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Simit Patel
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I'm a precious metals and energy investor as well as a currency trader who combines analysis of geopolitics, monetary economics, energy technology, innovation cycles, Internet technology, and technical price patterns to develop trading and investing outlooks. I trade/invest in all timeframes --... More
My company:
InformedTrades
My blog:
Forex Trading Journal
My book:
Wealth Management in the New World
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  • Trader's Paradox: Making the Most Money Involves Losing More Frequently Than You Win
    In the 9+ years I’ve spent in the trading business, I’ve grown to appreciate strategies with high loss rates. By “high loss rate,” I mean strategies that have a greater percentage of trades that are closed at a loss relative to trades closed at a profit. In order for such strategies to succeed, the average size of the wins must be greater than the average size of the losses. The lower the win rate of the strategy, the higher the average win must be to compensate or the losses. To put it simply and in line with conventional discussions of risk management, it’s about the amount being risked relative to the potential gain. 


    I think the primary component in maximizing the average size of wins is the ability to use technical analysis and position management to ride trends. Riding as much of the trend as possible, with the most possible leverage that can safely be utilized, is the goal. This has ultimately made stop loss management -- the art/science of managing stops, trailing them up to lock in profit and free-up more capital for risking, while letting trends run until they are exhausted -- the focus of my technical trading. By focusing primarily on candlesticks, support and resistance, and trendlines (subjects you can learn much more about in our University), I can hypothesize as to trends may be reversing, from the perspective of shorter and longer timeframes. 

    This is the first in a series of posts on my technical trading methodology, designed to complement my Global Macroeconomic Analysis course. My goal is to eventually have an EA created that either places trades for me or alerts me to conditions that I may want to examine and trade.


    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
    Tags: psychology
    Jun 03 2:23 PM | Link | Comment!
  • Financial Contagion and Volume Spread Analysis Setups Playing Out in Oil; Outlook Is Still to Buy the Dips
    The recent moves in crude oil serve as examples of financial contagion and traps/shakeouts in financial markets -- thus presenting us with a case study for traders in these two topics. Let's start with the chart below of crude oil; note the recent volatility, particularly over the last three trading days. 



    The fundamental factor driving this is the political tension in the Middle East, namely the prospect of revolution in Libya. This was the same market reaction we saw out of the market just several weeks prior during the uprising in Egypt. As such, this is a clear example of the concept of financial contagion in action -- the notion that events that shock a given economy can spread to shock other economies. As traders, we may find it advantageous to ask ourselves if this contagion will spread to another country? Or when will it end? I believe it is not over yet, and that we will see more similar uprisings and with similar impacts on the financial markets. 

    In addition to serving as an example of financial contagion, the recent behavior of oil in the financial markets illustrates many of the concepts found in volume spread analysis (VSA). This was highlighted by InformedTrades member Magic in a comment on Hektor’s blog, who started by first summarizing VSA:
    Here is VSA in a nutshell:

    To start, let's say SM [smart money] has accumulated most of the supply in a market. Now they have to pass that supply of to the crowd and make the most profit they can and use as little of their own money as possible.

    The first step they will take is to run tests to be certain there is no supply left. They do this because if they start their campaign then suddenly a bunch of supply shows up, they will have to start from scratch by accumulating this previously hidden supply - then run their tests again. Wasted money and time.

    Ok, now their ready to create demand and run the price up to a very tidy profit. The crowd is psychologically confused from the tests. Some are sure it will go down and other are just as sure it will go up. This is perfect manipulation.

    Now comes the Shakeouts and Traps. Price will shoot up - Upthrust. It will trigger the stops set by those who were sure price would drop. Now they have been shaken out of the market. Those that had placed orders in this area are trapped. Their orders are triggered and they are in.

    Next price will take a big drop - Spike. More of the crowd is Shaken-out or Trapped. And now the whole crowd panics. Those whose stops were hit find price has turned as they predicted and they are going to lose out. Others find themselves in a trade going the wrong way.

    Now SM can begin using their supply to move the price up. Traders caught in the first trap are now happy and telling their friends. Soon, those shaken out in the second move realize they were right and get back in. Price continues to move up.

    Until SM is out of supply. Then it all starts over in reverse.

    If you just keep this in mind, the rest of VSA is easy. Memorize each of the incidents in the psychological warfare campaign. Then, when you look at the charts, you will know where the campaign is and what is coming next.
    Further along in the conversation, Magic illustrated how this concept was being played out in the oil market:
    In the chart below you can see several from the daily /CL. They are so obvious I won't even get into volume on this. The first circle shows a candle with a low - that just happened to cross 86.00 and a candle making a new high in the area - crossed 88.00.

    The second circle: a new high crossing 90.00 and a low crossing 88.00.

    The third: new high crossing 92.00 & low at 88.00.

    Fourth: low 90.50 new high 92.50

    The second and third tests didn't come out so well, but the first and fourth paid off nicely. 



    Based on forecasting rooted in volume spread analysis and financial contagion, I believe further price increases are in the cards for oil. 

    To learn more about volume spread analysis and the concepts Magic is referring to, be sure to check out his course on supply and demand analysis

    As always, feel free to share your opinions and questions in the comments section below. 


    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
    Tags: USO
    Feb 22 3:18 PM | Link | Comment!
  • Where to Buy the Dip on Gold?
    Fundamentally the case for the bull market in gold is only getting stronger; until global debt levels come down in a big way, or at least until any monetary authority chooses to address the debt problem, the case for gold only gets stronger. To put it simply, the only issue that matters is debt.

    In light of that, the recent dips in gold constitute a discrepancy between price and value -- and thus offer an opportunity for investors/traders to profit from this discrepancy by buying the dip.  

    To find key price levels to buy at, we can take a look at price charts -- see the daily chart of gold below. Key observations:

    1. A head and shoulders pattern of sorts has formed, with the top of the head at approximately 1420 and the neckline at 1360. This distance of $60, projected to the downside from 1360, gives us a target of $1300 as a support level. 

    2. This $1300 support level is near the 50% Fibonacci retracement level of the bull move up from near $1160 in the summer of 2010 to the recent highs above $1420. 

    3. The 38.2% Fibonacci level of the aforementioned bull move is at 1324. This is also an area that proved itself to be a support level back in October of 2010. 



    Zooming out to the weekly chart, there are two matters I find notable:

    1. The price channel going back to 2008 is still intact, with the bottom trendline at just above $1280. By mid-March, the bottom trendline will be in the mid-1320s, a support level previously identified. A battle in March in the 1320s could thus prove to be important for determining the fate of gold, in terms of whether bears will gain momentum and advance to the downside or bulls will have formed their base for a stronger move upwards. 

    2. The 30 EMA on the weekly chart, a moving average the gold market has repeatedly gone back to over the years during this run up, is now at approximately 1315. This strengthens the case for some support being found in the 1320 vicinity. 



    Personally, I would expect some rangebound movement and a test of these levels before proceeding upwards beyond the previous highs. 

    Of course, feel free to share your comments in the section below.
     


    Disclosure: I am long PHYS.
    Tags: GOLD
    Jan 21 10:24 AM | Link | Comment!
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