Why do Markets Often Fall Quickly and Rise Slowly?

Why do Markets Often Fall Quickly and Rise Slowly?

Why do Markets Often Fall Quickly and Rise Slowly?

Uncle Scrooge’s two most frequent emotions hold the answer – fear and greed

Some of you may have noticed that when prices start to fall, they seem to gather momentum and if the news they are reacting to is really bad – then it’s almost like a free fall. At the same time an upward movement is quite often done in increments or at a steadier pace. Although this doesn’t always happen, it does make an impression.

The explanation lies within two of the emotions traders experience (we covered their specifics in this article, as well as some of the others). First among them is fear. It is the driving force behind the selling of an asset and decreasing a position in it when there is bad news. Its increased amount among traders during certain periods can be explained with the nature of the emotion – it’s more primal and was developed in our brains in an earlier period than greed. Fear helped us survive by not taking unnecessary risks and attempting to evaluate all their potential sources.

Greed, on the other hand, can be attributed to what drives upward movement. As a secondary emotion it acts in a different manner – it accumulates and its representation is more delayed.

Keep in mind that this isn’t the evil and completely negative meaning of the word – it’s more like a component of wealth attribution, not necessarily being unfair.

In confirmation of this are the volumes of the traded instruments. Usually when the price is falling there are higher volumes. Fear is stronger and works in the moment, it grabs you and you feel like you have only one choice – this makes people exit entire positions. Buying an instrument and hoping it climbs up and brings profits is usually done in increments – some investors and traders add relatively small amounts to their positions over days, months and years.

We have to make several important notes here. Currency pairs are NOT an example of drops and climbs. As they are indeed pairs, the quick downward movement for the first currency in the way the pair is written, is at the same an upward movement for the second currency. As a recent example we can take the EUR/USD which has been dropping from last year’s high of 1.40 to around 1.13. If you search for the USD/EUR pair – it exists in unison with the more widely accepted representation – you can see that it has risen from 0.75 to 0.87 for the same period.

Second, but not of less importance, is that steep drops and steady climbs might not happen for certain commodities. As an instrument type they have their specifics – they are traded in futures and are ultimately used in the physical world. This makes the dynamics in their supply and demand different from those of currencies, indices and stocks. Not to say that the fear and greed dynamic is absent here – it just works differently.

Here are our tips on how to take advantage of your knowledge of emotions and their influence:

– don’t forget that you can profit from movement in both directions – keep an eye out for big turns both up and down. Even if you’ve performed an analysis or just made a judgement call for one direction, it might turn out to be completely wrong – instead of wallowing and accepting defeat, you can actually make a quick u-turn and jump on the opposite movement

– consider your emotions in advance of making a trade in either direction, don’t let too much fear or greed cloud your judgement

– use the stop loss and take profit functionalities

– exercise patience when buying, as it will take more time to reach a good level to exit

– be alert and keep a closer look on the market when you sell; things will most likely happen quicker than in the other direction

All this is, as usual, is easier said than done. Keeping your emotions in check, and at the same time, following the markets and their trends, breakouts and ranges is hard enough. These emotions will always be present as we are human, but if you do put them in perspective while trading then you’ll have an edge over other traders who are less aware of themselves.

How Much Time do You Need for Trading? (Part Two)

How Much Time do You Need for Trading (part two)

How Much Time do You Need for Trading? (Part Two)

Finding the right balance between work/studying and trading

In part one we discussed how much time needs to be set aside for trading when you prefer to do it in more or less limited sessions during the day. This article will focus more on how you can combine trading with your work or studies and also scratches the surface of the full time trader’s world.

The advent of mobile applications and cheap(ish) data packages are what allowed people with full-time jobs or active study schedules to trade simultaneously with their main occupation. Apps and internet access provide the foundation for retail traders to stay close to the news and events that push and pull the markets.

This has drastically cut the time needed for both understanding what is generally happening and how price levels have changed since the last time they were checked. With advanced apps being released more and more trading is done on the go, while moving from one place to the other and filling it with something more exciting than the lines of shops or houses.

Some manage to squeeze it between their work tasks, or lectures, but this of course depends on the concentration they require. What can be observed in the last two or three years is a solid rise in trading from smartphones and the vast majority is being done by people who fit it in with other duties. This happens either in combination with trading from home on a laptop/PC or solely through their mobile devices.

Whether you work or study, there is one thing that you have to decide beforehand regarding your trading. It’s choosing between either only trading before and after your main activity, or if you’ll make new trades in between. The first option will require less time and allows for more planning and determining your behaviour in advance if something negative or positive happens.

If you do have time during work or lunch break the app can show you not only a snapshot of price movements on a chart, but also market sentiment and the exact change for the day (or longer period). This speeds up the “review” part and keeps you informed on how things are unfolding. If need be, you can adjust or exit existing trades or enter new ones. The level of concentration for doing these actions is different so choose in advance if you’re going to devote time, as it would be unfortunate if you suffered a large loss because you couldn’t react in time, or if you missed a profitable trade because you had to do something else.

Work can provide various levels of pressure during the day or over longer periods of time. If you trade in and around work, it’s important that you manage your own emotions so that they suit the market. If you are experiencing more stress with an unfinished assignment or in something else, then trading should be set aside. It’s purpose and aim is not to alleviate strain, but to bring in money.

How Much Time do You Need for Trading (part two) 2
We definitely have a better app than this one.

The same goes for studying, although the general case is that the lion’s portion of pressure comes around exam times. With this “confinement” of pressure and rhythm of efforts, you can manage your time better and define periods when you can put in enough time for solid research and follow-up before, during and after the trades. Trading, after all is described as a science in itself (as well as an art) and should be treated as such.

Full-time trading can be seen as an entirely different category when it comes to time spent. Here its allocation takes on another meaning, as this is usually the main income source. Even though the background of a full-time trader can vary between someone who has money and is looking to increase it (either incrementally or with big wins) to someone who starts off with a relatively small amount and is looking to multiply it at a certain rate (in the same fashion). These are of course generalisations, many other backgrounds of full-time traders exist.

With it being a science/art it demands the same time and effort from all types of traders. It becomes a job, but this time things are kind of in reverse. You need to leave yourself room for rest and other activities. Some dedicated traders have been known to bog themselves down in excessive research or to experience uncertainty due to the pressure of making a dynamic activity their primary income.

If a successful formula emerges and profits start to come in, then an unexpected danger might come up and its name is simply greed. Its manifestations can be overtrading and unreasonable increasing of position sizes. To curtail the former threat a schedule can be set in place with anywhere between 4-10 hours of total screen time per day, depending on the trading style. Some might need even less than four hours, but as the saying goes, “some just have it, others have to work at it”.

How Much Time do You Need for Trading? (Part One)

How Much Time do You Need for Trading

How Much Time do You Need for Trading

Finding the right balance between work/studying and trading

Initial luck, or lack of it, can strongly influence the way new traders perceive trading. They either see it as as the quickest money they’ve ever made, or a waste of time. The former group starts devoting more time in the hope that the excellent run will continue, while the latter drop everything without even scratching the surface, deciding that it’s either too hard or rigged.

Is doing these things right or wrong? Is it too optimistic to expect constant (high) returns, or that it will only lead to losses and you shouldn’t bother anymore. For some it might be so, but for the vast majority of people that choose to include trading into their lifestyle, the truth is somewhere in the middle.

The optimal path depends on your lifestyle, the amount of time that you can set aside for trading and your preferred trading style.

If you have a small amount of time, or want to start off nice and easy you can do it for anywhere between half and one hour a day. This includes the research part, “reading” the chart of your selected instrument, looking at indicators and the duration of the trades themselves. It’s preferable that this is done for a smaller number of instruments, ranging from one to five.

With this trading style, the chart timeframe most traders go for is the five minute one, with some opting for 15 or 30 minutes, although they can still the use longer ones for confirmations (one of our topics next week will cover in detail the tricks of the trade when it comes to timeframes). You can try and trade on tick charts or on the one minute interval to cram more trades in, but we don’t recommend this for newbies.

The main advantage of this style is that it lets you enjoy trading more because it can be done calmly, with the necessary level of focus and clarity in the decision making process. It doesn’t overlap with other tasks and is usually done in the evening, although it can take place in mornings as well.

The cons here come from the less suitable opportunities that present themselves. Limiting the amount of time and where it’s situated during the day effectively cuts the number of moments with suitable conditions. It’s obvious that they don’t always come around when you’re looking for them.

The good news here is that with more practice the time you’ll need to perform the “pre-trade” tasks will get smaller. Just like any skill it needs time to master and to identify what works and what doesn’t. In this case this would be finding the right instrument(s) that are a mix between being easy to understand, ones with more opportunities for profits and that are available in the time of day you prefer.

In our next article tomorrow we’ll explore combining trading with working and study activities, as well as what it means to trade full-time as a retail trader.

Will this Beach Stay in the Eurozone?

Will This Beach Stay in the Eurozone

Will This Beach Stay in the Eurozone

How to trade the most recent Greek financial crisis

The country with some of the greatest beaches and islands, combined with history galore, is again front and centre in the collective dialogue about the euro and the continent’s political union. With talk of war reparations, a right-left (you read it right) government in power and unsustainable debt going around, there is probably too much emotion and noise for some traders to decide how to take advantage of the situation.

In order to untangle this we need to start with a bit of historical background (thankfully not back to the ancient Greeks). First off – why does Greece want compensation from Germany for the WWII occupation, and why does it want it now?

The short answer is populism that plays to the tune of confrontation with Germany. The collective psyche in the country remembers the suffering inflicted over 70 years ago (between 250-300,000 dead from killings and famine in the four short years of occupation). But is this a reasonable request, in the context of a unified Europe, more so with a collective agreement signed and paid for in 1960. Markets don’t seem to be giving too much thought to this one.

The second historical reference is more of a period – the one leading to and overlapping with the accession of Greece in the EU. Many still question the wisdom of that decision and claim that the country was never ready for the monetary union in the first place. For them, this is the root of all the current woes and the inherent weaker position that the country finds itself in, compared to the stronger economies using the euro.

Structurally the Greek economy can be classified as one in stagnation over the last several decades. Occasional growth spurts, mainly due to the stable and growing tourism industry, have been overshadowed by an overall decline in labour participation and a crucial lack of innovation and reforms.

What needs reforming here? By many accounts the pension and social security systems are overextended and not only provide unreasonably high sums (including a 13th and 14th pension ), but they also demotivate workers still in their active years. In a country which until recently had a growing population, but at the same time an aging one, this is definitely a problem, despite the money that comes back from large communities of emigrants in the U.S., U.K., Australia and South Africa. Tax-evasion and corruption are also fundamental problems that need to be addressed by whoever is in power.

Greek revenue vs expenditure
Greek revenue vs expenditure

Opponents that claim Greece was given a bad deal with their EU membership, entrance in the eurozone and subsequent bailouts from the so-called Troika, claim that this was all by design. This is the line that the new government in Greece and its prime minister Alexis Tsipras are following – they want their debt shaved (or cut in half) as it was unsustainable in the first place. They demand a new agreement that postpones payments and changes their structure. But it’s just kicking the can down the road for the likes of the EU, ECB and IMF.

How to trade all of this. First thing’s first – don’t forget the current context. Greece is not the biggest problem of the EU. The EU is still its own biggest problem. Although the country has an issue with not having enough money to pay state workers, hospitals and for other vital public services, the focus of markets is on the longer term.

The approaches to the trade begin with splitting it into two timeframes – short and long term. The short term is for the the coming weeks and possibly months and it will see some days where the EUR/USD and possibly all other heavily traded euro crosses react to news and statements from the two sides. These will most likely be in both directions provoked by uncertainty and fear on the one hand and reassurance and calls for calm on the other. This will give more room for shorter trades lasting between minutes and hours, but will not provide a trend. There will be many false dawns before a certain agreement is reached.

But a trend will emerge, either further south from what is already a multi-year low in the EUR/USD, or upwards. For long-term traders this is the time for making a prediction on fundamental reasoning. They choose between three options.

The first one is that Greece leaves the eurozone, returns to the drachma and probably receives assistance from Russia or China, decoupling it to some extent from the European economy. Fears are that this might have a domino effect and more countries will leave the pact and probably the EU (although Italy, which has a far greater debt than Greece, say their debt is sustainable). Euro crumbles and is possibly abandoned.

Second option – Greece stays in the EU, this crisis is resolved “peacefully” with more money thrown at it and with limited reform – both in the country and in the union. This is the continuation of the status quo and if the last months are any indication – more euro weakness.

Door number three – Greece stays in the EU and they both reform. Structural reforms ensue in the land of Aristotle and Alexander the Great, the EU decentralises and finds its competitive edge again. The euro climbs and maybe even Great Britain sees something good about the whole “we’re one continent” thing.

Options two and three will of course be influenced by larger issues, but Greece will remain a part of them. Choose wisely because in the end markets don’t care who is right or wrong, they don’t have a moral compass. Where they go is determined by where they see efficiency and inefficiency, as well as indications of what comes next.

Which Chart Type is Best?

Pro’s and Con’s of Different Trading Chart Types

Pro’s and Con’s of Different Trading Chart Types

Helping you pick the best chart type for your trading

Charts are one of the first things that a trader has to select when they enter their account. The default selection in Trading 212 PRO is the area chart, selected for its simplicity in providing the most important information needed to make a trade. The other options – candlesticks, Heikin-Ashi and bars – are available so that all trading styles can be supplied with the information they need for decision-making.

The area chart is a variation of the more widely used line chart, that has a highlighted area under the price line for better visual distinction, but in this article we will be using the latter formulation, as it better describes what is actually seen.

Line Charts

Line charts are used for their clearness – the close price is all that matters here, everything else is considered noise for those who either need a quick look to decide which way the price is going, or who are looking for an answer to the question “where did the market close”.

Suited for updates on developments when you are on the go, but may lack important bits of information like the high and low levels that a price has reached. Different trading styles rely on these highs and lows to predict future movements, be it as directional cues or previous support and resistance levels. Trends, ranges and retracements can still be seen, but the other chart types provide a more precise look, similar to zooming in with your camera phone and then looking through binoculars.

Bar Charts

Bar charts (sometimes named OHLC charts) are effectively an upgraded version of line charts. Visually they are represented by vertical lines whose top and bottom are the high and low with two horizontal dashes that indicate the open (on the left) and close (on the right).

The OHLC abbreviation stands for Open, High, Low and Close prices, with the high and the low being the additions here. Traders who prefer this chart type are focused on the numbers and search for simple patterns in shorter timeframes. This is what bar charts give you. There is no explicit colouration here, unlike the next type of charts, and the emotional effect that some traders experience is limited.

Japanese Candlesticks

Japanese candlesticks, who get their name from the land of samurais, because they were used to describe rice trading, became popular after Steve Nison introduced them to the Western world. Candlesticks have three visual elements that represent four values. The body is like.. a fat candlestick and is drawn between the open and close of the price in the respective timeframe.

Usually there are two thinner lines (although this isn’t always the case, one of the two can be missing) that come from the top and bottom of the candlestick and they represent the highest and lowest level that the price has reached for the period. These are called the upper and lower wick, but both can be referred to as “shadows”.

What makes this chart type popular is that it actually catches and relays, at least to some extent, the emotions behind price movements. Especially long wicks can reveal strong support and resistance levels (link to article) if they are observed on longer periods and can show violent movements within a single day (see the Dow Jones daily candlestick for yesterday).

Here’s our video tutorial on Japanese candlesticks, we think it’s quite good.

Heikin-Ashi Chart

This is a trend-focused chart type and aims to filter out the effects of excess volatility. It’s name is also Japanese, meaning “average bar,” and are calculated using a modified OHLC formula.

  • xClose = (Open+High+Low+Close)/4
    o Average price of the current bar
  • xOpen = [xOpen(Previous Bar) + Close(Previous Bar)]/2
    o Midpoint of the previous bar
  • xHigh = Max(High, xOpen, xClose)
    o Highest value in the set
  • xLow = Min(Low, xOpen, xClose)
    o Lowest value in the set

There are several scenarios where the chart provides signals. The main situation is when there are no lower wicks, showing a strong uptrend (and vice versa). Another preferable situation would be when there is a small candle with long shadows on both sides – interpreted as a signal of a trend reversal.

One aspect of using charts, especially by traders in this day and age, is what screen they are used on. Line charts are easiest to read when the screen is small and provide the quickest information when taking a quick peek at what’s going on. If everything is ok then it will suffice, but if something has changed and you have to make a decision and make or change a trade, then it would be best to switch to your preferred chart type (if it isn’t the line one).

There are actually even more variations of charts – hollow candlesticks, bars excluding the open price – but these are exotic and used by an extremely low percentage of traders. Most traders get used to one type, predominantly candlesticks, as it has the mix of what is considered essential and displayed in a straightforward way.

The truth is that no single indicator will cover all situations and circumstances that arise in markets. Each can be useful in different situations and either provide enough information and save time, or enough information for the best possible decision.

Our next article will be available tomorrow at 4:00pm GMT- “Jack Ma – the Man Behind Alibaba’s Rise and Rise”.