A Beginner's Guide to Trading the HK50

If you’ve never traded the HK50, you might be missing out on a great opportunity to capitalize on economic growth in a promising foreign market.

 

Although the Hong Kong Stock Exchange is the third-largest stock exchange in Asia, and the sixth largest in the world, it often gets overshadowed by the Chinese and Japanese markets—not to mention the markets in New York and London. But seasoned investors are aware of the trading opportunities available in Hong Kong, especially with the HK50.

 

 

The Hang Seng Index, or HK50, tracks the 50 largest and most liquid companies on the Hong Kong Stock Exchange (HKSE), offering a reliable reflection of the economic strength of Hong Kong as well as China.

 

Here’s an overview of the HK50, including a primer on how to approach trades in this market.

 

Understanding the HK50

The HK50 is a massive index relative to the overall size of the Hong Kong Stock Exchange, accounting for roughly 65% of the exchange’s total market capitalization. The majority of the index is comprised of financial, utility, industrial, and property companies.

 

It is comparable in design to the S&P 500, which brings together 500 of the largest U.S. companies to provide a reliable barometer of the American economy at any given moment. In a similar way, the performance of the HK50 is regularly used to take a quick temperature check of the Hong Kong economy as well as China’s economy. For international investors, this can be helpful when trying to identify trade opportunities, whether they’re looking at forex pairings or other investments in Asian stocks.

 

In fact, due to the capital restrictions of the Chinese stock market, the HKSE and, in particular, the HK50—which are free of those restrictions—can actually provide a more accurate portrait of the Chinese economy than the Chinese exchange itself. Even if you aren’t specifically interested in investing in the HK50, it’s useful to become familiar with its performance over time, what its price movement says about the Hong Kong economy in particular, and how it affects Asian markets in general.

 

Why Should Traders Want to Invest in This Market?

The HK50 has enjoyed a long history of strong performance, growing in value by more than 20,000% since its inception in 1964. Although the trading hours for the HK50 aren’t ideal if you’re based in London, New York, or another Western city, the HK50 does still enjoy global popularity among investors thanks to its strong growth over time and its optimistic outlook for the future.

 

Here’s a look at a five-year chart for the HK50, underscoring the dramatic long-term gains of this fund—especially in contrast to similar indices around the world:

 

 

Since it’s a large but still emerging market, traders can enjoy high volatility that creates profit opportunities for well-researched investments. Additionally, many HK50 investors use exchange-traded funds (ETFs) as a simple way to capitalize on the overall growth of the Hong Kong and Chinese economies.

 

Diverse Investment Options

The HK50 offers multiple options for investing in an emerging financial market, ranging from day-trading opportunities to long-term investment vehicles. While Hong Kong has risen in popularity as a destination for forex investments, for example, ETFs are a popular method of investing in this foreign market, especially for traders trying to overcome a time zone difference.

 

American depository receipts (ADRs) and contracts for difference (CFDs) are also common vehicles for capitalizing on live trading opportunities. While CFD trading brings an additional degree of risk to international investments that already pose a greater liability than domestic investments, experienced investors may see this increased risk as well worth the potential payoff.

 

Other Advantages to Trading the HK50

The HK50’s global popularity can be credited to a number of advantages that come with this index. In addition to the diverse options offered by the HK50, traders also appreciate that the index has a strong performance history, making it a more stable index option that appeals to both novice and experienced traders.

 

Dividend earnings are also higher with the HK50 than with other indices, and it gives traders a financial foothold in a fast-growing economic region—while also insulating traders from the economic uncertainty that comes with Asian indices tied to India and other developing and volatile nations. As a modernized economy that is home to a number of global businesses, Hong Kong is a logical choice for traders looking to capitalize on gains in the overall global economy. 

 

It’s worth noting that many multinational corporations have established headquarters and operations in Hong Kong in part to insulate those businesses against recessions affecting the United States and other parts of the world. In a similar way, traders can use investments into the HK50 to diversify their risk profile while protecting their profit potential.

 

Disadvantages to Trading the HK50

While the HK50 is a strong, stable index that offers a degree of reliability to traders, it also lacks the market volatility that gives traders strong, swift profit opportunities. Indices based more heavily in the Indian and mainland China markets, for example, have historically seen better returns as the markets represented by those indices develop and grow.

 

Related to that reduced volatility is the fact that the HK50 is benchmarked at a fixed rate to the U.S. dollar. This means that a decline in the value of the U.S. dollar can lead to a depreciation of the value of HK50 holdings, which may not be desired by traders looking to diversify beyond their U.S. holdings.

 

In the chart below, notice how the HK50’s value has dropped and displayed greater volatility since the start of 2020. While this period of time portrayed is greatly affected by the development of the COVID-19 pandemic, it is notable how dramatically the index drops in value over the course of March, when the pandemic reached the United States in full force and brought that country’s economy to a halt:

 

 

Keep in mind, too, that even with safer, diversified HK50 investments such as ETFs, trading in overseas markets can carry greater risk than domestic investments. With the HK50, this is largely due to the unreliable political track record in China as well as the country’s history of intervening in market-based activities.

 

Despite these risks, the volatility and growth potential of the HK50 are attractive to many investors.

 

Conclusion

If you’re unfamiliar with the HK50 but interested in foreign investments, especially in Asia, it’s worth taking time to get a better understanding of this index, including the investment options it offers and the context it can provide in evaluating the Chinese and Hong Kong economies.

 

Given the high-risk, high-reward nature of the HK50, it’s wise to do your homework before opening positions in this market.


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Posted By nikkiagosta : 21 November, 2020
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Visualise yourself perfecting your trading method: spending countless hours working on a perfect system that has a 90% win rate and small losses. You study, study, study, and study again. At a certain point, the back-tested results give you the confidence to take it live.After a few winning trades, you get stopped out. Instead of taking the loss as a natural occurrence in the markets, you try to "weed out" the imprecision in the system that caused this loss. You stop trading, go back to the drawing board and tweak the method.If you can resonate with this situation, know this: no trading system is perfect and losses cannot be avoided. Many aspiring traders simply cannot accept this reality. Driven by fear, they tweak and mess up solid strategies, causing them to fall off the learning curve.Show me the moneyWant a solid strategy for interacting with the markets? Play volatility breakouts. When you see price consolidating in a shallow manner, get ready to play the break out of whatever tight range has formed. (Preferably in an established trend.)   USDCAD Daily Chart. Source: Pepperstone MT4 Sounds simple, right? Tips like this have lured many aspiring traders to risk hard earned cash in the markets, without fully appreciating the fact that by no means is it a perfect strategy. In fact, it's not even a strategy in itself. It's only a part of a strategy, because it doesn't tell you:* Where to exit if the market moves against you* If & where to exit (if & when the market moves in your favour)* How much to risk on any given signal* What kind of consistency the signal hasBut these considerations seem to be "tedious" and "boring" for most aspiring traders. 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There is no "best fit", nor is there anything like "one size fits all".Adopt Solid Setups"We don't actually trade the markets. We trade our beliefs about the markets". – Van Tharp, PhDIf you believe there is a fail-safe way of raking in constant profits, your belief is not in line with the way the markets work. You will be constantly frustrated because your belief will take you on a never-ending journey of trial & error. This is also known as a wild goose chase.It is important, early on in your trading career, to understand that no method is perfect. Every method is appropriate only in certain situations, and has advantages and disadvantages. The experienced traders know that the real key to trading performance is to understand what you're doing and why you're doing it.With that said, let's explore some solid setups, and discuss how traders are able to mess them up.a) Volatility Breakouts   USDCAD Daily Chart. Source: Pepperstone MT4 Volatility expands and contracts in a cyclical manner. A volatility breakout strategy is based upon finding those moments when volatility is dropping, and stalking a breakout – usually in the direction of the prevailing trend. It is a profitable strategy that continues to be employed by many market professionals.And yet, the quest for perfection can invalidate its edge. How?* Playing volatility breakouts against the trend. These typically have a harder time performing, relative to breakouts in line with trend.* Playing any breakout, without factoring in volatility. Typically, volatility breakout days close in the upper range of their 20-Day ATR.* Risking too much on each single trade.* Striving for perfection; using too many indicators and filters. That is possibly the easiest way to dilute any potential benefits of the method.b) Trend Following   USDCAD Daily Chart Source: Pepperstone MT4 Trend following, at its core, is all about letting profits run and cutting losses. Playing pullbacks that do not violate the peak/trough structure of the trend, or breakouts in line with the trend, are two ways to follow a trend until it ends. But it's also quite easy to mess things up. Consider:* Impatience. Following trends for quick pips is like using a Ferrari to go grocery shopping around town. You never use its full potential. Take the following example:   USDCAD Daily Chart Source: Pepperstone MT4 You see price starting a new trend in February 2016. A simple Stochastic Oscillator can help highlight potential high-quality pullbacks to help you engage with the trend at value. You see that the Daily peak/trough structure is still in place. So you decide to switch to a 1H timeframe to "nail the entry".   USDCAD 1H chart. Source: Pepperstone MT4 However, once on the 1H chart you also see all kinds of potential "trouble" zones. You lose track of the fact you're playing a pullback in a Daily trend, and you get caught micromanaging a potentially longer-term trade.* Playing every breakout in line with the trend. Of course, qualifying breakouts (perhaps using volatility breakouts in line with the trend) is much better than playing everything & anything.* Entering with a limit order at your "perfect price". See the example below:   NZDUSD 4H chart. Source: Pepperstone MT4 Many traders assume "patience" means "only wait for the perfect price," where "perfect" is based on some kind of price pattern, level, indicator, etc. This is why we cannot really stalk "perfect" entries."All-in, All-out" strategies may work in some contexts, but with trend trading, it might be better to scale in and scale out. Looking for the perfect entry will oftentimes mean missed opportunities.Confusing timeframes. When trend trading, the best thing to do is to choose one primary timeframe from which you observe your trend. A good choice is usually the Daily Chart. Then, when the Daily is pulling back or consolidating, you can dial down into lower time frames to try and get a better entry.Avoid confusing time frames and trends. A pullback on the daily chart looks like a trend on the hourly chart!Accept ImperfectionThe main idea is that no system, no setup, no indicator, and no method can ever be perfect. Usually, the more traders attempt to "optimize" or "perfect" a system, the more they deviate from the core concept of the system itself.Moreover, the quest for the perfect method usually stems from fear of failure. The correct approach is to work through and understand this fear. It's the mindset that's wrong: not the market.There will always be losses – the only thing to do is manage them correctly: cut the losses as soon as logically possible, and let your profits run as far as logically possible.The correct mindset is something much more along these lines:"I know that my next trade may not be successful, but I know that in time, after many attempts, on balance I will be positive."Have a plan"If you fail to plan, you are planning to fail." – Benjamin FranklinAt the end of the day, trading systems & setups are useful to build a strategy. Like any professional endeavour in life, in order to tackle the markets, you need a plan. The key is to have a plan that can be corrected and adjusted, based on the feedback (i.e. results) that you get when tackling the market.Don't search for perfection; search for understanding. Become an expert at one strategy, and build a solid plan around it, having faith that whatever conditions the market may present, you will be ready to adapt.


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