1. Dow Theory
1.1 History of technical analysis.
The beginnings of technical analysis were preceded by observations of price changes in financial markets over the centuries. The oldest tool in the arsenal of technical analysis is the "Japanese candlestick" chart, developed by Japanese rice traders in the XVII-XVIII centuries.
However, in 1900-1902, The Wall Street Journal published a series of relatively obscure articles on the mechanism of stock price movements. The author was the paper's founder and editor-in-chief, Charles Henry Dow, who, in addition to the paper, founded the famous Dow Jones financial news service.
Dow's successor as editor, William Peter Hamilton, described him as "ultra-conservative", a cool, knowledgeable and intelligent man who "knew his business" and did not allow himself to be annoyed by anything. At some period of his career he had his own seat on the New York Stock Exchange, for his good practical mind allowed him to penetrate the very essence of securities trading. Unfortunately, he died in 1902 at the age of only 52, so he did not publish anything from his research, except for selected material in newspaper articles. However, these observations were later synthesised into what we now call the "Dow Theory".
Initially, the principles outlined in Charles Dow were used to analyse the American indices he created, the industrial and railway indices. But most of Dow's analytical conclusions can just as well be applied to financial markets.
The development of computer technology in the second half of the 20th century led to improvements in analysis tools and methods, as well as the emergence of new methods that exploited the power of computer technology.
1.3 Fundamentals of Technical Analysis Theory
Technical analysis does not take into account why prices change direction (for example because of poor returns on stocks or changes in other prices), but only the fact that prices are already moving in a certain direction. From an analyst's point of view, profits can be made in any market if you correctly guess the trend and then close the trade on time. For example, if the price has dropped to the low side, you should take the chance and buy, and if it has risen to the high side, you should take the chance and sell without covering.
Also, in technical analysis we check the so-called patterns - the patterns that appear on the charts. For example, we know from history that the price rises in many cases continuously, and then falls in jumps (this happens due to the closing of short positions). Such observations can be used in order to open and close a trading position in time.
Read more: How to invest in stocks and what you need to know
Conclusions drawn from technical analysis may be inconsistent with those drawn from fundamental analysis. Basically, fundamental analysis is based on the fact that the value of a security differs from its market price, i.e. it is over- or under-valued. If it is possible to calculate the "right" price, it is possible to assume that the market will "correct" to the necessary level (the correction can be up or down). Therefore fundamental analysis can recommend to open a long position, while technical analysis will recommend to go short.
Criticism of Technical Analysis Although many "chartists" believe that their technique gives them an advantage over other traders, not all researchers share this belief. Technical analysis of price charts in the past does not allow us to guess the "reversal points" of prices in the future, and when prices develop in an already known direction, thechanalysis provides a simple "buy and hold" strategy. Among the critics of thechanalysis there are quite a few successful investors. Warren Buffett says the following: "I realised technical analysis didn't work when I turned the price charts upside down and got the same result." Peter Lynch gives an even sharper assessment: "The price charts are great for predicting the past". In defence of technical analysis, the goal of many traders is to recognise the direction in which the market is moving. George Lane, a technical analyst, became famous for his phrase: "The trend is your friend! The trend is your friend! You need a tool to recognise a trend. And the same tool should be used in order to exit a trading position on time. Technical analysis helps to do this (although it cannot predict anything accurately). Many market participants act on the basis of their experience, believing that "success lies on the far side of error" (Thomas Watson Sr., founder of IBM). Studying prices and trading volumes is necessary to gain experience in making trades in the stock market. Can I use technical analysis today? Before the advent of on-line trading, technical analysis was only of interest to a narrow circle of specialists. Now textbooks on technical analysis are available in many shops. Thus, knowledge of technical analysis is available to almost anyone.
1.4 Postulates of the Dow Theory.
1. There are three types of trends in the market. In an uptrend, every subsequent peak and every subsequent decline is higher than the previous one. In case of descending trend, each subsequent peak and declining trend is lower than the previous one. In a horizontal trend, every subsequent peak and decline is at about the same level as the previous ones. Dow also distinguished three categories of trends: primary, secondary and minor. He gave most importance to the primary or main trend which lasts more than a year, and sometimes several years. A secondary or intermediate trend is a correction to the main trend and usually lasts from three weeks to three months. Such intermediate corrections amount to one to two thirds (very often half) of the distance travelled by prices during the previous (main) trend. Small or short term trends last no longer than three weeks and are short term fluctuations of the intermediate trend.
2. The main trend has three phases. Phase one, or the accumulation phase, is when the most astute and informed investors start buying as all adverse economic information has already been taken into account by the market. The second phase occurs when those who use technical methods to follow trends come into play. The economic information becomes more and more optimistic. The trend enters its third or final phase when the general public enters the game and media-fueled excitement begins in the market. Economic forecasts are full of optimism. The volume of speculation increases. It is at this point that the knowledgeable investors who had been "hoarding" during the previous trend, when no one wanted to "hoard", begin to "spread". The trend comes to an end.
3. indices take into account everything. According to Dow Theory, any factor that can affect supply or demand in one way or another will invariably find its reflection in the index dynamics. Of course, these events are not predictable, but nevertheless they are instantly considered by the market and are reflected in index dynamics.
4. The indices should confirm each other. Dow was referring to the industry and railway indices. He believed that any important upward or downward signal in the market should pass in the values of both indices.
5. Trading volume must confirm the nature of the trend. Volume should rise in the direction of the main trend.
6. The trend is in effect until it gives clear signals that it has changed. Or in other words - the trend is more likely to continue than to change. A very important rule! It will help you choose the right direction to enter the market.
A trend is a definite price movement in one direction or another. In real life, no market moves in any direction in a straight line. The market dynamics is a series of zigzags: up and down and up and down. It is the direction of the dynamics of these ups and downs that forms the market trend.
The basic rule is: "The trend is your friend". Consequence: "Don't work against the trend"!
Read more: Dow Theory: Six basic principles of Technical analysis
1.5 Support and resistance levels
Support lines connect important market lows and occur when sellers are no longer able or willing to sell at lower prices. At this price level, the desire to buy is strong enough to resist selling pressure. The fall stops, and prices start moving up again.
Resistance lines connect important highs (tops) in the market, and occur when buyers are no longer able or willing to buy the commodity at higher prices. Seller pressure outweighs buyer pressure, and as a result the rise stops and gives way to a fall.
If we break the support line downwards, it turns into resistance. When you break up the resistance line, it turns into support.
Charles Dow's original principles were used to analyze the U.S. indices which he created, the Industrial Average and the Railroad Index. But most of Dow's analytical conclusions can just as well be applied to financial markets.
In financial markets, prices can be figuratively thought of as the outcome of a bout between a bull (buyer) and a bear (seller). Bulls push prices up and bears push prices down. In fact, the direction of price movement shows whose take is up.
Drawing on this figurative comparison, let's take a look at Phillip Morris' share price performance. Notice how whenever the prices during the analysis period fell to the level of $45.50, the bulls (i.e. the buyers) took the initiative to prevent further price declines. It means that at the price of $45.50 buyers considered it profitable to buy securities of this company (and sellers did not want to sell at the price lower than $45.50). This price situation is called support, because buyers are supporting the price of $45.50.
Similar to a support level, resistance is a level where sellers control prices, preventing them from rising further. Consider the following figure. Notice how whenever prices approached $51.50, the sellers outnumbered the buyers, preventing prices from rising.
The price at which the deal is made is a price which satisfies both the bull and the bear. It reflects the coincidence of their expectations. Bulls expect prices to rise and bears expect prices to fall.
Support levels indicate a price at which most investors expect it to rise; resistance levels indicate a price at which most investors believe it will fall.
But investors' expectations change over time! For example, for a long time investors thought the Dow Jones Industrial Average would not go above 1,000 (as indicated by the strong resistance at 1,000 in the following figure). But as the years have gone by, they are no longer surprised by an index close to 2500.
Read more: The basis of trading: Support and Resistance levels
When investors' expectations change, it is often quite dramatic. Look at how decisively prices have crossed the resistance level on the share price chart of Hasbro Inc. Also note that when that level was breached, trading volume increased significantly.
Once market participants realized that Hasbro stock could be worth more than $20.00, the number of investors willing to buy it at a higher price also increased (leading to an increase in both price and volume). By the same token, the bears, who would have previously started selling as prices approached $20.00, also believed that prices would rise further and gave up selling.
The formation of support and resistance levels is perhaps the most visible and recurring phenomenon on price charts. A breakout of support/resistance levels can be due to fundamental changes that exceed or fall short of investors' expectations (e.g., changes in earnings, management, competition, etc.) or due to a self-fulfilling prophecy (investors buying as they see prices going up). The cause is less significant than the effect: new expectations lead to new price levels.
The following figure shows a breakout due to fundamental reasons. It occurred when Snapple released a higher-than-expected earnings report. How do you see that they are higher? By the price movements that followed the publication of the report!
There are also support/resistance levels which are more related to emotion. For example, the Dow Jones Industrials could not break through 3000 for a long time, because investors were not psychologically prepared for it.
1.6 The strength of the support and resistance levels
The area of consolidation, which was struck by several trends, is like a battlefield full of craters. Its defenders have plenty of cover, and attackers will probably have to slow down. The longer prices stay in a consolidation area, the stronger the emotional commitment of bulls and bears to that area.
The strength of each support or resistance area is determined by three factors: its duration, height and the volume of trades that were concluded in it. These factors can be thought of as the length, width and depth of a consolidation zone. We can identify the main characteristics of the strength of the support and resistance lines:
The longer the consolidation zone, in time or in terms of the number of touches it has sustained, the stronger it is. Support and resistance, like good wine, get better with age. In two weeks of trading, the nearest support and resistance form, in two months people get used to them and support or resistance becomes of medium strength, and in two years an actual standard forms, providing very strong support and resistance. As support and resistance levels age, they weaken. Losers leave the market and are replaced by newcomers who have no emotional connection to the old price levels. Those who have just lost money remember very well what happened to them. They are probably still in the market, with their pain or regret, and are seeking to rectify the situation. Those who made bad decisions a few years ago are probably already out of the market and their feelings mean less. The strength of support and resistance increases every time prices reach that level. When players see prices turning around at a certain level, they will expect them to turn around the next time too.
The larger the range of prices in the resistance and support area, the stronger it is. A consolidation with a large break price range is like a high fence around valuable property. A consolidation area equal to 1 per cent of the current price level (4 points with the S&P 500 at 400) gives only marginal support or resistance. A price area equal to 3 per cent gives average support or resistance, and a price area equal to 7 per cent or more can halt a very strong trend.
The higher the volume of trades in a support or resistance area' the stronger it is. High volume in a consolidation area shows the involvement of many players and indicates strong emotions. Low volume indicates that players don't care about crossing that level and is a sign of weak support or resistance.
As soon as the trend on which you are trading approaches support or resistance, tighten your precautions. Precautionary measures are an instruction to sell below the existing price level if you have a buy position open or an instruction to close a sell position above the existing price level. Such an instruction will protect you from large losses if the trend changes. The trend shows the strength of the market when prices reach support and resistance levels. If they are strong enough to overcome them, the trend will accelerate and your precautionary measure will not be triggered. If the trend reveals weakness, then prices bounce off support or resistance. In this case, the precautionary measure saves most of the profit.
Support and resistance are more important on long-term charts than short-term charts. Weekly charts are more important than daily charts. A good trader sees several time scales and is guided by the longer one. If you are moving through the free zone on the weekly chart, then touching the resistance line on the daily chart is not as important. When you get close to resistance or support on the weekly chart, you need to be more ready for action.
Support and resistance levels are good for giving guidance on avoiding losses and preserving profits. The minimum of a consolidation area always coincides with the lowest support point. If you buy by placing your stop level below this low, the uptrend has plenty of room to manoeuvre. More cautious players buy after the upper boundary is crossed and place a safety measure in the middle of it. With a true breakout of resistance, it is unlikely that prices will move back into this range just as it is unlikely that the rocket will return to the launch pad immediately after liftoff. In a downtrend, mirror this procedure.
Many players avoid setting the stop level at round numbers. This prejudice goes back to the wise advice of Edwards and Magee to avoid setting a stop on a round figure because "everybody sets it there. In other words, if a player buys copper at 92, he sets the stop at 89.75, not 90. When he sells off a stock at 76, the precautionary measure is set at 80.25, not 80. But today, fewer stops are set on round numbers than on fractional numbers. So it is better to set the stop at a reasonable level, whether the number is round or not.
1.7 Actual and false breakouts
The market spends more time in a certain price corridor than in a trend. Most breakouts outside the price corridor are false. They are just in time to pull in the players who follow the trend before prices return to normal. False breakouts are the bane of amateurs, while professionals love them.
Professionals expect prices to fluctuate most of the time, without much deviation from the norm. They wait for the upside breakout to reach its final highs and, on the downside breakout, for prices to finally stop falling. They then play against the breakout by placing precautions on the last high or low in prices. This is a very tight stop and their risk is low, while there is an opportunity to make large profits if prices return to their range. The risk/reward ratio is so good that a professional can be wrong half the time and still make a profit.
The optimum play when opening a buy position is when a breakout to the upside on the daily chart is accompanied by technical indicators of a new uptrend forming on the weekly chart. Valid breakouts are accompanied by high volume, while false ones usually have low volume. True breakouts are confirmed when technical indicators reach new highs or lows in the direction of the trend and false breakouts are often indicated by divergence between prices and indicators.
2 Trends and Channels
2.1 Trend lines
The graphs show the "bulls" and "bears" actions. At the lows the bears are losing and the bulls are gaining control of the market. The highs indicate when the bulls have exhausted their resources and the initiative has been taken by the bears. The line connecting the two nearest lows gives the lowest total power divider for the bulls. A line connecting two adjacent highs gives the lowest total divisor of bearish strength. These lines are called trendlines. Players use them to identify the trend.
When prices are rising, draw an uptrend line through the lows. When prices are falling, draw a downtrend line through the highs. Projecting these lines into the future will help identify sell and buy points.
The most important characteristic of a trendline is its slope, because it determines the dominant force in the market. When the trend line is pointing upwards, it indicates that the bulls are in control. In that case it is wise to buy with caution below the trend line. When the trend line is pointing downward, it indicates that the bears are in control. In this case, it is wise to sell off and defend your position by stopping above the trend line.
2.2 Channels
A channel is formed by two parallel lines between which prices are traded. If you draw an uptrend line through the lows of declines, you should draw a channel line parallel to it through the highs of rises. If you draw a downtrend line through the highs of rises, draw a channel line through the lows of falls.
Channels, like trend lines, should be drawn through the boundaries of areas of price consolidation, discarding extreme lows and highs. The existence of channels adds to the reliability of the trend line. The reliability of channels is determined by the number of touches.
Channels reflect the maximum strength of the "bulls" in an uptrend and the maximum strength of the "bears" in a downtrend. The wider the channel, the stronger the trend. It is wise to trade in the direction the channel slopes, buying in the lower quarter or half of the uptrend channel and selling in the upper half or quarter of the downtrend channel. You should make profit on the other side of the channel.
2.3 Peculiarities of trading in the trend and in the channel
Traders try to profit from price fluctuations: buy low and sell high, or sell when prices are high and close a buy position when prices are falling. Even a quick glance at the charts shows that the market is in a price corridor most of the time. Much less time is spent on trends.
A trend occurs when prices are rising or falling all the time. In an uptrend (Uptrend) each rise reaches a higher value than the previous one and each fall stops at a higher level than the previous one. In a Downtrend, each downtrend reaches a deeper low than the previous one, and each rise stops at a lower level than the previous one. In a price corridor, in other words - in a flat (Trading Range, Trendless Market) all rises stop at approximately the same maximum level, and all falls reach approximately the same minimum.
A trader should distinguish a trend and a price corridor (channel). It is easier to trade during a trend. When prices are constant, it is harder to make money unless you trade options, which requires special skills.
Trading in a trend and in a price corridor requires different tactics. When you buy during an uptrend or sell during a downtrend, you have to give the trend the presumption of innocence and not let it easily derail you, beneficially strap in and hold as long as the trend lasts. When you are playing in a price corridor, you need to be sensitive and close your position at the first sign of change.
Another difference between trading in a trend and in a price corridor is your approach to the ups and downs of the market. In a trend, you follow the market - buy on the upside and sell on the downside. If prices are in a corridor, you should buy on the downside and sell on the upside.
An uptrend occurs when the bulls are stronger than the bears and their purchases push prices up. If the 'bears' manage to bring prices down, the 'bulls' come back in to play with renewed vigour, reversing the decline and pushing prices to a new high. A downtrend occurs when the bears are stronger and their selling pushes prices down. When an influx of buyers brings prices back up, the bears take the opportunity to sell again, knocking the rise down and pushing prices to a new low.
A pattern of consecutive lows and highs indicates a downtrend. Soybeans have fallen in price from November to mid-January. The low 4 is lower than the low 2 and the high 3 is lower than the high 1. A break of the downtrend line at 5 indicates the end of the downtrend. A breach of the line defining the downtrend may indicate a market reversal in the opposite direction or that prices will stop falling and fluctuate within a certain corridor.
The November-January downtrend moved into the price corridor defined by horizontal lines drawn through lows 4 and highs 3 and 6. When the decline from high 6 stopped at low 7 before reaching the bottom of the range, a tentative uptrend line could already be drawn. A breakout from the corridor at 8 confirms the start of a new uptrend.
At the right edge of the chart prices stopped just above the trend line. Since the trend is upward, this is a buying opportunity. The risk, in the case of a downward move, can be limited by placing the stop either below the last low or below the trend line. Note that the daily price intervals (distances from highs to lows) are relatively short. This is typical of a strong trend. A trend often ends after a few days with a wide price band indicating feverish activity.
When the bulls and bears are roughly equal in strength, prices remain within the price corridor. When the bulls manage to lift prices, the bears start selling and stop the fall. The profit hunters step in and interrupt the decline. "Bears" close the selling positions, which causes prices to rise, and the cycle repeats.
The price corridor is like a battle between two equally strong gangs. They are pushing each other back and forth on the street corner, but no one can master the position. The trend is like a fight in which one gang chases the other along the street. Every now and then, the weaker gang stops and tries to fight back, but then they still have to keep running.
There is no price movement in the price corridor, nor does the crowd spend most of their time aimlessly swarming around. The market spends more time in the price corridor than in the trend, simply because inactivity is more natural for people than meaningful activity. When the crowd gets excited, it looks for and creates a trend. The crowd doesn't stay excited for long, it goes back to its fluctuations. Professionals usually assume that there is a price corridor.
Identifying a trend or price corridor is the most difficult task of technical analysis. They are easy to identify in the middle of the chart, but the closer you get to the right-hand edge, the more difficult your task becomes.
There is no universal simple method for identifying the trend and price corridor. There are several methods, and it is wise to combine them. If they confirm each other's results, there is more confidence in that result. If they contradict each other, it is better not to trade and wait for certainty.
Having determined the boundaries of the trend, it is equally important to decide when to enter the market. If you have detected an uptrend, you will have to decide whether to buy immediately or wait until the local low. If you buy immediately, you will go along with the trend, but your precautionary measure is likely to be set far enough and your risk will be greater.
The most important indicator of a trend line is its slope. If the slope is up, then trade to the upside. If it is sloping downwards, then trade downwards.
An ascending line connecting lows 1 and 2 indicates an uptrend. Note that prices sometimes break through the trend line downwards, but then rise back up to it (3). This provides an excellent opportunity to sell. The same happens again at point 7, where prices return to the trend line after falling below it.
When you trade in the direction of the trend line, you usually act in the direction of the market tide. At the right edge of the chart, you should look for a selling opportunity as the trend is going down. Do not sell immediately, prices are too far below the trend line and even when you enter the game, insurance measures will not be able to reduce your losses. It is important to wait for a trade with a good profit to risk ratio. Patience is a trader's virtue.
If you wait until the low side, your risk will be less, but you will acquire competitors of four varieties: position holders who want to add to the position, players who want to close the position, players who have not yet bought, and players who sold too early and are now looking to buy, the waiting room is quite full for a price decline! The market is not exactly renowned for being charitable and a deep downturn could well mean the beginning of a change in trend direction. This reasoning also holds true in a downtrend. Waiting for a pullback when the trend is gaining momentum is for amateurs.
If the market is in a price corridor, in a flat, and you are waiting for a breakout, then you have to decide whether to buy in anticipation of a breakout, or during a breakout, or during a pullback after an actual breakout. If you are working with multiple positions, you can buy a third in anticipation of a breakout, a third during a breakout and a third during a pullback.
Whichever decision you make, one money management rule will always keep you out of the riskiest trades. The recommended distance from the entry point to your precautionary measure should be no more than 2 per cent of your capital. No matter how profitable a trade appears to be, skip it if it requires a more distant precautionary measure.
During a trend, money management tactics should be different than during a price corridor. During a trend, it is wise to make a smaller position volume and place precautions farther away. Then you will have less chance of being affected by market fluctuations, and the risk will still be under control.
During a price corridor it is very important to get the timing of your entry into the market right. Accuracy is important here, as there are few opportunities to profit. The trend is forgiving for a lagged entry, as long as you continue to act in the direction of the trend. Old gamblers advise: "Don't break your head in a bull market. If you are unsure whether the market is in a price corridor or trending, remember that professionals assume the existence of a price corridor until proven otherwise. If you are still in doubt, step aside.
Professionals love the price corridor because they can buy and dump positions with little or no risk of being taken over by a trend. Because they pay low or no commissions and do not suffer from price differentials, playing in a slightly fluctuating market is profitable for them. For those of us who play outside the trading room, it is better to wait for a trend to emerge. During a trend, you can trade less frequently, and your account will suffer less from commissions and price differences.
2.4 Conflicting time scales of trends
Most traders do not realize that the market is usually in a trend and price corridor at the same time! They choose one time frame, for example daily or hourly, and look for profitable deals on daily charts. When their attention is fixed on the daily or hourly chart, trends on other time frames, for example weekly or 10 minute charts, take them by surprise and upset their plans.
The market exists on all timeframes at the same time. It may be shown on the 10-minute, hourly, daily, weekly or any other chart. A daily chart may show a buy signal and a weekly chart may show a sell signal, and vice versa. Signals on different timeframes often contradict each other. Which of them should you follow?
Read more: What timeframe is the best to trade on
If you have doubts about the existence of a trend, consider a larger timescale chart.
The conflict between signals from different time scales coming from the same market is one of the great mysteries of market analysis. What appears to be a trend on a daily chart may turn out to be a slight bounce on a perfectly straight weekly chart. What looks like a normal price corridor on the daily chart reveals a wealth of upward and downward trends on the hourly chart, and so on. When professionals are in doubt, they look at the bigger picture, while amateurs focus on the smaller scale charts.
On the weekly chart, the Eurodollars show a pronounced A-B uptrend. At the same time, the daily chart shows that an X-Y downtrend is starting. Which one will you follow? The contradiction between signals of different time scales in the same market is one of the most frequent and most unpleasant dilemmas a player faces. You need to follow the market on several time scales and know how to react to contradictions between them.
2.5 How to draw a trend line
Most traders draw trend lines through the highest and lowest price levels, but it is better to draw them through the boundaries of price consolidation areas (fig b). These boundaries show where most players have changed direction. Technical analysis is a kind of public opinion poll, and in such a poll we are interested in the opinion of the masses, not a few extremists. Drawing trend lines across the boundaries of consolidation areas is somewhat subjective. You will have to fight the temptation to skew the ruler.
Panic selling of "bulls" and panic buying of "bears" create extremes, which look like "tails" on the chart. You may prefer to draw trend lines through consolidation areas rather than through extremes, also because the latter only tell you about the crowd that it is prone to panic.
Extreme points are very important, but not for drawing trend lines. The market usually recovers after such values, providing good opportunities for short-term play.
Draw trend lines through areas of price consolidation and leave out price extremes. "Tails" are high dashes at the end of the trend and they jump out of consolidation areas. The market moves away from the 'tails', offering good opportunities to play in the opposite direction.
Notice how persistently the angles of the trend lines are repeated month after month. If you know them, it will be easier for you to draw preliminary trend lines. At the right edge of the chart, prices touch trend lines. Buy as soon as you see that the next line has not made a new high.
The markets are constantly oscillating in search of the area where the trading volume will be highest. Tails indicate that a given price has been rejected by the market. This usually leads to a rush in the opposite direction. Once you spot a tail, play against it. Place your safety stop in the middle of the tail. If the market starts to 'chew its tail', it's time to exit the trade.
Victor Sperandeo gives another method of depicting trend lines in his book The Vic Player. His technique helps identify the reversal of a well-established trend.
Sperandeo draws an uptrend line through the lowest low of the entire trend and through the highest local low preceding the highest high. Such a line may not touch prices between these two points. The crossing of this line by prices gives the first signal that the trend is changing. The next signal is triggered when prices reach the previous maximum and move downward from it. The third signal is triggered when prices fall below the previous low. It confirms that the uptrend has changed direction. This procedure is mirrored in a downtrend.
2.6 Classification of trend lines
The main and most important characteristic of a trendline is its slope angle. When the trend line is sloping upwards, the bulls are in control and you should look for buying opportunities. When it is sloping downward, the bears are in control and we should be looking for a way to sell. You can classify trend lines according to their importance using five indicators: time scale, duration, number of times prices have touched the trend line, slope angle and volume of trades.
The basic rules for trendline evaluation:
The greater the time scale, the more important the trend line. The trend line on the weekly chart shows a more significant trend than on the daily chart. The trend line on the daily chart is more important than on the hourly chart, and so on.
The longer the trendline, the more reliable it is. A short trend line reflects the behaviour of the masses over a short time interval. A longer line reflects their behaviour over a longer period of time. The longer the trend line lasts, the greater its inertia. A serious bull market can follow its trend for several years.
The greater the number of price contacts with the trend line, the more reliable it is. In an uptrend, a return to the line means a rebellion among the "bears". In a downtrend, a price surge to the trend line indicates a bullish rebound. When prices reach the trend line and then move back up, you know that the dominant group in the market has won the rebellion. The preliminary trend line is drawn through only two points. A third contact point makes it more reliable. Four or five points of contact show that the market-dominating crowd is firmly in the grains of power.
The angle between the trend line and the horizontal reflects the intensity of emotions among the dominant market crowd. A steep trend line shows that the dominating crowd is dynamic. A relatively flat trend line indicates that the dominant crowd is turning slowly. A flat trend line usually lasts longer, similar to a competition between a turtle and a deer.
A comparison of the angles of the trend lines shows whether the dominant crowd is leaning more towards the "bulls" or the "bears". It is striking how often the trend lines go with the same slope in a given market. Perhaps this is because the key participants rarely change.
Often prices move away from the trend line faster. In this case you can draw a different, steeper trend line. This shows that the trend line is accelerating, becoming unstable (Figure 8). Having drawn a steeper trendline, you should harden your precautions by placing a stop immediately behind the previous trendline and adjust the stop after each new price bar appears on the chart. Breaking a steep trend is usually accompanied by a sharp rush in the opposite direction.
In an uptrend, the volume of trades usually increases when prices move up and decreases when they move down. This suggests that uptrends attract players and downtrends leave them indifferent. In a downtrend, the opposite happens: volume increases when there are declines and decreases when there are rises. A pullback in high volume threatens the trend because it shows a rebellious crowd rising.
If volume increases when prices move in the direction of the trend, it confirms the trend. If volume decreases when prices move against the trend, it also confirms the trend. If volume increases when prices return to the trend line, it indicates an opportunity for change. When volume decreases when prices move away from the trend line, the trend is in trouble.
2.6.1 Trend reversal
Figure 7. A simple method for trend reversal detection
Draw a trend line from the absolute maximum (A) to the lowest local maximum (B) preceding the absolute minimum (C), so that it does not cross the prices between A and B. A break through this trend line (1) gives the first signal that the trend is changing. A return to the previous low (2) gives the second signal that the trend is changing. This is a good time to start buying. When prices pass the local maximum (3), it will confirm that the trend has reversed. With this method, described by Victor Spirandeo, it is easier to catch major turns rather than short-term fluctuations.
2.6.2 Breakout of a trend
A breakout of an established trend shows that the dominant group in the market has lost its power. You need to be careful not to wait for signals to enter the game, most people lose money trying to ride the core out of the cannon.
The trend line is not a glass floor beneath the market, a single crack is enough to shatter it. Rather, it is a fence on which "bulls" and "bears" can lean. They can even move it slightly without destroying it. The trend is indeed broken when prices touch it from the other side. Some punters argue that a trend can only be considered broken when prices move away from it by two or three percentage points.
After breaking a steep uptrend, prices often jump back up, pass through the previous high and touch the old trendline from below (Figures 4 and 8). When that happens, you have an almost perfect opportunity to sell: a combination of a double high, a touch of the old trendline and possibly a bearish divergence in the indicators. Again the mirror image applies to downtrends.
Figure 8. The trend is accelerating
The stock market has been rising slowly and steadily since the low of 1987. You could buy whenever prices touched the flat trend line (1). The trend accelerated in 1988 and a new trend line (2) should be drawn at point A. When the new steeper line was broken, it signalled the end of the bull period. The market provided, as is often the case, a great opportunity to play down at point B when prices rose to the old trendline before the collapse.
Rules for using trends:
Trade in the direction of the slope of the trend line. If it goes up, look for buying opportunities and refrain from selling. If it slopes downwards, sell and avoid buying.
The trend line provides support or resistance. If prices are rising, place an order on the trend line and take precautions below it. When prices fall, do the opposite.
Steep trends precede sharp changes in direction. If the trend line is steeper than 45 degrees, place precautions on the trend line and adjust it daily.
Prices often return to the previous extreme price after they have broken a steep trendline. A rise to an old high with falling trading volume and divergence with the indicators provides an excellent opportunity to sell. A fall to the previous low after a break in the downtrend provides a low-risk buying opportunity.
Draw a range line, a channel parallel to the trend line and use it to identify when to take profits.
2.7 A preliminary trend line
Usually a trend line passes through at least two points on a chart. But there is a little known method of drawing a preliminary trend line through only one point (Figure 9).
If prices have broken through a downtrend and risen above it, you can assume that the downtrend has ended and a new uptrend has begun. Connect the last two highs and this will be the channel line for the new rise. Draw a line parallel to it through the last low. This preliminary trend line, parallel to the channel line, will show you where to expect the next low. It often indicates an excellent buying opportunity. This method works somewhat better on lows than on highs.
Figure 9. Channels and preliminary trend lines
The downward trend line 1, drawn through the highs of rises, characterizes a bearish market in corn. Line 2 is drawn through the lows parallel to the trend line. It tracks maximum bearish strength in a downtrend. The best opportunities to sell are in the upper half of the falling channel and to buy are in the lower half of the rising channel.
When prices break up through a downtrend line, the channel can help you draw a preliminary uptrend line. First draw a new channel line 3 connecting the two uptrend tops. Then draw a line parallel to it through the last low. This will be the provisional new trend line.
On the right edge of the chart, the corn is selling high. It is at the upper edge of the channel. If you want to play up, place a buy order near the new trend line 4.
If prices have broken the uptrend, measure the vertical distance from the trend line to the last high and set it aside from the breakout point downwards. If the crowd can be optimistic enough to push prices that many dollars above the trendline, they can probably also be pessimistic enough to push prices the same amount below the trendline. For a downtrend, apply this procedure in reverse. This method gives you a minimum estimate of the value of the next market movement, which is usually larger.
Trend lines can be applied to both volume and indicators. The slope of the trend line for volume shows whether there is more or less interest in the market. A rising trend in volume confirms an active trend. Falling volume indicates that the market crowd refuses to follow the trend. Of all the technical indicators, the Relative Strength Index-RSI is the most suitable for trendline analysis. Its trend lines often break earlier than trend lines on price charts, giving early warning of a change in market direction.
3. Gaps
A gap is a configuration of adjacent features on a price chart where the bottom of the first feature is higher than the top of the next (fig. 10). It suggests that no deals were made at a certain price, and deals were made only at higher and lower prices.
Gaps occur when prices jump when there is a sudden imbalance between buy and sell orders. Important news often leads to gaps. Gaps on the daily chart reflect reactions to events which came to light overnight, when trading was closed. If the news had been known during trading, the gaps would have only been on the smaller charts and the price spread would probably have been larger during the day.
For example, a strike at a large copper mine would benefit the bulls. If the news comes in the evening, the bears will get scared and want to close the position. They will flood the room with buy orders before the opening of trading. Traders in the room will react with a starting price of copper above the previous day's high. The smart trader prefers to trade when the market is quiet, while amateurs tend to react impulsively to news.
Gaps indicate that the market crowd is agitated, that the losers are in pain for their positions. When you know whether "bulls" or "bears" are hurting, you can predict what they will do next and act accordingly.
Figure 10. Breaks
Let's take a closer look at this movement. To do this, cover this chart with a piece of paper and slowly slide it from left to right.
А. Breakout Breakout. Trade downwards with a stop above the upper edge of the gap.
В. Gap depletion, prices are back up the next day. The downtrend has ended. Close the position immediately.
С. Another depletion gap, marked by no new highs afterwards. A few days are offered to trade down with a stop above the high.
D. A continuation gap during the downtrend. Trade down with a stop above the upper edge of the gap. Prices will activate a stop after a few days, as there is no method insured against failure.
Е. Exhaustion gap closing in a few days. Close the position immediately.
F. Normal gap in the price stop area. No action is recommended.
G. Breakout Gap. Play up with a stop just below the lower edge of the gap.
Н. Continuation Gap. Add more to the open position and place the stop just below the lower edge of the gap. The gap at the right edge of the chart will be either a continuation gap or an exhaustion gap. Relatively low volume hints at a continuation. If you will be buying, place a stop below the lower edge of this gap.
Some gaps are real and others are imaginary. A real gap occurs when the market misses some price corridor. An imaginary gap occurs when the trading takes place in another market while this market is closed. For example, the daily charts of the Chicago Futures Exchange are full of imaginary gaps. Currencies are traded in Tokyo, London and elsewhere when the Chicago exchange is closed. When the exchange opens, prices reflect the results of trading across the ocean.
All gaps can be divided into four main groups: normal, breakout, continuation and depletion. You need to be able to differentiate between them, as each tells a different story and requires a different tactic in the game.
3.1 Common Gaps
Common Gaps close quickly in a few days and prices return to their corridor. Common Gaps often occur in quiet markets without trends. They are common in futures markets with far-off closing dates and low-volume bottom lines, when all possible sell positions are already open.
Normal gaps have no continuation: new highs after an upward gap and new lows after a downward gap. Volume may increase slightly on the day of a regular gap, but it returns to its average values on the following days. The lack of new highs and lows, as well as constant volume, show that neither the bulls nor the bears have developed strong feelings about this market. Of all the gaps, regular gaps are the least useful for a trader.
Read more: What are futures: types, features, advantages and risks
Regular gaps occur more often than the others. In a stagnant market they occur very easily. A big trader once told how he could move gold up or down two dollars on a quiet day. He usually traded big contracts and if he bid for 20 contracts at once, other players would take notice, thinking that he knew something. Gold jumped up and his job was to sell before the gap closed.
The gap after a stock dividend occurs on the stock market on the day of the dividend and it is a normal gap. For example, if the dividend is 50 cents, each share becomes 50 cents cheaper after the dividend is paid. This is similar to how the price of a cow drops after she gives birth to a calf. After the cow gives birth, the price of the cow falls by the price of the calf, as it no longer comes with the cow. Previously, postpartum gaps were common. Now the daily range of the dividend-paying stock price is larger than that of the dividend, and post-dividend price movements rarely result in a gap.
3.2 Breakaways
Breakaway Gaps occur when prices leave a consolidation area with a high volume of trades and start a new trend, Breakaway Gaps can remain open for weeks and months or sometimes years. The longer the period of the price corridor that preceded the breakout, the longer the new trend will last.
An upward breakout is usually followed by a new high over the next few days and a downward breakout by a series of new lows. On the day of the breakout, there is a sharp increase in transaction volume, which persists for several days afterwards. On the day of the breakout, volume may be double the average of the previous few days.
The breakout shows a significant change in the mentality of the masses and reveals the presence of a lot of pressure supporting the new trend. The sooner you join the new trend, the better.
Most breakouts are common and close quickly. Professional players love them and play against the gap on the rebound. You need to be careful because if you do it mechanically, sooner or later the breakout will come back at you. You need to have deep pockets to hold a losing position for months, waiting for the gap to close.
3.3 Continuation Gaps
A Continuation Gap occurs in the middle of a strong trend which keeps making new highs or lows without closing the gap. It is similar to a breakout, but occurs in the middle of a trend, not at the very beginning. It means a rush of new strength to the dominant market group. There were many such gaps during the inflationary bull market in the commodity markets of the 1970s.
The continuation gap helps you estimate how long a trend can last. Measure the vertical distance from the beginning of the trend to the gap and set it off from the gap in the direction of the trend. When the market approaches this mark, you should consider taking profits.
Volume confirms the presence of a continuation gap if it increases by at least 50 per cent compared to the average level of the past few days. If prices do not make new highs or lows for several days after the gap, then you are probably dealing with a treacherous attrition gap.
3.4 Exhaustion Gap
The Exhaustion Gap is not accompanied by new highs or lows for several days after the gap. Prices stop and then go backwards to close the gap. Exhaustion Gaps occur at the end of a trend. Prices rise or fall for weeks or months and then jump in the direction of the trend. At first, the depletion gap looks like a continuation gap - jumping in the direction of the trend with high volume. But if prices fail to make new highs or lows over the next few days, it is probably a depletion gap.
That it is a depletion gap is only confirmed when prices move in the opposite direction and close it. This gap is like the last throw of a tired athlete. He lunges forward but cannot keep up the pace. If others catch up with him, he can be considered to have lost.
3.5 Island Rebound
An Island Reversal is formed by a combination of a continuation gap and a break in the opposite direction. The island gap looks like an island separated from the other prices by a strait with no trades. It starts as a continuation gap followed by a limited period of high volume trading. Prices then jump in the opposite direction, leaving a price island behind. This pattern forms very rarely, but it marks a fundamental change in trend direction. Play against the trend preceding the island.
It makes sense to look for gaps in similar markets. If gold gives a breakout, but platinum and silver do not, then you have an opportunity to make a "preemptive move" in a market, which has not yet moved.
Gaps can act as support and resistance levels. If more volume was seen upwards after the gap, it serves as an indication of strong support. If greater volume was observed before the gap upwards, then support is less strong.
Recommendations for trading using gaps:
Regular gaps do not provide good opportunities for traders, but if you are forced to trade, trade against them. If prices are up, sell as soon as the market stops making new highs and put a caution over the highs of the past few days. Close the position to the downside and take profits on the lower edge of the gap. If prices have jumped down, buy as soon as the market stops making new lows and place a caution below the lows of the past few days. Give an instruction to sell and take profits at the upper edge of the gap.
If the market has jumped out of the long-term price corridor at the peak in transaction volume and continues to give new highs and lows for several days, then you are probably facing a breakout. If prices have moved up, then buy by putting precautions on the lower edge of the gap. A true breakout gap almost never closes. In a downtrend, use the reverse procedure. Waiting for a pullback when a new trend has just begun can leave you on the sidelines.
Playing after a continuation breakout is similar to playing after a breakout breakout. Buy immediately and set up precautions at the lower edge of the breakout. On a downtrend, use the reverse procedure. Tighten your stop when the trend approaches the target level indicated by the continuation gap.
A true continuation or breakout gap should be confirmed by a series of new highs or lows. If this is not the case, then you may be facing a depletion gap. If the market refuses to make new lows or highs in the direction of the gap, then get out and re-evaluate the market, looking from the outside.
Exhaustion gaps offer attractive trading opportunities, as they are often followed by a swift reversal. If you find an upward depletion gap, sell by setting precautions above the last high. When prices start to fall, the weakest 'bulls' will start to dump. Sell while prices are still hitting new lows and return yours the next day after prices have failed to make a new low. In a downtrend, do the opposite.
Technical indicators can help identify the type of gap. The Force Index is based on price and volume. If the Force Index has changed little on the day of the gap, it is likely to be a normal gap. If the Force Index reaches a record high or low in several weeks, it confirms that a continuation or breakout is true.
Read more: About the SWIFT Global Interbank System
Charts with a time scale of less than 1 year show many opening gaps when the opening price lies outside the previous day's price corridor. If there is an imbalance between buy and sell orders before the opening, hall traders open the market lower or higher. If outsiders want to buy, hall traders sell to them at a price that will allow them to earn at the slightest drop in price. If customers want to sell, the goods are snatched out of their hands and paid enough to make money at the slightest price rise. Professionals play it cool: they know that the crowd rarely stays excited for long, and prices usually return to yesterday's corridor. They sell above or buy below that corridor, expecting that when prices level off, they will regain their position and make a profit.
4. Figures (patterns)
A pattern is a recognisable pattern of price changes. The patterns you see on the charts or computer screen are the traces left by "bulls" and "bears". The analyst is a hunter, looking for the faint traces, visible only to those who know where to look. Figures can help you decide whether a trend will continue or not.
There are two main groups of shapes: continuation and reversal. Continuation patterns include flags (Flags) and pennants (Pennants). They tell us to trade in the direction of the current trend. Turning patterns include Head and Shoulders, Reverse Head and Shoulders, Double Bottom and Double Top. They tell you that it's time to take profits from your existing positions. Some figures may be continuation figures as well as reversal figures. Triangles and rectangles are known to play such double role.
When several figures on the chart point in the same direction their signals are mutually reinforcing. For example, when there is an uptrend line crossing and a "head" and "shoulders" formation is completed, both facts indicate that the uptrend is ending. When different figures give contradictory signals, their effects cancel each other out and it is better to refrain from trading.
4.1 Trend reversal patterns
4.1.1 Head & Shoulders
Confirms a trend reversal. Peculiarities of the figure:
if "Head & Shoulders" figure appears on a bearish trend, the higher second shoulder
strengthens its signal;
if the second shoulder of "head and shoulders" figure is lower than the first one on the bull trend, it also strengthens the signal;
to identify a "head and shoulders" pattern, you should compare it with the volumes;
a false (failed) figure is possible.
There is a good sell position on the left and a good buy position on the right.
4.1.2 Triple and double bottom tops
Confirms trend reversal. This is a good position to open downwards
and this is a good position to open up
it is a good position to open down after receiving the confirmation
and this is a good position to open up after a confirmation
Among triple tops and especially among double tops there are many false signals going into the channel, which are eliminated by parallel analysis of convergence/divergence using oscillators and volume indicators.
4.1.3 V-shaped top and base ("spike")
The pattern is formed as a rule after a rapid previous trend. There are many gaps in the chart and practically no resistance/support levels. A trend break is formed as a key day, or as an island break.
The only signal for the trader may be a break of a very steep trend line.
Diamond or diamond is the rarest reversal pattern. It appears when two "triangles" - convergent and divergent - meet.
4.2 Trend continuation patterns
4.2.1 Triangle
General rules of triangle analysis:
in a classic triangle there should be five lines from the moment the triangle enters (three down and two up or vice versa)
if price enters from above, the stronger position for a downward continuation of price
if price enters from below, then the stronger position for the upside continuation
If the angle of the triangle is upwards, price is more likely to go up
Price is more likely to go down when the triangle angle is directed downwards
the more lines in the triangle and the closer to the top the exit, the stronger and more significant the price movement will be on the way out,
but if the exit occurs in the last quarter, the subsequent move is likely to be sluggish and unstable and the breakout is likely to be between 1/2 and 3/4, the apex of the triangle and will act as support-resistance level in the future;
volume declines as the triangle forms, rising sharply after the breakout, price will travel in the direction of the breakout at least as far as the triangle's highest point
4.2.2 Flag
A "flag" is usually formed after a precipitous previous trend. It looks like a rectangle against the direction of the trend. The "flag" is usually formed in the middle of the movement. As the "flag" is forming, the volume decreases, and rises sharply after breaking through. The formation takes from 5 to 15 bars.
4.2.3 Pennant
The "Pennant" is very similar to a small symmetrical triangle. The volume, as the "pennant" is formed, decreases, rising sharply after the breakout.
4.2.4 A wedge
A wedge is a pattern of a small triangle sloping against the direction of the trend. If the slope is in the direction of the trend, a trend break is most likely. A breakout usually occurs between 2/3 to 1.
4.2.5 Rectangle
A rectangle is very similar to a triple top. Oscillatory and volume analysis is used to determine the type of pattern formed. After the breakout the price will pass in the direction of the breakout a distance, not less than the rectangle height. The borders of the rectangle in the future will serve as good resistance - support levels.
Geometry in financial marketsTechnical analysis is a serious method of forecasting the movement of asset prices on the stock exchange. Its adherents believe that all the events, news, emotions and decisions of the exchange participants are already embedded in the price that the trading chart displays.Unlike fundamental analysis, economic calendars, news feeds or financial ratios are not used here. The main weapon of technical analysis is a pattern: a model, a sample. A pattern in trading is any figure formed on the chart by a price or indicator.The fundamental rule of this type of analytics is that history repeats itself. When a technical analysis figure appears in the trading terminal, the trader understands that the price is likely to behave the same as in most cases when this pattern appeared on the chart before.ClassificationTraditionally, trading patterns are divided into three types. The main criterion by which a figure gets its place in the classification is the direction of price movement after the pattern is formed.Figures of uncertainty. Two-sided shapesThis includes all the figures of technical analysis that can talk about both the continuation of the trend and its reversal, depending on the slope of the pattern lines relative to the direction of the current trend. The main representatives of this type of patterns are the wedge and the triangle in all their diversity."Wedge"In the growing trend, you can see two types of these figures: bearish and bullish "Wedge". Both models are formed by the narrowing of the price channel. The bullish "Wedge" looks like a small correction on the growing chart: local lows are updated, but the price in the range slows down. The highs and lows of the wedge are getting closer. For a trader, the signal to buy an asset will be the breaking of the upper limit of the descending "Wedge", bullish.Fig. 1. A descending "Wedge" on a growing chart.A bearish "Wedge" is formed similarly, but with an update of the highs. The price is slowing down, the range is getting smaller. This model signals a trend reversal or indicates a subsequent correction.Fig. 2. Bearish "Wedge".For a downward trend, the pattern is identified in a mirror."Triangle"Some analysts and resources attribute this pattern on the stock exchange to trend continuation figures. Practice shows that after the appearance of a "Triangle" on the chart, the trend can change direction. It depends on the shape specification. Traders and investors most often use two types of "Triangles":Ascending - has a horizontal resistance line, which is periodically tested by the price. At the same time, the lows are fixed higher with each wave, making the price range narrower. To enter a long position, traders use the fact of a breakdown of the resistance line of the "Triangle", or a subsequent rollback to it;Fig. 3. The ascending "Triangle" on the Apple stock chart.Descending - one of the sides of the pattern is formed by horizontal support, and the second by decreasing highs. This is the complete opposite of the ascending "Triangle". Entry points to the sale can be searched immediately after the breakdown of support or a rollback to it.Any of the two patterns can be formed both on a bearish movement and on a bullish one, so they belong to universal figures.Fig. 4. The descending "Triangle" on the Walmart stock chart.Continuation figuresIf such patterns as "Pennant", "Flag" or "Box" appear on the monitor screen, it is highly likely that after the figure is implemented, the price will continue to move in the same direction."Pennant"This pattern is often called a "Triangle" on the stock exchange, because it is formed in almost the same way. The price range fades with each change of direction, drawing a narrowing corridor. The difference is that the upper border of the "Pennant" is directed down, and the lower one is up. The figure can often be detected after strong impulse movements of the asset towards the main trend.The signal to enter the deal appears after the breakout of the pennant border in the direction of the main trend. For a downward trend, the situation is mirrored.Fig. 5. "Pennant" on the growing chart of Moderna shares."Rectangle": corridor, range, consolidationThe range consisting of horizontal support and resistance, into which the quote falls after strong price impulses. For example, after the release of important news. The asset in the corridor takes a break after a rapid movement. The longer the price stays in the range, the more likely it is to break through its boundary. The points for entering the deal should be searched after the breakdown of the boundaries of the "Rectangle" or their subsequent testing.Fig. 6. "Rectangle" in a downtrend."Flag"A continuation pattern that resembles a "Rectangle", but directed by borders against the main trend. It often appears after strong movements on the chart and shows that the bears mistook a small correction for a reversal and some sellers open positions. At some point, buyers start fighting again, the channel border breaks through, and the trend continues to move in the old direction. To enter the transaction, the fact of the breakdown of the boundaries of the "Flag" in the direction of the main trend is used.Fig. 7. "Flag" on the graph.Reversal patterns in tradingSome figures become harbingers of a change in the current trend or a serious correction. Often such patterns occur at historical highs or at strong support or resistance levels."Head and shoulders"The most well-known and used figure of technical analysis in all stock markets. The formation consists of three peaks, of which the middle one is the highest, and two at the edges are approximately at the same level. The pattern schematically resembles the silhouette of human shoulders and head. At the same time, the location of the "Shoulders" at different heights is allowed. The signal to enter the trade is the breakdown of the "Neck" line or its test after the breakdown. For a downtrend, the figure is formed in a mirror.Fig. 8. "Head and Shoulders" on the graph.Double and triple tops, double/triple bottomOne of the main rules of trading is not to buy an asset at the top, but to sell at the bottom. The following patterns are often formed in areas where the security has nowhere to fall or grow.The figure represents two or three tops, bottoms that stopped at the same level, after which the price returned to the last minimum or maximum, and broke through it, turning in the other direction.Fig. 9. The triple vertex on the graph.A double peak is formed similarly to a triple one (Figure 9), with the difference that the support line breaks through after the second peak. Entry points can be searched both after the breakdown of the level and after its subsequent testing.For the double/triple bottom pattern, the situation is mirrored.The above examples of patterns in trading are the main and most common. Using these technical analysis figures in your trading strategy, you should remember that they are not the Holy Grail of trading. It is possible to increase the percentage of accuracy of the price movement forecast by including patterns in complex strategies. 
Brokers are offering more and more services and different types of accounts, which often confuse beginners. An ECN forex account is a type of order execution that takes trades directly to the interbank market. Let's consider how to operate correctly in this environment and whether it is profitable for traders.What is an ECN account?Electronic Communication Network is translated from English as "electronic communication network". This is a platform where requests from all market participants are displayed. Transactions are executed between them without third parties.Differences from the standard oneUp until 10 to 15 years ago it was very common for a broker not to take positions to the market. Counter orders were closed internally. Such situation led to the conflict of interests between trader and broker. As the broker was directly interested in losses of the client.When trading using the ECN account on Forex the deals are sent to the platform, to which the counterparties are connected. The broker is not involved in the transactions and has no influence on them.In the processing centre, buy and sell orders are combined into a common Depth of Market and executed automatically, without intervention by intermediaries.ParticipantsPositions are traded on the interbank market, where both individuals and firms conduct transactions:Private traders.Central and commercial banks.Hedge funds.Corporations.The ECN platform is provided by the organisation that owns the software. Today it has a portfolio of clients from 40 of the world's major banks.FeaturesThe difference between ECN accounts and conventional accounts is that the intermediary is not involved in transactions. Because of this, the platform provides low spreads. The spreads are variable and can increase during times of high instrument volatility or when there is less liquidity in the market. Normally it is between 0 and 5 pips.As the company cannot make profit on spreads, there is a commission for transactions. This is a fee for connecting to the interbank market and stable operation without failures.Even with these fees, low spreads make trading more profitable than in standard conditions.Usually the fee is specified as a fixed amount per turnover of $1,000,000.Read more: What are the Forex platforms and which one to choose for tradingAdvantages and disadvantages of ECN accountsTo understand whether or not a trader requires special terms of service, you need to know the pros and cons.AdvantagesECN in forex is beneficial because:Automation helps eliminate non-market quotes. Transactions are made at the best prices.Low spreads from 0 pips make intraday trading and scalping profitable.Speed. Positions are executed instantly with no requotes.Ability to set orders within the spread.No broker influence. As orders are executed without intermediaries, this excludes interference and fraud.Such trading conditions are suitable for scalper and pips strategies, when the aim of one trade is several pips. The high speed and low spreads allow for maximum profits.DisadvantagesTraders have found disadvantages that intermediaries are silent about:Floating spreads increase to too large a size during economic news releases, at night, on public holidays or on cross-currency pairs.Commission. Some intermediaries charge high fees.Slippage occurs at times of high volatility, when price changes in milliseconds.High minimum deposit amount. If on standard conditions a deposit from $1 is allowed, here the rules are different.The leverage is lower. The ratio of 1:1000 is not accepted.These trading rules are more suitable for professionals who are interested in the speed of execution and withdrawal of orders to the interbank. Beginners can use standard or cent options to work with minimal investments.Read more: Top 5 crypto trading bots - trade on the signals of experienced tradersCriteria for choosing a brokerSome companies offer clients to open an ECN, but in reality do not take trades to the interbank. Orders continue to be executed by an intermediary. And the special trading conditions remain only in the advertisement. The trader thinks that he works on the real currency market.What are the signs of the account that help to understand that clients are not being cheated:Low spreads within market averages.Less leverage than usual - 1:200 or 1:500.Increased minimum deposit. Requirements - from $300-500. If special conditions are allowed for a $1 deposit, this may be a scam.There are no limitations on the minimum time of holding a position.Execution of orders on the market (Market Execution).Availability of commission for transactions.The speed of work is higher than in standard accounts.These features indicate that the company does take the client's positions to the interbank market. It is good if the broker names the specific platform on the website through which operations are conducted. But this information is rare and intermediaries are not obliged to inform the clients about it.ECN broker receives profit in the form of commission. He is interested in the trader conducting more operations.Regular kitchens get their clients' money when their trades are unsuccessful or the deposit is wiped out. From this point of view ECN companies are more reliable.How to open an ECN accountAfter choosing a company, you need to create a trading account. How to do this:Register on the website.Choose account option.To file an application to open an account.Fund in the account in a suitable way.Usually the operation is instantaneous. The trader receives a login and a password which must be entered into the trading terminal.Some brokers allow selecting a counteragent, through whom the trader's deals will be performed. It is better not to determine the particular company. Because conditions for opening a position at the moment may be unprofitable.It is more convenient to use the liquidity of all participants of the platform.Read more: 15 forex trading signals for beginners that you need to knowBottom lineECN accounts are a good alternative to the standard options. They are ideal for traders who want to trade directly in the interbank market. Even with the broker's commission, these trading conditions are more profitable than the standard ones. And low spreads and high speed of order execution will increase profitability of trading. Scalpers and those who use high-frequency trading robots will find these features particularly interesting. 
A recession is an extremely serious and prolonged period of dropping economic acts and data that affects an entire country or even a group of them. It has far-reaching and serious consequences that affect the country's citizens, governments, companies and investors.There is no unambiguous meaning of a recession, but it is usually characterized by a decline in a country's economic activity, including a drop in industrial production, unemployment, national GDP, sales and real income. Statistical agencies usually specify that a decline in GDP must be observed for at least two continuous quarters.Recessions are thought to be a standard component of the business cycle and occur approximately every 7 to 9 years. However, experts have no consensus on how long an economic downturn can last. Typically, a recession that lasts more than 100 consecutive days can be classified as an economic downturn, that lasts fewer than 100 days can be classified as a correction or a bearish trend. But if the economic downturn stays for much longer, several months or quarters, it can be called otherwise as an economic depression, which can last from years to even decades, and also have more serious social negative consequences.What is a double-dip recession?A dual recession is an economic downturn that leads to a brief rebound, temporary economic growth, and then a recession again. This appears to be when economic recovery indicators, such as several positive months of GDP growth, are interrupted by the following economic downturn.Dual recessions are very rare in practice. There is only a single example of a dual recession which occurred in the United States in 1982. It was brought about by a skyrocket in oil prices as per the decision by the OPEC oil cartel embargo. When the U.S. economy started to repair itself, the Fed sharply increased bank rates to curb growing inflation. Central bank rates then peaked at 21.6% and triggered an additional surge of the economic downturn in the United States.Lately, the European Union experienced a dual recession as the outcome of the COVID-19 pandemic. Europe's economic indicators dropped at the beginning of the COVID-19 pandemic, but growth resumed in early 2021 - and France's economy rose by 0.4%, for example. But another surge in disease brought the rebound to be only in the short term, and by April 2021, the eurozone's economic indicators had fallen once more by 0.6%.Read more: Features of successful Forex trading according to GDP dataWhat are the causes of recession?Recessions are specifically brought by economic downturns, which come as a result of different kinds of factors, including:Economic shocks - these occur when there is an unexpected crisis that leads to major financial complications. The most recent and well-known example is the COVID-19 outbreak, which has caused major economic downturns around the globe.Declining income and rising debt - when personal income falls, citizens have to switch to other origins of finance, mainly credit. As debt levels rise, the bankruptcies number rises, which can undermine the economy. This is exactly what occurred with the bursting of the real estate bubble that brought the financial crisis in 2008.Bank Withdrawals - when there is news that a bank may go bankrupt, this event can cause a significant number of bank customers to pull out their money from the bank. Unsupervised runaway withdrawals from banks can lead to bank failures and growing fear in the banking and financial industry. A mass consumer panic could also cause an economic downturn.Hypothetical asset bubbles - when the price of financial assets is inflated above their objective value, this is called a bubble. As a result, prices become volatile, often causing them to plummet. The following panic among market participants can cause companies and independent individuals to sell most of their assets and decrease risk.Trading during a recessionYou can open both long and short positions when you trade with derivatives. This leads to the benefit from both the downside and upside of the market.It is essential to mention that while volatility can provide new profit opportunities, it can also cause serious risks. It is well known that asset prices can fluctuate wildly while in a recession, which means that potential profits may become losses.This is especially true if you opened a short position while in an abrupt fall, but your forecast was wrong and the market rallied instead of falling. The size of resulting loss you may incur can be very large.Therefore, it is crucial to adopt risk management actions, such as setting an insurance stop loss, to protect trades from large losses if the market resists you. When you trade leveraged financial tools such as CFDs or forex, your possible losses can also increase, so it's essential to neglect the possibility of losing capital at an amount greater than you can afford to waste.Now let's see a few different types of assets and their reaction to a recessionIn a recession, what happens to the bonds?Prices of government bonds typically rise in an economic collapse. They are referred to as a safe haven from loss during an economic drop. The study found that government bonds increased 12% during the economic collapse in 2008 and 8% during the technology crisis from 2000 to 2002.The reason for this is that the bond market is future-oriented and shows investors' forecasts for the future. Thus, it turns out that by the time the economic collapse appears, much of the losses for the bond market are already factored in, and investors are expecting the post-recession recovery level.Central banks also choose to purchase bonds as part of their actions to stimulate the state economy by altering monetary policy. This usually coincides with a decline in central bank interest rates.On the other hand, not all bonds decline in an exact manner. It is important to analyze a bond's yield and how it relates to bank rates. For instance, bonds that were issued a long time ago have higher yields and they usually do better in a low-bank-rate situation due to their more appealing than recent bonds with lower yields.After the economic decline is over, when bank rates start to grow and monetary stimulus packages finish, then fresher bonds may have greater yields.It should be clear to recognize that junk bonds do not perform exactly as government bonds because of the difference in attitudes toward them. Junk bonds are considered less stable and more unsafe investments, while government bonds are usually thought of as more stable, especially when issued by countries with stable economies - such as Japan, Germany and United States.Read more: What is a Bond: types, risks, difference from stock, pros and consIn a recession, what happens to commodities?Typically, when an economy slows down, industrial output falls due to a decrease in infrastructure projects and new housing construction, which leads to a drop in demand for basic goods and lower prices.The value of some commodities while in an economic downfall, such as metals for industry, farming goods and energy, depends on if they are decayable or not. If a commodity cannot be held for a prolonged period of time, its value is likely to fall while in a recession when demand for it falls. This will be supported by a subsequent decline in production and viable storage problems.We remember the consequences in April 2020 of oil storage overflows when the highest volume of crude oil ever was left at the seaports. The oil glut caused global anxiety in the markets, and the price of WTI crude fell below zero for the first time, because investors were afraid that they would have to handle the supply of oil themselves.But prices of some basic resources react variously - especially as they are thought of as a storehouse of elemental value. This is usually the case for gold (XAU) and silver (XAG), but also for other metals with high demand like palladium (XPD) and platinum (XPL).In a recession, what happens to the gold?Purchasing gold while in an economic downturn is often seen as a beneficial decision because of its name "safe haven." For instance, during the 2008 collapse, when S&P 500 fell by 37% in value, the value of gold increased accordingly by 24%.The conventional wisdom is that metals retain their value and value in economic collapses due to the constant demand for them if government banks hold gold or from industries that do not always experience recessions exactly - such as technological advances and medicine.But, this connection became a self-exploration prophecy of sorts. Investors believe that gold is a safe haven, which is why it acts that way.It's crucial to mention that gold may not always grow in recessions like in other markets, gold prices experience both peaks and troughs-but it is thought to be more stable than stocks.One can open a gold position in many various ways, like by purchasing gold bars and coins made from precious metals suppliers, focusing on ETFs, trading CFDs or futures.Furthermore, whenever you open a position while in a recession, it's important to know the risk. Markets can adjust rapidly, and even well-known safe havens can take traders off guard by sudden, unpredictable price movements.In a recession, what happens to the stock market?Usually, the stock market is known as an indicator of the health of an economy because it reveals to us how easily companies can access national capital and how actively individuals invest in risky assets. Not surprisingly, while in an economic collapse, the stock market drops as investors exit the riskiest assets.On the other hand, there are categories of stocks that become leaders while in financial market downturns due to their gain and rise disregarding of the economic cycle. Such stocks are named "defensive stocks," and they usually include telecommunications companies, utilities, health care and consumer staples. The products that these companies offer are considered vital, so these companies keep on making strong sales and steady gains while other industry sectors experience the entire negative impact of the drop.Nonetheless, a stock market fall is not always equivalent to an economic downturn, specifically, if the drop is contained inside the market-it could simply be a local correction or a bearish trend for other reasons. Actually, many economists think that the stock market itself is not an adequate indicator of a nation's economic boom.Do gold stocks rise in a recession?Simply said, yes, gold stocks tend to rise in price while in a recession. While most parts of the stock market may fall under a recession, gold generally increases in value. This leads to gold mining and production companies getting a boost.On the other hand, changes in the price of gold stocks depend on their financial act and investor sentiment towards them. Therefore, there is no assurance that each gold stock will grow in price. You need to do your own analysis of the fundamentals of each company individually.In a recession, what happens to the forex market?Forex is completely immune to an economical collapse unless each country is destroyed by an economic collapse, traders will find a way to exploit the difference in power between the two currencies.Some currencies or groups of currencies will eventually fall as their national economies collapse in the recession. However, other currencies may take their place. Essentially, forex trading requires long positions in one currency and short positions in another, so forex traders can simultaneously trade the currency of a country whose economy is both in crisis and thriving.When a nation's economy goes into recession, central bank rates fall, making the country's currency less attractive for investment. Typically, currencies with low bank rates are used to purchase currencies with higher interest rates - a so-called carry trade technique.Meanwhile, as the economy repairs itself from the crisis and bank rates grow, the national currency begins to build up as international and national investors will seek to store their money in that country's banks or buy its currency.Read more: Causes of inflation and scientific approaches to their studyWhen was the last recession?The last economical downturn was in the middle of 2020 in the U.K. For the first time in 11 years, the economy reserved 20.4% from April to June 2020. The COVID-19 virus that began led to a sudden drop in household spending, a drop in industrial production in factories and construction, and a halt in transportation and travel, causing GDP to drop for two continuing quarters.Eventually, the economy did recover, and although there were renewed fears of a second dip in 2021, the GDP chart stayed securely in the shape of a "V." But, the lingering uncertainty in the economy has raised fright that another downturn could occur in 2022.The last considerable economic collapse was the financial crisis in 2008 which started in December 2007 and carried on till June 2009. By that time, it was the most lengthy recession since WWII. It was brought about by the catastrophe in the housing market, which was caused by poor control of the mortgage market in the United States.Even though it began in the U.S., it rapidly spread throughout Europe, including Great Britain, Germany, and France, as well as Asia. 
If you already have basic knowledge of how to work in financial markets and are on the verge of building your own trading system, I recommend studying the Ichimoku indicator. The Ichimoku indicator combines the power of five lines and Japanese imagery. Currently, it is becoming more and more popular among traders, being a solid foundation of their trading systems. This indicator can also help you achieve success and gain financial independence.Senkou Span and the Ichimoku CloudLet 's recall the definition of these lines:Senkou Span A (SSA) - the middle of the distance between Tenkan-sen (TS) and Kijun-sen (KS), shifted forward by the value of the second time interval.Senkou Span B (SSB) - the average value of the price for the third time interval, shifted forward by the value of the second time interval.Translated from Japanese – "riding, galloping ahead of the carriage."We have already said that the main lines of the indicator are the levels of a 50% pullback at various time intervals. They allow you to dynamically track the levels of these pullbacks, i.e. the possible values of trend corrections. The lines also make up a set of support/resistance levels of various strengths, their analogue can be considered a set of moving averages.Read more: What is Technical Analysis and why does an investor need itThe author of the indicator, Goichi Hosoda, conceived Senkou Spans as future levels of resistance and support, which draw a zone of predominance of the interests of market participants.Picture 1. SSA and SSB lines.Senkou-Span A gives us information about the short-term trend in the market. Its direction is recommendations for choosing a strategy: buy or sell. SSA is directed up – buy, down – sell. Finding the SSA above the SSB is a bullish market, under the SSB is a bearish one. Its second function is to act as a resistance or support level. However, the author of the indicator, Mr. Hosoda, considered this line weak for such a function, but this role cannot be ignored when analyzing the work with the chart.Senkou-Span B – unlike SSA, Hosoda paid more attention to this line. Having a larger time interval parameter, it, like Kijun Sen, carries the function of providing information about long-term trends in the market. Its direction, like all lines, gives us the choice of the direction of entry into the market. And the resistance/support function gives us the opportunity to find entry points into the market.And a very important point is that the exit of this line in the horizontal direction signals us about the end of the momentum of movement, a possible flat and a likely change in trend. Which gives us the opportunity to be ready, under certain conditions, to exit the market.However, the uniqueness of the indicator is that these two lines tell us about the future. Their mutual location, the location of the price, the fifth, not yet considered by us, the Chinkou Span and Kijun Sen and Tenkan Sen lines relative to them give us a lot of information about the market, its condition and prospects.Ichimoku Cloud and how to use itThe author of the indicator, Goichi Hosoda, conceived Senkou Spans as future levels of resistance and support, which draw a zone of predominance of the interests of market participants. According to Hosoda's plan, a change in the color of this zone signals a possible trend change or at least a rollback (correction).Look at Picture 2. If we analyze it carefully, we will see that this is indeed the case: the changed color of the cloud allowed the indicator user to see changes in market sentiment almost at the very beginning of this action. This signal is the most significant asset of the Ichimoku indicator.Picture 2. We track changes in trends using the Ichimoku cloud.If we look at Picture 2 again, we will pay attention to the fact that clouds look different not only in color, but also in shape. This form is set by the mutual arrangement of SSA and SSB. The unidirectional movement of the Senkoi in a direction other than horizontal tells us about the strength of the trend. The steeper the angle of the cloud movement, the stronger the trend and momentum of the market movement. The exit of these lines to the horizontal signals the equilibrium in the market (flat) and a possible change in the trend.Read more: Technical analysis on the forex marketHowever, here it is necessary to note such a moment as the width (thickness) of the cloud. The strength of the momentum of movement sometimes gives a negative reflection. It's like at the front. When a powerful, strong, fleeting blow leads to the breakthrough of all the enemy's resistances and withdrawal to his rear, but at the same time the rear of the attacker himself becomes very vulnerable. Because there are a lot of opponents left in them, and the attacker's reserves are far behind.So it is in this situation. With a powerful pulse, the thickness of the cloud is minimal, sometimes SSA and SSB merge into one line. These places are the most vulnerable to a breakdown when trends change. A more systematic, long-term movement, with reasonable pullbacks, draws a very "thick" cloud, which becomes very problematic for those who decide to change trends in the market. The thicker the cloud, the more interests there are of those who "drew" this cloud, and they just don't give up without a fight.Important. At the same time, it is necessary to note a very important point in the combination of these lines. When the SSB goes horizontal, and the SSA continues its directional movement, it means that we have only a weakening of the momentum of movement, but not a trend. At the same time, the Ichimoku cloud is expanding, which means that the prevailing interests in the market are expanding both in time and price ranges.In addition, the cloud carries another wonderful function. It, figuratively speaking, forms areas of "high" and "low" pressure. Acting as support and resistance, cloud lines form areas of interest for market participants. When the price is below the cloud, we are talking about the predominance of bearish trends in the market and, accordingly, the prevailing recommendation will be "sell". When the price enters the zone above the clouds, the bulls will have the initiative in the market, which means that we will stick to the buying strategy. At the same time, the cloud has another remarkable property. Inside it, the interests of bulls and bears intersect, consensus is established in the market, or maybe, on the contrary, there is a massacre and no one wants to give in, and we are seeing a flat.Ichimoku Cloud Trading SignalsWe have already briefly familiarized ourselves with some of the signals that the cloud and its components give us. Now let's look at this action in more detail. Let's start with the simple ones.Independent signals from SSA and SSBTrend signals:1. Recalculation of SSA and SSB. As we noted above, the most important signal for determining the trend from the Ichimoku indicator is the moment of intersection of the SSA and SSB lines, and the next change in the color of the cloud. An important condition for confirming this signal is the unidirectional movement of SSA and SSB following the intersection in the direction of the signal direction. The SSA will help with this. SSA is directed up – buy, down — sell.Read more: Features of intraday trading on the Forex market2. Unidirectional movement of SSA and SSB. As we have already noted, SSA is an indicator of the short-term trend in the market, and SSB tells us about the long-term preferences of the market. Therefore, when short-term and long-term trends coincide, we get their strengthening. Therefore, this signal itself is very strong. With a directional movement other than horizontal, this signal allows us to determine both the beginning of the trend and its continuation in a timely manner, thereby allowing us to enter the market in those conditions when we missed the beginning of the trend.3. SSA and SSB oncoming trafficPicture 3. Oncoming traffic.This action of the lines occurs at the moment when a rapid and final end of a long-term trend occurs in the market and precedes their crossing soon. This signal can also be used to take profits on the previous movement and enter the market in a different direction.Reversal (correction) signalPicture 4. Reversal (correction) signal.A reversal trading signal in this combination of Ichimoku indicator lines is issued by SSA. Being an indicator of short-term trends, SSA gives us the opportunity to timely determine the moment of exit from the trend, and catch the entry point into the market in new conditions.Conditions for the signalIf you look closely at Picture 4, you will see that by this time the SSB had already moved from directional movement to horizontal, which should have indicated a weakening of the momentum of the previous movement, and we should at least have expected a rollback (correction) of this movement. This is the first phase of the signal. Then, after a while, confirmation of this signal follows, the SSA is directed in the opposite direction of the movement and the price gives a reversal. Let's take an example of the work of SSA and SSB.Picture 5. An example of the reversal signal.Somewhere behind the scenes, the beginning of a bearish trend remains. Then SSA and SSB went horizontal (pos. 1), which corresponded to a short flat movement. Then the SSA and SSB turned down simultaneously (pos.2). We received a signal to continue the downtrend, and the opportunity to enter the market. After a while, SSB went horizontal, a signal of slowing momentum and a recommendation to be ready to exit the market, but SSA continued its downward movement, recommending that we hold the position.Then the SSA turned up (pos. 3), a signal of a change in trend (or correction) and exit from sales positions. Recommendation to buy. After a while, the SSA also entered the horizontal, advising us to be ready for the end of the correction and recommending that we exit the purchases. And then the unidirectional movement of both lines followed again (item 4), recommending that we re-enter the market with sales and keep them until the SSA changes its direction.Read more: 15 forex trading signals for beginners that you need to knowSignals of interaction of the price chart and cloud linesAs we already know from the definitions, the SSA and SSB lines act as support and resistance levels of the market. Based on this, strategies for working in the market are built on the breakdown or rebound of the price chart from these lines. Important components of this strategy are the factors of the mutual position of the chart and the cloud, as well as the color of the cloud standing in the way of the price chart. Let's look at these points with examples.Picture 6. Operation of the cloud.Picture 6 clearly shows how the cloud and its components work when interacting with the price chart. If the price approaches a bearish cloud from below, then SSA stands in its way (in this case, it acts as the lower boundary of the cloud and resistance). The breakdown of this line will allow the price to enter the cloud, where, as we described above, interests will meet with the opposing side. And the bulls' goal will be the opposite side of the cloud, where SSB will already act as resistance, and SSA will already act as support for them in this confrontation. Entering the cloud usually indicates a high probability of flat movement. This will be confirmed by the lines of the cloud that will be drawn at this time.Realizing that a breakdown of the SSB will put an end to the long-term trend, bears will resist at this border of the cloud. Especially since this is their cloud. And usually, when this line is reached, there is a rebound from it, and the price rushes back to the lower border of the SSA cloud. Such maneuvers can last as long as you want. If, during the reverse course to the SSA, this line turns out to be broken down, then we will most likely get a continuation of the bearish trend, the rebound will give the bulls new strength, and the price will again rush to the upper border of the cloud. A breakdown of the SSB will mean the price entering the growth zone, the victory of the bulls and the final trend change.The same thing happens with other variants of the price chart and the cloud. Only the options change, which line is the first on the way to the price chart.Thus, we have several more signals from the Ichimoku indicator.Breakdown of the upper boundary of the cloud up – a buy signal;Breakdown of the lower boundary of the cloud down – a sell signal;A rebound from the lower border of the cloud from below is a signal to continue the trend and sell;A rebound from the upper border of the cloud from above is a signal to continue the trend and buy.Read more: Forex Signals - what is it? How to use them?Working inside the Ichimoku Cloud (flat)Breakdown of the cloud boundary and entry into the cloud – a buy or sell signal with the goal – another cloud boundary.A rebound from the cloud boundaries is a buy or sell signal with a goal – another cloud boundary.When working with the price and cloud chart, as we said above, the moment of the thickness of this cloud and the angle of contact between the price and the SSB is important. The thinner the cloud, the more likely it is to break through. The sharper the angle between the price chart and the SSA or SSB, the less chance this line has to resist a breakdown.Here is briefly what I wanted to convey to you in this lesson. 
To assess the current state of the economy and future trends, investors use various tools: GDP dynamics, stock indexes, unemployment, inflation, PMI business activity index, producer inflation, consumer expectations indicator, etc. But in addition to stock indexes, you can also analyze the value of the national currency of the United States - the dollar.Since the stock market is an integral part of the economy, as integral as the dollar in the economy, the dynamics of the value of the national currency can serve as signals potentially important for the investor. The dollar is the main currency of international settlements, the main world reserve currency, the main volume of debt obligations in the world is issued in US dollars. Therefore, the value of the dollar is a kind of barometer not only of the US economy, but also of the world economy. The dollar has its own index - the DXY dollar index (DXY or USDX tickers).In this article, we will look at what the US dollar index DXY is, how it is calculated and how to interpret the dynamics of its value.What does the US dollar index DXY meanThe US dollar Index (DXY) is a calculated indicator of the market value of the US dollar relative to the "basket" of monetary units of the countries - the most important trading partners of the United States. The index basket consists of 6 currencies: euro, Japanese yen, British pound sterling, Canadian dollar, Swedish krona and Swiss franc.We can say that indirectly, the index value characterizes the dynamics of US exports, because with its growth, the demand for the dollar also increases.To calculate the index, currencies are assigned different weights in accordance with the shares of currencies in US international trade:At the time of the index's creation, to a greater extent, it was they who held the primacy in the foreign trade turnover of the United States. More than half of the weight (57.6%) has the euro, and the share of the smallest component – the Swiss franc - is 3.6%. Based on the weight of each currency pair, it can be concluded that the role of the euro in the formation of the dollar index is several times higher than that of other currencies.The DXY index is calculated using the weighted average geometric calculation method. Each national currency of the US partners from the currency basket of the index has its share of influence on the USDX index. The formula has the following form:The index value reflects the change in the ratio of the dollar to other currencies compared to its base value. The coefficient 50.14348112, which is involved in the calculation formula as the first term, was selected in such a way that the initial value of the index was 100 p. The power coefficients are equal to the shares of the corresponding currencies in the index base.The growth of the index indicates an increase in the value of the dollar compared to the "basket" of currencies, i.e. its strengthening, and vice versa, its decline indicates that it has become weaker. If the index value is greater than 100, then the strength of the dollar has increased by the corresponding amount. And, conversely, when the dollar price decreases, the index decreases.History of the US dollar index DXYThe calculation of the dollar index began in 1973 after the termination of the Breton Woods Agreement. In accordance with this agreement, for a long time, the currencies of 44 countries were pegged to the dollar, which, in turn, was backed by gold ($35 per troy ounce (gold standard).In 1973, the United States refused to link to gold, because its reserves in the United States were limited to a certain amount, and the dollars secured by gold were not enough for the development of world trade. Since then, countries have switched to floating exchange rates of national currencies.In the same 1973, the DXY index was created as a barometer evaluating the "paper" dollar in relation to other currencies. Initially, the basic basket of the index included 10 currencies, of which 8 were European. The base of the index has changed only once – in 1999 in connection with the formation of the eurozone and the emergence of the euro. The euro replaced 5 currencies of European countries from the index. Until 1999, the most significant currency for calculating the USDX index was the national currency of Germany – the German mark.The initial value of the index was taken as 100 p. The following index calculation results are measured as a ratio to the base value.Initially, the US dollar index was developed by the US Federal Reserve System in 1973 to obtain the average value of the US dollar weighted by foreign bilateral trade, freely floating against world currencies. Now the index is calculated by the ICE exchange holding (Intercontinental Exchange, Inc.). The calculation is made daily, once an hour. There are no regular adjustments or rebalancing of the ICE US dollar index.The values and dynamics of the dollar index may be different, but the following values are taken as benchmarks.More than 100 pp. – similar values indicate the strength of the dollar relative to other national currencies from the index basket.Equal to 100 p.p. – this means that the dollar is at the level of the other currencies of the index basket.Less than 100 pp. – this indicates the weakness of the US national currency.As can be seen on the graph, the maximum index value (160 pp.) was fixed in 1985, the minimum (72 pp.) - during the 2008 crisis. At the time of publication of the article (10.08.2022), the index value is 106.303 pp. This means that the value of the dollar has increased by 6,303 p.p. compared to the baseline value. This is the highest value in the last 20 years.Thus, the DXY index measures how the dollar price changes on the world market.What does the dynamics of the dollar index DXY indicateThe specificity of the DXY dollar index is that its dynamics cannot be interpreted unambiguously. Unlike conventional currencies, which fall when the country's economy deteriorates, the US dollar can strengthen both during economic growth in the US and during a global recession or economic downturn. This feature is due to the fact that the dollar is the world's reserve currency and plays a unique global role in the global economy. On the one hand, investors see the American currency as an opportunity to make money on the economic recovery, on the other hand, they consider the dollar as a relatively safe asset that will allow them to survive difficulties while saving their savings. This feature is called the "dollar smile theory". There are 3 phases in the behavior of the dollar:Phase 1 – Dollar growth due to increased risk aversion. The dollar is strengthening with a decrease in the growth rate of the global economy and an increase in risks in the markets. In such a situation, in order to avoid possible losses or minimize them, investors exit risky assets and direct funds to the dollar, which is considered a "safe haven currency". At this stage, the investor's goal is to preserve, not increase, the available capital. In addition, to invest in US Treasury bonds that are considered risk-free in any economic situation, dollars are also needed, which leads to increased demand for them and an increase in the exchange rate.Phase 2 - Economic recession and recession. At this stage, the economy is showing signs of slowing down or even recession, and the Fed is starting to cut interest rates. Investors are starting not to buy, but to sell the dollar in order to switch to currencies that can provide higher returns. Demand for the dollar is weak, which leads to its fall.Another factor is the relative economic efficiency of the United States and other countries. The US economy may not necessarily be stagnant, but if its economic growth is weaker than in other countries, then investors will prefer to sell US dollars and buy the currency of a country with a stronger economy. As a result, the lower part of the "smile" is formed - the dollar is falling.Phase 3 – Economic growth. The values of fundamental indicators are beginning to indicate an improvement in the economic situation, i.e. the phase of economic growth. Companies are increasing production, there are signs of economic recovery. Investors' risk appetite is returning. Thus, with stronger GDP growth in the US economy compared to other countries, the dollar is also strengthening. Thus, the key factor in the dynamics of the dollar index is relative economic growth. If the economy of the "rest of the world" can grow faster than the US economy, this will lead to a weakening of the US dollar. If the US economy is growing faster, then the US dollar will grow. In fact, the influx of foreign money into American enterprises and investments leads to an increase in the value of the dollar.An example of such a scenario is the 2008 crisis. In mid-2008, investors sought stability during the crisis period in the form of investing in the dollar, which led to its strengthening. As the situation normalized and the crisis processes slowed down, the focus of investors' interests began to shift to more profitable and risky instruments. This flow of capital led to a significant drop in the US dollar in early 2009. The recovery of the US economy from the crisis caused an increase in demand for the dollar and, as a result, its strengthening until the end of the 1st half of 2010.The factor of updating the highs of the dollar value relative to world currencies from the reserve basket in 2022: the Fed started tightening monetary policy earlier than other major central banks (against which the yield of government treasury bonds began to rise), the problems of the eurozone, the devaluation trend in the euro and yen, the weakness of stock markets. All this together makes American investments more profitable, because now they promise higher profits. Finally, investors and analysts are concerned about the global recession – the dollar is traditionally considered the most reliable asset in turbulent times.Let's take a closer look at how the change in the dollar index affects the dynamics of some investment instruments and the economy of enterprises.BondsThe increase in the profitability of investments in US Treasury bonds is accompanied by an increase in the DXY index. Bonds are traditionally considered the lowest-risk assets that allow you to save capital. At the same time, in order for them to be attractive for investment, their profitability should be higher than the inflation rate.Currently, due to an increase in the interest rate and an increase in bond yields, investors are starting to exit riskier assets of other countries, i.e. there is a flow of funds into the dollar for further investments in bonds. In addition, due to the unstable global economic and geopolitical situation, the demand for the most risk-free instruments is growing. This leads to a strengthening of the dollar.StocksA stronger dollar is not always good for equity investors. It means:A decrease in the profits of exporting companies and global corporations from sales of products in other countries.An increase in the costs of exporters, which leads to an increase in prices for the goods they produce and, as a result, a decrease in competitive advantage.Increasing the costs of foreign companies operating in the United States.Thus, the growth of the DXY index signals a weakening of the US stock market, i.e. the dollar index is basically moving opposite to the S&P 500 index.Such a decline in the market is due to the fact that a strong dollar makes imports cheaper and exports more expensive and less competitive in world markets. The rising dollar affects the profits of many global corporations.Exporting companies and global corporationsCompanies that supply their products around the world make more profit with a weak dollar.The high values of the DXY index, i.e. the growth in the value of the dollar negatively affects US exports. In this case, the volume of goods purchased by other countries decreases, because they need more of their own currency to buy the same volume. That is, US companies face the following consequences of the strengthening of the dollar:Decrease in the volume of exports.Margin reduction, as a result of a decrease in the volume of funds received, including for the development of the company. In this case, there is a significant adverse effect of exchange rate fluctuations.The weakening of the exchange rate of a foreign currency against the US dollar adversely affects the company's sales and revenues denominated in a foreign currency (other than the dollar), and usually leads to the company raising prices in other currencies to compensate for the strengthening of the US dollar, potentially reducing demand for its products. If in some cases, for some reason, the company decides not to raise prices, this negatively affects the profit that the company earns in US dollars: when converting foreign exchange earnings into US dollars, the company receives less (since the dollar has become more expensive).Importing companiesA strong dollar benefits US importers. With the growth of the dollar, imports for American companies become cheaper, and they can make more profit. For companies in other countries that import products from the United States – on the contrary, because they have to spend more of their currency to buy goods or raw materials.Commodity marketsPricing for most commodities occurs in the US dollar due to its role as the leading reserve currency. Local production costs and consumer prices can be expressed in different currencies, but for wholesale deliveries, the US dollar is used as a means of exchange. Over time, the growth of the dollar usually leads to a decrease in commodity prices, while the weakness of the reserve currency is a factor in the growth of prices in commodity markets. An increase in the DXY index leads to a decline in all commodity markets.Below is a graph of oil prices and the DXY index, which shows the inverse correlation of the dollar index with oil prices.In addition to the impact of the dollar's value on financial and commodity markets, it is worth mentioning separately the following global consequences for the economies of other countries:An increase in the debt burden on the budgets of countries that have dollar loans. After all, it is a well-known fact that the bulk of the world's debt obligations are denominated in US dollars. US banks actively lend not only to companies and businesses, but also to entire states. With the growth of the dollar, borrowers have to pay more on their debts.Emigration of capital from countries. When the national currency (other than the dollar) weakens, it forces large businesses and investors to withdraw funds from the economy of this country, which is an additional factor in the weakening of the local currency.Negative impact on economic growth. The effect of the dollar's growth is felt by importing companies, manufacturers who are heavily dependent on imported components from the United States. In the conditions of modern global globalization, it is difficult to find production facilities that are 100% provided by local markets. This is especially true for the production of complex technological products. To maintain output volumes at the same level, manufacturers need to spend more money on purchases, which often leads to losses. Therefore, a compromise option is to reduce the volume of output. On the scale of the country's economy, this means a drop in GDP.Pros and cons of the DXY Dollar IndexLike any other indicator, the US dollar index has its pros and cons:AdvantagesExtensive use of the index. The index is calculated around the clock.Availability of futures and options on the index. Index futures can act as a leading indicator of the movement of currency pairs. For example, if a bearish candle appears on his chart, it may mean that a surge will occur on the currency charts.Allows you to analyze the value of the dollar with more objectivity than the dynamics of a single currency pair.DisadvantagesA small number of currencies in the index, as well as a large proportion of the euro, which, when it fluctuates, leads to significant distortions and inadequate index values.It has stable power coefficients that do not correspond to the current modern structure of the US foreign trade turnover. The weights were last changed in 1999 after the introduction of the euro and have remained unchanged since then. However, much has changed in trade relations with the United States. For example, China, South Korea and Mexico have become key trading partners of the United States. The diagram below shows the structure of US foreign trade turnover in 2021:For a more adequate reflection of the US trade balance with other countries, the Fed calculates the Trade-weighted Dollar Index (TWDI). The basket of this index includes 26 currencies. Currency weights are recalculated annually. However, despite such a large number of currencies compared to the DXY index, the dynamics of the indices are almost the same due to the fact that the euro also has a lot of weight in TWDI.ConclusionThe US dollar index is a synthetic instrument reflecting the current dynamics of the price of the US currency. The index shows the strength or weakness of the US dollar more objectively than in relation to any one currency. This tool is used in their work by traders, investors, stock analysts. It gives a correct assessment of currency market trends and all assets in dollars. The global economic situation largely depends on the state of the American economy. The strength of the dollar can be considered as a temperature indicator not only of the US economy, but also of the global economy.The dynamics of the index indicates certain trends in the economy, but it is impossible to assess the current situation and trend by only one indicator. Moreover, the specificity of the index lies in the fact that the dynamics may indicate completely opposite trends – the dollar index shows its growth both during economic growth and during recessions. Therefore, the index can act as one of the tools in the investor's arsenal, but it is always necessary to conduct a comprehensive analysis of a number of macroeconomic indicators. 
One of the most popular methods of analyzing stock instruments is graphical technical analysis. Technical analysis is one of the main methods of analyzing and forecasting future asset prices.In this article we will consider the basic aspects of technical analysis: what it is, how it differs from fundamental analysis, the main tools and examples of their practical application.Technical and fundamental analysisTechnical analysis is a set of methods that allow you to analyze the chart and make a decision on buying/selling a particular instrument in the securities markets. Or, more simply, these are various ways of analyzing quotation charts in order to predict future price behavior.If fundamental analysis answers the question "which stocks or currency pair to buy?", then technical analysis shows at what point in time to buy.The fundamentalist is trying to understand the reason for the market movement, and the "tech guy" is interested in the very fact of this movement. All that a technician needs to know is that such market dynamics simply exist, and what exactly caused such a movement is not particularly important.The task of fundamental analysis is to help an investor buy a stake in a quality business. The task of technical analysis is to help the investor enter into a transaction at the best price. Or, in other words, to determine the optimal entry point.Trade directionsLong. When an investor waits for the growth of the paper, he buys them. In professional language, "longs", trades "long", long stocks / futures / etc., a long position, i.e. earns on the growth of value. In a simple way, bought cheaper, sold more expensive.Short. If a trader is waiting for the price to decrease, he sells them, in professional language "shorts", trades short, short position. Earns money by reducing the cost of the instrument.How can you sell something that was not in the portfolio?You borrow securities from a broker and sell them at the current high price. Then, when they become cheaper, the securities are bought back and given to the broker, and the difference between the "high" and "low" price is yours.Features of shorts. The broker lends the securities at a percentage. That is, if you pay only the commission for the transaction in the long, then in the short you also pay% for the debt. This should be borne in mind when calculating the profitability of the strategy and when entering a deal. The amount of the percentage must be specified with the broker. Usually, during intraday trading (when you short during the day and close the deal during the day), % is not taken, it is taken to transfer the position through the night.We wrote in detail about the technology of opening short positions in our article "How to short stocks".Graphic trendsAll technical analysis is price forecasting based on the history of the price movement itself. The market can have only two states: trend and flat (horizontal, sideways).Chart analysis always begins with determining the trend on the instrument. The trend is drawn on the older time frames so that there is an understanding of the global trend – in which direction it is necessary to look for inputs.The trend in a growing market is a consistent increase in the highs and lows on the chart.The trend in a falling market is a consistent decrease in the highs and lows on the chart.Trend rules. The trend will continue its movement rather than change direction. The task of the investor/trader is to trade according to the trend and join it at a comfortable entry point.A trend breakdown most often means a possible reversal or consolidation in the market. If the trend is strong, then we see on the chart that each previous pullback is higher (lower) than the previous one.Rules for building graphical modelsOn the uptrend chart, the trend is based on the minimums of candles/bars.On a downtrend, we build the trend on the highs of candles/ bars. For example, the global bearish trend since 2013 on the weekly chartHow to work on trends. The investor expects an entry on the test (touch) of the price of the trend line, that is, when the price has reached the line as much as possible and has strayed, it is possible to enter the transaction.Support and resistance levelsThe price chart always moves in waves. On the bases and peaks of the waves, we can see the levels at which the price turned around, or continued its movement after a long sideways movement.The support level is the border where the price turns up. It does not allow the price to fall lower.The resistance level is the boundary where the price turns down. It does not allow the price to go higher.Read more: The basis of trading: Support and Resistance levelsLevel RulesThe support line can become a resistance line and vice versa.The more often the price hits the level, the stronger it is.It's always a range, not a clear line.Mirror level.One of the strongest levels is considered to be the mirror level.Mirror levelIt can be seen on various instruments and time intervals.How to trade by levels:A risky option is to enter the breakdown level (marked with a blue arrow).Moderate - entering a position after the level test (marked with a red arrow).Stop loss - is set for the level / the nearest minimum / the mathematical risk/profit ratio is calculated.Price channelsA price channel is a limited trading range in which the price moves for a certain time. The boundaries of the trading channel are limited by two lines: support and resistance.Read more: What is Technical Analysis and why does an investor need itLike levels, price channels can be ascending, descending, and sideways depending on the phase in the market.How to build a price channel on a chart?For an ascending trading channel, it is necessary to determine the beginning of a trend movement and draw a trend line (the main channel line) along the first two lowest minimums (reference points). Then, parallel to it, project another trend line to the upper point located between them.How to trade?Most often, trading is conducted inside the channel: when testing the channel boundary – the entrance, the target is the opposite channel boundary, the stop loss is placed outside the channel boundary based on the risk guidelines of each individual trader.ConclusionTrading on the stock market is based on the same principles for everyone. But everyone's trading strategies are different - simply because investors' goals and risk profiles are different. The investor selects the most suitable strategy for him and by the level of risk, and by time frames, and by the system.The combination of fundamental and technical analysis in trading gives an excellent result. Complementary methods allow the investor to justify the transaction based on fundamental indicators, and the use of knowledge and technical analysis tools allows you to enter into a transaction on an optimal risk/profit combination.Read more: Technical analysis on the forex market 
Many investors are familiar with the negative attitude of people towards investments. It is especially difficult for beginners – their relatives and friends begin to dissuade and tell scary stories of those who were deceived and lost all their savings on investments. Stories also periodically appear in the media about how an employee of some broker or bank ran away with clients' money, how the promised mountains of gold turned into black holes of capital losses.Is everything really so scary in the investment market, who is to blame for all this and how to protect yourself from fraud on the stock exchange?Who is a brokerA broker is a professional bidder. He is an intermediary between the exchange and the investor. Not all bidders can trade directly on the exchange, there are certain restrictions for this. Organizations that do not have direct access to trading on the exchange, as well as individual investors, can only trade on the exchange through an intermediary broker. The broker registers the client on the exchange, organizes the client's technical access to trading, withholds taxes in accordance with the legislation. For its activities, the broker charges clients a commission, which depends on the chosen tariff and the operations that the investor performs on his account. A bank or an investment company with a special license can act as a broker.Thus, in his investment activity, the investor contacts directly with the broker. Therefore, choosing a broker is very important. The client's capabilities also depend on the broker: available exchanges and a set of tools, the threshold amount of investment, costs and quality of service. Well, if something goes wrong, it is logical to assume that who is to blame? - broker!Broker's deception or investor's mistake?So how can a broker cheat? Next, let's look at the main traps that an investor can fall into and which can cause the loss of a significant part or even all of the funds. We will immediately warn you that there will be no loud revelations. Not all the troubles and losses in investments are deception of the broker. An investor can sometimes make mistakes himself, be led by fabulous promises, make rash decisions."He who is warned is armed" - it is important for an investor to know about all the nuances, since mistakes in investing can cost too much.Forex brokersMost often, well-known fraud schemes are associated with the Forex market. In general, Forex is an over-the-counter interbank foreign exchange market. That is, in principle, individuals cannot be participants in this market. However, there are a huge number of offers on the Internet to make money on Forex / Forex / FX, and so on. At the same time, such earnings are positioned as investments, trading, and organizers as brokers. However, such activities have nothing to do with investments. This is the market of derivative financial instruments - essentially a casino where bets are placed on changes in the exchange rate of a currency pair. And in the casino, as you know, the casino wins. No one brings these individuals to any foreign exchange market, and we are not talking about real currency trading. And, despite the fact that an article about Forex dealers appeared in the law "On the Securities Market" (they are dealers, not brokers), and the Regulator even issued licenses to several Forex dealers, this market has not become safe. The number of scammers is large, and the number of people who want to get rich here and now is no less. Clients are offered training. You can start trading with small amounts that allow you to win first. Appetites are growing, and so is leverage. Unlike a deposit and traditional investments in the stock market, such games really usually end with a loss of funds. If the client still wins, there may be problems with the withdrawal of funds, under various pretexts: for example, to additionally replenish the account to withdraw income, or to wait for some time. And they can withdraw funds in an unknown direction with the help of frankly fraudulent actions. The fantasies of scammers are limitless.Thus, real brokers have nothing to do with it, and forex games have nothing to do with real investments.Read more: Forex broker: how to choose a good brokerScam brokersThe securities market has its own schemes of deception, but they are all based on the same desire of the client to get rich quickly and easily, which scammers use with might and main. Customers are persistently lured by tens and hundreds of percent of profits, "super promotions", bonuses, cashbacks, exceptional offers, put pressure on the need to make decisions quickly, without giving time to think. An experienced investor will not be led to such offers, and an inexperienced one will be offered a consultant or mentor who will accompany his transactions. While the deposit is small, customers make a profit, and are more willing to invest more money. The "broker" is very attentive and usually aware of the financial situation of his client. Further, the options for the development of events may be different, depending on the credulity of the client and the imagination of scammers. For example, a consultant may inform you that a great deal is planned, offer to make a bigger deposit in order to break a big jackpot. And if the client no longer has his own money, he will offer a loan. Trusting clients allow the broker's employees to make transactions on their behalf without instructions from the client himself, issue a power of attorney to perform transactions on the brokerage account, provide access to the account (login, password). This is how deceived investors appear, whose assets are "merged" by a broker, or disappeared together with a personal manager. In this case, yes, the broker is a fraud, the only question is, was there a broker (a real, licensed bidder), and who and why gave him a power of attorney, provided direct access to the account?Each broker may well have its own trading platform, and this is normal. However, not all platforms are certified. Fraudulent brokers can install special programs on them that ensure price slippage, delay execution of orders, limit the client's profitability when trading derivatives, fake price charts, and other tricks that are not always noticeable to the client, but are very reflected in the state of his account. These schemes relate more to trading, rather than long-term investment, but you need to know about them in order to understand how important it is to choose the right broker.Chargeback - challenging the transaction. When the client realized that he was deceived, he can try to return the money from the false broker by contacting his bank. This complicated procedure exists, but no one will give guarantees, and it will most likely not work to return the money. The recipient and the broker may be completely different persons, the recipient may have disappeared altogether, or the client transferred money to an individual on the card, or the client does not have enough documentary evidence, and the bank is not eager to bother, some employees may not even know about the possibility of such a procedure. However, there are companies that offer money-back services from "black" brokers. If they promise a 100% guarantee and require prepayment, it is likely that the client will fall for the bait of scammers a second time.Read more: Stock market Broker: how to choose it and how to work with itClone sitesClone sites that completely duplicate the interface of the original site. The difference may be in just one sign in the address bar. The site may contain all the necessary information and documentation - information about the organization and license, only fake. Such sites belong to scammers, and the money transferred using such sites, the details specified there, will go to the scammers, and not to the client's brokerage account.Overnight on the broker accountOvernight is a loan of securities that the broker, with the consent of the client, takes from his brokerage account for his short-term transactions between trading sessions at night or on weekends and undertakes to return before the start of the trading session. Remuneration is paid to the client for overnight transactions. At the same time, the client himself allows the broker to perform such operations with his securities, sometimes without even suspecting it. This item can be included by default in the brokerage agreement. Of course, this cannot be called fraud, unless this clause of the contract is deliberately hidden from the client. But this is an additional risk for the investor. After all, in the event of a sharp jump in the prices of borrowed assets, a situation may arise when the broker will not be able to redeem and return the securities to the client. And as you know, assets on brokerage accounts are not insured. Therefore, in this case, it is up to the client to decide whether to allow the broker to make overnight transactions.Increased broker feesBrokers charge clients a commission for their services, as well as for the services of the depository. The commission amount differs from broker to broker and depends on the selected tariff. The rates may differ significantly from each other and are targeted at different categories of customers. Someone performs ten operations per quarter or per year, and someone per hour. Someone needs access to foreign exchanges, someone does not. Someone is just starting his way as an investor and forms capital with small amounts, while someone is already operating with very significant amounts. The broker can also provide a personal consultant, trader or additional analytics. Obviously, the rates for different customers will differ. Imagine that a client with a small capital chose the tariff with the lowest transaction fee, but at the same time did not pay attention to the presence of a subscription fee on such a tariff. As a result, even if there are no transactions on the brokerage account, it will incur exorbitant maintenance costs. Or an active trader client will choose a tariff without a subscription fee, but with a commission for transactions, as for investors who make few transactions. Its maintenance costs will also be overstated.Read more: What is OvernightTwin tickersThere are companies with similar tickers on the stock exchange and there are cases when investors, either afraid of missing the moment and falling behind the trend, or simply out of ignorance or inattention, bought shares of another little-known company with a similar ticker instead of the shares of the desired company, accelerating the value of the latter to an incredible size. On the one hand, the situation is curious, but it can also become seriously unpleasant, depending on the size of the transaction and the consequences. Here are some examples:APLE and AAPL: real estate investment fund REIT (Apple Hospitality Reit) and the well-known "apple" (APPLE). As a result of confusion, you can become the owner of such different assets:ZOOM and ZM: In April 2020, investors mixed up the tickers and instead of shares of ZOOM VIDEO COMMUNICATIONS (ZM - developer of video conferencing service) bought shares of ZOOM TECHNOLOGIES (ZOOM is a supplier of wireless communication equipment, currently ticker ZTNO), as a result of which the price of the latter soared by almost 800%, but not for long.TLSA and TSLA: These twin tickers also represent very different companies. The well-known technology giant TESLA and the company from the biotechnology industry Tiziana Life Sciences.In this case, of course, there is no deception, this is the mistake of the investor himself. Such a mistake can end up being expensive. Therefore, when applying for the purchase of an asset, the investor should be very careful.Read more: Practical advices on choosing a Forex broker for a beginnerMargin tradingMargin transactions are transactions with leverage, on borrowed funds provided by the broker. If successful, such transactions can bring multiple profits. However, you need to understand that if an investor makes a mistake in his calculations and strategy, then losses can reset the investor's capital. Therefore, before entering into such transactions, you should evaluate your capabilities, strategy and risks well. As Warren Buffett said, "If you combine ignorance and credit, you will get very interesting results," and it is unlikely that he meant fabulous profits. If the possibility of margin lending is not disabled in the settings of the trading program, the investor may accidentally open such a deal without even knowing about it. And this, too, is no longer a broker's fraud, but an investor's own mistake. The broker offers opportunities, and it's up to the client to decide whether to take advantage of such opportunities or not.Trading robotsTechnology is our everything. The robot is an automated trading program that connects to the interface of the broker's application or terminal and, according to a given algorithm, opens and closes transactions on the exchange, also analyzing the price movement of the instrument in accordance with the settings. Robots are more relevant for traders, not long-term investors. A trading robot is significantly faster than a human. Some robots can make up to 1000 trades per second. There is no fundamental analysis, emotions – only indicators, signals and an algorithm. The robot can trade 24/7 and monitor several instruments at the same time. This can greatly facilitate the trader's work, as well as his capital. Is the speed of trading and the number of applications so important?A trading robot can, of course, be used if a trader understands how it works, what settings and algorithms it has, regularly checks and adjusts it to the market. If not, then one day the algorithm can drain all the capital at its tremendous speed. Besides, if someone has created a robot that can make the owner rich in a short time, why would the developer sell it? After all, the more users of the robot, the less they earn. And which of the developers of trading robots is listed in the FORBES lists? And even if the developer really sold the robot with a profitable strategy that worked well in a certain market situation, the robot may not be adapted to another situation.Deciding whether or not to use a robot is also the prerogative of the investor himself, and if something goes wrong, there will be no one to blame.Read more: What are stock trading robots and how do they operateStock market manipulationManipulations on the stock market can be carried out with both stocks, derivatives, and cryptocurrencies. Individual market participants are accelerating asset quotes to sell them at the peak. Advertising, mailing lists, groups-communities of investors in social networks, including paid, fake news, insider information are in use. The object of manipulation is more often low-liquid assets of small capitalization, companies of the "last echelons" (2.3 levels of listing or unlisted list). There is usually little information on the financial condition of such companies. In the absence of market makers and regulators, lack of information, and given the low liquidity and value of the asset, it does not take a lot of money to pump up the price. Manipulation schemes are often based on trading features and traders' strategies. As a result, manipulators earn money, and those who chased the hype and the crowd suffer losses. Manipulation is really fraud, for which a large fine or a real term can be threatened in America. Manipulations also happen in every country, mainly with third-tier stocks. They often end with a warning and a fine, however, in the case of a particularly large size or an organized group, criminal liability and imprisonment may also occur. Brokers, their employees, and other market participants may be involved in manipulations.How can an investor protect himself from fraud and mistakes1. Careful selection of a broker.The broker must have a brokerage license. It must be posted on the broker's website. You can check the license on the regulator's website. There are many other useful lists and registries on the same site: forex dealers, exchanges, trading systems, depositories, securities issuers and others:2. Really evaluate advertising promises and offers.Investing is always a risk. And the greater the expected profit, the higher the risk. No need to believe fabulous promises to get rich quickly, not troublesome, with a 100% guarantee. There are no guarantees in investments. Aggressive promising advertising, intrusive calls and "burning" super-offers should be treated with caution.3. Do not follow links from advertising offers in social networks and messengers.Perhaps the link will lead to a fraudulent site. It would not be superfluous to check whether the connection on the site is protected: the image of the lock at the beginning of the address bar.4. If you fall for the bait of scammers, you can contact the competent authorities about fraud, and your bank about the possibility of a chargeback. The probability of a refund is low, but there is a chance, and a considerable one, to fall into the trap of scammers for the second time, trying to carry out a chargeback with the help of intermediaries (perhaps the same ones who cheated the first time, but have already "retrained").5. Select the tariff deliberately in accordance with your portfolio and strategy.6. Disable overnight in the broker's application settings, for greater reliability, especially in a volatile crisis market.7. Disable the ability to make margin trades if the investor does not have sufficient knowledge and experience for margin trading. Everything can also be done in the broker's application or in the investor's personal account on the website.8. Carefully weigh whether it is worth using robot programs for trading and auto-research for investment. It may be much more effective for an investor to be trained to understand how to build and manage their investment portfolio. It is worth recalling Warren Buffett's quote again: "The risk comes from not knowing what you are doing."9. Carefully evaluate the asset before buying. What is the idea in this asset, what is its value and source of profit, does it correspond to the investor's strategy, is the price for the offered value adequate? Fundamental analysis will avoid manipulating asset prices and buying a dummy at a fabulous price. Also, preference should be given to highly liquid assets with large capitalization, which are difficult and expensive to manipulate.10. Invest in long-term debt. Traders are more susceptible to fraudulent manipulations, as they trade on news and price fluctuations. Technical analysis, signals, indicators, and often margin lending are the main tools of traders. And this is always a much greater risk than a reasonable investment in long-term investments based on fundamental analysis and diversification.11. Be a reasonable and cautious investor. Listen to official sources of information and make important decisions on your own, relying on your own knowledge, calculations and analysis. Do not follow other people's advice without passing them through the prism of your strategy. Do not give in to panic and hype. Do not forget that where there is money and the desire of people to get rich, there will definitely be scammers. Well, the most elementary thing: do not tell anyone your usernames / passwords. Law enforcement agencies and mass media regularly warn about possible fraudulent actions.Read more: What is Slippage in trading?ConclusionYou should not be afraid of cheating a broker if he meets the selection criteria: he has a license, a large number of active clients, large trading turnover, a certified trading platform, a convenient application, a tariff policy and a set of tools suitable for the investor, access to the trading platforms necessary for the investor, good customer service. You should be more afraid of your own rash actions, unjustified risk, lack of knowledge.As W. Buffett said, "The most important investment you can make is to invest in yourself." This is the safest investment and the most profitable. It is knowledge that will allow you to protect yourself from fraudsters and your own mistakes and self-deception.Learning is not scary, not difficult and cheaper than losing capital on scammers and your own mistakes. You can start with free information, which in our age of information technology has become more accessible to everyone than ever. However, it is worth filtering the information and checking its sources. You should trust only those who have achieved success themselves, invest their own funds, and were able to save and increase capital not only during periods when everything is growing in the market, but also during periods of corrections and crises. .png)
In 2022, there is a lot of talk about the crisis and recession. Everyone feels that something is wrong in the economy - the costs of habitual purchases have increased and, perhaps, what they have been saving for for a long time has become significantly more expensive. In addition, many economically active people are also private investors. Moreover, a significant increase in the number of investors occurred in the last 2 years, when deposit rates were not pleasing, and investments in the stock market showed impressive results. After the growth of stock markets in the post-crisis period, 2022 has become a real test for investors. First of all, for beginners who have just joined the ranks of investors. Pros could also face certain emotional difficulties.The stock market and the quotations of individual stocks can not only rise, but also fall. This is an axiom. Sometimes the drop can amount to tens or even hundreds of percent. Often investors do not understand what to do when quotes and the amount on the account "melts before our eyes". In this article, we, as practitioners whose investment portfolio has gone through a lot since 2015, but at the same time has shown and is showing decent results, will share our experience. We will tell you what is worth and what is not worth doing during the fall of the markets. Perhaps for someone these tips and recommendations will become a soothing pill when the first panic attacks appear.Calm, only calm!It is important to maintain psychological calm in a crisis, and it is doubly important for an investor – this will help avoid impulsive actions in the market, which you may regret later. There are a few simple rules that a reasonable investor should definitely not doDo not cook in the flow of negative newsIn the modern world, for most of us, the main source of news is the Internet. One has only to click on the title on a certain topic once, the search engine will immediately helpfully fill up the feed with such news. The most "clickable" news is negative, so it is not surprising that the reader of the news feed turns out to be an unwitting prisoner of the flow of negative information. The same principle works for the media – of all the events, journalists are more likely to talk about tragic ones or thicken the colors by placing the right accents. What can we say about the Internet or the philistine media, if even professional publications "sin" like this? You can even conduct an experiment by entering the query "crisis", "recession", "market collapse" and so on in the search engine. It turns out that everything will happen literally tomorrow, and you are not ready yet.It is important to understand that the objective picture of the world is often different from the one that is formed from the news. In addition, there are always more negative messages in a crisis, periods of falling markets, and due to the peculiarities of modern media, they usually fill the news feed. Do not read the news too often - it can cause constant background stress. Therefore, one of the important psychological qualities of an investor is to be able to emotionally distance himself from bad news and remain calm. It is a calm and balanced state that will help you not lose your way and follow the chosen investment strategy.Of course, it is impossible not to be interested in what is happening at all. Moreover, in the modern information world, important information obtained from reliable sources can help you make the right decision in time. Therefore, it is important to set up your sources of information in such a way as to weed out the unnecessary and not miss a really important event in the stream of momentary sensations.Do not look every hour at the changes in quotations, remember about long-term investmentOf course, an evergreen portfolio is fine. However, stocks cannot always show growth – their peculiarity is that they never grow in a straight line, although in the long term the market is always growing. The investor should be prepared for the fact that some stocks in the portfolio are growing, some are falling. In a crisis, all stocks can fall. But the stock market, like the economy, is cyclical: a crisis always gives way to a boom, and a period of growth is followed by a recession. If we choose fundamentally reliable assets in the portfolio and are confident in our choice, the momentary market conditions cannot plunge us into panic.If we look at the dynamics of the market over the past 30 years, we will see that there have been both corrections and collapses in history. The reasons and the depth of the fall were different, but what was the same was that any market decline ends, and recovery follows.Read more: Recession in the US in 2022Don't be afraid and don't panicThe stock market and the economy as a whole are developing cyclically. Periods of boom and recession have followed each other throughout the history of mankind. Of course, a lot of things collapse in a crisis, and even stable, well-developing companies may experience difficulties. However, you should not succumb to the influence of the crowd and panic, even if everyone around is just talking about the crisis. You will say it is very difficult. Indeed, it is not easy to resist when, for example, all stocks fall by 20 or 30 percent. The only thing that can be contrasted with emotions is reason. When a person reasons logically, emotions recede into the background.The Council. It is important to maintain the ability to reasonably assess what is happening. Knowledge of the basics of investing and financial literacy and the ability to apply them in practice will help to preserve the accumulated capital.Be critical of investment adviceWhat is most interesting, both experts and people who are far from investing can give advice. A separate category in the advice section is bloggers' advice. Currently, bloggers write and shoot videos about everything that subscribers read and watch, not counting explicit advertising. Investments are popular. Please, there are plenty of gurus on the Internet who give out content about investments every day. There are two main trends in the information flow of bloggers, which are better treated critically, especially in a crisis:1. It is profitable to invest - not for an ordinary person.Bloggers often write that only large investors can make good money on insiders and gray schemes at the expense of inexperienced "hamsters". What is the interest of such an author, it is clear – articles and videos with revelations always collect more views. And a novice investor wants to avoid mistakes. Someone has already burned themselves on financial pyramids and similar scams and is starting to look for what the catch might be in investing. Especially a lot of such "sensational" materials appear in times of crisis – everyone is worried about the future, and in a crisis it is as vague as ever. Therefore, bloggers write about conspiracy theories, subscribers are disappointed in the possibilities of the stock market, merge existing assets at any price and leave the market.The Council. If you sometimes find yourself reading another revealing article about conspiracy theories in the stock market, it is better to devote this time to learning the basics of investing. This is the only reasonable way out – it is fundamental knowledge that provides a solid foundation and helps to gain confidence in their actions. It is important to choose professional training in the basics of the stock market, investments and financial literacy, because there are also a lot of training offers.Read more: How to participate in an IPO2. The second topic frequently encountered by bloggers is tips on which securities to invest in.Such materials also collect a lot of views. Consulting an independent financial analyst is expensive, and bloggers give out advice for free – and the investor shifts responsibility for the final decision from his shoulders to the blogger. This is a common psychological trap of a novice investor: to look for someone who will confidently recommend what you can invest in profitably. Of course, bloggers argue their choice one way or another, without this, the recommendations would be completely unconvincing. In addition, it cannot be said that advice on the Internet is useless – perhaps there is a rational grain in them. But in order to separate really professional advice from populist statements for the sake of views and likes, it is necessary at least to understand the basics of investing. Today it is available to everyone. Moreover, investment literacy is currently a vital skill, as relevant as the ability to drive a car, for example. It is necessary to be clearly aware that only we ourselves are responsible for our investment decisions. The blogger got the right number of views – and has already earned. It does not matter to him whether those who used the voiced investment will eventually earn.The Council. It is necessary to develop at least a basic level of expertise in investments in order to be able to adequately perceive information flows from different sources. And of course, to minimize the flow of unprofessional information is not to read or watch bloggers who give out daily content for the spite of the day for the sake of views and likes.What not to do when markets fallAbove, we tried to understand what behavior in everyday life is best avoided by an investor in order to maintain calm and the ability to rationally treat a crisis situation. However, even if the above recommendations are followed, it is worth remembering that in no case should you do on the stock market in a crisis.Read more: How to make money in crisisDo not sell shares on emotionsWhen everything is falling, it may seem like a reasonable decision to save at least something and sell the shares right now. Objectively, this may mean fixing losses. Any investment decision should be balanced, and in a crisis – doubly so. It is important to conduct a fundamental analysis of the portfolio once again. If the company retains its potential and continues to develop even in a crisis, do not sell, but, if possible, average the position.Do not violate the rules of diversificationIn a crisis, even fundamentally attractive stocks can be very cheap. Investors are tempted to buy the paper they like for a large share in the portfolio. However, no one guarantees that the selected stock will recover or even increase in price, that the company will successfully cope with the crisis. In a period of uncertainty and high risks, it is more important than ever to diversify investments as much as possible so that the possible fall of one asset does not drag down the entire portfolio.We are talking more about stocks now - they attract everyone's attention in times of crisis. Of course, a balanced portfolio should also include bonds and, possibly, other financial instruments. You can read more about the diversification of the investment portfolio here.The same principle also applies to property as a whole: it is in a crisis that the temptation is great to shift capital into shares in the hope of profitably acquiring cheaper assets.Do not bring "last money" to the marketAll crises end sooner or later. However, this may not happen tomorrow or the day after tomorrow. In no case should you invest money in stocks that you may need in the near future, even if the price seems very attractive. Recovery after the crisis may take several years, and during this time the invested funds will be "frozen".Read more: Diversification of the investment portfolio: definition & methods of implementationDo not buy assets without fundamental analysisAs much as an inexperienced beginner wants to sell everything on a wave of panic, so much more sophisticated investor in a crisis wants to buy as many shares as possible at an attractive price. This is another extreme that can trap investors during a crisis. Of course, it is worth taking advantage of the opportunity to profitably acquire good assets, however, first of all it is necessary to adhere to the principles of reasonable investment. In times of crisis, fundamental analysis will help to protect against buying unreliable assets. It is important to analyze and understand whether the selected company will be able to survive the crisis, and only after that plan to buy shares.Do not expect that the market will grow tomorrowUncertainty at the moment is characteristic of the stock market as a whole – you can never predict for sure the further movement of quotations. In a crisis, the volatility of securities is even more unpredictable: when it seems that the bottom has been reached, the fall in stocks may continue (remember the well-known investor saying "To buy at the bottom - the second bottom as a gift"). Conversely, when an investor expects a further decline in prices, a market reversal may occur.Do not use margin dealsIn times of crisis, investors are tempted to bet on rapid growth or vice versa, on the continuation of the fall in quotations, and conduct transactions with leverage for a significant amount for the portfolio:borrow shares from a broker and sell them now (a "short" transaction) in the expectation that the price of the paper will fall further, and it will be possible to purchase it at a lower price and return it to the broker;borrow money from a broker and buy shares now (long or long position long sale) in the expectation that the price of the paper will rise, and it will be possible to get a positive difference after its sale.Leverage multiplies the result of the transaction - the investor can significantly increase profits or losses compared to the result that he could get from the transaction at his own expense. Of course, borrowed funds are provided by the broker at a certain percentage. Transactions with leverage are risky, they must be treated with the utmost care. Especially in a crisis, margin transactions can be a "disservice" to the investor. If the trend is guessed incorrectly, a large volume of margin transactions can lead to a margin call, that is, to the forced sale of assets by the broker to repay the debt on margin lending. The sale will be carried out at the market price at the time of sale, which may be unprofitable for the investor. Therefore, it is absolutely not necessary to use margin transactions in a crisis in the expectation that the market will grow or fall in the near future.Read more: Leverage on the stock marketConclusionIn this article, we have considered a few simple recommendations that will allow an investor to save capital in a crisis.To maintain emotional calm, you need:Do not cook in the flow of negative news.Do not look at the price changes every hour, remember about long-term investment.Be critical of investment advice.Don't be afraid and don't panic.There are also several principles of reasonable investment, which are especially relevant in a crisis:Do not sell shares on emotions.Do not violate the rules of diversification.Don't bring all the money to the market.Do not buy assets without fundamental analysis.Do not expect that the market will grow tomorrow.You can learn to be calm in a crisis situation, you can take financial literacy training and gain a certain level of expertise in investments. However, the stock market in a crisis is fraught with some temptations that can even encourage a relatively experienced investor to violate the basic principles of reasonable investment. Therefore, in order to preserve capital in turbulent times, it is necessary to strictly observe the principles given in the article. Only by understanding how to prevent the loss of existing wealth, you can move on to the next step – to increase capital.Read more: Basic knowledge of fundamental analysisAs you know, in a crisis, many assets are very cheap. Therefore, the famous phrase of Winston Churchill is the best fit for reasonable investors: "Never let a good crisis go to waste." However, the choice of reliable assets is a separate topic to which more than one article can be devoted. You can read a lot of articles or blogs about reasonable approaches in choosing reliable and promising securities, and it's better to see and hear.