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Trading 101

As Stock Market Peaks, These are the Best Alternatives for Growth

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The stock market’s epic rally may have run its course, according to Morgan Stanley. The bank has warned that U.S. equities have already peaked for the year, which means investors shouldn’t expect a return to record levels anytime soon. The return of volatility certainly corroborates their view. Rising interest rates and an escalating trade war also signal the possible end of the Trump reflation trade – at least, for now.

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Although a massive correction hasn’t been priced into Morgan’s forecast, investors should be considering ways to diversify away from stocks if they haven’t done so already.

The End of the Meltup

After a blistering start to 2018, stocks have struggled to regain their glory since an early-February rout wiped $5.2 trillion from global markets. Although markets have recovered, volatility appears to be a mainstay for the first time in at least two years.

The CBOE VIX, Wall Street’s preferred measure of volatility, has traded between 15 and 20 over the past month. That’s right around the historical average. The VIX spiked by the most on record in early February, ending a multi-year stretch where it traded in the single and low double-digits – basically, around half the historic average.

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Michael Wilson, chief U.S. equity strategist at Morgan Stanley, explains what this means:

“We think January was the top for sentiment, if not prices, for the year. With volatility moving higher we think it will be difficult for institutional clients to gross up to or beyond the January peaks,” he said in a weekly note on Monday, as reported by MarketWatch. “Retail sentiment indicators also look to have peaked in January and we do not see anything on the horizon to get retail investors more bullish than they were following a tax cut.”

For many, the end of the meltup isn’t a bad thing. Stocks have been richly valued for a long time, with much of the gains spurred on by hope of a Trump-inspired economic boom. Although the economy has performed better under the Trump administration, stock traders (i.e., the institutions) are now looking for more tangible evidence of a stronger recovery. Depending on who you ask, that might not materialize anytime soon.

Although Trump succeeded in lowering taxes, the cuts weren’t accompanied by an equal reduction in government spending. What they did do was spur on higher inflation expectations, which appears to be translating into actual price growth. In this environment, rising interest rates could spell trouble for indebted consumers who have already reduced their spending (as evidenced by the recent slump in retail sales).

What This Means for Investors

With U.S. stocks losing their luster, investors should already be considering ways to rebalance their portfolios. Given the current economic and political climate, the best vehicles for diversification are gold, cryptocurrencies and emerging markets.

Gold

The original safe haven is a natural bet in the current environment of rising interest rates and political instability. Although gold hasn’t made any news-shattering headlines recently, it has comfortably traded above $1,300 all year long. The signals we’ve gotten from the Federal Reserve is that interest rates will continue rising as inflation approaches and eventually crosses the 2% target. (Depending on which inflation measure you use, this has already happened.)

Interestingly, gold outperformed several major asset classes in 2017. As the following chart illustrates, silver is another commodity worth considering in the current economic climate.

Source: Mining.com.

Precious metals can be bought and stored outright or collected through various gold miner ETFs. With bullion trading well below record levels, the asset and its derivatives can still be had for cheap.

Cryptocurrencies

2018 has been a roller coaster for crypto investors, but those of use who’ve been in the market longer than 15 months know that volatility is nothing new. Recent price trends indicate there will be no V shaped rally, but that shouldn’t deter long-term investors (“hodlers”) from capitalizing on the cyclical downturn.

Market participants seem to agree that the vast majority of cryptocurrencies offer no long-term investment value (the phrase “shitcoins” is thrown around a lot to refer to these assets). But the cream of the crop certainly has a lot to offer. Bitcoin, Ethereum, Litecoin and Ripple seem to have the strongest fundamental indicators on their side. Stellar Lumens, bitcoin cash, OmiseGo and Zcash are also on the author’s watchlist of potential long-term gainers.

Although readers of Hacked don’t need a lot of convincing to buy more cryptocurrency, higher inflation could certainly make this asset class more attractive. As we mentioned above, higher inflation leads investors to consider other storehouses of value for protection. Bitcoin has been described by many as a storehouse of value that, despite volatility, is uncorrelated to other market developments.

Of course, there’s no guarantee bitcoin will rise because of inflation. We certainly aren’t speculating because of any historical precedent (inflation has been non-existent for much of bitcoin’s lifespan). But it’s certainly something to monitor given that bitcoin has behaved more like a commodity than a currency throughout its short history.

Emerging Markets

2017 was the year of the synchronized global recovery, but nowhere was this more apparent than in emerging markets. Emerging market funds outperformed Wall Street last year and are likely to do so again in the future.

If chasing growth is your strategy, then emerging markets are the first place to look. The International Monetary Fund (IMF) has forecasted emerging market growth of 4.9% this year and 5% in 2019. India is expected to top the list with a whopping GDP growth of 7.4% and 7.8% each year. Even Russia and Brazil – two countries hammered by the commodity downturn – are forecast to return to growth.

India’s economic potential has sent its small-cap stocks through the roof. In 2017, the Market Vectors India Small Cap ETF surged 65.4%. The iShares MSCI India Small Cap added 60.5%.

And say what you will about China’s economic slowdown, but its technology funds are soaring. The Guggenheim China Technology ETF returned 74% in 2017, while the KraneShares CSI China Internet ETF added 69.6%.

These are just some of the asset classes investors should be considering amid the latest downturn in developed market equities. Of course, this strategy depends largely on the path of inflation and corresponding monetary policy. The indicators we have now point to more robust price growth in the near future, which will require a gradual re-think of monetary policy in the Western hemisphere.

Disclaimer: The author owns bitcoin, Ethereum and other cryptocurrencies. He holds investment positions in the coins, but does not engage in short-term or day-trading.

Featured image courtesy of Shutterstock.

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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4.5 stars on average, based on 335 rated postsSam Bourgi is Chief Editor to Hacked.com, where he specializes in cryptocurrency, economics and the broader financial markets. Sam has nearly eight years of progressive experience as an analyst, writer and financial market commentator where he has contributed to the world's foremost newscasts.




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Trading 101

Trading 101: How to Use Fibonacci Numbers in Trading

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Fibonacci trading

Fibonacci is an extremely popular tool to use among all types of traders, be it professionals, amateurs, stock traders or crypto traders. It works in all markets and serves many different purposes for traders, far beyond just finding good entries and exits.

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Drawing Fibonacci retracements

To get things straight, let’s first say that there are no hard rules regarding how to use the various Fibonacci tools. Keep in mind that Fibonacci levels are based on percentages, meaning that you do have some flexibility when drawing them.

The first thing you need to do to use the Fibonacci retracement tool is to identify a certain price movement between two points on the chart, A and B, to measure. Both of these points should be tops or bottoms in the chart, also known as swing highs and lows, with price moving in a clearly defined trend between them, as in the examples below:

Fibonacci chart

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What you do next is simply to find the Fibonacci retracement tool in your charting platform, select point A and drag the tool to point B.

In TradingView, which is the platform I have used here, the Fibonacci retracement tool is found in the menu to the right of the chart. Click on the third button from the top (the pitchfork button) and you should be able to see it among many other drawing tools.

Once you have found the market top and bottom, the next step is to identify your retracement point, which we will call point C. This is the point where the reversal/retracement ends, and price resumes to the previous trend direction (as between point A and B).

Fibonacci as support/resistance levels

One important thing to realize here is that price movement don’t necessarily reverse at a Fibonacci level. However, the levels often serve as support and resistance levels, where price could potentially reverse. This can clearly be seen in the screenshot below where we have highlighted some points where Fibonacci levels acted as support and resistance, as the price resumed to its original trend.

Fibonacci retracement

With that said, the main use of Fibonacci retracements is probably as an entry indicator. For example, a trader could use the Fibonacci levels as re-entry levels during pullbacks once we have left point C and the price is moving in its original direction again.

Fibonacci as profit targets

Another important use for Fibonacci levels is for placing profit targets when swing trading. We are then talking about Fibonacci extensions rather than retracements.

The rules here vary wildly from trader to trader, but as a start, it is generally agreed that a 38.2 retracement often ends at a 138 Fibonacci extension. Likewise, a 50, 61.8, or 78.6 level Fibonacci retracement will often go to the 161 level extension.

The basic idea behind all uses of Fibonacci tools is the notion that a countertrend movement is likely to return back to the overarching trend in the market. In this context, the Fibonacci numbers can be helpful as a tool to add confluence to our initial bias of where the trend will resume, for example in combination with major support & resistance levels or other technical indicators. This way, we take a much more careful approach to the use of Fibonacci levels while we still make sure that we are always aware of where the levels are and thus where price reactions can be expected.

Featured image from Pixabay.

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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4.3 stars on average, based on 28 rated postsFredrik Vold is an entrepreneur, financial writer, and technical analysis enthusiast. He has been working and traveling in Asia for several years, and is currently based out of Beijing, China. He closely follows stocks, forex and cryptocurrencies, and is always looking for the next great alternative investment opportunity.




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Trading 101

A Discretionary Approach to Trend Following Trading

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Trend following trader

I have previously written about trend following trading and shared a systematic trend following strategy you can try. This time, I wanted to go over a discretionary strategy based on those same sound principles that make up the concept of trend following trading.

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Trend following itself is a solid approach to trading on many timeframes, and it is one of very few simple trading strategies that can be applied profitably over longer time periods. The validity of trend following has even been confirmed by research from large banks like in this CitiBank report from 2015.

As evidence of the popularity of this trading style, the report states that trend following strategies are “without a doubt the most popular systematic rule-based strategies used…” Further, it estimates that at least 85% of returns by so-called Commodity Trading Advisors (CTAs) can be explained by simple trend following strategies.

Discretionary vs. Systematic Trading

As you may already know, traders and trading strategies can be divided into two groups; discretionary and systematic traders. You should also make a choice as to which category you feel you belong in. Some people like to have fixed rules that they can follow in the same way every time (systematic traders), while others believe they have an ability to “read” market conditions and get a feel for what works and what doesn’t (discretionary traders).

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There is no right or wrong as to which one is better. However, it is a fact that many of the big and well-known trend followers and CTA’s stick to their systems and rarely make any adjustments to them.

Let’s take a look at the strategy.

Trading Strategy

The technical indicators you need for this strategy are:

  • 20 and 200 Moving Average
  • Average True Range (ATR)
    • The “Average True Range Trailing Stops” indicator in TradingView is a good choice (set to 14, 2)

If the 200 Moving Average is pointing up and the price is above it, we have an uptrend.

When it is determined that we have an uptrend, wait for the price to test support at the 20 Moving Average line.

If price hits this line and then bounces off twice, enter your buy order the third time it hits.

Set a trailing stop-loss 2 ATR from your entry. Unless you have access to more advanced trading software, you will have to adjust this stop level as the ATR moves upward. It’s not that much work though, especially not if you are trading on higher timeframes like the 4H or 1D.

Profit target: None. This may be shocking to some, but the approach taken by most trend followers is to hold on to the trade until the trailing stop is triggered. After all, why would you want to limit your profit potential when your goal is to ride the trend for as long as possible?

Lastly, in terms of risk management, I like to size my position so that I risk only 1% of my trading account on each trade. 2% is another common number to use. However, trend following strategies typically has lower win rates but with higher reward:risk ratios, so I like to leave some room for error.

The reason why I call this trading strategy discretionary is because it doesn’t have any hard rules. You can modify and adjust it as you want, for example by waiting for some kind of confirmation before you enter your order. You may also try to add for example the 50 MA and use as a trailing stop instead of the ATR line. And you can play around with the ATR settings to find an optimal setting for the market you are trading.

Which markets to trade?

The most important factor here is that you have to look for markets that are clearly trending. This is where your ability to “read” markets really comes to use. Check if the market has had a tendency to trend in the past. Although the 200 Moving Average is sloping up, it could still be a choppy market without clear direction.

As mentioned at the top of the article, the biggest players among trend followers are the CTAs typically trading commodity futures and currencies. However, it can also work well on stocks and probably cryptocurrencies as well.

Bring up your charts and do some visual backtesting so you can get a feel for how it performs in the market you are trading before dipping your toe in the water.

Featured image from Pixabay.

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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4.3 stars on average, based on 28 rated postsFredrik Vold is an entrepreneur, financial writer, and technical analysis enthusiast. He has been working and traveling in Asia for several years, and is currently based out of Beijing, China. He closely follows stocks, forex and cryptocurrencies, and is always looking for the next great alternative investment opportunity.




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Trading 101

A Long-term Investment Strategy with the 200-Day Moving Average

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Moving average

If you are looking for a way to be invested in the stock market during good times, but at the same time have some protection in place for when the next crisis hits, then look no further. Trend-following strategies should then be your friend, and I will here share a simple yet very effective such strategy designed for long-term capital growth with low volatility.

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Aside from my crypto investments, I have long been looking for a low-maintenance investment strategy for the stock market. As I don’t have much time for short-term trading anymore, I am mainly looking to make long-term investments that I can simply buy and forget about.

However, I still want to be protected in case we hit another crisis or enter into a larger bear market. In my opinion, there are lots of risks on the horizon for the financial market. Still, a bull market is a bull market and any good trend-following investor should be invested in it regardless of his own feelings or opinions about where the market should be heading.

The 200-day moving average

The 200-day moving average is one of the most used technical indicators out there, and possibly the most popular moving average, particularly among US stock market investors.

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Because of its popularity, as well as being featured in the media whenever the market crosses it, it works in many ways as a self-fulfilling prophecy. The 200-day moving average has also been in the headlines over the last few weeks after the plunge we saw in global stock markets in the beginning of February. The line then acted as support for the S&P, but a break below it would have been a significant event that many investors would take as the beginning of a larger bear market.

To illustrate this point, let’s take a look at the table below from Bloomberg. It shows six bear markets where losses exceed 20%, broken down by the loss before the market came down through the 200-day moving average and after it crossed the line.

200-day moving average

The question now becomes if you can use the 200-day moving average as an indicator to follow in your own trading. You would buy when the market closes above the 200-day moving average and sell when it closes below.

The answer to that is that it definitely could be used to ensure you stay invested during prolonged bull markets, while avoiding deep corrections and market crashes. However, a problem with all trend-following strategies is what’s known as whipsaws – those times when the trend appears to start in one direction just as it turns again into the opposite direction. This is what kills the profitability of most trend-following trading systems.

Dealing with whipsaws

One strategy for overcoming the problem with whipsaws is to wait a certain number of days after the moving average line has been crossed before you enter your trade. This way, you would filter out a lot of the choppy price movements during times when the market is not showing any clear direction.

For example, one strategy that often is proposed is to buy only when the market has closed above the 200-day moving average line for 5 consecutive days. Similarly, you would sell when the market has closed below the same line for 5 consecutive days. 5 days seems to be a popular choice as it filters out most of the choppy price movements that are happening right around the moving average line.

Depending on what market you test this strategy on, you may find that the absolute returns would have been higher with a simple buy-and-hold system. However, pay attention to what happened during market crashes like the one we had in 2008. If you apply it to the SPY ETF (the ETF that tracks the S&P500), you will see that the strategy then went to cash and you would have been protected against further downside. In addition, keep in mind that nobody knows how deep the next crash will be, all we know is that sooner or later it will come.

Personally, I would rather sacrifice a little bit of my returns for an insurance against a completely unknown risk to the downside. In my view, this strategy is perfect for long-term capital growth while keeping volatility very low and giving peace of mind to the investor during times of market turmoil.

Featured image from Pixabay.

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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4.3 stars on average, based on 28 rated postsFredrik Vold is an entrepreneur, financial writer, and technical analysis enthusiast. He has been working and traveling in Asia for several years, and is currently based out of Beijing, China. He closely follows stocks, forex and cryptocurrencies, and is always looking for the next great alternative investment opportunity.




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Hacked.com and its team members have pledged to reject any form of advertisement or sponsorships from 3rd parties. We will always be neutral and we strive towards a fully unbiased view on all topics. Whenever an author has a conflicting interest, that should be clearly stated in the post itself with a disclaimer. If you suspect that one of our team members are biased, please notify me immediately at jonas.borchgrevink(at)hacked.com.

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