Shorten Your Risk Exposure Time With Market Timing

One of the most difficult tasks that traders have is determining the right amount of risk exposure when entering a trade. Since every trade should be accompanied by a protective stop-loss order, the question always comes down to “how much room should I allow the market to move against me before getting stopped out?”

Some traders rely on previous support and resistance levels as a place to put their stops. However, often these areas are gunned for because floor traders know that there are plenty of orders waiting there for the taking.

Some traders will draw lines below or above sloping trends and use that as a stop-loss reference, often expecting the market to continue with that pattern. But then, how many times do we see that pattern get violated right when we discover it is there?

Others will use some percentage value, either based on some fixed profit expectation or a percentage of available funds, to determine their initial stop-loss.

There are many different approaches to picking a stop-loss. My personal preference and what I believe to be the best approach most times is to use the expected and confirmed swing price.

What do I mean by ‘expected and confirmed’ swing price?

As of 2019, it has been 30 years that I have focused on the science and mathematics of market behavior. More specifically, forecasting market swings (aka turns) in advance. This approach requires a firm understanding of several methods of forecasting, including the popular and well-exposed techniques involving Fibonacci and Gann ratios, to name just two. There are so many more!

By learning and applying various market timing techniques that are designed to expose the underlying cyclic behavior of the markets, the trader can then use this information to ‘shorten the risk exposure’ of any given trade.

Here is how this works.

Suppose by way of using some proven method of determining high-probability market turns you arrive at the expectation that a swing bottom is highly likely to occur in the next day or two (at the very latest). Your method is usually 80% or better in accuracy, so you do not have to concern yourself with whether it will be on time (say tomorrow), or one day late (the following day).

The reason for this is that, since you already know with a high degree of certainty of the probability for the swing bottom, you simply place your ‘buy stop’ order for entry to go long just above the high price of the day you expect the swing to occur. If the order is triggered, you immediately place your stop-loss just below the low of that same bar because it just ‘confirmed’ as a swing bottom. Your initial risk exposure is the range of that swing bottom price bar. The probability that it will hold and not get you knocked out with a loss is very low because you knew with high-probability that the swing bottom was going to occur on that day to begin with.

Now suppose that the swing bottom is going to be one bar late as earlier stated as possible. In that case, your buy-stop was not triggered and you can do the same routine the next day for the one-day late bar. Same rules apply.

The real trick, once you are in your trade, will be on managing the trade and adjusting your stop-loss as your position moves deeper and deeper into profit territory. That is a whole different subject for a whole different article. But for the subject at hand, finding the right time and price to put on your initial stop-loss order where it is not too small or too large is not only also important, but it can save you a lot of money, keep you in more trades, and keep you out of trades you later are glad about.

Investors Diversify Their Investments With Commodity Trading

Like Forex and shares, commodity derivatives’ trading is growing popular among the Indian investors, as the market has opened up nation-wide platforms for retail investors and traders to participate in commodities.

Multi-commodity exchanges like the National Commodity and Derivative Exchange, the Multi Commodity Exchange of India Ltd and the National Multi Commodity Exchange of India Ltd are established in the country to support retail investors, who want to diversify their portfolios beyond shares, bonds, real estate, and begin commodity trading.

The trading and settlement system in these exchanges is electronic, which makes it convenient to deal in commodity futures like gold, silver, base metals, crude oil, natural gas, agricultural commodities among others, without the actual need of possessing them as physical stocks. Also, live share prices, allows the trader to follow the market movements quickly and make smarter decisions.

Knows the basics

In commodity trading, the investors can fund their account based on their comfort level and risk tolerance level. However, it is essential to start familiarizing the norms of placing orders and trading strategies to deal wisely and prevent from overtrading.

When trading in commodities, the investors need do their homework well, understand the fundamentals of demand and supply, and make decisions based on storage and consumption of products. It offers an excellent portfolio diversification option to the investors because the commodities futures are less volatile compared to equity and bonds.

Retail investors can get involved in commodity trading seeking the support of a broker and trading happens online via the internet similar to the equities. Forward Markets Commission regulates the exchanges, but here brokers do not have to register themselves with the regulator.

Similar to the stocks trading, here too, the investor will require a bank account, a commodity demat account and account with the depository to start. An agreement with the broker is needed. The investor also has to supply the essentials required under Know Your Client format and by the exchanges and broker.

With a minimum amount of Rs 5,000, a retail investor can start their journey into the commodity trading since only a marginal amount (5-10 percent) of the actual value of the commodity contract is paid upfront to exchanges via the brokers.

Every broker and commodity may have a different amount and quantity requirements. For instance, in case of gold, one trading unit (10gms) is between Rs 30,040 and at 10 percent Rs 3,004 is payable upfront. The trading lots and rates of agricultural commodities also differ from exchange to exchange (in kg, quintals or tonnes). However, the base fund starts at approximately Rs 5,000.

Cash vs delivery mechanisms

While every exchange allows cash and delivery mechanisms in trading, when your choice is cash settled, indicate this early on when placing the order that you will not deliver the item. And when taking or making a delivery is your chosen option, keep all warehouse receipts handy for review. Moreover, you have the liberty to change your selection several times between cash settlement and delivery mode, until the expiry of the contract.

Know the fees

A broker may charge from 0.10-0.25 percent of the contract value but cannot exceed the maximum limit laid by the exchange. Transaction charges are also applicable from Rs 6 and Rs 10 per lakh/per contract. While research and collecting information from various channels like financial newspapers and magazine is helpful and following the commodity rates online and at live share prices portals is the way key to being informed and successful commodity trading.

Financial Literacy is a Must for Actors

In my early encounters with both seasoned and newbies in financing for development, documenting and reporting on the outreach and communication, it became obvious that there are huge misunderstandings on both sides of the aisle (donors-investors and recipients)… Specific to sub-Saharan Africa, and to a larger extent other parts in the world, when expectations are not communicated, roles left to assumption, this can jeopardize the “relationship” in such a framework. Whether risks are downplayed or returns overblown, it’s my role to reasonably define key responsibilities of each parties and make sure the Plan forward is well understood and updated as needed.

In today’s sub-Saharan Africa’s investment needs framework, it’s likely that opportunity gap will be affecting lack of performance in areas highly known as much in demand so that local livelihoods depend on. Basic infrastructure in food, agriculture, health and education is being provisioned without much regards to medium and long term impacts or in sync to local private actors’ interests. The lost decades of development in the seventies, being in part assigned to such poor planning cycles from donors’ perspectives.

Due to early stage’ markets in sub-Saharan Africa, investors are often made up of local entrepreneurs, with very few trans-border participation in such business opportunities. Endogenous investors often gain from residual setbacks and unfulfilled demands from donors’ investments. Despite, the African food market expanding with estimates showing that it will be worth US$1 trillion by 2030 up from the current US$300 billion. Key challenges remain to allow optimal transition of their enterprises into thriving businesses.

Recipients representing the bulk 90% of the development aid resources are poised, with little to no preparation, to fulfill the delicate task of producing the grains and harvesting it with help of women and families in a typical smallholders’ farmer settings. On that note, demand for food is also projected to at least double by 2050.

These trends, combined with the continent’s food import bill, estimated at a staggering US$30-50 billion, indicate that an opportunity exists for smallholder farmers, already producing 80% of the food we eat.