Category: Market

Market Profile – Take volume analysis to the next level

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What is the market profile
The market profile shows all volumes executed at each price level, while the normal volume indicator shows time-based volumes.
It allows you to look more accurately at the accumulation and distribution of markets and shows you that every candlestick is not created equally. Some prices are heavily traded, while others are thinly traded and are either quickly accepted or quickly rejected back into the “value zone”.

How it started
The market profile is not another redundant technical indicator developed by opportunistic programmers. It was created out of necessity. The technology was developed by Chicago Board of Trade trader J. Peter Steidlmayer because his goal was to replicate the primitive human behavior traders observed on the floor.
A key distinction made by market profile practitioners is the concept of “fair” and “unfair” prices. They believe that prices within the value region are fair prices, while prices above and below the value region are unfair.
Different market profiles
One is the volume distribution, which shows how much volume is traded at the price level. The other is the TPO(time-price-opportunity) distribution — which shows how much time is spent at the price level. Most profile traders use both tools, but often prefer one over the other.
Market overview: Bell curve
Stetmeyer, the founder of the Market Profile, was greatly inspired by the statistical bell curve while developing the market profile.
The bell curve is a distribution of outcomes, with the top of the bell curve representing the most frequent outcomes, decreasing in frequency as the height of the bell curve decreases.

How to Measure Market Sentiment

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Knowing how to measure market sentiment is a great way to shape your trading argument and determine which direction is the more likely outcome.
introduce
Have you ever been bullish on a stock, only to find that many investors already think the same way?
This can be very frustrating, and there is nothing worse than buying late in a bullish trend. One way to avoid being late is to gauge investor sentiment.
How to measure market sentiment
Measuring confidence can help you determine whether fear is pervasive or greed is too high. There are several particularly good tools for determining crowd psychology, providing you with bullish or bearish views.
Most trading indicators used by investors focus on price or volume, but there are also sentiment indicators that can be used to determine investor confidence.
The data used to calculate sentiment indicators can be more varied than traditional market indicators. Instead of focusing on price or volume, consider total open interest. You can also assess survey data or whether investors are protecting themselves from adverse market changes.

Some of the more popular mood indicators include:
Trader Commitment Report
Volatility index
Put/call volume ratio
Trader’s commitment report
Futures markets are liquid financial securities markets that offer contracts based on the future prices of stocks, indices, currencies and commodities. The most active futures exchanges are in the United States. Futures positions held by investors will be reported to US regulators.
The Commodity Futures Trading Commission reports position information to the public every week. Called a Commitment of Traders Report, it gives a write-down showing you have adjusted your open position in almost every commodity.
Each report is divided into several categories. In the case of corn, which trades actively on the Chicago Board of Trade, the CFTC divides traders into swaps dealers, managed money dealers and other reportable traders.
Swap dealers are banks that represent producers. Producers typically sell forward harvests through banks, known as swap dealers, which in turn use corn futures to hedge. Managed funds represent several different types of investment firms, including hedge funds, mutual funds, and even exchange-traded funds.

The 3 best inflation hedges

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Current fiscal policy has laid the groundwork for a steady rise in inflation, so we have compiled a list of assets that have proven to be effective inflation hedges.
What is inflation?
Simply put, inflation is a decline in the purchasing power of money, usually because the money supply has increased.
In the last century, as the United States adopted modern monetary and fiscal policies, we saw a significant decline in the purchasing power of the dollar.
The Fed’s response to the economic crisis has basically been to print more money, which lowers the value of other dollars.
Therefore, inflation is inevitable. In the words of Stephen Covey, it’s out of our control.
If we want wealth to rise, not fall, we need to focus on assets with purchasing power that consistently yield more than the rate of inflation.

Understanding inflation
The main way to track dollar inflation is through the consumer price index (CPI).
The CPI tells us the purchasing power of the dollar over time. When the index rises, the purchasing power of the dollar declines.
How to hedge against inflation?
To prevent inflation, you need one of two things, but preferably both: a store of value and a real rate of return.
For many people, a store of value means many things. But at the very least, a store of value must retain its purchasing power for some time. That means its value doesn’t fade over time.
Here’s the list directly from the May 2020 investor letter:
Purchasing power – How does this asset retain its value over time?
Integrity – How has it come to be recognized over time and universally as a store of value?
Liquidity – How quickly can assets be converted into trading currencies?
Portability – Can you move this asset geographically if you have to do so for unforeseen reasons?
Top hedge inflation
Here are three inflation hedges:
The real estate
The U.S. stock market
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Market closing order interpretation

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Have you ever wondered why there are huge spikes in volume in the last minute of trading, while prices barely move? This is the closing auction, which is the most liquid period during stock market trading, mainly because the market is more tightly organized.
This is where most investment funds, closing algorithm traders and index rebalancing take place.
Closing orders are basically mechanisms for these institutions to buy at the close of trading.

What are the closing market orders?
A closing order is a market order executed at the close of trading (16:00 EST). Because they are market orders, you can’t specify any prices, you can only receive closing orders.
They guarantee execution time, not price.
You must place your MOC order for the NYSE stock no later than 15:45 and 15:50 EST.
Let’s take an example.
You trade XYZ stock that day. The trend is strong, so you want to hold it at the close, but there is no overnight risk.
You’ve noticed that sometimes strong stocks move strongly at the close, so you want to get out at the last minute rather than hold stocks overnight or trade a few hours later.
That’s where the limit order comes in.
You submit an MOC order to your broker at 15:30 Eastern time before the deadline. Edt ends at 16:00 and you exit almost at 16:00:00 and receive the end print.
Notes on MOC orders
The deadline for
While the official deadlines for the NYSE and NASDAQ are 15:45 and 15:50, respectively, your broker may have different rules. Ask your agent, because they’re all different.
cancel
Neither nyse nor NASDAQ will allow you to cancel MOC orders after their respective deadlines of 15:45 and 15:50.
What happens during a daily limit order? Close the sale
The NYSE has appointed market makers, one of whose duties is to facilitate closing auctions. They do this by analysing all the closing orders and setting the auction price accordingly.
One of their obligations when conducting an auction is to provide liquidity for unbalanced orders.
For example, if there is an order to buy 100,000 shares and sell 120,000 shares, they need to provide liquidity of 20,000 shares to fill the gap.

Sell calls and puts at a premium

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Every option contract has two parties — the buyer and the seller.
You may be familiar with the call option.
You are buying the right, not the obligation, to buy or sell shares at a set price on a set date. But someone has to sell that right, and that’s the seller of the option.
You see, the sellers of options are the opposite of options trading. You pay them a “premium” (the price of the option) and they keep the money for taking the risk.
If the options expire worthless (i.e. the call expires below the strike price and the call expires above the strike price), their profit is the full premium.

Let’s create a hypothetical option trade to illustrate this concept. You buy the XYZ call option at the strike price of $10, which expires in two days, and pay $1 to buy the option.
The seller of the option is responsible for the other side of the transaction and sells the option to you.
They immediately withdraw $1 from their trading account. Two days passed, and when the option expired, XYZ was still trading at $9. Your option is now worthless, and the seller keeps their $1 profit.
Another example:
You buy the ABC call option at the strike price of $100, and when it expires in 4 days, you pay $5 to buy the option. Once the trade takes place, the option writer collects the $5.
The option expires four days later and ABC trades at $150. Your profit is now $45 ($50 after the strike price minus the $5 premium you paid) and the option writer has lost $45 on the trade.
Note that the standard stock option is 100 shares. So when you buy the option at a premium of $2, you multiply it by 100.
The profitability of short options
Short, put or put options all refer to the same thing. You’re shorting options, which means you’re betting against the option buyer.
So when you short an option contract, your maximum loss is the same as the maximum gain the option buyer would make on an equivalent contract.
For example, let’s review the profitability of a call option contract with a strike price of $50 and a cost of $2 between the buyer and seller of options:
Buyer selection:
Maximum benefit: Unlimited: There is no limit to how much stock prices can rise.
Maximum loss: the price you paid for the option (in this case, $2.00). This is also called an insurance premium.
Choose the seller:
Maximum gain: The price at which you put the option (in this case, $2.00). This is also called an insurance premium.
Maximum loss: Unlimited: Stock prices have no upper limit.
Notice how the profits of option buyers and sellers flipped? It’s easy to understand in this case.
Remember, put options are slightly different. Here is an example of a put option contract with a price of $2 and an option buyer and seller with a strike price of $50:
Buyer selection:
Maximum gain: The minimum increase in the stock price is zero, so to get the maximum profit from the put option, you have to subtract the premium paid from the strike price. In this case, it would be $50 – $2 = $48. To get your profit in dollars, you just multiply it by 48 times 100, which is $4,800.
Maximum loss: the exact amount you pay for the option (premium). In this case, it is $2.00 * 100 = $200
Choose the seller:
Maximum return: The price at which you put the option (premium)
Maximum loss: $4,800, the same as the maximum gain for the option buyer
Short calls and short puts
Two important factors distinguish a short call from a short put. When you short a call option, the theoretical risk is infinite.
In the unlikely event that you short a stock that has risen tenfold overnight, you are in trouble.
On the other hand, when you short a put option, your maximum loss is the price of the stock. If you short a put option on a $10 stock, the most you can lose is $10 minus the premium you got.
While this may seem like a trivial difference, it makes a huge difference when you can be absolutely certain of your maximum risk.

Open market orders: Should you use them?

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Open market orders are used to participate in an exchange’s opening auction. Because a MOO order is a market order, it guarantees execution, not price.

Interactive Brokers define open market orders as:

“Open market (MOO) orders combine market orders with OPG expiry times to create an order that is automatically submitted when the market opens and filled at market prices.”

The exact mechanism of the Mooo order varies from exchange to exchange. Nyse MOOs operates slightly differently from NASDAQ MOOs.

You can find detailed information about nasdaq auctions and NYSE opening auctions here.

What is action?
At the start of each trading day, there is an auction driven by market makers to determine the opening price for each stock. Each exchange employs market makers to reduce volatility and provide liquidity.

To better achieve their goals, they were granted privileges that ordinary traders couldn’t, but exchanges tried to balance that privilege by forcing market makers to facilitate trading, even if they didn’t want to.

These market makers used to be called specialists, but now they are called designated Market Makers (DMS).

In addition to maintaining an orderly market, the DMM is also responsible for facilitating opening and closing auctions.

Because opening and closing are the periods of most activity, they reduce the volatility that a large order from a mutual fund or ETF provider can create by providing liquidity to the other side of the trade.

Overnight and early in the morning, traders enter buy and sell orders at various prices.

Some are market orders, some are limit orders. The DMM’s job is to balance supply and demand. A lot of times there is an imbalance on one side of the market.

For example, there might be 10,000 shares of XYZ in a buy order, but 30,000 shares in a sell order. When there is such a severe imbalance, the DMM will offset the imbalance through purchases and maintain an orderly market when it opens up.

Even as a lone trader, you can see an imbalance in orders at the opening and closing, although this does require subscribing to the data feed through your broker.

Some traders track imbalances for days or weeks to determine which stocks or industries are seeing large flows of money.

The DMM uses the order flow information they have to determine an opening price for clearing the market, which is probably the fill price you get for open orders in the market.

When you submit an order that is not publicly available in the market, you accept a price that DMM determines to be “fair value” based on the current order flow.

You will certainly get it because it is a market order, but not at any particular price.

What is a Thinly Traded Stock?

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If you’re new to the trading world, you might hear traders refer to a particular stock as “thinly traded” in conversation, which leaves you a little confused.

Don’t worry, because you’ll find us traders coming up with a ton of jargon for the simplest of concepts, and most of the time, there’s no complicated explanation behind it.

In this context, a “thinly traded” stock is one that doesn’t trade very often.

The stock may have only a handful of trades a day, compared with hundreds of thousands for a stock like Apple (AAPL).

Why is this important? Because when you buy a stock, someone has to sell it to you, or if you want to sell a stock, someone has to buy it from you. If you want to buy or sell quickly, you need someone to wait in the market to buy or sell from you at a fair price.

If no one is waiting for you in the market, you may have to bid a high price to get a seller to sell you their shares.

That’s not a problem for an active stock like Apple, because at any given time there are thousands of people buying or selling at a reasonable price.

That can be a real problem for thinly traded stocks. Let’s say you already own stock and you really need to sell it. Maybe prices are falling, or you need to raise cash to buy a new home. Whatever the reason, you need the money asap!

If you really need to sell now, you must accept the highest offer in the current market. For a thinly traded stock, that could be a big discount to its recent trading price.

How do you know if a stock is thinly traded?
In financial markets, there is a concept of “liquidity”, which refers to your ability to trade (buy or sell) assets such as stocks, bonds or property quickly without getting a bad price.

Let’s use a real life example that we’re all familiar with.

Let’s say you’re a real estate flipper. You’re interested in a foreclosed house, and it’s in bad shape. The listing price is pretty attractive, and by talking to the realtor, you feel you can get a better deal. You and your team are good at fixing houses, so you’re confident about it.

But what is the next worry?

Because you’ll be mortgaging your house for the duration of the fixed N ‘flip operation, you’ll be spending money every month.

So the faster you throw, the more profit you make. In a really bad case, if you have a hard time selling it, you could lose money because you have to make a lot of mortgage payments before you can sell it.

So you really need to think about how quickly you can sell the house after you fix it.

You can determine this by looking at local real estate statistics, such as how long the average home has been on the market, how many homes are currently on the market (inventory), or how many homes in the neighborhood are dropping their listing prices (indicating buyers aren’t interested).

 

What is day trading?

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Day trading has surged in popularity in recent years, but what is it and why is it important?

According to the SECURITIES and Exchange Commission, day traders hold a stock for a few seconds or minutes in the hope that the price will continue to rise or fall in order to quickly lock in profits and quickly buy, sell, or short a stock throughout the day.

Day trading is a great way to make money and achieve financial independence. You can day trade in almost any market, though stocks, options, index futures, cryptocurrencies and forex are the most common.

But what is day trading? What is day trading? Today, we’re going to tell you the most important things you need to know about day trading.

What is day trading?
Day trading refers to buying and selling stocks or financial instruments for the purpose of making a profit during a single trading day.

When day traders trade stocks, they want to take advantage of the day’s price movements rather than trading overnight.

For example, if you buy GameStop stock (GME DOLLARS) on Monday, you have to sell it that day to be considered trading of the day.

Take a closer look at day trading and the associated risks
Day traders rely on sentiment and stock charts to generate trading ideas rather than basic data.

These traders typically trade only a small number of stocks or securities — sometimes just one — and have a detailed understanding of how those particular securities respond to events. This allows them to predict how prices will react, allowing them to trade profitably.

This type of speculation is common in stock markets and foreign exchange trading. But day traders can also trade exchange-traded funds, cryptocurrencies, bonds or commodities such as precious metals or crude oil. They can also trade futures or options — different types of derivative contracts.

Day trading is often portrayed in the media as a potentially high return and exciting endeavor. However, most junior day traders lose money because the practice carries a lot of risk that can lead to a person losing tens of thousands of dollars very quickly.

While most aspiring day traders seek financial security and freedom, one must adopt a trading strategy in order to be a successful trader.

Day traders have a wide range of trading strategies to choose from, but it is important to note that not every strategy will work in every market cycle and certain day trading styles may not be ideal.

If you don’t have a good trading strategy, you probably don’t have risk management, and you’re likely to blow up your account in a short period of time, like 90% of day traders.

Four risk factors for the accumulation of risk in financial markets

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Until everyone needs liquidity at the same time, it is hard to know how much leverage there is in the market.

Leverage can gather quietly in strange corners of the market, as the 2008 financial crisis and the recent collapse of Archaegos demonstrated.

I mean, who would have thought a bunch of media stocks like Viacom or Discovery would be at the forefront of a liquidity event?

Before we continue, let’s give a rough definition of leverage, because it means different things in the software world than it does in financial markets.

In this article, we will analyze the current level of leverage in the market through transparent data sources and try to estimate where the hidden leverage is.

The dangers of leverage
The dangers of leverage bring us back to the most basic practice in finance: lending. Banks lend, customers borrow.

Unsecured loans are based entirely on credit. If the borrower defaults, the bank is in trouble. Secured loans are loans backed by collateral, meaning that in the event of a default, banks have some assets tied to the loan that they can seize to cover some of the losses. That’s how mortgages work.

When conditions worsen, as they did in 2008, the value of customer collateral falls. So banks need more collateral so they don’t lose a lot of money if they default.

When banks demand more collateral from borrowers, they either default or raise cash in other ways.

They typically raise cash by selling other liquid assets. When everyone is selling liquid assets at the same time, it puts further downward pressure on prices across the industry, leading to a recession.

Borrowers have been hollowed out, either selling their assets at rock-bottom prices just to meet loan requirements, or they have defaulted on their loans and are now bankrupt. The banks lost a lot of money because a bunch of their loans went bad.

So you can see that if we toughen up the system, people borrow far more than they can afford, and banks lend, the negative feedback loop gets even worse.

There are many fascinating explanations for how the 2008 financial crisis happened, but at the most basic level it was about too much leverage in the financial system.

Today, we look back at the sources of dangerous and potentially hidden leverage in today’s financial system.

No, we do not cite 2008 to say that the financial system is in a similar situation today. Rather, we use it to illustrate the dangers of leverage.

First, we’ll review some publicly available data from the Financial Industry Regulatory Authority.

Margin debt is at an all-time high
One number we can transparently access is the total margin debt of finRA registered broker-dealers. FINRA is the self-regulatory body that regulates the security industry, and one of its responsibilities is to regulate registered broker-dealers.

These registered broker-dealers are required by FinRA to report certain data on their clients to ensure regulatory compliance, including the level of margin used by customers.

These data basically show us how much debt investors are getting into their brokers through margin debt. It answers the question: How much money do clients use that is not their own? That number has grown steadily since FINRA began collecting data in the late 1990s.

Below is our chart using a logarithmic scale of total debit balances on margin accounts for FINRA broker-dealer customers since 1997.

As you can see, the level of margin debt fluctuates with the market itself, but overall the number has been rising steadily and is now at an all-time high.

How To Draw Fibonacci Levels

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If you are an active day trader, you probably realize that Fibonacci retractions and extensions are the most important and useful tools in all price activity.

Day traders and technical analysts can use Fibonacci level analysis to identify entry levels, target profit taking, and determine stop loss levels.

In this guide, we will explain exactly how to plot Fibonacci levels so that you can better decide when to enter and exit trades.

What are Fibonacci numbers and ratios?
The Fibonacci sequence, sometimes called the Golden ratio, is a string of numbers in which each number is the sum of the first two.

For string 0,1,1,2,3,5,8,13,21,34,55, for example, if we add 0 + 1, we get 1. If I add 1 plus 1, I get 2. If we add 1 plus 2, we get 3, and so on and so on.

The resulting sequence is called the Fibonacci sequence, and each number in the sequence is called the Fibonacci sequence. The Fibonacci ratio is then calculated by divisor over the sequence. These calculations give the ratios used in the Fibonacci levels below.

0, 0.236, 0.382, 0.5, 0.618, 0.786, 1, 1.618, 2.618

These ratios are translated into percentages – 23.6%, 38.2%, 61.8%, 78.6% and so on – and then applied to charts in an attempt to identify potential levels of hidden support or resistance in the market.

The Fibonacci sequence was discovered by the Italian mathematician Pisa Leonardo in 1202 when he was considering a practical problem involving the growth of a rabbit population based on idealized assumptions.

This order governs many aspects of life; From the creation of flowers, to the formation of waves, to the proportions of human bodies. It also provides traders and technical analysts with the information they need to develop resistance and support levels that can be used in a risk management framework.

You can use the Fibonacci level on your own or in combination with other trading methods.

The Fibonacci sequence was used to form other theories, such as Elliott wave principle and Dow theory. You can also use other technical analysis tools to use the Fibonacci ratio.

How to calculate the Fibonacci callback level
One of the most common technical analysis tools derived from the Fibonacci gold ratio is the Fibonacci correction level.

The Fibonacci ratio of 61.8% and The Fibonacci ratio of 32.8% are calculated by subtracting the recent high from the recent low and targeting the upcoming rally. Most of these points can be calculated using graphing software.
As the S&P 500 chart above shows, Fibonacci retractions often act like magnets, creating a self-fulfilling prophecy.

As you can see from the chart, the realization that the coronavirus pandemic was about to hit the US economy triggered a rapid bear market that began in February and bottomed out in March. Prices fell from around 3400 to 2200 before rebounding to a 38.2% retracement level.

If we multiply the drop point by 38.2% and add that number to the low (2200), we get the Fibonacci retracement level of 38.2%, or 2647. The index starts to consolidate at this point.

After the consolidation period, prices retested the 38.2% retracement level and broke through the next level, the 50% retracement level. The merger was short-lived. The S&P 500 then began testing the 61.8% retracement and consolidated around that area.

When you draw the Fibonacci retracement line, you will measure the peak to trough of your target’s movement. Then multiply the difference between high and low by 61.8% and 38.2%.

If you measure a drop, these results are added to the low values; If you measure the rise, these results are subtracted from the high values. When prices rebound, these levels will serve as target support for your corrections or resistance levels.