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  • How to Diversify Your Trading Portfolio? Basic Approach

    Author: Maks Artemov

    Trading in financial markets can bring profit and losses in turns. There are plenty of reasons for losing money, starting with unpredictable behavior of assets and through an unwisely collected portfolio. This article is devoted to the latter reason, discussing basic approaches to diversifying your portfolio for decreasing risks and getting the maximum from the market.

    We all know the saying: “Never put all the eggs in one basket”, and it perfectly describes the danger of undiversified portfolios. Putting all the eggs in one basket here means investing everything in one instrument and waiting for a profit. Practice shows that this strategy does not always work.

    What is diversification?

    In investment, diversification means distributing your investment capital among various financial instruments to decrease risks and increase profit. This approach helps to compensate for possible losses that emerge from a decline of one of your instruments by making a profit on your other instruments.

    Until the 1950s, diversification principles in the stock market were limited by fundamental analysis (Graham and Dodd’s theory): people chose investment options by studying the business of issuers, almost neglecting risks.

    In 1952, in the Journal of Finance there was published an article on collecting an investment portfolio by a young postgraduate Harry Markowitz. His ideas from the article and his PhD thesis became the base for the modern portfolio theory.

    Markowitz described a fully mathematical approach to forming an investment portfolio that allows choosing assets based on the profit/risk ratio. In 1990, he won the Nobel prize for his research.
    In this article, I will not describe Markowitz’s ideas or the statistical aspect of forming a portfolio because these are the topic for a different, much more detailed talk. Before starting such a talk, you will need to understand the basic principles of diversification to avoid putting all the eggs in one basket already at this stage.

    Basic diversification principles for an investment portfolio

    In the modern world, all the branches of the economy cannot be growing at once. Hence, investors need to distribute their capital in such a way that in the case of a slump of an asset or group of assets in one sector of the economy the portfolio still generated a profit.

    The basic diversification principle presumes distributing your investment capital among the shares of companies from different branches of the economy, as well as among various financial instruments.

    Read more at R Blog - RoboForex

    RoboForex team


    • How to Trade with Bulls Power and Bears Power Indicators?

      Author: Victor Gryazin

      This article is devoted to using two indicators: Bulls Power and Bears Power – in financial markets. These indicators are meant for measuring the strength of trends.

      How do Bulls Power and Bears Power work?

      These indicators were created by a famous trader and the author of the book “Elder Triple Screen” Alexander Elder. They help estimate the current power balance of buyers and sellers and catch the moment when bears/bulls are getting weaker. The combination of these indicators is also known as the Elder Ray.

      Bulls Power demonstrates the strength of bulls in the market. It compares the highs with the Exponential Moving Average. If the Bulls Power histogram is above zero and growing, this means buyers are holding the price above the EMA, and bulls are now stronger than bears. And vice versa, if the histogram is declining, dropping below zero, this indicates the predominance of bears.

      Bears Power, in its turn, demonstrates the strength of bears in the market. It compares the lows with the EMA. If the Bears Power histogram is below zero and declining, this means sellers are holding the price below the EMA, and bears are now stronger than bulls. However, if the histogram starts growing and rises above zero, this means bulls are in control of the market.

      In essence, Bulls Power and Bears Power are irregular oscillators. They appear in separate windows under the price chart. They look like bar histograms with the central line at zero. To determine the direction of the active trend, Elder recommends adding to the chart an EMA (13), drawn by close prices.

      Installing and setting up the indicators

      Bulls Power and Bears Power are included in many popular trading terminals. To install the indicator to the chart of your financial instrument in MetaTrader 4 or MetaTrader 5, go to the Main Menu: Insert/Indicators/Oscillators/Bulls Power and Bears Power.

      The formulae of the indicators look as follows:

      Bulls Power = HIGH - EMA (13)
      Bears Power = LOW - EMA (13)

      Read more at R Blog - RoboForex

      RoboForex team


      • MACD – Trading the Trend Strategy

        Author: Andrey Goilov

        This trading method using Moving Averages works well with strong market movements. You must have already heard that trading the trend usually yields brilliant results; and if you add an oscillator, you get a full-scale trading strategy.

        An indicator-based strategy is attractive because it has strict entry and exit rules. And if the trader uses graphic analysis, they usually have to analyze charts looking for price patterns, as well as subjectively evaluate the market situation.

        Today, I will be telling you about a strategy used on M30 and H1. It allows placing close Stop Losses and trading intraday.

        About the strategy MACD – Trading the Trend

        The strategy is based on three Moving Averages, and MAs are the best indicator showing the market trend. Knowing the trend, you will know the direction of your work. As an additional signal source, the MACD is used. The strategy suits GBP/USD, AUD/USD, EUR/USD.

        Parameters of the trading strategy

        The strategy demonstrates the best results on H1 and M30. To get started, prepare the chart and add some indicators with certain parameters.
        • MA (85) is a Linear Weighted MA with period 85, apply to: Low, color: blue.
        • MA (75) is a Linear Weighted MA with period 75, apply to: Low, color: dark-blue.
        • MA (5) is a Linear Weighted MA with period 5, apply to: Low, color: yellow.
        • MACD (15, 26, 1) is the MACD with fast EMA (15), slow EMA (26), MACD SMA – 1.

        A signal to buy by the strategy

        The main signal to open a trade is a breakaway of the two slow MAs by the fast one, while the MACD will be used as an extra filter. The crossing of two MAs is a simple signal for a change of the trend. In this case, we expect a downtrend to come to an end and an uptrend to start, which means it is time to buy.

        The parameters for entering a buying trend are as follows:
        1. The MA (5) crosses the MA (85) and (75) from below, signifying a change of the trend.
        2. The MACD values are above zero, indicating the presence of an uptrend.
        Let us study an example with the currency pair NZD/USD. We see that the price was resting below the slow MAs, indicating a downtrend, but at some point it broke through the MAs, then the fast MA did the same, aiming upwards, indicating a change of a downtrend for an uptrend.

        Read more at R Blog - RoboForex

        RoboForex team