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Former investment bank FX trader: news trading and second order thinking

Former investment bank FX trader: news trading and second order thinking
Thanks to everyone who responded to the previous pieces on risk management. We ended up with nearly 2,000 upvotes and I'm delighted so many of you found it useful.
This time we're going to focus on a new area: reacting to and trading around news and fundamental developments.
A lot of people get this totally wrong and the main reason is that they trade the news at face value, without considering what the market had already priced in. If you've ever seen what you consider to be "good" or "better than forecast" news come out and yet been confused as the pair did nothing or moved in the opposite direction to expected, read on...
We are going to do this in two parts.
Part I
  • Introduction
  • Why use an economic calendar
  • How to read the calendar
  • Knowing what's priced in
  • Surveys
  • Rates decisions
  • First order thinking vs second order thinking

Introduction

Knowing how to use and benefit from the economic calendar is key for all traders - not just news traders.
In this chapter we are going to take a practical look at how to use the economic calendar. We are also going to look at how to interpret news using second order thinking.
The key concept is learning what has already been ‘priced in’ by the market so we can estimate how the market price might react to the new information.

Why use an economic calendar

The economic calendar contains all the scheduled economic releases for that day and week. Even if you purely trade based on technical analysis, you still must know what is in store.

https://preview.redd.it/20xdiq6gq4k51.png?width=1200&format=png&auto=webp&s=6cd47186db1039be7df4d7ad6782de36da48f1db
Why? Three main reasons.
Firstly, releases can help provide direction. They create trends. For example if GBPUSD has been fluctuating aimlessly within a range and suddenly the Bank of England starts raising rates you better believe the British Pound will start to move. Big news events often start long-term trends which you can trade around.
Secondly, a lot of the volatility occurs around these events. This is because these events give the market new information. Prior to a big scheduled release like the US Non Farm Payrolls you might find no one wants to take a big position. After it is released the market may move violently and potentially not just in a single direction - often prices may overshoot and come back down. Even without a trend this volatility provides lots of trading opportunities for the day trader.

https://preview.redd.it/u17iwbhiq4k51.png?width=1200&format=png&auto=webp&s=98ea8ed154c9468cb62037668c38e7387f2435af
Finally, these releases can change trends. Going into a huge release because of a technical indicator makes little sense. Everything could reverse and stop you out in a moment. You need to be aware of which events are likely to influence the positions you have on so you can decide whether to keep the positions or flatten exposure before the binary event for which you have no edge.
Most traders will therefore ‘scan’ the calendar for the week ahead, noting what the big events are and when they will occur. Then you can focus on each day at a time.

Reading the economic calendar


Most calendars show events cut by trading day. Helpfully they adjust the time of each release to your own timezone. For example we can see that the Bank of Japan Interest Rate decision is happening at 4am local time for this particular London-based trader.

https://preview.redd.it/lmx0q9qoq4k51.jpg?width=1200&format=pjpg&auto=webp&s=c6e9e1533b1ba236e51296de8db3be55dfa78ba1

Note that some events do not happen at a specific time. Think of a Central Banker’s speech for example - this can go on for an hour. It is not like an economic statistic that gets released at a precise time. Clicking the finger emoji will open up additional information on each event.

Event importance

How do you define importance? Well, some events are always unimportant. With the greatest of respect to Italian farmers, nobody cares about mundane releases like Italian farm productivity figures.
Other events always seem to be important. That means, markets consistently react to them and prices move. Interest rate decisions are an example of consistently high importance events.
So the Medium and High can be thought of as guides to how much each event typically affects markets. They are not perfect guides, however, as different events are more or less important depending on the circumstances.
For example, imagine the UK economy was undergoing a consumer-led recovery. The Central Bank has said it would raise interest rates (making GBPUSD move higher) if they feel the consumer is confident.
Consumer confidence data would suddenly become an extremely important event. At other times, when the Central Bank has not said it is focused on the consumer, this release might be near irrelevant.

Knowing what's priced in

Next to each piece of economic data you can normally see three figures. Actual, Forecast, and Previous.
  • Actual refers to the number as it is released.
  • Forecast refers to the consensus estimate from analysts.
  • Previous is what it was last time.
We are going to look at this in a bit more detail later but what you care about is when numbers are better or worse than expected. Whether a number is ‘good’ or ‘bad’ really does not matter much. Yes, really.

Once you understand that markets move based on the news vs expectations, you will be less confused by price action around events

This is a common misunderstanding. Say everyone is expecting ‘great’ economic data and it comes out as ‘good’. Does the price go up?
You might think it should. After all, the economic data was good. However, everyone expected it to be great and it was just … good. The great release was ‘priced in’ by the market already. Most likely the price will be disappointed and go down.
By priced in we simply mean that the market expected it and already bought or sold. The information was already in the price before the announcement.
Incidentally the official forecasts can be pretty stale and might not accurately capture what active traders in the market expect. See the following example.

An example of pricing in

For example, let’s say the market is focused on the number of Tesla deliveries. Analysts think it’ll be 100,000 this quarter. But Elon Musk tweets something that hints he’s really, really, really looking forward to the analyst call. Tesla’s price ticks higher after the tweet as traders put on positions, reflecting the sentiment that Tesla is likely to massively beat the 100,000. (This example is not a real one - it just serves to illustrate the concept.)

Tesla deliveries are up hugely vs last quarter ... but they are disappointing vs market expectations ... what do you think will happen to the stock?

On the day it turns out Tesla hit 101,000. A better than the officially forecasted result - sure - but only marginally. Way below what readers of Musk's twitter account might have thought. Disappointed traders may sell their longs and close out the positions. The stock might go down on ‘good’ results because the market had priced in something even better. (This example is not a real one - it just serves to illustrate the concept.)

Surveys

It can be a little hard to know what the market really expects. Often the published forecasts are stale and do not reflect what actual traders and investors are looking for.
One of the most effective ways is a simple survey of investors. Something like a Twitter poll like this one from CNBC is freely available and not a bad barometer.
CNBC, Bloomberg and other business TV stations often have polls on their Twitter accounts that let you know what others are expecting

Interest rates decisions

We know that interest rates heavily affect currency prices.
For major interest rate decisions there’s a great tool on the CME’s website that you can use.

See the link for a demo

This gives you a % probability of each interest rate level, implied by traded prices in the bond futures market. For example, in the case above the market thinks there’s a 20% chance the Fed will cut rates to 75-100bp.
Obviously this is far more accurate than analyst estimates because it uses actual bond prices where market participants are directly taking risk and placing bets. It basically looks at what interest rate traders are willing to lend at just before/after the date of the central bank meeting to imply the odds that the market ascribes to a change on that date.
Always try to estimate what the market has priced in. That way you have some context for whether the release really was better or worse than expected.

Second order thinking

You have to know what the market expects to try and guess how it’ll react. This is referred to by Howard Marks of Oaktree as second-level thinking. His explanation is so clear I am going to quote extensively.
It really is hard to improve on this clarity of thought:
First-level thinking is simplistic and superficial, and just about everyone can do it (a bad sign for anything involving an attempt at superiority). All the first-level thinker needs is an opinion about the future, as in “The outlook for the company is favorable, meaning the stock will go up.” Second-level thinking is deep, complex and convoluted.
Howard Marks
He explains first-level thinking:
The first-level thinker simply looks for the highest quality company, the best product, the fastest earnings growth or the lowest p/e ratio. He’s ignorant of the very existence of a second level at which to think, and of the need to pursue it.
Howard Marks
The above describes the guy who sees a 101,000 result and buys Tesla stock because - hey, this beat expectations. Marks goes on to describe second-level thinking:
The second-level thinker goes through a much more complex process when thinking about buying an asset. Is it good? Do others think it’s as good as I think it is? Is it really as good as I think it is? Is it as good as others think it is? Is it as good as others think others think it is? How will it change? How do others think it will change? How is it priced given: its current condition; how do I think its conditions will change; how others think it will change; and how others think others think it will change? And that’s just the beginning. No, this isn’t easy.
Howard Marks
In this version of events you are always thinking about the market’s response to Tesla results.
What do you think they’ll announce? What has the market priced in? Is Musk reliable? Are the people who bought because of his tweet likely to hold on if he disappoints or exit immediately? If it goes up at which price will they take profit? How big a number is now considered ‘wow’ by the market?
As Marks says: not easy. However, you need to start getting into the habit of thinking like this if you want to beat the market. You can make gameplans in advance for various scenarios.
Here are some examples from Marks to illustrate the difference between first order and second order thinking.

Some further examples
Trying to react fast to headlines is impossible in today’s market of ultra fast computers. You will never win on speed. Therefore you have to out-think the average participant.

Coming up in part II

Now that we have a basic understanding of concepts such as expectations and what the market has priced in, we can look at some interesting trading techniques and tools.
Part II
  • Preparing for quantitative and qualitative releases
  • Data surprise index
  • Using recent events to predict future reactions
  • Buy the rumour, sell the fact
  • The trimming position effect
  • Reversals
  • Some key FX releases
Hope you enjoyed this note. As always, please reply with any questions/feedback - it is fun to hear from you.
***
Disclaimer:This content is not investment advice and you should not place any reliance on it. The views expressed are the author's own and should not be attributed to any other person, including their employer.
submitted by getmrmarket to Forex [link] [comments]

Former investment bank FX trader: News trading and second order thinking part 2/2

Former investment bank FX trader: News trading and second order thinking part 2/2
Thanks for all the upvotes and comments on the previous pieces:
From the first half of the news trading note we learned some ways to estimate what is priced in by the market. We learned that we are trading any gap in market expectations rather than the result itself. A good result when the market expected a fantastic result is disappointing! We also looked at second order thinking. After all that, I hope the reaction of prices to events is starting to make more sense to you.

Before you understand the core concepts of pricing in and second order thinking, price reactions to events can seem mystifying at times
We'll add one thought-provoking quote. Keynes (that rare economist who also managed institutional money) offered this analogy. He compared selecting investments to a beauty contest in which newspaper readers would write in with their votes and win a prize if their votes most closely matched the six most popularly selected women across all readers:
It is not a case of choosing those (faces) which, to the best of one’s judgment, are really the prettiest, nor even those which average opinions genuinely thinks the prettiest. We have reached the third degree where we devote our intelligences to anticipating what average opinion expects the average opinion to be.
Trading is no different. You are trying to anticipate how other traders will react to news and how that will move prices. Perhaps you disagree with their reaction. Still, if you can anticipate what it will be you would be sensible to act upon it. Don't forget: meanwhile they are also trying to anticipate what you and everyone else will do.

Part II
  • Preparing for quantitative and qualitative releases
  • Data surprise index
  • Using recent events to predict future reactions
  • Buy the rumour, sell the fact
  • The trimming position effect
  • Reversals
  • Some key FX releases

Preparing for quantitative and qualitative releases

The majority of releases are quantitative. All that means is there’s some number. Like unemployment figures or GDP.
Historic results provide interesting context. We are looking below the Australian unemployment rate which is released monthly. If you plot it out a few years back you can spot a clear trend, which got massively reversed. Knowing this trend gives you additional information when the figure is released. In the same way prices can trend so do economic data.

A great resource that's totally free to use
This makes sense: if for example things are getting steadily better in the economy you’d expect to see unemployment steadily going down.
Knowing the trend and how much noise there is in the data gives you an informational edge over lazy traders.
For example, when we see the spike above 6% on the above you’d instantly know it was crazy and a huge trading opportunity since a) the fluctuations month on month are normally tiny and b) it is a huge reversal of the long-term trend.
Would all the other AUDUSD traders know and react proportionately? If not and yet they still trade, their laziness may be an opportunity for more informed traders to make some money.
Tradingeconomics.com offers really high quality analysis. You can see all the major indicators for each country. Clicking them brings up their history as well as an explanation of what they show.
For example, here’s German Consumer Confidence.

Helpful context
There are also qualitative events. Normally these are speeches by Central Bankers.
There are whole blogs dedicated to closely reading such texts and looking for subtle changes in direction or opinion on the economy. Stuff like how often does the phrase "in a good place" come up when the Chair of the Fed speaks. It is pretty dry stuff. Yet these are leading indicators of how each member may vote to set interest rates. Ed Yardeni is the go-to guy on central banks.

Data surprise index

The other thing you might look at is something investment banks produce for their customers. A data surprise index. I am not sure if these are available in retail land - there's no reason they shouldn't be but the economic calendars online are very basic.
You’ll remember we talked about data not being good or bad of itself but good or bad relative to what was expected. These indices measure this difference.
If results are consistently better than analysts expect then you’ll see a positive number. If they are consistently worse than analysts expect a negative number. You can see they tend to swing from positive to negative.

Mean reversion at its best! Data surprise indices measure how much better or worse data came in vs forecast
There are many theories for this but in general people consider that analysts herd around the consensus. They are scared to be outliers and look ‘wrong’ or ‘stupid’ so they instead place estimates close to the pack of their peers.
When economic conditions change they may therefore be slow to update. When they are wrong consistently - say too bearish - they eventually flip the other way and become too bullish.
These charts can be interesting to give you an idea of how the recent data releases have been versus market expectations. You may try to spot the turning points in macroeconomic data that drive long term currency prices and trends.

Using recent events to predict future reactions

The market reaction function is the most important thing on an economic calendar in many ways. It means: what will happen to the price if the data is better or worse than the market expects?
That seems easy to answer but it is not.
Consider the example of consumer confidence we had earlier.
  • Many times the market will shrug and ignore it.
  • But when the economic recovery is predicated on a strong consumer it may move markets a lot.
Or consider the S&P index of US stocks (Wall Street).
  • If you get good economic data that beats analyst estimates surely it should go up? Well, sometimes that is certainly the case.
  • But good economic data might result in the US Central Bank raising interest rates. Raising interest rates will generally make the stock market go down!
So better than expected data could make the S&P go up (“the economy is great”) or down (“the Fed is more likely to raise rates”). It depends. The market can interpret the same data totally differently at different times.
One clue is to look at what happened to the price of risk assets at the last event.
For example, let’s say we looked at unemployment and it came in a lot worse than forecast last month. What happened to the S&P back then?

2% drop last time on a 'worse than expected' number ... so it it is 'better than expected' best guess is we rally 2% higher
So this tells us that - at least for our most recent event - the S&P moved 2% lower on a far worse than expected number. This gives us some guidance as to what it might do next time and the direction. Bad number = lower S&P. For a huge surprise 2% is the size of move we’d expect.
Again - this is a real limitation of online calendars. They should show next to the historic results (expected/actual) the reaction of various instruments.

Buy the rumour, sell the fact

A final example of an unpredictable reaction relates to the old rule of ‘Buy the rumour, sell the fact.’ This captures the tendency for markets to anticipate events and then reverse when they occur.

Buy the rumour, sell the fact
In short: people take profit and close their positions when what they expected to happen is confirmed.
So we have to decide which driver is most important to the market at any point in time. You obviously cannot ask every participant. The best way to do it is to look at what happened recently. Look at the price action during recent releases and you will get a feel for how much the market moves and in which direction.

Trimming or taking off positions

One thing to note is that events sometimes give smart participants information about positioning. This is because many traders take off or reduce positions ahead of big news events for risk management purposes.
Imagine we see GBPUSD rises in the hour before GDP release. That probably indicates the market is short and has taken off / flattened its positions.

The price action before an event can tell you about speculative positioning
If GDP is merely in line with expectations those same people are likely to add back their positions. They avoided a potential banana skin. This is why sometimes the market moves on an event that seemingly was bang on consensus.
But you have learned something. The speculative market is short and may prove vulnerable to a squeeze.

Two kinds of reversals

Fairly often you’ll see the market move in one direction on a release then turn around and go the other way.
These are known as reversals. Traders will often ‘fade’ a move, meaning bet against it and expect it to reverse.

Logical reversals

Sometimes this happens when the data looks good at first glance but the details don’t support it.
For example, say the headline is very bullish on German manufacturing numbers but then a minute later it becomes clear the company who releases the data has changed methodology or believes the number is driven by a one-off event. Or maybe the headline number is positive but buried in the detail there is a very negative revision to previous numbers.
Fading the initial spike is one way to trade news. Try looking at what the price action is one minute after the event and thirty minutes afterwards on historic releases.

Crazy reversals


Some reversals don't make sense
Sometimes a reversal happens for seemingly no fundamental reason. Say you get clearly positive news that is better than anyone expects. There are no caveats to the positive number. Yet the price briefly spikes up and then falls hard. What on earth?
This is a pure supply and demand thing. Even on bullish news the market cannot sustain a rally. The market is telling you it wants to sell this asset. Try not to get in its way.

Some key releases

As we have already discussed, different releases are important at different times. However, we’ll look at some consistently important ones in this final section.

Interest rates decisions

These can sometimes be unscheduled. However, normally the decisions are announced monthly. The exact process varies for each central bank. Typically there’s a headline decision e.g. maintain 0.75% rate.
You may also see “minutes” of the meeting in which the decision was reached and a vote tally e.g. 7 for maintain, 2 for lower rates. These are always top-tier data releases and have capacity to move the currency a lot.
A hawkish central bank (higher rates) will tend to move a currency higher whilst a dovish central bank (lower rates) will tend to move a currency lower.
A central banker speaking is always a big event

Non farm payrolls

These are released once per month. This is another top-tier release that will move all USD pairs as well as equities.
There are three numbers:
  • The headline number of jobs created (bigger is better)
  • The unemployment rate (smaller is better)
  • Average hourly earnings (depends)
Bear in mind these headline numbers are often off by around 75,000. If a report comes in +/- 25,000 of the forecast, that is probably a non event.
In general a positive response should move the USD higher but check recent price action.
Other countries each have their own unemployment data releases but this is the single most important release.

Surveys

There are various types of surveys: consumer confidence; house price expectations; purchasing managers index etc.
Each one basically asks a group of people if they expect to make more purchases or activity in their area of expertise to rise. There are so many we won’t go into each one here.
A really useful tool is the tradingeconomics.com economic indicators for each country. You can see all the major indicators and an explanation of each plus the historic results.

GDP

Gross Domestic Product is another big release. It is a measure of how much a country’s economy is growing.
In general the market focuses more on ‘advance’ GDP forecasts more than ‘final’ numbers, which are often released at the same time.
This is because the final figures are accurate but by the time they come around the market has already seen all the inputs. The advance figure tends to be less accurate but incorporates new information that the market may not have known before the release.
In general a strong GDP number is good for the domestic currency.

Inflation

Countries tend to release measures of inflation (increase in prices) each month. These releases are important mainly because they may influence the future decisions of the central bank, when setting the interest rate.
See the FX fundamentals section for more details.

Industrial data

Things like factory orders or or inventory levels. These can provide a leading indicator of the strength of the economy.
These numbers can be extremely volatile. This is because a one-off large order can drive the numbers well outside usual levels.
Pay careful attention to previous releases so you have a sense of how noisy each release is and what kind of moves might be expected.

Comments

Often there is really good stuff in the comments/replies. Check out 'squitstoomuch' for some excellent observations on why some news sources are noisy but early (think: Twitter, ZeroHedge). The Softbank story is a good recent example: was in ZeroHedge a day before the FT but the market moved on the FT. Also an interesting comment on mistakes, which definitely happen on breaking news, and can cause massive reversals.

submitted by getmrmarket to Forex [link] [comments]

Dollar smiles again. Forecast as of 11.11.2020

Dollar smiles again. Forecast as of 11.11.2020
While the EURUSDbulls wonder why the price isn’t rising, the bears see the reasons for a deeper correction. What’s next? Let us discuss the Forex outlook and make up a EURUSD trading plan.

Monthly US dollar fundamental forecast

It is impossible to predict market trends. The market is unpredictable; it can always surprise us. The EURUSD bulls are surprised because the pair doesn’t grow. There should be several reasons for the euro growth. Joe Biden has won the US presidential election; there is positive news about the COVID-19 vaccines. Investors should have started selling the dollar. However, the greenback remains strong, encouraging traders to buy the USD.
Jefferies notes that the USD closed in the red zone six months out of the last seven, having been down by 11%. The dollar’s surge on November 9 proves that most of the negative had been priced in the quotes, and the greenback will hardly start falling now. The central bank in Europe and Asia, which compete with the Fed, are willing to provide an extra monetary stimulus, which is a bearish factor for their local currencies. Jefferies sees the EURUSD falling to 1.14 as the dollar smile theory is popular again. It suggests the USD should strengthen at the final, third stage of the economic cycle because the US GDP outperforms the global peers.
Even though the next two quarters, according to the President of the Federal Reserve Bank of Dallas Robert Kaplan, will be tough for the US, it should demonstrate robust growth in 2021. Unlike Europe, the USA does not impose a lockdown, and the restrictions introduced in the euro-area countries are costly. For example, each month of helping businesses and workers in Italy affected by COVID-19 will cost Rome €10 billion. If the restrictions last through March, it will cost €40 billion - €50 billion, or 3% of GDP. Furthermore, the PMIs and other indicators are falling, which is confirmed by a decrease in the ZEW Indicator of Economic Sentiment for Germany to the lowest level since April.

Dynamics of German economic sentiment index


Source: Bloomberg
The epidemiological situation in the euro area deteriorates. The ECB estimates that one in seven workers in Spain is associated with a business at risk of collapse, which compares with 8% of employees in Germany and France, and 10% - in Italy. The divergence in economic growth is in favor of the USA, which presses down the EURUSD.
And what about Biden’s victory and coronavirus vaccines? I believe the first driver has already worked out, which is evident from the euro drop on November 9. There is still much uncertainty around vaccines. Nobody can say how quickly they will be introduced and how long the immunity will last. The market needs time. The US stock indexes could be overvalued and will be unstable in the next few weeks. Besides, the positive news about COVID-19 vaccines will give Republicans a reason to delay or adopt a smaller fiscal stimulus than previously anticipated.

Monthly EURUSD trading plan

The euro should be strong in the long-term outlook, but it should weaken in the short term. Under such conditions, one could buy the EURUSD at the breakout of the resistance at 1.192. It will be relevant to sell the euro-dollar if the price breaks out the support at 1.179.
For more information follow the link to the website of the LiteForex
https://www.liteforex.com/blog/analysts-opinions/dollar-smiles-again-forecast-as-of-11112020/?uid=285861726&cid=62423
submitted by Maxvelgus to Finance_analytics [link] [comments]

Dollar is set back by euphoria. Forecast as of 09.11.2020

Dollar is set back by euphoria. Forecast as of 09.11.2020
Investors continue trading the idea of Joe Biden becoming the president. That is why the S&P 500 features the best weekly rise since April and pushes the EURUSD up. How long will it continue? Let us discuss the Forex outlook and make up a EURUSD trading plan.

Weekly US dollar fundamental analysis

Euphoria rules the market. Investors forgot about both COVID-19, the US fiscal stimulus's unsettled issue, and Donald Trump rejecting the voting results. Traders are satisfied with the less uncertainty around Joe Biden’s policy, hoping for lower volatility. Analysts suggest that the divided Congress won’t allow Biden to carry out radical reforms in tightening taxation and regulation of technology companies. As a result, the S&P 500 grew by 7.3% in the first week of November, and the USD dropped to the lowest level since early September.
How long will the euphoria last? History proves that starting from 2000, if the S&P 500 was growing on election day, it continued growing in November and December. The first years of presidential terms were also favorable for the US stock indexes. The S&P 500 grew by 18.6% on average. However, the stock indexes’ trends during the time of the divided Congress, which prevented the White House from carrying out radical reforms, were controversial. During 45 years, starting from 1928, when one party controlled the US government, the stock market rose at an average rate of 7.46% annually, up from 7.26% in 46 years when the power was divided.

Reaction of S&P 500 to the political situation in USA


Source: Wall Street Journal
In my opinion, the markets are going too fast. Investors want to join the stock market’s uptrend, forgetting about the negative. However, are some negative factors that should have their effect. First, political uncertainty continues. Donald Trump is challenging the election results. Because of the second round of voting in Georgia, we will know the partisan makeup of the U.S. Senate only on January 5. It creates obstacles to the agreement on the new fiscal stimulus. Until a fresh stimulus is provided, the US economy will be slowing down, which presses down both the global GDP and the risk appetite.
Second, the coronavirus vaccines haven’t yet been developed, and the COVID-19 pandemic continues in the USA and in the euro area. The numbers of new coronavirus cases, hospitalizations, and deaths are hitting all-time highs, so investors’ optimism is surprising. The epidemiological situation in Europe is deteriorating. France, Germany, and other countries are locked down. This fact suggests that the divergence in the economic growth and monetary policy is in favor of the EURUSD bears.
Finally, the U.S. dollar may not be falling amid the growth of the S&P 500. The negative correlation between stocks and the USD is the strongest at the time of uncertainty, also because of the US presidential election. Once uncertainty eases, the negative correlation should stop working.

Weekly EURUSD trading plan

Euphoria rules the market, but it can’t last for long. If the EURUSD bulls fail to hold the price above 1.188, the pair should roll down to 1.183 and 1.1785. Otherwise, if the resistance is held up, the euro could continue the rally up to $1.195-$1.196 and even $1.2. Next, large traders should take some profits and exit the longs.
For more information follow the link to the website of the LiteForex
https://www.liteforex.com/blog/analysts-opinions/dollar-is-set-back-by-euphoria-forecast-as-of-09112020/?uid=285861726&cid=62423

submitted by Maxvelgus to Finance_analytics [link] [comments]

Forex Forecast | Forex Prediction

Forex Forecast | Forex Prediction

https://preview.redd.it/jjzub2rqjex51.jpg?width=2000&format=pjpg&auto=webp&s=7e33a47720ca89de6ecd13ca2e9042f943c05685



If you have been in the forex market even for a little while, you have no doubt heard people say ‘trade with the trend.’ The sentiment is not just some anecdote we throw out there. There is a lot of truth in the statement, especially as it pertains to forex prediction.
In the forex forecast, identification of trends is one of the critical skills one needs to have to be successful. Patterns are not all the same; they vary. Some of them are short, intermediate, or long term. Identifying trends is highly profitable because it is how we do forex forecast.
When we come to a general trading strategy, we always encourage traders to trade with the trend. If the pattern is going up, you should proceed with caution and be attentive to the moves you make. A trend applies to more than just the general movement of the currency pairs.
submitted by TopFreeFxSignal to u/TopFreeFxSignal [link] [comments]

Trading economic news

The majority of this sub is focused on technical analysis. I regularly ridicule such "tea leaf readers" and advocate for trading based on fundamentals and economic news instead, so I figured I should take the time to write up something on how exactly you can trade economic news releases.
This post is long as balls so I won't be upset if you get bored and go back to your drooping dick patterns or whatever.

How economic news is released

First, it helps to know how economic news is compiled and released. Let's take Initial Jobless Claims, the number of initial claims for unemployment benefits around the United States from Sunday through Saturday. Initial in this context means the first claim for benefits made by an individual during a particular stretch of unemployment. The Initial Jobless Claims figure appears in the Department of Labor's Unemployment Insurance Weekly Claims Report, which compiles information from all of the per-state departments that report to the DOL during the week. A typical number is between 100k and 250k and it can vary quite significantly week-to-week.
The Unemployment Insurance Weekly Claims Report contains data that lags 5 days behind. For example, the Report issued on Thursday March 26th 2020 contained data about the week ending on Saturday March 21st 2020.
In the days leading up to the Report, financial companies will survey economists and run complicated mathematical models to forecast the upcoming Initial Jobless Claims figure. The results of surveyed experts is called the "consensus"; specific companies, experts, and websites will also provide their own forecasts. Different companies will release different consensuses. Usually they are pretty close (within 2-3k), but for last week's record-high Initial Jobless Claims the reported consensuses varied by up to 1M! In other words, there was essentially no consensus.
The Unemployment Insurance Weekly Claims Report is released each Thursday morning at exactly 8:30 AM ET. (On Thanksgiving the Report is released on Wednesday instead.) Media representatives gather at the Frances Perkins Building in Washington DC and are admitted to the "lockup" at 8:00 AM ET. In order to be admitted to the lockup you have to be a credentialed member of a media organization that has signed the DOL lockup agreement. The lockup room is small so there is a limited number of spots.
No phones are allowed. Reporters bring their laptops and connect to a local network; there is a master switch on the wall that prevents/enables Internet connectivity on this network. Once the doors are closed the Unemployment Insurance Weekly Claims Report is distributed, with a heading that announces it is "embargoed" (not to be released) prior to 8:30 AM. Reporters type up their analyses of the report, including extracting key figures like Initial Jobless Claims. They load their write-ups into their companies' software, which prepares to send it out as soon as Internet is enabled. At 8:30 AM the DOL representative in the room flips the wall switch and all of the laptops are connected to the Internet, releasing their write-ups to their companies and on to their companies' partners.
Many of those media companies have externally accessible APIs for distributing news. Media aggregators and squawk services (like RanSquawk and TradeTheNews) subscribe to all of these different APIs and then redistribute the key economic figures from the Report to their own subscribers within one second after Internet is enabled in the DOL lockup.
Some squawk services are text-based while others are audio-based. FinancialJuice.com provides a free audio squawk service; internally they have a paid subscription to a professional squawk service and they simply read out the latest headlines to their own listeners, subsidized by ads on the site. I've been using it for 4 months now and have been pretty happy. It usually lags behind the official release times by 1-2 seconds and occasionally they verbally flub the numbers or stutter and have to repeat, but you can't beat the price!
Important - I’m not affiliated with FinancialJuice and I’m not advocating that you use them over any other squawk. If you use them and they misspeak a number and you lose all your money don’t blame me. If anybody has any other free alternatives please share them!

How the news affects forex markets

Institutional forex traders subscribe to these squawk services and use custom software to consume the emerging data programmatically and then automatically initiate trades based on the perceived change to the fundamentals that the figures represent.
It's important to note that every institution will have "priced in" their own forecasted figures well in advance of an actual news release. Forecasts and consensuses all come out at different times in the days leading up to a news release, so by the time the news drops everybody is really only looking for an unexpected result. You can't really know what any given institution expects the value to be, but unless someone has inside information you can pretty much assume that the market has collectively priced in the experts' consensus. When the news comes out, institutions will trade based on the difference between the actual and their forecast.
Sometimes the news reflects a real change to the fundamentals with an economic effect that will change the demand for a currency, like an interest rate decision. However, in the case of the Initial Jobless Claims figure, which is a backwards-looking metric, trading is really just self-fulfilling speculation that market participants will buy dollars when unemployment is low and sell dollars when unemployment is high. Generally speaking, news that reflects a real economic shift has a bigger effect than news that only matters to speculators.
Massive and extremely fast news-based trades happen within tenths of a second on the ECNs on which institutional traders are participants. Over the next few seconds the resulting price changes trickle down to retail traders. Some economic news, like Non Farm Payroll Employment, has an effect that can last minutes to hours as "slow money" follows behind on the trend created by the "fast money". Other news, like Initial Jobless Claims, has a short impact that trails off within a couple minutes and is subsequently dwarfed by the usual pseudorandom movements in the market.
The bigger the difference between actual and consensus, the bigger the effect on any given currency pair. Since economic news releases generally relate to a single currency, the biggest and most easily predicted effects are seen on pairs where one currency is directly effected and the other is not affected at all. Personally I trade USD/JPY because the time difference between the US and Japan ensures that no news will be coming out of Japan at the same time that economic news is being released in the US.
Before deciding to trade any particular news release you should measure the historical correlation between the release (specifically, the difference between actual and consensus) and the resulting short-term change in the currency pair. Historical data for various news releases (along with historical consensus data) is readily available. You can pay to get it exported into Excel or whatever, or you can scroll through it for free on websites like TradingEconomics.com.
Let's look at two examples: Initial Jobless Claims and Non Farm Payroll Employment (NFP). I collected historical consensuses and actuals for these releases from January 2018 through the present, measured the "surprise" difference for each, and then correlated that to short-term changes in USD/JPY at the time of release using 5 second candles.
I omitted any releases that occurred simultaneously as another major release. For example, occasionally the monthly Initial Jobless Claims comes out at the exact same time as the monthly Balance of Trade figure, which is a more significant economic indicator and can be expected to dwarf the effect of the Unemployment Insurance Weekly Claims Report.
USD/JPY correlation with Initial Jobless Claims (2018 - present)
USD/JPY correlation with Non Farm Payrolls (2018 - present)
The horizontal axes on these charts is the duration (in seconds) after the news release over which correlation was calculated. The vertical axis is the Pearson correlation coefficient: +1 means that the change in USD/JPY over that duration was perfectly linearly correlated to the "surprise" in the releases; -1 means that the change in USD/JPY was perfectly linearly correlated but in the opposite direction, and 0 means that there is no correlation at all.
For Initial Jobless Claims you can see that for the first 30 seconds USD/JPY is strongly negatively correlated with the difference between consensus and actual jobless claims. That is, fewer-than-forecast jobless claims (fewer newly unemployed people than expected) strengthens the dollar and greater-than-forecast jobless claims (more newly unemployed people than expected) weakens the dollar. Correlation then trails off and changes to a moderate/weak positive correlation. I interpret this as algorithms "buying the dip" and vice versa, but I don't know for sure. From this chart it appears that you could profit by opening a trade for 15 seconds (duration with strongest correlation) that is long USD/JPY when Initial Jobless Claims is lower than the consensus and short USD/JPY when Initial Jobless Claims is higher than expected.
The chart for Non Farm Payroll looks very different. Correlation is positive (higher-than-expected payrolls strengthen the dollar and lower-than-expected payrolls weaken the dollar) and peaks at around 45 seconds, then slowly decreases as time goes on. This implies that price changes due to NFP are quite significant relative to background noise and "stick" even as normal fluctuations pick back up.
I wanted to show an example of what the USD/JPY S5 chart looks like when an "uncontested" (no other major simultaneously news release) Initial Jobless Claims and NFP drops, but unfortunately my broker's charts only go back a week. (I can pull historical data going back years through the API but to make it into a pretty chart would be a bit of work.) If anybody can get a 5-second chart of USD/JPY at March 19, 2020, UTC 12:30 and/or at February 7, 2020, UTC 13:30 let me know and I'll add it here.

Backtesting

So without too much effort we determined that (1) USD/JPY is strongly negatively correlated with the Initial Jobless Claims figure for the first 15 seconds after the release of the Unemployment Insurance Weekly Claims Report (when no other major news is being released) and also that (2) USD/JPY is strongly positively correlated with the Non Farms Payroll figure for the first 45 seconds after the release of the Employment Situation report.
Before you can assume you can profit off the news you have to backtest and consider three important parameters.
Entry speed: How quickly can you realistically enter the trade? The correlation performed above was measured from the exact moment the news was released, but realistically if you've got your finger on the trigger and your ear to the squawk it will take a few seconds to hit "Buy" or "Sell" and confirm. If 90% of the price move happens in the first second you're SOL. For back-testing purposes I assume a 5 second delay. In practice I use custom software that opens a trade with one click, and I can reliably enter a trade within 2-3 seconds after the news drops, using the FinancialJuice free squawk.
Minimum surprise: Should you trade every release or can you do better by only trading those with a big enough "surprise" factor? Backtesting will tell you whether being more selective is better long-term or not.
Hold time: The optimal time to hold the trade is not necessarily the same as the time of maximum correlation. That's a good starting point but it's not necessarily the best number. Backtesting each possible hold time will let you find the best one.
The spread: When you're only holding a position open for 30 seconds, the spread will kill you. The correlations performed above used the midpoint price, but in reality you have to buy at the ask and sell at the bid. Brokers aren't stupid and the moment volume on the ECN jumps they will widen the spread for their retail customers. The only way to determine if the news-driven price movements reliably overcome the spread is to backtest.
Stops: Personally I don't use stops, neither take-profit nor stop-loss, since I'm automatically closing the trade after a fixed (and very short) amount of time. Additionally, brokers have a minimum stop distance; the profits from scalping the news are so slim that even the nearest stops they allow will generally not get triggered.
I backtested trading these two news releases (since 2018), using a 5 second entry delay, real historical spreads, and no stops, cycling through different "surprise" thresholds and hold times to find the combination that returns the highest net profit. It's important to maximize net profit, not expected value per trade, so you don't over-optimize and reduce the total number of trades taken to one single profitable trade. If you want to get fancy you can set up a custom metric that combines number of trades, expected value, and drawdown into a single score to be maximized.
For the Initial Jobless Claims figure I found that the best combination is to hold trades open for 25 seconds (that is, open at 5 seconds elapsed and hold until 30 seconds elapsed) and only trade when the difference between consensus and actual is 7k or higher. That leads to 30 trades taken since 2018 and an expected return of... drumroll please... -0.0093 yen per unit per trade.
Yep, that's a loss of approx. $8.63 per lot.
Disappointing right? That's the spread and that's why you have to backtest. Even though the release of the Unemployment Insurance Weekly Claims Report has a strong correlation with movement in USD/JPY, it's simply not something that a retail trader can profit from.
Let's turn to the NFP. There I found that the best combination is to hold trades open for 75 seconds (that is, open at 5 seconds elapsed and hold until 80 seconds elapsed) and trade every single NFP (no minimum "surprise" threshold). That leads to 20 trades taken since 2018 and an expected return of... drumroll please... +0.1306 yen per unit per trade.
That's a profit of approx. $121.25 per lot. Not bad for 75 seconds of work! That's a +6% ROI at 50x leverage.

Make it real

If you want to do this for realsies, you need to run these numbers for all of the major economic news releases. Markit Manufacturing PMI, Factory Orders MoM, Trade Balance, PPI MoM, Export and Import Prices, Michigan Consumer Sentiment, Retail Sales MoM, Industrial Production MoM, you get the idea. You keep a list of all of the releases you want to trade, when they are released, and the ideal hold time and "surprise" threshold. A few minutes before the prescribed release time you open up your broker's software, turn on your squawk, maybe jot a few notes about consensuses and model forecasts, and get your finger on the button. At the moment you hear the release you open the trade in the correct direction, hold it (without looking at the chart!) for the required amount of time, then close it and go on with your day.
Some benefits of trading this way: * Most major economic releases come out at either 8:30 AM ET or 10:00 AM ET, and then you're done for the day. * It's easily backtestable. You can look back at the numbers and see exactly what to expect your return to be. * It's fun! Packing your trading into 30 seconds and knowing that institutions are moving billions of dollars around as fast as they can based on the exact same news you just read is thrilling. * You can wow your friends by saying things like "The St. Louis Fed had some interesting remarks on consumer spending in the latest Beige Book." * No crayons involved.
Some downsides: * It's tricky to be fast enough without writing custom software. Some broker software is very slow and requires multiple dialog boxes before a position is opened, which won't cut it. * The profits are very slim, you're not going to impress your instagram followers to join your expensive trade copying service with your 30-second twice-weekly trades. * Any friends you might wow with your boring-ass economic talking points are themselves the most boring people in the world.
I hope you enjoyed this long as fuck post and you give trading economic news a try!
submitted by thicc_dads_club to Forex [link] [comments]

XAU/USD forecast: Gold market will face a turmoil

XAU/USD forecast: Gold market will face a turmoil

Fundamental gold price forecast for today

Coronavirus vaccines will hold XAU/USD bulls back

Mass gold sell-offs in the mid-August discouraged the gold bulls. However, a quick rebound above $2000 per ounce allowed large banks to resume their recommendations to buy. According to Credit Suisse forecasts, gold prices will grow to $2500 in 2021. Standard Chartered Bank believes investors will use any price decline to open long positions amid the weak dollar, low bond rates, and substantial fiscal stimuli. There are enough bulls in the gold market, and this fact alone raises concerns in the extended rally of the XAU/USD. Can there be turmoil?
Many bullish factors have already been priced in the XAUUSD, and there are not so many growth drivers left. I mean the long-term dollar weakness and the Fed’s willingness to put up with the inflation above its 2% target for as long as it is necessary. The problem is whether consumer prices will grow. The inflation level, expected by the bond market, returned to the January level in five years; but it is still below the Fed’s target. Inflation-adjusted five-year options suggest a little chance that the indicator will be above 3%. It is more likely to slide below 1%. The story of 2009-2011 can repeat in the gold market. Then, the gold price, having reached its all-time high, crashed, as investors didn’t nay more believe that the fiscal stimulus could accelerate the PCE.
In my opinion, the bond market can give a clue on the future gold trends. Gold price correlates with the Treasury Inflation-Protected Securities (TIPS). The increase in the TIPS yields on August 11-12 triggered an XAU/USD correction.

Dynamics of gold and TIPS yields



Source: Wall Street Journal
The gold rally takes place ahead of auctions and amid talks about the Russian vaccine. The more is fiscal stimulus, the more money needs Treasury. The initial public offering makes investors sell securities in the secondary market, which pushes up the yields. Taking into account vast scales of the state funding, such a situation could repeat, which increases the risks of instability in the gold market.
Still, the most significant danger for the gold buyers could result from good news about the COVID-19 vaccine. The Treasury yields are quite responsive to the pandemic. Positive information about vaccines will support the economy, but, at the same time, it will weigh on gold. Purchasing managers think the glass is half-full, and the continuous rally of the US PMI must support the growth of the global bond market rates.

Dynamics of US PMI and Treasury yields



Source: Nordea Markets
Therefore, gold bulls still have two big advantages. They are the greenback weakness and the Fed’s willingness to put up with a high inflation rate. Nonetheless, unless the consumer price growth accelerates and the USD crashes, the XAU/USD will hardly continue to rally. On the contrary, an increase in the Treasury yields looks more likely, which suggests the relevance of the gold sales on the rise to $2050-2055 and $2130-2135.
For more information follow the link to the website of the LiteForex
https://www.liteforex.com/blog/analysts-opinions/xauusd-forecast-gold-market-will-face-a-turmoil/?uid=285861726&cid=79634
submitted by Maxvelgus to Finance_analytics [link] [comments]

Forecast for XAU/USD: Gold churns out records

Forecast for XAU/USD: Gold churns out records

Fundamental forecast for gold for today

Precious metal climbed too high

It’s done! What gold bugs had been dreaming about for decades happened: the price has reached a level of $2,000 per ounce. The weakness of the US dollar, the fall of the 10-year U.S. Bond yield to unbelievable minus 1%, and unstoppable growth of ETF reserves did their work. Meanwhile, gold bugs grew much older: according to JP Morgan’s research, the precious metal is usually bought by aged investors, while young traders prefer Bitcoin or high-tech stocks.
Many may find it surprising that gold is growing amidst the rally of US stock indexes. That often happens during recessions, though: enormous volumes of central banks’ cheap liquidity allow investors to build up long positions in risky and reliable assets. What’s more, the market prefers precious metals when it’s unsure about GDP’s recovery.

S&P 500’s and gold’s evolutions

Source: Trading Economics
Even if gold climbed high, there are still a lot of bullish forecasts: Goldman Sachs believes that the prices may go up to $2300 per ounce because investors are looking for a new reserve currency; RBC Capital Markets projects a level of $3,000.
XAU/USD bulls may have succeeded because the recession didn’t follow the 2007-2009 scenario. Then, the Fed’s monetary stimuli were enough for getting the economy back to the trend; now, it’s unclear. Then, the USD was growing as the US GDP’s recovery rate was faster than its global peers’ one; now, it’s falling amidst the economic divergence of growth. Then, the idea that inflation would speed up amidst increased money supply failed; now, it’s still alive. The difference between then and now allows us to say that gold hasn’t stop rallying yet.
The best scenario for gold would be a W-shape recovery of the US economy. It implies extending monetary and fiscal stimuli, further weakening the USD, and a drop in real US bond yields. However, a V-shape recovery of GDP will allow XAU/USD quotes to grow too. A long-term downtrend of the USD index is doubtless. At the same time, the Fed makes it clear that it’s ready to tolerate high inflation, which will raise the bond market rates.

Gold and expected inflation dynamics

Source: Wall Street Journal
The second coronavirus wave in Europe is the main factor in the development of the bullish scenario for gold. Under this scenario, the euro will fall, the USD index will grow and will probably continue growing as the divergence of economic growth will benefit the USA. That scenario is unlikely to happen. So, hold your long positions formed at $1820-1825 per ounce and build them up during retracements. XAU/USD may correct on the Congress’s approval of a new fiscal relief package and strong stats on the US labor market.
For more information follow the link to the website of the LiteForex
https://www.liteforex.com/blog/analysts-opinions/forecast-for-xauusd-gold-churns-out-records/ ?uid=285861726&cid=79634
submitted by Maxvelgus to Finance_analytics [link] [comments]

EUR/USD forecast: Poor management will kill dollar

EUUSD forecast: Poor management will kill dollar

Fundamental U.S. dollar forecast for today

EUUSD pair is being corrected, but the euro uptrend is strong

You can take all my factories, all my capital, everything I have from me. But leave me five of my best managers, and before you know it, I’ll be ahead of everyone else again. One of the richest men of the 19th century, Andrew Carnegie, was right. Success in business depends on efficient management. Forex trading is also a business. The strength of a currency is determined also by efficient management. The euro-area used to envy the USA that could afford to redistribute financial resources from strong states to weak ones. Only the pandemic has forced the EU to abandon the principle “at court everyone is for himself.” It has immediately influenced the EUUSD.
In the modern world, a bet on a currency is a bet on the control over the coronavirus. However, Congress failed to agree on the extension of the program of weekly unemployment benefits that officially expired on July 31, leaving more than 25 million people without support. In Europe, however, the rich North provides aid for the poor South. So, the management in the euro-area seems to be more effective. Financial analysts suggest that poor management could kill the US dollar.
In August, the USD index has featured the worst drop over almost two years. The bear speculative
sentiment in the derivatives market is as strong as in April 2018.

Dynamics of US dollar speculative positions

Source: Wall Street Journal.
As I suggested earlier, weak data on European GDPs triggered the EUUSD correction. However, amid the divergence in the epidemiological environment, the euro-area economy is likely to recover sooner than the US growth. Federal Reserve Bank of Minneapolis President Neel Kashkari has even suggested a fresh lockdown for 4 – 6 weeks. Allegedly, the US Congress can afford it.
The euro-area GDP in the April-May period fell by 40.3% on an annual basis, which, compared with the same period of 2019, seems to be a more dramatic drop than the US GDP drop by 32.9%. However, population support programs will continue in 2021; the worst-affected regions, including Italy, performed better than expected. The control over the coronavirus relieves fear, which is a key factor in the economic recovery trend.

Dynamics of European GDPs

Source: Bloomberg
Of course, there are many problems in the euro area. The European economy is much dependent on exports and tourism, which makes foreign demand a very important factor. Under the current conditions, it could slow down the economic recovery. Besides, the number of coronavirus cases has increased amid the end of the lockdown in some parts of the region, including Spain.
The epidemiological situation in the US is difficult, the management is poor. Besides, the US even now, when all the countries try to unite to solve a common problem, continues its attacks on China trying to please the ambitions of the White House. All these factors support the idea of the strong EUUSD uptrend. It makes sense to use the drawdowns to 1.173, 1.168, and 1.162 to enter long-term purchases.
For more information follow the link to the website of the LiteForex
https://www.liteforex.com/blog/analysts-opinions/eurusd-forecast-poor-management-will-kill-dolla?uid=285861726&cid=79634
submitted by Maxvelgus to Finance_analytics [link] [comments]

Hibiscus Petroleum Berhad (5199.KL)


https://preview.redd.it/gp18bjnlabr41.jpg?width=768&format=pjpg&auto=webp&s=6054e7f52e8d52da403016139ae43e0e799abf15
Download PDF of this article here: https://docdro.id/6eLgUPo
In light of the recent fall in oil prices due to the Saudi-Russian dispute and dampening demand for oil due to the lockdowns implemented globally, O&G stocks have taken a severe beating, falling approximately 50% from their highs at the beginning of the year. Not spared from this onslaught is Hibiscus Petroleum Berhad (Hibiscus), a listed oil and gas (O&G) exploration and production (E&P) company.
Why invest in O&G stocks in this particularly uncertain period? For one, valuations of these stocks have fallen to multi-year lows, bringing the potential ROI on these stocks to attractive levels. Oil prices are cyclical, and are bound to return to the mean given a sufficiently long time horizon. The trick is to find those companies who can survive through this downturn and emerge into “normal” profitability once oil prices rebound.
In this article, I will explore the upsides and downsides of investing in Hibiscus. I will do my best to cater this report to newcomers to the O&G industry – rather than address exclusively experts and veterans of the O&G sector. As an equity analyst, I aim to provide a view on the company primarily, and will generally refrain from providing macro views on oil or opinions about secular trends of the sector. I hope you enjoy reading it!
Stock code: 5199.KL
Stock name: Hibiscus Petroleum Berhad
Financial information and financial reports: https://www.malaysiastock.biz/Corporate-Infomation.aspx?securityCode=5199
Company website: https://www.hibiscuspetroleum.com/

Company Snapshot

Hibiscus Petroleum Berhad (5199.KL) is an oil and gas (O&G) upstream exploration and production (E&P) company located in Malaysia. As an E&P company, their business can be basically described as:
· looking for oil,
· drawing it out of the ground, and
· selling it on global oil markets.
This means Hibiscus’s profits are particularly exposed to fluctuating oil prices. With oil prices falling to sub-$30 from about $60 at the beginning of the year, Hibiscus’s stock price has also fallen by about 50% YTD – from around RM 1.00 to RM 0.45 (as of 5 April 2020).
https://preview.redd.it/3dqc4jraabr41.png?width=641&format=png&auto=webp&s=7ba0e8614c4e9d781edfc670016a874b90560684
https://preview.redd.it/lvdkrf0cabr41.png?width=356&format=png&auto=webp&s=46f250a713887b06986932fa475dc59c7c28582e
While the company is domiciled in Malaysia, its two main oil producing fields are located in both Malaysia and the UK. The Malaysian oil field is commonly referred to as the North Sabah field, while the UK oil field is commonly referred to as the Anasuria oil field. Hibiscus has licenses to other oil fields in different parts of the world, notably the Marigold/Sunflower oil fields in the UK and the VIC cluster in Australia, but its revenues and profits mainly stem from the former two oil producing fields.
Given that it’s a small player and has only two primary producing oil fields, it’s not surprising that Hibiscus sells its oil to a concentrated pool of customers, with 2 of them representing 80% of its revenues (i.e. Petronas and BP). Fortunately, both these customers are oil supermajors, and are unlikely to default on their obligations despite low oil prices.
At RM 0.45 per share, the market capitalization is RM 714.7m and it has a trailing PE ratio of about 5x. It doesn’t carry any debt, and it hasn’t paid a dividend in its listing history. The MD, Mr. Kenneth Gerard Pereira, owns about 10% of the company’s outstanding shares.

Reserves (Total recoverable oil) & Production (bbl/day)

To begin analyzing the company, it’s necessary to understand a little of the industry jargon. We’ll start with Reserves and Production.
In general, there are three types of categories for a company’s recoverable oil volumes – Reserves, Contingent Resources and Prospective Resources. Reserves are those oil fields which are “commercial”, which is defined as below:
As defined by the SPE PRMS, Reserves are “… quantities of petroleum anticipated to be commercially recoverable by application of development projects to known accumulations from a given date forward under defined conditions.” Therefore, Reserves must be discovered (by drilling, recoverable (with current technology), remaining in the subsurface (at the effective date of the evaluation) and “commercial” based on the development project proposed.)
Note that Reserves are associated with development projects. To be considered as “commercial”, there must be a firm intention to proceed with the project in a reasonable time frame (typically 5 years, and such intention must be based upon all of the following criteria:)
- A reasonable assessment of the future economics of the development project meeting defined investment and operating criteria; - A reasonable expectation that there will be a market for all or at least the expected sales quantities of production required to justify development; - Evidence that the necessary production and transportation facilities are available or can be made available; and - Evidence that legal, contractual, environmental and other social and economic concerns will allow for the actual implementation of the recovery project being evaluated.
Contingent Resources and Prospective Resources are further defined as below:
- Contingent Resources: potentially recoverable volumes associated with a development plan that targets discovered volumes but is not (yet commercial (as defined above); and) - Prospective Resources: potentially recoverable volumes associated with a development plan that targets as yet undiscovered volumes.
In the industry lingo, we generally refer to Reserves as ‘P’ and Contingent Resources as ‘C’. These ‘P’ and ‘C’ resources can be further categorized into 1P/2P/3P resources and 1C/2C/3C resources, each referring to a low/medium/high estimate of the company’s potential recoverable oil volumes:
- Low/1C/1P estimate: there should be reasonable certainty that volumes actually recovered will equal or exceed the estimate; - Best/2C/2P estimate: there should be an equal likelihood of the actual volumes of petroleum being larger or smaller than the estimate; and - High/3C/3P estimate: there is a low probability that the estimate will be exceeded.
Hence in the E&P industry, it is easy to see why most investors and analysts refer to the 2P estimate as the best estimate for a company’s actual recoverable oil volumes. This is because 2P reserves (‘2P’ referring to ‘Proved and Probable’) are a middle estimate of the recoverable oil volumes legally recognized as “commercial”.
However, there’s nothing stopping you from including 2C resources (riskier) or utilizing 1P resources (conservative) as your estimate for total recoverable oil volumes, depending on your risk appetite. In this instance, the company has provided a snapshot of its 2P and 2C resources in its analyst presentation:
https://preview.redd.it/o8qejdyc8br41.png?width=710&format=png&auto=webp&s=b3ab9be8f83badf0206adc982feda3a558d43e78
Basically, what the company is saying here is that by 2021, it will have classified as 2P reserves at least 23.7 million bbl from its Anasuria field and 20.5 million bbl from its North Sabah field – for total 2P reserves of 44.2 million bbl (we are ignoring the Australian VIC cluster as it is only estimated to reach first oil by 2022).
Furthermore, the company is stating that they have discovered (but not yet legally classified as “commercial”) a further 71 million bbl of oil from both the Anasuria and North Sabah fields, as well as the Marigold/Sunflower fields. If we include these 2C resources, the total potential recoverable oil volumes could exceed 100 million bbl.
In this report, we shall explore all valuation scenarios giving consideration to both 2P and 2C resources.
https://preview.redd.it/gk54qplf8br41.png?width=489&format=png&auto=webp&s=c905b7a6328432218b5b9dfd53cc9ef1390bd604
The company further targets a 2021 production rate of 20,000 bbl (LTM: 8,000 bbl), which includes 5,000 bbl from its Anasuria field (LTM: 2,500 bbl) and 7,000 bbl from its North Sabah field (LTM: 5,300 bbl).
This is a substantial increase in forecasted production from both existing and prospective oil fields. If it materializes, annual production rate could be as high as 7,300 mmbbl, and 2021 revenues (given FY20 USD/bbl of $60) could exceed RM 1.5 billion (FY20: RM 988 million).
However, this targeted forecast is quite a stretch from current production levels. Nevertheless, we shall consider all provided information in estimating a valuation for Hibiscus.
To understand Hibiscus’s oil production capacity and forecast its revenues and profits, we need to have a better appreciation of the performance of its two main cash-generating assets – the North Sabah field and the Anasuria field.

North Sabah oil field
https://preview.redd.it/62nssexj8br41.png?width=1003&format=png&auto=webp&s=cd78f86d51165fb9a93015e49496f7f98dad64dd
Hibiscus owns a 50% interest in the North Sabah field together with its partner Petronas, and has production rights over the field up to year 2040. The asset contains 4 oil fields, namely the St Joseph field, South Furious field, SF 30 field and Barton field.
For the sake of brevity, we shall not delve deep into the operational aspects of the fields or the contractual nature of its production sharing contract (PSC). We’ll just focus on the factors which relate to its financial performance. These are:
· Average uptime
· Total oil sold
· Average realized oil price
· Average OPEX per bbl
With regards to average uptime, we can see that the company maintains relative high facility availability, exceeding 90% uptime in all quarters of the LTM with exception of Jul-Sep 2019. The dip in average uptime was due to production enhancement projects and maintenance activities undertaken to improve the production capacity of the St Joseph and SF30 oil fields.
Hence, we can conclude that management has a good handle on operational performance. It also implies that there is little room for further improvement in production resulting from increased uptime.
As North Sabah is under a production sharing contract (PSC), there is a distinction between gross oil production and net oil production. The former relates to total oil drawn out of the ground, whereas the latter refers to Hibiscus’s share of oil production after taxes, royalties and expenses are accounted for. In this case, we want to pay attention to net oil production, not gross.
We can arrive at Hibiscus’s total oil sold for the last twelve months (LTM) by adding up the total oil sold for each of the last 4 quarters. Summing up the figures yields total oil sold for the LTM of approximately 2,075,305 bbl.
Then, we can arrive at an average realized oil price over the LTM by averaging the average realized oil price for the last 4 quarters, giving us an average realized oil price over the LTM of USD 68.57/bbl. We can do the same for average OPEX per bbl, giving us an average OPEX per bbl over the LTM of USD 13.23/bbl.
Thus, we can sum up the above financial performance of the North Sabah field with the following figures:
· Total oil sold: 2,075,305 bbl
· Average realized oil price: USD 68.57/bbl
· Average OPEX per bbl: USD 13.23/bbl

Anasuria oil field
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Doing the same exercise as above for the Anasuria field, we arrive at the following financial performance for the Anasuria field:
· Total oil sold: 1,073,304 bbl
· Average realized oil price: USD 63.57/bbl
· Average OPEX per bbl: USD 23.22/bbl
As gas production is relatively immaterial, and to be conservative, we shall only consider the crude oil production from the Anasuria field in forecasting revenues.

Valuation (Method 1)

Putting the figures from both oil fields together, we get the following data:
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Given that we have determined LTM EBITDA of RM 632m, the next step would be to subtract ITDA (interest, tax, depreciation & amortization) from it to obtain estimated LTM Net Profit. Using FY2020’s ITDA of approximately RM 318m as a guideline, we arrive at an estimated LTM Net Profit of RM 314m (FY20: 230m). Given the current market capitalization of RM 714.7m, this implies a trailing LTM PE of 2.3x.
Performing a sensitivity analysis given different oil prices, we arrive at the following net profit table for the company under different oil price scenarios, assuming oil production rate and ITDA remain constant:
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From the above exercise, it becomes apparent that Hibiscus has a breakeven oil price of about USD 41.8863/bbl, and has a lot of operating leverage given the exponential rate of increase in its Net Profit with each consequent increase in oil prices.
Considering that the oil production rate (EBITDA) is likely to increase faster than ITDA’s proportion to revenues (fixed costs), at an implied PE of 4.33x, it seems likely that an investment in Hibiscus will be profitable over the next 10 years (with the assumption that oil prices will revert to the mean in the long-term).

Valuation (Method 2)

Of course, there are a lot of assumptions behind the above method of valuation. Hence, it would be prudent to perform multiple methods of valuation and compare the figures to one another.
As opposed to the profit/loss assessment in Valuation (Method 1), another way of performing a valuation would be to estimate its balance sheet value, i.e. total revenues from 2P Reserves, and assign a reasonable margin to it.
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From the above, we understand that Hibiscus’s 2P reserves from the North Sabah and Anasuria fields alone are approximately 44.2 mmbbl (we ignore contribution from Australia’s VIC cluster as it hasn’t been developed yet).
Doing a similar sensitivity analysis of different oil prices as above, we arrive at the following estimated total revenues and accumulated net profit:
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Let’s assume that the above average of RM 9.68 billion in total realizable revenues from current 2P reserves holds true. If we assign a conservative Net Profit margin of 15% (FY20: 23%; past 5 years average: 16%), we arrive at estimated accumulated Net Profit from 2P Reserves of RM 1.452 billion. Given the current market capitalization of RM 714 million, we might be able to say that the equity is worth about twice the current share price.
However, it is understandable that some readers might feel that the figures used in the above estimate (e.g. net profit margin of 15%) were randomly plucked from the sky. So how do we reconcile them with figures from the financial statements? Fortunately, there appears to be a way to do just that.
Intangible Assets
I refer you to a figure in the financial statements which provides a shortcut to the valuation of 2P Reserves. This is the carrying value of Intangible Assets on the Balance Sheet.
As of 2QFY21, that amount was RM 1,468,860,000 (i.e. RM 1.468 billion).
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Quite coincidentally, one might observe that this figure is dangerously close to the estimated accumulated Net Profit from 2P Reserves of RM 1.452 billion we calculated earlier. But why would this amount matter at all?
To answer that, I refer you to the notes of the Annual Report FY20 (AR20). On page 148 of the AR20, we find the following two paragraphs:
E&E assets comprise of rights and concession and conventional studies. Following the acquisition of a concession right to explore a licensed area, the costs incurred such as geological and geophysical surveys, drilling, commercial appraisal costs and other directly attributable costs of exploration and appraisal including technical and administrative costs, are capitalised as conventional studies, presented as intangible assets.
E&E assets are assessed for impairment when facts and circumstances suggest that the carrying amount of an E&E asset may exceed its recoverable amount. The Group will allocate E&E assets to cash generating unit (“CGU”s or groups of CGUs for the purpose of assessing such assets for impairment. Each CGU or group of units to which an E&E asset is allocated will not be larger than an operating segment as disclosed in Note 39 to the financial statements.)
Hence, we can determine that firstly, the intangible asset value represents capitalized costs of acquisition of the oil fields, including technical exploration costs and costs of acquiring the relevant licenses. Secondly, an impairment review will be carried out when “the carrying amount of an E&E asset may exceed its recoverable amount”, with E&E assets being allocated to “cash generating units” (CGU) for the purposes of assessment.
On page 169 of the AR20, we find the following:
Carrying amounts of the Group’s intangible assets, oil and gas assets and FPSO are reviewed for possible impairment annually including any indicators of impairment. For the purpose of assessing impairment, assets are grouped at the lowest level CGUs for which there is a separately identifiable cash flow available. These CGUs are based on operating areas, represented by the 2011 North Sabah EOR PSC (“North Sabah”, the Anasuria Cluster, the Marigold and Sunflower fields, the VIC/P57 exploration permit (“VIC/P57”) and the VIC/L31 production license (“VIC/L31”).)
So apparently, the CGUs that have been assigned refer to the respective oil producing fields, two of which include the North Sabah field and the Anasuria field. In order to perform the impairment review, estimates of future cash flow will be made by management to assess the “recoverable amount” (as described above), subject to assumptions and an appropriate discount rate.
Hence, what we can gather up to now is that management will estimate future recoverable cash flows from a CGU (i.e. the North Sabah and Anasuria oil fields), compare that to their carrying value, and perform an impairment if their future recoverable cash flows are less than their carrying value. In other words, if estimated accumulated profits from the North Sabah and Anasuria oil fields are less than their carrying value, an impairment is required.
So where do we find the carrying values for the North Sabah and Anasuria oil fields? Further down on page 184 in the AR20, we see the following:
Included in rights and concession are the carrying amounts of producing field licenses in the Anasuria Cluster amounting to RM668,211,518 (2018: RM687,664,530, producing field licenses in North Sabah amounting to RM471,031,008 (2018: RM414,333,116))
Hence, we can determine that the carrying values for the North Sabah and Anasuria oil fields are RM 471m and RM 668m respectively. But where do we find the future recoverable cash flows of the fields as estimated by management, and what are the assumptions used in that calculation?
Fortunately, we find just that on page 185:
17 INTANGIBLE ASSETS (CONTINUED)
(a Anasuria Cluster)
The Directors have concluded that there is no impairment indicator for Anasuria Cluster during the current financial year. In the previous financial year, due to uncertainties in crude oil prices, the Group has assessed the recoverable amount of the intangible assets, oil and gas assets and FPSO relating to the Anasuria Cluster. The recoverable amount is determined using the FVLCTS model based on discounted cash flows (“DCF” derived from the expected cash in/outflow pattern over the production lives.)
The key assumptions used to determine the recoverable amount for the Anasuria Cluster were as follows:
(i Discount rate of 10%;)
(ii Future cost inflation factor of 2% per annum;)
(iii Oil price forecast based on the oil price forward curve from independent parties; and,)
(iv Oil production profile based on the assessment by independent oil and gas reserve experts.)
Based on the assessments performed, the Directors concluded that the recoverable amount calculated based on the valuation model is higher than the carrying amount.
(b North Sabah)
The acquisition of the North Sabah assets was completed in the previous financial year. Details of the acquisition are as disclosed in Note 15 to the financial statements.
The Directors have concluded that there is no impairment indicator for North Sabah during the current financial year.
Here, we can see that the recoverable amount of the Anasuria field was estimated based on a DCF of expected future cash flows over the production life of the asset. The key assumptions used by management all seem appropriate, including a discount rate of 10% and oil price and oil production estimates based on independent assessment. From there, management concludes that the recoverable amount of the Anasuria field is higher than its carrying amount (i.e. no impairment required). Likewise, for the North Sabah field.
How do we interpret this? Basically, what management is saying is that given a 10% discount rate and independent oil price and oil production estimates, the accumulated profits (i.e. recoverable amount) from both the North Sabah and the Anasuria fields exceed their carrying amounts of RM 471m and RM 668m respectively.
In other words, according to management’s own estimates, the carrying value of the Intangible Assets of RM 1.468 billion approximates the accumulated Net Profit recoverable from 2P reserves.
To conclude Valuation (Method 2), we arrive at the following:

Our estimates Management estimates
Accumulated Net Profit from 2P Reserves RM 1.452 billion RM 1.468 billion

Financials

By now, we have established the basic economics of Hibiscus’s business, including its revenues (i.e. oil production and oil price scenarios), costs (OPEX, ITDA), profitability (breakeven, future earnings potential) and balance sheet value (2P reserves, valuation). Moving on, we want to gain a deeper understanding of the 3 statements to anticipate any blind spots and risks. We’ll refer to the financial statements of both the FY20 annual report and the 2Q21 quarterly report in this analysis.
For the sake of brevity, I’ll only point out those line items which need extra attention, and skip over the rest. Feel free to go through the financial statements on your own to gain a better familiarity of the business.
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Income Statement
First, we’ll start with the Income Statement on page 135 of the AR20. Revenues are straightforward, as we’ve discussed above. Cost of Sales and Administrative Expenses fall under the jurisdiction of OPEX, which we’ve also seen earlier. Other Expenses are mostly made up of Depreciation & Amortization of RM 115m.
Finance Costs are where things start to get tricky. Why does a company which carries no debt have such huge amounts of finance costs? The reason can be found in Note 8, where it is revealed that the bulk of finance costs relate to the unwinding of discount of provision for decommissioning costs of RM 25m (Note 32).
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This actually refers to the expected future costs of restoring the Anasuria and North Sabah fields to their original condition once the oil reserves have been depleted. Accounting standards require the company to provide for these decommissioning costs as they are estimable and probable. The way the decommissioning costs are accounted for is the same as an amortized loan, where the initial carrying value is recognized as a liability and the discount rate applied is reversed each year as an expense on the Income Statement. However, these expenses are largely non-cash in nature and do not necessitate a cash outflow every year (FY20: RM 69m).
Unwinding of discount on non-current other payables of RM 12m relate to contractual payments to the North Sabah sellers. We will discuss it later.
Taxation is another tricky subject, and is even more significant than Finance Costs at RM 161m. In gist, Hibiscus is subject to the 38% PITA (Petroleum Income Tax Act) under Malaysian jurisdiction, and the 30% Petroleum tax + 10% Supplementary tax under UK jurisdiction. Of the RM 161m, RM 41m of it relates to deferred tax which originates from the difference between tax treatment and accounting treatment on capitalized assets (accelerated depreciation vs straight-line depreciation). Nonetheless, what you should take away from this is that the tax expense is a tangible expense and material to breakeven analysis.
Fortunately, tax is a variable expense, and should not materially impact the cash flow of Hibiscus in today’s low oil price environment.
Note: Cash outflows for Tax Paid in FY20 was RM 97m, substantially below the RM 161m tax expense.
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Balance Sheet
The balance sheet of Hibiscus is unexciting; I’ll just bring your attention to those line items which need additional scrutiny. I’ll use the figures in the latest 2Q21 quarterly report (2Q21) and refer to the notes in AR20 for clarity.
We’ve already discussed Intangible Assets in the section above, so I won’t dwell on it again.
Moving on, the company has Equipment of RM 582m, largely relating to O&G assets (e.g. the Anasuria FPSO vessel and CAPEX incurred on production enhancement projects). Restricted cash and bank balances represent contractual obligations for decommissioning costs of the Anasuria Cluster, and are inaccessible for use in operations.
Inventories are relatively low, despite Hibiscus being an E&P company, so forex fluctuations on carrying value of inventories are relatively immaterial. Trade receivables largely relate to entitlements from Petronas and BP (both oil supermajors), and are hence quite safe from impairment. Other receivables, deposits and prepayments are significant as they relate to security deposits placed with sellers of the oil fields acquired; these should be ignored for cash flow purposes.
Note: Total cash and bank balances do not include approximately RM 105 m proceeds from the North Sabah December 2019 offtake (which was received in January 2020)
Cash and bank balances of RM 90m do not include RM 105m of proceeds from offtake received in 3Q21 (Jan 2020). Hence, the actual cash and bank balances as of 2Q21 approximate RM 200m.
Liabilities are a little more interesting. First, I’ll draw your attention to the significant Deferred tax liabilities of RM 457m. These largely relate to the amortization of CAPEX (i.e. Equipment and capitalized E&E expenses), which is given an accelerated depreciation treatment for tax purposes.
The way this works is that the government gives Hibiscus a favorable tax treatment on capital expenditures incurred via an accelerated depreciation schedule, so that the taxable income is less than usual. However, this leads to the taxable depreciation being utilized quicker than accounting depreciation, hence the tax payable merely deferred to a later period – when the tax depreciation runs out but accounting depreciation remains. Given the capital intensive nature of the business, it is understandable why Deferred tax liabilities are so large.
We’ve discussed Provision for decommissioning costs under the Finance Costs section earlier. They are also quite significant at RM 266m.
Notably, the Other Payables and Accruals are a hefty RM 431m. What do they relate to? Basically, they are contractual obligations to the sellers of the oil fields which are only payable upon oil prices reaching certain thresholds. Hence, while they are current in nature, they will only become payable when oil prices recover to previous highs, and are hence not an immediate cash outflow concern given today’s low oil prices.
Cash Flow Statement
There is nothing in the cash flow statement which warrants concern.
Notably, the company generated OCF of approximately RM 500m in FY20 and RM 116m in 2Q21. It further incurred RM 330m and RM 234m of CAPEX in FY20 and 2Q21 respectively, largely owing to production enhancement projects to increase the production rate of the Anasuria and North Sabah fields, which according to management estimates are accretive to ROI.
Tax paid was RM 97m in FY20 and RM 61m in 2Q21 (tax expense: RM 161m and RM 62m respectively).

Risks

There are a few obvious and not-so-obvious risks that one should be aware of before investing in Hibiscus. We shall not consider operational risks (e.g. uptime, OPEX) as they are outside the jurisdiction of the equity analyst. Instead, we shall focus on the financial and strategic risks largely outside the control of management. The main ones are:
· Oil prices remaining subdued for long periods of time
· Fluctuation of exchange rates
· Customer concentration risk
· 2P Reserves being less than estimated
· Significant current and non-current liabilities
· Potential issuance of equity
Oil prices remaining subdued
Of topmost concern in the minds of most analysts is whether Hibiscus has the wherewithal to sustain itself through this period of low oil prices (sub-$30). A quick and dirty estimate of annual cash outflow (i.e. burn rate) assuming a $20 oil world and historical production rates is between RM 50m-70m per year, which considering the RM 200m cash balance implies about 3-4 years of sustainability before the company runs out of cash and has to rely on external assistance for financing.
Table 1: Hibiscus EBITDA at different oil price and exchange rates
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The above table shows different EBITDA scenarios (RM ‘m) given different oil prices (left column) and USD:MYR exchange rates (top row). Currently, oil prices are $27 and USD:MYR is 1:4.36.
Given conservative assumptions of average OPEX/bbl of $20 (current: $15), we can safely say that the company will be loss-making as long as oil remains at $20 or below (red). However, we can see that once oil prices hit $25, the company can tank the lower-end estimate of the annual burn rate of RM 50m (orange), while at RM $27 it can sufficiently muddle through the higher-end estimate of the annual burn rate of RM 70m (green).
Hence, we can assume that as long as the average oil price over the next 3-4 years remains above $25, Hibiscus should come out of this fine without the need for any external financing.
Customer Concentration Risk
With regards to customer concentration risk, there is not much the analyst or investor can do except to accept the risk. Fortunately, 80% of revenues can be attributed to two oil supermajors (Petronas and BP), hence the risk of default on contractual obligations and trade receivables seems to be quite diminished.
2P Reserves being less than estimated
2P Reserves being less than estimated is another risk that one should keep in mind. Fortunately, the current market cap is merely RM 714m – at half of estimated recoverable amounts of RM 1.468 billion – so there’s a decent margin of safety. In addition, there are other mitigating factors which shall be discussed in the next section (‘Opportunities’).
Significant non-current and current liabilities
The significant non-current and current liabilities have been addressed in the previous section. It has been determined that they pose no threat to immediate cash flow due to them being long-term in nature (e.g. decommissioning costs, deferred tax, etc). Hence, for the purpose of assessing going concern, their amounts should not be a cause for concern.
Potential issuance of equity
Finally, we come to the possibility of external financing being required in this low oil price environment. While the company should last 3-4 years on existing cash reserves, there is always the risk of other black swan events materializing (e.g. coronavirus) or simply oil prices remaining muted for longer than 4 years.
Furthermore, management has hinted that they wish to acquire new oil assets at presently depressed prices to increase daily production rate to a targeted 20,000 bbl by end-2021. They have room to acquire debt, but they may also wish to issue equity for this purpose. Hence, the possibility of dilution to existing shareholders cannot be entirely ruled out.
However, given management’s historical track record of prioritizing ROI and optimal capital allocation, and in consideration of the fact that the MD owns 10% of outstanding shares, there is some assurance that any potential acquisitions will be accretive to EPS and therefore valuations.

Opportunities

As with the existence of risk, the presence of material opportunities also looms over the company. Some of them are discussed below:
· Increased Daily Oil Production Rate
· Inclusion of 2C Resources
· Future oil prices exceeding $50 and effects from coronavirus dissipating
Increased Daily Oil Production Rate
The first and most obvious opportunity is the potential for increased production rate. We’ve seen in the last quarter (2Q21) that the North Sabah field increased its daily production rate by approximately 20% as a result of production enhancement projects (infill drilling), lowering OPEX/bbl as a result. To vastly oversimplify, infill drilling is the process of maximizing well density by drilling in the spaces between existing wells to improve oil production.
The same improvements are being undertaken at the Anasuria field via infill drilling, subsea debottlenecking, water injection and sidetracking of existing wells. Without boring you with industry jargon, this basically means future production rate is likely to improve going forward.
By how much can the oil production rate be improved by? Management estimates in their analyst presentation that enhancements in the Anasuria field will be able to yield 5,000 bbl/day by 2021 (current: 2,500 bbl/day).
Similarly, improvements in the North Sabah field is expected to yield 7,000 bbl/day by 2021 (current: 5,300 bbl/day).
This implies a total 2021 expected daily production rate from the two fields alone of 12,000 bbl/day (current: 8,000 bbl/day). That’s a 50% increase in yields which we haven’t factored into our valuation yet.
Furthermore, we haven’t considered any production from existing 2C resources (e.g. Marigold/Sunflower) or any potential acquisitions which may occur in the future. By management estimates, this can potentially increase production by another 8,000 bbl/day, bringing total production to 20,000 bbl/day.
While this seems like a stretch of the imagination, it pays to keep them in mind when forecasting future revenues and valuations.
Just to play around with the numbers, I’ve come up with a sensitivity analysis of possible annual EBITDA at different oil prices and daily oil production rates:
Table 2: Hibiscus EBITDA at different oil price and daily oil production rates
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The left column represents different oil prices while the top row represents different daily oil production rates.
The green column represents EBITDA at current daily production rate of 8,000 bbl/day; the orange column represents EBITDA at targeted daily production rate of 12,000 bbl/day; while the purple column represents EBITDA at maximum daily production rate of 20,000 bbl/day.
Even conservatively assuming increased estimated annual ITDA of RM 500m (FY20: RM 318m), and long-term average oil prices of $50 (FY20: $60), the estimated Net Profit and P/E ratio is potentially lucrative at daily oil production rates of 12,000 bbl/day and above.
2C Resources
Since we’re on the topic of improved daily oil production rate, it bears to pay in mind the relatively enormous potential from Hibiscus’s 2C Resources. North Sabah’s 2C Resources alone exceed 30 mmbbl; while those from the yet undiagnosed Marigold/Sunflower fields also reach 30 mmbbl. Altogether, 2C Resources exceed 70 mmbbl, which dwarfs the 44 mmbbl of 2P Reserves we have considered up to this point in our valuation estimates.
To refresh your memory, 2C Resources represents oil volumes which have been discovered but are not yet classified as “commercial”. This means that there is reasonable certainty of the oil being recoverable, as opposed to simply being in the very early stages of exploration. So, to be conservative, we will imagine that only 50% of 2C Resources are eligible for reclassification to 2P reserves, i.e. 35 mmbbl of oil.
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This additional 35 mmbbl of oil represents an 80% increase to existing 2P reserves. Assuming the daily oil production rate increases similarly by 80%, we will arrive at 14,400 bbl/day of oil production. According to Table 2 above, this would yield an EBITDA of roughly RM 630m assuming $50 oil.
Comparing that estimated EBITDA to FY20’s actual EBITDA:
FY20 FY21 (incl. 2C) Difference
Daily oil production (bbl/day) 8,626 14,400 +66%
Average oil price (USD/bbl) $68.57 $50 -27%
Average OPEX/bbl (USD) $16.64 $20 +20%
EBITDA (RM ‘m) 632 630 -
Hence, even conservatively assuming lower oil prices and higher OPEX/bbl (which should decrease in the presence of higher oil volumes) than last year, we get approximately the same EBITDA as FY20.
For the sake of completeness, let’s assume that Hibiscus issues twice the no. of existing shares over the next 10 years, effectively diluting shareholders by 50%. Even without accounting for the possibility of the acquisition of new oil fields, at the current market capitalization of RM 714m, the prospective P/E would be about 10x. Not too shabby.
Future oil prices exceeding $50 and effects from coronavirus dissipating
Hibiscus shares have recently been hit by a one-two punch from oil prices cratering from $60 to $30, as a result of both the Saudi-Russian dispute and depressed demand for oil due to coronavirus. This has massively increased supply and at the same time hugely depressed demand for oil (due to the globally coordinated lockdowns being implemented).
Given a long enough timeframe, I fully expect OPEC+ to come to an agreement and the economic effects from the coronavirus to dissipate, allowing oil prices to rebound. As we equity investors are aware, oil prices are cyclical and are bound to recover over the next 10 years.
When it does, valuations of O&G stocks (including Hibiscus’s) are likely to improve as investors overshoot expectations and begin to forecast higher oil prices into perpetuity, as they always tend to do in good times. When that time arrives, Hibiscus’s valuations are likely to become overoptimistic as all O&G stocks tend to do during oil upcycles, resulting in valuations far exceeding reasonable estimates of future earnings. If you can hold the shares up until then, it’s likely you will make much more on your investment than what we’ve been estimating.

Conclusion

Wrapping up what we’ve discussed so far, we can conclude that Hibiscus’s market capitalization of RM 714m far undershoots reasonable estimates of fair value even under conservative assumptions of recoverable oil volumes and long-term average oil prices. As a value investor, I hesitate to assign a target share price, but it’s safe to say that this stock is worth at least RM 1.00 (current: RM 0.45). Risk is relatively contained and the upside far exceeds the downside. While I have no opinion on the short-term trajectory of oil prices, I can safely recommend this stock as a long-term Buy based on fundamental research.
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2020 Foresight: What to do to Protect and Profit in Bear Market.

2020 Foresight: What to do to Protect and Profit in Bear Market.
Not many people like to talk about bear markets, especially not when the more emotive terms such as "Stock market crash" are used. It's often looked upon as fear mongering, and sensationalism. Preparation is practical, though.

This post is not intended to be fear mongering. In fact I want to discuss ways we can look at the market and plan for different scenarios that can mean we have no reason to be afraid.
Even if the S&P500 was to trade at 1,000 (big drop from current price (Today is the 31st August 2019, price is 2,946), we can plan and act in such ways this is a non harmful event for us. Particularly those who have net worth's to protect that has heavy stocks exposure.
This is not going to be one of these, "It's the top RIGHT NOW ... everyone panic!" sort of posts. Regardless of my views on this, I know this is a message that would not be well received. You do not know me, and too often people have cried wolf on this and been laughably incorrect. Instead what I will do is describe price moves in the indices that most people will have every reason to believe at this point can't happen.
Hopefully, they do not happen. I am not gleefully fangirling for a market crash. I just think there is prudence in preparation. These events will not happen in the hours after I post this, so I'd ask you kindly suspend prejudices. There is nothing to be gained by bickering over opinions of whether this will happen or not. I just want to give my perspective on how a person should protect themselves after it happens, if it does.
I'll cover some of the things I'd forecast will be points people will want to raise or questions likely to be asked. If you'd like to skip to the forecast and subsequent trade plan you can scroll down to the line break (unless you're going to make a common comment, then please read the following section first).

Why Do I think My Opinion Matters?

Many of you may be smarter than I in many ways, but few of you will have spent as much time assessing charting patterns as I have. Indeed, many people will scoff at the very idea of "lines on a chart" being worth anything. I'm not here to have this debate, I fully agree your view point is rational and logical. If I'd not spent years watching price charts every day, I'd think the same.
I focus mostly on Forex markets. I know these well. There are many ways currencies look like they may move that are ways they should not move unless there is big problems in stocks. These are nagging warnings. The attitude to risk in the Forex markets is negative, and stock markets show dangerous patterns. I watch these topping sorts of patterns every day. I see them in intra-day crashes, intra-week crashes and intra-month crashes.
Most major moves fit into these patterns, and when the same patterns are applied to previous stock markets in the months before they crashed, the way the patterns form and then complete (in a crash) is the same. From my perspective, these are just intra-decade crashes. There is little technical difference on the charts - although it's very different in the real world it affects.
This is why I am doing this in a "IF we see this ... then this is likely". I know at this point in the pattern, my methods predict something that will be highly unusual. If that thing happens, if we do not crash after that, we'd be breaking the trend of all market crashes in history (this is not likely, it does not seem the smart way to bet your net worth).

Technical Analysis is Tea Leaves!


You're welcome to your opinion on this, and I do understand your point of view. I will not post examples to try and prove my perspective on it, since it will always be called "curve-fitting". All I will say is nothing I have done in my years of trading has involved me persuading others what I do works. I do not sell training or anything of the like. I've spent many years using the things I've learned to bet my own money, and I've done well.
I will not debate on this subject, because it's always a deadlock. You can not convince me I've not seen what I've seen, and I can not show you what I've seen, and do not expect you to believe it without proof.

Stop Fear Mongering!


I really would like to re-iterate, I do not want you to be afraid. I am going to describe something that might happen that will be scary if it does happen. If it does not, there is no problem. I do not wish you to be fearful before, during or after.

This is like "Stop, Drop and Roll". None of us ever expect to be ablaze. If we are, this is good information. It will be better than running about waving arms and feeding the flames to engulf us. All I want to do here is to give you the "stop, drop and roll" of a market crash. To prevent you panicking and making bad decisions at bad areas. To allow you instead to go, "Fuck! Okay ... well that's not good. Now I have to ..." if scary things do happen.

No One Can Time the Market!

People have predicted and traded every stock market crash in history. The fact that many people try this and get it wrong does not take away from the fact people get this right, then place the right trades and make millions. Not many people make understanding the ways a market moves their life's work. If you do, you get a good feel for it's mood at any given time.

[Fundamental Analysis ] Says That Won't Happen!

I am not here to debate analysis viewpoints. Doing so has little use, it's better to forecast, assess and then take the best actions. I'll confess I am too ignorant on many of these topic to engage in debate. I wake up every day 5 days a week and decide where to bet my money. In doing this, I've found charts forecast and news reports. I can find no way of making money by being told what happened already, so I use the charts.
What I will say is for the warning move I will discuss to happen, something news related will have to change. Some catalyst event will have to happen. In 2008, it was Lehman. Make no mistake, the warnings were on the chart long before the bankruptcy was in the news.

Time in the Markets is Better than Timing the Markets


I am perfectly fine with this perspective, and not here to argue against it. If the market could drop 50% or more and you'd not be concerned because you think it will be back up in 10 years, this is none of my business.
I'm a day trader, so for me personally timing the markets is everything. Spending a lot of time in the market day trading often means you've made a mistake. I'm looking for ways to get foresight into what market moves may develop and understanding of what times and conditions I can enter into these moves to profit from the.
I want to stress I am not necessarily advocating the average person tries to time the markets. In the same way an electrician would not suggest you re-wire your own home. You also could not say to the electrician it's better to leave the lights off than risk getting a shock. Different preparations and skills sets give different possibilities. I spent a lot of years and lost money through a lot of them starting out learning how to do this.
The things I will explain here will not allow a person to consistently time the market. If I may be excused a cheesy pun, this "crash course" will be dealing with only single event, and one single set of scenarios. What I want to put forward for you in this is price moves to watch for and then (really quite specific) levels of price that are likely to offer us the best prices to protect long stock portfolios, or take speculative short trades. Very thin area of assessment.


Forecast and Plan.

What if the S&P500 Went to 2,200 ... Quickly?


It's the weekend, and the last day of August in 2019. The S&P500 has closed 2922 after rallying through the week after some sharp drops from all time highs. We may see record highs again if this keeps up ... but what if next week it opens and starts to fall? Or maybe rallies higher but can not make a new high and starts to fall.
What if it falls faster than it did in the last drop, and what if this time it does not stop? What if it gets to the lows of 2790, and goes from there quickly to 2700. These big levels act as resistance and the market can not trade higher than them. Instead it hits them, reverses and goes down more.

I think people would be nervous, but there'd be still the feeling of this being a normal, albeit tough, corrective move. There's weekly lows of 2,333. Above here the market is still technically up-trending. What if we got there, and the market went through it like it was nothing? What if the coming weeks or months we seen candles bigger than any we've seen recently? What if we were hearing news reports of record falls, rather than record highs?
What if over the development of only weeks and some horrific trading days we went from today's 2922 to break under the 2015 lows of 1,886?
I think people would be afraid!
Nothing I am saying is for the purposes of fear mongering, but I think this is possible. I'd like to say I think it's "highly unlikely", but I am thinking a lot about how to structure real bets on it and I like my odds. If this happens, it's likely the market will go lower still. What you do during the following weeks and months may have a huge affect on your financial health by the start of 2021.

How Does This Scenario Look on a S&P500 Chart?



https://preview.redd.it/ggqyvs2f6xj31.png?width=658&format=png&auto=webp&s=a9d00d758caf655341bd4780a8277b7556546a50

That looks like it's not going to happen, right? I think that this looks like it's not going to happen. We learn through our life experience, and my life experience has taught me when I ignore what I think about things like this and build well structured trade plans that would assume it will happen, money comes. For me, this makes sense to bet on at the moment, as unlikely as it looks. That's getting a bit into "Calling the high", though. \Which this is not about.

This is about what do you do if this happens? What if there is a day when they say on the news that the market just made it's lowest point in the last five years ... and economists and experts say it can go down more!

1 - Filter and assess your sources.
Before you act or even think about the information these sources have (pertaining to what trades to make or expect), check what they were saying now. If they're not saying this could happen - don't worry too much about what they say happens next. They have as much chance of being wrong.

2 - Do not panic.
This is a time to remain calm. Bad things have happened, and there will have been multiple days the market has dropped precipitously. Different economic factors explaining these moves may be threatening to get worse and the market may take more dangerous swings spiking under recent lows. This is the point at which most people will panic and make bad choices with their portfolio.

3 - Buy Around 1,800
This obviously sounds like something anyone would do right now, with price at 2,922; but with the conditions that'd have to be occurring for this of move to happen will make this highly counter intuitive at the time.

4 - Understand Something Changed, New Highs are Not Coming
From peak pessimism around 1,800 I expect the market to start to rally. Rallying strong. Making markets great again.
At this point, you should understand something has changed. The market is not meant to trade at that level in an up-trend. Frequently when these levels 'break', there is a strong counter move that is fierce. It's also brief. We can buy here and offset some of the losses in the mini bounce (but be very cautious).
2,129 area is where the danger of a bear move comes back in. It might rally a bit above here into 2,333.

This is where the second mistake many people will make will be. Not buying the lows, but then starting to buy into this rally thinking it's going to new highs.

Very Important: If price makes moves consistent with what I've described 2,220 - 2,300 are hedge areas.
If you take appropriate actions in these areas you can protect yourself from the chance of excessive loss if the market is to crash in 2020. You can also do this without taking on much risk. Granted if you hedge long portfolios there is some risk of losing a little, but your area of risk on these hedges is less than the area of risk on a long portfolio after this has happened.
When this has happened, historically it's always led to a crash in the coming months/year. We'll have done something the markets do not usually do. Big corrections may look similar, but when you deal with this all the time, you come to know there are specifics that should be noted. If the levels I've mentioned for a buy fill, the market is crashing. It's no longer a question of if.

5 - Hold Hedges Until 1,100

If we crash, the low will probably be only a bit below this level. Anything more than this in a fall would be truly horrific (I know many people think this is horrific, but from a technical point of view this is really to be expected, and not unusual. It only happens after long periods of time, so it's unexpected and uncommon. It not unusual in trend formation).

https://preview.redd.it/puc4slkk6xj31.png?width=662&format=png&auto=webp&s=69e219ba15beddd6bbc944898efa8bce74cd3c85
I am not a financial adviser, and can not tell you any trades you should be making to hedge portfolios or to take speculative positions. I've given these levels on the S&P500, and there are many things correlated to this you could use to protect portfolios. If this happens, I will be very much 'In the trenches'. I'll be trading in various markets every day and sharing some of my insights and trade plans, but I can't tell you specifically what to do.


I am only sharing this with you to let you know there are strategies people have used in the past to predict crashes, and I've used these strategies a lot and become good with them. They now predict a market crash starting in 2019, developing through 2020, and the things I've explained in this post would be the next steps if the prediction is accurate.
If the next steps happen, the strategy would then forecast the S&P500 to go from 2,200 - 2,400 sort of range to 1,000.
I am asking no one to take this seriously at the moment, but I would suggest if the market makes moves similar to what I've described - you then consider there may be a lot of merit to what it further forecasts. Things could look very different from how they do this weekend in a few weekends time.
submitted by whatthefx to wallstreetbets [link] [comments]

Preparing for the Impulse: The Japanese Yen Surge

Preparing for the Impulse: The Japanese Yen Surge
See first: https://www.reddit.com/Forex/comments/clx0v9/profiting_in_trends_planning_for_the_impulsive/

Against it's major counterparts, the JPY has been showing a lot of strength. It's now getting into areas where it is threatening breakouts of decade long support and resistance levels.

Opportunity for us as traders if this happens is abundant. We've not seen trading conditions like this for over 10 years on this currency, and back then it was a hell of a show! In this post I'll discuss this, and my plans to trade it.

I'm going to focus on one currency pair, although I do think this same sort of move will be reflected across most of the XXXJPY pairs. The pair I will be using is GBPJPY. I like the volatility in this pair, and along with the JPY looking continually strong and there being uncertainty in the GBP with possible Brexit related issues, this seems like an ideal target for planning to trade a strong move up in the JPY.

The Big Overview

I'll start by drawing your attention to something a lot of you will have probably not been aware of. GBPJPY has always been in a downtrend. All this stuff happening day to day, week to week and month to month has always fitted into an overall larger downtrend. In the context of that downtrend, there have been no surprises in the price moves GBPJPY has made. This is not true of the real world events that drove these moves. Things like market crashes, bubbles and Brexit.

https://preview.redd.it/5gfhwxcy6wj31.png?width=663&format=png&auto=webp&s=4d4806dee84a7bbe073e08d153da946222893eeb

Source: https://www.poundsterlinglive.com/bank-of-england-spot/historical-spot-exchange-rates/gbp/GBP-to-JPY

I know this has been largely sideways for a long time, but it is valid to say this is a downtrend. The highs are getting lower, and the lows have been getting lower (last low after the Brexit fall and following 'flash crash' some weeks later).
This is important to understand, because it's going to help a lot when we look at what has happened over the last 5 - 10 years in this pair, and what it tells us might be about to happen in the coming few months and year to come. If the same pattern continues, a well designed and executed trade plan can make life changing money for the person who does that. I hope those of you who take the time to check the things I say here understand that is very feasible.

The last Decade


In the same way I've shown you how we can understand when a trend has corrective weeks and see certain sorts of price structure in that, from 2012 to 2015 GBPJPY had a corrective half decade. In the context of large price moves over decades, this was a sharp correction. I've discussed at length in my posts how sharp corrections can then lead into impulse legs.

https://preview.redd.it/kvnrqau07wj31.png?width=675&format=png&auto=webp&s=8e96f02a189a811d511ef7946037fd670d106b1b
I've explained though my posts and real time analysis and trades in the short term how in an impulse leg we would expect to see a strong move in line with the trend, then it stalling for a while. Choppy range. Then there being a big spike out move of that range. Making dramatic new lows. Then we'd enter into another corrective cycle (I've been showing you weeks, it's more practical. We'll be looking at the same thing scaled out over longer, that's all).

At this point, we can say the following things which are all non-subjective.
  • GBPJPY has always been in a downtrend.
  • A clear high after a strong rally was made in 2016
  • Since then, GBPJPY has downtrended
5 year chart confirms the latter two points.

https://preview.redd.it/a44rzzs47wj31.png?width=686&format=png&auto=webp&s=43fbebe933fa80d1c24a1f8fde2c08653d125d18

These are interesting facts. We can do a lot of with this information to understand where we may really be in the overall context of what this pair is doing.

The Clear Trend Cycle of the Last 5 Years


If we were to use the Elliot Wave theory, based on the above data we have we'd expect to see down trending formations on the weekly chart over the last 5 years. These would form is three distinct trend legs, each having a corrective pattern after. We would expect to see after that a strong correction (corrective year in down trending 5 year cycle), it stop at the 61.8% fib and then resume a down trend. The down trend would form similarly in three main moves.

https://preview.redd.it/ghvgzr577wj31.png?width=663&format=png&auto=webp&s=caeedc4f48ab3b4d1ed921ef519a33200db62868

Whether or not you believe Elliot Wave theory is any good or not, this is what it would predict. If you gave someone who knew about Elliot trading the facts we've established - they'd make this prediction. So let's see how that would look on the GBPJPY chart. I'm having problems with my cTrader platform today, so will have to use MT4 charting.


These are three distinct swings from a high to a low. It also fits all the other Elliot rules about swing formation (which I won't cover, but you can Google and learn if you'd like to). We then go into a period of correction. GBPJPY rallies for a year.
This corrective year does not look very different from a corrective week. Which I've shown how we can understand and trade though various different posts.

https://preview.redd.it/m9ga8pp97wj31.png?width=590&format=png&auto=webp&s=6ed069207b8297c0ab67d6608206b57a1b354fef
Source: https://www.reddit.com/Forex/comments/cwwe34/common_trading_mistakes_how_trend_strategies_lose/

Compare the charts, there is nothing different. It's not because I've copied this chart, it is just what a trend and correction looks like. I've shown this is not curve fitting by forecasting these corrective weeks and telling you all my trades in them (very high success rate).

What about the retrace level?
When we draw fibs from the shoulders high (which is where the resistance was, there was a false breakout of it giving an ever so slightly higher high), it's uncanny how price reacted to this level.

https://preview.redd.it/68pa0bgc7wj31.png?width=667&format=png&auto=webp&s=8f78ce2c11f267f32dacd17c8717dcfa1f8bcb6a
This is exactly what the theory would predict. I hope even those sceptical about Elliot theory can agree this looks like three trend moves with corrections, a big correction and then a top at 61.8%. Which is everything the starting data would predict if the theory was valid and in action.

Assumptions and Planning


To this point, I've made no assumptions. This is a reporting/highlighting of facts on historical data of this pair. Now I am going to make some assumptions to use them to prepare a trade plan. These will be;

  • This is an Elliot formation, and will continue to be.
  • Since it is, this leg will have symmetry to the previous leg.

I'll use the latter to confirm the former. I'll use a projection of what it'd look like if it was similar to the previous move. I'll put in my markers, and look for things to confirm or deny it. There'll be ways to both suggest I am right, and suggest I am wrong. For as long as nothing that obviously invalidates these assumptions happens in the future price action, I'll continue to assume them to be accurate.

Charting Up for Forecasts

The first thing I have do here is get some markers. What I want to do is see if there is a consistency in price interactions on certain fib levels (this is using different methods from what I've previously discussed in my posts, to avoid confusion for those who follow my stuff). I am going to draw extension swings and these will give level forecasts. I have strategies based upon this, and I'm looking for action to be consistent with these, and also duplicated in the big swings down.
I need to be very careful with how I draw my fibs. Since I can see what happened in the chart, it obviously gives me some bias to curve fit to that. This does not suit my objective. Making it fit will not help give foresight. So I need to look for ways to draw the fib on the exact same part of the swing in both of the moves.

https://preview.redd.it/d5qwm8vg7wj31.png?width=662&format=png&auto=webp&s=ad2deba557f9f6d8a0fe06d34cbe3307e7cccc24

These two parts of price moves look like very similar expressions of each other to me. There is the consolidation at the low, and then a big breakout. Looking closer at the top, both of them make false breakouts low before making a top. So I am going to use these swings to draw my fibs on, from the low to the high. What I will be looking for as specific markers is the price reaction to the 1.61% level (highly important fib).
A strategy I have designed around this would look for price to stall at this level, bounce a bit and then make a big breakout and strong trend. This would continue into the 2.20 and 2.61 extension levels. So I'm interested to see if that matches in.

https://preview.redd.it/mpoqz4aj7wj31.png?width=663&format=png&auto=webp&s=710d72120085c1e137c800f57a36f910f78eebcb
Very similar price moves are seen in the area where price traded through the 1.61 level. The breakout strategy here predicts a retracement and then another sell to new lows.
On the left swing, we made a retracement and now test lows. On the right swing, we've got to the point of testing the lows here. This is making this level very important. The breakout strategy here would predict a swing to 61 is price breaks these lows. This might sound unlikely, but this signal would have been flagged as possible back in 2008. It would require the certain criteria I've explained here, and all of this has appeared on the chart since then. This gives me many reasons to suspect a big sell is coming.

On to the next assumption. For this fall to happen in a strong style like all of these are suggesting, it'd have to be one hell of a move. Elliot wave theory would predict this, if it was wave 3 move, these are the strongest. From these I'm going to form a hypothesis and then see if I can find evidence for or against it. I am going to take the hypothesis that where we are in this current GBPJPY chart is going to late come to been seen in a larger context as this.

https://preview.redd.it/tkfzja5n7wj31.png?width=661&format=png&auto=webp&s=47fc014619a61728f16e1527e729b82edad6b94e

This hypothesis would have the Brexit lows and correction from this being the same as the small bounce up before this market capitulated. This would forecast there being a break in this pair to the downside, and that then being followed by multiple sustained strong falls. I know this looks insanely big ... but this is not much in the context of the theme of the last 50 years. This sort of thing has always been what happened when we made this breakout.

Since I have my breakout strategy forecasting 61, I check for confluence of anything that may also give that area as a forecast. I'm looking for symmetry, so I take the ratio of the size of the first big fall on the left to the ratio of when it all out crashed. These legs are close to 50% more (bit more, this is easy math). The low to high of the recent swing would be 7,500 pips. So this would forecast 11,000.
When you take that away from the high of 156, it comes in very close to 61. Certainly close enough to be considered within the margin of error this strategy has for forecasting.

I will be posting a lot more detailed trade plans that this. Dealing specific levels to plan to engage the market, stop trailing and taking profit. I'll also quite actively track my trades I am making to enter into the market for this move. This post is to get the broad strokes of why I'm looking for this trade in place, and to help you to have proper context by what I mean when you hear me talking about big sells on this pair and other XXXJPY pairs.
submitted by whatthefx to Forex [link] [comments]

Forecasting the End of Major Corrections, and Accumulating Trend Trading Positions.

Forecasting the End of Major Corrections, and Accumulating Trend Trading Positions.
A prerequisite post to this post can be read here; https://www.reddit.com/Forex/comments/clx0v9/profiting_in_trends_planning_for_the_impulsive/
It will also be beneficial to read this;
https://www.reddit.com/Forex/comments/clbxk2/shorting_noobs_common_trend_following_mistakes_im/

Before getting into the meat of things, you need to understand the 'elastic band' effect of large moves in the market. What this means is most of the time before a market starts to make a big move in the direction it is ultimately going, it will make a strong and usually fast counter move. You know this already in a way. You've been taught from early on (I assume) that pin bars (hammers etc) are indications the market is reversing. You're told the wicks are formed by price pushing into an area and being rejected from it.

In a trend formation, this is what the intra-week price action would tend to look like when there is the formation of reversal candles at the close of the weekly timeframe.


https://preview.redd.it/nv1nbk0c9th31.png?width=909&format=png&auto=webp&s=f87d94ee33f0d07cde211c05d9234a236a487309
Here we would have been in a down trend and then for a week or two seen bullish momentum. The blue swing is the "elastic band" move. Or what I like to call the "ping swing".

The formation I have drawn here is not arbitrary. A lot of specific things are going on in this chart. Here I've highlighted the relevant ones. When we've seen all of these, we know there is a good chance we have reached the end of a C leg correction (read up on basic Elliot wave theory if you do not understand this terminology).


https://preview.redd.it/8u9bg43nath31.png?width=1066&format=png&auto=webp&s=1ddb04a27b9a99ddbcaab5eef4e3ca7eea78e000

There can be variance in the 4 and 5 area. I am being polite, I should be honest. This area is often a bitch to trade in. Sometimes there are deep retracements and sometimes they are really shallow. Personally I've not been able to find ways to get strong ideas of how to forecast which is more likely. It tends to be an area I lose money and one I continue to work on trying to develop better ways of dealing with.

Here are examples of each type from trades I've taken recently.


https://preview.redd.it/6n0x4k43cth31.png?width=744&format=png&auto=webp&s=f03fdbff3176e1df36727f3606dbf6fc67912e53
This is explained in more context at https://www.reddit.com/Forex/comments/cks8q1/shorting_noobs_problems_proofs_and_fine_tuning/

This chart is messy because a lot of positions are being taken rather than a specific strategy being followed, but as I've explained in the 'Shorting Noobs' series of posts, I am mot interested in trading off the 61.8% fib.


https://preview.redd.it/97cb1x0wcth31.png?width=719&format=png&auto=webp&s=d49bbac385242184d9f9ba2708d1e9fe92efba42
Here is one with EURUSD that had very shallow sell-off then made the ping swing.

https://preview.redd.it/dbiujru0fth31.png?width=1025&format=png&auto=webp&s=277682a868af7cb2dc2b612243a8abfef54e9de0
You maybe thinking at this point, "But the range bit looks like it should be the 5". I know! I told you it's a bitch. As you can see here regardless of this I have still sold the best price. I am doing this by having a clear SR level I am forecasting in this sort of move. (Explained in more detail in the shorting noob series [2] [3] )
Note, it is still entirely possible that this can make another ping swing and slightly spike out this high. If it does, we have a great opportunity. At this point, we are wiser to look for the better RR trade with trend continuation by considering we are possibly in this part of the move and we have the next (usually stronger than previous) sell off coming.


https://preview.redd.it/15xd09pzfth31.png?width=730&format=png&auto=webp&s=c5e3a70fbc9411b36d74a7e32ebf5c1aabf1ad05

Which actually fits inside another cycle for a ping swing.

https://preview.redd.it/31craqbkgth31.png?width=1018&format=png&auto=webp&s=4d7cc139aa406673213c62009220a3182e7e9e55

Here is a real time forecast of a ping swing we can watch for and set pending orders (or define areas to watch for reversal patterns)

GBPUSD

https://preview.redd.it/uz93cn53ith31.png?width=1082&format=png&auto=webp&s=3b2d9a7fc12c961dafb7ee3cc7aa4c1aec29c927
(Ignore the buy trades on this, they are from a different type of strategy)

This is a lot of information, and to intrinsically understand this you'd have to go over a lot of trending charts and watch how they have developed. I have spent a hell of a lot of time on this. I will round up with leaving you just a few simple rules we can take from understanding this general pattern that recurs in trends. Some of them will help you win, others will help to prevent you losing.

1 - When it starts to chop, it's time to stop.

When a trend that has been in a free flowing form starts to get choppy, it's time to stop following the trend for the time being. You should be aware the next breakout(s) can be false ones, and the next shallow correction for a "Retest & continue" type trade is likely a trap.

2 - Big corrections rarely feature only one leg.

When you see a really big move against the trend it gets really tempting to rejoin the trend once it starts to form price action reversal candles. Any time you're entering without the market having previously faked and then spiked out early sellers at least a couple of times, you have a more risky trade.

3 - Forecast where early sellers will lose.

Quite simply, if you see a downtrend and then a spike up and what looks like the continuation of a downtrend you can assume there are sellers into what they think will be the new downtrend move. It's also quite likely these sellers have it very wrong on their stop area. It will be just above the previous highs and the consolation range. This is the very area we'd expect the ping swing to spike into and then make the proper trend move after whipsawing those who sold too early.
Where they are getting stopped out, you want to be entering. Not sure where this is? Look in Forex forums, they'll tell you.

4 - Velocity does not mean victory!

As price comes into the reversal area it will usually be carrying a lot of short term momentum and moving fast. Moving quickly into an area is not in any way an indication of a break of that area or a reversal. In fact, once you've identified where you think the ping swing will end, the more parabolic that move is into that area the better for the reversal trade. Plan ahead, do not be caught up in the moment. The moment will be deceptive.

5 - Have excellent exit plans on both sides of this sort of move.

If the move fails, the counter move running against you can be persistent. Stop losses should be around 78% of the swing. Small spike outs of the 61.8% level are to be expected. Breaks of the 76% level are not. Similarly, profits can come lightening quickly. Which can actually be a problem if you've not planned the areas you want to exit or how to trail your stops. So be well prepared to exit before you enter.


The things I have explained in this post have validity on all timeframes. I scalp with it, and I swing with it. It transfers readily to any market with trending properties. If you were to master this (especially at an intraday level - which is harder) , it would be highly likely you significantly beat what most people would think are "good returns" when the markets are trending.
It would be possible for someone who has sufficient skill in doing this to make themselves substantial profits even starting from a small amount of money and using moderate risk over the course of just trading 4 - 5 major trend moves on daily and weekly charts. This is quite an easy setup in my opinion (once it's been highlighted at least) and for as long as you can find trends to use it, it will outperform most strategies I see on public display.

(All bets are off in ranges. This will make a mockery of you if you try to do it in ranges)

Happy trend following :)
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Best Forex Trading Strategy: Long Term Trend Trading ...

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