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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.

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.

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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4.6 stars on average, based on 466 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: Determining and Trading Trend Strength

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Trend-following trading remains the most popular approach to trading in the retail segment, both in crypto and other markets. However, before taking positions in the direction of a trend, it is crucial to determine if the trend is gaining or losing strength. As trend traders, we need to make sure we are only taking trades in trends that are building up, and not those that are fading.

While we have covered the basics of trend-following trading in the past, and also revealed several trend-following strategies, we will here focus on how you can determine if a trend is worth trading, using both systematic and discretionary tools.

Trend waves and pullbacks

Studying trend waves and pullbacks during a trend forms the basis of a discretionary approach to determining trend strength.

In a trending market, small pullbacks signal strength in the trend. If each pullback is getting increasingly smaller as the trend continues, we can say that the trend is picking up momentum. Another thing we often see in strong bullish trends in that the pullback is not really a pullback, but rather a sideways consolidation of the price. This indicates that bulls are strongly in control of the market, buying up even the smallest dip in prices.

On the other hand, as pullbacks get larger and occur more frequently, we can take it as a sign that the trend is losing momentum and the price may reverse into the opposite direction soon.

Moving Averages

Moving Averages are probably some of the best-known tools for trend traders, and for good reason. They are incredibly simple to use, and can provide powerful signals in almost all markets.

The most common way to determine trend strength with Moving Averages is to apply two Moving Average lines to the chart; one slower and one faster. For example, combining the 20 and 50 period Moving Averages is a common strategy among swing traders in both forex, stocks, and crypto (the lower the period setting of the Moving Average is, the faster it reacts to changes in the price).

In a strong uptrend, we should have the faster moving average staying consistently above the slower Moving Average. If the distance between the two moving average lines grows, it means that the trend is gaining momentum, and if the distance between them shrinks, the trend is losing momentum.

If the two lines cross over each other, this is often taken as a sign that the trend is about to reverse. Many successful trend-following strategies follow the simple logic of buying an asset when the faster Moving Average crosses over the slower one, and selling an asset when the slower Moving Average crosses over the faster one.

Price rejection

What we call rejection of higher or lower prices in technical analysis is most easily spotted using traditional candlestick charts and looking for long wicks sticking out either above or below the “body” of the candles, as in the screenshot below.

Price rejection

In this chart, we can clearly see that we had a strong bullish trend and that the price attempted to extent the trend further, but repeatedly got rejected by the market. After four attempts at going higher, this market lost all bullishness and went into an extended downtrend.

Relative Strength Index (RSI)

As the name implies, RSI is an indicator that measures strength. In just the same way as we define an uptrend in price as a series of higher lows and higher highs, the RSI line should also make higher lows and higher highs when the market is trending up. In non-trending (range-bound) markets, the RSI generally moves sideways and stays between readings of 30 and 70.

As trends come to an end, we sometimes see divergences between the trend of the RSI and the price itself. For example, price may be making a new higher high, while the RSI line fails at making a new high, or even makes a new lower high, as we have two examples of in the screenshot below:

RSI divergence

Average Directional Index (ADX)

This is the classic trend indicator that many traders still use. The indicator consists of a red line and a green line and it basically says that a green line above a red line means we are in an uptrend. In the opposite case, a red line above a green line would mean that we are in a downtrend. If the two lines are close together it means that the market is not clearly trending, but rather stuck in a range.

Trend-following strategies sometimes make use of the ADX indicator in combination with Moving Averages to find strong price trends to ride. The ADX could then help determine the strength of the trend while for example cross-overs of two Moving Averages could serve as entry and exit points.

Which one should you use?

Perhaps unfortunately, which specific indicator to use in your trend-following trading really comes down to personal preferences. There is no right or wrong indicator to use, nor is there any right or wrong way to combine indicators and create your own trading strategy.

That said, most traders try to avoid combining indicators that are measuring the same thing. For example, ADX, Moving Averages and MACD are all considered trend indicators, while RSI and Stochastic are considered momentum indicators. In other words, you could combine Moving Averages and RSI, but should avoid combining Moving Averages and ADX with each other.

Experimentation is also fine, but instead of trying to learn how to use lots of different indicators, a better strategy is generally to use a few and become an expert at them. They are all powerful in their own way, it just comes down to the trader to master them.

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 35 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

Trading 101 and Beyond: The Head and Shoulders Pattern and Why You Should Never Ignore it

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The “Head and Shoulders” pattern (H&S henceforth) is perhaps one of the most widely used and misused technical patterns out there. Figure 1 depicts an example of a H&S pattern (tops – white ellipses; neckline – bright blue trendline).

Figure 1. REGN Daily Chart

It is without a doubt the pattern’s name that makes people smirk when they hear market commentators referring to it. After all, why would anyone invest/trade their hard-earned money using a pattern that has the same name as the most popular anti-dandruff shampoo? I am personally never thrilled to discuss the pattern. Imagine advising a portfolio manager, who relies entirely on fundamental analysis, that they should immediately sell one of their favourite names because the stock has broken its “neckline”… Patterns such as the double/triple top seem to be never questioned, whereas the H&S pattern gets ridiculed left, right and center, even though their implications are not that much different.

The former takes into consideration that the same level has served as resistance on more than one occasion (i.e. market participants realize that a security is too “expensive” at a certain price and a horizontal resistance is formed). Double/triple tops have an implied target of the distance between the “resistance” level (marked by the double or triple top) and the interim low (the lowest level within the pattern) projected down from the interim low (see Figure 2; double top – violet horizontal trendline; interim low – bright blue horizontal trendline; target – yellow vertical line).

Figure 2. MRK Daily Chart.

Hypothetically, if the stock had bounced up one more time before moving lower, a H&S would have been observed (tops – white ellipses; neckline – bright blue trendline; target – yellow vertical line in Figure 3). The only difference between the two is the slight change in the implied target, which is simply dictated by the slope of the neckline. That is, had the neckline been flat, the target from the H&S would have been identical to the one obtained from the double top.

Figure 3. MRK Hypothetical Daily Chart

While double/triple tops seem to be understood by most market participants, the H&S pattern is often disregarded. In the next section, I discuss why, on the contrary, the pattern should never be ignored.

The H&S Pattern

A textbook H&S pattern occurs in an uptrend and has three peaks, with the middle one being the highest. The neckline connects the two interim lows (i.e. the lows on each side of the “head”) and is used as the trigger to sell. Similarly, an inverse H&S transpires in a downtrend and has three troughs, with the middle one being the lowest. The neckline connects the interim highs and is used as the trigger to initiate long positions. So what makes this pattern so important? Two things.

Note, at a first glance the two don’t have much to do with the pattern so just bear with me.

  1. Prices tend to trend, and the trend should be considered active until there have been definite signals that a reversal has occurred. Yes, this is one of the six tenets of Dow Theory. A quick glance at S&P 500’s monthly chart reveals that the tenet could very well hold true (Figure 4). With the exception of 2016, the index always appeared to trend for extended periods. That is, the index was either posting higher highs and higher lows (uptrend) or lower highs and lower lows (downtrend) until eventually reversing. So how is this related to the H&S pattern? Let’s recall that a H&S pattern occurs in an uptrend and, by definition, includes one lower high – the right “shoulder”. So unless the neckline has a very steep slope, a break below it, in most cases, would lead to a lower low. A lower high (the right “shoulder”) and a lower low (the subsequent move below the neckline) implies a downtrend. But as the chart depicts, there were a total of only three periods where the index posted lower highs and lower lows (i.e. the dot-com bust, the “Great Recession”, and the sideways move in 2016). Therefore, the H&S pattern should not occur frequently on charts of “trending” securities, similar to that of S&P 500. Of course, unless prices are indeed reversing. We will return to this chart shortly to examine the pattern’s track record.

Figure 4. S&P 500 Monthly Chart

  1. Stock prices are significantly more volatile than their underlying drivers. This proposition has been a topic of discussion for many years, with Robert Schiller pointing out to this phenomenon in his papers “Do Stock Prices Move Too Much to be Justified by Subsequent Changes in Dividends” in 1980 and “The Volatility of Stock Market Prices” 7 years later. He concludes that stock prices deviate significantly more than the expected changes in real dividends. For more details on the subject, you can refer to Shiller’s texts. Market volatility, particularly since the “Great Recession”, is indicative of markets exhibiting bouts of extreme volatility, which cannot be explained by fundamental drivers. The “Flash Crashes” of 2010 and 2015, and the several late-day selloffs during the February and mid-March corrections in 2018 are only some of the examples of such volatility. In the context of H&S patterns, as market volatility exacerbates each move during a trend, a change in trend (i.e. a completed H&S pattern) should be followed by a swift move in the direction of the new trend.

All in all, the combined implication from the above two points is that market participants can profit tremendously by initiating positions at the onset of a new trend (i.e. when a trend reversal occurs) because 1) markets will move in the direction of the new trend for a prolonged period (as markets tend to trend), and 2) each move during the new trend will be of large magnitude (as markets are significantly more volatile than their underlying drivers).

Going back to the monthly S&P 500’s chart, it is evident that nearly all major trends had terminated with a H&S pattern (tops and bottoms – white ellipses; necklines – bright blue trendlines in Figure 5).

Figure 5. S&P 500 Monthly Chart

Of course, the pattern has also given false signals. Zooming in (Figure 6 –S&P 500 weekly chart), two such occasions catch the eye – the 2016 consolidation (already visible on the monthly chart, Figure 5) and earlier in 2010. On both occasions, the index broke below the neckline of a H&S pattern (neckline – yellow trendlines, break below necklines – yellow arrows) but did not subsequently trend in the opposite direction (i.e. a trend reversal did not lead to a prolonged movement in the opposite direction).

Figure 6. S&P 500 Weekly Chart

However, had one gone short upon both signals, they would have had an opportunity to reverse and go back long shortly after. Not surprisingly, it was inverse H&S patterns that gave clues that the topping patterns in Figure 6 are giving false signals (lows – bright blue ellipses; necklines – bright blue trendlines in Figure 7).

Figure 7. S&P 500 Weekly Chart (same period as in Figure 6 – 2009 to May 22, 2018)

Overall, using the pattern would have led to catching practically all major tops and bottoms over the last 20 years, and being whipsawed on two occasions. Not a bad track record given how quickly one could have been able to close and reverse in both 2010 and 2016.

Formation of the Pattern

So how exactly does a H&S pattern form? Imagine a prolonged uptrend where each subsequent rally takes prices to a new high and each subsequent pullback terminates at a higher level. As prices tend to trend (point #1 above), prices are expected to move way past fundamental values before they reverse. Market volatility (point #2) only exacerbates the extent of each move. It is only after prices have reached extreme levels, in relation to their true drivers, that they are unable to make a new high (yellow trendline in Figure 8).

Figure 8. Hypothetical Uptrend with One Lower High 

This is not a reversal as of yet. A reversal of a trend requires not only a lower high but also a lower low. For example, if the subsequent low terminates at a higher level, followed by a new high, the uptrend will be considered intact (Figure 9).

Figure 9. Hypothetical Uptrend Continuation

However, had the subsequent down-move terminated at a lower level, the security would be considered in a downtrend (Figure 10).

Figure 10. Hypothetical Uptrend Reversal

As seen in Figure 5, in most cases, once markets eventually reverse, they start trending in the opposite direction. That is, markets trend higher to reach extreme “expensive” readings before they reverse and trend downwards until they become extremely “cheap”.

Unfortunately, most of the technical analysis literature on the subject describes the pattern with a very stringent set of rules. Those rules, while aiming to make interpretation of the pattern objective, may lead to untimely entry & exit, and ultimately to unprofitable trading.

Traditional & Alternative Interpretations of the H&S Pattern

Traditional Interpretation #1: The H&S pattern is a reversal pattern (i.e. H&S can only point to falling prices and inverse H&S – to rising prices). This is perhaps one of the two greatest myths about the pattern. Most traditional texts discuss the action of prices breaking through the “head” of the pattern as simply one of the three ways to negate the pattern’s original reversal signal (the other two being -1) breaking back above the neckline, and 2) breaking above the right shoulder). This completely ignores the fact that a “failed” H&S pattern may often give a continuation signal that is more potent than a reversal signal generated by a “completed” H&S pattern. Given that markets trend for extended periods, there are various examples of “failed” H&S patterns pointing to a continuation of the ongoing trend before the eventual reversal takes place. Let’s look at a few examples. First, Figure 11 depicts Aphria’s (APH.TO) price action since mid- 2016. The stock formed a “tentative” H&S pattern from November 2016 to August 2017 (tops – white ellipses, neckline – green trendline). APH never broke below the neckline, and instead broke through the head in late 2017, giving one of its most potent buy signals, with the stock tripling over the next few months.

Figure 11. APH.TO Daily Chart

More recently, a client of mine requested a technical overview of New Flyer Industries (NFI.TO). Over the last 3 years, the stock had formed several tentative H&S patterns (tops – white ellipses; necklines – green trendlines in Figure 12). Similar to Aphria, the necklines were never broken, and the subsequent breaks above the “heads” of the pattern resulted in major buy signals.

Figure 12. NFI.TO 2-Day Chart

Going back to the S&P 500’s weekly chart, the index formed a tentative H&S pattern in 2012 (tops – white ellipses, neckline – green trendline in Figure 13), but instead of breaking the neckline, it broke the head and continued its advance.

Figure 13. S&P 500 Weekly Chart

Credit for this alternative interpretation goes to Fregal Walsh, who had published a paper on the subject in the 2015 IFTA Annual Journal.

Traditional Interpretation #2:  The first counter move after the pattern is completed should terminate at the neckline. In other words, after the break of the neckline and the initial move in the opposite direction of the prior trend, prices are expected to reverse and halt at the neckline before reversing again in the direction of the breakout (first counter move after pattern completion terminates at the neckline – yellow trendline in Figure 14).

Figure 14. Traditional Theory for First Counter-move after a H&S Completion

While this certainly is the case for most broken trendlines (i.e. support turns into resistance and vice versa), this is yet another stringent guideline in the context of the H&S pattern , which can certainly lead to missed opportunities. On one hand, prices may never retrace back to the neckline, meaning one may never enter in the direction of the breakout if they were to wait for a retest. On the other hand, prices would often not only retrace back to the neckline, but would also move back above/below it before eventually reversing in the direction of the breakout. Using the same monthly chart of S&P 500, it is evident that out of the 5 major H&S patterns, on 4 occasions (patterns 1, 2, 3 & 4 in Figure 15), the index never retested the neckline after breaking it. Notice that this was the case irrespective of the direction or the slope of the neckline.

Figure 15. S&P 500 Monthly Chart

In the last inverse H&S pattern (#5), the index reached the neckline but before bouncing higher it broke below it (Figure 16).

Figure 16. S&P 500 2-day Chart

I am certainly not implying that subsequent retests of the neckline are insignificant. Often enough, if the specific technical backdrop of a security warrants it, I use the neckline as either a potential entry or a negation level. Rather, I am suggesting that if one is certain of a trend reversal, they should not religiously wait for a retest of the neckline. Also, sometimes, the neckline could be broken back (i.e. the security moves back within the pattern) but this not necessarily mean that one should close all positions. Figure 17 shows one of many such examples, where a stock (ATD.B.TO) moved back above the neckline of the H&S pattern (green trendline) for a week before plummeting over the next few months.

Figure 17. ATD.B.TO Daily Chart

Entry

Traditional technical analysis theory suggests that one should wait for the neckline to be broken before initiating a trade. To a large degree, entering upon a close below/above the neckline is a reasonable entry strategy. After all, as we saw in Figures 11, 12 & 13, the pattern could very well be consolidating before breaking the “head” of the pattern and continuing its prior trend. In that case, a premature entry in the expectation that the neckline will be broken will result in an unprofitable trade. Thus, on a systematic basis (and without considering any other technical developments), waiting for a close beyond the neckline is advised (H&S tops – white ellipses;  neckline – blue trendline; target – vertical blue line; entry – blue arrow in Figure 18).

Figure 18. WMT Daily Chart

Unfortunately, this entry often leads to trades with a very unfavourable risk-reward profile, as by the time the neckline is broken on a closing basis the stock may have already moved significantly away from the top of the pattern (i.e. from the negation level which determines the risk of the trade). One way to tackle this is to wait for a corrective move in the opposite direction of the breakout before initiating a trade. This scenario was already covered in the previous section, where it was shown that the first corrective move after the break of the neckline may terminate 1) prior to retesting the neckline, 2) at the neckline, or 3) beyond the neckline (yellow lines in Figure 19 indicating possible scenarios for the first counter-move after the neckline is broken; eventual move in the direction of the breakdown – red line).

Figure 19. Possible Scenarios for First Counter-move after a H&S Completion

Having done extensive work on “price gaps”, I had found that if a gap transpires during the formation of the head or the right shoulder, or upon breaking out of the pattern (i.e. breaking the neckline), a probable scenario is that price will pull back to pre-gap levels, giving a K-Divergence signal. See my primer on gaps for more details on how to trade the gap phenomenon and my “K-Divergence” paper in the 2018 IFTA Annual Journal for details on the specific H&S trading application.

Exit

Naturally, one exit strategy is to close positions once the pattern reaches its implied target (i.e. the distance from the head to the neckline projected from the neckline break – see Figures 3 & 18 for examples). It is noteworthy that the suggested target is considered to be a “minimum” projection from the point of pattern completion. Simply looking at S&P 500’s monthly chart, it is evident that the minimum target was exceeded on every occasion (target – purple vertical lines in Figure 20).

Figure 20. S&P 500 Monthly Chart

Not surprisingly, as index’s constituents are more volatile than the index itself, they form the pattern much more frequently. When it comes to individual stocks, the minimum target can be used to close at least half of the position. WMT’s chart (Figure 18 above) shows just that – an S&P 500 constituent completing a H&S pattern (and meeting its minimum downside target in May) without the index completing a topping pattern during the same period.

Conclusion 

Hopefully, the above discussion has at the very least made you just a little bit less skeptical about the infamous Head and Shoulders pattern. If you have any questions or if you would like to see a more thorough description/explanation for any of the sections in this article, feel free to do so in the comment section below.

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 15 rated postsPublished author of technical research. In his work on price “gaps”, published in the 2018 International Federation of Technical Analysts’ Annual Journal, he developed a new technical tool for analyzing and trading the “gap” phenomenon – the “K-Divergence” (http://ifta.org/public/files/journal/d_ifta_journal_18). Besides obtaining a Master in Financial Technical Analysis, he has completed a BBA and an MBA from the Schulich School of Business in Toronto and has completed all exams for the CFA, CMT and CFTe designations. Currently, providing research to investment management and financial advisory firms. http://www.linkedin.com/in/konstantindimov




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Trading 101

Managing the Safety of Your Cryptocurrency

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The fact that Coinbase and other companies have made it possible for nearly anyone to invest in cryptocurrencies is almost unilaterally a good thing, but it has led to many people buying cryptocurrencies without understanding the ecosystem. Bitcoin and other cryptocurrencies are only seen as risky investments because of their future worth, when there is also the risk of theft in the present.

Many investors focus their time on the idea of maximizing the returns on their investments, but protection against downside is equally important. We’ve all heard the oft-cited thought experiment where when you lose 50% of your investment, you now need 100% returns to get back to even. Avoiding negative returns is an equal priority to achieving high ones.

There are some steps a newbie cryptocurrency investor can take to make sure they are as protected as they can be. From wallets to basic security and diversification, the points below are a few quick changes you can make that will maximize your security.

The Basics

The two most basic steps are not keeping your money in an exchange wallet, and using a 2-factor authentication application. Many people new to the ecosystem will go with the path of least resistance, and that results in only having a password protecting their assets.

Exchanges are considered to be secure, but there have been many breaches in the past, so it is not impossible your funds could be compromised in the future. In the case of a hack, hopefully your exchange would cover you, but the best thing you can do is move your funds into an offline wallet (e.g. desktop, mobile, or hardware). By splitting your money off from the giant “honeypot” that exchanges serve as, the incentive for hackers is greatly reduced.

Additionally, by enabling 2-factor authentication and using an application, you mitigate for the risk that your password or phone number are compromised. This may sound crazy, but it is possible for a SIM card to get hijacked and a hacker to use your phone number to gain access to your funds. Authly and Google Authenticator make it possible to prevent that from happening.

Wallet Management

Once you have made sure your money is on a wallet, there are still risks you need to understand. At this point, the biggest risk is that you might forget the passcode or PIN to your wallet. Or you could lose the device with the private keys on it. Both of these situations can be handled easily by taking careful note of your memetic passcode and backing up your wallets onto a second device.

It might help to back up a bit for a second. Your private key is what verifies your ownership of a public key, which can be thought of as being similar to a bank account. When you moved your coins into an offline wallet, you “took ownership” of your private keys. This is an essential part of forming a decentralized network, because if you hadn’t done that, all the keys would still be managed by a centralized source. Another way to look at it as if you are making sure no one else knows your ATM code.

Something fewer people in the ecosystem realize is they are not assigned a single set of keys, but actually many pairs. These pairs of keys are generated from a “seed root”, which is a 16 word sequence of seemingly random words (see this list for more about this). By having this seed root, you are can prove you are the rightful owner of the cryptocurrency in question. It is considered to be the password of passwords, and should be guarded as such.

Knowing all of this, the best way for you to carry on with your security is to write down your 16-word seed root, file it away in a separate area from your wallet, and then back up the data onto an offline hard drive that can be recovered in the case of emergency. All of this may sound like a paranoid hassle now, but the small time investment will make the difference.

Protect Your Crypto

By learning to manage your money well, you will be able to increase the protection of your cryptocurrency. The final thing you should consider is spreading out your funds between several different wallets. There is always the risk that a company gets compromised, and by diversifying where you hold your securities, you can reduce the effect this may have.

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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