|Simple Trading Ideas||
Risk is part of our everyday life. You take a risk when you drive your car, fly an airplane, move away from your home, you gamble, start a business, buy a house or buy stocks or any other asset types.
By definition risk is the outcome which could be different what you expected. Think about a business where you can’t find customers, or a new home where your basement gets flooded every time there is heavy rain. When it comes to investment you can lose portion or all of your money. When we talk about risk we usually talk about negative outcome.
You have to learn how much risk you can take. It depends on your personality, your experience, your age, your responsibilities. Don’t take more risk than what you can handle. Not only you can lose all your money but it can ruin your health and your relationships. Some people hate to take any risk some people love to take risks (which could be dangerous too)
In the world of investing there are different types of risks. The main risks are classified as:
· Systematic Risk is when a large number of assets are affected. A major political event can trigger one. It’s harder to protect yourself from this class of risk.
· Unsystematic Risk when only a specific stock or a small number of stocks are affected. An earnings report, retail sales report, oil inventories can trigger one.
Other types or risks are Credit Risk, Country Risk, Foreign-Exchange Risk, Interest Rate Risk, Political Risk and Market Risk.
Risk is the reason why prices move, without risk it would be hard to make money with any investment.
We measure risk with volatility. The higher the volatility the bigger market moves are expected. You take a bigger risk when you buy assets with higher volatility. Volatility can be measured with standard deviation.
The higher the risk the higher the return could be but the losses could be bigger too. For example buying options is riskier than buying stocks or buying leveraged ETFs is riskier than buying unleveraged ETFs.
You can protect your portfolio from various risks with diversification but you can never completely eliminate it. Diversification means buying at least 10-12 different securities from different asset classes, such as stocks, options, bonds, gold, real estate, currency and keep some cash too.
The performance chart below shows how the nine sectors of the S&P 500 were doing during the past six days. As you can see defensive sectors were doing much better. This is usually the case during a correction when defensive sectors are outperforming offensive sectors. Money is moving out of offensive sectors into defensive sectors. Sector rotation is one way to hedge your portfolio. The cycle line helps to indentify which sectors are doing better during different phases of the market cycle.
$SPXADP is the Advance-Decline Percent Index for the S&P 500. It's a breadth indicator that measures the percentage of Net Advances after the Market Close. It's calculated as follows:
AD Percent = (Advances Less Declines) / Total Issues * 100
The Advance-Decline Percent fluctuates between 100% and -100%. 100% means that all stocks in the group in this case the S&P 500 advanced. The AD Percent chart is very choppy so to use a moving average to smooth it out makes sense. The chart below shows %SPXADP with the 21 period moving average. The -3% and 3% horizontal lines separate the bearish and bullish zones. Moving below -3% the bearish treshhold would be bearish for the S%P 500.
As I noted yersterday SPY found short-term support and nicely advenced today. The chart below shows the daily chart for SPY today. There is certain weakness on the chart. One of them is that MACD is still below the signal line and the other one is that CCI and its 10 period MA are both below 0. If SPY continues to move up next week my upside target would be close to the upper Bollinger Band.
The daily chart for SPY shows that yesterday's red candlestick and today's white candlestick completed a piercing pattern. In a piercing pattern a white candlestick follows a red candlestick both of them having relatively large bodies. It's a short term bullish reversal pattern. Today's white candlestick opened below yesterday's close and closed above the midpoint of yesterday's red candlestick. That's what makes these two candles a piercing pattern. Also notice that today's white candle found support on the 50-day SMA. As I mentioned this could be only a short term bullish reversal.