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Friday, 2 August 2013
Friday, 5 July 2013
What is Economics?
Lionel Robbins, a British economist, said that "Economics is the study of the use of scarce resources which have alternative uses." This might be the best definition of economics I have come across. Resources are scarce which means that people want more than is available to them. Another way of saying it is that our wants are unlimited and the resources to fulfill our wants are limited. Scarcity required us to economize, therefore the need for economics was born.
Scarcity has also required us to study trade-offs or the various uses of resources. Thomas Sowell states in his brilliant book Basic Economics:
"Not only scarcity but also "alternative uses" are at the heart of economics. If each resource had only one use, economics would be much simpler. But water can be used to produce ice or steam by itself or innumerable other mixtures and compounds in combination with other things. A virtually limitless number of products can also be produce from wood or from petroleum, iron ore, etc. How much of each resource should be allocated to each of its many uses? Every economy has to answer that question, and each one does, in one way or another, efficiently or inefficiently. Doing so efficiently is what economics is all about."
Fallacy of Economics
You may have heard the saying that an economist thinks he knows more about money than the people who have it. This comes from a misunderstanding of economics and what it entails. Decisions don't even have to involve money to be economic. Economics is not about how to make money or how to run a business. It is about the study of relationships between items such as prices, commerce, wages, and international trade from the viewpoint of how it affects the distribution of scarce resources to society. Even more broadly defined, Economics is the inquiry of praxeology - the study of human action or conduct. Ludwig von Mises championed the inclusion of all human action into the study of economics and anything less was incomplete.
Benefit of Economics
How can we benefit from economics? Economics helps us determine how well the various uses of resources affects our society. More specifically, we can determine what particular actions or policies do to either increase poverty or wealth. This can be very valuable indeed.
Sunday, 23 June 2013
Friday, 14 June 2013
Sunday, 9 June 2013
Sunday, 2 June 2013
Wednesday, 22 May 2013
Day Trading Strategies
Most Common Day Trading Strategies:
| Strategy | Description |
| Scalping | Scalping is one of the most popular strategies, which involves selling almost immediately after a trade becomes profitable. Here the price target is obviously just after profitability is attained. |
| Fading | Fading involves shorting stocks after rapid moves upwards. This is based on the assumption that (1) they are overbought, (2) early buyers are ready to begin taking profits and (3) existing buyers may be scared out. Although risky, this strategy can be extremely rewarding. Here the price target is when buyers begin stepping in again. |
| Daily Pivots | This strategy involves profiting from a stock's daily volatility. This is done by attempting to buy at the low of the day (LOD) and sell at the high of the day (HOD). Here the price target is simply at the next sign of a reversal, using the same patterns as above. |
| Momentum | This strategy usually involves trading on news releases or finding strong trending moves supported by high volume. One type of momentum trader will buy on news releases and ride a trend until it exhibits signs of reversal. The other type will fade the price surge. Here the price target is when volume begins to decrease and bearish candles start appearing. |
Divergence Trading
Trading in the downtrend or reversals are considered as riskiest technique in Technical Analysis. But reversals can also be detected in a less risky way. Divergence is a very good technique to trade reversals in a less risky way and to pull out good chunk of money from trend reversals. Trend continuation can also be detected by Divergence.
When the price of an asset or security and an indicator index or other related asset move in opposite direction in the same range of time, then it is called divergence.
There are two types of divergence,
1. Regular Divergence
2. Hidden Divergence
3. Exaggerated Divergence
1. Regular Divergence:
This type of divergence detects trend reversals. Regular divergence can be Bullish or Bearish.When the price is creating Lower Low (LL) but indicator is creating Higher Low (HL) then it is Regular Bullish Divergence, indicates a strong possibility of trend reversal from downtrend to uptrend. It happens when a security or assets price is in downtrend but indicator is going upward as indicators have specific range for which it can not react with extreme falls so it react against the price trend which is a divergence.
Here is an example chart of Regular Bullish Divergence,
In the chart above, we can see that Price created Lower Low (LL) while indicator (MACD crossovers) created Higher Low (HL) which is a Regular Bullish Divergence. MACD bullish crossover after detecting divergence is a very good entry opportunity for buying.
When the price creates Higher High (HH) but indicator creates Lower High (LH) then it is Regular Bearish Divergence indicating trend reversal from uptrend to downtrend.
Here is an example chart of Regular Bearish Divergence,
In the chart above (BEXIMCO), price has created Higher High (HH) but MACD indicator created Lower High (LH) in its crossovers which is a Regular Bearish Divergence. After detecting divergence 2nd MACD bearish crossover can be treated as a strong sell signal.
2. Hidden Divergence:
Divergences not only detect a potential trend reversal but also the continuation of current trend. Hidden divergences can detect the continuation of the trend. When the price is making Higher Low (HL) but indicator is showing Lower Low (LL) then it is Hidden Bullish Divergence.
Here is an example chart of Hidden Bullish Divergence,
In the chart above, we can see that price created Higher Low (HL) while MACD indicator created Lower Low (LL) in its crossovers which is a Hidden Bullish Divergence which indicates that the uptrend will continue.When the price is making Lower High (LH) but indicator is showing Higher High (HH), then it is Hidden Bearish Divergence.
Here is an example chart of Hidden Bearish Divergence,
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In the chart above, we can see that price created Lower High (LH) but MACD indicator created Higher High (HH) between its crossovers which is a Hidden Bearish Divergence, indicates that the downtrend will continue.
3. Exaggerated Divergence:
It is similar to Regular Divergence. The difference between these two divergences is, in Exaggerated Divergence price creates double tops/bottoms or Similar High/Low (SH/SL).Exaggerated Bullish Divergence occurs, when the price is creating double bottom or similar lows (SL) but indicator is showing Higher Low (HL).
Here is an example chart of Exaggerated Bullish Divergence,
In
the chart above, price created Similar Low (SL) or double bottom but MACD indicator is showing Higher Low (HL) between its crossovers which is Exaggerated Bullish Divergence indicates the flat trend will turn into uptrend soon.Exaggerated Bearish Divergence occurs, when the price is creating double top/Similar High (SH) but indicator is showing Lower High (LH).
Here is an example chart of Exaggerated Bearish Divergence,
In the chart above, we can see that price created double top/Similar High (SH) while MACD indicator created Lower High (LH) between its crossovers which is Exaggerated Bearish Divergence indicating a strong possibility of downtrend.
Now lets make a trading strategy based on divergence.
Trading Strategy
Indicators Used:
Moving Average Convergence Divergence (MACD)
Entry:
1. Identify the divergence
2. After identifying divergence, use MACD crossover to take final entry decision.
Exit:
1. Use MACD reverse crossover to exit.
2. Or, use fixed stop of 20% or 30% or else.
3. Or, use trailing stop.
Stop Loss:
1. Use 6-7% stop loss.
2. Or, exit when reverse crossover occurs in MACD.
Thursday, 9 May 2013
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