Trading and probability

Placing stops: Mastering trade management and risk control

Moving your stops to breakeven

Now, once price moves in the direction of your trade you know that you can start reducing your risk. In the trade example above, once price had moved above the 50EMA just above the entry price and cleared the overhead highs at 1233.00, you could have considered moving the stop to breakeven. Risk would have been managed and limited. In certain situations it is also possible to trail your stop as you move into profit

How a good exit helps you keep profitable

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Learning the role emotions play in your trading

How are you trading at the moment? Or, more specifically, how are your emotions affecting your trading at the moment? Take a moment to ask, 'How do I feel when I am trading well as opposed to how I feel when I am trading badly?' Trading is a very emotional pursuit. In fact, you may have reached the conclusion that you need to remove the emotions entirely from your trading. This idea is the birth of the automatic trading robots. The thinking was that the emotions of a trader are getting in their way and if we can just entirely eradicate that from the trading process then trading will become easy. Now, this may well be the case for automated high frequency trading reacting quicker than humans, but many traders will have their own story of trading robots they have bought. The 'whatever you call it' turbo or Max robinator FX 2099. You may well have your own experience of that sure fire robot you bought back in 2010. All you had to do was sit on the beach and drink the cocktails bought to you. The dream probably lasted all of 3 weeks. My dream lasted until about day two.  The problem of course is that pure logic has it's weaknesses. In fact there are times when it is just stupid to be purely logical.

The latest findings from neuroscience is that we should combine both our reason and our emotions. 

Neuroscience sheds some light on the role emotions play in our decision making

Now neuroscience is a relatively new science. The brain has been relatively poorly studied and it is only in the last twenty years or so that the science has really developed. The most up to date thinking is that as information comes into us through our senses that is evaluated by the amygdala part of our brain. The information is then given an emotional marker or label by the amygdala. Now, once an emotion is tagged to the event, the information goes up to the Cortex. So, in effect, we are only evaluating what we have already had a feeling about first. We feel first and think second. This is obvious to us when we consider the type of advertising that works. To sell a product a company engages our emotions and feelings and gets us thinking and feeling first. Adverts don't give us a list of pro's and con's about a product because we don't think in a way that is entirely detached from our emotions. Instead the adverts give us a feel, the music, the images etc and that is what prompts us to buy and then to think about the sale. The bottom line is that we feel, before we think.

So, you see the issue?  We can't trade without emotion. It is a foolish approach for us to try. So, what purpose do our emotions have. Ok, emotions actually give us information by making us feel before we  think. That helps us respond quickly. So, if your feeling fear you will respond quickly to avoid the threat or danger. That feeling can speed up the whole process of reasoning. Emotions also help us to focus on what is important. We are drawn to respond to the greatest threats or dangers through our feelings.  Furthermore, emotions also help us to have confidence and competence. A competent trader is a confident trader and, usually, a profitable trader.

Emotions are key in decision making

Accept that all your emotions are very important in making decisions. Now, extremely strong emotions can hinder our trading, for sure. They need addressing. However, emotions are not your enemy. They are your friends. So start to think of emotions as your allies and not your enemies. Use the emotions you are feeling as you would a data feed. So, if you are feeling fear in a trade what does that mean? Perhaps you are over leveraged and the fear is warning you that you are in danger. Are you feeling confident? Perhaps that is telling you that your analysis is correct.  Maybe you lack confidence in your trading? Perhaps that is telling you that you don't have enough experience yet and you need to learn more. Listen to your feelings, and don't ignore them. See them as your assistant, rather than your enemy.

Conclusion

Emotions are there to help us, rather than hinder us. We have all heard about EQ - or emotional intelligence, and that is tapping into that emotional part of us. It is being able to reason emotionally.  Now, emotions can be out of control and they can be totally indulged. For example, if you feel angry it wouldn't always be appropriate to act on that anger. However, reasoning emotionally and being aware of your emotions is much more in tune with the way we actually think. Perhaps you are needing to learn to stop trying to suppress and ignore your emotions and to start listening to them. Perhaps they are trying to tell you something that you have been ignoring.

Making use of the Fib

"Fibonacci" is a well-known word. It's the name of an Italian mathematician who became famous by discovering a peculiar series of numbers (0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, etc).

Every number in this sequence is the sum of the two preceding ones. The ratios of these numbers mysteriously correspond to the proportions of things in the universe, from sunflowers to galaxies.

Long ago traders found that Fibonacci numbers and ratios can be suitable for technical analysis. Firstly, they are nicely mathematical and add a pleasing element of nerdiness. Secondly, they produce objective price reference points and thus reduce the subjectivity of analysis if used correctly.

Today, MetaTrader has a built-in set of Fibonacci tools. It includes retracement, expansion, fan, arcs, and time zones.

Fibonacci tools are used for 2 main purposes:

1. To identify support and resistance levels (Fibonacci retracement).
2. To predict the potential scope of price movement (Fibonacci expansion).

Let's focus on Fibo retracement levels and Fibo expansions as these tools offer the greatest merit to Forex traders.

Fibonacci retracement

The primary task of Fibo retracement tool is to determine the size of potential correction against the main trend.

It's very important to use this tool correctly. Here are the rules:

1. Find a distinct high and a distinct low of the price.
2. Apply the Fibonacci retracement levels from the left to the right connecting these two points of the price. For an uptrend, you'll draw this line from minimum to maximum. For the downtrend, you'll need to draw a line from maximum to minimum. Notice that there should not be higher highs or lower lows to the right of those that you chose.
3. Include candlestick's shadows (wicks).

Then 9 horizontal lines will automatically appear intersecting the trend line at Fibonacci levels of 0%, 23.6%, 38.2%, 50%, 61.8%, 100%, 161.8%, 261.8%, and 423.6%. You can manually add 78.6% level. Where do these levels come from?

If you divide any consecutive numbers of the Fibonacci sequence, for example, 88 by 55, you will get 1.618 (the "golden ratio"). The level of 61.8% comes from 55/89 being equal to 0.618, while 38.2% is derived from skipping 1 sequence in division e.g. 55/144 = 0.382. The levels of 0%, 50%, and 100% are not Fibo numbers but they still represent important landmarks for the price.

If you take Fibonacci from an uptrend, Fibo levels will provide support and limit the bearish correction. At the picture above, bearish correction ended at the point C (38.2% Fibo level). If you take Fibonacci from a downtrend, Fibo levels will provide resistance and limit the bullish correction.

When price arrives to the first Fibo level on its way, it's expected to pause. If the countertrend pressure is too big, it breaks the level and goes to the next one. Retracement levels of 38.2%, 50%, and 61.8% are considered the most important. If the price retraces more than 61.8% of the previous move (on a closing basis), the odds are that it will reach the beginning of a trend.

There are 2 main ways to trade using Fibo retracement tool:

1. Aggressive traders can open positions at every Fibo level. If the price breaks one Fibo level, such traders target the next one. This is trading against the main trend.
2. Conservative traders wait for the price to rebound from a Fibo level in the direction of the main trend. A confirmation signal at the point C is needed before such trader opens a position.

Important tips

1. Look at the area around a Fibonacci level rather than at an exact level. There's no pip-precision at the market.

2. Pay attention to the long-term trends. Fibo levels from longer-term trends and higher timeframes have more weight.

3. Use Fibonacci on several timeframes. When different Fibonacci levels converge, they become more significant.

4. Avoid using Fibos on very small timeframes. Experience shows that it works better from H1 and higher, though you can always experiment.

5. Don't count on Fibonacci alone. Fibonacci is not a ready-made solution for trading. To increase the probability of success, use other things together with Fibo retracement for confirmation.

What combos can be there? Fibonacci retracement plus a trend line may produce a good entry point. The 200-period Moving Average that is in the same area as 50% Fibonacci retracement will be a stronger obstacle for the price. You can take profit in this area or enter in the direction of the main trend. In addition, look for reversal candlestick patterns near the Fibo retracement levels.

Fibonacci expENsion

Fibonacci retracement can provide you not only with correction levels, but also with some targets. If the price retraces 100% of the previous trend and breaks 100% level, you can use 161.8% Fibo as the next target.

Fibonacci expANsion

Fibonacci expansion is a separate tool. If a trend resumes after a correction to the point C and goes beyond the point B, you can expect the market to move to the point D. Its location may be found by applying the 'Fibonacci expansion' tool to points A, B, and C (D is the projection of Fibo levels calculated on the basis of AB from the point C). The point D is a good place for a Take Profit order.

Conclusion

Fibonacci tools offer a way to mathematically break price action into sectors. It's a popular tool used by billions of market players. As a result, if you do Fibo based on a distinctive movement of the price, the odds are that many traders will do the same thing and cluster their orders around the Fibo levels. Thus the self-fulfilling prophecy will make these levels "work" for traders.

- This article was submitted by FBS
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How to plan your trades using Japanese candlesticks

Japanese candlesticks and their patterns can be a valuable source of information for Forex traders. We examined their structure and patterns in the previous articles. This time, we'll focus on applying the theory to practice and see how one can use the logic of candlesticks for opening trade positions.

Have a plan

Seek confirmation of reversals

Conclusion

Joseph De La Vega understood the riddle of markets in 1688

Computers and the information age have changed nearly everything about how we trade but so many parts of the decision on whether to buy or sell are unchanged.

The above scene is from the interior of the Amsterdam stock exchange where stocks began trading in 1611. Seventy-seven years later, Joseph De La Vega wrote perhaps the first detailed book on how to trade stocks in 1688.

It's titled Confusion de Confusiones and much of it is as relevant today as it was 330 years ago. Originally written in Spanish, it was translated to English in 1957 and still remains little known.

As the translated introduction reports, De La Vega compared the life on the exchange to a labyrinth and said participants moved in a world of darkness which nobody wholly understood. He said no pen was able really to describe in all its intricacies.

The title describes how every rational action was tied to an irrational one. He calls it a 'gambling hell'.

The book is written in an usual style where the voice of the author is given to a variety of characters but several passages stand out, including four principles on how to speculate:

"The first principle [in speculation] : Never give anyone the advice to buy or sell shares, because, where perspicacity [keenness of understanding] is weakened, the most benevolent piece of advice can turn out badly. The second principle: Take every gain without showing remorse about missed profits, because an eel may escape sooner than you think. It is wise to enjoy that which is possible without hoping for the continuance of a favorable conjuncture and the persistence of good luck. The third principle: Profits on the exchange are the treasures of goblins. At one time they may be carbuncle stones, then coals, then diamonds, then flint-stones, then morning dew, then tears. The fourth principle: Whoever wishes to win in this game must have patience and money, since the values are so little constant and the rumors so little founded on truth. He who knows how to endure blows without being terrified by the misfortune resembles the lion who answers the thunder with a roar, and is unlike the hind who, stunned by the thunder, tries to flee. It is certain that he who does not give up hope will win, and will secure money adequate for the operations that he envisaged at the start. Owing to the vicissitudes [volatility], many people make themselves ridiculous because some speculators are guided by dreams, others by prophecies, these by illusions, those by moods, and innumerable men by chimeras."

In a separate pass he describes bulls ("lovers") and bears ("contremine").

"The bulls are like the giraffe which is scared by nothing … They love everything, they praise everything, they exaggerate everything," he writes.

"The bears, on the contrary, are completely ruled by fear, trepidation, and nervous ness. Rabbits become elephants, brawls in a tavern become rebellions, faint shadows appear to them as signs of chaos," De La Vega writes.

Ultimately, he says it's best to drink from both cups but that the natural inclination in stocks is higher with the occasional fall.

"Experience has shown that usually the bulls are victorious and the bears lose out," he wrote.

His optimism was well-placed for time. The Dutch East India company's shares rose steadily for more than 200 years, albeit with plenty of volatility. By some measures, it was the largest company in history.

Perhaps my favorite line from the book is this one, the idea that you can never quit once you're involved in markets.

"It is a great error to assume that you can withdraw [temporarily] from the Exchange or that you can gain peace of mind when you cease to meet with the other speculators. If ill fate pursues you persistently, it can reach you just as well in the rocks and the forests, where lightning may strike you and wild beasts may attack you. . . . Moreover, it is foolish to think that you can withdraw from the Exchange after you have tasted [the sweetness of the honey]. . . . He who has [once] entered the [charmed] circle of the Exchange is in eternal agitation and sits in a prison, the key of which lies in the ocean and the bars of which are never opened. . . ."

Here's an online version of Confusion de Confusiones.

Trading strategies: Trading news releases

Trading a news release can be another useful tool to have in your trading inventory. However, there is a right way, and a wrong way to trade a news announcement. This article will aim to guide you how to recognise key news that can be traded, how to enter, where to place your stops and where to take profit.

Recognizing key news

The first aspect of trading news releases is learning how to recognise important news vs unimportant news. Every day there are literally hundreds and hundreds of data points, interviews, blog posts, and analysts comments on the breaking news. However, opportunities to trade a news release may only come once or twice a week. So, the first step to taking these opportunities is to recognise the significant news. How do you do this? Well, you do this by understanding what the market is focusing on. This is best explained through an example. At the time of writing one of the best examples is the British Pound. The United Kingdom is in the middle of intense negotiations regarding it's withdrawal from the eurozone. The market is pricing in a chance of a Brexit 'no deal' and the GBP has a year long high of net GBP short position. The market is heavily biased short on the nervousness that the UK doesn't achieve a decent Brexit deal with the EU. Therefore, the market is sensitive to any positive news about the Brexit negotiations. So, during this period of negotiating headlines are moving the GBP quickly and sharply. This is a great time for headline trades.

How to enter

Now we have our intense GBP situation outlined, we now know which headlines are tradable. Specifically, it will be any news release that indicate how the Brexit negotiations with the EU are going. There have been a considerable number of such headlines over the last few weeks. However, it is no good seeing these headlines at the end of the day for trading them directly. No, these headline trades need to be entered within the first 5 minutes of the news being released.

How you react can make a big difference

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Jeff Bezos is the richest person in the world.  Can his lessons for business, work for you in your trading?

On September 19th, 2018, Jeff Bezos gave a somewhat rare interview at the Air Force Association Air and Space Conference.  Although his comments were from his experience from running Amazon and his space company Blue Origin, they had a lot of relevance to running a trading business as well.   

The allure of gold...

Gold's history dates back to at least 3100 BC and has probably been traded before then. Over the years Gold has continually increased in value. More recently, since the financial crisis of 2008, the price of Gold has rapidly increased.

This huge increase over the period made it one of the of the most profitable markets over the last decade. In a decade of uncertainty Gold was bid as a reliable safe haven. As paper currencies were viewed with suspicion the lure of Gold and it's proven long term value proved alluring to many.

It has served as a refuge for investors fearful of putting their money into less reliable markets. In the chart below you can see that the price of Gold increased from around $967 an ounce to $1900 an ounce at its peak in 2011.

However, despite the continued uncertainty we have seen lately with the US China trade war, the weakening of Turkey's Lira, the convoluted way NAFTA has been handled the price of Gold has been rather muted. In the chart below you can see the steady fall in Gold prices since June 2018. 

Tip #1 Watch the Federal Reserve and the Midterm elections for Gold's future price

Over this last year much of Gold's weakness is being attributed to US dollar strength. The strengthening US economy and the Federal Reserve's anticipated two rate hikes has led to the US dollar being viewed as a preferred safe haven to Gold.

In all of the US and China trade war talks it is thought that a strong US economy would be well placed to weather any storm. However, the strong US dollar has been compounded by other central banks like the European Central Bank, the Bank of England, and Japan being slower to increase their interest rates.

The strengthening US dollar against the Lira and the Yuan have only compounded the problem. So, the higher the US interest rates the less appealing Gold is since it has no yield value. It is also worth watching Mid-Term elections coming up in November and if the Democrats gain control of the House of Representatives the US dollar would likely lose ground against Gold on the lack of certainty going forwards.

Tip #2 Gold tends to appreciate in low interest environments

The world has been in a period of ultra-low interest rates since the financial crisis of 2008. The Swiss National Bank, for example, is still in a period of negative interest rates. During these times Gold has more attraction since if bonds and saving accounts only offer poor returns, why not place your money in the relative security of Gold.

However, as interest rates increase across the world Gold will likely continue to depreciate as investors place their money elsewhere. Gold has particular interest in a low interest and high crisis environment. As the crisis recedes and interest rates rise then Gold's price recedes. It is a cyclical market going through 'waves' of interest.

Tip #3 Think long term, Gold has been in a strong uptrend since 1971

Looking at the chart below you can see that Gold has appreciated considerably since 1971. If you had bought and held since 1971 you would be sitting in a very nice profit now. In this context the current prices might represent a good time to put in some long-term longs. 

An example where we might see Gold being bid would be in the situation of the dollar being sold off. So, by using the outlook for the dollar it may be a good indication of where to add some medium/longer term longs.

Tip #4 use moving averages to define and limit your risk

Timing of entries can be very difficult and the use of the key moving averages like the 100 and 200MA can provide key places to both enter and define your risk against. In the monthly chart above the 100 and 200 MA is plotted on the Monthly chart.

In recent months price has tested the 100 MA and tried to find support against it. If a strong US dollar environment continues then the 200 MA is below, just above the key 1000.00 level.

This will provide a key pivot point for Gold moving forward and should provide a medium-term line in the sand for the direction of Gold. Stay above is bullish and move below is bearish

Tip #5 Ignore the interest rate correlation when trading day to day

Of course, not everyone will want to hold their Gold positions for months and years. If you did, you may be best placed to average in by buying in small increments across a larger timescale. The benefit of this is that your price is 'averaged' out across a range of different values.

However, for trading Gold on an intraday basis the inverse correlation between falling interest rates and increasing Gold prices should not be your focus. Instead look at the use of key technical tools such as moving averages, pivot points and candle stick patterns as well as the market sentiment for that day in the market.

This article was submitted by UFX.com

Support and resistance explained

How to navigate a path through an upcoming risk event

A risk event is any market event that the market is anticipating. For example, this could be an anticipated rate statement, a speech from a central banker, or a long awaited trade deal announcement like Brexit or Nafta. There are two key ways to trade risk events and that is by trading into them and/or out of them. 

Trading into a risk event 

The first aspect to be aware of in trading risk events is to be aware of the calendar of events that is coming up for the next week. These are widely available and most brokers have their own calendar you can access. Every Friday each risk event for the coming week will have the expected readings published so you can know what the market is expecting for the up coming release. These expected readings are compiled from the opinions of experts as to what they are expecting from the up coming releases. Your next job is to interpret the expected upcoming data in line with the market context or central banks outlook. For example, consider the following hypothetical situation. If you have the jobs number coming out for Australia in the next week and it is expected to be a higher reading than previously and you also know that the Reserve Bank of Australia has stated that their focus is on an increasing jobs number in order to be sure of an interest rate rise, then you can be confident that the market will be buying AUD into that data announcement. The reason the market would be buying AUD into the risk event would be because it is expected to be a positive reading. The positive reading would confirm the RBA's criteria for raising interest rates and the AUD would be bid on these expectations alone. 

To take these kind of trade you need the expected positive figure to agree with the general positive outlook of the currency, as in the example above. You want to ensure there is a match with the 

expected reading that is in line with the general outlook for the currency. e.g. trade positively expected readings with positive outlooks for a country. You can also do the vice versa. So, in order to effectively trade into a risk event look at what the central bank is focusing on and the underlying fundamentals. Once you have this information you are ready to start considering trading into risk events. 

A final step in preparation 

Now that you think you have a risk event to trade you can start to read other analyst and financial commentators to get a feel for what the market is thinking. Try to read from a few different sources to get a good feel about what the market is thinking about the upcoming risk event and the different scenarios that may occur from the data release. You will now have a really good feel for the market anticipation of the event you have chosen. 

Entry 

Now simply enter the market at a logical place where you can define and limit your risk. The actual entry price is not the most important thing. However, you need to enter the market before the actual risk event is released and you want to make sure that your risk is sensible. 

Exit 

You can now exit the trade before the announcement or move your stop loss and try to play for more out of the risk event. 

Trading out of a risk event 

The way to trade out of a risk event is where there is a substantial deviation from what the market was expecting. A good example of this was found on the 17th of August on the USD/CAD chart when there was a significant deviation for Canada's CPI reading. It was expected to be 2.5% y/y and instead it was released as 3.0% y/y. This was a significant surprise for the markets, and at the time increased the probability of a Bank of Canada rate hike in their September meeting. Now that you have your surprise deviation you are in a good position to trade. You could have entered short on a retrace of the spike down. 

A similar way of trading out of a risk event is when the market is heavily expecting one outcome, but that outcome changes. A recent example of this can be seen below when the US was widely expected to impose tariffs on $200 bln worth of Chines imports into the US. The market was expecting these tariffs to take effect, but then there was a surprise announcement that the US would start negotiating with China again. The market responded very quickly and went from a risk off bias to a risk on bias instantly. AUD/JPY gained very quickly on the announcement as a good proxy for 'risk on' trading. For savvy traders who are tuned into the sentiment and , quite literally, into the news could have profited from the resulting move. These kind of statements that are squawked really need to be responded to within the first few minutes to be profitable for a trader on a very short term basis 

The key aspect of trading into and out of risk events is having a good grasp of what the market is expecting from a certain event. By aligning yourself with the market expectations you are going to have a decent grasp of future direction. A key aspect of executing these strategies is having a good technical grasp of how to limit your losses, while offering yourself decent gains.

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The greater fool theory explains almost every bubble

Some things have an intrinsic value. The most-obvious example is a stock with a dividend. The absolute floor for an equity is its dividend and so long as their is a profitable business behind it, the value is a multiple of that dividend.

Other things don't have an intrinsic value. This includes virtually everything that doesn't produce a yield. Oftentimes, prices of those things rise and fall based on future expectations of what profits or yield might be. In other cases, there is an estimation of utility. Oil, for instance, can be refined into gasoline which can be used to move things or for dozens of other uses.

Oftentimes there is a dispute about utility or a dispute about future profitability, which can lead to a dispute about prices. One way to resolve this is a model but oftentimes that's so fraught with assumptions that it's useless.

So how do you establish prices? Obviously, via the market.

This is when storytelling, which is another way of saying a sales job, takes over.

Cryptocurrencies are an obvious example. A Bitcoin has no yield but it has some utility. To some, that utility is replacing the US dollar as a global transparent currency. To others, it's a way to facilitate transactions. And for others still, it's a handy tool for criminal transactions. How you price it then, depends on how you view the future utility.

Or does it?

Another way to price it is simply looking at how others view it. You might believe that all of those utilities are baseless but if you believe that others are buying it because they believe those things, then it's rational to buy.

That reasoning is why I argued more than a year ago that Bitcoin wasn't a real currency but that it was still going higher.

The only trade on BitCoin is the hype trade. The fundamentals don't matter. The only thing that matters is how enthusiastic the true believers are.

I also touched on that here:

This is all called the greater fool theory.

The idea is that something can always rise so long as there is another person who believes it will.

You can argue that Bitcoin was simply a great story. It was full of buzzwords about transparency, trust, tracking, efficiency plus it was just complicated enough that it wasn't accessible yet alluring in the way that all technical innovations are.

The price essentially tracked the rise in its exposure. As more people learned about it, a certain portion invested.

The problem is that eventually you run out of people.

For crypto, a month or so before the top, I remember talking to a distant relative who is an absolute blowhard. He had just bought some and I told my wife that had to be the beginning of the end. Other people were telling stories about their grandparents were asking them how to buy crypto.

In comments this week, Ethereum founder Vitalik Buterin touched on this:

Making buy/sell decisions based on what you hear from people on the street sounds ridiculous but some of the most famous traders are just that.

Joe Kennedy, John F Kennedy's father, famously said he sold his entire stock portfolio before the 1929 crash because a shoeshine boy gave him some stock tips. And he figured that when the shoeshine boys have tips, the market was too popular for its own good.

Here's how John Maynard Keynes explained the Greater Fool Theory:

Imagine a beauty pageant, where the judges knew that, because beauty was in the eye of the beholder, the contest would be decided on the judge's perception of beauty. Someone who wanted to predict the outcome would have to assess the judge's perceptions, not the contestant's beauty. As a result, your vote for the winner would not depend on who you thought was prettiest. Instead, your vote would depend on how you thought the judges would vote.

How do you trade a bubble?

In anything where there is no intrinsic value, utility or there is so much uncertainty that it's impossible to evaluate, there is no real analysis of the market.

Instead, you are simply evaluating what other people think.

The great bubble at the moment is in marijuana stocks. The story is that it will be legalized. That's already happened in Uruguay and in October it will happen in Canada.

That set off a bonanza of speculation about how companies will make a mint selling marijuana. Pot stocks have absolutely soared. It started last year in Canada with some producers rising 10x in a few months.

A second wave of the bubble has kicked off on the belief that marijuana will eventually be legalized globally. It ramped up with the Nasdaq listing of Tilray; it's the first US listing of a pot company and it's average a 15% gain per day since it's was launched.

Someone who bought on the IPO, or in early Aug, is up more than 500%.

Here's the problem. Marijuana is extremely easy to grow. It's called weed because you can grow it in a ditch. Sure, the quality might vary but if you could grow a lower-quality iPhone in your back yard, then Apple wouldn't be a trillion dollar company.

But in a bubble that doesn't matter. Marijuana legalization is a great story. People undoubtedly spend a lot of money on pot and companies could make money doing it. It's not a story I believe yet it's compelling enough that fools around the world are going to believe it.

ForexLiveHere's the Google search trends chart for 'weed stocks'.

The lesson is simple. When you're evaluating some assets, you don't necessarily need to be able to make sense of them. You are just evaluating the story. If it's compelling enough, the asset will continue to rise until the supply of fools is exhausted.

Simply: The price you should buy something isn't always its intrinsic value, or utility -- it's what you think someone else will pay for it.

Fail to plan, plan to fail

ForexLive

It's not that bad

I posted a part of this chart earlier but here's a longer version. It shows Canadian GDP for the past 50 years. It's similar in most of the world.

It's beautiful chart going from the lower left to the upper right with some tiny dips.

I feel like the perception of growth is something far different.

I don't know if it's the scars of the crisis or the experience of a few outliers like Italy and Spain but the reality is that recessions are bumps in the road. Yes, for some people who lose jobs/careers it's heartbreaking but as investors we see recessions as these mythical dragons to be feared but they're more mosquito than monster.    

As investors and traders, recessions are incredible opportunities to find mis-priced markets and if you have a longer view and a steady hand then your path -- like this chart -- will be higher.

Five patterns for new forex traders

RSI oscillates between the range of 0-100 if the price moves below 30 that means it is in the oversold region, if the price moves above 70 that means it is in the overbought region. Why is this important though?

If an asset is oversold or overbought, there is high probability the current trend will undergo a reversal. Another way certain traders use RSI (cross-referencing it against other indicators to avoid false signals) is using a drop below 30 as a "buy" signal and a cross above the 70 level as a "sell" signal and anything in between a sign to hold the position.

3.Moving Average Convergence Divergence (MACD)

MACD is a slightly more complex in calculation and analyzing: it is the difference between an asset's 26-day and 12-day exponential moving averages and a 9-day EMA is plotted on the MACD also. These EMA's are a variation of moving averages that puts emphasis on more recent prices.

The MACD points towards a bullish trend when it moves above the 9-day EMA. As you can see in the image above, MACD indicator features a histogram, when the asset is in an uptrend it expands, whereas when its in a downtrend it contracts.

4.  Alligator

Easily the most colorfully named indicator the Williams Alligator Indicator is composed of three normalized moving averages, calculated each to 5, 8, 13 periods which smooths out the indicator's movement. 

This indicator uses a loose variation of the 80/20 principle, stipulating that the market moves - 15-30% of the time, the remaining time moving more or less sideways. The creator of this indicator believed that most traders (institutional or retail) exit positions at a higher frequency when markets are their most volatile.

The three parts of the alligator are similar to its terrifying real-world equivalent:

-Lips (the green) smoothed by the following three bars after a 5 bar SMMA

-Teeth (the red) smoothed by 5 bars following 8 bar SMMA

-Jaw (the blue) smoothed by 8 bars following 13 bar SMMA

As you might have extrapolated from the breakdown, the Lips move the quickest and the Jaw the slowest. If the Lips cross through the other lines downwards a short signal is given, if it moves inversely (from the bottom of the chart to the top) a long signal is given.

When the Lips are going down and cross the Teeth and Jaw the alligator's sleeping the opposite is the alligator waking up according again to the creator. When the three lines are spread apart moving up or down, this is the alligator eating with its mouth wide open. This gives the signal of a general continuing trend when position should be held - according again to Williams.

5. Bollinger Bands

One of the most popular indicators in recent years and is visually similar to William's alligator, but instead of using just moving averages with different timeframes, it also uses standard deviations to plot its lines. The reason many traders swear by the Bollinger Bands indicator is due to it giving more specific short and long signals (comparable to other indicators).

As you can see below where the high price crosses the upper band, a short signal is given and where the low price crosses the lower band, a long signal is given (highlighted by circles on the EUR/USD chart below).

Bollinger bands also occasionally act like support and resistance, like other indicator do (highlighted by squares below). 

Bollinger Bands also help traders identify periods of volatility, as the upper and lower bands will converge when volatility is lower as they diverge when volatility increases. You can see that many of the signals in the chart above are given during what is called a "squeeze", or high volatility/time when the bands converge.

Beware of the False Signal

The reason that makes trading so exciting is the same reason that makes it risky - its volatility. A fool-proof method to give accurate signals have yet to be invented. If there was you probably wouldn't be reading this article, you'd be on the markets!

This is why most traders, analysts and general market-watchers use a combination of indicators to extrapolate data. To further protect themselves against false signals and market volatility many use risk management trading tools offered by Forex brokers.

Planning for success is probably the easiest part of trading but protecting your investment and trading account is the most crucial. So, no matter which combination of indicators you use, make sure you also have robust risk management strategy in place. 

How focused are you on anticipating your forex trades?

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How to trade TRY

#4 - Keep an eye on the EUR/USD pair

A far more liquid pair to trade than the USD/TRY is the EUR/USD. The EUR/USD pair is being affected by the Turkish Lira crisis due to the amount of financing that Europe's banks have given to Turkey.

The fear was that if the Lira became any weaker than the Turkish banks and institutions would default on their loans they had taken from Europe's banks. As a result, the Euro lost value with the Lira. So, a smart move, if the Turkish crisis re-emerges, and the Lira weakens again, might be to short EUR/USD.

The pair has a much higher liquidity that USD/TRY, being one of the world's most traded currency pair, and a much smaller spread. Risk is also easier to calculate on the EUR/USD pair than on the USD/TRY pair, so this is worth remembering.

#5 Keep an eye on the news

Turkey introduced a number of measures which have temporarily halted the tumble in the Lira. However, the next direction will be decided by the actions of the US and Turkey. Any improvement in politics between the US and Turkey will be supportive. Recently Qatar injected $15bln of support which helped further stem the bleed of the weakening Lira. 

The key event to look out for though, is a central bank rate hike to start addressing the twin problems of a weaker Lira and higher inflation which is affecting the country. This will cause the Lira to strengthen and is what markets are really wanting to see happen in order to give strength to the failing Lira. 

This post was submitted by LegacyFX

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How to trade Germany's main stock index

The DAX is a blue-chip stock market index which comprises of thirty major German companies trading on the Frankfurt Stock Exchange (FSE). In this sense it is similar to the Dow Jones Industrial Average which also shows how 30 large publicly owned companies in the US have traded.

Some of the leading companies in the DAX index are Siemens, Allianz, Adidas, Deutsche Bank, ThyssenKrupp and Lufthansa. Germany is the largest economy in the European Union and in the top 7 largest economies in the world. The DAX is a capitalization-weighted index which means that the companies with a greater market capitalization will have the greatest influence on the price.

The DAX's history

The DAX actually started it's like known as the Börsen-Zeitung and it was started by a German financial newspaper. If you had bought and held the DAX from the 1960's you would be in a very healthy profit now.

The DAX has made strong growth since its inception and it went through 2000 points in 1993, 5000 points in 1998 and during the financial crisis of 2008 the DAX had made it above 7500. The Dax reached its record high this year peaking at 13,596.89 in January. Its current price is 12,346 and the chart below shows how it's value has increased since 1959 when it was priced at only around 300.

The exchange for DAX futures is the Eurex which has a market opening time from 0700-2100 BST time. Trading the DAX can be done day to day as there are many moves to be had. Trading the DAX with SimpleFX is very easy. Here are some top tips for trading the DAX.

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What does it take to be a trader

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Platform review

The MassInsights™ Technology will also help you see a quick change in buy and sell orders. You can even set alerts to be sent to you in order that you can be notified as soon as trend reversal is occurring.

Another key feature is the volatility spotter which, as the name suggests, spots the volatility of certain moves on specific assets. Linked to this is the notification that you get when there is a growth in the number of traders opening positions on a specific asset.

It also depicts large spikes in volume letting you know when more positions are being opened than normal. This could be an excellent feature to use when a fundamental shift has occurred in the market and any substantial increase in volume could be used as a confirming indicator to join the move.

Attractiveness

The layout of the charts is simple and user friendly. Trades can be executed with just one click and then managed from the bar that appears on the bottom of your screen. Furthermore, just one click on the chart aspect of the asset or currency being traded calls up a separate page. 

This page contains information about the asset or currency being traded, information on that market's trading hours, the current price and Daily Volatility. This same page also contains a price chart which has a full range of charting tools and indicators. All with the convenience of a web trading platform. Below is a screenshot of the overview for Gold:

Climbing the path of improvement

All of us want to keep improving in our trading, so how can we keep continuously developing? We achieve this by building on our strengths and working on or around our weaknesses.  

The first thing to do is to be brutally honest with yourself and review these key areas:

• Your Profit and Loss balance
• How do you trade? (Entries, risk, and exits)
• What are your strengths?
• What are your limitations?
• What do you need to improve

Be honest in your evaluation. What kind of trader are you? Intraday or more positional. In the same way that some athletes are sprinters and others are long distance runners work out and decide which trading style suits you.  Once you have evaluated yourself soberly, now look at how to take your trading to the next level.

1. Imagine what the trader that you want to be looks like. What behaviour would you have? How would you trade? Now imagine that trader is given a score of 100.
2. Now evaluate what score you would give yourself out of 100?
3. Then ask yourself, how did you get to point 2? How did you become the trader you are?
4. Now say to yourself, how do I improve my score by just 5 points.

We can then focus on our strengths and work around your weaknesses. Now, your temptation will be to purely focus on your weakness, don't. The key to your trading greatness will probably rely on your strengths being used more. Now, as a child I played soccer in the UK and I was right footed. I worked on my left foot over and over again until I could kick with both feet. I worked on my weakness and I was a good footballer. However, for me , my strength is my ability to speak. I have always been a good speaker,  it is just something that came naturally to me. So, over the years I have focused on my strength of public speaking and as a result I often end up speaking in public, because I have worked on that natural strength. I know now that you should pursue your strengths more than you should try and correct weaknesses, at least after a point (some weaknesses will destroy you if left unchecked, like over leveraging).  If necessary, work around them. We are a tennis family with everyone, apart from me, being very good at tennis. So, if you look at Rafa Nadal when he plays he used to run around his backhand a lot to try and hit as many forehand shots as he can. Why? Because he has a wicked forehand that puts so much topspin on the ball it rips up and high and into his opponent. He plays to his strength unashamedly, you should too. So, yes improve or work around your weakness but your number one goal is to play to your strength. What's your niche? Where are you killing it in your trading? Work it out and do it more.

Play to your strengths

Are you having lots of winning trades by focusing on the squawk during the day? Well, do it more.

 Perhaps, you notice that you are a brilliant positional trader and when you hold trades for a week/months or more you tend to have a higher percentage of winners well pursue that.

 So ask yourself, 'what went well today/this week/this month?' Well, do it again next day/week or month.

Don't ignore your weakness

Have you lost money from poor risk management? Well, address it. Have you been trading in a too emotional state, well think how to manage those emotions.

Write down your new approach 

Finally, jot down a new approach that you are going to take going forward.

Five patterns to look for

Japanese candlesticks are the building bricks of the market. It's necessary to train your eyes to distinguish their patterns so that you can look beyond the piles of price blocks and be able to read and foresee the movements of the price.

Traders often focus on reversal candlestick patterns, although continuation ones are also worth considering. Here are some tips you may find useful.

Who needs continuation patterns?

Trend traders do. Once you have embarked upon a trend, you want to stay in it, the longer the better, but walk away when the market starts smelling of a reversal. Continuation patterns reflect the natural periods of correction and consolidation which take place during a trend. If you locate such pattern, you will be able to join the trend. The important thing is to make sure that you have the young trend that still has potential and not the aging one.

Continuation patterns you can track

There are many various continuation patterns with more or less subtle features. We'll focus on those that are easier to make out and explain.

1)Marubozu

If you spotted a candlestick with a sizeable body but without shadows at the breakout of a support/resistance, it's an indication that the market aims to continue moving in the chosen direction and has momentum for it.

Respond to your trading environment, don't just react

Anyone can react, but only a wise man responds.  A desire to react, in the moment,  to our trading environment can be compelling, unexpected and catch us by surprise. As traders we face a constant battle with our self control and a great deal of trading is about controlling strong urges that we have to trade. Often times we need to prevent the strong urges that we have to trade from influencing us. The reaction part of us happens almost instinctively. So, in order to evaluate our desire to trade we need to pause. By inserting a delay into our instant reactive desire we can grow in self-control and discipline. You might recognise this. Have you ever put on a trade, and then removed it only to put it back on 10 minutes later? You are  possibly oscillating between reacting and responding in that moment. We don't want to just be reacting to the markets, we want to be responding. The central pillar of responding well is paying attention.  

Pay attention and be self-aware

Top performers pay attention. It is very difficult to perform well at anything if you are not paying attention. If you are both attentive and self aware you will be better able to manage your habits, your awareness and your ability to be self controlled. It will also give you the ability to empathise.  What has that got to do with trading, you ask? Well, this is a crucial skill in the markets as you start to see what likely moves the market will make next. If situation X occurs then country Y will likely do Z.  Adam demonstrated this in his recent interview posted here with BNN on the Canadian. It can simply be getting a 'feel' for the market. Think of other countries, how will they respond to their situation. At the moment think of China - what will happen next for them. Think about eventualities and empathise with their situations. It will help you be a better trader.

Attention and self-awareness will also help you be aware of your environment. Every day we receive a wall of information. The feeds tick away, the squawk is squawking and analysts are responding. You need to receive this information mentally and then you need to be able to understand it. The problem we have is that when stress gets too much, we lose out ability to make proper sense of our trading environment. We either freeze or just react. In either freezing or reacting we will have stress. Uncertainty and fear will go hand in hand with reacting. The state we want as traders is that we don't want to react we want to respond. A reaction is non-conscious. A response is considered, deliberate and managed. The good news is that we can improve our attention and awareness.

So, this week I have posted a number of posts on our mental state of mind. Why not go through them over the weekend and, if you are not already doing them, use them to stimulate your thoughts on practices you could implement to improve your trading. Have a great weekend and thank you for all the great contributions individuals have made on this thread over the last week.

Developing the right frame of mind for trading.

Thinking straight: Deal with negativity?

Born to win?

Developing a strong trading mindset

Enjoy your homework ;-)

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A strong frame of mind

We have already established that trading is stressful (as if we needed persuading), so now let's look at some strategies for helping us to deal with stress. We all need stress to motivate us, so we don't want to avoid all stress. We just want to be able to cope well with stress. 

When we have a losing run or a heavy loss the first reaction we have is a combination of disbelief and anger. It is an emotional response. Now, we don't want to just repress these emotions. They drive our behaviour and can cause us to react. Sometimes we might want to jump straight back into the market to 'get back our losses'. We look for the first half set-up we see, price is at a weekly support so we put in a buy, or price has spiked 40 points on the EUR/USD we jump in. This is almost entirely an emotional response. As we have seen this is the fight or flight part of our brain in operation as we are in a panic mode. We are angry, emotional and in this state we are highly vulnerable to making poor decisions. Perhaps, we could lose months of hard earned profit in a 'moment of madness'. Except, it is not madness, it is just an emotional reaction and it is understandable. So, the first step in dealing with this is to recognise when you are in this state. Virtually all traders will recognise this state and be able to share stories of how this has affected them. You need to move out of the emotional state of mind into the acceptance mindset. Let the loss sink in, accept it, and now you are ready to move on. Here are 5  tips to help you develop  a better frame of mind.

 Tip 1

Record your thoughts and feelings at the end of each day. What are you thinking and how you are feeling? Perhaps you had a heavy losing or winning trade? Write down how you are feeling. This action itself is a helpful mental exercise to help deal with some of these emotions.

Tip 2

Accept that a losing trade or a losing run is temporary. Furthermore, realise that you can change it. Even If you have never been profitable as a trader, you can change that. Trading is teachable, like any skill. Like riding a bike, at first you fell off, but then you got it licked. 

Tip 3

When you are in a very negative state of mind, which you will tend towards during a losing streak, try to look at some of the things that are positive for you. What are your strengths? Your positives? What things can you control?

Tip 4

Get some rest. If you don't rest, you will burn out. Are you getting enough recovery time? Make sure that you factor recovery into your day. This is recovery for the nervous system, so a gym session is not the answer here. You want to have a definite rest : Sleep, or a time of quiet. Perhaps try some breathing techniques. Allow yourself a break. Why not break in between trading sessions? Don't just hammer at it for 12-15 hours straight. Your performance will suffer and your energy will flag. Get a decent night's sleep too. Rest will help your performance. Make sure you take holidays.

Tip 5

One of the worst things I find about trading is that it is a lonely pursuit. `I love people, teamwork and banter.  Sat at the terminal, little people contact and it can become a sealed little world. 99% of the people in your life can't relate to trading and either think you are a hero or a villain and then a lot of the correspondence you have is one way. So, get a support network if you don't have one. Could you pair up with someone else in a performance activity and compare notes? Is there a top-level sports person you could meet with and talk about your performance and state of mind with. What about meeting up with some of your online trading acquaintances?  Is there a local meet-up you could arrange in your city?

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