Tuesday, November 30, 2010
Indices Trading - Eurostoxx 50
For now it looks like the Eurostoxx 50 is breaking below trendline support. A clear singnal would be a close below the trendline today and maybe tomorrow a failed retest of this trendline. Why tomorrow? Because tomorrow is December 1st and on the first trading day of a month there is usually a bias to the upside.
If the Eurostoxx 50 can close above 2700 this week it could be a false break and as a result a strong bounce could occur.
Monday, November 29, 2010
Money Management, Position Sizing and Risk/Reward
In my opinion the most important thing is the risk-reward ratio of every trade. As a trader or investor you have to analyze markets to find opportunities. If you think you found such an opportunity then you have to set an initial stop level and a level where you think your stock/option/future is moving to; in other words where you want to exit your position with a profit. If you did that you have your potential risk and your potential profit/reward.
With these two numbers you can easily calculate the risk to reward ratio, so how many $/€ you are risking for one potential profit. The ratio should be at least 1:2, so for every $/€ you are risking, you can earn at least two $/€. By respecting that rule you need not to be right on every trade. Even better you do not have to be profitable on half of your trades.
Another very important rule is that you should not risk more than a percent of your total account in a trade. In numbers that means if you have an account with $ 100,000 your potential loss (initial stop) of a trade must not be more than $ 1,000. That is called money management and the most important rule of trading. You have to respect that rule or otherwise you will go bankrupt over time. In fact every trader will have ten or more negative trades in a row and as a result if you are risking too much on every trade your maximum drawdown will be too high.
In conclusion you must have a flexible position size. If you are always buying a stock with 10% of your account you will not get an initial risk of 1% or less. In that case you need to trim your position till it fits the 1% rule.
On this topic there is one great book "Trade your Way to Financial Freedom" by Van K. Tharp.
With these two numbers you can easily calculate the risk to reward ratio, so how many $/€ you are risking for one potential profit. The ratio should be at least 1:2, so for every $/€ you are risking, you can earn at least two $/€. By respecting that rule you need not to be right on every trade. Even better you do not have to be profitable on half of your trades.
Another very important rule is that you should not risk more than a percent of your total account in a trade. In numbers that means if you have an account with $ 100,000 your potential loss (initial stop) of a trade must not be more than $ 1,000. That is called money management and the most important rule of trading. You have to respect that rule or otherwise you will go bankrupt over time. In fact every trader will have ten or more negative trades in a row and as a result if you are risking too much on every trade your maximum drawdown will be too high.
In conclusion you must have a flexible position size. If you are always buying a stock with 10% of your account you will not get an initial risk of 1% or less. In that case you need to trim your position till it fits the 1% rule.
On this topic there is one great book "Trade your Way to Financial Freedom" by Van K. Tharp.
ATX (Austrian Traded Index) and VOESTALPINE (AT0000937503)
Today I want to describe the Austrian stock market a little bit closer and therefore I want to take a look at the ATX (Austrian Traded Index) and one stock of the ATX, namely VOESTALPINE.
The ATX contains 20 stocks with a very high weighting of the banking sector (~30%). The Austrian market is considered as a developed market with a strong exposure to Eastern Europe. That is why the ATX sold off hard in 2008 but also why the ATX was skyrocketing from 2003 to 2007.
Here a monthly chart of the ATX:
The EWO ETF is tracking this index. The next chart shows that the ATX is at a critical level. If the ATX breaks to the upside the next targets are 3200 and then 3600.
During the last few months the ATX was consolidating very nicely and was going sideways.
The ATX is just below its resistance level around 2750 to 2800 and a break below 2650 on a closing basis would indicate further selling and a break to the upside would indicate prices around 3200 in the medium term.
The Voestalpine is an Austrian steel producer. On Friday the company broke above the critical Fibonacci Retracement level and above its high from April. Here is the weekly chart of the Voestalpine. The next major restistance will be around the € 38 area.
Have a nice day and take care!
The ATX contains 20 stocks with a very high weighting of the banking sector (~30%). The Austrian market is considered as a developed market with a strong exposure to Eastern Europe. That is why the ATX sold off hard in 2008 but also why the ATX was skyrocketing from 2003 to 2007.
Here a monthly chart of the ATX:
The EWO ETF is tracking this index. The next chart shows that the ATX is at a critical level. If the ATX breaks to the upside the next targets are 3200 and then 3600.
During the last few months the ATX was consolidating very nicely and was going sideways.
The Voestalpine is an Austrian steel producer. On Friday the company broke above the critical Fibonacci Retracement level and above its high from April. Here is the weekly chart of the Voestalpine. The next major restistance will be around the € 38 area.
Have a nice day and take care!
Sunday, November 28, 2010
Indices – 28th November 2010
First I want to take a look at the German DAX 30. As you can see here the German market had a nice rebound since the March ’09 lows. Moreover you can see that the Fibonacci Retracement levels were working pretty well. On the weekly chart below the next overhead resistance is around the 7200 level.
Compared to the Eurostoxx 50 the DAX shows some relative strength, especially since Europe’s solvency crisis.
The next chart is showing the DAX in a shorter timeframe with a rising trend channel. At the moment the lower trendline is around 6000 points and the upper trendline is around 6950. Furthermore the RSI is showing a negative divergence because the price is rising while the RSI is declining. Usually such a divergence is indicating that a correction will occur.
Nevertheless I would not short such a strong index before he shows some weakness. For me the index first has to gap above the upper trendline which is shown in chart number three. And if that gap up is combined with a doij candlestick, then I am looking to short the DAX if the breakout could not hold support of the upper trendline. The other short possibility is if the trend since mid-October in chart number 4 breaks. To short the DAX is nowadays very dangerous. In my opinion the Eurostoxx 50 would be the better short candidate.
Now let’s take a look at the Eurostoxx 50.
During the last year the index is trading more or less sideways, but the next chart shows why the index could be a potential short candidate.
This chart shows that the index is forming a bearish wedge and if it breaks it could go down pretty fast. As you can see the RSI showed a few weeks ago a bearish divergence before the Eurostoxx 50 declined.
In the very short term the index formed a bullish hammer on Friday. This could be a great swing trade on the long side with a well defined stop in form of the rising trendline.
The US-indices are also at interesting levels. During the last week and a half the Dow Jones Industrial and the S&P 500 were trading in a very tight range. In the DJIA the levels to watch are around 11200 and 11000 and in the S&P 500 at 1200 and 1172. If one of these levels breaks the indices will move further down or up in the direction of the break.
The next support on the downside could be around 10700 in the DJIA and 1150 in the S&P. On the upside the old highs would be resistance.
So that’s it for today! Good luck and take care.
A quick reminder:
Everything posted at this blog is for educational purposes only and should never be conceived as recommendation for buying and selling anything. You must do your own research.
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