Was ist ein Short Squeeze? LYNX

Former investment bank FX trader: some thoughts

Former investment bank FX trader: some thoughts
Hi guys,
I have been using reddit for years in my personal life (not trading!) and wanted to give something back in an area where i am an expert.
I worked at an investment bank for seven years and joined them as a graduate FX trader so have lots of professional experience, by which i mean I was trained and paid by a big institution to trade on their behalf. This is very different to being a full-time home trader, although that is not to discredit those guys, who can accumulate a good amount of experience/wisdom through self learning.
When I get time I'm going to write a mid-length posts on each topic for you guys along the lines of how i was trained. I guess there would be 15-20 topics in total so about 50-60 posts. Feel free to comment or ask questions.
The first topic is Risk Management and we'll cover it in three parts
Part I
  • Why it matters
  • Position sizing
  • Kelly
  • Using stops sensibly
  • Picking a clear level

Why it matters

The first rule of making money through trading is to ensure you do not lose money. Look at any serious hedge fund’s website and they’ll talk about their first priority being “preservation of investor capital.”
You have to keep it before you grow it.
Strangely, if you look at retail trading websites, for every one article on risk management there are probably fifty on trade selection. This is completely the wrong way around.
The great news is that this stuff is pretty simple and process-driven. Anyone can learn and follow best practices.
Seriously, avoiding mistakes is one of the most important things: there's not some holy grail system for finding winning trades, rather a routine and fairly boring set of processes that ensure that you are profitable, despite having plenty of losing trades alongside the winners.

Capital and position sizing

The first thing you have to know is how much capital you are working with. Let’s say you have $100,000 deposited. This is your maximum trading capital. Your trading capital is not the leveraged amount. It is the amount of money you have deposited and can withdraw or lose.
Position sizing is what ensures that a losing streak does not take you out of the market.
A rule of thumb is that one should risk no more than 2% of one’s account balance on an individual trade and no more than 8% of one’s account balance on a specific theme. We’ll look at why that’s a rule of thumb later. For now let’s just accept those numbers and look at examples.
So we have $100,000 in our account. And we wish to buy EURUSD. We should therefore not be risking more than 2% which $2,000.
We look at a technical chart and decide to leave a stop below the monthly low, which is 55 pips below market. We’ll come back to this in a bit. So what should our position size be?
We go to the calculator page, select Position Size and enter our details. There are many such calculators online - just google "Pip calculator".

https://preview.redd.it/y38zb666e5h51.jpg?width=1200&format=pjpg&auto=webp&s=26e4fe569dc5c1f43ce4c746230c49b138691d14
So the appropriate size is a buy position of 363,636 EURUSD. If it reaches our stop level we know we’ll lose precisely $2,000 or 2% of our capital.
You should be using this calculator (or something similar) on every single trade so that you know your risk.
Now imagine that we have similar bets on EURJPY and EURGBP, which have also broken above moving averages. Clearly this EUR-momentum is a theme. If it works all three bets are likely to pay off. But if it goes wrong we are likely to lose on all three at once. We are going to look at this concept of correlation in more detail later.
The total amount of risk in our portfolio - if all of the trades on this EUR-momentum theme were to hit their stops - should not exceed $8,000 or 8% of total capital. This allows us to go big on themes we like without going bust when the theme does not work.
As we’ll see later, many traders only win on 40-60% of trades. So you have to accept losing trades will be common and ensure you size trades so they cannot ruin you.
Similarly, like poker players, we should risk more on trades we feel confident about and less on trades that seem less compelling. However, this should always be subject to overall position sizing constraints.
For example before you put on each trade you might rate the strength of your conviction in the trade and allocate a position size accordingly:

https://preview.redd.it/q2ea6rgae5h51.png?width=1200&format=png&auto=webp&s=4332cb8d0bbbc3d8db972c1f28e8189105393e5b
To keep yourself disciplined you should try to ensure that no more than one in twenty trades are graded exceptional and allocated 5% of account balance risk. It really should be a rare moment when all the stars align for you.
Notice that the nice thing about dealing in percentages is that it scales. Say you start out with $100,000 but end the year up 50% at $150,000. Now a 1% bet will risk $1,500 rather than $1,000. That makes sense as your capital has grown.
It is extremely common for retail accounts to blow-up by making only 4-5 losing trades because they are leveraged at 50:1 and have taken on far too large a position, relative to their account balance.
Consider that GBPUSD tends to move 1% each day. If you have an account balance of $10k then it would be crazy to take a position of $500k (50:1 leveraged). A 1% move on $500k is $5k.
Two perfectly regular down days in a row — or a single day’s move of 2% — and you will receive a margin call from the broker, have the account closed out, and have lost all your money.
Do not let this happen to you. Use position sizing discipline to protect yourself.

Kelly Criterion

If you’re wondering - why “about 2%” per trade? - that’s a fair question. Why not 0.5% or 10% or any other number?
The Kelly Criterion is a formula that was adapted for use in casinos. If you know the odds of winning and the expected pay-off, it tells you how much you should bet in each round.
This is harder than it sounds. Let’s say you could bet on a weighted coin flip, where it lands on heads 60% of the time and tails 40% of the time. The payout is $2 per $1 bet.
Well, absolutely you should bet. The odds are in your favour. But if you have, say, $100 it is less obvious how much you should bet to avoid ruin.
Say you bet $50, the odds that it could land on tails twice in a row are 16%. You could easily be out after the first two flips.
Equally, betting $1 is not going to maximise your advantage. The odds are 60/40 in your favour so only betting $1 is likely too conservative. The Kelly Criterion is a formula that produces the long-run optimal bet size, given the odds.
Applying the formula to forex trading looks like this:
Position size % = Winning trade % - ( (1- Winning trade %) / Risk-reward ratio
If you have recorded hundreds of trades in your journal - see next chapter - you can calculate what this outputs for you specifically.
If you don't have hundreds of trades then let’s assume some realistic defaults of Winning trade % being 30% and Risk-reward ratio being 3. The 3 implies your TP is 3x the distance of your stop from entry e.g. 300 pips take profit and 100 pips stop loss.
So that’s 0.3 - (1 - 0.3) / 3 = 6.6%.
Hold on a second. 6.6% of your account probably feels like a LOT to risk per trade.This is the main observation people have on Kelly: whilst it may optimise the long-run results it doesn’t take into account the pain of drawdowns. It is better thought of as the rational maximum limit. You needn’t go right up to the limit!
With a 30% winning trade ratio, the odds of you losing on four trades in a row is nearly one in four. That would result in a drawdown of nearly a quarter of your starting account balance. Could you really stomach that and put on the fifth trade, cool as ice? Most of us could not.
Accordingly people tend to reduce the bet size. For example, let’s say you know you would feel emotionally affected by losing 25% of your account.
Well, the simplest way is to divide the Kelly output by four. You have effectively hidden 75% of your account balance from Kelly and it is now optimised to avoid a total wipeout of just the 25% it can see.
This gives 6.6% / 4 = 1.65%. Of course different trading approaches and different risk appetites will provide different optimal bet sizes but as a rule of thumb something between 1-2% is appropriate for the style and risk appetite of most retail traders.
Incidentally be very wary of systems or traders who claim high winning trade % like 80%. Invariably these don’t pass a basic sense-check:
  • How many live trades have you done? Often they’ll have done only a handful of real trades and the rest are simulated backtests, which are overfitted. The model will soon die.
  • What is your risk-reward ratio on each trade? If you have a take profit $3 away and a stop loss $100 away, of course most trades will be winners. You will not be making money, however! In general most traders should trade smaller position sizes and less frequently than they do. If you are going to bias one way or the other, far better to start off too small.

How to use stop losses sensibly

Stop losses have a bad reputation amongst the retail community but are absolutely essential to risk management. No serious discretionary trader can operate without them.
A stop loss is a resting order, left with the broker, to automatically close your position if it reaches a certain price. For a recap on the various order types visit this chapter.
The valid concern with stop losses is that disreputable brokers look for a concentration of stops and then, when the market is close, whipsaw the price through the stop levels so that the clients ‘stop out’ and sell to the broker at a low rate before the market naturally comes back higher. This is referred to as ‘stop hunting’.
This would be extremely immoral behaviour and the way to guard against it is to use a highly reputable top-tier broker in a well regulated region such as the UK.
Why are stop losses so important? Well, there is no other way to manage risk with certainty.
You should always have a pre-determined stop loss before you put on a trade. Not having one is a recipe for disaster: you will find yourself emotionally attached to the trade as it goes against you and it will be extremely hard to cut the loss. This is a well known behavioural bias that we’ll explore in a later chapter.
Learning to take a loss and move on rationally is a key lesson for new traders.
A common mistake is to think of the market as a personal nemesis. The market, of course, is totally impersonal; it doesn’t care whether you make money or not.
Bruce Kovner, founder of the hedge fund Caxton Associates
There is an old saying amongst bank traders which is “losers average losers”.
It is tempting, having bought EURUSD and seeing it go lower, to buy more. Your average price will improve if you keep buying as it goes lower. If it was cheap before it must be a bargain now, right? Wrong.
Where does that end? Always have a pre-determined cut-off point which limits your risk. A level where you know the reason for the trade was proved ‘wrong’ ... and stick to it strictly. If you trade using discretion, use stops.

Picking a clear level

Where you leave your stop loss is key.
Typically traders will leave them at big technical levels such as recent highs or lows. For example if EURUSD is trading at 1.1250 and the recent month’s low is 1.1205 then leaving it just below at 1.1200 seems sensible.

If you were going long, just below the double bottom support zone seems like a sensible area to leave a stop
You want to give it a bit of breathing room as we know support zones often get challenged before the price rallies. This is because lots of traders identify the same zones. You won’t be the only one selling around 1.1200.
The “weak hands” who leave their sell stop order at exactly the level are likely to get taken out as the market tests the support. Those who leave it ten or fifteen pips below the level have more breathing room and will survive a quick test of the level before a resumed run-up.
Your timeframe and trading style clearly play a part. Here’s a candlestick chart (one candle is one day) for GBPUSD.

https://preview.redd.it/moyngdy4f5h51.png?width=1200&format=png&auto=webp&s=91af88da00dd3a09e202880d8029b0ddf04fb802
If you are putting on a trend-following trade you expect to hold for weeks then you need to have a stop loss that can withstand the daily noise. Look at the downtrend on the chart. There were plenty of days in which the price rallied 60 pips or more during the wider downtrend.
So having a really tight stop of, say, 25 pips that gets chopped up in noisy short-term moves is not going to work for this kind of trade. You need to use a wider stop and take a smaller position size, determined by the stop level.
There are several tools you can use to help you estimate what is a safe distance and we’ll look at those in the next section.
There are of course exceptions. For example, if you are doing range-break style trading you might have a really tight stop, set just below the previous range high.

https://preview.redd.it/ygy0tko7f5h51.png?width=1200&format=png&auto=webp&s=34af49da61c911befdc0db26af66f6c313556c81
Clearly then where you set stops will depend on your trading style as well as your holding horizons and the volatility of each instrument.
Here are some guidelines that can help:
  1. Use technical analysis to pick important levels (support, resistance, previous high/lows, moving averages etc.) as these provide clear exit and entry points on a trade.
  2. Ensure that the stop gives your trade enough room to breathe and reflects your timeframe and typical volatility of each pair. See next section.
  3. Always pick your stop level first. Then use a calculator to determine the appropriate lot size for the position, based on the % of your account balance you wish to risk on the trade.
So far we have talked about price-based stops. There is another sort which is more of a fundamental stop, used alongside - not instead of - price stops. If either breaks you’re out.
For example if you stop understanding why a product is going up or down and your fundamental thesis has been confirmed wrong, get out. For example, if you are long because you think the central bank is turning hawkish and AUDUSD is going to play catch up with rates … then you hear dovish noises from the central bank and the bond yields retrace lower and back in line with the currency - close your AUDUSD position. You already know your thesis was wrong. No need to give away more money to the market.

Coming up in part II

EDIT: part II here
Letting stops breathe
When to change a stop
Entering and exiting winning positions
Risk:reward ratios
Risk-adjusted returns

Coming up in part III

Squeezes and other risks
Market positioning
Bet correlation
Crap trades, timeouts and monthly limits

***
Disclaimer:This content is not investment advice and you should not place any reliance on it. The views expressed are the author's own and should not be attributed to any other person, including their employer.
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Former investment bank FX trader: Risk management part 3/3

Former investment bank FX trader: Risk management part 3/3
Welcome to the third and final part of this chapter.
Thank you all for the 100s of comments and upvotes - maybe this post will take us above 1,000 for this topic!
Keep any feedback or questions coming in the replies below.
Before you read this note, please start with Part I and then Part II so it hangs together and makes sense.
Part III
  • Squeezes and other risks
  • Market positioning
  • Bet correlation
  • Crap trades, timeouts and monthly limits

Squeezes and other risks

We are going to cover three common risks that traders face: events; squeezes, asymmetric bets.

Events

Economic releases can cause large short-term volatility. The most famous is Non Farm Payrolls, which is the most widely watched measure of US employment levels and affects the price of many instruments.On an NFP announcement currencies like EURUSD might jump (or drop) 100 pips no problem.
This is fine and there are trading strategies that one may employ around this but the key thing is to be aware of these releases.You can find economic calendars all over the internet - including on this site - and you need only check if there are any major releases each day or week.
For example, if you are trading off some intraday chart and scalping a few pips here and there it would be highly sensible to go into a known data release flat as it is pure coin-toss and not the reason for your trading. It only takes five minutes each day to plan for the day ahead so do not get caught out by this. Many retail traders get stopped out on such events when price volatility is at its peak.

Squeezes

Short squeezes bring a lot of danger and perhaps some opportunity.
The story of VW and Porsche is the best short squeeze ever. Throughout these articles we've used FX examples wherever possible but in this one instance the concept (which is also highly relevant in FX) is best illustrated with an historical lesson from a different asset class.
A short squeeze is when a participant ends up in a short position they are forced to cover. Especially when the rest of the market knows that this participant can be bullied into stopping out at terrible levels, provided the market can briefly drive the price into their pain zone.

There's a reason for the car, don't worry
Hedge funds had been shorting VW stock. However the amount of VW stock available to buy in the open market was actually quite limited. The local government owned a chunk and Porsche itself had bought and locked away around 30%. Neither of these would sell to the hedge-funds so a good amount of the stock was un-buyable at any price.
If you sell or short a stock you must be prepared to buy it back to go flat at some point.
To cut a long story short, Porsche bought a lot of call options on VW stock. These options gave them the right to purchase VW stock from banks at slightly above market price.
Eventually the banks who had sold these options realised there was no VW stock to go out and buy since the German government wouldn’t sell its allocation and Porsche wouldn’t either. If Porsche called in the options the banks were in trouble.
Porsche called in the options which forced the shorts to buy stock - at whatever price they could get it.
The price squeezed higher as those that were short got massively squeezed and stopped out. For one brief moment in 2008, VW was the world’s most valuable company. Shorts were burned hard.

Incredible event
Porsche apparently made $11.5 billion on the trade. The BBC described Porsche as “a hedge fund with a carmaker attached.”
If this all seems exotic then know that the same thing happens in FX all the time. If everyone in the market is talking about a key level in EURUSD being 1.2050 then you can bet the market will try to push through 1.2050 just to take out any short stops at that level. Whether it then rallies higher or fails and trades back lower is a different matter entirely.
This brings us on to the matter of crowded trades. We will look at positioning in more detail in the next section. Crowded trades are dangerous for PNL. If everyone believes EURUSD is going down and has already sold EURUSD then you run the risk of a short squeeze.
For additional selling to take place you need a very good reason for people to add to their position whereas a move in the other direction could force mass buying to cover their shorts.
A trading mentor when I worked at the investment bank once advised me:
Always think about which move would cause the maximum people the maximum pain. That move is precisely what you should be watching out for at all times.

Asymmetric losses

Also known as picking up pennies in front of a steamroller. This risk has caught out many a retail trader. Sometimes it is referred to as a "negative skew" strategy.
Ideally what you are looking for is asymmetric risk trade set-ups: that is where the downside is clearly defined and smaller than the upside. What you want to avoid is the opposite.
A famous example of this going wrong was the Swiss National Bank de-peg in 2012.
The Swiss National Bank had said they would defend the price of EURCHF so that it did not go below 1.2. Many people believed it could never go below 1.2 due to this. Many retail traders therefore opted for a strategy that some describe as ‘picking up pennies in front of a steam-roller’.
They would would buy EURCHF above the peg level and hope for a tiny rally of several pips before selling them back and keep doing this repeatedly. Often they were highly leveraged at 100:1 so that they could amplify the profit of the tiny 5-10 pip rally.
Then this happened.

Something that changed FX markets forever
The SNB suddenly did the unthinkable. They stopped defending the price. CHF jumped and so EURCHF (the number of CHF per 1 EUR) dropped to new lows very fast. Clearly, this trade had horrific risk : reward asymmetry: you risked 30% to make 0.05%.
Other strategies like naively selling options have the same result. You win a small amount of money each day and then spectacularly blow up at some point down the line.

Market positioning

We have talked about short squeezes. But how do you know what the market position is? And should you care?
Let’s start with the first. You should definitely care.
Let’s imagine the entire market is exceptionally long EURUSD and positioning reaches extreme levels. This makes EURUSD very vulnerable.
To keep the price going higher EURUSD needs to attract fresh buy orders. If everyone is already long and has no room to add, what can incentivise people to keep buying? The news flow might be good. They may believe EURUSD goes higher. But they have already bought and have their maximum position on.
On the flip side, if there’s an unexpected event and EURUSD gaps lower you will have the entire market trying to exit the position at the same time. Like a herd of cows running through a single doorway. Messy.
We are going to look at this in more detail in a later chapter, where we discuss ‘carry’ trades. For now this TRYJPY chart might provide some idea of what a rush to the exits of a crowded position looks like.

A carry trade position clear-out in action
Knowing if the market is currently at extreme levels of long or short can therefore be helpful.
The CFTC makes available a weekly report, which details the overall positions of speculative traders “Non Commercial Traders” in some of the major futures products. This includes futures tied to deliverable FX pairs such as EURUSD as well as products such as gold. The report is called “CFTC Commitments of Traders” ("COT").
This is a great benchmark. It is far more representative of the overall market than the proprietary ones offered by retail brokers as it covers a far larger cross-section of the institutional market.
Generally market participants will not pay a lot of attention to commercial hedgers, which are also detailed in the report. This data is worth tracking but these folks are simply hedging real-world transactions rather than speculating so their activity is far less revealing and far more noisy.
You can find the data online for free and download it directly here.

Raw format is kinda hard to work with

However, many websites will chart this for you free of charge and you may find it more convenient to look at it that way. Just google “CFTC positioning charts”.

But you can easily get visualisations
You can visually spot extreme positioning. It is extremely powerful.
Bear in mind the reports come out Friday afternoon US time and the report is a snapshot up to the prior Tuesday. That means it is a lagged report - by the time it is released it is a few days out of date. For longer term trades where you hold positions for weeks this is of course still pretty helpful information.
As well as the absolute level (is the speculative market net long or short) you can also use this to pick up on changes in positioning.
For example if bad news comes out how much does the net short increase? If good news comes out, the market may remain net short but how much did they buy back?
A lot of traders ask themselves “Does the market have this trade on?” The positioning data is a good method for answering this. It provides a good finger on the pulse of the wider market sentiment and activity.
For example you might say: “There was lots of noise about the good employment numbers in the US. However, there wasn’t actually a lot of position change on the back of it. Maybe everyone who wants to buy already has. What would happen now if bad news came out?”
In general traders will be wary of entering a crowded position because it will be hard to attract additional buyers or sellers and there could be an aggressive exit.
If you want to enter a trade that is showing extreme levels of positioning you must think carefully about this dynamic.

Bet correlation

Retail traders often drastically underestimate how correlated their bets are.
Through bitter experience, I have learned that a mistake in position correlation is the root of some of the most serious problems in trading. If you have eight highly correlated positions, then you are really trading one position that is eight times as large.
Bruce Kovner of hedge fund, Caxton Associates
For example, if you are trading a bunch of pairs against the USD you will end up with a simply huge USD exposure. A single USD-trigger can ruin all your bets. Your ideal scenario — and it isn’t always possible — would be to have a highly diversified portfolio of bets that do not move in tandem.
Look at this chart. Inverted USD index (DXY) is green. AUDUSD is orange. EURUSD is blue.

Chart from TradingView
So the whole thing is just one big USD trade! If you are long AUDUSD, long EURUSD, and short DXY you have three anti USD bets that are all likely to work or fail together.
The more diversified your portfolio of bets are, the more risk you can take on each.
There’s a really good video, explaining the benefits of diversification from Ray Dalio.
A systematic fund with access to an investable universe of 10,000 instruments has more opportunity to make a better risk-adjusted return than a trader who only focuses on three symbols. Diversification really is the closest thing to a free lunch in finance.
But let’s be pragmatic and realistic. Human retail traders don’t have capacity to run even one hundred bets at a time. More realistic would be an average of 2-3 trades on simultaneously. So what can be done?
For example:
  • You might diversify across time horizons by having a mix of short-term and long-term trades.
  • You might diversify across asset classes - trading some FX but also crypto and equities.
  • You might diversify your trade generation approach so you are not relying on the same indicators or drivers on each trade.
  • You might diversify your exposure to the market regime by having some trades that assume a trend will continue (momentum) and some that assume we will be range-bound (carry).
And so on. Basically you want to scan your portfolio of trades and make sure you are not putting all your eggs in one basket. If some trades underperform others will perform - assuming the bets are not correlated - and that way you can ensure your overall portfolio takes less risk per unit of return.
The key thing is to start thinking about a portfolio of bets and what each new trade offers to your existing portfolio of risk. Will it diversify or amplify a current exposure?

Crap trades, timeouts and monthly limits

One common mistake is to get bored and restless and put on crap trades. This just means trades in which you have low conviction.
It is perfectly fine not to trade. If you feel like you do not understand the market at a particular point, simply choose not to trade.
Flat is a position.
Do not waste your bullets on rubbish trades. Only enter a trade when you have carefully considered it from all angles and feel good about the risk. This will make it far easier to hold onto the trade if it moves against you at any point. You actually believe in it.
Equally, you need to set monthly limits. A standard limit might be a 10% account balance stop per month. At that point you close all your positions immediately and stop trading till next month.

Be strict with yourself and walk away
Let’s assume you started the year with $100k and made 5% in January so enter Feb with $105k balance. Your stop is therefore 10% of $105k or $10.5k . If your account balance dips to $94.5k ($105k-$10.5k) then you stop yourself out and don’t resume trading till March the first.
Having monthly calendar breaks is nice for another reason. Say you made a load of money in January. You don’t want to start February feeling you are up 5% or it is too tempting to avoid trading all month and protect the existing win. Each month and each year should feel like a clean slate and an independent period.
Everyone has trading slumps. It is perfectly normal. It will definitely happen to you at some stage. The trick is to take a break and refocus. Conserve your capital by not trading a lot whilst you are on a losing streak. This period will be much harder for you emotionally and you’ll end up making suboptimal decisions. An enforced break will help you see the bigger picture.
Put in place a process before you start trading and then it’ll be easy to follow and will feel much less emotional. Remember: the market doesn’t care if you win or lose, it is nothing personal.
When your head has cooled and you feel calm you return the next month and begin the task of building back your account balance.

That's a wrap on risk management

Thanks for taking time to read this three-part chapter on risk management. I hope you enjoyed it. Do comment in the replies if you have any questions or feedback.
Remember: the most important part of trading is not making money. It is not losing money. Always start with that principle. I hope these three notes have provided some food for thought on how you might approach risk management and are of practical use to you when trading. Avoiding mistakes is not a sexy tagline but it is an effective and reliable way to improve results.
Next up I will be writing about an exciting topic I think many traders should look at rather differently: news trading. Please follow on here to receive notifications and the broad outline is below.
News Trading Part I
  • Introduction
  • Why use the economic calendar
  • Reading the economic calendar
  • Knowing what's priced in
  • Surveys
  • Interest rates
  • First order thinking vs second order thinking
News Trading Part II
  • Preparing for quantitative and qualitative releases
  • Data surprise index
  • Using recent events to predict future reactions
  • Buy the rumour, sell the fact
  • The mysterious 'position trim' effect
  • Reversals
  • Some key FX releases
***

Disclaimer:This content is not investment advice and you should not place any reliance on it. The views expressed are the author's own and should not be attributed to any other person, including their employer.
submitted by getmrmarket to Forex [link] [comments]

Former investment bank FX trader: News trading and second order thinking part 2/2

Former investment bank FX trader: News trading and second order thinking part 2/2
Thanks for all the upvotes and comments on the previous pieces:
From the first half of the news trading note we learned some ways to estimate what is priced in by the market. We learned that we are trading any gap in market expectations rather than the result itself. A good result when the market expected a fantastic result is disappointing! We also looked at second order thinking. After all that, I hope the reaction of prices to events is starting to make more sense to you.

Before you understand the core concepts of pricing in and second order thinking, price reactions to events can seem mystifying at times
We'll add one thought-provoking quote. Keynes (that rare economist who also managed institutional money) offered this analogy. He compared selecting investments to a beauty contest in which newspaper readers would write in with their votes and win a prize if their votes most closely matched the six most popularly selected women across all readers:
It is not a case of choosing those (faces) which, to the best of one’s judgment, are really the prettiest, nor even those which average opinions genuinely thinks the prettiest. We have reached the third degree where we devote our intelligences to anticipating what average opinion expects the average opinion to be.
Trading is no different. You are trying to anticipate how other traders will react to news and how that will move prices. Perhaps you disagree with their reaction. Still, if you can anticipate what it will be you would be sensible to act upon it. Don't forget: meanwhile they are also trying to anticipate what you and everyone else will do.

Part II
  • Preparing for quantitative and qualitative releases
  • Data surprise index
  • Using recent events to predict future reactions
  • Buy the rumour, sell the fact
  • The trimming position effect
  • Reversals
  • Some key FX releases

Preparing for quantitative and qualitative releases

The majority of releases are quantitative. All that means is there’s some number. Like unemployment figures or GDP.
Historic results provide interesting context. We are looking below the Australian unemployment rate which is released monthly. If you plot it out a few years back you can spot a clear trend, which got massively reversed. Knowing this trend gives you additional information when the figure is released. In the same way prices can trend so do economic data.

A great resource that's totally free to use
This makes sense: if for example things are getting steadily better in the economy you’d expect to see unemployment steadily going down.
Knowing the trend and how much noise there is in the data gives you an informational edge over lazy traders.
For example, when we see the spike above 6% on the above you’d instantly know it was crazy and a huge trading opportunity since a) the fluctuations month on month are normally tiny and b) it is a huge reversal of the long-term trend.
Would all the other AUDUSD traders know and react proportionately? If not and yet they still trade, their laziness may be an opportunity for more informed traders to make some money.
Tradingeconomics.com offers really high quality analysis. You can see all the major indicators for each country. Clicking them brings up their history as well as an explanation of what they show.
For example, here’s German Consumer Confidence.

Helpful context
There are also qualitative events. Normally these are speeches by Central Bankers.
There are whole blogs dedicated to closely reading such texts and looking for subtle changes in direction or opinion on the economy. Stuff like how often does the phrase "in a good place" come up when the Chair of the Fed speaks. It is pretty dry stuff. Yet these are leading indicators of how each member may vote to set interest rates. Ed Yardeni is the go-to guy on central banks.

Data surprise index

The other thing you might look at is something investment banks produce for their customers. A data surprise index. I am not sure if these are available in retail land - there's no reason they shouldn't be but the economic calendars online are very basic.
You’ll remember we talked about data not being good or bad of itself but good or bad relative to what was expected. These indices measure this difference.
If results are consistently better than analysts expect then you’ll see a positive number. If they are consistently worse than analysts expect a negative number. You can see they tend to swing from positive to negative.

Mean reversion at its best! Data surprise indices measure how much better or worse data came in vs forecast
There are many theories for this but in general people consider that analysts herd around the consensus. They are scared to be outliers and look ‘wrong’ or ‘stupid’ so they instead place estimates close to the pack of their peers.
When economic conditions change they may therefore be slow to update. When they are wrong consistently - say too bearish - they eventually flip the other way and become too bullish.
These charts can be interesting to give you an idea of how the recent data releases have been versus market expectations. You may try to spot the turning points in macroeconomic data that drive long term currency prices and trends.

Using recent events to predict future reactions

The market reaction function is the most important thing on an economic calendar in many ways. It means: what will happen to the price if the data is better or worse than the market expects?
That seems easy to answer but it is not.
Consider the example of consumer confidence we had earlier.
  • Many times the market will shrug and ignore it.
  • But when the economic recovery is predicated on a strong consumer it may move markets a lot.
Or consider the S&P index of US stocks (Wall Street).
  • If you get good economic data that beats analyst estimates surely it should go up? Well, sometimes that is certainly the case.
  • But good economic data might result in the US Central Bank raising interest rates. Raising interest rates will generally make the stock market go down!
So better than expected data could make the S&P go up (“the economy is great”) or down (“the Fed is more likely to raise rates”). It depends. The market can interpret the same data totally differently at different times.
One clue is to look at what happened to the price of risk assets at the last event.
For example, let’s say we looked at unemployment and it came in a lot worse than forecast last month. What happened to the S&P back then?

2% drop last time on a 'worse than expected' number ... so it it is 'better than expected' best guess is we rally 2% higher
So this tells us that - at least for our most recent event - the S&P moved 2% lower on a far worse than expected number. This gives us some guidance as to what it might do next time and the direction. Bad number = lower S&P. For a huge surprise 2% is the size of move we’d expect.
Again - this is a real limitation of online calendars. They should show next to the historic results (expected/actual) the reaction of various instruments.

Buy the rumour, sell the fact

A final example of an unpredictable reaction relates to the old rule of ‘Buy the rumour, sell the fact.’ This captures the tendency for markets to anticipate events and then reverse when they occur.

Buy the rumour, sell the fact
In short: people take profit and close their positions when what they expected to happen is confirmed.
So we have to decide which driver is most important to the market at any point in time. You obviously cannot ask every participant. The best way to do it is to look at what happened recently. Look at the price action during recent releases and you will get a feel for how much the market moves and in which direction.

Trimming or taking off positions

One thing to note is that events sometimes give smart participants information about positioning. This is because many traders take off or reduce positions ahead of big news events for risk management purposes.
Imagine we see GBPUSD rises in the hour before GDP release. That probably indicates the market is short and has taken off / flattened its positions.

The price action before an event can tell you about speculative positioning
If GDP is merely in line with expectations those same people are likely to add back their positions. They avoided a potential banana skin. This is why sometimes the market moves on an event that seemingly was bang on consensus.
But you have learned something. The speculative market is short and may prove vulnerable to a squeeze.

Two kinds of reversals

Fairly often you’ll see the market move in one direction on a release then turn around and go the other way.
These are known as reversals. Traders will often ‘fade’ a move, meaning bet against it and expect it to reverse.

Logical reversals

Sometimes this happens when the data looks good at first glance but the details don’t support it.
For example, say the headline is very bullish on German manufacturing numbers but then a minute later it becomes clear the company who releases the data has changed methodology or believes the number is driven by a one-off event. Or maybe the headline number is positive but buried in the detail there is a very negative revision to previous numbers.
Fading the initial spike is one way to trade news. Try looking at what the price action is one minute after the event and thirty minutes afterwards on historic releases.

Crazy reversals


Some reversals don't make sense
Sometimes a reversal happens for seemingly no fundamental reason. Say you get clearly positive news that is better than anyone expects. There are no caveats to the positive number. Yet the price briefly spikes up and then falls hard. What on earth?
This is a pure supply and demand thing. Even on bullish news the market cannot sustain a rally. The market is telling you it wants to sell this asset. Try not to get in its way.

Some key releases

As we have already discussed, different releases are important at different times. However, we’ll look at some consistently important ones in this final section.

Interest rates decisions

These can sometimes be unscheduled. However, normally the decisions are announced monthly. The exact process varies for each central bank. Typically there’s a headline decision e.g. maintain 0.75% rate.
You may also see “minutes” of the meeting in which the decision was reached and a vote tally e.g. 7 for maintain, 2 for lower rates. These are always top-tier data releases and have capacity to move the currency a lot.
A hawkish central bank (higher rates) will tend to move a currency higher whilst a dovish central bank (lower rates) will tend to move a currency lower.
A central banker speaking is always a big event

Non farm payrolls

These are released once per month. This is another top-tier release that will move all USD pairs as well as equities.
There are three numbers:
  • The headline number of jobs created (bigger is better)
  • The unemployment rate (smaller is better)
  • Average hourly earnings (depends)
Bear in mind these headline numbers are often off by around 75,000. If a report comes in +/- 25,000 of the forecast, that is probably a non event.
In general a positive response should move the USD higher but check recent price action.
Other countries each have their own unemployment data releases but this is the single most important release.

Surveys

There are various types of surveys: consumer confidence; house price expectations; purchasing managers index etc.
Each one basically asks a group of people if they expect to make more purchases or activity in their area of expertise to rise. There are so many we won’t go into each one here.
A really useful tool is the tradingeconomics.com economic indicators for each country. You can see all the major indicators and an explanation of each plus the historic results.

GDP

Gross Domestic Product is another big release. It is a measure of how much a country’s economy is growing.
In general the market focuses more on ‘advance’ GDP forecasts more than ‘final’ numbers, which are often released at the same time.
This is because the final figures are accurate but by the time they come around the market has already seen all the inputs. The advance figure tends to be less accurate but incorporates new information that the market may not have known before the release.
In general a strong GDP number is good for the domestic currency.

Inflation

Countries tend to release measures of inflation (increase in prices) each month. These releases are important mainly because they may influence the future decisions of the central bank, when setting the interest rate.
See the FX fundamentals section for more details.

Industrial data

Things like factory orders or or inventory levels. These can provide a leading indicator of the strength of the economy.
These numbers can be extremely volatile. This is because a one-off large order can drive the numbers well outside usual levels.
Pay careful attention to previous releases so you have a sense of how noisy each release is and what kind of moves might be expected.

Comments

Often there is really good stuff in the comments/replies. Check out 'squitstoomuch' for some excellent observations on why some news sources are noisy but early (think: Twitter, ZeroHedge). The Softbank story is a good recent example: was in ZeroHedge a day before the FT but the market moved on the FT. Also an interesting comment on mistakes, which definitely happen on breaking news, and can cause massive reversals.

submitted by getmrmarket to Forex [link] [comments]

Gold and Silver rocket ride - 110k in 1 month

Gold and Silver rocket ride - 110k in 1 month
IMPORTANT: OVER 75% OF PEOPLE LOSE MONEY WITH CFD TRADING. IF YOU'RE A NOOB, DON'T EVEN THINK OF OPENING A CFD ACCOUNT. TRY MAKING CONSISTENT MONEY SWING TRADING ASX STONKS FIRST. THEN KEEP DOING THAT UNTIL YOU GET BORED AND WANT TO LOSE BIG MONEY VERY QUICKLY. ONLY THEN YOU MAY HAVE WHAT IT TAKES TO TRADE WITH LEVERAGE.
You most likely don't have my discipline and pain tolerance. Or my feel for risk/reward math. On top of this you need markets to play nice and a bit of luck.
I'm no wiz, but I know my strengths and weaknesses. I smell a good setup and prepare accordingly.
Hope you all nail your big opportunity when it shows up. If not, that's okay too. You'll keep getting chances. Be patient. Focus on small wins. Plus there's far more important things in life than being loaded.
------
How I lost 5k trading CFDs then turned it around
Back in April, I was playing with CFDs and nearly blew up my account. Started with $5k and dropped to almost zero because trading forex with leverage is a very stupid game. This is why IG gives you a demo account. But instead of using the demo account to learn how not to fuck up massively, I was using it to place giant YOLO shorts on US markets.
By being a bit less retarded on the forex trades I clawed back some losses then topped up the account with another $2.5k before starting to open small positions in gold. From 3 to 10 contracts depending on how confident I felt. Then smelling a massive opportunity, I ramped up the leverage by going with much larger positions.
Day 5
https://preview.redd.it/oqd955abwak51.png?width=1080&format=png&auto=webp&s=84aa309284c22117630899e39b8b1bfb89c670f3
Entering the silver trade
It was only after making decent profits in gold that I dared venture into silver. I wanted to enter silver around $18 but missed the boat after waiting too long for a dip. $20 was still great. Tons of upside left.
Silver is one nasty motherfucker to trade. It's a much smaller market than gold so the swings can be wild. Silver will play along nicely then suddenly fuck you really hard. If you use too much leverage you're basically waiting for your account to blow up. Stop losses will save you, but they can also kill your best trades. I didn't bother with stops for most of the ride because I'm an ASX_bets retard but also because I had ultra high conviction in the $25-27 price target.
Started with 25 contracts. I very nearly missed out on this mini pump. Some might call it luck.
Day 18
https://preview.redd.it/de8jozlexak51.png?width=1080&format=png&auto=webp&s=79d174c67a86754c7d9fd78aa594f88282c08834
Adding to my silver positions
Increased my position size once I had a profit buffer to protect against sharp drops. It's WAY easier to blow up a CFD account than it appears. When trades are going well you feel like you can keep adding leverage and make millions. But even small swings will kill you if your positions are too big. Discipline is key.
Buying 50 contracts in silver is not the same as 50 contracts in gold because silver moves are 2-4 times bigger. When gold moves 100 points, expect a 200-400 points move in silver. Having an equal mix of gold an silver contracts helped lower the overall volatility of my account.
Anything over 10 contracts in silver is big. You can lose hundreds within minutes. Buy 50 contracts, the price drops $1 and you're $5000 in the hole. I knew when to push and when to hold back. This was EXTREMELY important. I did not get greedy. I was happy to let price moves do most of the lifting.
Started the day with 3k profits. Went to bed that night with big beautiful bhags. 17k
https://preview.redd.it/qcbeoxvnxak51.png?width=1080&format=png&auto=webp&s=4228593b9d86cc5f0460f44af06c7292ea644625
Day 19
Woke up the next morning with even bigger bhags. 30k
https://preview.redd.it/9b439y5qxak51.png?width=1080&format=png&auto=webp&s=19e3ad27d7237bc88fdeb329ebcd113e11349554
Day 24
More pump. I added 50 silver contracts that day after a decent drop. Profits now up to around 41k.
Held through the big swings...
Like a proper bitch, Silver dropped another 5% soon after I added those 50 contracts and my 41k profit became 20k very suddenly. But no stop loss and I held firmly. What's a 21k drop when you've been down 35k on BBOZ before. Metals bounced back hard later that evening. Still not selling. High conviction made all the difference here.
Five days later and I was up to 50k profit.
At that point, I felt safe enough to add another 50 contracts.
https://preview.redd.it/j2at0n95zck51.png?width=1080&format=png&auto=webp&s=4a0ea2fabe6a245807fb9ee8a8d0bc4ce854ba3a
And it paid off BIG
Both gold and silver keep pumping. Profit now 86k.
Day 28
https://preview.redd.it/f3pz0an8zck51.png?width=1080&format=png&auto=webp&s=0ca765b6cad423786dee33a1366c70d324e39b8d
Why sell now?
Not selling yet. GV's silver target was $25-27 so I was confident holding through some wild swings.
GV = Gold Ventures https://twitter.com/thelastdegree
A turbo chad from Belgium who made a massive fortune trading options during 2008-2011 when silver went from $9 to $50 before crashing hard. GV is a certified wizard when it comes to timing the gold and silver cycles. Started with his wife's 32k savings and is now worth 18 million EUR or USD, I'm not sure and who cares. GV is pretty low key but commands plenty of respect from other metal traders on Twitter.
Meanwhile GV was on holiday but still shitting money.
https://preview.redd.it/ixsxwjx30dk51.png?width=1080&format=png&auto=webp&s=9fd5741634a7a5b0f913f5ea12edf05722f9fddf
GV also has a junior miner portfolio worth several millions. I believe it's true. I went deep into his Twitter history. He was buying heavily into the March crash and some of his picks like AbraPlata have since made 10x. Junior miners are like call options on metal prices with no expiry date but you still need to pick winners and enteexit at the right time.
Magical Six Figure Milestone
Not long after... BOOM! Hit 100k in profit.
When starting, I knew there was potentially 40k-50k to be made from this setup even without playing it perfectly. I would have been okay with 20k.
Day 32
https://preview.redd.it/oy8sqsgz1dk51.png?width=1080&format=png&auto=webp&s=a8c628670578b81d72b9a41bd9d2307a27a2fbf7
Start taking profits
Silver was still going strong but I felt it was time to de-risk.
So I started taking profits on both gold and silver around that time.
https://preview.redd.it/gvdqs67a2dk51.png?width=1080&format=png&auto=webp&s=64a77d3ccca86fe6e29eb43e0c2eaf096f68867c
Okay I'm out
The way silver kept pumping, I knew a big correction was imminent. By 12pm I was completely out with over 110k profit. Home and dry.
I went on with my daily work routine, a bit more relaxed and not checking charts every 5 minutes.
And then metals dumped hard.
There was money to be made on the short side but there was also a strong possibility of shorts being squeezed. So I didn't bother.
https://preview.redd.it/opoio79i2dk51.png?width=1080&format=png&auto=webp&s=80187384d37e03eec8d01814248bbe4c5a48cc4f
After the dump, I had no appetite to get back in with big positions. In hindsight I could have made tons more if I held to $29 but the ride from $24 to $29 is far more risky than $20 to $26. I'm quite okay with my 40x performance. Plus I needed to reset mentally after this rocket ride. More often than not, the best thing to do after a huge trading win is to take a break. Wisdom gained from the BBOZ days :)
Withdrew my initial capital and 90% of the profits from IG. Left around 6k on the account to keep playing.
https://preview.redd.it/1djdhz1m2dk51.jpg?width=1080&format=pjpg&auto=webp&s=c028a06d4e0cf73bfb80f8ac48dd18e333b791d4
Feels good to have extra funds to invest with but I also need to set some aside for the monster tax bill next year. You're welcome Australia, and all the JobSeekeJobKeeper leeches.
Hey everyone, check out my insane stats!
That 85% win rate though...
  • IG MARKETS - TRADE ANALYTICS - 29 JUNE TO 29 JULY
https://preview.redd.it/slkmhrlq2dk51.png?width=1272&format=png&auto=webp&s=b15b261144d3cd55c1d28530a80efd30c49f3125
Less impressive when zooming out to include the forex train wreck in April and my more recent metal trades.
  • IG MARKETS - TRADE ANALYTICS - 1 JANUARY TO 17 AUGUST
https://preview.redd.it/jam28zau2dk51.png?width=1272&format=png&auto=webp&s=99fd332c319984f1de28d1ec7e6a58df2754946d
-----
Credits to:
https://twitter.com/thelastdegree - already covered above
https://twitter.com/DaveHcontrarian - called the metals and S&P500 bull runs
https://twitter.com/AdamMancini4 - simple yet powerful charts
https://twitter.com/badcharts1 - advanced silver charts
https://twitter.com/graddhybpc - advanced gold and silver charts
https://twitter.com/Northst18363337 - another master of charts
https://twitter.com/bhagdip143 - ultimate master of monster position and making bhags
BTW fuck Facebook groups, you'll hardly learn anything there. Full of losers. Twitter is where the elite traders and big dick fund managers bounce ideas. A solid Twitter list is worth thousands if not millions in the right hands.
submitted by _HeyHeyHeyyy_ to u/_HeyHeyHeyyy_ [link] [comments]

[Free] The Complete Day Trading Course - YouTube Playlist (New 2020)

Day Trading & Technical Analysis System For Intraday Trading Stocks, Forex, Crypto, Options Trading & Financial Trading
What you'll learn
Learn All The Charting Tools, Trading Strategies And Profitable Hacks For Day Trading With Real World Examples!
Dedicated Support from the Course Instructors and the Learning Community. 100% Questions Answered Within 24 Hours!
How to Build a Solid Strong Foundation For Day Trading
How to Use TradingView For Chart Analysis & Paper Trading
How to Choose The Best Chart Time Frames For Day Trading
How to Use Different Day Trading Order Types
How to Short Sell & Deal With Short Squeezes
How to Avoid Blowing Up Your Account
How to Use Support & Resistance
How to Trade Profitable Technical Indicators & Overlays That Work Well For Day Trading
How to Identify Market Directions Using EMA
How to Identify Market Directions Using MACD
How to Identify Overbought and Oversold Conditions Using RSI
How to Use Bollinger Bands to Buy Low Sell High
How to Trade Profitable Chart Patterns That Work Well For Day Trading
How to Trade Broadening Tops and Bottoms
How to Trade Wedges and Triangles
How to Trade Flags and Pennants
How to Trade Gaps
How to Trade Double Tops and Bottoms
How to Trade Rounding Tops and Bottoms
How to Trade Diamond Tops and Bottoms
How to Trade Cup and Handle
How to Trade Head and Shoulders
How to Trade Dead-Cat Bounces
And a lot more...
Videos
Introduction

003 How to Use Trading View For Chart Analysis

004 How to Choose The Best Chart Time Frames For Day Trading

005 Day Trading Order Types

006 Short Selling Short Squeeze

007 How to Avoid Blowing Up Your Account

008 How to Use Support Resistance

009 How to Identify Market Directions Using EMAs

010 How to Identify Market Directions Using MACD

011 How to Identify Overbought and Oversold Conditions Using RSI

012 How to Use Bollinger Bands to Buy Low Sell High

013 How to Trade Broadening Tops and Bottoms

014 How to Trade Wedges and Triangles

015 How to Trade Flags and Pennants

016 How to Trade Gaps

017 How to Trade Double Tops and Bottoms

018 How to Trade Rounding Tops and Bottoms

019 How to Trade Diamond Tops and Bottoms

020 How to Trade Cup and Handle

021 How to Trade Head and Shoulder

022 How to Trade Dead Cat Bounces
submitted by cardporbudspha to Daytrading [link] [comments]

[Free] The Complete Day Trading Course - YouTube Playlist (New 2020)

Day Trading & Technical Analysis System For Intraday Trading Stocks, Forex, Crypto, Options Trading & Financial Trading
What you'll learn
Learn All The Charting Tools, Trading Strategies And Profitable Hacks For Day Trading With Real World Examples!
Dedicated Support from the Course Instructors and the Learning Community. 100% Questions Answered Within 24 Hours!
How to Build a Solid Strong Foundation For Day Trading
How to Use TradingView For Chart Analysis & Paper Trading
How to Choose The Best Chart Time Frames For Day Trading
How to Use Different Day Trading Order Types
How to Short Sell & Deal With Short Squeezes
How to Avoid Blowing Up Your Account
submitted by cardporbudspha to Trading [link] [comments]

GBPJPY Trend Invalidation Signals and Contingency Plans

GBPJPY Trend Invalidation Signals and Contingency Plans
Took multiple losses on GBPJPY as it ran through all the trend continuation setups, and the persistence of how it has done this move is something that gives us reason to re-assess trade plans, and be diligent on risks as well as opportunities the conditions we are now in may present.

I feel like I've seen this movie before. Usually when getting squeezed in a trend continuation, there are a few hits you have to take and then there is a big pay off. As a general rule, the better the move will be the harder it is to position for. So early losses on this were all within the acceptable margin of error in this strategy (I think I also made setup errors, which was bad. I can do better on that). After we ran some more setups (that looked fully valid at time of execution), I noped out. Stopped selling, and waited to see what happened.

Last time I remember being on the wrong side of such a fierce move of this form on GBPJPY was similar. Done well shorting, scalped some buys at a support, then reversed into the "correction" - and it went parabolic against me. I remember this well, because in the coming week there were news reports of the GBP having it's best day/week in a yeadecade (I forget specifics, but GBP was in the news for the rally). In the week after that, the high was made .... because that was when Brexit happened.

What happened there, from a charting perspective, is we went into a 2 week corrective cycle and then started another impulsive wave. If this happens we may see something spectacular in GBPJPY in the near term. This may feature a record breaking rally (or at least strong one) into 145, and even 155 (current price 130). From there, we may start a new trend taking the market into the large chart forecasts of 89 and 61.

I can retire if that happens. Absolutely. I'm going to plan, with various contingencies, for something like that possibly happening. In this post I''ll show what warnings signs we got over the last days as sellers. Where our main dangers will be as buyers. The levels as which we can be more sure buyers have won out in the short term, and also where the possible spikes low could come and how we'd trade them / what we'd do next.

I'll use MT4 charting for this analysis, since it will require a lot of different fibs and patterns assessment, I find fibs on MT4 quicker to work with than cTrader.

The Big Gartley Pattern


So the first thing we want to establish is where the buyers are coming from. Double bottom is accurate, but a bit vague. If we look closer, we can see the daily chart pinging off the 61.8 and 76 fib levels. This would be consistent with a Gartley pattern, and this would be a bullish reversal pattern (If successful). We have a couple probable scenarios here. One is a big break and move lower, and the other is a persistent move up in a small time frame trending chart form.

https://preview.redd.it/ycjwj3bsxmk31.png?width=806&format=png&auto=webp&s=94198bcff8cdf3e9b4cae306496bd91b5477a7f0
Let's look closer and see what the last days of trading have suggested to us about this.
Here is the 1 hour chart around the 76 level.
https://preview.redd.it/1c31uqv4qmk31.png?width=809&format=png&auto=webp&s=47df97d3f4f31238bacbb20282f8495399e01527
We've possibly formed the start of a second trend leg in the recent move up. Our best move here would be wait for a dip, buy into that and then run the trend upwards. We should see more strong moves like today, and these should be in nice structured form giving us easy entries and exits. This would be a good scenario for trading.
If a spike out is to form from this level, we'd now have it in a clear butterfly pattern. So we'd look for a 1.61 extension of this swing giving us a projected low of 125 area. This would be a harder move to trade. We either have to keep selling into the resistance levels and risk multiple small losses, or wait for momentum downwards and use breakout strategies. I feel method one has failed this week. We can perhaps look more at method two in a close under 128 (which will not happen if we are to trend).

https://preview.redd.it/djz31dxdrmk31.png?width=814&format=png&auto=webp&s=ce05f051a785177e7598e8c4f430224183366013
As buyers, the possibility of this take out low move is our main danger. We have to be aware this can happen and it will be a fast move if it does. Risk control is important.

Bullish Scenarios

For now I am going to work on trade plans for if price remains above 128.50 and indicates bullish momentum. I want to work on targets and then reversal areas.

When we use the analysis above and consider we may be entering into big corrective leg, we can consider that this might be a 'ping swing' like move.

https://preview.redd.it/s9fyuyhmsmk31.png?width=813&format=png&auto=webp&s=8aa69ac8b99bbd3874593a60fcf6e76b930be911
Remember the main characteristics of a ping swing. It's very strong. The move is parabolic. There's a spike out of major levels, and then there is an impulse leg.
Weigh that against the price action I described the last time I seen the same setup on GBBPJPY running into Brexit. The market followed that same template of price movements, and then came down in spectacular fashion.
This is where our main opportunity is, and this is where it seem the smart way to be betting is at this time. If the lows made here are taken out, we can look for positions around 125 to load up for this (a spike out and rally is still valid).
In the immediate term, we can just buy dips. Use tight stops and get high RR if it runs up, have very small losses to the downside. A correction from 130.20 to 128.50 gives us a great buying opportunity to get started in this move (buying over 130 but under 130.60 I think is a bad trade. Better to wait)
If we can establish a good buy position and see a ping swing move (which would be 2,000 pips - and GBPJPY can do this without many pullbacks, it's wild) the profit potential on this is enormous. Very small risks can be taken for extreme profits on the other end. If we do this and make good profits in the run up to that, we can then use a portion of these profits to position aggressively on the 61.8 spike out, and maybe have big positions in a decade long breakout to the downside in GBPJPY.
Whether or not there is a spike out low, when buying our first target is 145.00. This is either buying from 128.50 or 125 if that trade does not work out.
It would be very dangerous to sell if there is a spike out low into 125. Selling here could be brutal in the whip against you (as could selling in the leg we have but not getting out quick). For some perspective on this, GBPJPY went from 145 to 160 in only a couple strong trading days the last time we had conditions similar to this. The possibility of this, makes it a bad time to be a seller - horrible time to be a stubborn one.

Wrap up.

No buys 130 - 130.50. Possible buys if there is a break of this.
Sells possible in this area, but risky. Not great RR. I'd not bother.
Buy level 1 - 128.50. 143 could be swing target here.
128 major bear break area. Danger of fast move here. Cut buys.
125 if met in spike, big buying area. Target 143 and stop 123 (tighter with price action).
145 first major upside resis. If we break this, 155.
Absolutely no selling into parabolic moves on GBPJPY at levels not mentioned here, isn't worth it.
submitted by whatthefx to u/whatthefx [link] [comments]

How to be an Edgy Trader: Producing Positive Probabilities

After a relatively short time in Forex, most people will have heard of traders using the term "edge". "You have to have an edge", "I gotta protect my edge, man" and so on. What traders mean when they say this is something that gives them a calculated (in their perspective, anyway) reason to believe they should be profitable over enough trades. If this whole concept is completely new to you, read this for simplified explanation [link to add].

How do you actually get an edge, though? What does it mean? How does one goes about "finding their edge"?
I can only speak from a personal perspective on this, I am sure there are many more ways people have edges outside of what I am going to talk about. There will be people who have edges that are outside of my comprehension. They may be able to tell you some far cooler stuff, but I personally decided to focus on entering.

It is not a unique thought, I know. I never tried to trade-mark "enter well" but it is something I have paid particular attention to detail on. Not only how to get areas of the market that by default offer better risk reward (see more on this later in this post), but then how to put them on steroids was dialled in entries allowing for larger lots. Note, this is not to say "larger lots" means "risk everything in your account". You can risk exceptionally little as a percentage doing this, and still have the chance of good gains.

This has been something of a three part process for me. Here is how it has went;

Find areas where price is likely to reverse from where you can quickly know if you are wrong to get out.
This does not have to trend reversals, it is usually better to look for the ends of trend corrections, and enter for a new trend leg reversal. I worked out how to do this reasonably early, I think. Relative to what I have seen from others when they are starting up, I would say I was maybe on the upper end of the bell-curve in being able to broadly identify good support/resistance levels while still quite a newbie.
This might have worked out for me, if it was not for the fact I was really wanting to get tiny stops and would put far too much weight on just the levels I was selecting. Sometimes they were astonishingly accurate, which encouraged me to begin to put too much faith into them. Through this time, I was getting punked a lot in the markets. I would start to buy, get stopped out a few times and then just as I gave up buying, it would make a massive move upwards. This was so frustrating. This went on for a long time, with me constantly trying to make the forecasting of specific levels more accurate, which was what I thought the fix was.
This was a good first step. Although it felt hellish at the time, I can see now that getting a good general grasp of levels price may bounce from, or make significant breakouts through, is a good fundamental skill to have.

Expecting and accounting for spikes. Turning my foe to a friend.

So basically what happened is it got smacked with so many spike outs that I started to look at it as "it will be the place I think, plus a dirty spike" (me and spikes were not on speaking terms, at this point). This part there was a lot of arbitrariness. At the time I probably thought of it as "more art than science", but looking back on it I see while I was focusing on how unfair the spikes were and basically just "fuck you" selling into spikes. This was going a bit better, meh ... well, no this also kind sucked.
At this point I would sometimes get rock'n'roll star entries. This made me feel good. Very clever. I was not actually doing all that well, though. I could just sometimes get the spectacular entry I'd been on the hunt for. So there were times I felt particularly smug and clever during this time, but overall I was still losing. The real bane of this part became targeting. Once I'd got my rock'n'roll star entry, what now? It may sound like a good problem to have, but having risk set for a 5 pips stop and a trade up 25 pips with the potential to drop 100 more presents some serious problems. There is a lot of scope to make mistakes here. Also, even if you do what I would now consider to be the right thing (and clearly so), there is a lot of scope to do the right thing and end up feeling like you screwed up. This was what was getting me mostly in this time. My entries were good enough for me to cover my losses in big winning trades, but I was not managing big winning trades efficiently. On a psychological note, when I'd get these big decisions (having to be made in seconds sometimes) wrong, I would often lose my cool and any sense of actual trading rational.

This time was hard. I felt like what it must feel to be tired climbing a mountain, and find your intended route blocked. You can see the summit right there, but you lack a way to get there. You have already drained so many of your physical and mental resources to get where you are and now it is seriously time to ask yourself is it time to climb back down.
I decided to climb up. Then I fell a bunch of times. Licked my wounds. Fell again. Felt uber sorry for myself, and then finally got a grip and started to climb again.

Specific Entry Strategies

It was someone else who told me, they said something to me and it was really a very simple thing. I think others must have said the same thing to me many times also, but it flew in the face of my general idea of "I want to be selling the end of the spike for best possible entry". I won't go into the details of what it was, but it basically amounted to making me see that not having a predicable and repeatable level to set my stops and targets was preventing me from being able to create an edge, or even if I did; I could not understand what it was.

I started to notice things, that I'd literally watched 1,000s of times happen before and see them as nuisance rather than opportunity. I noticed the levels I'd pick price would often stall at them. Then quickly wick (which was why the "fuck you" selling into spikes worked from time to time). I further noticed that a lot of the times I was getting in at the optimum price (and I was getting rather good at this by now), when I was having big profitable trades come back against me and stop me out at tiny break even profits only to then trend for what would have been $$$, 80% or so of the time it seemed to reverse right off the original level, or close enough anyway. These two things had been killing me. The spike out of my entry level and the retrace of my profits to be slight + break even stop outs (I'd panic and close them before they went bad ... or sometimes, I'd not, and they'd go bad).

I came to see that these two things I'd blamed for being the reason I was losing were actually assets to be within my scope to benefit from. If rather than doing what I was doing and getting full risk on too early, I waited to see if it wicked through, made a convincing move and then retested my original level. If it did, the wick could be my stop loss. This was tiny. This was so much better than selling into the wick and "guesstimating" the stop ... by which of course I mean "fucking it right up".

Practical Chart Examples


https://preview.redd.it/i1551s1z9c821.png?width=1360&format=png&auto=webp&s=acaa7e80f94dfe2ba056833cd8788ba006528387
Let's say on this chart I has hypothetically selected the blue level as my sell level. This is obviously a great level if I can target close to the lows and get it even 40% of the time. My stops are tiny, and my reward is big.

Here is how I'd lose all my money while being fundamentally right here;

In phase one, I am selling 2 bars before the high, where there is the doji sort of candle. I am short, I have sold the top pip and I feel smug. Then I get spiked out. I sell a few other times with same results, then probably switch long to just completely trash my day.

In phase two, I am doing the same kinda thing but I am thinking I have out foxed the market by waiting and I start to sell into big candle breaking out of the doji. Here I have more chance of getting the trade, but often price just presses a bit too far with me being squeezed out at the high.

This chart does not really give a good representation of how things would work in phrase three, because I would be using smaller charts and looking for the signs of price action reversing, and then looking for the spots where I can get in tucking stops behind a close high. Essentially it is just added patience and being more tactical when it comes to entering.

You can see if the pay off for a "normal stop" risk reward trade would be a good one here (probably 1:3 or 1:4), the overall scope for massive profit potential (without massive risk) is humongous. Often this will be decreased because you have to trail up stops and price retraces, but if price trends aggressively, 1:20 sort of risk:reward trades can be found here. 1:10 are a lot more common. 1:5 are somewhat frequent.

Through dedicated study to how to enter and target from these sort of moves, I have gotten to a point where I can hit that 1:5 trade more than 20% of the time. Over long periods of time (assuming markets continue to be as they were), I should expect to break even by getting this 20% win rate, and when times are good, win rates like 40 - 50% lead to extraordinary profits, without extraordinary risks.

This is where I have carved out my edge in trading. It is largely based on the concepts of swings/trends formation, support and resistance and classic reversal patterns. All widely available to learn about. Then I put excessive hours of focus on how to turn that common knowledge into uncommon ability.

A determined person reading this, should be able to go and do that for themselves, based on the information provided here to get them started.

(Disclaimer, it took me YEARS, the roses here have thorns ... I want to reiterate, expect this to take some time. Even with me telling you the mistakes I squandered so much time on and how to hack past them)


submitted by inweedwetrust to Forexnoobs [link] [comments]

Let's Talk Fundamentals (because they might be important this week)

This is more of a brain dump to encourage discussion, so I'd love to hear your thoughts.
Something strange happened this week.
Stocks fell off - mostly Japanese stocks, but equity markets everywhere suffered nasty losses. The S&P 500 shat a nasty reversal candle on Thursday, and the Nikkei posted one of its largest falls in history on Friday.
At the same time bonds fell (yields rose). The US Dollar also fell.
That's not how it's supposed to work.
When stocks fall, bond yields fall (bond prices rise) because more people buy them. Where the hell was the money going?
Into the Yen and the Swiss Franc, mostly. The Yen because most of the action was in Japan. The USD/JPY and Nikkei 225 are HEAVILY correlated. I can't tell if the fall in stocks preceded the fall in USD/JPY (and AUD/JPY, which many say led the way), or if it was the other way around, but either way we had classic risk aversion kicking in.
USD/JPY posted its largest weekly decline since 2011.
There was some jawboning, and data from Japan to suggest that the new QE measures are working.
But wait a second: they've only just started. That money hasn't really filtered down to anywhere where it's actually being used to power the economy. The only real effect so far has been a massive uplift in stocks. This is because a lot of the Nikkei 225 is made up of exporters and multi-nationals, and a falling Yen boosts their expected profits - nobody's actually made any money yet.
The technicals still only say "retracement", not "reversal", but we're hanging in by a thread - especially USD/JPY. If we break Friday's low, 100 is in sight. If this break is for real, this psychological barrier will mean absolutely nothing.
After this 97.00 is next, then 95.00/94.50, then 92. I don't think any fall would get down to 92, or even 94, but 97 is highly possible by the end of this week - and if we get there, it could be in a matter of minutes.
Before I go on, COT data
(For newbie traders, COT means Commitment of Traders, and it's a series of complicated charts showing net speculative futures positioning. When you overly it onto price data, you will find that extremes of short positioning tend to precede massive rallies. This is because a LOT of people get increasingly short as price starts to fall, which reaches an extreme as it continues to fall. Price starts to come back up, and the extreme extends a little bit more, before you get a short squeeze and everyone buys furiously to get out of unprofitable short positions)
Aussie COT showed a massive extreme in short positioning: http://stocktwits.com/message/13774559
So did the Japanese Yen: http://stocktwits.com/message/13774580
The most telling is the S&P500: http://stocktwits.com/message/13774599
The light blue line says that the big money is getting more and more out of stocks (or since it's futures positioning, they're starting to bet it will fall)
All other things being equal, this means these two are probably due a large correction. All other things might not be equal, however. Extremes in quiet times can become the norm in unusual circumstances - bear this in mind.
This is the scenario if Asian stocks lead the fall. Longs are clearly nervous, but the docket is light this week. This alone could be enough - with minor bad news sparking panic selling. The US Dollar could see some initial selling purely on USD/JPY, pushing the majors higher. This will happen during the Asian session. If it happens in the morning, you will see European markets open lower, and we might get early USD weakness as USD/JPY sells off.
But it won't last. The risk aversion will spill into European and US stocks as these markets open, and they may gap significantly lower. In this case the Swiss Franc will strengthen first, followed by the US Dollar. So I don't like USD/CHF so much here. The US Dollar will almost certainly surge once US markets open.
If this is the real deal, (and that is the biggest fucking "IF" ever because many have called this reversal lots of times and have given up after being wrong repeatedly) this dollar surge will be enormous. The world will be waking up from its dream of a fragile recovery that has been overblown by surging stock markets.
Stock markets have been rallying for mixed reasons. Some of it is investor confidence, but most of it is simply the search for yield, which most cash investments can't provide at the moment. Dividend yields in stocks are good, and fund managers have been buying them because they need to beat indices, which are rising more quickly than the values of their portfolios. This cycle has fed itself, and stocks have risen, even though demand for those companies' products and services has remained tepid.
If this happens, the Yen crosses will be blown to bits, as will the majors. But don't just go short everything if you see it falling. It will be difficult to know whether it's the real thing, and you'll have to be in front of your trading screen at the time (unless you want to set breakout orders)
We are seeing all the signs of a minor bubble bursting.
The headlines have been all about markets hitting new highs, and everybody buying stocks. That is usually a sign that the smart money has started selling their large holdings to incoming retail investors, and that a lot of the profit from the bull run has been made. If stocks start to look wobbly up here, the last ones in will be the first ones out.
Look at USD/JPY or the other Yen crosses zoomed out to 2005. The rise is absurd. I showed it to my girlfriend, who doesn't know the first thing about Forex, and she said it looked unnatural and if she had to guess, the next move would be "down a bit". This kind of woke me up a little - it was so obvious because the move up seems to be against the laws of nature, even if backed by fundamentals. Humans are good at pattern recognition, and even she could look at previous price action and recognize that a sharp rise like this almost never happens without a bit of falling.
It all depends on where you bought.
For example, if you had held USD/JPY since 92.00, and you planned to hold it for the rest of the year, you wouldn't worry so much about a drop to 97 (though it would be annoying). If you were long on a break of 100.00, you would be getting the fuck out. Your stop might be at 100, or maybe you'd locked in 50 pips. The point is that longs are now nervous, and bids will be hard to find below 100. Most people are probably prepared to take a chance buying a dip into around 100 (I know I am), but not below there.
Below there are stop losses. Hundreds of millions of them.
So that's my take on things. I'm not saying the world will end this week, but we all know that what goes up very quickly when there isn't a good reason to do so, usually comes down pretty quickly as well.
Others would argue with my fundamentals. I've seen articles saying that the rise in stocks can be attributed to companies holding on to cash reserves and paying high dividends, because they are worried that the recovery might not come. When they finally do see it coming, they will start spending that cash on growing and employing people - so maybe stocks are leading the global economy in this recovery.
I say horse shit. Demand has to precede supply, and right now the powerhouses of the global economy have more supply capacity than there is demand for. We have got into this situation because corporate profits have stayed very good during the last few years, but household incomes have fallen in real terms, and the average consumer is no better off, even though central bank governors are starting to say otherwise.
You and I are still earning far less money than we should be, and spending proportionally more and more of it every year as wage growth struggles to keep up with inflation, which is already low in most developed countries. Corporate profits continue to do well, but this money is not being spent in the real economy and used to create jobs.
I'm not going to go all marxist here for my last thoughts, but it is important to realise that there is a continuing and growing concentration of wealth in the hands of the few. They might say that they are the job creators, and many of them are. But for the most part they are the wealth hoarders. That money goes into things that cause the economy to appear to be growing, but do not actually grow the real economy - company stock, large assets, investments.
They also buy things from companies that are seeing their profits grow faster than the wages they pay. Where a dozen board executives get huge bonuses and a hundred thousand shareholders see their balance sheets grow, the people who are actually spending their portion of that company's profits (the employees) don't have any more money to inject into the economy than they did last year.
These market forces are going to collide sooner or later. Either:
I'm not saying it will happen this week, or at all. All I'm saying is that stocks are rising very quickly on not much at all. There are precedents for this throughout history, and it never ends well. When you hear hoof beats, don't think zebras.
TL;DR Forecast is choppy, with a light chance of apocalypse
submitted by NormanConquest to Forex [link] [comments]

How to Day Trade A Short Squeeze! How to trade a short squeeze  Trading Spotlight - YouTube Surviving and Trading a Short Squeeze 006 Short Selling Short Squeeze What is a Short Squeeze? Part 1 Stock BIG Short Squeeze, Forex: USD Dump NY Open Technical Analysis, Price Action, 07.04.2020

A short squeeze is when the market reverses aggressively after a relentless sell-off. This can occur on many different timeframes, and like most opinions in the markets can be subjective depending on the trader. One may view the 15min chart and note the short squeeze, however, another may view it as nothing more than noise on the 4hr chart. Chart-1 shows what appears to be a characteristic long squeeze event. Here AUDCHF is in a long bearish trend. At time 1, the bearish trend starts to intensify.At time 2, the price falls accelerate sharply, reaching a tipping point.This is probably where automated stop loss orders start to kick in and trigger selling in volume. Interesting looking chart with rising volume the last few days. Might be shorts covering - short interest is high with 20% and might go in squeeze mode since it´s a small cap with relatively low liquidity. Round bottom looks nice as well as the double bottom (almost.. more if you think of aa supportzone than the previous low) Short Squeeze … jeder Anleger hat diesen Begriff schon mehrfach gehört. Aber nicht allzu viele können damit wirklich etwas anfangen. Und noch weniger wissen, wie bemerkenswert dieses Phänomen ist. Denn Short Squeeze, das ist die Situation, in der Bären den Bullen Gutes tun, ohne es zu wollen, quasi „aus Versehen“. Das Rezept dazu: Ein Abwärtstrend mit selbstsicheren Bären und ein ... A short squeeze – а situation in which a heavily shorted currency moves sharply higher, forcing more short sellers to close out their short positions and adding to the upward pressure on the currency. A short squeeze implies that short sellers are being squeezed out of their short positions, usually at a loss. A short squeeze is generally triggered by a breaks through a strong level of ... I think a short squeeze is coming soon Spartan Energy Acquisition Corp Cl A (SPAQ) 8.96 -0.19 (-2.08%) 10/29/20 8.92 x 4 8.94 x 5 POST-MARKET 8.92 -0.04 (-0.45%) 18:27 ET Expiration: 2020-11-20 (m) 22 Days to expiration on 2020-11-20 buy call option strike 10$ and... Ein Short Squeeze heißt übersetzt soviel wie Angebotsknappheit oder Engpass und kann fast in jeden Markt oder Instrument auftreten. Egal ob DAX, Einzelaktien, Forex oder Rohstoffe etc. auch Optionsscheine und Zertifikate sind natürlich durch das Basis-Instrument indirekt beteiligt, durch den Hebel natürlich umso stärker. Short im Markt bedeutet ganz einfach, auf fallende Kurse zu setzen.

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How to Day Trade A Short Squeeze!

Published on Nov 5, 2017. How to Day Trade a Short Squeeze like we encountered on Friday! Breaking down this massive move on $DCIX and examining the emotional effects that traders have on the ... Fausto Pugliese and our instructors teach our students how to day trade the market by using strategies and programs such as technical analysis, risk management, chart patterns, level II, time and ... What is a Short Squeeze in Forex? - Duration: 20:06. ... Candlestick charts: The ULTIMATE beginners guide to reading a candlestick chart - Duration: 16:26. The Trading Channel 1,638,672 views. 16 ... 006 Short Selling Short Squeeze Day Trading & Technical Analysis System For Intraday Trading Stocks, Forex, Crypto, Options Trading & Financial Trading What you'll learn Learn All The Charting ... Professional trader Paul Wallace introduces you to trading Short Squeeze and covers the following topics: - What is a Short Squeeze? - Where does one show up on the charts? Skip navigation Sign in. Search

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