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Trading 101

Trading 101: Trading Forex Swing Reversals

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It’s easy to get distracted by the plethora of trading strategies recommended online, where each new strategy you read about appear to promise more than the previous one. This is indeed a dangerous path to go down, and it will lead you nowhere in trading.

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Stop Looking For New Strategies

Most traders who are struggling with being consistent should stop looking for new strategies right away. If you find yourself constantly blaming your strategy for your losses and hunting for new strategies online, it’s time to simply pick one and stick with it for some time.

More likely than not, it is your implementation and execution of the strategy that is causing your problems, not the strategy itself. This is especially true for strategies that involve some degree of discretion, and are not purely mechanical.

Execution is Key

Instead of switching strategy, I recommend taking a closer look at how you are executing your trades. Check your trading journal and go back and take a look at the charts. Did you really follow your trading plan, or was there some part of the trade you should have executed differently that would have improved your result?

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Remember, reviewing your trades and your own performance is just as important as making new trades if you want to last as a consistently profitable trader.

Reversal Trading Strategy

In this article I will share one strategy that you can choose to stick with, optimize, and refine to fit your own style. It is not a 100% mechanical strategy, and thus involves some degree of discretion from the trader, including an understanding of how to use supply and demand zones.

Once you understand the concept of supply and demand zones, you will know that these are areas on the chart where price tends to consolidate before it “decides” on the next move. It may happen as a reversal in the opposite direction of the previous trend, a continued consolidation, or a spike through the supply/demand zone in the direction of the trend.

For this trading strategy we are looking for potential reversals into the opposite direction of the previous trend. In the chart below, I have indicated the cluster zones that we call supply/demand zones.

To me, this is a chart that now looks “top heavy” and ripe for a sell-off at least down to the support zone in the 0.90 area and perhaps all the way down to the previous swing low at 0.60.

Wait For Confirmation

However, unless the market gives us any sort of confirmation about our short bias, we are not going to do anything except observing the price action. What we are looking for specifically would be a strong breakdown below the current resistance zone before we enter our short order.

Personally, I never enter before I see a red candle that breaks and closes below the 20 period simple moving average (SMA) line in a strong way. The 20 SMA in particular often works as a dynamic support line for the price, and a break through this line often gives trend followers an indication that the trend is broken, and that it’s time for them to get out of their trade.

By waiting for the strong break below the 20 SMA, the market has confirmed for us that the dynamic between buyers and sellers is changing. The bears are in control, and we can expect lots of stop-loss orders that are placed just below the resistance zone to be triggered, and thus reinforcing the sell-off.

Let’s take a look to see what actually happened in this case:

Indeed, we did see a strong break below the 20 SMA with several consecutive red candles. In this case, the market continued to fall for the next few months.

Reversal Trading Strategy Rules

Although this is a fairly discretionary strategy that requires you to make a judgment call on the overall market conditions, there are a few general guidelines that can help you spot the right setups:

  • Look for a strong previous trend in the chart, either up or down.
  • Highlight consolidation areas where the price is hovering around the 20 SMA, including all support/resistance zones above/below the current price.
  • Wait for price to break away from the support/resistance zone in a strong way and the candle to close on the other side of the 20 SMA.
  • Finally, enter your order if risk:reward is satisfactory and there are no obvious support/resistance zones nearby.

The first point is a very important condition for this strategy, as it is what makes it possible to get a strong reversal in the price. Without a strong previous trend, the reversal may be weak and not worth our effort as traders.

If you have previously been a trend trader, the concept of reversal trading may be a bit more difficult to get used to. However, as trend traders, we know how sharp the reversal often is when our dear trend ends. It can be violent and explosive to watch, and it hurts trend followers’ returns badly. As such, why not give the other side of the trade a chance and see if you can be more successful this way?

Featured image from Flickr.

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

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

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 332 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

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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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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