DeFi Deep Dive: How Crypto Investors Can Generate Impressive Yields

Key Points

  • DeFi is an emergent financial technology that allows users to consume and provide financial services without a third party.
  • Some of the most popular yield generation strategies include Staking, Liquidity Provision and Lending.
  • Smart Contract, Impermanent Loss and Rug Pull risks are some of the main pitfalls investors will need to navigate.

What is DeFi?

Decentralized Finance (DeFi) is a new and emergent financial technology that allows users to consume and provide financial services without the need to rely on a third party, with transactions secured utilizing blockchain/distributed ledger technology, much like that used by cryptocurrencies.

In traditional centralized finance, when consumers transact, save and invest, they rely upon a centralized entity (such as a credit card company like Visa, a bank or an investment management company) whose goal is to turn a profit. Thus, they usually take a cut at the cost of the consumer.

While cryptocurrency solves the problem of having a middle-man at the center of each monetary transaction, the aim of DeFi is to cut out the middle-man from the saving/lending/investing process, thus also removing fees here.

Of course, it isn’t all just about reducing fees. Just like cryptocurrency, DeFi is decentralized and permissionless in its nature, thus removing the ability of any one centralized power (be that governments or banks) to manipulate an individual’s access to financial services.

At present, individuals are able to secure loans and other financial services without the need for credit checks or going through the Know Your Customer (KYC) process, so long as they have sufficient collateral (usually in the form of crypto) to put up.

DeFi developers have built a multitude of so-called Decentralised Applications (dApps) that run on one or multiple smart-contract enabled layer 1 blockchains (such as the ethereum, Tron, Solana or Cardano blockchains). dApps are the heart of DeFi and the health of a smart-contract enabled blockchain’s DeFi ecosystem can often be measured by how many/the variety of dApps it has running.

Those seeking to invest can go into the websites of these dApps, connect their wallets and deposit funds into various yield-producing strategies as they choose. Those seeking to borrow can utilize a variety of DeFi platforms to borrow against collateral (usually bitcoin or ethereum).

How Can You Utilise DeFi To Generate Yield?

The generation of yield in DeFi, often referred to as “yield farming”, can be done in a number of ways. A few of the most popular methods are summarised below:

1) Staking – Proof of Stake (PoS) cryptocurrencies require a certain number of holders to lock up their crypto for a certain period of time in order to secure the network. This is called “Staking”, and the holders of Staked cryptocurrencies are compensated via yield (almost always in the same cryptocurrency as that being staked).

According to staked.us, stakers of Ethereum (2.0), Cardano and Solana can expect a yield of between 4-6%. Most centralized cryptocurrency exchanges will allow users to stake their crypto on their website, but it is also possible to stake crypto via various dApps.

2) Liquidity Provision – When crypto investors provide liquidity, they are essentially pooling their crypto into a fund that facilitates trade on a Decentralised Exchange (a type of dApp, also referred to as a DEX) or other type of DeFi application. In contrast to centralized finance where there is a high barrier to outside entrants into the world of market-making, crypto Liquidity Providers (LPs) are able to participate through the use of automated market makers (AMMs), one of DeFi’s most promising emergent technologies.

In most cases, prospective LPs will need to provide liquidity in both of the cryptocurrencies of the trading pair they are providing liquidity for. Crypto holders can become LPs using a number of DEX platforms. Some of the most popular include Uniswap, PancakeSwap, Orca, Curve Finance and SunSwap. Yields can vary wildly based on the perceived riskiness of the cryptocurrencies involved.

3) Lending – Crypto holders can utilise a variety of centralized and decentralized applications to lend their tokens to borrowers by locking their crypto into so-called “vaults”. Rates on leading cryptocurrencies such as bitcoin and ethereum are typically quite low, but rates on stablecoins can be very attractive (anything up to 30%). Some examples of the most popular Lending DeFi platforms include AAVE, Compound and JustLend.

What Are The Risks?

Given the youth of the DeFi space and its lack of regulation, prospective investors face a litany of risks. Below are summarised a few of the main ones to take note of.

1) Smart Contract Risks – DeFi is powered by smart contracts, which are essentially just code. Poorly written code can expose potential DeFi investors to loss if it leaves room for hackers to exploit funds.

2) Impermanent Loss – Some investment tactics in DeFi, such as staking and liquidity provision, require that investors lock up funds for a certain period of time. During this time, the price of cryptocurrencies can move wildly, exposing investors to losses.

3) Rug Pulls – This is when a fraudulent developer creates a new DeFi token with the intention of pumping the price to draw in gullible investors, only to then pull out as much value as possible before abandoning the project and letting the value of the token crash to zero. Sometimes investors in scam tokens aren’t even able to sell them, as happened famously happened with the Squid token last year. Unfortunately, due to a lack of regulation to protect investors from bad actors, DeFi is rife with such pitfalls.

4) Regulation Risk – There is practically no regulation in the DeFi space at the moment. But this could quickly change in the coming years and the impact on investments across the space will be hard to gauge.

5) Market Risks – Stablecoins play a key role in the DeFi space, with investors keen to lend them out for high yields and borrowers keen to borrow them against collateral. But as seen earlier in the month with Terra’s algorithmic stablecoin UST, investors in stablecoins must factor in the risk of a de-pegging event that could see them lose much of or all of their capital.

Current State Of The DeFi Market

According to DeFi analytics website DeFi Llama, the total Trade Value Locked (i.e. the total sum of money committed in DeFi smart contracts) across the entire space stands at just below $100 billion as of 26 May. That compares to a TVL of more than $172 billion at the start of the month and a TVL of over $220 as recently as the end of December.

This month’s sharp decline came in wake of the collapse of the Terra ecosystem, which was triggered by the de-pegging of its US dollar stablecoin UST and a subsequent “bank-run” like rush of capital out of the stablecoin that triggered hyperinflation in LUNA. The Terra ecosystem was at one point the second largest in the DeFi space (only behind ethereum) with a TVL of nearly $22 billion as recently as 5 May. TVL is now only around $170 million, with the collapse sending a chill across the entire industry.

A further headwind to the growth of the DeFi space in recent months has been the broad downturn in cryptocurrency prices, with the likes of bitcoin and ethereum down in the region of 60% versus the record peaks they printed last November. DeFi investments are still viewed as highly speculative in nature, hence in risk-off cryptocurrency market conditions, it isn’t surprising to see investors avoid pouring more money into the space.

Still, despite recent de-risking that has seen capital leave DeFi in recent weeks, TVL in the space is still nearly 100x versus this time two years. DeFi remains very much at a nascent stage in its development. As developers and innovations build better and more trustworthy dApps, the long-term trajectory is almost certainly tilted towards greater adoption and further growth.

Regulation could also play a pivotal role in allowing DeFi to break into the mainstream. A strong, well-thought-out regulatory environment could protect prospective investors from many of the aforementioned risks (like rug pulls and centralization by stealth). Indeed, regulation is likely a pre-requisite if big money is ever to come anywhere near the space (i.e. major asset/pension fund managers, for example).

Choosing the Best Forex and CFD Broker

Instead, they have to trade through a financial services organization, known as a forex or CFD broker. These businesses act as ‘intermediaries’ or ‘middlemen”, perfectly explaining their function and importance in the trading process.

New traders have literally hundreds of brokers to choose from when opening a forex or CFD account. This diversity makes it harder to find a perfect fit for an individual’s skill level, educational needs, and initial trading stake. To assist in your investigation, we’ve organized a checklist to print out and keep at your desk, identifying key factors to review when choosing a forex or CFD broker.

KEY POINTS

  • A robust trading platform is needed to trade our modern electronic markets.
  • Good brokers offer resources and value-added services that support the client’s objectives.
  • Choose a broker who is regulated and disciplined by a local regulatory body.
  • Match the broker choice with your skill, experience, and capitalization level.
  • Look for hidden costs before opening a brokerage account.

Investor Protection & Regulations

Look at regulation and domicile when selecting a forex or CFD broker, examining the firm’s home page for compliance with competent regulatory agencies (see ‘How Do Brokers Make Money’). A regulated broker has met operating standards imposed by the regulatory body in the country or zone of domicile (headquarters).

Standard regulatory requirements include adequate capitalization, segregation of accounts in order to protect client funds, and annual filings that can be easily accessed by applicants. Additionally, regulation provides reimbursement up to a statutory amount if the firm becomes insolvent and ensures the broker upholds rigorous standards as a financial service provider.

Major countries/zones with financial regulatory agencies, backed up with strict enforcement:

Tradable Products

Examine the list of tradable currency pairs before choosing a forex or CFD broker.  At a minimum, the brokerage should offer all major currency pairs (EUR/USD, USD/JPY, GBP/USD, USD/CHF) and cross-currency pairs, as well as so-called commodity currency pairs (USD/CAD, AUD/USD, NZD/USD). Traders who take exposure solely in these instruments won’t need a long list of minor pairs from faraway places that aren’t of interest.

However, a robust list reflects a broker’s willingness to go the extra mile in providing customers with the opportunity to trade lesser-known pairs when a shock event or other market mover hits that part of the world. For example, the USD/MXN pair attracted huge buying and selling interest when the United States renegotiated NAFTA with Mexico and Canada. Just keep in mind that minor and exotic pairs usually incur much wider spreads and higher commissions.

Look at the margin and leverage offered for each currency group. European regulations have capped margin on forex and forex CFDs since 2018, with a 30:1 limit on major currency pairs and 20: 1 limit on non-major currency pairs. Make sure to read the fine print because EU-regulated brokers are also required to prominently disclose the percentage of clients who lose money and provide negative balance protection to ensure the account never drops below 0.

Account Opening

Opening a ‘live’ account at most brokerages will require personal information about your current income, savings, marital status, trading experience, and risk tolerance. You’ll also have to provide minimum opening account capital, which varies from broker to broker.

On the other hand, a free demo account just requires a name and email address, giving potential customers an opportunity to ‘kick the tires’ before committing real money.  In many venues, you can go through an instant ID verification process and access the live platform in just a few minutes. In the United States, applicants also have to provide a social security number for tax purposes.

Forex and CFD brokers may also offer tiered account options that cater to different risk, capitalization, and experience levels:

  • Micro Account: One lot is equivalent to 1,000 units of the traded instrument.
  • Mini Account: One lot is equivalent to 10,000 units of the traded instrument.
  • Standard Account:  One lot is equivalent to 100,000 units of the traded instrument.

A low minimum initial investment is required to open a Micro or Mini account. The Standard account requires a higher initial investment, although the minimum varies from broker to broker. Given these tiers, it’s best to select a trading account that is commensurate with your investment capital.

Deposits & Withdrawal Options

The new account can be funded through personal check, debit card, ACH, wire transfer, or an online service like Paypal or Skrill. Some brokers will allow credit card funding but that’s no longer typical. Many brokers also let clients choose their base currency, which will be the country of origin in most cases. Funding completed through personal or bank checks may delay account access until those funds clear.

Withdrawal options vary from broker to broker and can be hard to find at web sites. This is often intentional, with the broker seeking to hide fees and standard delays in access to withdrawn funds. Processing times can vary from 24 hours to several weeks, so read the fine print closely to avoid frustration. Withdrawals are also subject to minimum amounts that vary from broker to broker and, in most cases, must go through the originating funding source, due to money laundering considerations.

Web/Desktop Platforms

The trading platform is the client’s gateway to the forex market so the applicant must ensure the interface performs all of the functions needed to trade profitably, and is reliable, with few complaints of outages on public forums. Many brokers provide a choice of platforms but the majority of newcomers should stick with the default, at least at the beginning. Also look for desktop and web versions that offer equal functionality.

Most platforms are provided through third party solution providers like MetaQuotes Software, the forex industry’s standard-bearer. Some brokers also build ‘in-house’ proprietary platforms, in an attempt to differentiate themselves from industry rivals. A proprietary platform often provides a host of features not found on a standard platform, added in reaction to input from the broker’s client base.

Look for these standard features on all trading platforms:

  • Comprehensive charting package
  • Customizable watch lists
  • Wide range of technical indicators
  • One-click trading
  • Sophisticated order entry
  • Risk management tools
  • Portfolio management

These features play a crucial role in ensuring the new trader enjoys a seamless and productive trading experience. Even so, it’s a matter of personal choice because most platforms offer the same bells and whistles. The broker’s free demo account provides a perfect way for applicants to find the best fit for their experience and capitalization level. Walk away and don’t look back if the broker doesn’t provide a demo account.

When looking for a forex or CFD broker, you’ll quickly discover the huge popularity of MetaQuotes Software’s MetaTrader, which is now offered at more than 80% of all brokers in the United States, Europe, and Australia. This mature platform is a perfect choice for new forex traders due to easy customization, robust charting, and an API that supports hundreds of add-ons. The platform is also available by desktop, on the web, and through mobile devices, allowing easy synchronization while on the go.

Mobile Trading Platforms

All forex and CFD brokers should provide slimmed-down mobile trading platforms so you don’t have to stare at a computer screen all day. These should automatically synchronize with desktop and web versions but don’t expect all the features of bigger platforms.  Major platforms, including Metatrader, now offer mobile and tablet versions for Android and iOS. Note that some brokers will ‘self-brand’ popular mobile platforms so you might need to read the fine print to find the app’s origin.

Trading Features

Brokers try to distinguish themselves from industry rivals by offering additional, value-added services that include free market analysis, real-time news feeds, live streams, and trading signals. Most of these services are provided free of charge but brokers may require minimum account size for access.

Applicants should make a checklist of advanced features when shopping for a broker. In addition to standard add-ons, look for tools that include market scanners, VPNs, and notification alerts. Also check for discounts or free trading for high volume customers. Many traders look for advanced charting or alternate platforms that go beyond the capabilities of standard offerings. Some brokers even offer third-party integration so real-time data can be used in an ‘off-the-shelf’ platform, like Elliott Wave software.

Day traders and scalpers also benefit from specialized value-added services. Given time frames for these strategies, look for a diverse selection of instruments to scout for short-term trading opportunities. These can include a signal service, tools like an economic calendar, market news filtering, and real-time earnings releases.

Commissions & Spreads

Unlike the majority of financial markets, forex and CFD brokers usually profit through spreads rather than commissions, explaining why many of these folks advertise their services as ‘commission-free’. Brokers make money by taking the spread for each buy and sell transaction passing through their hands. The spread marks the difference between the buying price and the selling price. For example, if the bid/ask for the EUR/USD currency pair is priced at 1.0875/1.0878, the spread is 1.0878 – 1.0875 = 3 pips.

As a forex trader, you will come across three types of cost structures. The type you receive will depend on the broker’s business model:

  • Fixed spread:  the spread doesn’t change as price fluctuates so you know the cost before you trade.
  • Floating spread: the spread is variable, stretching and contracting in reaction to market volatility.
  • Commission: calculated as a percentage of the spread. You should know this cost before you trade.

Traders looking for predictability with transaction costs prefer fixed spreads. Conversely, traders looking to save money through the entry and exit timing prefer floating spreads. Ultimately, specific trading needs and transaction history will determine the right choice.

Bonus & Promotions

Brokers may offer account bonuses that include a month or more of no-commission or no-cost trades, loyalty rebates, and even iPhones. Bonuses and promotions for frequent traders have become quite common as well, with customers receiving volume discounts or a basket of free trades after passing a monthly transaction threshold. Some brokers have also introduced generous rewards programs that pay customers who achieve financial commitment ‘levels’.

Customer Support

Newcomers forget to ‘factor-in’ customer support when choosing a broker because they don’t understand this group’s role in the ultimate trading experience. It’s not a question of ‘if’ you’ll need their assistance but ‘when’ because a time comes, sooner or later, when prompt customer service is needed to avoid financial losses. When it happens, you need timely access to knowledgeable individuals who don’t hate their jobs. As a result, you should confirm the broker provides reliable customer support, verified by reviews and in public forums.

Look for multiple ways to contact customer support because some brokers still rely on antiquated ticketing systems and don’t offer real-time chat or a toll-free number. All reputable brokers provide clients with several means of contact, including e-mail, live chat, support ticket, and toll-free telephone. Bottom line: don’t put yourself in the uncomfortable position of worrying what your broker is going to do with your problem … or your money.

Research

The best forex and CFD brokers offer plenty of research resources at no extra charge, letting new traders do ‘deep dives’ on the currencies they want to buy or sell, with an eye on macro conditions or developing issues that may affect price action. These resources should include daily reports from forex experts, long-term technical analysis, dates to watch, and live webinars featuring presentations on major forex pairs and emerging opportunities.

Trader Education

The depth of educational resources at a forex or CFD broker reveals the level of their commitment or lack of commitment to new traders. Look for an on-site trading ‘academy’ or ‘university’, with dozens of useful up-to-date articles and video programming to accelerate your learning and build lifetime skills. On the flip side, walk away if your search through a broker’s website comes up empty, or the few available resources are out of date or neglected.

The Trading Experience: from Novice to Professional

New forex traders need these broker resources to start out in the trading game:

  • Comprehensive education:  a suite of educational materials to assist new traders in skill mastery. These can include webinars, live streams, videos, courses, guides, and articles.
  • Demo accounts:  Reputable brokers offer free demo accounts. They are especially useful when starting out or test-driving a broker’s platform before opening a live account.
  • User-friendly platform: As a new trader, you don’t need complicated software with lots of bells and whistles. For now, find a popular, easy-to-navigate platform with lots of customization features.

As you progress, your trading needs will differ significantly from those of a new trader.

Experienced forex traders need a broker who provides these value-added services:

  • Comprehensive trading tools:  a variety of tools including commission calculator, economic calendar, and advanced charting with tons of indicators and one-click trading.
  • High leverage: experienced traders seek leverage to multiply their capital. Just keep in mind that leverage increases risk and reward equally.
  • Low spreads: spreads can undermine long-term profitability. Look for higher-tier account types that lock in lower spreads and offer volume discounts.

Questions to Ask the Broker

  • Is (broker) regulated?
  • Where is (broker)based?
  • How does (broker) make money?
  • How do I deposit into the (broker) account?
  • What is the minimum deposit for (broker)?
  • How do I withdraw money from (broker)?
  • What is the maximum leverage at (broker)?
  • How do I open an account with (broker)?
  • Does (broker) use MetaTrader or a proprietary platform?

Summary

Finding the best forex or CFD broker is hard work but the effort pays off, greatly improving your long-term prospects as a trader. This beginner’s guide provides a good first step in that selection process. However, everyone is different and your best choice may require a delicate balance between transaction costs, perks, platforms, and all the other resources needed to trade the forex market.

To simplify your search, FX Empire conducts regular in-depth reviews of all major forex and CFD brokers, vetting each broker on our recommended list to ensure they meet high industry standards. We strongly believe these financial institutions will provide the services needed to survive and prosper in our modern electronic markets.

Benefits of Contracts for Differences

CFDs allow forex traders to take long or short exposure using leverage and settle the transaction with cash, rather than delivery of physical assets.  These instruments differ from buying or selling the underlying asset because the contract holder doesn’t need to post 100% of capital and does not own the asset. CFDs are not allowed in the United States.

The CFD trading stake only needs to cover the net change from the entry price to the exit price. Compare this to a forex broker who requires a higher percentage of capital in the account to buy or sell currency pairs. CFDs can be used to trade directionally, or you can buy one CFD and simultaneously sell another CFD, capturing the relative change in value in a ‘pairs trade’.

KEY POINTS

  • Contracts-for-difference are derivative instruments that track many assets.
  • CFDs provide leverage based on the buy and sell price, rather than the underlying assets.
  • CFDs support greater total exposure than forex cash markets.
  • EU rules limit the margin on forex CFDs to 30:1 on major pairs and 20:1 on minor pairs.
  • Limit CFD exposure on a single trade to a small percentage of total capital.

Do CFDs Provide Leverage?

The contract for difference has an embedded leverage feature that differs from broker to broker, and asset to asset. Leverage increases both trading profits and trading losses, allowing the market participant to take an exposure with borrowed capital. Current European Union regulations limit leverage on major currency pairs to 30: 1 and minor currency pairs to 20: 1. In addition, those rules provide negative balance protection so the trading account never goes below zero.

Forex contracts for difference are bought or sold in standard, mini, or micro ‘lots’, or unit sizes, that correspond with $100,000, $10,000, or $1,000 of the underlying forex pair, respectively.  So, for example, a broker following EU rules will allow the trader to purchase three EUR/USD CFD mini lots ($30,000) while posting collateral (free account capital) of just $1,000.

It’s important to understand how leverage will impact your trading returns, positively and negatively.  For example, if you purchase $30,000 of EUR/USD using 30: 1 leverage in a $1,000 account, it will take just a 3.33% ($30,000 * .0333) move to either double your money or wipe out your capital. So, while leverage is an attractive tool, it’s also a double-edged sword.

To use leverage, the trader needs to open a ‘margin’ account as opposed to a ‘cash’ account. Each broker has different criteria for opening a margin account but most require a higher minimum stake than a cash account. In addition, the applicant may need to answer questions about trading experience and investment knowledge.

After opening a margin account, the trader needs to maintain a specific amount of capital. Each position requires the account holder to post a specific amount of funds from this capital pool, referred to as ‘initial margin’.  This is the money needed to cover the loss if the trade doesn’t work out as expected.

The broker will ensure the account holder has funds to cover potential losses or positions will be closed automatically to cover the deficit. As the market moves, the amount of margin needed to maintain the trade will change. If the value of the position decreases, the broker will take a ‘maintenance margin’ to cover losses in addition to the initial margin. If the value of the position increases, the initial margin will remain unchanged, but the maintenance margin will decline.

The margin calculation is in real-time, telling the broker the minimum amount of capital required for the account holder to maintain the trade.  If the position moves against the trader and account capital isn’t increased, the broker has the right to liquidate the position.  It’s vital that new forex traders understand the written margin agreement and the broker’s rights to liquidate positions before starting to trade CFDs.

Managing Your Risk

Trading CFDs can be risky, especially if you use leverage, so a written trading plan (trading rules) must be in place before entering a position (see ‘Psychology and Trading’). Limit the amount of individual trade exposure to a small percentage of the total account size, providing a measure of safety as your trading skills grow.  Place stops on all trades, cut your losses and, if the market moves in your favor, adjust the stop and lock in some profits.

Summary

Contracts for difference (CFDs) are financial derivatives that allow market participants to trade the forex market without purchasing or selling currency pairs. CFD pricing tracks underlying assets and provides leverage to enhance returns. Trading CFDs requires opening a margin account at a CFD broker. Leverage can significantly enhance forex trading returns but will also generate damaging losses, especially when applied incorrectly. A well-constructed risk management plan is needed to trade CFDs for consistent profits.

Psychology and Trading

Unfortunately, new participants get punished with this naive mentality, shocked to discover that ‘winning’ trades aren’t enough to become successful in the forex market.

Trading is a head game and it’s not the market you need to beat … it’s yourself. Psychological habits built up over years or decades affect our trading decisions and stand in the way of long-term profitability. Psychology is the study of the mind, behavior, and behavior patterns. It’s what makes us do the things we do and how we overcome obstacles that are holding us back.


KEY POINTS

  • Discipline is the key to long-term market survival.
  • New traders need to write down trading rules and follow them.
  • Greed and fear control the buy and sell decisions of losing traders.
  • Most folks have trouble taking losses, which is a required skill for profitable trading.
  • Control emotions by limiting individual trade risk to a small percentage of total capital.

Trading Discipline: The Foundation to Profits

Trading discipline is the foundation to profits because it provides a set of rules to follow that lower the frequency of self-inflicted losses. We’re all human, prone to mistakes and miscalculations that no discipline can eradicate, but rules optimize this behavior so it doesn’t drive us insane. Even so, it won’t extinguish all greed and fear, the two strongest trading emotions and hardest ones to overcome.

Write down a set of trading rules to follow religiously to lower the impact of greed and fear. It’s harder to follow those rules than to put them on paper due to the destructive habits we’re trying to overcome. Rules can be as simple as trading just once per day or as complex and multi-leveled as entering a trade only when an instrument, for example, (1) bounces from support (2) after a bullish breakout, (3) confirmed by a bullish crossover in MACD and (4) rising RSI.

The forex market can evoke intense anger and frustration when it doesn’t do what you expect. Grudge trading, revenge trading, and trying to ‘get back at the market’ with wild bets are all deadly and real ways to lose your trading capital. Rules are intended to keep you from making trades based on blindness, triggered by these dark emotions, and the most important step you can take on the road to profitability.

List of Simple Rules

Here is a list of simple rules for speculative forex traders.

  • “I will risk no more than 2% of capital on a trade”. (Using a percentage instead of a fixed amount allows the trade size to grow or shrink, depending on account balance, in order to maximize profits and minimize losses).
  • “I will always trade with the trend. I will determine trends by price action, trendlines, moving averages, and momentum indicators”.
  • “I will only enter on confirmed long and short entry signals. My signals are bullish or bearish crossovers in relative strength and momentum indicators, confirmed by a breakout or breakdown of the 50-period moving average”.
  • “I will not enter if price action is within 3% of resistance for a buy trade or 3% of support for a sell (short) trade”.
  • “I will use support and resistance as exit targets. If the price reaches a target, I will exit to take profits”. (Some profits are better than no profits and infinitely more satisfying than losses).
  • “I won’t have more than one trade open on one asset at a time”.
  • “I won’t have more than five trades open at the same time, or risk more than 5% of account capital at one time”.
  • “I will always follow my rules”.

The last rule is the most important rule of all. It doesn’t make sense to have rules if you don’t follow them.

Negative Psychological Factors

The following list identifies the biggest reasons that traders lose money. These often-unconscious emotions generate bad decisions and must be addressed with specific rules to reduce negative fallout. When you take emotions out of the equation, better decisions, more consistent wins, and capital preservation will naturally follow.

  • Fear: one of the market’s most vicious emotions. Fear can keep you from making a good trade, or keep you from taking a timely profit. Fear of losing money will keep you awake at night but don’t let that stop you from trading. The solution: keep trade size small so one loss can’t hurt too badly and you still have the capital to trade.

Scared Trader

  • Greed: is as damaging as fear but the positive feelings make it harder to recognize. Greed is the other face of fear. Greed is the fear of losing profits you don’t have, or the desire to make big trades and take even bigger profits. Greed rears its ugly head when we’re doing well, taking most of us by surprise. In its most common form, profits build confidence beyond the current experience level, invoking greed that encourages over-aggressive trades and excessive leverage.

Greedy man

  • Ambition: a required trait for long-term success but a noose around the trader’s neck when it isn’t controlled.  Admittedly, it takes a ton of raw desire (and adrenaline) to succeed in the financial markets but ambition becomes dangerous to survival when it triggers bad decisions. Comparing results to another trader’s performance and letting that influence your decisions offers a perfect example of runaway ambition.
  • Loss: an inevitable part of trading that can be managed through rules and discipline. The goal is to take ‘appropriate’ losses while avoiding catastrophic career-ending losses. Position sizing is the key to loss management (2% rule), and not getting blinded by greed or fear and throwing away money. Walk away if you get frustrated from a string of losses.
  • Hope: turns against you when the ‘ticker tape’ turns against you. It makes sense to hope that your hard work pays off but the train goes off the tracks when ‘hoping’ a trade pays off the mortgage, buys a vacation, or saves a marriage. That’s ‘gambling’ not trading, a perfect way to lose your trading stake and wash out of the forex market.

Summary

Negative psychological traits and their impact on trade decisions need to be studied and mastered to succeed in the forex market. Putting it bluntly, emotions need to be removed from forex decision-making to be profitable in the long term. That requires specific rules, the discipline to follow them, and the ability to walk away when things go haywire.

Seven Common Trading Mistakes

In many cases, these folks just made dumb mistakes that could easily have been avoided, given the proper guidance and discipline.


KEY POINTS

  • Common mistakes force the majority of forex traders to ‘wash out’ and leave the markets.
  • Poor trend recognition is a major reason why traders fail.
  • Leverage is deadly to new traders, encouraging unskilled participants to risk too much capital.
  • The chosen market interface (platform) has to meet the trader’s specific needs.
  • Stop losses keep traders ‘in the game’ long enough to develop important skills.

Here are the most common mistakes made by new forex traders.

1. Choosing the Wrong Platform

A robust platform is essential if you want to trade the forex market. The ‘right‘ platform will provide solid educational resources, access to news, a dependable real-time feed, an easy-to-read trading interface, and a variety of trading signals. The software should also include access to major currency and cross-currency pairs, as well as minor and exotic pairs you find of interest.

2. Risking Too Much

Newcomers let the fear of missing out (FOMO) take control, encouraging excessive risk. This is a classic mind-cramp that starts when new traders see missed opportunities and wonder how much they would have gained while forgetting much they could have lost. Say you lose 50% of your capital on a single trade. You now need to double your money on the next trade, just to break even. That isn’t sustainable, especially if you’re just getting started in the forex market.

Only trade what you can afford to lose. A good rule of thumb: risk no more than 2% of capital on a single position, or a combination of correlated positions (pairs that move together). The percentage might seem small but it’s an effective methodology to stay in the game long enough to develop profitable skills.

Another advantage: you’ll stay calm and not lose your cool the next time you’re stuck in a losing trade. It will also discourage closing out good trades too early out of panic because you’re now willing to lose up to the percentage limit.

3. Ignoring Longer Time Frames

The longer the trend higher or lower, the stronger and more durable it will be. Many traders walk into the forex market with a day trading mentality, getting sucked repeatedly into 1-minute to 15-minute chart signals. However, trends on hourly, daily, and weekly time frames exert much greater control, causing the majority of contrary short-term signals to fail. For example, a dip on a 15-minute chart means nothing without a review of higher time frames.

4. Trading with Poor Risk-to-Reward Ratio

The act of trading releases adrenaline and focuses attention, generating addictive sensations that aren’t impacted by profits or losses. This bad chemistry induces the new trader to take positions with poor profit potential and excessive risk, just for the thrill of ‘being in the market’. Rigid discipline and unbiased reward-to-risk analysis is needed before taking a trade to overcome this common flaw. In most cases, stick to opportunities that generate profits of at least three times expected losses if trades turn against you.

5. Not Using a Stop Loss

Placing a stop loss at the right price marks the difference between prosperity, survival, and losing everything. The forex market becomes enormously volatile at times, carving near-violent price swings with little or no warning. Add in excessive leverage and the new trader faces a potentially catastrophic loss in just a few minutes. Even walking downstairs and making a sandwich can trigger career-ending losses so it’s vital to place a stop after entering a new position.

6. Trading Difficult and Unclear Patterns

Take only the most promising profit opportunities and walk away from everything else. Do your homework no matter how long it takes, looking for nearly-perfect technical patterns or fundamental set-ups. Beware of form-fitting when doing your research. An untrained eye can easily block out aspects of a chart that don’t fit the pre-established bullish or bearish bias. When in doubt, rely on cross-verification that looks for confirmation through three, four or even five different types of indicators or analytical methods before taking the trade.

unclear pattern

7. Losing Control of Your Emotions

A profitable trading career requires the same level of mental discipline as building a successful marriage or raising children. If you lose control of your emotions in other aspects of your life, expect the same thing to happen when a trade goes against you. Tobacco, alcohol, THC, and gluttony all contribute to a trader’s emotional state so it’s a good idea to start the journey by developing good health habits, getting a good night’s sleep, and doing a little meditation.

Frustration

Summary

New traders come into the forex game hoping to ‘score big’ and take home a quick fortune. Then reality bites, generating unexpected losses that lower confidence and generate waves of bad decision-making. Survivors eventually learn that profitable trading is a lifetime pursuit, in which the practitioner controls his or her emotions and lets numbers and signals decide buy and sell decisions, rather than greed or fear.

Basics of Forex Trading – Part 2

As a trader, you’ll have access to all or some of these venues, depending on the services provided by your broker. In addition, let’s introduce the three types of trading styles you can choose, depending on your account size, willingness to watch the forex market in ‘real-time’, and long-term goals.


KEY POINTS

  • Currencies can be traded through spot, forwards, and futures markets.
  • Forex traders can take positions lasting from a few seconds to a few months or years.
  • The majority of forex trading strategies follow the trend, higher or lower.
  • Trends and counter-trends can be subdivided into much longer and shorter time frames.
  • Charles Dow’s work on trends more than 100 years ago is still used every day by forex traders.

Spot Market and the Forwards & Futures Markets

Market participants can take risks in three types of forex markets: spot market, forwards market, and futures market:

  • Spot Market: the most popular of the three, with traders worldwide exchanging ‘real assets’ through an electronic communications network, broker dealing desk, contracts for difference, or direct interbank system. Prices on the spot market are based on supply and demand.

Spot market

  • Forwards Market:  a more sophisticated venue, accessed by international companies and large investors seeking to hedge currency risk. For example, McDonald’s might enter into forwards contracts to lower the risk of exchange rate fluctuations and price shocks in other parts of the world. The parties to a forwards contract choose agreed-upon pricing, which can differ greatly from interbank or futures quotes.

Forward Market

  • Futures Market: the most popular forex venue prior to the advent of retail forex brokers. Futures contracts are based upon a standard size and settlement dates on the Chicago Mercantile Exchange (CME) in the United States and regulated by the National Futures Association. Smaller exchanges in other countries also offer currency futures contracts. Minimum price increments, delivery, and settlement dates are determined by the contract and the exchange is the counter-party in all cases.

Different Trading Styles

The majority of retail forex traders follow one or more of three main strategies and methodologies:

  • Day trading
  • Scalping
  • Swing (position) trading

Day trading and scalping are two of the most aggressive and active trading styles. In both cases, positions will be closed before the end of the active session. However, these styles differ in trade frequency and holding period.

Scalping techniques take advantage of very small movements, often buying and selling within a few seconds or minutes. Scalpers analyze very short-term charts, looking at 1-minute to 5-minute price action for clues to directional impulses. High transaction costs eat up returns with this high volume trading strategy, requiring a high win-to-loss ratio to book consistent profits.

Day trading techniques focus exposure on 5-minute to hourly charts, looking for directional impulses lasting from one to six hours, as a general rule. Occasionally, day traders will ‘take-home’ a position, holding it overnight while seeking greater profits or an important move at the start of the next session.

Swing trading techniques are longer-term, with positions held for days or weeks. A sizable minority of swing traders also review long-term signals and hold positions for several months.  The chosen method determines which price charts to follow, looking for buying or selling signals on hourly, daily, and even weekly charts.

Forex traders use different types of entry and exit orders, depending on their trading styles. For example, scalpers use market orders more often than swing traders because it lets them enter or exit positions instantly. Limit orders are more useful for day traders and swing traders because positions can be taken at pre-determined prices. In addition, it’s important to use stops on all, day and swing trades to limit losses, in case the market decides you’re wrong.

The Importance of the Trend in Forex Trading

Forex traders follow interest rates and the world economy but most rely on technical analysis to evaluate major trends and make trading decisions. This classic approach depends upon three basic assumptions:

  • Prices discount everything.
  • History tends to repeat itself.
  • Prices move in trends.

The majority of newcomers think prices only go up or down but Dow Theory asserts there are actually three trends in the market: up, down, and ‘sideways’ or rangebound. According to Charles Dow’s work, 100 years ago, investors and traders need to look at the sequence of highs and lows to determine a trend’s long and short-term direction.

Downtrend

uptreng

Sideways

Specifically, his theory states an uptrend is generated by higher highs and higher lows while a downtrend is generated by lower highs and lower lows. In addition, when neither buyers nor sellers have control of the market, prices evolve within a lateral consolidation, also called a ‘trading range’.

ups and downs

The theory categorizes relationships between trends in different time frames, which may converge with each other or diverge from each other. According to Dow, each trend is formed by three other trends: ‘primary’, ‘secondary’, and ‘minor’.

A primary trend lasts more than a year and signals a bull or bear market. Within a primary trend, a secondary trend goes in the other direction, carving a pullback lasting between three weeks and three months. Finally, minor price action is common within the secondary trend, lasting less than 3 weeks.

Traders and technicians have refined Dow’s brilliant trend observations over the last century. We now understand, in our fast-moving modern electronic markets, that primary, secondary, and minor trends can evolve over days or weeks, rather than months or years. Even scalpers apply Dow’s work when flipping positions in the 21st century, using 1-minute to 5-minute charts to determine the primary trend.

Summary

Market participants can take forex exposure through a variety of cash and derivatives markets but most trade in a cash market through a forex or contracts-for-difference broker. Most forex traders speculate on currency prices through time-based trend-following strategies that include scalping, day trading, swing trading, and long-term investment. The majority of forex trading falls in-between these extremes, with positions open for a few hours to a few days.

Basics of Forex Trading – Part 1

What is the forex market? Why is it a great market to trade? What is a currency pair and how it is read? What are the major terms and concepts that forex traders need to learn? These are some of the questions you will find answers to at the end of this series.

Forex trading can be an exciting and lucrative activity, but it can also be tough, especially for beginners. New market participants underestimate the importance of financial education, lack risk management skills, tend to have unrealistic expectations, and fail to control their emotions, pushing them to act irrationally and impair their performance. In addition, traders in all markets have to accept drawdowns and losses because the best strategies only work part of the time.


KEY POINTS

  • The forex market is the largest and most liquid financial market in the world.
  • Traders speculate on the foreign exchange through currency pairs.
  • A variety of factors affect the price of a currency in relation to a second currency.
  • The trader opens and closes positions through buy, sell, stop, and limit orders.
  • Traders use margin and leverage to increase reward and risk.

What is the Forex Market?

The foreign exchange market, also called ‘forex’ or the ‘FX market’, is a global decentralized venue where the world’s money is exchanged through the buying and selling (short) of different currencies. This trading takes place through transactions at brokerages, over-the-counter (OTC) markets, or via the interbank system, rather than centralized exchanges.

Many types of market participants trade the forex market, including private individuals (retail traders) working from home on personal computers or on the road through mobile devices. Thousands of professionals also trade forex through funds, institutions, central banks, and commercial banks, among others.

Forex has grown into the world’s most liquid market for the following reasons:

  • Its Enormous size, with trillions of dollars in daily transactions
  • 24-hour access between Monday and Friday
  • Wide variety of currencies and currency pairs
  • All levels of volatility, from quiet price action to historic uptrends and downtrends
  • Low account minimums
  • Low transaction costs (commissions, spreads, fees, and interest)

Forex trading is conducted through cash-based spot markets, as well as derivatives markets that provide sophisticated access to forwards, futures, options, and currency swaps. Private individuals generally trade forex to speculate on higher or lower prices, making a profit or loss on each closed position. On the other hand, most institutional forex activity is geared towards hedging against currency and interest rate risk or to diversify large portfolios.

New traders open accounts at forex or contracts for difference (CFD) brokers, taking exposure when they speculate on currency pairs, like the Euro vs. U.S. Dollar (EUR/USD) or U.S. Dollar vs. Japanese Yen (USD/JPY). At a typical forex broker, the participant opens a buy or sell (short) position in a decentralized market and books a profit or incurs a loss on the difference between the opening and closing prices.

Exposure at a CFD broker is taken between the trader and broker, establishing a legal obligation to exchange the difference between the entry and exit price of the asset, which can be a currency pair or other financial instrument that includes stocks, bonds, and futures. Forex lot sizes are uniform regardless of currency pair while CFDs have greater size flexibility. This advantage translates into greater risk control and customization of a trader’s experience level and market strategy.

What Moves the Forex Market?

Many factors move the forex market on a daily basis. Forex traders keep 24-hour economic calendars close at hand because regularly-scheduled data releases generate the majority of currency pair rallies and declines, especially when numbers fall outside expectations projected by experts. Global shock events and political developments move currency markets as well, with an election, skirmish, or natural disaster translating into highly-volatile price action.

Economic Calendar

Reading a Forex Quote

Foreign exchange is always quoted in pairs. For example, in the EUR/USD currency pair, the Euro (EUR) is the ‘base’ currency while the U.S. Dollar (USD) is the ‘quoted’ currency. The quoted currency is always the equivalent of one base currency, so if the EUR/USD exchange rate is worth 1.1222, you will get $1.12 for €1.00.

Note how the EUR/USD currency pair has four decimals. This is typical of most currency pairs, except those including the Japanese Yen (JPY), which displays only two decimals. When a currency pair moves up or down, the change is measured in ‘Pips’, which is a one-digit movement in the last decimal of a currency pair. So, for example, when the EUR/USD rallies from $1.1222 to $1.1223, the EUR/USD has increased by one Pip.

Forex Quote

The broker’s trading platform will display two prices in a currency pair quotation: a SELL price on the left (BID price) and a BUY price on the right (ASK price). The difference between these prices is called the ‘spread’. The spread is pocketed by the broker and is one of the main ways in which the company makes money.

A buy order that’s filled above the quoted ask or sell order that’s filled below the quoted bid incurs ‘slippage’, one of the biggest obstacles to profitable forex trading. Slippage occurs most often in volatile or active currency pairs when placing a market order.

Forex Spread

The average daily trading volume of the forex market now exceeds 5 trillion U.S. Dollars, making it the most liquid market in the world. Liquidity refers to how easy it is for market participants to open and close positions without affecting the price of the underlying asset.

The concept of liquidity also works hand-in-hand with volatility, which measures the speed and velocity of changing buy and sell prices. The majority of forex traders love volatile markets because they provide greater opportunities to profit, especially with short-term strategies like scalping and day trading.

Forex Trading Risks

Most forex traders lose money over time. Lack of preparation, bad leveraging, weak skill sets, and emotional fatigue all take their toll, triggering losses that eventually force the trader to ‘wash out’, leaving the forex game to the next participant.  The profitable minority learns how to overcome these headwinds, often spending hours building skillsets, doing research, and testing new systems and strategies.

In addition, banks around the world seek to manage sovereign and credit risk through bid and ask prices on the interbank quoting system, triggering frequent supply and demand disruptions unrelated to market-moving events or economic releases. These pose a major risk for the typical newcomer who grows complacent between scheduled market movers, failing to place stop losses, or taking too much short-term exposure for their experience level.

Ironically, the new trader’s biggest risk comes from the broker they choose. The vast interbank system is a hodgepodge of ‘regulated brokers’, offering unbiased market access, and ‘unregulated brokers’ who take advantage of customers’ lack of sophistication. These companies are easy to spot because most are domiciled (headquartered) in off-shore tax havens, rather than in the U.S., U.K., E.U., or Australia, which heavily regulate currency trading.

Unregulated brokers do the most damage when they operate a ‘dealing desk’ that takes the other side of a customer’s position and manipulate price through ‘requoting’ to trigger stops and force unexpected losses, especially in the off-hours when most active traders are asleep. It can also be difficult to get your money back when you choose to close an account at an unregulated broker.

Key Forex Trading Terms

Currency Pair: Currency pairs consist of two currencies, the base currency on the left (top) and the quoted currency on the right (bottom). EUR/USD is an example of a currency pair. When buying this pair, the trader buys the Euro and sells the U.S. Dollar. Alternatively, when selling this pair, the trader sells the Euro and buys the U.S. Dollar.

Major Pairs: Currency pairs can be sub-divided into major, cross, minor, and exotic pairs. Major pairs include the U.S. Dollar as the base or counter-currency, coupled with one of seven major currencies: EUR, CAD, GBP, CHF, JPY, AUD, and NZD.  New traders focus on major pairs because they’re highly liquid and carry lower transaction costs through tighter spreads, limiting slippage.

Cross Pairs: Cross pairs consist of any two major currencies, except the U.S. Dollar. Unlike major pairs, cross pairs have higher transaction costs, higher volatility, and lower liquidity, increasing potential slippage. Examples of cross pairs include EUR/GBP, EUR/CHF, and AUD/NZD.

Exchange Rate:  Exchange rate shows the price of a base currency, expressed in terms of a counter-currency (quoted currency). For example, if the EUR/USD exchange rate is 1.2500, €1.00 will cost $1.25. A rising exchange rate indicates the base currency is appreciating against the counter-currency while a falling exchange rate indicates the base currency is depreciating against the counter-currency.

Bid/Ask: Currency pairs have two exchange rates: the bid price and the ask price. The bid price identifies the current price that market participants can sell (short), while the ask price identifies the current price that market participants can buy. The bid price is always lower than the ask price and the difference between the two is called the spread.

Spread: The difference between the bid price and ask price. The spread marks one type of transaction cost for a trade and a profit source for the broker. This cost can greatly reduce profits or increase losses when engaged in high-frequency trading strategies, like scalping.

Pip:  Pip refers to ‘percentage in point’, or the smallest increment that a currency pair can rise or fall in price. One pip is equal to the fourth decimal of most currency pairs. For example, if the EUR/USD ask price is quoted at 1.2542 and rallies to 1.2548, the change is equal to six pips.

Hedge: A hedge marks a forex transaction intended to offset or protect another position from positive or negative exchange rate risk. Traders, investors, and institutions apply hedging techniques to enhance profits, limit losses, or protect investments.

Margin: Brokers lend money up to a multiple of account capital, called margin, so traders can take leveraged positions. Borrowed funds incur transaction costs through overnight lending rates. For example, a 30: 1 margin allows exposure up to 30 times higher than account capital.  Leveraged positions need to build profits in excess of borrowing costs or they lose money.

Leverage: Leverage allows traders to take positions in excess of account capital through broker margin lending. Taking substantial leverage is risky for new forex traders but an appropriate and required strategy for experienced forex traders.

Major Order Types

The forex trader opens a position through a buy or sell order, specifying whether to take the position ‘at the market’, or at a specified price. A market order will execute immediately at the current ask price for a buy or the current bid price for a sell. Both orders can incur slippage when prices are moving quickly, triggering trade executions at much higher or lower price levels.

A limit order can be used in place of a market order, specifying the price at which a) the limit order turns into a market order or b) the exact price of the entry. The order will be filled when the price is hit with the first technique, potentially incurring slippage, but the price can ‘skip over’ order with the second technique and never get filled. Similar limit order types, including stop and stop-loss orders, are used to open, manage, and close outstanding positions.

In summary:

  • Buy Stop: open a long position at the price higher than the current price or close a short position at the price lower than the current price.
  • Sell Stop: open a short position at the price lower than the current price or close a long position at the price higher than the current price.
  • Buy Limit: open a long position at the price lower than the current price or close a short position at the price higher than the current price.
  • Sell Limit: open a short position at the price higher than the current price or close a long position at the price lower than the current price.

Summary

The forex market has grown hugely popular with new traders and has never been easier to access. Learning the basics of forex trading isn’t overly complicated but choosing the right way to trade requires self-examination, with a realistic view of personality traits, available time, long-term goals, and current income. It’s a rewarding endeavor that benefits from dedication, patience, emotional control, and a willingness to build multiple skillsets and strategies over time.

What Would Be the Benefits and Drawbacks of a Digital Dollar?

Key Insights

  • Biden government has stepped up the pace of digital USD progress.
  • Some are reluctant to let China win a tech race.
  • Others are unsure if a digital dollar is desirable – or necessary.

Central bank digital currencies (CBDCs) have become the talk of the town this year: First came the Winter Olympics in Beijing – when China took the opportunity to showcase its digital yuan to the world for the first time. Next came the Ukraine crisis, with sanctions forcing Russia to ramp up its own efforts to create a digital version of the RUB.

And in the meantime, crypto adoption and bitcoin (BTC) advocacy just keeps gaining pace – forcing central and commercial banks to create solutions that can compete with crypto in the remittance, digitization, and cross-border transactions arenas.

But while the digital yuan is likely to make a nationwide rollout in the coming months and the likes of the European Central Bank, the Bank of England and the Bank of Japan have begun exploring their own CBDC options, the dollar has become the (analog) elephant in the room.

The greenback is the world’s reserve currency, and a digital version would change the way that the world’s biggest economy does business. A digital USD could also become a heavy-hitting international trade tool for the digital age.

But until recently, progress on a digital USD was positively glacial.

All that has changed in the past few weeks, however. In February, the Boston Fed and the Massachusetts Institute of Technology (MIT) revealed results from what they are calling “Project Hamilton” – a design for a high-performance, resilient transaction processor for a CBDC that, in two tests, handled 1.7 million transactions per second.

President Joe Biden’s recent Executive Order on “Ensuring Responsible Development of Digital Assets” also instructed agencies to produce reports on a digital USD – a sign that Washington is finally getting serious about possible CBDC issuance. But what positives – and negatives – could a digital greenback bring?

Why Issuing A Digital Dollar Would Be a Good Idea

The US needs to keep pace with China

China’s digital RMB is almost ready to come out of the oven. Some 8 million users of digital e-commerce platforms are already buying everything from takeout noodles to dumbbells using the CBDC in 11 major cities, with a glut of extra cities about to be added to the pilot.

Some American Senators are none too pleased that the US is nowhere near this kind of progress. Sherrod Brown last year urged the Fed to “lead the way” on CBDCs and noted that “some of our international counterparts are moving quickly to determine whether to implement a central bank digital currency.” Brown wrote:

“The United States must do the same. We cannot be left behind.”

The USD needs to compete with crypto

The fiercest opponents of crypto are often the most vocal advocates for CBDC adoption. They realize that conventional finance has a long way to go if it wants to compete with fintech and crypto.

Even in Russia, the Central Bank has repeatedly called for a blanket crypto ban and the urgent rollout of a digital RUB.

The Fed has long ago realized that it cannot really work with crypto and that decentralization essentially wrests power away from any kind of central financial hub. As such, all it can really do – some would say – is to regulate crypto to the point where it can do no harm to the USD, and then copy all of its “good” parts for use in a digital dollar.

The Fed should create a digital reserve currency for the Web 3.0 era

The greenback is still the currency the world goes to when it is spooked about local inflation or when international companies want to make trade deals. But CBDCs and – maybe one day – stablecoins could threaten that.

Meta/Facebook and its Libra/Diem plans may be dead in the water, but the idea of a tech giant releasing a fiatbacked global token petrifies regulators. As would a digital yuan if it proved a hit on the global stage.

Some, like the Twitter founder Jack Dorsey, speak about BTC’s potential to become the internet’s native currency. But if a digital USD that did away with the need for bank transfers, Swift and the rest were to appear tomorrow, trade firms would likely be all over it.

And Why it Might Not Be So Great After All…

A Digital USD Is Not Needed (Yet)

Some lawmakers are concerned that an American CBDC runs contrary to the tried and true US values of encouraging competition in the private sector. Senator Tom Emmer, one of the biggest critics of CBDC issuance has claimed that a CBDC could “put the Fed on an insidious path akin to China’s digital authoritarianism.”

Some Fed officials have stated that they don’t see an obvious need for a CBDC, while others have urged a wait-and-see approach. A Washington Post opinion columnist recently suggested:

The United States does not need to be first to issue a digital currency; it needs to be the best.”

The non-digital USD is still dominant, so why risk a digital dollar launch now?

Even if CBDCs launch elsewhere, there is scant evidence to show that this could lead to widespread de-dollarization. Sure, some economies such as Russia have been purging their currency reserves of the greenback and the likes of El Salvador and Honduras have been trying to chip away at their dollar dependence.

But when most people talk of hard currencies, they are talking about the USD and perhaps a select few others. Per a Fed report last year, the dollar “comprised 60% of globally disclosed official foreign reserves in 2021.”

The Fed added that “this share has declined from 71% of reserves in 2000. The chasing pack is miles behind: 21% of holdings are in the euro, with just 2% in RMB. Will a digital yuan – or ruble – really change this picture?

Can the US afford to sit and wait as the CBDC race gathers pace?

The UK banking giant Barclays recently claimed that its analysts had concluded that the Fed “should have few problems in achieving widespread use of a CBDC, at least domestically if it determined that there was a need for one.”

The bank claimed that this was due to the fact that “when it comes to legality, stability, and trust – the three main advantages of public-sector systems – the Fed and the dollar score highly.”

CBDCs are still unproven on the global stage, and while it may be galling for some to let China win a tech race, others will insist that it would be more prudent for Washington to keep its digital currency powder dry for the moment – and let others test the waters first.

Centralized Crypto Exchanges VS. Decentralized Exchanges

For the uninitiated, crypto can be complicated enough without worrying about whether an exchange is centralized or not. For people used to dealing in hard currencies and stocks, for instance, trying to understand how a token like Bitcoin operates on a blockchain protocol is enough of a mind-bender without having to think about whether the platform they use to buy it has a CEO and a head office or not.

But the further down the crypto rabbit hole you travel, the more you will come to notice that it does actually matter whether you choose a centralized exchange (CEX) or a decentralized exchange (DEX).

Crypto was born in 2009 with the release of the Bitcoin White Paper, but it was not until 2014 that companies and individuals began exploring the idea of creating DEXes. Arguably it took several years for DEXes to become what they are now. But suffice it to say that crypto communities willed DEXes into being because they wanted to match their decentralized coins with the key functions of an exchange – without having to bring brick-and-mortar businesses into the equation.

What Is a Centralized Exchange?

Most people would agree that crypto exchanges have four core functions:

  • Capital deposits
  • Order broadcasting
  • Order matching
  • Token exchange

As custodial bodies with business registrations, often complying with legal regulations – including those pertaining to the financial sector – CEXes attempt to provide a gateway into the crypto world for those who want to, well, basically buy some BTC or altcoins when prices are low and sell them when the markets rise.

Ideally, such a body is accountable to government regulators, conducts know-your-customer (KYC) customer monitoring and flags suspicious-looking transactions for possible money-laundering violations, and holds considerable token and fiat reserves of its own. Bigger platforms may also be insured against the risk of hacking events.

They usually have a customer helpline, chatbot assistants, business registration numbers and actual offices – some of which offer face-to-face customer services for people who’d rather speak to an actual in-the-flesh person about their crypto investments.

They also centralize all of the above-mentioned core functions through their platforms.

If you keep your crypto in the wallets they provide, your coins are either stored in their hot (trading, online) wallets or their cold (storage, offline) wallets.

They make their money, for the most part, by charging you transaction fees every time you make a trade or a transfer.

If you think these fees are too steep or think that the whole point of crypto is to avoid the kind of centralized, Big Brother monitoring you might experience with a tradfi bank, chances are you may have been thinking of making the DEX switch.

What Are the Benefits of Using a CEX?

CEXes are expensive to use and may well run counter to the spirit of blockchain technology, but they do have a number of key benefits, namely the following:

Liquidity

A big CEX makes its money from having enough fiat and assets in reserve to let you make instantaneous deposits and withdrawals. If you want to swap your BTC for USD, for instance, you would expect to be able to do that in seconds with a CEX…or you’d take your custom elsewhere.

Liquidity is a CEX’s trump card, some would argue – and that is why they put so much effort into providing customers with all the high-speed liquidity they could possibly need.

Security

Although high-profile hacks were once common in the world of crypto, it appears that many of the bigger exchanges are finally learning their lesson. While it’s certainly true that exchanges used to have almost laughably poor security systems, this is no longer true in most cases.

As such, the number of hacks executed on bigger crypto exchanges has fallen in recent years. Many also take out costly insurance policies that allow customers to recoup some or all of their lost funds in the event of a security breach.

Regulation

In many countries, crypto exchanges have to apply for operating permits and prove their stability and competence to financial regulators. These same regulators are keen to bring crypto under the same kind of regulatory umbrella as exists for tradfi institutions such as banks.

As such, they are monitored for irregular transactions and must implement investor protection measures. They also have to provide customers with risk notifications about the non-reversible nature of transactions and comply with government orders. If ensuring that your financial operations are conducted above-board and meet compliance standards, a CEX may be for you.

Easy-to-use

For most people, this is the real biggie. Creating user-friendly interfaces that even your grandmother could make her way around is a CEX’s priority. And because orders and custody are all centralized on their platforms, they let you make your trades in seconds. Sure, you pay more for that privilege, but if you just want to buy some BTC fast and don’t care about much else, a CEX usually has you covered.

What Is a Decentralized Exchange?

Put (perhaps overly) simply, a DEX can be like turning on advanced settings in an app. The app (the CEX in this metaphor) is set up to meet the needs of the most typical user who can’t be bothered over-thinking and interacting with their phone too much. But once you start tinkering with the settings and taking manual control, things get complicated – if sometimes better.

A DEX puts you in charge of your own tokens or fiat by letting you execute functions on a blockchain network directly. They do away with the central hub of the wheel so that there is no sole point of failure.

There’s no KYC here. And when it comes to prices, the DEX usually makes use of automated market maker technology that removes the need for a middleman body that regulates the price of coins. Algorithms – rather than employees – dictate how everything works.

You also need to take charge of your own private keys. A CEX usually handles this just like a bank manages your PIN. If you forget it, you can simply ask the CEX to send you a new one or reset it. If you are using a DEX and lose your private keys, your funds could become irretrievable – forever.

What Are the Benefits of Using a DEX?

DEXes can arguably bestow the following benefits on their users:

A better fit for decentralized tokens

Crypto runs on decentralized blockchain protocols, so it has long been an irony that trading them has been confined to centralized organizations that gate off direct blockchain access. If decentralized coins and decentralized finance (DeFi) are your thing, why would you want to involve something that resembles a tradfi bank or bureau de change in the picture?

No KYC

What governments like least about crypto is elements of anonymity: anonymous wallets, anonymous transactions – and exchanges that allow users to operate under the radar. Proponents of crypto claim that the internet needs a native currency, and one that does away with governments’ rights to monitor, block or freeze transactions. It might sound a bit anarchic or utopian to some, but others like the fact that DEXes don’t require users to prove who they are and submit selfies and copies of documents like passports to faceless tech giant firms.

Self-custody options

“Not your keys, not your coins” is the familiar battle cry of the crypto podcaster Antonio Pompliano. If you don’t control your own private keys, you can’t take charge of your custody. Your tokens may be sitting in a wallet attached to your login details and password on a CEX, but – like a bank – the funds you own aren’t actually in your possession. Do you trust yourself to look after your own assets or a tech company? The answer will likely determine whether or not you will use a DEX.

Lower fees

As there’s theoretically no middleman to pay with a DEX, you don’t need to worry about a platform’s bottom line. Ultimately, if a CEX becomes unprofitable for too long, it will go out of business. With a DEX, fees can often be much lower. Sometimes the liquidity problem means that DEXes have to team up with liquidity providers – a factor that can actually drive fees up. But for the most part, the lack of an intermediary does help reduce costs to traders in many instances.

A wider selection of tokens

CEXes are forever listing and delisting coins – again often due to regulations. In Japan, for instance, regulators get to approve or reject coins, a factor that leads to an often very narrow selection of tokens on centralized trading platforms. CEXes have a lot to lose if a token turns out to be a dud – and often have listing councils that spend days or weeks going through listing applications with a fine-tooth comb. That can ensure greater safety for users, but it can also hinder your ability to make your own choices in this regard. DEXes put the responsibility in your hands, again decentralizing the process.

So Which One Is Best for Me?

It would be great to end with a quick and easy answer, but as is the case with most things crypto-related, the answer is: it’s complicated.

Essentially, whether you choose a CEX or a DEX just depends on your needs: Do you want an easy, fuss-free system, or do you prefer advanced options and greater independence?

Crypto is divisive in many ways, and the choice of whether to use a CEX or DEX will inevitably put you on one side of the fence or the other – even if you have little interest in the CEX vs DEX controversy.

If you think you have better things to do with your time than fuss about with algorithms, blockchain networks and private key management, use a big, reputable CEX. But if you want deeper levels of control over the way you trade and want to explore a way to reduce your trading costs, maybe a DEX is worth looking into.

These Are the 3 Biggest Differences Between a Cryptocurrency and a CBDC

Central Bank Digital Currencies (CBDCs) have become a pressing concern for governments all over the world. Every central bank you care to mention, from Jamaica to Japan, is either talking about them, desperately trying to create them or currently trying to launch them.

The subcontinent’s central Reserve Bank of India could roll out its digital rupee as early as this year.

Meanwhile, in the world’s most populous country, the pace of progress is even faster. China, which is already piloting its digital RMB in 11 major cities – including the capital Beijing, as well as the economic powerhouses Shanghai and Shenzhen – has already begun onboarding its biggest commercial banks and tech firms to the new token.

Even the United States, the world’s biggest economy is mulling a digital greenback launch – with some in the sector calling an American CBDC “inevitable.”

Some say that the advent of crypto has forced central banks’ hands – pushing them to create their own answer to digital tokens like Bitcoin and Ethereum. But what are the biggest difference between CBDCs and coins like BTC?

CBDCs don’t have to use blockchains

Many central banks are building their pilot tokens on existing public blockchain protocols. For instance, South Korea is now testing its digital KRW prototype on the Klaytn blockchain (which uses the native Klay token). The latter was developed by a subsidiary of the domestic internet giant Kakao. Australia’s central bank is also looking at an Ethereum-powered solution.

The masterminds behind other leading CBDC projects, such as Sweden’s e-krona initiative, also say they will make use of blockchain and distributed ledger technology.

But unlike crypto – which is by its very nature decentralized – CBDCs don’t have to use blockchain. Case in point: the digital RMB. China’s leadership has championed blockchain technology but has decided to effectively eschew it in the creation of the e-CNY, currently being showcased to the planet at the Winter Olympics.

In theory, there are a plethora of ways a central bank could create a digital currency, and blockchain technology is just one of a number of tools bankers have at their disposal. The same cannot be said for crypto. Because, as any savvy crypto investor knows, a cryptocurrency without a blockchain is, ultimately, a scam.

CBDCs are the epitome of centralization, cryptos are the polar opposite

The above is a perfect example of the next biggest difference between coins like BTC and CBDCs. The central People’s Bank of China (PBoC) doesn’t need to use blockchain technology for its token because transparency and decentralization are not its main aims in creating its coin.

Some critics (including Washington-based senators) say that, in fact, the PBoC is creating its e-CNY in a bid to increase centralization.

Governments, Beijing included, hate cash because it is the de facto currency of the black market. They also hate the fact that tech firms currently have a stranglehold on payment platforms because big IT companies operate across borders and can grow extremely powerful.

Skeptics would argue that CBDCs, if successful, would let them kill two birds with one stone. By making a centralized digital currency that has no elements of anonymity built into it, they could (theoretically) do away with black markets, freeze criminals’ funds, and wrestle back control of payments from IT companies.

Centralization would essentially reposition central banks, currently at the fringes of daily economic activity, as the central, controlling bodies at the heart of domestic finance. Crypto, its advocates claim, seeks to do the exact opposite.

CBDCs are (still) largely theoretical and exist only in the planning stage

Crypto has an enormous head start over CBDCs. Although crypto pay incentives have never really taken off, crypto ownership has shot up in recent years. People may not want to spend BTC and altcoins, but they certainly seem keen to buy them.

You are no longer an outlier if you tell people you own Bitcoin, ETH, or altcoins. In fact, many mainstream financial advisors now tell their clients to keep a small amount of their portfolio in crypto – advice even some city treasuries are taking to heart.

By contrast, CBDCs aren’t even in their infancy yet. Except for a select few countries such as the Bahamas and Cambodia, CBDC rollouts are still years off, experts have told FXEmpire.

China’s progress is impressive, but the PBoC is still claiming to be in the “R&D phase” of its digital yuan project. Other nations, such as Israel, are claiming breakthroughs, but the truth of the matter is nobody really knows if, when, and how CBDCs will start launching, or how aggressively central banks will promote them.

In the meantime, crypto keeps on growing. And as central banks now have their hands full battling inflation – another factor that appears to be driving up crypto adoption in multiple regions – crypto advocates agree that CBDCs face an uphill battle in their quest to pass, and surpass, crypto.

Can Crypto Really Beat Inflation?

Crypto has been vaunted variously as an inflation-proof asset and a digital answer to gold. But just how accurate are these descriptions? With inflation on the rise, the answer could well be around the corner.

The Problem of Inflation

Everyone with fiat savings fears the dreaded “i” word. But after years of low or almost no inflation in many parts of the world, it suddenly seems we cannot escape talk of a coming inflationary storm.

Much of the economic talk in 2021 centered on inflationary hotspots in Turkey, Argentina, Venezuela and the like.

Source: https://dolartoday.com/indicadores/; http://www.bcv.org.ve/estadisticas/tipo-de-cambio
Graphic: Nicolas Perrault III

But while these were once seen as outliers, nations that have been living without inflation for decades are now posting worrying figures. In countries like the UK and the United States, central banks are now finding themselves under increasing pressure to raise interest rates to fight back.

However, the problem cannot be so easily swept under the carpet. Wages in the West are on the rise, food prices are shooting up worldwide and energy price hikes are becoming commonplace.

If inflation is now a given, it is only logical to expect fiat currency holders to respond. Pressures like these naturally push investors toward “safe assets” – traditionally blue-chip stocks and gold. But more recently, the “safe asset” category has a new member: crypto.

Does Crypto Work as a Store of Value?

Many major economists say they think so, with some calling Bitcoin and the like “digital gold.”

One notable example is the Visa CEO Alfred Kelly, who last year said: “We see all [cryptoassets] as digital gold. They are predominantly held as assets that are not used as a form of payment in a significant way at this point.”

Just as gold or “safe-bet” stocks often experience price volatility, they are simply too valuable to bottom out. They are also a safe distance from currency markets, meaning that they might get dragged into periods of fiat-related volatility, but can never (or so the theory goes) experience the same kind of hyperinflationary pressures that can cause a currency to collapse, à la Germany in the 1920s.

While the Turkish Lira and the Argentine Peso are not quite at the same level, they too are edging ever closer to inescapable currency chaos.

In both nations, crypto adoption is flying up. Turks make a million crypto transactions a day, Reuters reported last month. In Argentina, even the President has called crypto a “hard currency, somewhat,” with the power to “nullify inflation.”

Bitcoin prices over the past five years

Is There Really Any Truth to All This?

This month, Rio de Janeiro’s Mayor said that he intends for the Brazilian city to keep 1% of its treasury reserves in crypto. Other cities have taken a similar tack, while there is now no shortage of mainstream financial advisors speaking to media outlets like CNBC and Time about the benefits of buying crypto. Most now advise investors to keep at least a small portion of crypto (10% or less, mostly) in their portfolios.

It looks like global politicians are starting to take this advice to heart.

Could Crypto Actually Replace Fiat?

Most critics think that crypto’s weak point is its use as a form of payment. Visa’s Kelly is just one of those who have pointed out that people seem happy to buy, trade and hold crypto, but seem unwilling to spend their coins on goods or services.

High gas fees, slow and transaction prices are often cited as prohibitive factors, while crypto pay incentives have thus far failed to blossom. But micro-payment-friendly solutions have been mooted, including the Bitcoin Lightning Network, which has been championed by the Bitcoin-keen government of El Salvador’s President Nayib Bukele.

Bukele’s government last year adopted BTC as legal tender, and has since snapped up hundreds of tokens using public funds. That means that crypto is now being put to the test in the Central American nation as not only as a treasury reserve asset (a store of value), but also as a means of payment.

As these are perhaps the two key properties an asset needs to possess if aspires to be called a currency, perhaps we will find out very soon if crypto really has what it takes to go toe-to-toe with fiat!

What Is Santa Floki Coin and Where To Buy It

A brand-new cryptocurrency made the headlines across the sphere due to its astonishing skyrocketing move after a tweet made by the eccentric billionaire and Tesla’s CEO, Elon Musk.

Of course, we’re talking about Santa Floki Coin (HOHOHO), whose price soared by over 18,840% in a couple of days ahead of the end of 2022.

The token surged from $0.000000012935 to a new all-time high of $0.00000245, according to data from CoinMarketCap.

Since then, the optimism around the coin as often happens with the sudden spikes that follow such patterns, faded away, and HOHOHO retraced back to exchange hands at around $0.0000002049 as of press time.

Who Are The Creators

According to Santa Floki’s official website, the coin was developed by Parabolic’s Development Team, which was established with the objective to produce “strong projects, offering the investor peace of mind.”

On November 16, 2021, it began a presale across social media platforms and the website, accompanied by official audits and an NFT launch.

The team behind the token also developed a personal wallet and announced a 3D metaverse gaming project, including major partnerships. However, the development team hasn’t given enough information on whether there are more plans for 2022, aside from growing the community of holders.

HOHOHO coin was developed under Binance Smart Chain (BEP20) blockchain, and it has a fully diluted market of over $2.5 million as of press time, according to CoinMarketCap. As per the rewards, the website says:

“(…) as a matter of fact, the contract is designed to allow 4% of all BUY/SELL transactions to be rewarded back to the holders of SantaFloki in the form of BUSD.”

Where Can I Buy Santa Floki Coin

Santa Floki can be bought via cryptocurrency exchanges like PancakeSwap and LATOKEN. The website also notes that HOHOHO can be acquired via Trust Wallet and Metamask.

Elon Musk and Santa Floki: Is He Endorsing the Coin?

As highlighted above, the Santa Floki coin price pumped strongly before the end of 2021 due to a tweet from Elon Musk, where he published the picture of a dog dressed in a Santa Claus outfit, accompanied with the text “Floki Santa.”

It’s not clear if Tesla’s CEO bought the cryptocurrency or not, as somebody could infer that after the cryptic tweet crossed the wires.

In fact, the creators of Santa Floki thanked Musk for the “recognition” granted through the tweet, although the billionaire never replied nor continued with the saga in other tweets to confirm if he’s legitimately endorsing the project.

Santa Floki creators’ tweet included a meme’s image comparing the surge of Dogecoin (DOGE) in 2020 and HOHOHO coin recently.

Risks of Trading Santa Floki

As usual with the brand-new tokens, there are high risks involved when somebody wants to invest in them. But, first, a cryptocurrency that just arrived in the space carries a lot of volatility because it’s gathering investors from around the world.

In fact, if it’s legitimate, the project is actively working to gain trust across people and make them acquire the tokens.

Second, the cryptocurrency will be highly susceptible to pump and dumps followed by tweets from celebrities or key crypto players’ statements, such as the one that came from Musk.

Moreover, as time passes, the market cap will increase and thus the volatility, which will produce even more savage swings that could make even riskier trading coins like Santa Floki.

Recent Brand-New Tokens Pumps

Early in December, FXEmpire reported that just a single joke during a Congressional hearing was needed to encourage cryptocurrency enthusiasts to create a brand-new coin.

A US Congressman, Representative Brad Sherman, made some statements in the midst of regulatory discussions with crypto CEOs, talking about meme coins and the relationship with the name of an animal.

In fact, Mongoose Coin (MONG) became a reality and hit a market cap of $14 million at that time, on December 10. After such a mention in the hearing named “Digital Assets and the Future of Finance: Understanding Innovation in the United States,” MONG gained an ROI of over 80,000%.

It became interesting how just an ironic mention sparked discussions about the risky nature of investing in meme coins like Mongoose Coin, which are exposed to such volatility.

Support and Resistance – Pivot Analysis

What is Support and Resistance?

The purpose of support and resistance levels is to identify favorable entry and exit points.

There are multiple trading strategies that incorporate support and resistance levels. Additionally, there are multiple support and resistance strategies, the most common being the use of pivot levels and their associated major support and resistance levels that are based on a time period’s pivot level.

When trading, it is beneficial to use more common strategies as these will tend to be followed by a greater number of traders.

Support

Support levels refer to price levels below which an asset does not drop for an extended length of time.

At support levels, buyers enter into long positions thus delivering support and preventing further downside.

It is important to note, however, that there will be multiple support strategies. These include the use of the most recent lows as an example and Fibonacci’s. Pivots and major support levels are the most commonly used levels.

Once a support level has been breached, the support level becomes a resistance level.

Resistance

Similarly, resistance levels are price levels at which sellers will look to exit an asset or enter into a short position.

Here, resistance levels are calculated for time intervals by using the highs and lows of the previous time interval. In the case of using major resistance levels, traders base their resistance levels on the pivot level for a specified time interval, t.

Other resistance levels commonly used include daily, weekly, monthly, yearly, and all-time highs and Fibonacci’s.

Once a resistance level has been broken, the resistance level becomes a support level.

How to draw support and resistance

Analysts and traders calculate the pivot and the major support and resistance levels for multiple time periods. These can be as short as hourly and as long as monthly.

Once you have calculated the pivot and major support and resistance levels, traders and analysts will then plot these on charts to assist in their trading decisions as shown in the chart below.

Calculating Pivot Levels

A pivot level is derived by calculating the average of the high, the low, and the closing price of a time interval, t.

Looking at a 1-hour time interval for the chart below, we would take the average of the day high $55,329, the day low $53,711, and the closing price $54,791 to obtain the next day’s pivot level. Here the pivot level would be $54,610.

Chart 1 FX Empire Chart

Calculating Support Levels

Once you have calculated the pivot level, the major support levels, these being S1, S2, and S3 can be calculated. In the example below, using an hourly chart, a day’s pivot and major support levels can be calculated.

First Major Support Level: 2 x Pivot / the previous time interval high. In the example above, this would be (2 x $54,610) / 55,329 = $53,892.

Traders would be looking at the first major support level as an entry price.

Second Major Support level: S2 = Pivot – (Day high – Day low).

In the example above, this would be $54,610 – ($55,329 – $53,711) = $52,992.

Traders would be looking at the second major support level as an entry price in the event of an extended reversal.

Third Major Support level: S3 = S2 – (Day high – Day low).

In the example above, this would be $52,992 – ($55,329 – $53,711) = $51,374.

Traders would be looking at the third major support level as an entry price in the event of a market sell-off.

Support FX Empr

Calculating Resistance Levels

Once you have calculated the pivot level, the major resistance levels, these being R1, R2, and R3, can also be calculated.

First Major Resistance Level: R1: = 2 x Pivot / the previous time interval low. In the example above, this would be (2 x $54,610) / 53,711 = $55,510.

Traders would be looking at the first major resistance level as an exit price.

Second Major Resistance level: R2 = Pivot + (Day high – Day low).

In the example above, this would be $54,610 + ($55,329 – $53,711) = $56,228.

Traders would be looking at the second major resistance level as an entry price in the event of an extended rally.

Third Major Resistance level: R3 = R2 + (Day high – Day low).

In the example above, this would be $56,228 – ($55,329 – $53,711) = $57,846.

Traders would be looking at the third major resistance level as an exit price in the event of an event-driven breakout.

Resistance FX Emp

Support and Resistance trading strategies

As previously outlined, traders can use major support and resistance levels for a range of time periods. It is therefore important to decide the trading strategies to then select the appropriate time periods for calculating the pivot and major support and resistance levels.

For instance, day traders would use 1-minute charts and the previous day’s high, low, and closing price to calculate the support and resistance levels for the day ahead.

By contrast, swing traders would use 4-hourly and daily charts to calculate the respective pivot, major support and resistance levels.

Pivot and Support Levels

When considering major support levels, the pivot levels play a hand in whether support levels are likely to come into play. There are two ways in which to consider pivot levels:

  • A fall through a pivot level would be needed to bring support levels into play. This tends to be the scenario in a post-bullish or during a bullish session.
  • Failure to move through or back through the pivot level would also bring support levels into play. This tends to be the scenario in a post-bearish or during a bearish session.

Pivot and Resistance Levels

When considering major resistance levels, the pivot levels play a hand in whether resistance levels are likely to come into play. There are two ways in which to consider pivot levels:

  • A move through a pivot level would be needed to bring resistance levels into play. This tends to be the scenario in a post-bearish or during a bearish session.
  • Avoiding a fall through or back through the pivot level would also bring resistance levels into play. This tends to be the scenario in a post-bullish or during a bullish session.

Using Support Levels

In a correcting market, an asset may fall through its first support level, labelled as S1. Once breached, the second major support level will be the next key entry point for investors. In such an event, S1 would then become a resistance level.

The 3rd major support level is generally only breached and a major economic or financial event. These include earnings, central bank and government policy, and other global events.

The below chart shows flight to safety in response to the new Omicron COVID-19 strain. Demand for the Japanese Yen broke down support levels as the Greenback slid to sub-¥114 levels.

Support Example FX Empire Chart

Historically, global events would include:

  • The global financial crisis.
  • COVID-19 pandemic.
  • Dot.com

Here, 1st and 2nd major support levels would have provided little interest to investors looking to enter the market.

3rd major support levels, however, may have drawn investors in. Key in using major support levels is for an asset price not to fall below for an extended period of time

Using Resistance Levels

In a bull market, an asset may move through its first major resistance level, labelled as R1. Once broken, the second major resistance level will be the next key entry point for investors. In such an event, R1 would then become a support level.

The 3rd major resistance level is generally only broken through as a result a major economic or financial event. These include earnings, central bank and government policy, and other global events.

As with the above example, news of the new COVID-19 strain and government plans to contain the spread led to a reversal of EUR carry trades. The EUR broke down the 3 major resistance levels on its way to $1.13 levels against the Greenback.

Resistance Example FX Empire Chart

Historically, global events would include:

  • COVID-19 Pandemic recovery.
  • Post-Global Financial Crisis recovery.
  • Central bank action.
  • U.S Presidential Election
  • In the case of equities, corporate action and earnings.

Here, 1st and 2nd major resistance levels would have provided little interest to investors looking to exit the market.

3rd major resistance levels, however, may have resulted in investors locking in profits. Key in using major resistance levels is for an asset price not to move above a specified price for an extended period of time

Once a resistance level has been broken, however, the resistance level become a support level that forms part of the major support levels for the time period in question.

Other Major Support and Resistance Levels

There are multiple indicators/strategies that traders. Traders and analysts need to consider these when using pivot levels and the major support and resistance levels described above.

Of particular importance are all-time highs and lows, and daily, weekly, monthly, and yearly highs and lows.

For example, an asset class may face resistance at its current week high that may sit below the first major resistance levels.

Other strategies include the use of Fibonacci’s, moving averages, Bollinger’s, and MACDs.

Trading without the use of support and resistance levels would likely lead to losses. More significant losses are likely, however, without a trading strategy. Importantly, the two will need to be aligned.

What are Lending Protocols? The Rise of DeFi Lending

The cryptocurrency space has grown to become a $3 trillion industry. Over the past decade, there have been numerous innovations within the cryptocurrency space. One of the most recent innovations is the decentralized finance (DeFi) space.

DeFi is one of the fastest-growing sectors within the cryptocurrency space. It offers numerous services to cryptocurrency investors and other market players. Due to its importance, this post will touch on an aspect of DeFi, which is lending.

What is DeFi?

DeFi can be defined in simple terms as decentralized finance. This is an ecosystem of financial applications built on top of blockchain technology. Unlike the regular financial ecosystem, the DeFi space operates without any third part of central authority.

Instead, DeFi relies on a peer-to-peer network to establish decentralized applications that would allow people to connect and manage their assets regardless of their location or status. DeFi aims to ensure people gain access to open-source, transparent and permissionless financial services from every part of the world.

The decentralized finance ecosystem is built on smart contracts. Smart contracts are self-executing and don’t require a third-party intermediary. DeFi started on the Ethereum network. Hence, it is not a surprise that most of the DeFi protocols are built on the Ethereum blockchain.

Understanding DeFi Lending

DeFi lending occurs thanks to the lending platforms or protocols. These platforms offer cryptocurrency loans in a trustless manner, allowing the holders to stake the coins they have in the DeFi lending platforms for lending purposes.

On the DeFi platform, a borrower can take a loan, allowing the lender to earn interests once the loan is returned. The lending process is executed from the start till the finish without intermediaries.

A coin holder sends the tokens they intend to lend into a pool using a smart contract. Once the coins are sent to a smart contract, they become available to other users to borrow. Afterward, the smart contract issues tokens (usually, the platform’s native token) that are doled out automatically to the lender. The tokens can be redeemed at a later stage in addition to the underlying assets that were sent to the smart contract.

Virtually all the loans issued via the native tokens are collateralized. This means that users who wish to borrow funds will need to provide a guarantee. However, unlike the centralized financial system, the guarantee in the DeFi space is in the form of cryptocurrencies that are worth more than the actual loan itself.

On paper, this idea might seem absurd as the borrower could potentially sell their assets in the first place to generate the money. However, there are numerous reasons why DeFi borrowing makes sense.

For starters, the users might require funds to take care of unforeseen expenses they may have incurred and don’t intend to sell their holdings as they believe the assets are due to an increase in value in the future. Furthermore, by borrowing money via DeFi protocols, users can avoid or delay paying capital gains taxes on their cryptocurrencies. Also, individuals can use the funds they borrow from the DeFi protocols to increase their leverage on some trading positions.

What are the Popular DeFi Lending and Borrowing Protocols?

Maker

Maker is one of the leading and unique DeFi crypto lending platforms. It allows users to borrow money via its DAI tokens. DAI is a stablecoin whose value is pegged to the US Dollar. Using the Maker protocol is available to anyone. Users can open a vault, lock collateral like ETH or other cryptocurrencies and generate DAI as a debt against the locked collateral.

The Maker protocol encourages users to take part in operational earnings via governance fees, acting as interest rates for the platform. MKR is the native token of the Maker protocol, and its holders serve as the last line of defense in the event of a black swan. As soon as the collateral value starts to decrease, MKR is minted and sold in an open market to raise more collateral. Hence, diluting MKR holders.

Aave

Another leading DeFi lending protocol is Aave. This is an open-source platform and one of the most popular DeFi lending protocols in the crypto space. Aave is a non-custodial liquidity platform for earning interests on deposit and borrowing assets. It allows the lenders to deposit their cryptocurrencies in a pool and receive an equivalent amount of aTokens, its native token. The protocol algorithmically adjusts interest rates based on demand and supply, indicating that the more a user holds aTokens, the higher the interest amount.

AAVE/USD chart. Source: FXEMPIRE

Compound

Another popular DeFi lending protocol is Compound. This is an algorithmic and autonomous money market protocol designed to unlock numerous open financial applications. Compound allows users to deposit cryptos, earn interests and borrow other cryptocurrency assets against them. By using smart contracts, Compound automates the management and storage of capital on the protocol.

As a permissionless protocol, anyone with a cryptocurrency wallet and an internet connection can interact with Compound and earn interest. Metamask is one of the wallets that support the Compound DeFi protocol. The Compound protocol supports the lending and borrowing of numerous assets, including DAI, ETH, WBTC, REP, BAT, USDC, USDT and ZRX.

How NFTs Can Be More Than Just Tools for Artists

There is little to no doubt that the world has definitely evolved and is ready to move even deeper into the NFT trend. However, like every new concept that grabs attention, many people run the risk of misunderstanding some fundamental things about NFTs.

NFTs Have Benefited the Art and Content Industries

One of the biggest misconceptions about NFTs is that they are only beneficial for artists and content creators who want to protect themselves. This misconception is completely understandable since NFTs have become especially popular because of these artists. Names like Snoop Dogg, Grimes, and more have been prominent in the push for artists to jump on the NFT train and become more self-sufficient.

Even in Africa, artists are using NFTs massively. Jude “MI” Abaga, one of the biggest hip-hop artists on the continent, has partnered with Binance and is looking at the possibility of launching his next album as an NFT. everywhere you go, artists are driving the adoption of NFTs.

Then, there’s the actual art scene. People are minting NFTs everywhere, using them to sell digital art and make money. They’re now side-stepping the conventional art industry, which involves exhibition houses and curators – all of whom take their own cut of the funds. Now, with NFTs, anyone can make money.

The same can be said for content creators. These people can build their following significantly and leverage that to sell NFTs to people. They set their own prices, and they get to enjoy all the profits that come from the sales of their tokens. If they like, they could program their NFTs so they take cuts out of any token sales that occur even after they’re done with their own purchases.

Utility NFTs: Their Rise, and Why They Look Appealing

But, NFTs are much more than this. Today, there is an interesting rise of “utility NFTs” – NFTs whose values are based on specific metrics which, to the largest extent, can be measured. Many NFT enthusiasts actually believe that these utility NFTs are the future of the industry.

Today, the NFT market is in an interesting position. Many tokens don’t specifically have a market value, and this has experts scared that the rise in popularity of NFTs will eventually create a bubble that will massively pop eventually. We saw a bit of a glimpse into this eventuality when the crypto market itself went on a downturn for months. Coins dropped significantly in value, and NFT volumes actually slowed down.

With NFT volumes rising significantly in February, things took a bit of a turn for the worse at the start of April. Coincidentally, this was also the period when the larger crypto market started what would be a months-long crash.

While things might be going great again, the crypto market has shown several signs of dangerous volatility that could wreck investors. What if we’re seeing the same thing with NFTs?

Despite the general belief that we could be in an NFT bubble, however, many experts believe that NFTs can still survive any wipeout that happens. One of the key factors that will play into that will be utility NFTs.

The concept of utility NFTs is pretty much the same as a utility token. These NFTs provide actual value, as well as the benefit of being scarce. A utility NFT could offer access to specific benefits and perks to its holder. Then, combined with the nature of being scarce, this token can drive massive value.

Several projects are already exploring the growth of utility NFTs. One interesting project is Sloties – an NFT project looking to revolutionize the gaming industry. Sloties are a collection of 10,000 NFTs built on the Ethereum blockchain. Each Slotie purchased offers ownership of an actual gaming platform’s profits. Sloties can also be used for staking, while the tokens offer additional perks like rakeback guarantees on bets and much more.

It’s easy to see the benefits that a project like Sloties will bring. The gaming industry is a real one, with billions of dollars in value and revenues. Instead of just buying an NFT for the fun of it, Sloties actually allow you to benefit from gaming.

There are many other projects using utility NFTs to their benefit – and those of the token buyers.

Should You Keep Faith in Utility NFTs?

For now, it is worth noting that utility NFTs are still in their infancy. If anything will be done with these tokens, prospective investors will need to verify the details of the utility that they claim to offer.

The cryptocurrency space is filled with several scam projects that claim to do something but aren’t true. Considering that there is still a lack of regulation in the NFT space, investors are tasked with verifying the details of the tokens they purchase.

Of course, this isn’t to say you shouldn’t invest in utility NFTs. Based on the intrinsic value that they offer, utility NFTs are actually a much better investment than just any other token out there. At the very least, they offer something. The problem is simply that you need to be more confident about the projects you’re backing by purchasing these tokens.

What is Shiba Inu? The Meme Coin Designed to Kill Dogecoin

One of the most important trends in the cryptocurrency space over the past year is meme coins. The rise of Dogecoin has led to the creation of a wide range of other meme coins as investors flocked to them in hopes of making money.

Dogecoin rallied by more than 7,000% at some point earlier this year, attracting more people to the cryptocurrency world. As a result, investors started to focus on other meme coins and invest in them looking to make as much profit as Dogecoin did.

Dogecoin chart

One of the biggest meme coins in the market is Shiba Inu (SHIB), the coin designed to “kill Dogecoin” and overtake it in the market. However, for those who are hearing about it for the first time, here is everything you should know about Shiba Inu.

What is Shiba Inu?

Shiba Inu (SHIB) is an Ethereum-based cryptocurrency that features the Shiba Inu dog. SHIB is considered by many to be an alternative to Dogecoin. However, the Shiba Inu coin was created to be the “Dogecoin killer.”

shibainu coin fxempire

SHIB is a meme coin based on the Japanese Shiba Inu dog. The meme coins are usually launched as an inside joke rather than as digital products with real-world utility although Dogecoin has been around since 2013, Shiba Inu was launched in August 2020 by an anonymous individual or group called Ryoshi. 

According to the 28-page whitepaper or woof paper, the goal of Shiba Inu’s creator was to move away from the rigid social structures and traditional mindset. Shiba Inu is designed to be an experiment in decentralized spontaneous community building” and to give power back to the “average person.”

How Does Shiba Inu Work?

Shiba Inu is an Ethereum-based token, which means that it is compatible with the vast Ethereum ecosystem. According to the developer, the Ethereum blockchain was the perfect host for Shiba Inu because it was already secure and well-established, and it allowed the project to stay decentralized.

The Shiba Inu ecosystem is comprised of three tokens and other services that users can enjoy. The three tokens are;

  • Shiba Inu (SHIB): SHIB is the project’s main currency. It is the token that powers the entire Shiba Inu ecosystem and has a total supply of 1 quadrillion. However, the developer locked 50% of the supply in Uniswap for liquidity purposes while Ethereum co-founder Vitalik Buterin was tasked with holding the remaining 50%. Buterin sold some of the tokens in his possession and donated the money to a Covid-19 relief fund in India, an act that further pushed SHIB’s price higher. Buterin burned 40% of SHIB’s total supply, reducing the possible amount available to users. 
  • Leash (LEASH): This is the second token in the Shiba Inu ecosystem and it represents the other side of Shiba. Its total supply is 107,646 tokens, far below the trillions of Shiba Inu tokens.
  • Bone (BONE): This is the governance token of the Shiba Inu ecosystem. It allows the ShibArmy to vote on upcoming proposals and has a total supply of 250 million tokens. 

There are other sides to the Shiba Inu ecosystem and they include;

  • ShibaSwap: This is the decentralized exchange of the Shiba Inu ecosystem. This is an exchange designed to allow people to trade cryptocurrencies in a decentralized manner. 
  • Shiba Inu Incubator: The incubator is designed to discover ways to honor the creativity of artists outside of the traditional artforms. It aims to breed genuine creators of art and other content. 
  • Shiboshi: These are Shiba Inu-generated Non Fungible Tokens (NFTs) available on the Ethereum blockchain each Shiboshi has a different trait, making them unique. 

Is Shiba Inu Real Money? Why has it Rallied so Much?

It is tough to think of Shiba Inu as real money. The cryptocurrency space has evolved over the past few years to involve stablecoins. Stablecoins are digital currencies whose values are tied to fiat currencies. They are the most likely to be considered real money.

SHIB/USD chart. Source: FXEMPIRE

We also have some coins such as Bitcoin, DASH, Litecoin and some others that are designed to serve as currency and have received adoption in various parts of the world. However, Shiba Inu is a meme coin, and is hard to consider it as real money. 

SHIB has been one of the best performing cryptocurrencies so far in 2021. Over the past three months alone, SHIB has added more than 500% to its value. It briefly overtook Dogecoin in terms of market cap.

The rally was caused by a wide range of things including getting listed on the Coinbase cryptocurrency exchange a few weeks ago. The rally brought so much media attention to SHIB and more investors flooded into the cryptocurrency. 

Tesla founder Elon Musk added fuel to the fire when he tweeted a picture of his new Shiba Inu puppy Floki last month. thus, generating massive retail investor interest in the meme token. 

The launch of the Shiba Inu NFTs also added to the excitement as NFTs are gaining popularity in the cryptocurrency space and beyond. There are currency unconfirmed rumors that popular stock and crypto trading app Robinhood is set to list SHIB on its platform. All these contributed to Shiba Inu recording massive gains in recent weeks. 

Shiba Inu Wallet

As one of the top 20 cryptocurrencies in the world, SHIB is very valuable in the crypto space. It is an ERC-20 token, which means that it can be stored in numerous wallets that support Ethereum-based tokens. Some of the wallets you can use to store your SHIB tokens include; 

  • Ledger Nano X (cold storage wallet)
  • Trezor (cold storage wallet)
  • Trust Wallet 
  • Ellipal Titan (hardware wallet)
  • MetaMask 
  • Coinomi
  • Lumi wallet
  • CoolWallet
  • Guarda Wallet 

Gold Technical Analysis – How Do Professionals Trade Gold?

Professional money managers use several technical, fundamental, and sentiment indicators to determine the future direction of gold prices. The Metal is both precious and industrial and is viewed as both a commodity and a currency. The yellow metal, as it is often referred to as, is generally quoted in US dollars and trades both as an exchange-traded instrument as well as over the counter.

How Do Professionals Trade Gold?

Gold is considered a safe-haven asset that appreciates in value when investors are looking for an alternative to other currencies that are depreciating. When interest rates are declining around the world, the demand for a currency that will sustain its value provides a backdrop for rising gold prices. Gold is traded in the cash, futures, and forward markets.

Gold has a forward interest rate, like dollar rates or Euribor rates. This interest rate called the GOFO rate increases relative to the US dollar when gold demand rises. Officially, the Gold Forward Offer Rate, or GOFO, is the interest rate at which contributors are prepared to lend gold on a swap against US dollars, they can use gold as collateral and potentially pay a much smaller rate of interest to borrow the cash than otherwise.

Cash, futures, and forward traders will evaluate three dimensions that provide them with a view of the gold market. These include the technicals, the fundamental backdrop, and sentiment.

Technical Analysis of the Gold Market

Professional gold investors attempt to analyze the long-term trend in gold prices by evaluating a weekly chart. Gold prices trend and trade sideways like other capital market instruments. By using different tools you can determine if the price is likely to trend or remain in a range.

Weekly continuous gold futures prices in August 2021are trading sideways to lower based on its position relative to the 50 and 10 Weekly Moving Averages.

Momentum is confirming this assessment as the MACD (moving average convergence divergence) index is generating a crossover sell signal, while the relatively tight distance between the moving averages suggest nearly flat momentum. The indicator is also suggesting momentum may be getting ready to accelerate.

The MACD is a very useful momentum index that uses moving average to generate a crossover signal that describes when positive as well as negative momentum is accelerating.

Weekly Continuous Gold MACD
Weekly Continuous Gold MACD

Momentum is Important

An often used momentum indicator is the Relative Strength Index (RSI). This momentum oscillator describes whether prices are accelerating relative to the last 14-periods.

After peaking during the week-ending August 7, 2020, the RSI has been trending lower. With a reading of 70 the high threshold and a reading of 30 the low threshold, the current reading of 47.56 indicates nearly flat momentum with a slight bias to the downside. Bullish gold traders are now waiting for the market to cross over to the strong side of the 50 level. This will give them an early jump on a shift in momentum to higher.

The key to using the RSI is to look at prior highs to determine how far momentum has accelerated in the past. The weekly RSI has hit levels of 82, 77 and 75 in the past, which means that positive momentum can still accelerate over the upper threshold at 70 as gold prices break out.

Weekly Continuous Gold RSI

Gold Market Sentiment

There are several ways to determine market sentiment within the gold market. One of the best indicators is using the Commitment of Trader’s report released by the Commodity Futures Trading Commission (CFTC). This report helps traders understand market dynamics.

The COT reports show position data that is reported by category. This information is reported to the CFTC by brokers and clearing members. While the actual reason that a trader has a position is not reported, experts make certain assumptions that provide information about those positions.

Gold Committment of Traders

Positions are reported by category. For gold futures and options, the categories include swap dealers, managed money, and other reportables. Swap dealers include banks and investment banks as well as industry-specific merchandisers. Managed money includes hedge funds, pensions funds, and mutual funds. Other reportables is retail trade.

The CFTC staff does not know specific reasons for specific positions and hence this information does not factor in determining trader classifications. For example, the CFTC does not know if a swap dealer is taking a speculative position or hedging risk. What experts need to evaluate is why positions are increasing or decreasing.

Gold Committment of Traders Small and Large Speculators

Professional traders generally assume that all the swap dealer positions reflect hedges from deals transacted with gold producers and refiners. Those positions are offset with speculative positions taken by managed money.

Managed money takes positions that provide you with information about sentiment. There are two concepts that you need to evaluate. The first is a trend in place. If the COT information shows that managed money or large specs are increasing their long positions, sentiment toward gold is increasing. If they are increasing their short positions, then the negative sentiment is increasing.

The second concept is whether the open long or short positions in managed money is overextended. If managed money is overextended, sentiment is too high and prices could snap back quickly.

Gold Fundamentals

The two most important gold fundamental indicators are the direction of US Treasury yields and whether the US dollar is likely to rise or fall.

Higher Treasury yields or interest rates raise the opportunity cost of holding non-interest-bearing gold. In another way to look at it, since gold doesn’t pay interest or a dividend to hold it, rising or high interest rates make gold a less attractive investment. When interest rates fell to near zero as they did in 2020 – 2021, gold became a more desired asset.

Since gold is priced in US dollars, when the dollar rises, it makes gold more expensive to holders of foreign currencies. This means gold prices need to fall to accommodate the higher cost of purchasing it in dollars. The reverse is true when the dollar declines.

A third fundamental factor to watch is consumer inflation. Gold is viewed as a hedge against inflation, which can be caused by massive stimulus measures. When inflation is on the rise, gold prices will offset increases in a basket of goods or services.

Summary

Gold prices fluctuate weekly, and over the long term either trade within a trend or consolidate. There are several technical indicators, such as the MACD, RSI, and Moving averages that can help you determine the future direction of gold prices.

In addition, professional traders use a combination of technical analysis, sentiment analysis, and fundamental analysis to determine the future price of gold.

Sentiment analysis can include the Commitment of Traders report released weekly by the CFTC.

Additionally, professional investors will track the direction of Treasury yields and the value of the US dollar, which are the driving forces behind the value of gold.

Analysis Methods – Fundamental, Technical and Sentiment Analysis

Technical analysis is the study of trading activity through the use of patterns, trends, price movement, and volume. Fundamental analysis is the study of price movement to determine the value of an asset. Sentimental analysis is feeling the tone of the market through the study of crowd psychology.

Each of these methods of looking at an asset’s value has its merits and no one of them is complete on its own. Still, with some types of trading, you will want to rely more heavily on one type of analysis than another in order to better control the risk.

Analysis Tools Defined

Technical analysis differs from fundamental and sentimental analysis in that it only takes into account the price and volume of an asset.

The core assumption is that all known fundamentals are factored into price; thus, they become irrelevant and there is no need to pay close attention to them.

The technical trader is not attempting to measure the asset’s intrinsic value, but rather trying to use technical analysis tools like chart patterns, oscillators and trends to determine what an asset will do in the future.

Fundamental analysis relies on macro-and micro-economic factors to determine the long-term and short-term value of an asset. Fundamental analysis looks at the factors that cannot be measured in a price chart. Some of these factors include supply/demand, economic strength, and economic growth.

Sentimental analysis has often been described as “reading the news”. However, it is probably closer to “reading the price action”. This is because something reading the headlines can fool a trader. Therefore, sentimental analysis works better over the short run with technical analysis, but over the long run, fundamental analysis will likely override any short-term sentimental biases.

Trading with sentimental analysis alone can be effective, but you need to be patient when you utilize this method. News does not happen every day for every asset. If you specialize in currencies, for example, you might only be making a couple of trades per week.

How and When to Use the Three Analysis Tools

Every trader will have a slightly different way of analyzing their assets of choice, and this is okay.

Some traders refer to themselves as pure technical traders and choose to ignore the fundamentals completely. They rely on statistical confidence in trading signals and assume the fundamentals have been priced into their analysis.

Fundamental traders tend to develop a bias in a market based on the macro-economic or long-term fundamentals then make adjustments to the microeconomic or short-term fundamental news.

Sentimental traders tend to react to the headlines and trade the momentum based on the news. This implies that a sentimental trader leans toward the technical side since momentum refers to price action.

A sentimental trader is linked to the fundamental side of the equation because the best momentum-generating headline is often caused by a surprise in the news. In order to be surprised by the news, one has to know the fundamental expectations ahead of a report, for example.

Summary

There is no one way to trade that is better than another. However, when measuring trading risk, technical analysis is probably the best tool to use. Furthermore, when building a trading system, technical analysis is probably best because of the plethora of statistical tools available to back-test trading theories.

It’s difficult to measure the success of fundamental analysis over the short run because it takes a long-time for a major fundamental event to develop. Think about how difficult it is to trade central bank activity over the short run. Then think about how much easier it is once a central bank decides to loosen or tighten policy.

Sentimental analysis is primarily used by the trader who likes action. The sentimental trader often has an indication of what the fundamental report is expected to show then reacts to whether the report is above or below expectations. Furthermore, the trader likely takes a peek at the chart to determine the momentum of the price action. In this case, it’s safe to say the sentimental analysis trader is more likely to use a blend of technical and fundamental analysis.

Many people thrive on short-term trades, but just as many need to trade longer-term in order to be successful. A well-rounded approach will utilize both time frames and will also use all three types of analysis.

You’ve probably heard the popular phrase about how you shouldn’t keep all of your eggs in one basket. This is a fancy way of saying you shouldn’t rely solely on one method for success. This suggests that trading a blend of technical, fundamental, and sentiment analysis may be the best approach with more control over risk.

Trading is a high-risk activity any way you look at it and you will want to reduce that risk for long-term success. A little bit of short-term trading plus a little bit of long-term trading will be your best choice for sustained results. Just like blending a little technical analysis with a little fundamental analysis.

Meanwhile, if you like trading the action then sentimental trading is probably the best, provided you use technical chart points to control the risk.

Crypto Trading Beginner’s Guide

Sentiment about cryptocurrencies was split among users after the market drawdown in May. More experienced traders were ready for the fall, and mainly newbies and enthusiasts lost their funds and exited the market in anger.

In this review, I will try to tell, based on personal experience and knowledge, all the subtleties of trading on the crypto market.

Cryptocurrency trading spot or derivatives

Today, exchanges and marketplaces offer many trading tools for trading in the cryptocurrency market. Crypto markets offer different contracts, like spot and derivatives. A significant difference between trading on the spot market and the derivatives market is the actual acquisition of an asset. So, for example, when trading on the spot market, a person acquires an asset for the purpose of selling it in the future to generate profit from a difference in price.

Trading in the spot market can be compared to trading in the stock market, and the person trading in this market will be considered an investor. To fix profits on the spot market, you can set only one order – a sell order, and place a buy order to buy putting the amount of the purchased or sold the asset. The most popular exchanges for spot trading are Coinbase, Kraken, Gemini, Binance.

Coinbase

Unlike the spot market, when trading in the derivatives market, a person does not actually acquire an asset but opens a position for the purpose of price speculation, and a person trading in this market is classified as a trader. The advantage of trading in the derivatives market is trading in both directions, that is, profits can be obtained even if the price of an asset falls, comparable to trading contracts for differences (CFDs) and trading futures (also a class of derivatives). Derivatives trading platforms provide a fairly high leverage, which allows a trader to increase his capital and reap great benefits, but also implies the risk of losing all funds in the position.

It is also important to take into account that trading on the derivatives market, a trader can set various orders to make a profit from the trade or accept a loss for the trade: take profit and stop loss functions. That is, since the asset is not actually purchased, two orders can be placed simultaneously. The advantage is that a trader, when the price reverses, will be able to close the position with an insignificant loss, and if the price continues to move in the predicted direction, close the position and fix the profit automatically. Popular exchanges and platforms for trading crypto derivatives: FTX, Bybit, Overbit, and Bitget.

Overbit

Market analysis and education

There are several types of analysis for predicting price movement: technical, fundamental, market sentiment analysis.

Technical analysis

The most popular type of market analysis, which includes the study of asset price movements and trading volumes. Everyone determines for themselves a trading strategy based on technical analysis, but mainly Dow theory, Elliott Wave theory, and Fibonacci mathematical tools are used. The best tool for technical analysis nowadays is considered TradingView.

TradingView

Fundamental analysis

The study includes an analysis of such fundamental data as the financing of the project, reports on the updates made, deposit/withdrawal of funds to/from the exchange, the open interest ratio, the funding rate, as well as, if the asset is traded against a currency, economic data affecting this currency (more often the US dollar).

Market sentiment analysis

The second most popular analysis method in the cryptocurrency market. Market sentiment is calculated using algorithms that wander popular social networks and all over the Internet looking for positive and negative comments about the cryptocurrency. Such algorithms are used to calculate one of the important indexes – the “Fear and Greed” index.

Education

Most crypto exchanges and cryptocurrency trading platforms provide their own training materials, but they are more introductory and do not contain detailed information. Therefore, after reading materials on any type of analysis of the cryptocurrency market, you should not consider yourself a pro and open positions that exceed 50% of your deposit. Coinbase is a good example of providing educational material. To start trading after completing the training, you can use indefinite demo trading on HitBTC for spot, Binance and Bitget for derivatives, the latter provides only a few pairs, but the balance can be replenished with an unlimited number of times.

Coinbase

Signals

There are groups and traders, as well as various applications/indicators that sell signals for a certain fee. Signals are calls to open a position or place an order when a certain price is reached. You must study each received signal yourself, if you are ready to use such services, then do not disregard your own analyses, so you can learn how to trade yourself even faster.

Copy-trading

You can use signals and enter manually into the market, or you can copy the orders of popular traders. Copy trading is based on the automatic opening of a position with the copying of all settings: entry price, take profit, stop loss. The world leader and first social trading platform, eToro pioneered copy trading in the forex market, and now provides the same platform with minor modifications for trading cryptocurrencies. Copy-trading can also be used to conduct your own analysis, to consider why the trade was successful and vice versa.

On BitGet platform, which claims to have a higher copy trading turnover than eToro, it is possible to view all traders in detail, consider the trading strategy and positions, which can also be used to study trading in the market. Just like trading with other tools, copy-trading has its own risk of account drawdown, therefore, before subscribing to a trader to copy his trades, you need to view the history of his trades in detail, as well as find information about him on the Internet, in social networks.

BitGet

Conclusion

Trading in the cryptocurrency market has its risks, but so does the reward. You should always take a cold-blooded attitude towards all market situations. To begin with, study the market, study and possibly start using signals and copy trading on small volumes, but always strive for an independent understanding of the market and analyze. Study carefully risk management, never trade more than 50% of the balance at the initial stage. Do not get upset about low profits, a small profit is better than any loss.

Stock Buybacks: Why Would a Company Reinvest in Themselves?

U.S. corporate buybacks are on the rise in 2021 lifting investor spirits after last year’s pandemic dampened activity. While most investors are eager to see how much buybacks may support their investments, some are confused over what they are and how they work, and whether they are actually good or bad for a company’s stock price.

Corporations often buy back large blocks of their stocks typically when share prices are low, but some may choose for other reasons to buy their company’s stock even when analysts believe company shares are overvalued. Whether they buy their shares at cheap or expensive levels, a stock buyback is not always beneficial for individual investors.

Historic Background

Stock repurchases weren’t always legal per se. After the stock market crash of 1929 and the Great Depression, the U.S. government passed the Securities Act of 1933 and the Securities Exchange Act of 1934 to try to prevent it from happening again.

The 1934 legislation didn’t bar stock buybacks, per se, but it barred companies from doing anything to manipulate their stock prices. Companies knew that if they did a stock buyback, it could open them up to accusations from the Securities and Exchange Commission (SEC) of trying to manipulate their stock price, so most just didn’t.

Tax cuts during the Trump administration made stock repurchases very popular as corporations spent billions on their own stock to reward shareholders and investors. However, corporate executives and insiders have also been accused of taking advantage of the stock buyback boom to sell shares they own to the companies they work for, profiting handsomely. Companies are spending millions or billions of dollars to reward shareholders and prop up their stock prices with buybacks, even if that means laying off workers to do it.

Recently, the Biden Administration announced it was planning on reforming current tax laws. If corporations begin to fear that some of the tax advantages of a stock buyback may be reduced or eliminated then this may encourage companies to become more active in 2021 before the tax changes become law.

What is a Stock Buyback?

A stock buyback, also known as a share repurchase, takes place when a corporation buys its own outstanding shares in order to reduce the number of shares available on the open market.

In a stock buyback, a company repurchases its own shares from the broader marketplace, usually through the open market. That leaves the remaining shareholders with a bigger chunk of the company and increases the earnings they reap per share, on top of the regular dividend payments that companies make to shareholders out of their profits.

Why Companies Perform Buybacks

Corporations buy back shares for a number of reasons such as to increase the value of remaining shares available by reducing the supply of outstanding shares or to prevent other shareholders from taking a controlling stake, sometimes called a hostile takeover.

Another reason for a buyback is for compensation purposes. Companies often award their corporate employees with stock and stock options. This benefits the existing shareholders and board members who are usually paid in stock options.

Pros of Stock Buybacks for Investors

  1. Boost in share prices
  2. Rising dividends
  3. Better earnings per share
  4. Less excess cash
  5. Positive psychology

“With the market being as expensive as it seems, share repurchases could drive the market that much higher,” said Robert Pavlik, senior portfolio manager at Dakota Wealth in Fairfield, Connecticut.

“It adds to the Street’s belief that there’s an underlying bid, we’re not in this alone, and someone else is going to support the stock and that’s the company,” he said. “It turns out to be a good thing for share prices. But they run the risk of overvaluing stocks, and it speaks to the broader question about why companies are doing it.”

Cons of Stock Buybacks for Investors

  1. Poor predictions
  2. Sinking dividends
  3. Poor use of capital
  4. Management self-interest
  5. Cover for stock handouts

Larry Fink, CEO of BlackRock, one of the largest investment companies in the world, in 2014 warned U.S. companies to slow down on buybacks and dividends.

“We certainly believe that returning cash to shareholders should be part of a balanced capital strategy; however, when done for the wrong reasons and at the expense of capital investment, it can jeopardize a company’s ability to generate sustainable long-term returns,” he wrote in a letter.

Recent Activity Indicates Companies Leaning to the Pro Side

The rapidly improving economy and stocks at record highs may be fueling a flurry of stock buyback activity in 2021.

Banks have improved their capital positions and should be allowed to continue to buy back their own shares, Treasury Secretary Janet Yellen said in March.

Regulators restricted share repurchases in 2020 for the biggest institutions in the country as a precautionary measure after COVID-19 reached pandemic status. After those banks passed a pandemic-focused stress test in December, the Federal Reserve said it would allow buybacks to resume, though with some restrictions.

Yellen, speaking in March before the Senate Committee on Banking, Housing and Urban Affairs, said she agreed with allowing the share buybacks.

“I have been opposed earlier when we were very concerned about the situation the banks would face about stock buybacks,” Yellen said. “But financial institutions look healthier now, and I believe they should have some of the liberty provided by the rules to make returns to shareholders.”

They are expected to do just that as the buyback restrictions eased during the first quarter of 2021.

While Yellen see no problem with financial institutions resuming buyback activity, Warren Buffett’s capital-deployment machine pulled back on several fronts at the start of the year as the billionaire took a more cautious stance on stocks.

Berkshire Hathaway Inc slowed its buyback pace, according to a regulatory filing Saturday. Buffett has struggled in recent years to keep up with Berkshire’s ever-gushing cash flow. That’s led him to repurchase significant amounts of Berkshire stock, pulling a lever for capital deployment that he had previously avoided in favor of big acquisitions or stock purchases. He set a record in the third quarter of last year, snapping up $9 billion of stocks, but slowed that pace during the first quarter with repurchases of $6.6 billion.

Berkshire repurchased more stock in January and February than the company did in March when the stock climbed 5.8% according to the filing. Buffett’s long been disciplined on the price of buybacks, noting in 2018 when the company loosened its repurchase policy that he and his longtime business partner and Berkshire Vice Chairman Charlie Munger can repurchase shares when they’re below Berkshire’s intrinsic value.

Despite buybacks that fell short of Buffett’s quarterly record, the billionaire investor has continued to go after Berkshire’s own stock since the end of March, with at least $1.25 billion of repurchases through April 22, according to the filing. And given that Berkshire has no set amount allocated for buyback plans, sizable repurchases are still a nice bit of capital deployment, according to CFRA Research analyst Cathy Seifert.

“The fact that Berkshire allocated over $6 billion to buybacks this quarter is going to be positively received by investors” Seifert said.

What Bloomberg Intelligence Says

“The $6.6 billion 1Q buyback was an expected drop from 4Q, but still significant. Nearly all segments showed accelerated revenue and earnings.”

Share Buyback Plans are Booming

Corporate buyback announcements ‘exploded’ as trading in April wrapped up and that helped push stocks higher, said Vanda Research.

A jump in buybacks should help soften the blow in the U.S. equity market in the event of a drawdown.

“As net equity supply shrinks every dollar invested in the U.S. market will have a larger marginal impact,” said Vanda.