The concept of divergence has always been popular in the financial market. According to the popular Merriam-Webster dictionary, one definition of divergence is the process of moving away from the course or standard.
In trading, it refers to a situation when the price of an asset moves in the opposite direction to the indicator. In this article, you will learn what a divergent is, how to spot one, types of divergences, and the rules you need to follow when using the strategy.
What is a divergence in trading?
Divergence can be seen in different ways in the financial market. For example, when using technical indicators, it can be defined as a period when the price of an asset is moving in one direction while indicators are guiding for the opposite to happen.
For example, a currency pair may be rising even as the Relative Strength Index (RSI) starts to decline from its extreme overbought levels. In most cases, when this happens, it is usually a signal that the original trend of an asset is starting to wane.
In the chart below, we see that the Relative Strength Index is falling even as the EUR/USD pair holds steady.
From the fundamental perspective, divergence is viewed as a period when the shares of a company are not in line with its intrinsic data. For example, the stock of a company may continue dropping even after reporting relatively strong economic numbers.
A good example is what happened to Intel in 2020. The stock cratered by more than 20% even after the firm continued to beat analysts forecasts.
Types of divergences
Broadly, there are two main types of divergences in trading:
- Bullish divergence
For starters, a bull is a trader or investor who hopes that the price of an asset will continue rising. A bullish divergence, therefore, happens when the price of an asset is falling even as one or more indicator starts to signal a potential upward trend.
This divergence can happen in all types of assets, including forex, shares, and commodities. The chart below is a good example of a bullish divergence.
- Bearish divergence
A bearish divergence is the exact opposite of a bullish divergence. It happens when the price of an asset continues to fall even as the indicator starts to rise.
How to trade divergences
In all fairness, trading divergences is a relatively difficult thing, especially for new traders. That’s because divergences don’t provide an initial signal of when to buy or when to sell. Still, you can use several indicator-specific strategies to trade these divergences.
Trading divergencies using the MACD
The Moving Average Convergence and Divergence (MACD) is one of the popular indicators used to show divergences in the market. The MACD is derived by subtracting a shorter moving average period from a longer one.
The most popular periods are the 26-day and 12-day moving averages. The signal line is usually the 9-day moving average. In other words, the MACD converts the normal moving averages into an oscillator.
Ideally, trading signals in MACD happen when the two lines make a crossover. If it happens below the neutral line, it is usually a bullish signal. Also, if it happens above the neutral line, it is usually a bearish signal.
A bullish divergence in MACD happens when the price of an asset forms a lower low while the MACD forms a higher low. In this case, the lower low will affirm the current trend but the higher low in the indicator will signal a loss of strength.
Similarly, a bearish divergence forms when the price of an asset forms a higher high while the MACD forms a lower high. The chart below shows a bearish divergence on the Alphabet stock.
Using the RSI to trade divergencies
Another approach of trading divergencies is using the Relative Strength Indicator (RSI). For starters, this indicator is one of the most popular indicators in the world today. It is typically used to identify overbought and oversold levels.
The indicator is calculated by first adding the gains and losses in a certain period and then finding the average gains and losses.
In most cases, a buy signal emerges when the index falls to below 30, which is the oversold level while a sell signal emerges when the RSI is above 70. Therefore, a divergence emerges when the RSI is rising while the price is falling, and vice versa.
The chart below shows a divergence that formed on the GOOG chart.
Identifying divergences using Stochastic oscillator
Another approach of identifying divergencies is using the stochastic oscillator. For starters, the stochastic oscillator is also a popular two-lined indicator that identifies overbought and oversold situations.
A bullish trend emerges when the two lines make a crossover below the lower line and continue rising. The vice versa is also true.
The chart below shows a bullish divergence on the GOOG chart. As you can see, while the share price is dropping, the two lines of the Stochastic oscillator are rising.
There are other popular strategies of trading divergencies. Some of the other popular indicators you can use are momentum, the relative vigour index, and the divergence indicator that is in MetaTrader.
Trading divergences is one of the many trading strategies that professional traders use to make money. Indeed, it is a widely-used approach, especially among the experienced Wall Street titans. All you need to do to trade it well is to identify the indicators you will use, understand them, and then practice using a demo account.
External Useful Resources
- Why is Experience in Divergence Trading a Must? – Quantisti
Time of the day is essential for all day traders because it can influence the amount of returns they generate. This applies to both stocks and forex traders.
In this article, we will look at the various periods of the day and how you can use them to your advantage.
Forex is a 24-hour business
The forex market is usually a 24-hour business. This happens because, unlike stocks, forex does not have a centralized exchange like the New York Stock Exchange (NYSE) and the Nasdaq.
Instead, the forex market happens across global centers of trade like Shanghai, Tokyo, London, and New York.
Sessions are not all the same
While forex is a 24-hour business, in reality, these sessions are not all the same. For example, the Asian session tends to be a bit dull because of the limited volumes. Also, minimal vital economic data are released during the sessions. The most common are the Australian central bank decisions and China and Japan PMIs. There are usually no major movements during that session.
The amount of volatility and volumes start rising during the European and American sessions. That’s when the major market centers of New York and London starts to open, which brings volume with them.
Also, important market numbers are released during these sessions. These include the nonfarm payrolls, US and European central bank decisions, retail sales, and inflation, among others.
Most importantly, volatility usually increases at the intersections of the Asian and European, European and the American, and the American and Asian sessions.
Cryptocurrencies is a 24/7 business
While forex is a 24-hour, five-day business, digital currencies don’t have opening and closing times. Instead, they run every day for 24 hours because of their disruptive nature. In general, the cryptocurrency industry is removing the barriers that existed in the past.
Volatility in the cryptocurrency industry happens virtually every day. However, in our experience, a lot of movements tend to happen during the weekend. This is in part due to the fact that traders are only focused on crypto when the other markets are closed.
Further volume increases on Monday morning when large investors are coming in and on Friday when they are leaving.
Premarket in stocks
In the stock market, especially in the United States, there are periods that are very vital. Let’s start with the premarket. This refers to a session when the stock market is closed but before the market opens fully at 09.30 am.
The session happens from 07:00 am to 09:30 am.
Some brokers give you access to trade during this session while others operate when the live sessions operate.
The pre-market is essential because it shows you how shares will open. For example, if Nio stock is up by 5% in premarket trading, it means that it will likely open up by about 5%. If it drops by about 6%, the same is true.
As a trader, we recommend that you focus a lot on the premarket session because of how important it is. To do this, we suggest that you have a good source of premarket data that will show you the biggest gainers and losers.
Some of the best sources of this are Investing.com and Webull. The chart below shows some of these numbers.
We also recommend that you have access to a watchlist. This is a document that shows you the top movers, their volumes, and the reasons why they are either rising or falling.
You can subscribe to our comprehensive market watchlist here.
US stocks close at 16:00 GMT. However, the party never stops at this time. Instead, there’s the after-hours session, which can be very useful as well. This session is between 04:00 pm and 08:30 pm.
In fact, stocks experience significant gains or losses during this session. That’s because many companies with vital information to share prefer releasing it after the market closes.
Also, during the earnings season, most companies publish their earnings after the market closes. Like with the pre-market, some brokers give you an opportunity to place orders during the after-hours. But these orders are usually opened when the market opens.
While trading in the pre-market and after-market is usually a good thing, it comes with several risks. These include low liquidity, high volatility, and wider bid and ask spread.
The market open
The market open is a vital period for the stock market. In fact, it is the most important since that’s when orders made in premarket and after-hours are executed. Also, it is important because of the high volume that is usually associated with it.
In fact, when you look at a chart, you will find a strong gap-up or gap-down during the market open. As the market session proceeds, this volatility tends to ease.
Therefore, as a trader, you should ensure that you are on your desk when the market opens. You should use the information in the premarket to find essential market opportunities.
The market close
Finally, there’s a period when the market closes. In the United States, this is usually at 4:30 pm. It is also an important period because many day traders are usually winding-down their positions for the day.
As such, there’s usually some increased volatility and market action during this period.
In this article, we have looked at the concept of time in the financial market. For forex and cryptocurrencies, we have seen that they are usually open for 24 hours. But, we have seen that these sessions are not always the same.
Similarly, for stocks, we have seen the best periods to trade and the premarket and watchlist tools that you need to have.
External Useful Resources
- Best Time Of Day To Buy Stocks – DayTradingZ
Volume is one of the key items in day trading, as we have mentioned before. It refers to the number and size of orders that are being filled in the market. In most cases, a high volume is usually viewed as being positive for the price compared to a low volume environment.
We have just looked at some of the popular volume-based indicators like the money flow index, VWAP, and accumulation and distribution. In this article, we will look at the ease of movement indicator, which is another popular type of volume-based oscillator.
What is the ease of movement (EOM) indicator?
Developed by Richard Arms, the Ease of Movement (EOM) indicator aims to explain the relationship between the price of an asset and the volume. These are usually the most useful aspects of the financial market.
Also, as the name suggests, the indicators’ goal is to find whether the price will rise or fall with little resistance. In most cases, if the price is able to move easily, they will continue doing so for a substantial amount of time.
As an oscillator, the ease of movement indicator is usually shown as a line that moves up and down. It oscillates between a positive and a negative figure. Indeed, when applied in a chart, the indicator usually looks like the momentum indicator, which we have covered before.
The chart below shows the two indicators applied in the EUR/USD pair. The EOM is in green while the momentum is in blue.
While the EOM is a highly-effective indicator, it is unfortunately not provided by default in the MetaTrader environment. But you can always download it in the MT4 and MT5 marketplace and install it manually. Many other advanced charting platforms offer the indicator by default.
How the EOM is calculated
As with all technical indicators, the EOM is calculated using a combination of various mathematical concepts. However, as we have written before, there is no need for you to know how the indicators are calculated. Instead, you just need to know the meaning of the indicator and how to apply it in the financial market.
There are three main parts of calculating the ease of movement indicator.
#1. You calculate the distance moved by the asset in a certain period. The most popular period is usually 14. You calculate this distance by comparing the present period’s midpoint with the previous period’s midpoint. You do this by adding the highest and lowest levels and then dividing by two.
As you will find out, the distance will be positive if the current midpoint is above the previous midpoints and vice versa.
|Distance moved = ((H+L)/2 – (Previous high + previous low)/2)|
#2 The next stage is where you calculate the box ratio. In this, Arms suggested using a volume of 100 million to make it relevant with other numbers. The formula is:
|Box ratio = ((V/100 million)/ H+L|
|1-period EMV = ((H+L)/2 – (Previous H + Previous L)/2) / ((V/100 million) (H-L)|
#3 Finally, the period’s ease of movement indicator will be the 14-period simple moving average of the 1-period EMV.
How to use the EOM in trading
While the process of calculating the EOM indicator is long and relatively complex, using it is relatively easy. In fact, it is relatively similar to how other oscillators are used.
Ideally, a buying opportunity usually emerges when the ease of movement indicator has moved substantially below the neutral line. In this situation, the price of the asset is usually said to be extremely oversold. In this case, you should buy the asset and continue holding it so long as the EOM indicator is rising.
A good example of this is in the Microsoft shares below.
Similarly, a short opportunity should be grasped when the EOM indicator moves to its highest level. This is usually a sign that the price of the asset is getting overbought. As such, you should hold it until it starts to reverse.
Most traders draw a horizontal line at the zero line as a guideline. A good example of this is shown in the chart below.
Further, some day traders use the ease of movement indicator to find divergences. A divergence happens when the price of an asset is moving in the opposite direction of the indicator. When a divergence happens, it is usually a sign that the original trend is starting to wane, as shown below.
Pros of the ease of movement indicator
There are several key benefits of the ease of movement indicator. These are:
- It is a relatively easy-to-use technical indicator
- A good indicator to confirm or validate trends
- It can be used easily with other technical indicators
Cons of the ease of movement indicator
Similarly, there are several cons or disadvantages of the EOM indicator, including:
- It is relatively difficult to calculate it, as shown above
- Not very useful for day trading. Instead, it is mostly used for long-term trading
- It is hard to identify buying and shorting positions
The ease of movement indicator has been around for decades. It is one of those indicators that uses volume to provide guidance about the market. However, as mentioned, it is often useful among position traders who buy and hold financial assets for a long time.
To use it, we recommend that you use it in a demo account before you use it well.
External Useful Resources
- Ease of Movement Trading Strategy – Trading Setups Review
News plays an important role in the financial market. Indeed, it is one of the biggest sources of market volatility, as we have written before. In this article, we will look at the best approach to trade breaking news continuation moves in stocks, commodities, and other assets.
Why news matters
News is very essential in the financial market such that many advanced traders pay hundreds or thousands of dollars every month to have access to the latest information. The famous Bloomberg Terminal costs more than $20,000 per year while Reuters Eikon goes for more than $1,800 per month.
News are important because they affect the prices of assets directly. For example, in stocks, news about a company may have a major effect on its performance. Recently, Salesforce announced that it would spend more than $27 billion to acquire Slack, the collaboration tool.
This news led to major market moves, with the share price of Slack rising by more than 15%.
Also, in forex, the British pound rallied when the United Kingdom and the European Union reached a Brexit agreement. The deal prevented a situation where the two sides were to impose sanctions against one another in 2021.
In cryptocurrencies, XRP tumbled by more than 50% when the Securities and Exchange Commission (SEC) launched an investigation into Ripple. The agency alleged that Ripple ran security without its authorisation.
Hard to catch the first move
In an ideal situation, traders usually benefit a lot when they are able to catch the first move when the news comes out. However, in most cases, this is usually not possible. For one, most news tends to come out when the market is closed.
Indeed, many companies will release important information just after the market closes or before the open. As such, unless you have direct market access (DMA), it is often difficult to trade such moves in a normal account.
Also, most of these moves happen instantly because of the important role algorithms play. These days, a substantial amount of volume in the market is because of automated systems by firms like Citadel and Virtu Finance.
Still, it is possible to catch some of the news early and ride the trend. To do this, we recommend that you use quality online platforms that have access to quality breaking news. Most importantly, you should have access to Bloomberg, CNBC, and Fox Business, which are the most reputable financial television channels.
How to trade breaking news continuation
There are several steps you need to trade breaking news continuation moves.
Avoid the trap of pump and dump schemes
First, you need to verify the source of the information. This is important, because, in the past, many unscrupulous entities have pushed false information to pump and dump stocks.
For example, they will publish a news item that is later denied. In most times, you should do your best to verify the authenticity of these reports. Ideally, you should use legitimate news sources like Bloomberg, CNBC, Wall Street Journal, and Financial Times to do this. The pump and dump schemes often happen in small-cap stocks.
Watch out for volume
Next, you should go to your trading terminal and look at the volume. In a perfect situation, the volume of a financial asset tends to increase when there is genuine breaking news. That’s because more people are attempting to get into the asset and ride the wave. You should be very careful if the event is not supported by volume.
Ideally, there are three main outcomes after a piece of major news comes out.
- First, after the initial pop, the price of the financial asset could pullback as the market participants digest the news.
- Alternatively, the price of the asset could continue moving in the original direction. If it rose at first, the trend could continue going forward.
- Another option is where the price pops and then remains at the same level. This often happens after a merger and acquisition, as it happened with Slack.
The role of volume, technical analysis, and chart patterns
As mentioned above, the role of the volume is usually very important when trading news and their continuation patterns. If a major move is not backed by volume, it can be a warning that this move will not continue and vice versa.
In addition to the typical volume that is provided in your chart, you should take advantage of level 2 and time and sales if your broker provides them. At Day Trade the World (DTTW), our traders have access to this information.
Level 2 shows you the bid and ask price trends while time and sales shows you the movement in volume.
Equally important is the role of technical analysis when you are trading breaking news continuation patterns. That’s because, in most periods, the price will often land on key support and resistance levels. Some of the technical tools you should use are Fibonacci retracement, Andrews Pitchfork, and Gann box, among others
Also, it is important to use candlestick patterns to identify potential breakouts. Some of the most popular patterns that can help you achieve this are:
Breaking news are essential in the financial market because of the amount of volatility they bring. Unfortunately, there is no well-defined strategy of trading such events because they are usually different.
Still, using the approaches and skills we mentioned above will help you make excellent trading decisions.
External Useful Resources
New! CSE-Listed Securities
Please be advised that from Wednesday, April 4, 2018, all three Nasdaq Canada venues—CXC, CX2, and CXD—made CSE-listed securities available to trade.
The same fee schedules that are currently in place for CXC, CX2, and CXD on TSX-listed securities will apply to CSE-listed securities.
Note: in order to see quotes, the entitlement packages for “CXCCSE” and “CX2CSE” must be enabled in the Metro Entitlements process. Both packages are free.
CSE Listed Securities available on Aequitas NEO
Please be advised that effective from Friday, February 2, 2018, Aequitas NEO was started to trade on CSE market listed securities.
In PPro8, traders will be able to send orders to both the NEO and LIT books by configuring the new gateway orders in Keyboard Setup.
To see Aequitas LIT (AQL) and NEO (AQN) in Stock Window Level2, traders need to enable their respective entitlement packages. Traders who already have their entitlement packages activated will need to disable and enable the packages.
The fees for executions on Aequitas LIT and NEO will be the same as for executions on TSX and Venture markets.
CSE was already available to trade in TMS from May 25, 2017, with both the CNSX and OMG books supported.
Nasdaq CXC Midpoint Extended Life Order (M-ELO)
Effective Monday, January 18, 2021, we released the new Nasdaq CXC (CHIX) Midpoint Extended Life Order (M-ELO) for Canadian markets.
M-ELO orders will only execute against other M-ELO orders, ensuring the matching of like-minded traders on a broker-neutral exchange. M-ELO orders are non-display and report to the tape as any other midpoint execution.
DTTW™ traders can access this order type by choosing Gateway CHIX and Destination M-ELO in PPro8. The gateway fee for it is Free.
For more information on M-ELO, you can refer to the following resources:
Effective Tuesday, September 1, 2020, the CSE will reduce their fees as follows:
|Gateway||Liquidity Flags||Description||Current Fee||New Fee|
|XCSE||PTD or PVD||Dark Trading – Add liquidity||0.00005||0|
|XCSE||Any except PTD and PVD||Flat fee for fill over 40,000 20,000 and price less than $0.1 on TSXV||10||2|
|XCSE||Any except PTD and PVD||Flat fee for fill over 20,000 and price over $0.1 on TSXV||15||2|
|XCSE||Any except PTD and PVD||Flat fee for fill over 20,000 and price over $1 on TSX||15||2|
|CSE||PCD||Dark Trading – Add liquidity above $1||0.0001||0|
|CSE||PCD||Dark Trading – Add liquidity below $1||0.0001 ($5 cap per execution)||0|
Older change (9/1/2019)
Please be advised that effective Sunday, September 1, 2019, CSE is going to lower their gateway fees as follows:
|Market||Gateway||Liquidity Flags||Desceription||Current Fee||New Fee|
|CSE||CSE||PCD||Dark Trading – Add liquidity above $1||0.0002||0.0001|
|CSE||CSE||PCD||Dark Trading – Add liquidity below $1||0.0002 ($5 cap per execution)||0.0001 ($5 cap per execution)|
|TO and VN||XCSE||PTD or PVD||Dark Trading-Add liquidity||0.0001||0.00005|
Please see the Fee Table or the official Nasdaq website for a complete list of fees.
CXC & CX2 Fee Change (09/01)
Effective tomorrow, Tuesday, September 1, 2020, Nasdaq Canada will change their fee on the CXC (CHIX) and CX2 gateways, as follows:
|Gateway||Liquidity Flags||Description||Current Fee||New Fee|
|CHIX||R or Y or r or 2 or D||Remove Liquidity between $0.10 and $1||0.0000||0.0003|
|CHIX||R or Y or r or 2 or D||Remove Liquidity under $0.10||0.0000||0.0003|
|CHIX||R or Y or r or 2 or D||For shares over 200,000 and Remove Liquidity under $1||0.0000||Flat $1|
|CHIX||R or Y or r or 2 or D||For shares over 200,000 and Remove Liquidity under $1||0.0000||Flat $1|
|CHIX||A or N or S or 1||Add Liquidity between $0.10 and $1||0.0001||0|
|CHIX||A or N or S or 1||Add Liquidity under $0.10||0.0001||0|
|CX2||R or Y or 2||Remove Liquidity between $0.10 and $1 on TSX List Symbols||-0.0004||-0.0002|
|CX2||R or Y or 2||Remove Liquidity under $0.10 on TSX List Symbols||-0.0004||-0.0002|
|CX2||R or Y or 2||Remove Liquidity on TSX-V and CSE symbols||-0.0004||-0.0002|
Please be advised that effective tomorrow, Thursday, August 1, 2019, Nasdaq CXC and CX2 (Canada) are going to lower their entitlements fees, as follows.
|Package Name||Package Description||New Price|
|CXCTOB TO||Nasdaq CXC TSX L1||14.86 CAD|
|CXCFULL TO||Nasdaq CXC TSX L2||35.48 CAD|
|CXCTOB VN||Nasdaq CXC Venture L1||2.37 CAD|
|CXCFULL VN||Nasdaq CXC Venture L2||2.94 CAD|
|CX2TOB TO||Nasdaq CX2 TSX L1||5.65 CAD|
|CX2FULL TO||Nasdaq CX2 TSX L2||14.41 CAD|
|CX2TOB VN||Nasdaq CX2 Venture L1||2.94 CAD|
|CX2FULL VN||Nasdaq CX2 Venture L2||6.05 CAD|
If you have any comments or questions, you can create a mojo.
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Market cycles and seasonality are important concepts in the financial market. Seasonality refers to a certain belief that the stock market rises or falls in certain periods.
Cycles, on the other hand, is the belief that the equity market performs in a certain way after it goes through a certain condition. For example, it tends to rally after going through a substantial dip.
In this article, we will look at the January Effect, which is a type of seasonality.
What is the January Effect?
The January Effect is the idea that stocks, especially the S&P 500 index, usually rise in January. Investors believe that stocks bounce back in January after experiencing a dip in the final week of December.
The idea is that stocks usually rise in the run-up to Christmas, in what is known as the Santa Rally. After that, traders usually start selling their holdings before December 31st in their bid to do what is known as tax-loss harvesting.
For starters, tax-loss harvesting is the process of selling stocks in a bid to lower your overall costs. For example, if you own a basket of stocks, some will make a profit while others will make a loss.
In tax-loss harvesting, you can sell the stocks that made a loss and then you use that loss to offset your capital gains tax. Finally, you can use this money to invest in other stocks that are bound to rise.
Subsequently, some stocks will generally drop in December and then start bouncing back in January due to this harvesting.
Other Reasons Why the January Effect Happens
Another reason why the January effect happens is that many portfolio managers use the month to reset their holdings. For example, if you are a fund manager, you will mostly measure your performance per-annum. Therefore, in the final week of December, you can sell all your holdings and then start afresh in the new year. This will possibly see you buy new stocks during this period.
Similar to this, some long-term investors use the concept of periodic arbitrage in their investments. In this, they attempt to buy the laggards stocks in the previous year hoping that they will rebound. As a result, it is an often occurrence for these stocks to bounce back.
The January effect also usually happens because of the enthusiasm among the investing community about the coming year. In this, if the stocks had a great year, they hope that the trend will continue. However, if they had a bad year, they hope that they will go through a rebound.
Finally, many people form New Year’s resolutions. The most common resolution is usually related to weight gain and weight loss. Also, a common goal for most people is on financial health. Some plan to invest in the financial market, which leads to higher stock prices.
Example of the January effect
2020 forms an excellent example of the January effect at work. Before the year started, most global indices dropped slightly as traders took their profits. But in the first week of the year, global stocks bounced back, as shown below.
In total, the S&P 500, Nasdaq 100, FTSE 100, and Dow Jones rose by more than 3%, making it the best start of the year in years. This upswing was due to the increasing hopes of a bigger stimulus package in the United States.
A bigger example of leverage is shown in the longer-term chart shown below. As you can see, the S&P 500, which tracks the biggest 500 companies in the United States, rose in January 2017, 2018, and 2019. However, it dropped in 2020, in part because of the confusion about the coronavirus cases and the trade war between China and the United States.
Does the January effect work?
There have been multiple studies about the efficacy of the January effect in the financial market. Some authors have noted that stocks generally rise during this period. A good study is shown in the chart below.
However, as you can see, the S&P 500 has actually risen and dropped in equal number of times between 2000 and 2019.
Therefore, as a trader, you should not always price-in the January effect in your trading. Instead, you should focus on your original strategy and identify winners and losers.
For example, if you specialise in technical analysis and price action, you should use these strategies to select your assets. Similarly, if you specialise on fundamental analysis and tools like time and sales and level 2, you should use it well.
The concept of market cycles is often talked a lot in the financial media. You will often hear analysts talk about the Santa rally and the January effect. They are catchy and often make sense.
However, as a day trader, you should think beyond that. This means that you should focus on your trading strategy and avoid such market cycle terms.
Fear and greed is a common concept in the financial market. Fear is characterized by concepts like exiting a trade early or avoiding the market altogether. Greed, on the other hand, mostly refers to the process of buying when everyone is buying and selling when everyone is selling.
These approaches are also associated with the concept of following the crowd. In this article, we will look at how you can follow the crowd profitability.
What is following the crowd?
Ideally, as the name suggests, following the crowd is the simple trading strategy of doing what most people are doing. This could involve buying companies that everyone is buying and shorting those that most people are shorting.
Surprisingly, this is one of the most common and profitable strategies in the world. Indeed, some of the most-followed companies like Tesla, Apple, and Microsoft have outperformed the underfollowed companies like Occidental, Coty, and Regency Apartments, among others.
Following the trend does not only happen in stocks. It happens in other assets like cryptocurrencies like Bitcoin and Ethereum. Indeed, in recent months, the price of cryptocurrencies has been rising, mostly because of following the crowd strategy.
Also, currencies like the US dollar have been dropping partly due to the strategy.
How to follow the crowd effectively
Following the crowd is a relatively simple strategy to use in the financial market. As the name suggests, you just need to identify a market that is moving in a similar direction and then following it. If the stock is moving higher, you buy and hold and if it’s moving lower, you short and hold.
The first strategy of following the crowd well is to understand the real reason for the performance. For example, if the share prices of electric car, cannabis, and cloud computing firms are rising, you should strive to understand the real reason behind it.
Examples: electric car, cannabis, cloud computing
For electric vehicles, the reason behind the recent rally is that the world is going through a revolution where the demand for EVs is rising. Several countries, especially those in China and Europe have already announced plans to ban fossil fuel cars.
In addition, there is another popular trend of Environmental, Social, and Governance (ESG) strategies. In this, investors are allocating their funds to companies that are environmentally responsible and those that have social and quality governance.
As such, electric car companies are viewed as being at the forefront of environmental responsibility.
Cannabis companies have also been rising recently. That’s because the market believes that more states in the United States will move to accept cannabis products. Indeed, some countries like Canada, Georgia, and South Africa have accommodated the products.
Meanwhile, the investing crowd has followed companies in the cloud computing industry because of the large total addressable market and the overall transition to the industry.
The same shift is happening in the cryptocurrencies industry. At the time of writing (beginning of 2021), the price of most cryptocurrencies has risen because of the overall institutional demand. Participants in the industry believe that demand for the currencies will continue rising into the future.
You can use the same approach when following the crowd when its selling a certain asset. For example, companies in the cruise ship industry declined in 2020 because of the pandemic. Their share prices dropped by more than 60% since most of them were forced to park their ships.
Using technical analysis to follow the crowd
Another approach of following the crowd is to use technical analysis. This refers to the process of using technical indicators like the moving average and Bollinger bands to make decisions.
For example, you can use two exponential moving averages to know whether the trend will continue or whether there is a possibility of a reversal. In the chart below, we see how the EUR/USD traded in 2020.
As you can see, the price remained above the two moving averages for the most part of the year. Therefore, it could have made a lot of sense to buy the pair so long as the price was above the two moving averages.
Another popular technical indicator to use is Bollinger Bands. The idea is to buy a currency pair and hold it so long as it is above the middle line of the bands. Similarly, you can short the asset when the bands are between the middle and lower line, as shown below.
How to identify when a trend is about to an end
The biggest challenge for following the crowd is that trends always end. And when they do, many followers tend to suffer. Indeed, we have seen this several times, including during the dot com bubble, housing crisis, and the first Bitcoin rally of 2017.
So, the question is how do you know when the rally is about to end? This is often a difficult question to answer. One of the easiest approaches is to use technical analysis. There are several indicators that can guide you about this.
For example, in indices analysis, you can use the advance-decline line to make this prediction. This indicator looks at the firms in an index that are rising and those that are falling. Therefore, if after a long period of rising the index starts to fall, it could be a signal that more sellers are coming. This could be a good time to sell.
Other indicators you can use to do this is the accumulation and distribution and the smart money index (SMI).
Following the crowd is an excellent day trading and investing strategy in the financial market. It just refers to the process of identifying an existing trend and following it. To do it well, you need to use the concept of technical and fundamental analysis.
External Useful Resource
- Crowd Behavior and Going Against the Public – Tradingpedia
2020 was one of the best years for Initial Public Offerings (IPOs) in the financial market. In total, companies raised more than $78 billion, the highest figure in more than a decade. Surprisingly, this happened during a difficult year when the world experienced its first major pandemic.
Some of the most notable firms that went public during the year are Airbnb, Asana, and Snowflake, among others. In this article, we will look at what an IPO is and how to trade a lock-up expiration.
What is an IPO?
Companies use different methods of raising money to fund growth and other projects. Two of the most popular approaches are debt and equity.
Debt is the process where companies raise money from a bank and pay it back through instalments. The lender usually benefits from the interest they receive from the borrower. The company, in its part, benefits from the fact that it does not sell its stake to the lender.
Equity, on the other hand, is an approach where the company sells a stake in its business to external investors. This can be done either in the public market or in the private market. The latter is popular in the venture capital industry, which has helped power firms like Facebook and Alphabet to be the juggernauts they are today.
How investors can take profits
When investors put their money to a private firm, their goal is to exit at a profit. To do this, they can sell their stake to other private investors. Alternatively, they can exit once the company goes through an Initial Public Offering (IPO).
An IPO is a process where a private company sells its stake to the public. After an IPO, the shares can be bought and sold by any investor or trader in the market. It is a process in which companies like Apple, Microsoft, and Intel are traded today.
What is an IPO Lock-up period?
Before a company goes public, the shares are usually owned by several key people. They include the founders of the firm, the pre-IPO investors like venture capital firms, and its employees.
An IPO lock-up period is a period where a company’s insiders are restricted from selling their shares in the public market. This period is usually about 90 days and 180 days after the IPO.
The main purposes
A lock-up period has two main purposes. First, it prevents the insiders from flooding the market with shares, which could push the stock price lower. In most cases, the stock will drop when there’s a lot of supply of shares than the overall demand.
Second, a lock-up period prevents insiders from rushing out of the market early enough. For one, if the insiders don’t believe in the firm’s future, an IPO provides them with an excellent opportunity to exit their investments. Therefore, a lock-up period is a way of protecting retail investors.
Therefore, a lock-up period is an excellent period for traders because of the amount of volatility it is associated with.
How to identify upcoming IPO Lock-up periods
The secret for trading IPO Lock-ups is to identify when they are happening. In the past, knowing when the IPO Lock-up is coming up was extremely difficult, especially for retail traders. That’s because most of these tools were premium and only available to professional traders.
Today, this has changed because of the vast number of free resources that tell you when the lock-up period is coming up.
Investing.com is one of the best free resources that has a lock-up expiry calendar. Other excellent resources are Yahoo Finance and Webull.com, as shown below.
How to trade IPO Lock-up periods
There is no well-defined strategy to trade an IPO lock-up expiration. However, you can follow several strategies to make money and avoid mistakes when trading during this period.
First, as mentioned above, you should know when the expiration period is about to come. You can use the sites we mentioned above to get this information.
Second, you need to look at the overall chart patterns to identify potential entry and exit points. Ideally, in most periods, it is usually not advisable to buy a firm that is heading towards an expiration. That’s because, the general thinking in the market is that shares tend to drop after the expiration period.
How to identify entry points
There are several strategies you can use to identify potential entry points. Some of the tools you can use to identify these levels are indicators like VWAP, moving averages, and the Relative Strength Index.
Further, you can use tools like the Fibonacci retracement and Pitchfork to identify levels to buy and sell the shares.
Still, there are other unwritten rules when trading lock-ups!
First, if the stock is extremely lower than the IPO price, there’s a possibility that there will be no major movement. That’s because, in this situation, many insiders may not be ready to sell at a stop loss.
Second, if the shares have surged after the IPO, there’s a possibility that the stock will drop as insiders take profits. Also, some of them will sell their shares with the goal of buying them at a lower price.
An IPO lock-up is a period where insiders are given a chance to sell their shares a few months after the stock goes public. It allows additional shares to come to the market, which increases volatility.
In this article, we have looked at why it happens and some of the strategies you can use to trade it.
Volume is an important concept when trading the financial market. Indeed, we have written about it several times before in our volume, VWAP, and on-balance volume articles before. We have also recommended using volume indicators when using all types of technical indicators in the market.
In this report, we will look at the relative volume indicator, often shortened as RVOL, and explain how you can use it in the market.
What is the Relative Volume Indicator?
Volume refers to the number of shares of a certain company that are bought or sold in any given day. Fortunately, this data is usually compiled and provided by most online brokers, which means that you can easily find it. For example, an average of more than 48 million Tesla shares are traded every day.
Therefore, if you find that 500 million shares have been traded, it can tell you something about the market.
The Relative Volume Indicator is, therefore, a tool that uses this data to illustrate the current volume of a stock compared to the past trading volume of the same stock. As such, this index is usually written as a ratio.
How the relative volume is calculated
The RVOL indicator is calculated in a relatively simple way. You just divide the current volume of an asset with the average volume in a certain period. Let us use the example of Tesla that is shown below.
In the figure above, we see that on average, the volume of Tesla shares that are traded is about 48 million. At the time of writing (end of 2020), the volume had risen to more than 222 million because the company was being introduced to the S&P 500 index. As a result, the RVOL for the company is 4.65.
The chart below shows the four-hour chart of Tesla stock together with the volume indicator and RVOL.
On the other hand, for a company like Nikola, the average volume is 22 million while the volume at the time of writing was 8 million. That brings the RVOL to 0.36.
It is worth noting that the RVOL is not found in most day trading platforms like the MetaTrader. It is also not inbuilt with the TradingView platform. Therefore, you must install it on the MT4/5 or use the non-built-in version in TradingView
How to Use the RVOL in trading
As a trader, you should always use the volume indicator when trading the market. The easiest approach to do this is to use the information provided in premarket trading.
For example, if you specialise on trading top movers, you should use information in premarket trading to find the top movers and their volume. For example, in the chart below, we see that Vereit is the best-performer in premarket trading as its stock has risen by more than 400%.
We also find that the average volume of the company is 2.4 million. But on this day, the volume was more than 9 million.
This means that the stock jump is being supported by volume. As such, you need to identify the reasons why the stock has risen that much. By looking at the news of the day, we find that it rose that much because the company completed a 1 to 5 reverse split.
This means that there was no major news that would affect the fundamentals of the company.
The worst-performer: Mesoblast example
Let’s use another example. On the same day that Vereit stock jumped, we see that Mesoblast was the worst-performer in premarket trading. The average volume of Mesoblast is about 865,000 per day. On this day, the volume rose to more than 4 million.
Looking at the news, we see that this happened because a Covid-19 drug it was developing with backing by Novartis was not effective. That also pushed its Relative Volume relatively higher, as shown below.
Combining RVOL with other strategies
In most periods, using RVOL by itself tends to be meaningless. Therefore, we recommend a situation where you use other trading strategies to know whether to buy or short an asset.
In the case of Mesoblast that is shown below, we can use the concepts of Fibonacci retracement. Below, we see that the stock crashed to near the 78.6% Fibonacci retracement level and then attempted to rebound.
Therefore, in the future, we know that there are two main scenarios.
First, the stock may attempt to fill this gap or it may attempt to fall below the retracement level. As such, we can place two pending orders that seek to benefit from either of the two. For example, you can place a sell stop order at $2 and a buy stop at $3.
If the stock drops below $2, your sell stop order will become a market order and push you to profitability. If it attempts to fill the gap, you will also be in the money.
The Relative Volume Index is an important concept that you should always use when trading in the financial market. The index can give you a good picture of what is happening in a given stock.
But using it alone is not worthwhile. Therefore, we recommend that you combine it with other financial tools.
External Useful Resource
- How To Calculate Relative Volume in Real TIme – StockBeep
High Frequency Trading (HFT) has continued to increase in the last few years. In fact, old hedge funds which previously focused on traditional methods of trading are now establishing their own quantitative trading divisions.
This is because most of the trading occurring today is done through quantitative robots. One of the leading hedge funds in the market is Citadel which is run by Ken Griffin. On a daily basis, the transactional arm of the hedge fund transacts more than $1 billion a few minutes after the market opens.
Another influential hedge fund managers in this industry is James Simmons who runs a hedge fund called Renaissance Technologies. These hedge funds have only a few employees who mostly are not financial professionals. They are either mathematicians or computer scientists whose work is to create algorithms to execute trades.
What is Quantitative Trading?
Quantitative trading is a day trading approach that involves using mathematical models to find trading opportunities. The idea is that several models, when carefully done, can help you predict the future. All day traders can use this approach today.
Those traders who are also excellent in mathematical modelling and coding can build their codes from scratch. At the same time, those who don’t have this knowledge can easily buy already-built robots in online marketplaces. One of the best-known marketplaces is the one run by MQL, which owns the popular MetaTrader 4 and 5.
Why quantitative trading is the future of trading and why you should learn it
#1 – Barriers Removed
In the past, to create your own robot, you needed to have a background in computer science or in software development.
This is because one needed to take time and develop the code which will execute trades. This prevented most people from developing these applications because not many financial professionals have experience in coding.
Today, most online brokers have developed platforms to help people with no coding experience to develop their robots. They have drag and drop tools and instructions which enables them to create robots within minutes.
#2 – Knowledgebase Available
In the past, to learn about quantitative trading, one needed to go to school and learn about coding. This was a major barrier to entry because many people saw no need for this training.
Today, traders have access to information on how to create trading bots. This information is available in various quant trading tutorials and videos which guide people on how to develop these codes.
There are also many online videos that guide people to develop the robots. In the past, this information was not available.
#3 – The Big Thing Now
As mentioned in the introduction, most hedge funds are now turning to automated trading. Most hedge funds are now experiencing a period of low growth and increased outflows.
On the other hand, automated hedge funds such as Betterment are experiencing a period of growth. Therefore, as the trend and the returns continues to grow, chances are that most people will focus on this new trend.
#4 – A Simple Process
Before you start practicing algorithmic trading, chances are that you feel that it is a difficult process. However, as you become more acquainted to the system, you will realize that it’s a simple process.
Once you have mastered the art and science of combining various indicators you will have a better time trading. Remember that the key to successful algo trading is to create a good system and backtest it for a period of time.
If you prove without any reasonable doubt that your system is good, then you will have an easy process of trading.
→ How to Create Effective Trading Algorithms to Automate Your Trading
#5 – It Works
The last reason why algorithmic trading is the future is that it is an accurate method. The best way to look at this is to compare hedge funds that use the systems and compare it with those that don’t.
In the 2008 financial crisis, while most hedge funds closed shop, James Simmon’s firm reported its best year s far with an 80% return.
The fund has also never had any negative years. This means that when well-executed, algorithmic trading works. The key is to develop a good system and then backtest for a good period of time.
Why data matters
In quant trading, data is one of the most important parameter that must be gotten right. In fact, it has been argued that data is the backbone of any quantitative trading system. It’s the engine that powers any system. If a single digit or decimal point is left out when developing the system, chances of losing your trades are very high.
Price data and fundamental data
There are two main types of data when developing algorithms. These are: price data and fundamental data.
Price data includes a number of parameters such as the price of the asset, trading volumes of assets, size of the trade, and the information derived from transactions among others. In simple terms, price data refers to the entire order book which shows a continuous series of all bids and offers of an asset.
On the other hand, fundamental data are more complicated and refer to a number of data types that are difficult to categorize. They refer to any other data that is entered that is not related to the price of asset. Some of the good types of fundamental data are: price to book ratio, financial performance, and sentiment among others.
Macroeconomic data such as inflation and interest rates can also be said to be fundamental data.
Understand the data
To know how to use the data, one needs to understand where to get the data from. In quant trading and high frequency trading, the accuracy of the data must be accompanied by the timely delivery of the data. A microsecond in the financial market can mean huge losses.
There are many sources of data which include: regulators (filings relating to large owners), government agencies (mostly for fundamental data), news agencies (such as Bloomberg), proprietary data vendors (such as Markit), and corporations.
After getting the data, a common problem faced by many quantitative traders is on cleaning the data. This is a common problem that has led to the downfall of many quant traders. A common problem with quants is missing data especially where the data is not supplied at the given time by the data supplier.
This can be solved by building a system that understands when the data is missing. This system will not take irrational decisions that can lead to significant losses.
Another problem is what we call look-ahead bias. This is when you assume that you could have known something before it was possible to know it. As stated before, data is the machine that moves quant systems.
Hedge funds such as Renaissance technologies and Citadel have for years made more than 20% returns using quantitative systems. The LTCM mentioned above is a good example of what not to do when using quant systems. The fund almost lost 100% of its capital as a result of poor data sets combinations.
Therefore, you should carefully take your time when developing your system. You should back test and forward test the system to ensure that everything is right.
How to quantitative trade
There are several approaches to quantitative trading. But at the core, QT is just an automated method the manual trading. For example, if you use double moving averages to identify buying and selling opportunities, you can create a robot that will implement that when you are not around.
First, you need to have a trading strategy in mind. For example, if you are a scalper, you can find a quantitative robot that focuses on the scalping strategy. Similarly, if you are a trend follower, you can find a robot that is designed to follow this strategy.
Second, if you are a developer, you should focus on your strategy to build an algorithmic robot that is based on the strategy you have tried and tested over the years.
Finally, another approach is to buy a robot online, as we have described above. However, you should be extremely careful about buying robots online. For one, you should always take a free trial before you commit to spending money with a robot. Also, you should test the robot to see whether it works.
Quantitative trading is a relatively new approaches to the financial market. Indeed, the volume of trades executed algorithmically has increased substantially over the years. In fact, trillions of dollars-worth of trades are executed algorithmically every day.
Fortunately, anyone can use the strategy either by building his own algorithm or by buying an already-made product.