The Importance of Risk Management
Hi everyone, this week the major NASDAQ tech companies released their earnings, and Elon Musk progressed in his efforts to become the next social media mogul. Some interesting shifts have occurred in the foreign exchange market and, without surprise, there has been more worrying resource news as a result of the conflict in Ukraine. Enjoy!
Prices rocket as Russia cut gas supplies
Gazprom, the largest oil supplier in Russia has this week cut supplies to Poland and Bulgaria. The two countries are the first in the EU to have supplies cut after Putin threatened that gas deliveries must be paid in Roubles or else supplies will be stopped. This was a backlash against the heavy sanctions that the EU had imposed on Russia after their invasion of Ukraine two months ago. The supply cut has caused wholesale European gas futures contracts to rise by 20%. This price rise will filter down the supply chain and into the pockets of consumers in the EU and UK.
Russia’s gas pipelines into Europe
Musk takes Twitter
This week the Twitter board has agreed to accept Elon Musk’s $44 billion takeover bid. Current shareholders in Twitter will receive $54.20 for each share they own, a 38% premium to the share price at the start of April. Musk intends to introduce a range of new features to the app, with his main aim being to promote free speech, as he stated on Tuesday, “Free speech is the bedrock of a functioning society.” There is a chance that the deal could still break down if it were to be blocked by regulators, but it is expected that the deal will be closed by the end of this year.
Big Tech, Big Bucks
Big tech companies in the US have released their earnings figures this week. Amazon has reported below analyst expectations with a net loss of $3.8bn in the first quarter of 2022 due to a decline in online retail sales and rising costs, causing their share price to fall by 10%. On the other end of the scale, Meta Platforms, the parent company of Facebook, have enjoyed a $7.5bn profit in the quarter, which was slightly ahead of wall street expectations. Nice buy Peter! Their share price jumped 20% in after-hours trading. Finally, Apple has achieved record revenue in their services division in Q1, helping them post an overall revenue of $97.3bn and a $25bn net profit, their third highest ever… and they still charge me 79p a month for iCloud storage space.
Meta Platform’s is rolling in it, Source: Meta Platforms Investor Relations
US economy teetering on the edge
Figures released by the US Commerce Department on Thursday have shown that the US economy has shrunk for the first time since the beginning of the COVID-19 pandemic. In Q1 of 2022, the Gross Domestic Product (GDP - Market value of all goods and services produced by a country) dropped on an annualised basis by 1.4%. The GDP was pushed down by a growing trade deficit, with imports rising 17% and exports falling by 6%. Economists are concerned that rising inflation and aggressive quantitative tightening measures could bring the US economy into a recession. A 0.5% interest rate hike is expected in May.
A recession is defined as two quarters of negative GDP growth - only one more needed!
FX Tsunami in Japan
The Japanese Yen has fallen to its lowest level in decades this week after the BoJ decided against monetary tightening of the economy, as they believe the Japanese economy is currently too weak for these measures. This move is likely to frustrate the Japanese public as the sliding exchange rate will push up import costs and add to the inflation that is already punishing the economy. The US Dollar is currently worth 130 Japanese Yen and is approaching levels that haven’t been seen since 1998.
On the other side of the coin, the US dollar has hit a 20-year high as investors have priced in multiple interest rate rises in the remainder of 2022. The US Dollar index (which tracks the US Dollar against a group of other major world currencies) has risen 0.9% to its highest since 2002. For a full explanation of currency movements, see Peter’s article from last week!
I hope you enjoyed this weeks article,
Patrick
Bitcoin Trade Update – Importance of Risk Management
This week’s article will cover a short update on the Bitcoin trade I discussed last week and the important lessons that can be drawn from it, in particular the importance of risk management. Additionally, I will write about why entering a new position here is, in my opinion, a bad idea.
The Bitcoin price rolled over and reversed from the psychological $43,000 resistance level and my stop loss was hit before reaching the third ‘take profit’ target at $44,400. However, due to splitting price targets up into intervals and strict adherence to stop losses, 30% of my trade was closed in profit resulting in a total gain of 1.28% for the trade as a whole. This may seem like a small number but given the trade was only open for 3 days and the uncertainty in the markets at present, any positive return is a delight for me. I also use a small amount of leverage in my trades in order to enhance percentage returns (using a small amount of capital to enter larger positions through derivative contracts/borrowed funds) however I strongly advise against this for those new to trading as it is a double-edged sword; gains are amplified but so are losses. Leverage has been the primary cause for the total wipe-out of many trading accounts, a notable victim being Archegos Capital, which collapsed in 2021 resulting in a colossal $10 billion loss due to incompetent use of leverage.
This trade highlights how vital risk management is, especially when trading volatile assets like Bitcoin, where violent and unexpected price swings occur regularly. After reaching my second ‘take profit’ target, the stop loss was moved to breakeven because I believed that if the price retraced back to the breakeven the trade would be invalidated since it would have broken through two major support lines which needed to be held in order for the price to maintain an upward trend. It can be seen from the chart above that this worked out perfectly as Bitcoin retraced violently, invalidating the trade, and I escaped without any losses. If I had not placed a stop loss the outcome would have resulted in substantial losses as the price soon further fell back to the key support zone before consolidating and breaking below the zone (see above).
Bitcoin price has now retraced to the bottom trend line of the upward price channel (see above) I established last week, with the price reversing directly off the line on Wednesday. There is also a bullish RSI divergence which indicates seller strength weakening in the short term. When the price is at significant areas of support like this, the opportunity to enter a new long position may present itself. However, I will not be entering a new trade for the following reasons:
Firstly, the technical picture is not all that convincing. By comparing this bounce to the previous two reactions to the bottom channel trend line, this is a relatively weak reaction. The previous two reacted with a quick move down followed by a sharp V-shape recovery on the same day indicated by the long candlestick wicks in the chart (circled in orange), therefore strong buying power had entered the market. This time around price has remained relatively close to the channel line for much longer. Volume is also far weaker on this bounce than the previous two making for quite the un-compelling reversal story here. Price would need a decent couple of strong daily closes above the key $39,800 level before I can think about a more bullish narrative playing out.
My reluctance to go long here is further amplified by the fact that global markets are in a dire state of uncertainty. The Federal Reserve appears to be increasingly hawkish by the day, with markets now pricing in a 97% chance of the Fed Funds rate reaching 1.25%-1.5% (or 125-150bps) by the July FOMC meeting. Of course, these tightening developments are hammering risk assets with April set to be the worst month the NASDAQ has seen since 2008. Bitcoin comes into the equation here as its correlation with the NASDAQ has reached a high of 0.7 this month (1 meaning 100% correlated, 0 meaning no correlation, less than 0 meaning negative correlation). With such a high correlation to the equity markets trading Bitcoin becomes much more risky and difficult. Given high levels of uncertainty and diminishing market sentiment as well as earnings being released this week for the tech giants like Apple, Google, and Amazon, going long here is too risky in my opinion. Any unforeseen bearish developments may be enough to break below key support around $37,800.
To top it off, I am currently far too busy with studying for my final year exams at the moment to do any form of trading. This statement cannot be overlooked and is extremely important for maintaining consistent profits. Trading, especially on shorter timeframes is a notoriously arduous and intense task that requires most of, if not all of your time and attention. If you have other major events going on in your life which will distract you from making the highest quality trading decisions then you definitely should not be placing any of your money at risk. Risk management always comes first.
See you next week,
Ronan
Disclaimer
This communication is for informational and educational purposes only and should not be taken nor used as investment advice, as a personal recommendation, or solicitation to buy or sell any financial instrument. This material has been prepared without considering any particular recipient’s investment objectives or financial situation and has not been prepared in accordance with the legal and regulatory requirements to promote independent research. Any references to past or future performance of a financial instrument, index or structured product are not, and should not be taken as, a reliable indicator of future performance. I assume no liability as to the accuracy or completeness of the content of this publication.