes absolutely no sense that risk-averse and loss-averse players would try to make money in the markets. The subject is fascinating to me, I have this impression I have dropped on an alien planet where nothing makes sense and it feels so fantastic, like I am in a Star Trek episode. I think (I am quite certain of it) we can see this in full display with Bitcoin: These are not winning odds... Also notice all these Bitcoin baghodlers that like to talk a lot in hindsight NEVER tell anyone what their position is and NEVER have an idea on their profile. Emotional (illogical) brain and low hormones (even moar risk aversion) is a bad combination... You look at some people that lied to police to avoid losing their job or reputation and that would never have lied to get the job in the first place... The majority always runs away from profit when it is objectively much better, and instead chooses the much smaller but guaranteed reward. And the majority will choose taking huge not worth it risks to avoid a loss, rather than just take a small loss and be on their merry way. I find it stunning than the majority of people could literally have the holy grail, and they would still mess it up because they are scared. This game (obviously) is not about changing and managing your emotions. Or autists would all be billionaires it's so obvious... Guess who these "it's easy it's all about emotions" ads are targetted to? What it takes is thousands of hours of screen time, practice, backtesting, reading, number crunching. The emotion stuff everyone learns about at the start is just a way to weed out the ones not meant to play this game. There are plenty other activities out there. As far as I am concerned if an individual has it deeply rooted in their subconscious this "bug", there is no way to rewire the brain this deep. For the (13% according to these questions lol) that have the ability to compete, it's a matter of spending the time getting good and rub hands when noobs cheerfully pile in, in a bubble or when trading gets popular in general (and then they create bubbles). The predators can abuse these cheerful greedy noobs and have a huge feast. When they baghold for ages or keep holding the price down it's less interesting though. But part of me wants to have this image of stomping noobs. Well Bitcoin was bagheld more than usual because they saw it go up so many times before (still super irrational and still sold the bottom for the most part, somehow XD), but hey they are pumping the S&P like the Nasdaq in 2000 right? The noobs are also going to sell GME fast right? After buying it up fast. (Sad I can't short). I don't think this info is really useful to be honest, the people without the illogical bug won't get much out of it (it's cool to know where the illogical as regulators say "inefficient" patterns come from), the people with the illogical bug will be in denial and convinced they are part of the winners. Is this anything more than an ego stroke and having a laugh while belittling illogical risk averse people? Well I think it's interesting, and plenty of scientists do too.
Education
by MrRenev
The Top 5 Fundamental Currency DriversThe goal of this article is to understand what really moves the markets. 1. Central Bank Decisions These organizations manage the countries monetary system and policy. They control the countries money supply and operate through specific mandates. Stable inflation is a common mandate applicable to the majority of central banks. Interest rates are a crucial tool used by them to reach their mandates. Changes in interest rates have a tremendous impact on the Forex markets. Rate decisions from central banks can cause lots of volatility. They’re also great opportunities for making money. For this reason, interest rates should be something all Forex traders monitor. Good to start here as a beginner in fundamentals. 2. Economic News Releases News releases like: GDP Gross Domestic Product CPI Consumer Price Index Employment Data like average earnings, NFP, and unemployment Rate could have a huge impact on interest rate decisions and traders always have expectations on these releases if it differs from it market reacts. 3. Geopolitical Events Politicians are an important part of the market moves. Investors seek stable economies, also tax decisions and fiscal policy decisions are drivers of the market. 4. Natural Disasters Things like earthquakes or tsunamis can negatively affect a country’s economy. 5. Intermarket Movements Equities Bonds and Commodities are all connected to each other so one spike in an asset class could lead to moves in the other asset classes too. Things like risk aversion and risk appetite are a daily play on the markets because the risk is a great factor of daily currency moves. Safe haven bids are bonds Japanese yen and Swiss franc in a market crash these assets have money inflows. Hope you enjoyed this small article for more information visit my website vitezabraham.com. Have a Nice day! Vitez
Education
by Vitezabraham
Weekly Market recap 5: Still at the crossroads of the sentimentsWhere we are, and "if-thens" Since the last week, the sentiment hasn't changed too dramatically, looking at the technical picture of DXY, I still see it as a range in a medium-term. Although, DXY crept down, closer to the "orange" line of defence (see the orange long-term trendline). Along with the stabilizing S&P500 index (The stock index has had the classic negative correlation with the DXY since the crash in March), DXY gives me reasons to have a short-term bearish bias, hence likely transition to risk appetite. If DXY closes below the orange trendline (around 92.2), it will be a strong sign of the beginning of a bearish market in USD. The last line of defence is around 91.7 (Sep 1 low). On the contrary, if DXY manages to close above the long-term trendline of the downtrend which started in March, I'd consider buying USD. I would need additional confirmations of course, as it is still a range market. Such confirmations may include reaching 94.00 level. The highlighters of sentiments A)If we bet on risk Say DXY would continue the downtrend, and we enter the risk appetite sentiment. What do we short USD against? Let's look at the most common risk duet of AUD and NZD (see the AUDNZD chart). If you zoom out a bit, the first thing you notice is the range, gradually descending channel. It tells us that AUD has been weaker in the long term and it's better to be long NZD in general. MA(100) is playing the role of the "mean" here. For short-term trading, it's nice to take into account how far the pair is from the mean. A good AUD-short would be after the candle reversal pattern (I marked the last one with the grey area) was formed near the upper border of the channel. Generally speaking, the further AUDNZD from the mean, the clearer it is what to buy to ride the risk appetite sentiment. B) If we bet on safe-havens Look at the long-term chart of USDJPY. USD has been pressured since 2015. Therefore I'd prefer going long JPY if risk aversion activates. However, I may still consider buying USD if USDJPY breaks the 5 years descending trendline. Summing up Eventually, follow the hints of DXY and then choose the most diverged currencies by their relative strength or weakness. For example, if risk aversion starts, I'd focus on shorting the weakest one (most likely USD) against relatively strongest one (let's say NZD). Adjust it to the short-term sentiments of European currencies and CAD, and you have a road map to find numerous additional setups.
by Cherry94
Weekly Market recap 4: We need patience hereThe glimpse of optimism The market got back to the explicit state of the "certain uncertainty". You can see that the H&S pattern in DXY failed to push the USD higher. DXY couldn't even hold above the key 94.00 level for a considerable time. The sentiment shifted from risk aversion to some hints of optimism as S&P500 managed to recover from the correction and even came close to all-time highs. Brent oil made a fake breakout of the 39.00 level showing signs of strengths as it's still consolidating near the key level 44.00. AUD has been the weakest risk-asset currency recently. Even though it showed attempts to resume the long-term uptrend as optimism grew. When things get blur For the last week, the market has been digesting the gains from optimism as S&P500 and AUDUSD pulled back while DXY recovered from recent losses. Brent oil behaves remarkably, however. I cannot really see any obvious relationship of it with stocks and currencies for now; it's just consolidating. The market state is pretty vague at this point. I assume the trigger to the new wave of volatility may come from Brent. The closure above the 44.00 level can hint the bearish sentiment for DXY and attempts to advance below 39.00 can push the DXY higher. If it's too gloomy, get rid of AUD Among risk assets, AUD has been the weakest recently. On the AUDUSD chart, you can see the failed attempt to go above MA(50). If it breaks 0.7000, the chances are high that the long-term uptrend is finished. For some reason, AUD pairs have had quite a smooth price action recently, which implies the inflow of liquidity or the general agreement on the direction of the currency. Looks like it is "in-play". I would consider shorting AUD if the global sentiment shifts more towards safe-heavens. All in all, it's a good time to be patient now and look for the confirmation signs of the sentiment shift. The technical picture tells that currencies have been in the range for a considerable time already. The longer it stays like this, the more interesting the proceeding trend will be. The most important here is patience. Everything can change very quickly, and traders need to be ready for this.
by Cherry94
NASDAQ topping pattern -- danger 2nd WAVE COVID & electionTVC:NDX All three confirmations for price to correct below neckline of "incined" Head and Shoulders -- Growing concern over fresh lockdowns hit travel sector hard while banks and oil price also suffer RSI nearing overbought 65 to 70 -- also on Right Shoulder The riots and unprecedented uncertainty concerning many national elections from NZ to USA coming in OCT and NOV into year end 2020 Look for first 4H red candle below the high close of the right shoulder to Scale into a Short position in NDX and other high Beta risk assets like FX:AUDUSD and NZDCHF and GBPCHF
TVC:NDQShort
by Outside_The_Box_NZ
2
AUDJPY Possible Bearish Continuation Price floating below the long period SMA 200 (red) and trading under the weekly and daily pivot point already indicting bearish sentiment for this pair. Comdolls aren't doing well and the risk bets are not good so far which we can see from the price action in most of comdolls related pairs like au,uc,nu. Yen and dollar ruling over the market this week so far which let me think that this pair might drop further lower if market mode are in risk off.
Short
by Anatta0
2