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Tuesday, April 17, 2018

Sharpening Your Trading Skills: The Relative Strength Index (RSI)

By Jim Wyckoff
Of Kitco News
One of the more popular computer-generated technical indicators is the Relative Strength Index (RSI) oscillator. (An oscillator, defined in market terms, is a technical study that attempts to measure market price momentum—such as a market being overbought or oversold.)
I’ll define and briefly discuss the RSI, and then I’ll tell you how I use it in my market analysis and trading decisions.
The Relative Strength Index (RSI ) is a J. Welles Wilder, Jr. trading tool. The main purpose of the study is to measure the market's strength or weakness. A high RSI, above 70, suggests an overbought or weakening bull market. Conversely, a low RSI, below 30, implies an oversold market or dying bear market. While you can use the RSI as an overbought and oversold indicator, it works best when a failure swing occurs between the RSI and market prices. For example, the market makes new highs after a bull market setback, but the RSI fails to exceed its previous highs.
Another use of the RSI is divergence. Market prices continue to move higher/lower while the RSI fails to move higher/lower during the same time period. Divergence may occur in a few trading intervals, but true divergence usually requires a lengthy time frame, perhaps as much as 20 to 60 trading intervals.
Selling when the RSI is above 70 or buying when the RSI is below 30 can be an expensive trading system. A move to those levels is a signal that market conditions are ripe for a market top or bottom. But it does not, in itself, indicate a top or a bottom. A failure swing or divergence accompanies the best trading signals.
The RSI exhibits chart formations as well. Common bar chart formations readily appear on the RSI study. They are trendlines, head and shoulders, and double tops and bottoms. In addition, the study can highlight support and resistance zones.
How I employ the RSI
As you just read above, some traders use these oscillators to generate buy and sell signals in markets-—and even as an overall trading system. However, I treat the RSI as just one trading tool in my trading toolbox. I use it in certain situations, but only as a “secondary” tool. I tend to use most computer-generated technical indicators as secondary tools when I am analyzing a market or considering a trade. My “primary” trading tools include chart patterns, fundamental analysis and trend lines.
Oscillators tend not to work well in markets that are in a strong trend. They can show a market at either an overbought or oversold reading, while the market continues to trend strongly. Another example of oscillators not working well is when a market trades into the upper boundary of a congestion area on the chart and then breaks out on the upside of the congestion area. At that point, it’s likely that an oscillator such as the RSI would show the market as being overbought and possibly generate a sell signal—when in fact, the market is just beginning to show its real upside power.
I do look at oscillators when a market has been in a decent trend for a period of time, but not an overly strong trend. I can pretty much tell by looking at a bar chart if a market is “extended” (overbought or oversold), but will employ the RSI to confirm my thinking. I also like to look at the oscillators when a market has been in a longer-term downtrend. If the readings are extreme-—say a reading of 10 or below on the RSI-—that is a good signal the market is well oversold and could be due for at least an upside correction. However, I still would not use an oscillator, under this circumstance, to enter a long-side trade in straight futures, as that would be trying to bottom-pick.
Oscillators are not perfect and are certainly not the “Holy Grail” that some traders continually seek. However, the RSI is a useful tool to employ under certain market conditions.

Monday, April 16, 2018

What is leverage?

Leverage is a facility that enables you to gain a large exposure to a financial market while only tying up a relatively small amount of your capital. It is a key feature of CFD trading.

When you invest in a leveraged product, the provider will ask you to put up a sum representing just a fraction of the total value of your position. Effectively, the provider is lending you the balance.

Your profit or loss is based on the full position, however. So the amount you gain or lose might seem very high in relation to the sum you’ve invested. It could even be much greater than your initial outlay.
To find out more about how leverage is a key component of CFD trading, please visit the Leverage and Margin section of our CFD trading module.

Trading on margin

Your initial outlay is referred to as a margin or deposit requirement. Your provider will request this to cover or part-cover any potential losses you may incur.
The margin is always a fraction of what it would cost to buy the assets directly, but the exact size depends on various factors – a more liquid and less volatile market will require a smaller margin (e.g. 5%), whereas a volatile market may require a larger margin.

Some products require margins as a fixed amount per contract, while others are calculated as a percentage of the value of the position.
Margin rates and slippage factors can vary, dependent on the regulatory rules governing the country in which your account is based.

How leverage works

A 10% margin means that for just $100 you could get the same exposure as a $1000 investment. This represents leverage of 10 times, or 10:1.
You have made the same profit in both cases, but using leverage you only had to put down $100 as margin instead of the full $1000. Your return on investment is 100%, as opposed to just 20% if you had to purchase the assets directly.

Magnified profits and losses

You can see that using leverage is a great way to magnify your exposure in a particular market. However, it should always be kept in mind that leverage not only magnifies your potential profits but also your potential losses. It is possible to lose much more than your initial margin if the market turns sharply against you.
See our managing risk module for information on how you can protect yourself against potential magnified losses.

The benefits of leverage

The primary benefit of leverage is that it frees up your capital, as you only have to commit a fraction of the value of the assets you are interested in.
With leverage you can take a much larger position than you could with a direct physical holding. This means you can get the most out of your capital, and perhaps invest in a range of different assets instead of restricting yourself to one or two.

However, you should bear in mind that when trading with leverage you give up the benefit of actually taking ownership (in the case of shares) or delivery (in the case of futures). It is also vital to remember that you could be called upon to put down more margin and cover your losses if the market goes in the wrong direction for you.

Who uses leveraged products?
Investors and traders use leverage to magnify their exposure to various markets. This allows them to free up their capital to commit to other investments, thus spreading a set amount of capital much further than would be possible by buying the physical assets.

You can use leverage on most markets, including sharesforexcommoditiesindices, bonds, ETPs and more. Forex is an especially highly leveraged market, with some brokers offering leverage of 400:1 and upwards. Naturally there are risks involved with such great leverage, and you should take care to fully understand the risks involved.

Firms also use leverage in much the same way, to invest in assets that have the potential to return a relatively high yield. A common corporate strategy is to use debt to finance operations. This is done because businesses feel they can make returns on these investments above the cost of the interest they need to pay on their debt.

Source :

Margin and leverage : One of the main features of CFD trading is the ability to trade on margin and utilise leverage.

Benefits and risks of leverage

Trading on margin means you can gain the same amount of market exposure by depositing just a small fraction of the total value of your trade. This leverage can be useful to CFD traders because it means that they can put their money to use elsewhere.
Leverage can help magnify your returns which is great news if the market moves in the direction that you expect. However, the key risk with leverage is that it can magnify your losses in exactly the same way as your gains.
There is the potential to lose part and more of your investment if you do not manage your risk efficiently. Losses can exceed your deposits and you may lose more than you initially invest.
For instance, say the margin requirement for a particular market is 5%. This means you would be required to have on deposit 5% of the full value of the trade as initial margin to open the position.

Share trading vs CFDs using leverage

You want to buy 1,000 shares in company XYZ and the current share price is 250p. Your total investment is £2,500. The equivalent as a CFD trade would be to go long (buy) 1000 CFDs in company XYZ.
CFD leverage example
This example shows that with CFD trading you are only required to deposit £125 to open the equivalent of a £2,500 investment. This is how trading on margin leverages your position, freeing up additional funds to use on other products or other positions.

How leverage can magnify profits

Company XYZ share price rallies after strong earnings and you decide to close your trade out with a profit of £100. The return on your CFD deposit is 80%, whereas the return on your share trade is 4%.
How leverage magnifies profits

How leverage can magnify losses

Supposing your trade in Company XYZ was unsuccessful and your stop loss was hit, the trade made a £100 loss. In this scenario, the return on your CFD deposit is -80%, whereas the return on your share trade was-4%. Using leverage has magnified your losses.
How leverage magnifies losses

Margin requirements

Please note margin factors vary across markets. Generally speaking, the higher the margin requirement, the riskier or more illiquid the market. Please see the relevant Market Information sheet on the trading platform for full details.

Margin calls and close out levels

In addition to margin, you should always ensure you have sufficient funds in your account to cover any losses for the period that you decide to hold open you trade.
If you don't, you could quickly find yourself on a margin call, which can happen when you don't have enough funds in your account to keep open the position which puts you at risk of having it automatically closed out. City Index closes out positions after funds have dropped below 50% of the trade's margin requirement.
You should always ensure you have sufficient funds in your account to cover any losses for the period that you decide to hold open your trade.
Margin call
The Margin Level Indicator on the City Index platform represents the level of funds you have associated with your open positions. It is located in the upper right corner of the trading platform. It displays one of the three scenarios listed below:
  • Sufficient margin
    If your margin level indicator is greater than 200%, this will show as > 200%. This means that you have sufficient funds required to keep your positions open
  • Your trade is at risk
    If your margin level falls below 200%, the margin level will display a percentage between 50% and 200%. You are at risk of your trade falling further and automatically being closed out
  • Insufficient margin
    Should your margin level fall below 50%, you no longer have enough funds in your account to cover your total margin. A warning symbol will be displayed next to the margin level if it drops below 80%. Consequently closure of your open positions may be triggered

Wednesday, May 23, 2012

This Is the Bottom for Gold – John Hathaway

In an interview with Louis James, John Hathaway discusses the US’s economic outlook and why he’s delighted by the current bearish sentiment toward gold.

[To be a successful speculator, one must be willing to go against the mainstream investment trends, as John is. There's no better way to get a primer on contrarian investing than by sitting in on the recently concluded Casey Research Recovery Reality Check Summit – and you can do that by ordering the Summit Audio Collection today. Every presentation, every chart and graph, and every actionable investment tip can be yours, in either the instantly available MP3 files, or in CD format.]
Louis James: Ladies and gentleman, thanks for tuning in. We’re at the Casey Research Recovery Reality Check Summit. We’re talking with John Hathaway, one of the more successful fund investors – institutional investors – in our precious metals field near and dear to my heart. John, can you give us a quick version of what you talked about here, for those who didn’t make it to the conference?
John Hathaway: Sure, yes. I think we’re at the end of a correction that resulted from the peak last summer. It was overcooked, kind of hyperventilated hysteria over the debt-ceiling talks, the rating downgrade of the US sovereign debt, and I think basically the stocks and the metal had been working off that boiled down to what we now have is a simmer. I think we are at a position where there’s not a lot of downside, and I would not be surprised by revisiting the previous highs of $1,900 and maybe even new highs over $2,000 this year.
What will do that is basically – so much of the narrative has been quantitative easing. When Bernanke announced on the 29th of February that they were done with quantitative easing (and if you believe that I’ve got a bridge to sell you, but for the time being let’s assume that there won’t be any), I was very impressed that gold did not go to a new low. It printed somewhere below $1,600 at the end of the year, made a couple-of-day swoon, but it didn’t go to a new low. And then when the Fed minutes came out it also did not go to a new low, it kind of reiterated what Bernanke said. So the narrative may be changing. I’m not ruling out quantitative easing as a possibility, but there are things out there that gold might be looking at that the CNBC mentality hasn’t figured out.
Remember that gold rose for many years before we even heard of quantitative easing; it was in a steady uptrend. So what could those things be? What would take gold – what would be the new headlines that might take gold to higher highs? To me, the biggest thing is that the Federal Reserve has purchased something like 61% of all new Treasury debt in the last year; and if they aren’t going to continue that, then what’s going to happen to rates?
Louis: Right.
John: The Chinese – who had been big supporters because they were rigging their currency – have not been generating foreign exchange to anything like the extent they were, so their participation rate in Treasury auctions has gone way down. If you look up the TIC numbers, foreign buying of Treasuries has dropped precipitously, so you have the two biggest pillars of support for keeping rates low in question here, and let’s see what happens on June 30th. If you don’t have a political buyer, either the Chinese and foreign buyers who are manipulating currency, and the Fed because they said they aren’t going to do it, what are rates going to do?
If you are going to get a risk-free return inflation-adjusted today that’s not politically motivated, it’s got to be somewhere around 4-5% on the short end of the curve. Every hundred basis points adds a huge amount to the budget deficit, so to me we’re in a real trap here, where it’s going to be a game of chicken as to whether the Fed can really live up to what Bernanke said on the 29th.
Louis: Isn’t that really the bottom line? They can’t allow that interest rate to rise with the debt outstanding –
John: It seems very difficult. The recovery, the alleged recovery that we had, is very… I’ll grant that things are better than they were a year ago or two years ago, but you’d have to call it feeble at best and maybe not sustainable. That’s one thing that I think could affect the gold market.
The second thing, and I think it’s very important too, is that inflation is rising. Even though the economy is soft, the number I look at – and I know we’re going to have John Williams speak at lunch, and we know he has a very good take on it – is the MIT Inflation Index, because that’s real-time pricing of billions of products. You can get to that website just by googling “MIT Inflation Project”; and that does not include services. Most of the services I take are inflating at more than 5%; they are closer to 10%. But goods that could be measured in real time are rising at 5%, so that’s also going to be a factor. That means if rates stay where they are, the Feds are just going to be that much more behind the curve.
So those are two things; and the third thing is that there’s $1.5 trillion of liquidity in the system that should the recovery – and I’m not a macro forecaster, but let’s say the recovery does sustain itself – you’ve got $1.5 trillion of free reserves that could just turn into money supply. Then you really would have a potentially hyperinflationary scenario, and the Fed would be completely powerless to do anything about it. So I think that’s bullish for gold – gold is not backward looking, it basically looks forward. I can go on and on. You’ve got the European unresolved sovereign debt crisis in Europe.
Louis: Let me jump in with a question about this, then. You’ve stood out really from the crowd in that most people agree on the general prognosis for gold. Most people are sort of near-term bearish, you know, the ones –
John: It makes me so happy.
Louis: [Laughs] But, you know, once a bear sentiment sets in, it seems to almost have its own momentum.
John: Yes.
Louis: You’re the only who’s saying “I think we’re near the bottom.” Most people are saying, “Sell in May and go away” –
John: Yes, I heard a couple of things from this session that just made me want to jump up and buy –
Louis: I understand the contrarian reason for that, but can you tell our audience a couple of reasons why you think we might be near the bottom or why you’re ready to buy now and not waiting to see how this summer turns out?
John: Sure. Well, first of all, I’m not a trader. I mean, I’m long, and last summer I thought, “Gee, this is really a little spooky, we’re not at a sustainable level,” but there wasn’t a whole lot I could do about it. And here we are and we have some cash, we have some inflows, so we are able to put money to work. And what is it that makes me think we’re there? Sentiment numbers are extremely negative, historically, when they’ve gotten to these levels. By the way, I put out a quarterly newsletter now that has a lot of this data, which can be found on our website.
Louis: Go ahead and give us the website.
John: It’s the Tocqueville Asset Management website, and it should be fairly easy to find. So sentiment is at levels that have been associated with big rallies. Traders’ commitments, net longs, net spec longs are way, way down there. I look at that a lot just as a way to see where the market is positioned. The guys who can create some volatility are not there, and so if gold starts moving, they won’t want to miss it, and so they’ll come in. And then, we’ve looked at some technical stuff. I’m not a technician but most of what I see from a technical perspective is extremely constructive. So I put those things together.
Sentiment is rock bottom. COMEX traders’ commitments are very, very constructive, and technical things that we look at are very constructive. So I would say all of those things, plus hearing these guys say that they are not going to step in – that’s more anecdotal, but that to me is just very, very positive. So I – frankly I don’t stake my reputation the way that Dennis Gartman does on making trading calls, but just as an experienced observer of this market for some number of years now, I think we’re ready to make a move higher.
Louis: Okay, well, thank you very much. Word to the wise.
John: Thank you.

Comments :
Paksu: Next support $1525, it's possible...

Sunday, April 15, 2012

RSI – How Do You Do

Sometimes, review is a good thing. Thus, I pulled this from my vast archives of writing because it speaks to a volatile market (it pertains to equity as well as forex trading), much like the one we now are in, again …

Another week in the market is now under our belt.  Although, I can’t complain, as things have been going my way, I can say that I hope the economy stabilizes sooner rather than later, which I guess puts me in the company of, oh, just about everyone else in America.  Be that as it may, I do have the question below to answer, and so I will …
I am new in forex the field.  I learned that if RSI is above 70 than I should sell, and if it is below 30 than I should buy.  Mostly, though, the RSI seem to remain in the 40, 50, 60 range most of the time.  What should I do at these points?
The first thing I will tell you is that one indicator does not a trade make.  If you are relying just on RSI (Relative Strength Index), then you are making a mistake.  
Generally, indicators work in combination with other indicators to both find and confirm potential trades.  Thus, the RSI only has meaningful value when compared with other indicators, if you ask me, and you did.
Second, even if you rely solely on the RSI, or if you do use it in combination with other indicators, the 70/30, buy/sell “rule” is not a rule at all; it is a guide.  
Generally, when in the 70 range, a market is considered “overbought.”  When in the 30 range, a market is considered “oversold.”  But even though the readings may be such, you should consider other factors in the RSI, such as the timing of the move into either the 70 or 30 range, how long the indicator has remained within either range, and the general volatility of the market itself during the trading time you are viewing.  Outside of the RSI, in my opinion, two of the best indicators to use in combination with the RSI are MACD (Moving Average Convergence Divergence) and Stochastic.  Both indicators give information on momentum, which allows you to compare with what the RSI is telling you (See the chart below.).  
Note how all three indicators are telling almost the same story – the market has enjoyed certain stability and a bit of an upturn.  The RSI, however, suggests that that the “run” may be over.  The other indicators, although not as definite as the RSI, suggest the same.
As to the notion that in forex, the RSI seems to be in the middles ranges most of the time, I really don’t have much to say to that, other than you just might need to spend a lot more time watching the charts.  Where the RSI goes is wholly dependent on the price action of the market, and in these days of high volatility, I would think the forex markets would spend at least as much time in the 70/30 range as they spend in the middle range.  As to what you should do when the RSI is in the middle range … Well, I guess that just depends on your strategy.  You do have a strategy, right?
Trade in the day; invest in your life …
Trader Ed  

Thursday, February 2, 2012

Why Gold Is Shining Bright & What the Fed is Doing

I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around [the banks] will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs.
~ Thomas Jefferson ~

As the weekly chart of gold futures illustrates below, gold has recently pulled back sharply and has broken out. I will likely be looking for any pullbacks in gold as buying opportunities as long as support holds.
Gold Weekly Chart
In closing, for longer term investors the stock market might have some serious short term juice as cheap money and artificially low interest rates should juice returns. However, eventually equities will start to underperform. At that point, gold will be in the final stages of its bubble and the term parabolic could likely be applied.
If central banks around the world continue to print money there are only a few places to hide. Precious metals and other commodities like oil will vastly outperform stocks in the long run if the Dollar continues to slide. The real question we should be asking is who will win the race to debase, Draghi or Bernanke?
January 30th, 2012 at 12:24 pm
By: Chris VermeulenFree Weekly ETF Reports & Analysis:
Co-Author: JW JonesFree Weekly Options Reports & Analysis:

Tun Mahathir comments on printing more money to recover economic problems.

The Governor of the Bank of England has advised printing money to overcome Britain’s financial crisis. This is a great idea. When you lose money just print money to make up for the losses. The United States had printed 300 billion USD to bail out banks and overcome the crisis. Of course if Malaysia had printed Ringgits to pay off debts during the financial crisis we would be soundly condemned. No one would accept our Ringgit and we would be bankrupted. But rich countries apparently can print money to pay debts.