Category: How to Master in Trading – Advanced

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This category – How to Master In Trading – Advanced is directed at elite traders. The impressive thing is that all posts and articles are very precise in explanation no matter how complicated the subject is. All advanced trading techniques, methods, strategies are understandable thanks to comprehensive and detailed explanations.

  • Do Forex signals work 

    Do Forex signals work 

    By Gorica Gligorijevic
    • If you want to turn $200 into $15,000 in a few months?  No, Forex signals will not work for you.
    • If you want to win every trade, every week and every month?  No, Forex signals will not work for you.
    • It will work if you want to systematically participate in the Forex market over the long term and slowly grow your wealth.

    Yes, Forex signals can work for you if you choose the right service.

    It is unbelievable how many signals services are impossible to follow in the real world and how many signal followers have unrealistic goals when joining a signals service.

    Let’s put this in some realistic frame.

    Real signals providers have to go through a test period. Providing signals for other traders take some responsibilities. They must provide personal data, for example, personal and last name, passport copy, address, contact info, etc. It is needed in case of any conflicts between a subscriber and a provider. This data are known only between those two parties, subscriber and provider.

    You will recognize the valuable signal provider if you can see that the signal name is fully specified. Your provider has to specify the type of terminal, is it MetaTrader4 or MetaTrader5, also, he or she has to add a broker’s server name. The information also must contain the number of the account that will transfer the signals and traders password for ‘read-only’ mode. If a signal providers service isn’t free, the provider must have been registered as a provider with qualification, meaning passed some tests and examinations, so he/she can be a signal seller giving original practices.

    And say we have this situation, to show you how exactly your deposit will play via trading signals service with maximum protection for each participant. 

    Let’s examine a specific example.

    Provider’s balance is $20,000 , leverage 1:100
    Your balance is $50,000, leverage 1:200, deposit load percentage is 50%
    And assume you are betting on EURUSD currency pair where the exchange rate is 1.1047.

    Your balances ratio regarding the defined part of the deposit in percentage terms is

    (50 000 * 0,5) / 20 000 = 1,25 (125%)

    Let’s examine the leverage. Your leverage of 1:200 is greater than provider’s which is 1:100, hence it isn’t necessary to perform the correction on leverages.

    Currency rate of the deposits at the moment of calculation:

    1,25 * 1,1047 = 1,3808 (138.08%)

    After rounding, the total percentage value is 140% or 1.4 ratios.

    Therefore under the settled conditions, provider’s deal with a volume of 1 lot will be copied to your account in the amount of 140% which is the volume of 1.4 lots.

    That’s how Forex trading signals work.

    If you want to have a good experience with a Forex signals service there must follow these two things:

    • You need to use a Forex signals service that is designed so the signal follower can get similar results to the service with relative ease.
    • You need to align your expectations with reality and understand what can and what cannot be accomplished by following a Forex signals service.

    We all know how this can be difficult. The point is that if you don’t have any previous training experience you will not be able to know what reasonable expectations really are.
    We are surrounded by all the hype of quick and large profits and it is really hard not to be misled.

     

    Trading With Signals 19

    An example of a Forex trading signal

     

    But, the simple answer is: Yes, copying forex signals are feasible with one condition: Forex signals can work if you find the trusty service. You need to find the trusty service that you can trade and that realize your expectations. If not, you will constantly be disappointed and keep searching for something better. The best way to figure out if Forex signals work and the service is suits you is to take a trial.

    Types of Forex signals

    Signals are basically electronically transferred bits of information that you can opt to receive via your email on your PC or your laptop, as well as your mobile phone. It is no matter where you are, you can receive this critical need-to-know information.

    Signals inform you of the best times to purchase or sell the asset you are actively trading in. It also lets you know when you should place profit limit orders or protective stop-loss orders that are critical to your financial good.

    Forex trading signals are normally referred to as entry and exit signals. They have to be a result of detailed analysis, research, and tracking. When the signals are transmitted to you, keep in mind that they are only considered as accurate and active for a brief period of time. So, you have to react quickly.

    The type of signal is determined by the specific function it may have and how it generally operates.

    Technically there are two types of FX signals which are permanently available in the Forex market, and they are:

    • Manual Forex signals
    • Automated Forex signals

    When the first type of signal is used, a trader has to sit in front of the computer for a large amount of time, looking for signals to make a final decision on whether to buy or sell a certain currency.

     

    An example of Forex daily signals

    But the most popular type of Forex signal is copy-trading signals.

    The clue is in the name, as to how they work. It involves following the trades of other real traders and copying the trades that they make. There are many different copy-trading signal providers. Traders are allowed to enter the service to become signal providers, but there are usually several specific requirements, such as set trading volumes.

    Other traders can choose to use the platform and follow these signal providers. Copying another person’s trade can happen automatically, or the signal service will send a notification and then it’s up to the individual trader to execute the trade manually, should they want to. It is usual for this type of signal service to charge a subscription fee or take a commission from a trader’s profit. The signal providers who are being followed charge commission on the profits of the traders that are following them.

    This type of signal service has become very popular because all the participants in the business only make money if the traders using the service makes money. The significant about automated Forex signals is that the trader only commands the software to seek what signals to look for. The human psychological pressure is completely removed. There is the software which will automatically interpret what action to choose: buy or sell a concrete currency. Trading in this way can be quite perfect as long as it is done in a proper way and by a genuine expert.

    The software can process much more data compared to a human Forex trader.

    So, you are able to manage several currency pairs at one time. And you are also able to monitor all the charts you desire 24/7 and without missing any significant signals. But the most successful appliance of signals is utilization a hybrid of both types.

    And that is what the most Forex gurus do.

    Trading With Signals 16

    An example of Forex automated signals 1

    This type of signals service doesn’t use real people to generate the signals. Instead, these are automated or algorithm-based signals, which scrutinize various charts and make predictions and can be relatively accurate Forex signals. This type of Forex signal uses the same tactics and strategies a manual trader would use, but there is no human emotion involved, just a set of clear-cut rules to follow.

    Fundamental and technical analysis, along with a variety of indicators are used to uncover any developing trends.

    Trends are predefined and often predictable movements of currency pairs, and once the software has uncovered them it sends a signal to the subscriber and advises them to make the appropriate investment.

    Automated Forex signals can be quite accurate, but historically, not all have proven to offer the same level of accuracy. So much so that a large number of traders still prefer signals generated by a real live human being.

    .

    Trading With Signals 20

    An example of Automated Forex trading signals 2

    But not all automated signals are made from the same material, and some do make relatively accurate predictions.  Many traders, even some of the most advanced, choose to use signals generated by algorithms daily. However, they will tend to evaluate the signal themselves before acting on the prediction.

    Both manual and automatic Forex trading signals can be received online.

    You can receive forex signals from specialized companies and top forex brokers, generally at a low cost somewhere between $5 to $10 a day and more for monthly rates. Trade signals can also be coupled with fundamental analysis. That will give you another protection in your stock trading. Using trade signals can be precious for you. They will point you out good opportunities but also will alert when they may pass. When you want to buy, check first that the signal offers you a free trial. That will allow you to test the information, and make sure it is good quality before buying it.

    To ensure that a trader is obtaining the information that will benefit in the end, they should only cooperate with companies who are willing to provide previous, evaluated results. Moreover, those firms who validate their information are much easier to trust rather than companies who refuse to grant traders a free trial and access to audited results.

    That is without the doubt the policy of top Forex signals.

    But we have to say, fraud can be a problem when dealing with trading signals. As the forex market attracts a wide and diverse audience, the reliance on information for making financial decisions can be a crucial asset to investors. The possibility exists that some trading signal providers will provide insufficient or inferior information at a premium cost to investors, which can impede or damage an investor’s ability to make the best decision they can in the market.

    The best way is to do your own research the trading signals organizations and considering the advantages/disadvantages for each one before making any kind of financial commitment to one of them.

  • Who are Forex signals providers?

    Who are Forex signals providers?

    By Gorica Gligorijevic

    Almost all Forex traders with their trading system dream of founding signal service. Think, having thousands of subscribers getting your trading signals for a $50 monthly fee. That is everyone’s dream.

    So, let’s say, the signal provider is a trader who grants access to the data on his or her trading operations allowing other traders to copy them on their trading accounts. Signals can be provided either for free or on a financial basis. You can be a signal provider.

    To become a Signal Provider, you need an active MQL5.community account.

    Forex signal provider is a trader who trades on his own life or demo account and sends the same forex signals online to his followers. In most cases, this process is automated and takes no time, literally.

     

    Screenshot from MQL5.community

    The signal provider doesn’t have to do anything manually to send forex signals indicator to his copiers. With a wide variety of forex signals services available today it is important to learn how signal providers are selected and ranked.

    There are a lot of platforms that allow anyone to register and start selling signals without any preliminary verification of traders experience, knowledge or ability to manage risks. Since after registration trading results of a signal provider are displayed publicly, users can make their own analysis to determine whether the strategy worth following.

    But there is another approach: the trader must fit certain risk/reward requirements and volatility levels before being accepted as a signal provider.

    This method helps a trader make sure that signal seller only offers reliable strategies and don’t accept high-risk ones for copying. It also fits well into copy trading advice and regulations of many countries. All providers are then ranked based on proprietary Forex signal indicator algorithm that takes into account maturity of a strategy (how long has it been executed for), maximum drawdown, regular profitability, volatility, the average number of simultaneously open trades and many other parameters.

    But, remember that this is an extremely competitive arena.

    Because information is so accessible via the internet, you can receive it anywhere as was mentioned above, so that you have round-the-clock access.

    A Forex trading platform or “hub” gathers the necessary information to transform it into the signals that you receive. An additional safeguard is present in the fact that Forex companies are extremely careful and consistently pay attention to details when sending these signals to the various brokers, dealers, and individual investors.

    Many, many forex traders are looking for quick money, getting rich in several weeks. Some forex signals services may have a good run for a few months and then it’s game over. A lot of these guys use crazy stops and those that do use stops use loads of taking profit orders. A professional service will not give so many take profit orders and tell the subscribers to pick one or do whatever they want with it.

    Being a forex signal provider is measured by consistency. If there is no consistency it is a waste of money. Any signal provider that promises fast money or big profits is lying to you and to itself. No one can guarantee that you will make money, because there are good months and bad months. Selecting the right profitable signal provider is one of the most difficult tasks, especially for the new traders.

    Many, many forex traders are looking for quick money, getting rich in several weeks.

    Some forex signals services may have a good run for a few months and then it’s game over.
    A lot of these guys use crazy stops and those that do use stops use loads of taking profit orders. A professional service will not give so many take profit orders and tell the subscribers to pick one or do whatever they want with it.
    Being a forex signal provider is measured by consistency. If there is no consistency it is a waste of money. Any signal provider that promises money or big profits is lying to you and to itself.
    No one can guarantee that you will make money, because there are good months and bad months.

    Selecting the right profitable signal provider is one of the most difficult tasks especially for the new traders.

    How to pick the right signal provider

    A lot of forex traders use forex signal providers to assist them in profit. Traders who try to make profitable trades can leverage off successful forex traders by copying their trades. Not all the forex signal suppliers out there are trustworthy. Attempting to figure out which ones are scam artists and which ones are genuine can be an awful task.

    Finding a reliable forex signal service can seem like a challenge.

    There are signal providers that are professional and honest, of course. But unfortunately, some providers do not always have their subscribers best interest in mind. It is up to you to make sure that you are working with a trustworthy forex signals provider that you can have confidence in. There are several things traders would consider when are going to pick your signal provider. A trader should be aware that there are a lot of hardcore scammers in the market working very hard to provide fake, low quality and substandard forex signals.

    Most of these hardcore scammers have no background or training in any financial matters and usually feed the trader with performance statistics that are imaginary but yet convincing to a trader who is not smart enough. The best way a trader can deal with this problem is by spending at least 5 minutes looking at what other traders are saying about this respective signals provider. This will help him or her in making a proper judgment.

    Another way is by looking at the level of detail contained in the signals.

    If you realize that it just entails a few charts with a loss or profitable line, you will have a reason to think twice before following such signals. You should look for testimonials about various forex signal providers available in the market. Be aware of what other players in the industry are saying about the available signal providers. This will enable you to choose the best provider in terms of accuracy, quality, timeliness, and affordability of the services offered. You should check the number of TPs the providers have in one trade. And, also, how the providers put together the performance statistics.

     

    The best way a trader can deal with this problem is by spending at least 5 minutes looking at what other traders are saying about this respective signals provider.

     

    The bottom line is that any trader who wants to be profitable in the long term should start learning by himself or herself about forex signals through experience and self-training.

    How to separate the websites of scammers from genuine suppliers

    Their sites are so similar and competitive. Sometimes you can see forex traders getting in the scammers’ site rather than the genuine forex signal supplier. When they find that the signal is not profiting, they are already passing the point of no return. The scammers had taken the cash and it is past the point where it is possible to do anything.

    These scammers will give you entry and exit signals. But they will not provide you information on how they find the entry and exit points. They want you to follow their signals blindly, that’s all. The scammers will promise you a great profit, a huge return with minimum investments. With all the fantastic promises, you will be motivated to subscribe.

    That is the moment when you will find that whatever you have subscribed to is a pack of lies.

    The types of Forex signal providers

    Forex Signal providers are typically separated into two different groups based on how they generate their trading ideas – technical analysis and fundamental analysis.

    Technical Analysts

    They base their trading decisions on chart analysis including support and resistance levels, candlestick patterns, price channels, market structure, or other technical approaches. Many technical analysts have a proprietary method for analyzing the markets and the highly successful ones have spent many years researching and testing their methodology over historical data and in real-time market conditions.

    Fundamental Analysts

    Who base their trading decisions on economic and news related data. This could be in the form of long-term interest rate analysis, inflation, central bank policy, employment reports, sentiment surveys, and more. Some are longer-term position traders while many others are shorter-term traders that try to catch volatility spikes after an anticipated news release.

     

     

    Some traders may think “reliable” means having a high win rate, but that is not really what you primarily want to be looking at. Actually, win rates are not that important as a metric by itself. You must also analyze the average risk to reward in conjunction with the win rate.

    There are strategies with 90% win rates that can lose money and then there are strategies with 30% win rates that can make money.

    Another factor to consider is the technology the signal provider is using.

    Do they have a reliable platform to send out notifications and are there multiple ways for you to receive the alerts? Something else to look at is the depth of detail that the forex buy sell signals provide. Do the trading alerts always provide stop-loss levels and targets or do they only provide superficial information such as entries but no exit details?

    These are some of the factors you need to consider.

    Sign up for a Trial

    Sometimes this is the best way to get started is by signing up for a forex signals trial. You may get a real sense of the quality of service by diving in and taking a test drive. Many providers offer a 1 or 2 week trial for members.

    Join their Email List

    Another way to find out the quality of information you will receive from a provider is by joining their email newsletter. You will find the value that they provide for free so that you can evaluate whether their premium forex signals service will meet your expectations

    Check their Track Record

    All reputable FX signal providers will provide a performance record detailing their published trades. This is a good way to find their average pip profit per month, their risk parameters, average win percentage, and other related metrics.

    Google them

    Yes, simply Google them. Are they mentioned in any important trade publications or articles? What type of social following do they have? Do everything possible to find to whom you are dealing with. Just don’t be one of those naysayers.

    Check it, try it, test it and make your own conclusions.

  • Low-risk Options Trading Strategy

    Low-risk Options Trading Strategy

    These low-risk options trading strategies are commonly used for trading stocks but they are suitable for any market you would like to trade.
    By Guy Avtalyon

    Low-risk options trading strategy should be cleverly defined. It is a whole different story from any other trading.  Options trading means a bit more security. How? Instead of estimating what price the particular asset will hit, you can enter the opposite position and speculate which price it will not hit. Sounds weird? Absolutely not. Yes, for some people this whole world of puts and calls may sound scary but low-risk options trading strategy is one of the easiest ways to make money.

    For example, you can take a position called a covered call which is one of the safest. So, instead of talking a lot, let explain this low-risk options trading strategy. 

    Covered call as low-risk options trading strategy

    This can be an excellent method to increase your profit. This strategy means to sell the right to buy a stock that you own, at a specific price, on a determined date. You’ll receive the premium when selling a contract, and you’ll receive it immediately. The best part is that you’ll profit even if the stock price doesn’t change, no matter if it stays the same or drops. The buyer, to whom you sell the contract, can make a profit only if the stock price increases within the specified time frame.

    So, you’ll have better chances than the buyer of doing well. And, don’t forget this, you’ll get the premium. You can use it to protect your trades in other positions you take if they are risky. 

    For you, that are new in this field, use the stock you already hold. In case you lose on the contract you’ll have the stock to simply give. Keep in mind that the call is only valid until the expiration. If the stock price stays below the strike price, then you’ll keep the profit or cost reduction. You can do it over and over again with the covered call. In this way, you’ll continue to reduce your cost and increase protection against unfavorable moves in the stock.

    Collared Stock

    Collared stock, or ‘collars’, are similar in approach to a covered call. In this strategy, you should start with a covered call. But the difference is that you will not take a premium to reduce the cost of your positions. Instead, you’ll take that profit to buy a put option and use it as added downside protection. By buying the put option, you’ll get the right to sell your stock at the strike price. And the best part, despite anything that could happen, you’ll have the right to sell that stock at the strike price. Frankly, this put option is the best stop-loss you can buy.

    This strategy is suitable after a large run-up in the stock. Also, when the investor assumes there is a notable downside.  You can tune Collared stock to take the remaining risk out of the stock position. How much it will be, depends on the position of the call and put options strike prices relative to the current price.
    For example, if you got $1.80 for the sale of 115 call option.

    How much put to buy?

    Let’s go further. If you have, let’s say the 110 put costs $2,75 and 105 put costs $1,15, you have a tradeoff. So, make it. The other solution is to buy the 110 strikes that will give you almost the full protection. Or you keep a bit risk on the position and purchase the 105 strikes. For the first solution, you’ll need more money, you’ll have to pay an extra amount of $0.95 for the protection. It can be a rocky path. Instead, buy the 105 strike puts. By entering this position, you’ll save $0.65 in cost reduction.

    Can you see it? This strategy means to take off as much as a possible risk from stock you can. The point with tradeoff is to take upside reward with the most risk you take off.

    In essence, it’s almost the same when you’re selling the stock. The potential risk is big, so the reasonable question is why shouldn’t you sell the stock instead? It’s simpler. Anyway, this strategy is broadly used by hedge funds to limit the market’s moving.

    Short Put or Naked Short Put

    Nothing indecent to see here. All you are performing is writing a put for the premium, or the credit from selling the put. It is alike as a covered call but without the stock.

    When you sell the put, you have an obligation to buy shares from the counterparty at the strike price if they decide to execute the contract. You’ll sell a put when you suppose the stock price will go up or stay near to the current price. But, if the stock increases, you’ll keep all the money you got from the sale.

    But there is another way also. You can use writing puts to be paid to wait for the price to pull back. And then enter the stock. In essence, you’re paid to take the risk of some other trader’s stock. Your hope is the stock will pull back and the option will be exercised by the owner of the stock. So you’ll take delivery of the shares. 

    This strategy is excellent while the markets are high. Well, what will happen if you don’t want that stock or the price suddenly drops? The premium will compensate for the drop. Same as with a covered call. If you try this with stock instead of the options, there will be no compensation. 

    With short put, you’ll have lost less than you can in stock trading.

    Generally, short puts outperform covered calls in risk-reduction trade-offs but unfortunately not in all market conditions. There is a concept in options trading known as the “volatility smile”. It points out that markets are more terrifying than greedy.  Remember, since a short put doesn’t have stock in the position, you’ll need to be very active to stay invested.

    This is a kind of leverage, so you’ll have to use it very carefully. The beginner traders should approach short put trades with the knowledge that they could be forced to buy the stock at the strike price of the put they sold. It’s very reasonable to keep aside enough money to buy the stock if you are assigned.

    Risk Reversal as low-risk options trading strategy

    With options, the focus is on implied volatility. This means, when the market falls, implied volatility increases, and vice versa. The market becomes rougher when stocks decline and more pleasant when stocks grow.

    A risk reversal copies buying stock. That means you’re selling a put and then using those profits to buy a call. But as a difference from the stocks, in this position, you’re taking advantage of the already mentioned volatility smile. It will allow you to spread out the exercise prices and take additional advantage of volatility differences. 

    This low-risk options trading strategy is a great method to employ for a big move up in stock. But, you’ll not be allowed to play in the zone between the put and call.

    Put Spread 

    So far we mentioned the low-risk options trading strategy that trades upside for downside protection. But there are other low-risk strategies for options trading.
    When you trade a position that has direction there is one obvious risk that won’t go away: the risk that you’re wrong in gauging what is the future direction of the stock. In options trading, you don’t need to trade a direction. You don’t have to determine if a stock will grow or decline. Instead, you can trade volatility and time decay. One of the lowest risk strategies is the calendar spread. The calendar spread is when you sell a near-term put and buy the same put but with the later expiry date.

    For instance, you sell the March 100 put and buy the April 110 put.  So, if we know the pricing is based on the future value of the stock, the more time the option lasts, it will lead to more value. That is the benefit of the calendar spread.

    But why would you need to do this? Simply, to benefit from the time and volatility changes. This isn’t the most exciting strategy but in trading, less is more. In other words, less excitement means less risk.

    Low-risk Options Trading Strategy

    How can you make money?

    Easy! As you go closer to the expiry date of the first put contract, its value will decline every day more than the longer-dated put. But you’ll have to stay close to the current trading range. Meaning, take advantage of the time decay of a short put. This is the way to have a steady increase in profit as long as you stay in the range. Don’t wait for the expiration date. Wait until 15-25% of the maximum return. You’ll have a nice profit.

    With these low-risk options trading strategies, you’ll have some of the tools needed to add to your portfolio. These strategies are commonly used for trading stocks but you can also buy calls and puts if you want to trade cryptocurrencies. In trading any market, it is very important to be equipped with the knowledge of how to take lower risks and maximize the profit.

    More articles on this subject:

    >>> Low-risk Options Trading Strategy

    >>> Mistakes in Options Trading – How To Avoid Them?

    >>> How Options Trading Make Money?

    >>> Greeks In Trading Options As A Risk Measure

    >>> What Is Options Trading Examples

    >>> Trading Options – Understand the World of Options (Full tutorial)

    >>> Short Call Option Strategy Explained

     

  • How to Identify Trend Reversal?

    How to Identify Trend Reversal?

    How to Identify Trend Reversal?
    Some strategies can help you to identify trend changes even before they happen.

    If you want to know how to identify trend reversal ahead of time, we’re sorry but it doesn’t exist. There is no trading system or methodology capable of doing that. The only thing you can do is to learn how to read the price action and identify potential zones where the market could reverse. 

    So, how to identify trend reversal? It appears when the direction of stock changes and goes back in the opposite direction. The examples of reversal are uptrends that reverse into downtrends and vice versa. What trend reversal tells us? First of all, the sentiment in the stock is changing. For example, an uptrend that reverses into a downtrend tells us that traders are taking profit from the overbought price of the stock. 

    On the other hand, when downtrend reverses into the uptrend shows the sentiment is changing to bullish. That means the buyers are boosting bids to reverse back into the bullish trend. Let’s examine several indicators that might help us to understand how to identify trend reversal. 

    Why is it important to know how to identify trend reversal? 

    The main importance lies in the fact that if you recognize the trend reversal on time, you’ll be able to exit the position in profit or at least, to protect your trade from extended losses. But the trend reversal also gives you a chance to profit if you trade in the opposite direction.

    But there is a problem to recognize the start of the trend. We can spot the new trend only when it is already formed. It is visible after the new direction starts. The other problem is that you don’t see just one trend. Let’s say that the time frame you’re trading may have a trend that differs from the other on the lower or higher chart.

    Use Moving averages to identify trend reversal

    Traders broadly use moving averages to identify trend reversal and as alert of the “potential” start of a new trend direction.

    Let’s say the price passes a moving average and goes above it, that could be a sign that an uptrend has just started. Hence, when the price goes below the MA indicator, the downtrend is starting. 

    For example, in forex trading, use two MAs, one slower and one faster. When the faster MA crosses the slower MA, it is a confirmation that the new trend is developing. But you have to be careful because technical indicators can lag prices. So, you will be late for any trend change. In the best scenario, you’ll recognize a new trend, not at the start, but very close to. Still, moving averages, particularly the 200 periods moving average, are helpful indicators that may show a trend reversal.

    How to identify a trend ending? 

    Trends aren’t highways. You cannot just start the engine and drive from point A to point B.  What we can do about trend reversals is to estimate its probability to happen.

    For example, while you are trading in an uptrend direction, you can notice on your chart that something may show the market has a high possibility of reversing.

    Bullish and Bearish – how to identify trend reversal?

    An uptrend is bullish price development that proceeds to make constant higher highs and higher lows. A bullish reversal appears when the stock stops making higher highs and begins to make lower highs and lower lows. In other words, it reverses the direction from up to down. 

    A bearish trend reversal develops the same formations but inversely. In a bearish downtrend, the price action creates lower highs and lower lows. When the price ends forming lower lows and establishes a higher low and remains to rise with higher highs and higher lows, it is a bearish trend reversal.

    Different time frames

    How to identify trend reversal on different time frames? 

    The high and lows can differ depending on the time frame chart you use. Let’s explain this. For example, you use the 60-minute and 5-minute charts. In the 60-minute chart, you can see a range of lower high and lower low in a downtrend. But, your 5-minute chart can show the uptrend where higher highs and higher low candlestick closes.

    This means, your 60-minute chart shows the overall constant trends but your 5-minute chart can show a different tendency. It shows moves back to the longer time frame resistance. Here are two possible scenarios. The price will return back down is one possible scenario. The other scenario could be, the price may continue to bounce and reveal the early trend reversal attempt. The time frame you are trading is very important. It has to be aligned with a more extended time frame trend.

    How to trade trend reversal

    You can trade trend reversal at different points during the reversal process.

    The first important thing that you must keep in mind is to regularly maintain trailing stops. It is important in case the reversal turns out to be a fake. Usually, trend reversal starts as a move that fails to bounce but finally succeeds in reversing the trend. The point of reversal is a break: breakout or breakdown. It is followed by the opposing trend direction. The uptrend will ultimately top.

    As the price tries to bounce again, it is faced with greater selling pressure. So, it starts to produce lower highs and lower lows to finally break support and forms the downtrend. 

    Of course, this trend reversal has to be confirmed. If you enter the position in anticipation of a reversal without confirmation,  that may expose your trade to a risk of getting a fake signal. Also, your stop-loss will be triggered and you’ll exit the trade without profit. 

    If you enter the trade based on the confirmation, your entry point can be too far, so you’ll profit a little. Also, you could get stopped low on the reversion.

    How to have a proper execution?

    After you get the confirmation, wait for the first attempt and enter the trade close to the reversal support zone. You’ll have enough time to enter the trade if you use some of the popular methods to confirm the trend reversal. 

    For example, you can use trend lines. They are a simple method of visually recognizing trends and reversals. You’ll need to draw the trend lines ahead of time and to actively monitor. It’s simple to draw the trend line. Just connect the highest high and the lowest high to make the upper trend line. To draw the lower trend line, connect the lowest low and the highest low. 

    Trend lines could be diagonal or horizontal. If both trend lines are moving up or down together diagonally, they are in an uptrend or downtrend. How to identify trend reversal occurs? If the opposite trend line of the trend gets breached and then developed in higher highs and higher lows we have downtrend reversal in a breakout. Hence, the lower highs and lower lows represent an uptrend reversal.

    In case both trend lines are horizontal,  it is a consolidation that will finally end as a breakout or breakdown. 

    Bottom line

    There is no system that can tell you how to identify trend reversal with total precision. The only chance we have is to watch the price action and identify the potential zone where the market could reverse. So, we have to identify the weakness in the trending move, and strength in the retracement move. The also important signal is a break of support and resistance. Some other indicators could be a break of the long-term trendline, or if the price is coming into the higher-timeframe formation, or goes parabolic. Also, pay attention if the price is overextended.

    The more concentrated circumstances there are, the greater the possibility of a trend reversal.

  • Morning Star Pattern How To Trade It?

    Morning Star Pattern How To Trade It?

    Morning Star Pattern How To Trade It?
    How to identify the Morning Star pattern, how to trade it? Is it bullish or bearish? Is the Morning Star pattern good or bad when seen in the chart?

    To know how to trade this pattern we have to know what the Morning Star pattern is. First of all, you have to look at three candles and are near the support level. If yes, to have the Morning Star pattern, the first candle has to be bearish, the second has to be doji, and, finally, the third has to be a bullish candlestick. This third candlestick is important because it creates a bullish reversal pattern. So, logically, the Morning Star pattern is a bullish reversal pattern. At first glance, it may not look as bullish but we’ll explain to you how to recognize this pattern when it appears. Also, Traders-Paradise will introduce you to some trading techniques related to the Morning Star pattern. 

    This pattern will always tell you that something good is on its way. Bullish traders will always look for this pattern because a great reversal may occur. 

    The advantage of Japanese candlestick patterns is that even one candle has the whole story but when they are arranged together, you’ll have the novel. In terms of trading stocks, you’ll have the pattern that will tell you when your stock is going to breakout or breakdown. What is more important, when using the Morning Star pattern, you’ll know everything about the emotions of traders. For example, if you see long-legged candlestick, you’ll know that there was a hard battle among bulls and bears but without progress or change. At the end of the trading day, they are both pushed to the starting levels. 

    Therefore, understanding of candlesticks and their purposes is essential.

    What is a Morning Star pattern?

    We’ll need three trading days to be sure the Morning Star pattern appears. As we said earlier, this pattern is bullish but the first candlestick is large and bearish. That is due to the current trend and the first candle is in harmony with the trend. The second candle you’ll recognize when you see a small real body. It is a doji. This doji reveals hesitation and it’s followed by the third candlestick which is bullish. This third candle should be a large bullish one (the charts aren’t perfect, so how big is this third one, doesn’t really matter at this moment), so it tells us the bulls are coming back. They want to take over.

    So, the first day the bears have absolute control. The candlestick from the next day will tell us that there was a battle between bears and bulls and one of them is in control but yet it isn’t known which one. That’s something that doji tells. Still, we don’t know who is the winner so we have to look on the second day as on the day of indecision. We’ll understand who has a control on the third day when the bulls actually are knocking down the bears and winning the battle. So, the new direction on the stock price is starting. The price reversal is here.

    How strong is the reversal? 

    Well, we have to consider several signs to be able to conclude that.

    The longer the candles, the higher reversal. Further, the reversal will be higher if there is any gap on both sides of the middle candlestick of the Morning Star pattern. 

    To make this clearer, the second candle is the star. It has a short real body, separated from the real body of the first candlestick. The gap between the real bodies of the two candles separates a star from a doji or a spinning top. The star may appear in the shadow of the first candle, it isn’t necessary to form below the low of the first candle.

    The appearance of the start is the first sign of bears’ weakness. They are not strong enough to push the price lower than the closing price on the prior day. The third candle will confirm their weakness. This third candle has to be lighter in color. Actually, the middle candle can be red or green or black or white because the bulls and bears are going to balance out across the session.) in the charts and pierces into the body of the candle from the first day. 

    Also, if there is a gap between the first and second days. Here we came to the size of the third candle. If this candle is higher than the candle from the first day, that means the greater the bullish takeover. 

    How to trade Morning Star Pattern?

    We already said the Morning star pattern is a sign for the start of a trend reversal. From bearish to bullish. Well, you have technical indicators on disposal that may help you to unveil the Morning Star is going to form. For example, when the price is nearing a support zone. The other indicator could be when RSI confirms that the stock is oversold.

    Also, pay attention to the volume. It can be a great contributor to the forming of this pattern. When the volume increases during the three trading days and on the third day it’s the highest that’s the confirmation of the Morning Star pattern followed by the reversal.

    You should take up a bullish position in the stock when the Morning Star forms. Then, ride the uptrend until there is an indication of an added reversal. So, it’s important to notice when the first falling bearish candlestick is going to form. Further, monitor for the second smaller candlestick which is spinning top or doji, as we explained above. Plan your stop now. When the third candlestick is formed it is a bullish one, wait until it breaks above the third and take a long position. If you go long, set your stop below the bottom of the last candlestick. Some traders would wait until the price drops below the third candlestick and then enter a short position and set a stop above that candle. 

    Bottom line

    This pattern is a bullish reversal pattern. That means that buyers (bulls) take control of the sellers (bears) and push the price in the opposite direction.
    Trading completely on visual patterns can be a risky plan. The Morning Star pattern is best when it is supported by volume and a support level, as the back indicators. It isn’t hard to notice this pattern. It will appear whenever a small candle occurs in a downtrend.
    Whatever the candlestick pattern you use, you have to understand that there are many variations of it and on it. But one thing is sure, the Morning Star is a bullish reversal pattern that tells us that some good things are going to come.

  • Inverted Hammer Candlestick Pattern

    Inverted Hammer Candlestick Pattern

    (Updated October 2021)

    Inverted Hammer Candlestick Pattern
    Inverted Hammer candlestick pattern occurs essentially at the bottom of the downtrend and can warn of a possible reversal upward

    Inverted Hammer candlestick pattern is visible on a chart during the higher pressure from buyers to push a stock price up. It is a bullish reversal pattern. This pattern is identified by a long upper shadow and a small real body. They usually appear following the real longer black body. It’s pretty similar to the Shooting star candlestick pattern. Inverted Hammer occurs in a downtrend. In trading charts, you’ll notice a long black candle visible on the first day of appearance. On the next day, you can see how a small real body develops. It will occur at the lower end of the range. The candle for the second day will have an upper shadow, two times longer than the real body, and will not have a lower shadow. Don’t pay attention to the color of the real body. It isn’t important at this moment.

    What does the Inverted Hammer candlestick pattern tell us? 

    The long upper shadow indicates the buying pressure after the opening price. It is followed by significant selling pressure but insufficient to bring the price down, below the open. However, we’ll need bullish confirmation that may come as a long empty candlestick or a gap up, but followed by a heavy trading volume. 

    Inverted Hammer candlestick pattern tells us that bullish traders raise their confidence. The top of the candle is made when bulls push the price up the farthest they can. The bottom of the candle shows the bears attempting to resist that higher price. Bears are short-sellers. Still, the bullish trend is extremely strong, and the market is settled at a higher price. 

    Also, an inverted hammer candlestick pattern tells us that there could be a price reversal as a result of a bearish trend. Keep in mind, never observe the inverted hammer candlestick pattern solely. You’ll need confirmation of other technical indicators. Ultimately, check your trading plan before trading the inverted hammer. 

    What is the Hammer candlestick pattern?

    A hammer pattern in candlestick charting is a price pattern. It happens when an asset trades lower than its opening price, but the rally is formed inside the given period, for example, one trading day, to close near the opening price. The pattern looks like a hammer. The lower shadow is a minimum twice the size of the real body. The body of the candlestick signifies the difference in the opening and closing prices and the shadow tells about the high and low prices for that period.

    A hammer occurs after the price of security declines. That is the sign the market is trying to define a bottom. Hammer will appear when the sellers miss forming the bottom and push the price to rise and reverse. In short, the price drops after the open but later, closes near the bottom after regrouping. 

    A hammer candlestick doesn’t show a price reversal to the upside,  it has to be confirmed. Confirmation means the next candle that follows the hammer, closes higher up to the closing price. On such occasions, traders usually enter the long position or exit their short positions. Traders that are taking long positions it is recommended to set a stop-loss below the low of the shadow.

    The meaning of Inverted hammer pattern

    It is important to understand that all inverted patterns imply that the price will change soon. It will not reveal a particular trend but it will warn you that the market will change its momentum.

    Speaking about an inverted hammer pattern, its appearance shows the market is going up with buyers that are taking control. So, the price will go higher. Also, momentum changes, so the sellers are taking the price back to the level of the opening price. The pattern can send out many buys and sells signals in various cases. 

    Inverted Hammer is a trend reversal pattern, and it’s opposite to the hammer pattern. As a signal of bearish reversal, it comes after the stock price falls and symbolizes the strength. What does it look like? Let’s say the stock price tries to move up but the current downtrend blocks it. The bears push it down and form the top tail of the inverted hammer. At first glance, it may look like the trend is continuing since it arrives near a support zone and indicates the bullishness of the stock.  And the war can start. The bulls against the bears, where the bulls are trying to launch the stock up to new higher levels.

    How much the color is important?

    It’s time to explain the color of the body of the inverted candlestick. It could be dark or light. The light body reveals that a stock closes higher and is more powerful than its peers.

    When the uptrend is out of the scene the pattern is ready for the trend reversal. The stock price will go back to the opening price and probably stay around that price until the end of the trading day. You should wait for the next day and the new opening price.  You’ll know if the stock goes down further or the buyers will give it another chance and take the stock to a better position.

    The Inverted Hammer candlestick pattern is maybe one of the main reversal signals in stock trading. You must consider confirmation criteria before trading with this signal. The upper side has to be twice longer than the length of the body, while the lower shadow is very small or there is no, it’s invisible. You must be sure you have the right picture. Let’s say this way, the length of the upper shadow is directly proportional to the possibility of a reversal.

    Also, if there is a gap down in comparison to the close of the prior day, it could be the base for strong reversal. Start trade the Inverted Hammer candlestick pattern the day after the appearance of the signal because in that period the stock will open higher. Consider one aspect more, it’s the level of the trading volume on the day when the inverted hammer signal appears. High volume will increase the odds of blow-off.

    The logic behind this pattern

    First of all, the market condition is bearish as a reply to a downtrend. The stock could start to trade higher, so the bulls will not have the necessary strength. Hence, we have sellers on the scene that are pushing the price down to the lower trading range. Generally speaking, the bears will dominate the market all trading day in such a case.

    The bulls will attempt to recover power the next day causing the price jumps because the bears aren’t able to exercise the needed resistance. If the price sustains its strength even on the next day, you can be sure that you have the confirmation for the inverted hammer pattern.

    If you want to trade an uptrend, you can “go long” which means you can buy. But if the signal isn’t strong enough and the downtrend will continue, so you can “go short” which means you can sell the stock or any other asset you hold.

    Bottom line

    Inverted Hammer candlestick pattern indicates a bullish reversal and it’s recognized in downtrends. Traders need this to decide on the next move. Keep in mind, this pattern isn’t the same as the shooting star pattern. There is a difference. Inverted Hammer candlestick patterns will never occur at the high of the trend line as the shooting star. Inverted hammer will always occur at the low of the trend but not as often as regular hammers. Sometimes, the signals that an inverted hammer may produce can be confusing. That’s the reason to double examine the length of the shadow. It is the most important. 

    Some experts will not recommend using this signal as a trigger for entry. Still, if you want to use it you’ll have an advantage if you wait for a bullish confirmation candlestick. This signal performs the best in time frames of four hours or one trading day. In longer time frames, use it as an entry signal to sell, but not to buy. Remember, the inverted hammer pattern must appear after a downtrend. The flat or sideways markets are something you will not like in trading this pattern.

  • Shooting Star Candlestick Pattern

    Shooting Star Candlestick Pattern

    Shooting Star Candlestick Pattern
    The shooting star pattern represents one of the most important candlesticks patterns in trading. It can decide the entries and exits of your trades.

    Shooting star candlestick pattern is a bearish reversal pattern that appears at the top of uptrends. How does this pattern appear? A Shooting star candlestick pattern is formed when the price of the open, low, and close is approximately the same.  

    A shooting star candlestick pattern is actually a bearish candlestick. It’s easy to notice it.  It has a long upper shadow, small lower shadow or there is no this shadow at all, but there is a small solid body close to the low of the given day. To make a long story short, a shooting star candlestick pattern appears when the security opens, develops notably, but again closes near the open. Traders-Paradise wrote a lot about how to trade patterns, but this one is extremely important.

    How to recognize the Shooting star candlestick pattern

    To be sure it is a shooting star pattern, some conditions have to be fulfilled.  Firstly, the configuration must be created while the price rises. The other condition is that the shooting star candlestick’s body has to be half the size of a distance between the highest price on the given day and its opening price is. And, the last condition, as we said, there shouldn’t be any shadow near the real body or it can be a bit, barely visible.

    The bearish Shooting star candlestick pattern is created only if the low and the close are around the same. Traders recognize this pattern as very strong. When we notice this pattern in the charts it is confirmation that the bears were strong enough to defeat the bulls. Also, it is a confirmation that the bears closed the price below the opening price which means they pushed the price more. The Shooting star candlestick pattern isn’t a hundred percent bearish pattern, but nonetheless it is bearish when the open and low are approximately the same. Remember, they had to close the price BELOW the open. This means the bears were strong enough to halt the bulls but were not capable of sending the price back to what it was worth at the open. 

    When this pattern may occur?

    A shooting star candlestick pattern occurs when the market price is pushed up pretty notably, but then rejects and closes near the open price. This creates a long upper candle, a small lower candle, and a small body.

    Why is the shooting star candlestick pattern often seen as a possible signal of bearish reversal? Because the uptrend might not continue, meaning the price may fall. Don’t confuse the shooting star with the inverted hammer candlestick pattern.  Yes, both have a longer upper candle and small body. The inverted hammer flags bullish which is opposed to bearish reversal, and it is visible at the bottom of a downtrend, not on the top of an uptrend.

    What does the Shooting star candlestick pattern reveal?

    A Shooting star candlestick pattern indicates a possible price top and reversal. It is an extremely powerful signal when it occurs after a group of three or more continuous rising candles with higher highs. However, this pattern may happen during a phase of rising prices, even if a few candles were bearish.

    When the price advances strong to the top, a shooting star opens and continues to rise greatly over the day. This is a result of strong buying pressure during several periods. What is possible to happen? The sellers will come up to the scene in an attempt to push the price back down, close to the open price, and delete all gains for that day. If they succeed that will mean the buyers don’t have control anymore by the close of the day, and it’s possible the sellers will take over.

    In trading charts, the buyers are visible as a long upper shadow.

    They are buying during the day but it looks they are losing their positions since the price drops back to the open.
    After the shooting star, the candle forms. That is the confirmation of the shooting star candle. If you take a look at the chart you’ll notice the next candle’s high is under the high of the shooting star. Also, you’ll see how the price moves down and close near the close of the shooting star. On heavy volume, the first candle after the shooting star will be lower or will open around the previous close after which it will move lower.  That could indicate the price could go down further. In such circumstances, the traders may look for a short sell.

    In case the price increases after a shooting star, the price span could serve as resistance. For instance, if the price consolidates in the zone of the shooting star. If the price eventually remains to rise, the uptrend stays unreached, the traders should choose the long positions overselling or shorting.

    How to trade the Shooting star candlestick pattern?

    For example, the stock is growing in an overall uptrend. The uptrend becomes faster just before the appearance of a shooting star. The shooting star displays the price opened and pushed higher. In charts, it will be visible as an upper shadow, then closed near the open. The next day the price may close lower, which is a confirmation of a possibility for the price to move even lower. If the high of the shooting star wasn’t passed, the price could move in a downtrend for the next few weeks. When trading this pattern, it is a smart decision to sell long positions after the confirmation candle becomes visible.

    Let’s say you’re following the Tesla Inc. stock price and it opens the trading day at $990. Well, the price starts going down at $970 but suddenly good news generates the stock price to rise quickly, and it reaches a high of $1.020. Finally, it closes at $1.000. These changes create a shooting star candlestick.

    If you want to trade the shooting star candlestick pattern keep in mind that it could indicate a negative reversal, also. In short, market prices may go down.

    Limitations of this pattern

    Just one candle isn’t important in a major uptrend. Prices are changing. If in one short period the sellers are taking control, it could be irrelevant. That’s why traders need confirmation. They have to sell just after the shooting star, but even with confirmation, they have no guarantees the price will continue to drop. Not even how long. One of the possible scenarios is the price could increase after some short drop and continue to rise in a long-term uptrend.

    When trading this pattern you have to use stop-loss orders if you want to reduce the risk. One of the smart decisions is to use this candlestick pattern in combination with other methods of analysis.

    Bottom line

    The Shooting star candlestick pattern can indicate the end of an uptrend, so traders may decide to reduce the long positions or exit the trades. It is smart to use some other indicators with this pattern to determine potential sell signals. For example, you could wait a day to test if prices will proceed to fall. Also, you can use the break of an upward trendline. More aggressive traders can use the Shooting star candlestick pattern as a sell signal.
    The bullish version of the Shooting star pattern is the Inverted hammer pattern. Stay tuned, that’s the next.

  • How To Use Moving Averages In Trading Stocks?

    How To Use Moving Averages In Trading Stocks?

    How To Use Moving Averages In Trading Stocks?
    Many traders tried to use the SMA to predict the sell or buy options on a chart. You can pull this off by using various averages for triggers.

    By Guy Avtalyon

    Moving averages are one of the most popular trading tools, so let’s see how to use moving averages in trading stocks. Some traders have great knowledge about it but some still make it wrong. The latter might have an extremely great influence on trading success and traders’ confidence in this strategy. But actually it’s a great strategy if you know how to use moving averages in trading stocks.

    Our aim is to show you exactly that and how to avoid mistakes. We’ll show you how to choose the type and length of the moving average. Also, we’ll show you how to use moving averages in trading stocks and how they can help you to make trading decisions.

    Which moving average to choose? 

    Not a small number of traders will ask what moving average to choose, EMA or SMA. To evoke. EMA is an exponential moving average while SMA is the simple moving average. There are not too many differences between these two but if you choose one or other that can make a difference in your trading result.

    The main difference between EMA and SMA is speed. Moving average EMA will always move much faster and thus will change the direction before than SMA. Hence, EMA is capable of faster recognizing the stock price change. On the other hand, SMA would take much more time to turn when the stock price changes.

    But you cannot conclude which is better based on their speed. How is that? EMA acts quickly when the stock price changes direction, which means it’s more sensitive. When something is sensitive it’s at the same time more vulnerable. That’s the reason why EMA could send a wrong trading signal. Simply, it reacts too soon.

    For example, if the stock price starts to go down, the EMA will begin turning down promptly and it will indicate a change in the direction too early. What if it is a short-term living change? What if it is a false signal? So, we’ll need to watch the SMA. It moves slower thus it provides a more accurate signal. 

    Well, it will be nice if so simple but it isn’t.  If you trade according to EMA only, you’ll be at risk to enter a trade too early. Also, if you use SMA only there is another problem because you might enter the trade too late. There is an additional benefit to using SMA. During the volatile markets, its signal is less wrong.

    How to trade with the SMA?

    SMA is a generally accepted technical indicator, as we said. Do you remember how we use it in school? It’s similar.
    By using SMA you’ll be able to recognize the strategy that will work for you. In the beginning, here is the formula and later we’ll show you how to use moving averages in trading stocks.

    The SMA formula is the average closing price of a stock over the given periods. So, add all closing prices on the particular stock during the week, for example, and divide the result by the number of days (a trading week is 5 days long). This may look like this for 5 days:

    (19 + 20 + 22 + 18 + 21) / 5 = 100 / 5 = 20

    You can calculate SMA for 10 days, 15 days, 50 days, etc. It’s simple math. Well. all indicators are based on math.

    With SMA, you cannot do whatever you want. It is important to use the most practiced SMAs, not some unnatural 33-days, for example. That cannot beat the market. Traders use 10, 15, 20, 50, 100, or 200 SMAs every day. And you have to know what is interesting for other traders, what they are looking for.
    The point is, the shorter the SMA, the more signals you will get. For instance, if you use 5-days SMA use it along with a longer SMA because you’ll need a proper trigger for your trade, not an indicators’ noise. Short-term traders will use SMAs for up to 20-days. 

    How to use moving averages

    The right question is how to make money with SMA. Find stocks that are breaking out or down but it has to be done strongly. Use SMAs, test them all, to recognize which setting carries the best price. Now, when this is done, let the price test a particular SMA, if done successfully you’ll have a confirmation of the trend. Enter the trade on the first following bar.

    Also, you can use two SMA to fade the primary trend. You’ll have to be positive that the stock price didn’t touch 5-days or 10-days SMAs in the latest 10 bars. The price should close below or above both SMAs but in the opposite direction of the primary trend in the same bar. Enter the trade on the first following bar.

    These are two approaches: with the trend or fade the trend when trading with SMA.

    How to use moving averages EMA?

    The EMA is maybe the oldest indicator of technical analysis. The EMA strategy is helpful to identify the prevailing trend in the stock market. When executing your trades, EMA will provide support and resistance level to do that. The exponential moving average strategy works in all markets and in any time frame, actually. It is a line on the price chart that uses a math formula to help you smooth out the price performance. The EMA formula pays more attention to the recent stock prices. As we said above, it’s faster.
    The EMA helps to reduce the noise of daily price action and shows the trend but also,  perfect in determining future changes in the market price.

    How to calculate the EMA?

    Use the SMA as the start-point for the EMA value. Let’s assume we want to observe 20-days. So, we’ll need to calculate the SMA for 20 days. On the first next day, the 21st day, we have to use SMA from the prior day as the first EMA.

    The calculation for the SMA is simple since it is the sum of the closing prices during a chosen period, and divided by the number of results obtained for that period. For instance, a 20-day SMA is the sum of the 20 closing prices for the last 20 days and divided by 20. Further, you must calculate the multiplier for weighting the EMA. Here is the formula

    (2 / (number of results + 1)). 

    In the example of the 20-day average, it looks like this:

    2/(20+1) = 2/21 = 0,0952

    Let’s calculate the current EMA.

    EMA = closing price x multiplier + EMA (prior day) x (1-multiplier)

    The EMA puts a higher weight to recent prices, while the SMA gives equal weight to all values. The weighting is higher for a short-period EMA than for a long-period EMA. 

    EMA strategy

    Use one moving average with a long period and one with a short period to remove subjectivity from the trading.

    Draw on your chart 20 and 50 EMAs. Do it precisely to be able to identify crossover when it occurs and wait for the price to trade above 20 and 50 EMA. The area between 20 and 50 EMA should be retested twice or more times. If two tests are successful and successive that means the market has sufficient time to develop a trend.

    We hope you can now understand how to use moving averages in trading stocks. They are fundamental for strategies based on technical analysis. If you use moving averages in combination, you’ll be able to predict both short-term and long-term stock price movements.
    How to use moving averages in trading stock more? Use them to define levels of support and resistance.
    Stay tuned, that will be the next topic.

  • Goal-based investing – How Does It Work?

    Goal-based investing – How Does It Work?

    Goal-based investing - How Does It Work?
    By focusing on investment goals, investors can easily define investments’ purpose and intent

    In goal-based investing the point is to give your investments a specific goal. It isn’t the same as traditional investing where you can easily allocate the assets in your portfolio and address each of them with a specific goal. Goal-based investing means to have separated portfolios for each of your investment goals. Each of them will carry different risks, investment time horizons. So, you’ll have to adjust all these portfolios toward a particular goal. Here is one example of goal-based investing.

    For example, you would like to save for retirement, but at the same time, you want to fund the investment in your life dream vacation. Are these two goals competing? They are coming with different time horizons, also the importance is different. Hence, acceptable risks are different. Investing for a dream vacation will require less time, for example, 1 or 2 years could be quite enough. But, on the other side, investing for retirement will take at least 10 years, for instance. What do we have here? One short-term investment and the other with a longer time horizon. 

    Using a traditional asset allocation

    If we use a traditional asset allocation portfolio to achieve these goals, the short-term investment could influence the risk of the whole portfolio. Moreover, it could be ruling for the entire portfolio. So, to meet your long-term goals could be potentially difficult. And here is one of the advantages of goal-based investing. In conventional investing, investor’s gains and failures are measured against some benchmark index but in goal-based investing your real-life situation is what balances your portfolio. Since you can be focused on one investment goal, you could avoid market noise. What is more important, if the markets are volatile, it is easier to handle these kinds of portfolios.

    What is goal-based investing? 

    Goals-based investing is a strategy that helps investors to meet their personal goals. No matter what they may be. This investing strategy works in an easy and uncomplicated way. Goal-based investing may look like a simple concept, but it is a deviation from the standard risk-tolerance structure. In traditional investing, we can recognize investors based on their risk tolerance as conservative, or aggressive. These differences have important meanings for investment strategy and for risk management.

    Well, the risk isn’t just about the volatility of some asset or market. Traditionally, the risk represents the annual volatility or the standard deviation of monthly returns over one year. For example, small-caps have the highest volatility so they are riskier investments. When it comes to a goal-based investor, for some beginners in the market, small-caps might look less risky. Hence, for older investors that are seeking the highest level of sustainable spending, large-caps could be less attractive for this kind of investor.

    So, what is riskier is determined by investment and goals.

    Based on return expectations, goal-based investing allocates assets to reach financial goals. So, the risk is simply explained without complicated calculations. The risk appears when assets are lacking to meet your goals. For example, retirement investment risk is when investors have to withdraw and sell their investments for everyday life.
    Efficient goal-based investing needs a deep understanding of your real financial goals. 

    The value of goal-based investing

    Goal-based investing should cover three practical purposes.

    If you choose this strategy you should observe risk not just as volatility, but instead as the possibility of setting your goals. Risk tolerance isn’t abstract. It is linked to your goals, time horizon, and life plane. Based on the risk tolerance you’ll choose the investment approach. For example, an investment portfolio for retirement should consist of investments that are different than for an investor living in retirement.

    Ultimately, goal-based investing could improve what has become the traditional strategy for asset allocation. Traditional investing is based on the premise that a portfolio’s value is essentially driven by asset allocation. But some recently done analysis shows that out of the portfolio’s overall return, about half of return is due to asset allocation, and the rest of returns is from goal-based investments.

    Is it possible to build an ideal goal-based portfolio?

    Modern Portfolio Theory claims that it’s possible. An ideal portfolio should provide you maximum returns by taking on a moderate amount of risk, mainly through diversification. 

    Goal-based investing isn’t something unknown. It’s actually an advanced version of the way how you manage your family finances. The same as you put money in different envelopes or accounts, you should allocate your investments. For example, if your goal is to save for retirement you’ll probably separate your money in proportion 50:50, half will be for spending, the other half for goal-based investing. But if you are investing for the purpose of a dream vacation, the better choice is to spread your money in proportion, for example, 70:30 where 70% of your money will be used for all your expenses and 30% for your current goal-based investing. It may be trickier if you have several goal-based investments and several portfolios. That would require more work while monitoring each of them. 

    The good news is that you can find support from professionals. But if you have less than five such portfolios maybe you should dedicate some of your spare time to monitor them. When you decide that a goal-based investing is suitable for you, you can then build the risk-adjusted portfolios to meet each individual goal.

    Important to know before investing

    Ask yourself some crucial questions for each goal. For example, what is the purpose of the savings? How long do you want to stay invested? Do you plan to put additional amounts in investments? Can you anticipate any need to withdraw your savings before your goal is reached? Will you spend part or the whole amount of your income from the investments during the investment period, or you plan to reinvest it? When you go through all these and many other questions for each goal, you’ll come up with the assets you will invest in.

    The benefits of goal-based investing

    Maybe the main benefit is that this strategy allows you to know the precise amount that is needed and when is needed to reach your goals. In this way, you’ll be able to determine how much you exactly need to invest. The other benefit is that this kind of investing gives you a better chance to pick the investment product suitable for your goals. You’ll be able to make the proper investment decision without following the crowd. One of the advantages is that you’ll have more investment discipline. The main goal of any investment is to generate returns. When you know how much exactly you invested and compare it with your financial goals, you’re able to get better returns. Maybe you’ll add different assets to meet different goals. This will provide you to diversify your portfolio to reduce the risk. Fewer risks, in this case, means more profits. That may have a great influence on your financial freedom.

    System for this kind of investing

    When you determine your financial goals, you have to make a clear plan on how to reach them inside the set period. You need to determine the amount of money needed to reach your goal. Pick the assets based on your investment horizon and risk and rate-of-return.
    Investing in the right assets is complex and needs in-depth understanding and analytical work. If you want to grow your wealth, you’ll need to hold your investments for a longer period. Never forget the power of compounding. Reinvest your income into the same assets to produce additional returns.

    Bottom line

    Goal-based investing is an easy way for investors with special goals in mind. It enables investors to set risk preferences for goals of different importance and need, gauging progress, or failures against their goals. Your success isn’t related to any market benchmark index but related to real-life events.
    Keep in mind, the circumstances and goals are changing and from time to time you’ll need to revisit them as the markets continue to change, go up and down.

  • Difference Between CUSIP And ISIN Codes

    Difference Between CUSIP And ISIN Codes

    Difference Between CUSIP And ISIN Codes
    While the company’s reports may not all be true, nothing can be hidden if you use CUSIP for the US companies and ISIN for international trading.

    CUSIP and ISIN codes are some of the most well-known securities identification numbers that are used to trade.

    If we have in mind that both are codes used for securities to help settlement and clearing in trading, what is the difference between CUSIP and ISIN?
    ISIN stands for International Securities Identification Number, while CUSIP stands for Committee on Uniform Security Identification Purposes. Both are displayed as codes Let’s look at the difference between CUSIP and ISIN.
    We already explained in the previous post what CUSIP is, let’s explain what ISIN is to understand the difference between them.  

    What is ISIN?

    It is a security code that consists of 12 alphanumeric characters. ISIN is used almost all over the world, but it is particularly known and used in Europe. So, we said it consists of 12 characters where the first two are the country code. It is followed by 9 alphanumeric characters which are the national security identifier, and we have one more digit, the 12th. 

    Difference between CUSIP and ISIN

    Well, where is the difference between CUSIP and ISIN if both serve to help settlement and clearing in trading securities?

    The first difference is that CUSIP, mostly used in the US, North America actually, consists of 9 alphanumeric digits. The first 6 letters outline the issuer, the next two digits represent the issue, the last figure is the check digit.

    Both have the same purpose to uniform the identification of securities which are settled and traded.

    ISIN is accepted for shares, futures trading, options, derivatives, and debt security that are traded and settled. This code looks something like this: two letters to identify the country, for example, Germany, so they would be GE. The next we have a national security identifier formed of nine digits, for example, “275946739” and as the last but not the least one check digit.

    The country code is provided by the International Organization for Standardization or shorter ISO. The National Numbering Agency (NNA) provides the national security identifier for every country in particular.

    What is the check digit? 

    The check digit is received by using the Modulus 10 Double Add Double system. This system converts the letters to numbers by adding their place in the alphabet to nine. 

    To calculate the check-digit, use the first 11 digits, and start at the last number and go from right to left. Each second digit you should multiply by 2. Letters are converted to numbers. You’ll have a string of digits as a result. All numbers over 9 separate into 2 digits. Add them up. The next step is to subtract from 10 and you’ll have the ISIN check digit.

    For example, when the final result is 0, that means the check digit is 0.

    Alphabetical letters are transferred to a numeric value. The letter A is 10 and the others are as following:

    A = 10; B = 11; C = 12; D = 13; E = 14; F = 15; G = 16; H = 17, etc where  Y = 34.

    To summarize,  convert letters to numbers by using the model above but start from the right last digit, every other digit multiply by 2. Subtract the result from the smallest number ending with 0 to get the check digit.

    The check digit for CUSIP is calculated by converting letters to numbers by using their position in the alphabet. Every second digit multiplies by 2 to get the CUSIP check digit.

    The importance of these codes to investors

    ISIN codes are important for companies that have investors or want to raise the capital. The main purpose of the ISIN code is to clear and settle trades. 

    Both the ISIN number and the CUSIP number are an official code that is required today. The numbers will help you to identify the security. They are kind of a personal social security number for the companies. 

    For example, the ISIN number is necessary for cross border trading. Moreover, ISIN code has many purposes.

    An ISIN or CUSIP number isn’t a ticker symbol that spots stock at the market. For example, the company may have several ticker symbols. That depends on trading platforms but its securities will have the same ISIN number. ISIN code is required but companies cannot create the ISIN code themselves. When a company wants to have an ISIN number it has to contact the numbering agency, for example, the Association of National Numbering Agencies (ANNA).

    How to convert CUSIP to ISIN?

    The CUSIP number is entirely included in the ISIN number. The ISIN is a larger code with 2 prefixed letters, for example, the “US” for the United States of America. CUSIP number doesn’t have this prefix because it is entirely a North American identifier.

    For example, ISIN US0328974369 is extended from CUSIP 032897436. Keep in mind that this is an imaginary example, and as such not a real example. Let’s go further! You can notice that country code is added on the front of this numeric phrase, and the check digit is at the end. So. we can easily recognize that the issuer is from the US. 

    Let’s determine the digit at the end. Just a bit of math more.

    Let’s convert letters to numbers.

    U = 30, S = 28. 

    So we have 

    US0328974369 as 30280328974369

    The next is to collect odd and even numbers.

    30280328974369 = (3, 2, 0, 2, 9, 4, 6); (0, 8, 3, 8, 7, 3, 9)

    Now we have to multiply the group containing the rightmost numbers (meaning the FIRST group) by 2:

    3×2 + 2×2 + 0x2 + 2×2 + 9×2 + 4×2 + 6×2

    which is 

    6 + 4 + 0 + 4 + (1+8) + 8 + (1+2) 

    Now, add up the individual digits

    6 + 4 + 0 + 4 + (1+8) + 8 + (1+2) + (0 + 8 + 3 + 8 + 7 + 3 + 9)  = 72

    Then use the 10s modulus of the sum.

    Bottom line

    The CUSIP number is important to help the settlement and the trading securities. The CUSIP consists of nine characters, with letters and numbers. It is assigned to securities that are traded in the United States and Canada. CUSIP numbers are publicly available. 

    ISIN Numbers are expanded CUSIP numbers and represent the International Securities Identification Number system.

    This is how the international system for the clearance of securities is established. The difference between CUSIP and ISIN is in 3 digits and we showed you what they are and how to calculate them. Both can simplify trading, selling, or buying securities, especially in international investing.

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