Year: 2020

A Bottom fishing As An Investment Strategy

The most popular bottom fishing strategy is value investing but traders also use technical analysis to identify oversold stocks that may be winning bottom fishing possibilities.

Bottom fishing as an investment strategy refers to the situation when investors are looking for securities whose prices have lately dropped. Also, that are assets considered undervalued.

Bottom fishing as an investment strategy means that investors are buying low-cost shares but they must have prospects of recovery. This strategy also refers to investing in stocks or other securities that dropped due to the overall market decline. But they are not randomly picked stocks, they have to be able to make a profit in the future. Well, it is general hope.

Buy low, sell high

We are sure you have had to hear about the old market saying “buy low, sell high” as the most pragmatic and most profitable strategy in the stock market. But, also, it isn’t as easy as many like to say. You have to take into consideration several things while implementing bottom fishing as an investing strategy. Firstly, you’ll be faced with some traders claiming that it is an insignificant strategy. The reason behind their opinion is if you are buying the stocks that are bottoming you do that near its lowest value.

The point is that almost every stock is a losing one. Usually, some momentum traders and trend followers will support this opinion. Where are they finding confirmation for this? Well, traders tend to sell to breakeven after they have been keeping a losing stock for a short time. They want to cut losses and that’s why they are selling, to take their money back and buy some other stock. Traders are moving on.

Overhead resistance will affect the way a stock trades but it is expected when using this strategy. Moreover, overhead resistance isn’t as inflexible as some investors believe.

Bottom fishing is an investment strategy that suggests finding bargains among low-priced stocks in the hope of making a profit later.

What to think about while creating this strategy

The most important thing is to know that you are not buying the stock just because it is low-cost. Lower than ever. The point is to recognize the stocks that have the best possibility for continued upsides.

Keep in mind that buying at the absolute low isn’t always the best time to do so. Your strategy has to be to buy stocks that have a chance of continued movement. Stock price change may occur on the news or a technical advancement like a higher high. A new all-time low can cause a sharp bounce if traders assume the selling is overdone. But it is different from bottom fishing. Bottom fishing as an investment strategy has to take you to bigger returns.

Not all low-cost stocks are good opportunities.

Some are low with reason, simply they are bad players. For example, some stock might look good at first glance but you noticed one small problem. Don’t buy! When there is one problem it is more likely that stock has numerous hidden problems. There is no guarantee that low stock will not drop further.

Further, for bottom fishing strategy, you will need more time to spend than it is the case with position trading, for example. You have to be patient with this strategy. You are buying a weak stock, and they became weak due to the lack of investors’ interest. Do you know when they will be interested again? Of course, you cannot know that nor anyone else can. When you want to use a bottom fishing as an investment strategy you must be patient and have a time frame of months, often years to see the stock is bouncing back

If you aren’t psychologically ready to stay with these trades for a long time you shouldn’t start them at all.

The bottom fishing strategy requires discipline

If you want to practice bottom fishing as an investment strategy you will need discipline. It requires extra effort. It isn’t easy for some aggressive traders to hold a stock for months and without any action. We know some of them that made a great mistake by cutting such stock just because they were bored. If you notice you are sitting in stocks that are dropping lower on the small volume you still can exit the position. The losses might add up quickly, so you’ll need to set a strong stop loss to avoid it. Even if you hold a stock paid $1. It can produce big losses over time if you don’t have at least basic risk management. Stop-loss and exit points are very important in this strategy.

The two main types of bottom fishing

There is the overreaction and the value. For example, the news of some company’s problems may cause a lot of traders eager to enter for a sharp recovery. The stock suddenly had a sharp decline but they may think the market overreacted and the stock will bounce quickly. That could be faulty thinking but what if the long-term bottom fishers start to buy that stock too? The company’s problems are temporary and as times go by, could be forgotten.

The point is that the bottom fishing on the news or even earnings is a good opportunity to trade a bit of volatility. But you have to be an aggressive trader and able to play the big fluctuations. These short term trades can easily become investments if you don’t pay attention to it. Before you enter the position you must have a solid trading plan with defined entry point, stop-loss, and exit point. Optimize your strategy before you jump in. There is one tricky part with cheap stocks – they can become cheaper.

The essence of bottom fishing as an investment strategy

Bottom fishing is when you try to find the bottom of a stock that has a higher price. Let’s say a stock was at $200 and now it is at $20. When you try to bottom the fish stock you’re actually trying to catch its bottom and buy it and provide it to go to the upside. In simple words, you want to get a good deal, to obtain the lowest possible price or bargain on the stock. But, if you want a good bottom fishing you must understand how it works. There are too many fresh traders starting bottom fishing but ending up with stock lower or never getting out from that low level. They are spending years stacking in bad investments. Also, their money becomes locked in such bad investments.

A real-life example

Nowadays, we have a big selloff in the stock market. It is a great opportunity to buy some stocks that were very expensive since they are much lower now. A high priced stock has the drawback. Everyone would like to buy but have insufficient capital. That’s why the trading volume of such stock can be small. And suddenly due to some unfortunate event, the price is going down. Buying these stocks is a very good opportunity because they have the chance to go back up to the top. But it is hard to catch the bottom for these stocks. So many investors push up the price in the hope to get out at a higher price.

Are they right or wrong? It is obvious they’ll have to sell these stocks when they start to come back up to reduce their losses. That is the main disadvantage of bottom fishing if you don’t do it accurately.

Bottom line

If you want a proper approach to the bottom fishing, you’ll have to watch for higher highs and higher lows. When you notice in the chart that a trend line is moving up off of a bounce you’ll see the real bottom. Well, you might not catch it at the lowest point, but you’ll catch it in a range of 5% or 10% which is a good deal for long-term investment. That can be a good strategy for investors willing to hold a stock for several years.

For example, the stock price had a sharp decline and fell from $300 to $100 per share over three days. You could determine it was due to market conditions. So, you are buying 10 shares for $1.000. Next week, the price returned to $300 per share. What are you going to do? Sell, of course. You can sell the share of stock that you purchased for $1.000 at $3.000 (10 shares at $300 each) and make a profit of $2.000. Really not bad.

Bottom fishing as an investment strategy is attractive for boosting portfolio value. Also, it is good for fast making profit while the volatility in the market is present. But, keep in mind, it can be risky because you can’t be 100% sure how the stock or market will go, how the price will run as a result of investors’ behavior, or how the particular company will survive the problems in the global economy.

16th March 2020
The Average Daily Trading Volume How to Calculate

(Updated October 2021)

A stock’s daily trading volume shows the number of shares that are traded per day. Traders have to calculate if the volume is high or low.

The average daily trading volume represents an average number of stocks or other assets and securities traded in one single day. Also, it is an average number of stocks traded over a particular time frame.

To calculate this you will need to know the number of shares traded over a particular time, for example, 20 days. The calculation is quite simple, just divide the number of shares by the number of trading in a specified period. Daily volume is the total number of shares traded in one day.

Trading activity is connected to a stock’s liquidity. When we say the average daily trading volume of a stock is high, that means the stock is easy to trade and has very high liquidity. Hence, the average daily trading volume has a great impact on the stock price. For example, if trading volume is low, the stock is cheaper because there are not too many traders or investors ready to buy it. Some traders and investors favor higher average daily trading volume because the higher volume provides them to easily enter the position. When the stock has a low average trading volume it is more difficult to enter or exit the position at the price you want.

How to calculate the average daily trading volume

As you expected, it is quite simple. All you have to do is to add up trading volumes during the past days for a particular period and divide that number by the number of days you observe. It is usual to calculate ADTV (Average Daily Trading Volume) for 20 or 30 days but you can calculate it for any period if you like. For example, sum the average daily trading volumes for the last 30 days and divide it by 30. The number you will get is a 30-day average daily trading volume.

Since the average daily trading volume has a great impact on the stock price it is important to know how many transactions were on a particular share. The same share can be traded many times, back and forth and the volume is counted on each trade, each transaction. For example, let’s say that 100 shares of a hypothetical company were purchased, and sold after a while, and re-purchased, and re-sold. What is the volume? We had 4 transactions on 100 shares, right? So, the volume in this particular case would be expressed as 400 shares, not 800 or 100. This is just a hypothetical example even though the same 100 shares could be traded many more times.

How to find the volume on a chart?

Thanks to existing trading platforms it is easy since each will display it. Just look at the bottom of the price chart and you’ll notice a vertical bar. That bar indicates a positive or negative change in quantity over the charting time period. That is the trading volume.
For example (if you don’t like too much noise in your charts), you will use 10-minutes charts. Hence, the vertical bar will display you the trading volume for every 10-minutes interval.

Also, you will notice that these bars are displayed in two colors, red and green. Red will show you net selling volume, and green bars will let you know the net buying volume.
You can measure the volume with a moving average, also. It will show you when the volume is approximately thin or heavy.

What is an average daily trading volume for a great stock?

Are you looking for the $2 stock with an average daily volume of 90,000 shares per day? It won’t be easy. Sorry!

The stocks that traded thinly are very risky and changeable. To put this simple, we have a limited number of shares in the market. Any large buying might influence the stock price skyrocketing. The same happens when traders and investors start to sell, the stock price will fall. Both scenarios are not beneficial for investors. So, you must be extremely careful when trading stocks with daily trading volume below 400.000 shares. You can be sure it is a thinly traded stock even if it is cheap as much as $2. The stocks with low prices carry higher risks. For example, penny stocks.

Here we came to the dollar volume. While the daily trading volume shows how many shares traded per day, the dollar volume shows the value of the shares traded. To calculate this you have to multiply the daily trading volume by the price per share.

For example, if our hypothetical company has a total trading volume of 300.000 shares at $2, what would be the dollar volume? The dollar volume would be $600.000. This is a good metric to uncover if some stock has sufficient liquidity to support a position.

To decrease the risks, it is better to trade stocks with a minimum dollar volume in the range from $20 million to $25 million. Look at the institutional traders, they prefer a stock with daily dollar volume in the millions.

Understanding Average Daily Trading Volume

Average daily trading volume can rise or drop enormously. These changes explain how traders value the stock. When the average daily trading is low you have to look at that stock as extremely volatile. But, the opposite is with higher volume. Such stock is better to trade because it has smaller spreads and it is less volatile. To repeat, the stock with higher trading volume is less volatile because traders have to make many and many trades to influence the price. Also, when the average trading volume is high, trades are executed easily.

This is a helpful tool if you want to analyze the price movement of any liquid stock. Increasing volume can verify the breakout. Hence, a decrease in volume means the breakout is going to fail.

The trading volume is a very important measure.

It will rise along with the stock price’s rise. So, you can use it to confirm the stock price changes, no matter if it goes up or down. When we notice that some stock is rising in volume but there are not enough traders to support that rise and push it more, the price will pullback.

Pullback with low volume may support the price finally move in the trend direction. How does it work? Let’s say the stock price is in the uptrend. So, it is normal the volume to rise along with a strong rising price. But if traders are not interested in that stock, the volume is low and the stock will pullback. In case the price begins to rise again, the volume will follow that rise. For smart traders, it is a good time to enter the position because they have confirmation of the uptrend from the price and the volume both. But be careful and do smart trading. If the volume goes a lot over average, that can unveil the maximum of the price progress. That usually means there will be no further rise in price. All interested in that stock already made as many trades as they wanted and there is no one more willing to push the stock price to go up further. That often causes price reversal.

Bottom line

The average daily trading volume shows the entire amount of stocks that change hands during one trading day. This can be applied to shares, options contracts, indexes or the whole stock market. Daily volume is related to the period of time. It is very important to understand that when counting volume per day or any other period each transaction has to be counted once, meaning each buy/sell execution. To clarify this, if we have a situation in which one trader is selling 500 shares and the other one is buying them, we cannot say the volume is 1.000, it is 500. Anyway, this is an important metric that will show you if some stock is easy or difficult to trade.

13th March 2020
Share Turnover Ratio – What Is It and How to Calculate?

The share turnover ratio isn’t the most important measure you have to take into consideration when picking a stock but it is important to know will you need a lot of time to sell off the stock.

Share turnover ratio shows how difficult or easy, is to buy or sell shares of some stock on the market. Share turnover ratio compares the number of shares traded during some period with the total volume of shares that available for trade during the given period. Investors often avoid the shares of a company with low share turnover.

Share turnover is a measure of stock liquidity. When we want to measure it we have to divide the total number of shares traded during the given period by the average number of shares available for sale. For example, if the 1 million shares are traded during the year, and the average volume of shares for sale was 100.000 then we can say that turnover was 10 times. Shares can have higher or lower turnover. The higher share turnover shows that the company has more liquid shares.

So, we can say that the share turnover compares the number of traded shares to the number of outstanding shares. When we see a high level of share turnover, this means investors can easier and smoother buy and sell the shares.

They often believe that smaller companies have less share turnover because they are, as investors think, less liquid than big companies. But that might be a great mistake. It isn’t rare that smaller companies have a greater amount of share turnover compared to big companies.

How is this possible?

Very often the reason is the price per share. Big company’s price per share can be several hundreds of dollars and only rich investors are buying them. Yes, large companies have huge floats, thousands of shares might trade daily. But what percentage do they have? The real percentage of their total outstanding shares is small.

On the other side, a small company’s share is significantly cheaper and such is traded more frequently. So, they may have a higher daily trading volume.

Possibilities of share turnover ratio

The share turnover ratio compares sellers versus buyers of stock. To calculate it we will need two numbers to know. One is the daily trading volume of stock and the other is the number of shares available for sale. This second number is actually a daily float of stock, the total number of outstanding shares. The result is expressed in percentages. And you will see, every time when we get as a result, the high share turnover ratio we can be sure that there is a high daily volume and low float. Also, a low daily volume and the high float will always give us, as a result, a low share turnover ratio.

But these figures are so relative. The real share turnover ratio depends on the company and the sector it belongs to. For example, you can see from time to time that some stocks have a high turnover ratio but it can be periodically. When the demand for some stock rises, the turnover ratio will grow at the same time. So, this ratio isn’t able to show how the company is healthy.

The limitations of share turnover ratio

The share turnover ratio can show how easy investors can buy or sell their shares of some stock. Literally, this ratio isn’t able to tell us anything about the company’s performance. Let’s assume you are examining a large company’s stock. You know that the company has, let’s say, 4 billion shares outstanding. It is a really large company. Also, the known fact for you is the averaged trading volume. It is, for example, 40 million per month. So, this company’s share turnover ratio is 1%. What does this number tell us? The stock is illiquid. Would you avoid this stock? Remember, it is a big, well-known company, with great history, with a permanent rise, good management, great prospect. Of course, you wouldn’t. Contrary, everyone would like to buy that stock. That is a case with Apple, for example. Would you avoid investing in that company? The point is that the low share turnover ratio shouldn’t be the most important concern when picking a stock.

Moreover, when a stock is dropping and only a few want to buy it, that stock will have low turnover. But the same is true if the stock is expensive. If single share costs, for example, $800 only a small number of investors can afford to buy it and the share turnover ratio will be very low.

So, do you understand why this ratio isn’t reliable when you want to estimate how good stock is? That is the reason why you should use the other parameters too.

Is this measure important at all?

In short, yes.

It is an important measure and investors should be aware of it. A low share turnover ratio indicates that you may need a lot of time to sell off such stock and, what is also important, the stock price may decrease while you are waiting to find someone and sell it. Hence, not many investors are willing to put their money as such a risk and buy the share of the company with a low share turnover ratio. But always keep in mind, a low share turnover ratio is normal for a small market-cap company. But we owe you an explanation of what is an average daily trading volume.

Average daily trading volume

Average daily trading volume or short ADTV is the average number of shares traded during one day in a particular stock. Daily volume simply means how many shares are traded per day. So, we can average daily volume. It is a crucial measure because high or low trading volume triggers different kinds of traders and investors. Some investors and traders favor high average daily trading volume. It is because with high volume is easier to get into and out of the position. As we already said, when the stock has low volume it is more likely to be harder to enter or exit at the proper price since there are less buyers and sellers. But when the traders and investors start to value the stock differently ADTV can increase or decrease. For example, if the average daily trading volume is higher, that means the stock is less volatile and more investors would like to buy it. But this doesn’t mean that stocks with high volume don’t change in price because they can change a lot.

The higher the trading volume is, the more buyers and sellers will easier and faster execute a trade.

This is a useful tool for analyzing the price action of any liquid stock. For example, the increasing volume may confirm the breakout. If there is any lack of volume, the breakout may fail. But that is the subject for a longer article.

Bottom line

Several figures and ratios deliver information about stocks and represent great help to investors when deciding whether they should buy or sell. The stock volume and the share turnover ratio are one of them. They provide valuable information about any stock.

Share turnover ratio is an important measure for investors but shouldn’t be used as a sole criterion. If investors or traders use this one solely it is more likely they will miss out on very important data, for example about the quality of the stock, and make a wrong investing decision.

One suggestion before doing anything in real: use our preferred trading platform virtual trading system and check the two formula pattern.

12th March 2020
Safe Haven Assets Where Investors Have Begun Piling Into

Safe-haven assets are a fundamental place to avoid economic downturns. They express the markets that can protect the investment from losses when the market falls.

The safe-haven assets are investments that investors start piling into during intense market volatility and uncertainty. The main goal is to take a position into investments that are recognized as safe from losses. Even more, they have the capacity to rise in price while the bulk of other assets are declining value.

Safe-haven assets provide investors to limit their exposure to losses when market downturns and protect their capital invested. Like we have now when almost all markets plunged. When the markets enter tumultuous times like this one, the value of investments falls sharply. Investors are seeking assets that are not correlated to the markets. These kinds of assets are safe-haven assets.

So, we can say that safe-haven assets are able to hold or grow in value during the market turbulence.

Do anything to minimize the risk

Risk is real if you want to invest in stock markets. But it isn’t necessary to be exposed to great risks if you can avoid it. The point is to minimize the risks all the time, during the life of your investment. But when the market is declining almost all assets become too risky. In order to protect their capital, investors leave their position in unsafe assets and start buying something safer.
Safe-haven assets are those that don’t carry a high risk of loss. Historically that was cash, real estate, mutual funds, CDs, etc. You may ask, is gold a safe-haven asset? Gold as much as silver are historically used as a hedge against market or political uncertainty or the devaluation of a currency. But having in mind that gold coins have varied during the unstable political situations, it might be a wrong choice. Anyway, commodities are risky.

Better pick s risk-free assets, such as sovereign debt instruments or hold gold and silver trough futures.

What are safe-haven assets?

Safe-haven assets are the necessary answer to economic downturns. They are the markets that can protect investors from losses when other assets and markets fall. How can they protect your investment portfolio?
Safe-haven assets are holdings where investors and traders set their money to protect against major droppings. Safe-haven assets must allow protection from losses.

But what are the characteristics of safe-haven assets?

If you want trade safe-haven assets you must pay attention to liquidity. Such assets must have high liquidity. Why is this characteristic so important? Because that will provide you to enter and exit positions at a price you determine but without slippage. Further, safe-haven markets must have limited supply. You don’t want the assets with a supply that passes their demand. It is more likely for such an asset to decrease in value. For example, gold has a deficit of supply, but higher value when demand increases.

True safe-haven assets have to hold a certain level of demand in the future. So you, as an investor, must believe in the assets’ future, you must be confident about it. For example, that is the reason why silver isn’t so good investment choice. Yes, it has many purposes now, but it can be replaced in the future by some other material. On the other side, you might recognize copper as safe-haven assets because of its importance that increases over time. Almost every day, science, the industry find new ways to use copper.

Can you see where the essence of safe-haven assets? It is permanent. We cannot ever say that some temporary high valued asset belongs to the corpus of safe-haven assets.

Is gold the ultimate safe-haven asset?

For many investors, gold is a safer asset to buy and hold, safer than cash, because it is a tangible asset. Further, no one can print more gold as it is possible with banknotes. This is important because it provides the value of gold not being changed in this way. From the historical point, gold served as insurance during unfavorable economic circumstances. Gold prices regularly rise when drastic events happen. Moreover, gold is negatively correlated to the US dollar. Meaning, when the dollar is strong it is costly to buy and hold. That drives gold prices lower. And vice versa. Investors know this. Whenever the US dollar was trading lower, they started piling into gold.

What are other safe-havens?

When the market records turbulent circumstances the value of most investments falls sharply. So, investors want to buy assets that are negatively correlated to the overall market. They are moving their investments into safe-haven assets.
That can be defensive stocks, such as consumer goods, utility, biotechnology, healthcare. These stocks tend to resist the market’s downturn. People are buying food, drugs, they need health care and groceries. Also, don’t think that real estate due to its lack of liquidity isn’t a safe-haven asset. The real estate has a constant income flow that can offset the liquidity.

Infrastructure is also safe-haven assets. So, even though the markets are going down there are plenty of ways to stay invested.

Building a safe-haven assets portfolio will need some additional attention to optimizing returns. But the results may be quite surprising. But there are safe-haven currencies also. For example, the Japanese Yen (JPY) is seen as one of the most stable safe-haven currencies.

Can we trade safe-haven assets?

Of course, we can. So after we’ve recognized safe-havens assets, want to trade them. The question is how and when to trade them. The possibility isn’t questionable. Let’s say this way, a market downturn is likely to hit due to the factors you can recognize.

If you want to move a chunk of your portfolio into safer assets there are several things you have to consider.

First of all, trading safe-haven stocks is practiced as a defensive tool. The aim is to overcome a declining economy as even defensive stocks may not generate a positive return. It’s true that the slow economy will let safe-haven stocks beat the market, but it doesn’t mean that you will profit.

When trading safe-haven stocks examine the beta of stocks before investing. Beta points the relationship between the stock and the market. If the beta is 1, that means the stock price is fully correlated with the market, but when the beta is above 1, the stock is more volatile than the market, and finally, when the beta is closer to zero the correlation with the market is smaller. Knowing the beta of the stock will enable you to hedge against volatility.

The P/E ratio will show you if the safe-haven stocks are undervalued or overvalued. The safe-haven stocks are well-known for being undervalued. Also, the stocks with high dividends, meaning greater than 6%, are a good pick for safe-haven stocks. At least, as much as the stock from a well-established company. Well-known brands or large-cap stocks will lose less in value than small-caps during the market downturns.

All these factors are important and you have to evaluate them before picking your safe-haven assets and adjust your new holdings to your risk appetite.

Currencies as safe-haven assets

Some currencies are recognized as safe-havens. In periods when the market is extremely volatile, currency traders would like to move their cash into safe-haven currencies as protection. Those kinds of currencies are the Swiss franc, the euro, the Japanese yen, and the U.S. dollar.

Forex traders have to pay attention to some currencies that might act differently to market shifts than others. Also, there is always a question of what currencies suit to be safe-havens.

Bottom line

The “safe-haven” refers to financial assets that investors turn to protect their profit from periods of market turbulence.
Safe-haven currencies, safe-haven stocks, gold, have historically preserved or increased their value during market downturns. They gave good protection against losses. Why shouldn’t they do such a thing for us now?

One suggestion before doing anything in real: use our preferred trading platform virtual trading system and check the two formula pattern.

10th March 2020
MACD Indicator – Moving Average Convergence Divergence

MACD is one of the most popular indicators used among traders. It helps identify the trends direction, its speed, and its velocity of change.

MACD is short for “Moving Average Convergence Divergence.” It is a valuable tool. Traders know how important it is to use MACD as an indicator. Also, how reliable is using this tool in trading strategies. But that can wait for a while, firstly, let’s explain what is Moving Average Convergence Divergence or shorter MACD.

It is a trend-following momentum indicator that presents the correlation between two moving averages of a stocks’ price or in some other assets. We can calculate the MACD, it is quite simple.

Just subtract the 26-period EMA from the 12-period EMA. EMA is an Exponential moving average.

Here is the formula:

MACD = 12-period EMA − 26-period EMA

The 26-period EMA is a long-term EMA, while 12-period EMA is a short-term EMA.

If you need more explanation about EMA, let’s say that the exponential moving average or EMA is a type of MA, moving average. EMA puts more weight and importance on the most recent or current data points. That’s why the EMA is also referred to as the exponentially weighted moving average.

The result we get by using the calculation is the MACD line.

The MACD is useful to identify MAs that are showing a new trend, no matter if it is bullish or bearish. But it’s the priority in trading, right? Finding the trends has a great impact on your account since that is the place where you can earn money.

To recognize the trend you will need to calculate MACD as we show you, but you will need the MACD signal line, which is a 9-period EMA of the MACD and MACD histogram that is calculated:

MACD histogram = MACD – MACD signal line

The main method of reading the MACD is with moving average crossovers. When the 12-period EMA crosses over the longer-term 26-period EMA pay attention since the possible buy signal is generated.

You can buy the stocks or other assets when the MACD crosses above its signal line.

The selling signal is when the MACD crosses below this line.

MACD indicators are interpreted in many ways, but the general methods are divergences, crossovers, and rapid rises/falls.

How the MACD indicator works

When MACD is above zero is recognized as bullish, but when it is below zero it is bearish. If MACD returns up from below zero it is bullish. Consequently, when it goes down from above zero it is bearish. When the MACD line crosses more below the zero lines the signal is stronger. Also, when the MACD line passes more above the zero lines the signal is stronger.

The MACD can go zig-zag, it will whipsaw, the line will cross back and forward over the signal line. Traders who use this indicator don’t trade in these circumstances because the risk is too high. To avoid losses they usually don’t enter the positions or close them. The point is to reduce volatility inside the portfolio.

The divergence between the MACD and the price movement is a more powerful signal when it verifies the crossover signals.

Is it reliable in trading strategies?

MACD is one of the most-used technical indicators. It is a leading and lagging indicator at the same time. So it is versatile and multifunctional, so being that it is very useful for traders. But one feature of this indicator is maybe more important. The indicator has the ability to identify price trends and direction, and forecast momentum, but it isn’t complex. It is pretty simple, so it is suitable for beginners and elite traders to easily come to the result of the analysis. That is the reason why many traders view MACD as one of the most reliable technical tools.

Well, this tool isn’t quite helpful for intraday trading but can be used to daily, weekly or monthly charts.

There are many trading strategies based on MACD but basic strategy employs a two-moving-averages method. One 12-period and one 26-period, along with a 9-day EMA that assists to deliver clear trading signals.

Operating the MACD

As we said, it is a versatile trading tool and the indicator is strong enough to stand alone. But traders cannot rely on this single indicator for predictions. They have to use some other indicators along with MACD to ramp-up success in forecasting. It works great when traders need to identify trend strength or stock’s direction.

If you need to identify the strength of the trends or stocks direction, overlapping their moving averages lines onto the MACD histogram is really helpful. MACD can be observed as a histogram alone, also.

How to Trade Forex Using MACD Indicator

If we know there are 2 moving averages with diverse speeds, we can understand the more active one or faster will react quicker to price change than the slower MA.

So, what will happen when a new trend occurs?

The faster lines will act first and ultimately cross the slower ones and continue to diverge from the slower ones. Simply, they will move away. When you see that in the charts, you can be pretty sure the new trend is formed.

When you see that the fast line passed under the slow line, that is a new downtrend. Don’t think something is wrong if you cannot see the histogram when the lines crossed. It is absolutely normal since the difference between the lines at the moment of the cross is zero.

The histogram will appear bigger as the downtrend starts and the faster line moves away from the slower line. That is an indication of a strong trend

For example, you trade EUR/USD pairs and the faster line crossed above the slower and the histogram isn’t visible. This hints that the downtrend could reverse. So, EUR/USD starts to go up because the new uptrend is created.

But be careful, MACD moving averages are lagging behind price since it is just an average of historical prices. But there is just a bit of a lag. It is not enough for MACD not to be one of the favorites for many traders.

More about MACD

As you can see, the MACD is all concerning the convergence and divergence of the two moving averages. Convergence happens when the moving averages go towards each other. Divergence happens when the moving averages go away from each other. The 12-day moving average is faster and affects the most of MACD movements. The 26-day moving average is slower and less active on price changes.

MACD was developed by Gerald Appel in the late ’70s. It is one of the simplest and most useful momentum indicators that you could find. The MACD utilizes two trend-following indicators, moving averages, turning them into a momentum oscillator. So it provides traders to follow trend and momentum. But the MACD is not especially useful for recognizing overbought and oversold levels.

Bottom line

The MACD indicator is unique because it takes together momentum and trend in one indicator. This special combination can be used to daily, weekly or monthly charts. The usual setting for MACD is the difference between the 12-period and 26-period EMAs. You can try a shorter short-term moving average and a longer long-term moving average to have more sensitivity and more frequent signal line crossovers.

The drawback of MACD is that it isn’t able to identify overbought and oversold levels since it does not have an upper or lower limit to connect these movements. For example, over sharp moves, the MACD can continue to over-extend exceeding its historical heights. Moreover, always keep in mind how the MACD is calculated. We are using the current difference among two moving averages, meaning the MACD values depend on the price of the underlying asset.

So, it isn’t possible to relate MACD values for a group of securities with differing prices.

Some traders will use only on the acceleration part of MACD, some will prefer to have both parts in order.

The one is sure, MACD is a versatile indicator and every trader should have it as part of the tool kit.

9th March 2020
Falling Knife Stocks – How To Profit From Falling Knife

(Updated October 2021)

Falling knife stocks represent a high opportunity to make a lot of money, but they have a tremendous potential to hurt the traders’ portfolio.

The falling knife stocks represent the stocks that have felt a speedy decline in the price and it happened in a short time. A ‘falling knife’ is a metaphor for the quickly sinking in the price of stocks. Also, it could happen with other assets too. We are sure you have heard numerous times “don’t try to catch a falling knife,” but what does that really mean?

That means be prepared but wait for the price to bottom out before you buy it. Why is this so important, why to wait for the stock price to bottom out? Well, the falling knife can rebound quickly. That is called a whipsaw. But also, the stocks may fail totally, for example, if the company goes bankrupt.

Even if you know nothing about investing, you know the phrase “buy low sell high.” But it is good in theory. In practice…

Okay, let’s see! Suppose we have a stock with price drops. Firstly it was just 10%. No problem, we could survive that, we can cover that loss in our portfolio with gains on other assets. Oh, wait! Our stock continues to fall more and more, by 30%, an additional 40%, 60% even 90%. All this happened in a few months, for instance. That is the so-called “falling knife.”

The falling knife definition

Falling knife quotes to a sharp fall, but no one can tell what is the precise magnitude or how long this dropping will last until it becomes a falling knife. But certainly, there is some data we can use to determine if there is a falling knife at all. So let’s say that the stock that dropped 50% in one month or 70% in five months are both recognized as a falling knife. They are both falling knife stocks.

The general advice from experts is “don’t try to catch the falling knife” and it is even more valuable for the beginners. In any case, anyone who wants to continue to invest in that stocks or wants to trade them should be extremely cautious. This kind of stock could be very dangerous since you may end up in a sharp loss if you enter your position at the wrong time. So try not to jump into stock during a drop. Of course, traders trade on this dropping. But traders don’t want to stay in position for a long time, they want to be in a short position, so they will examine all indicators to time the trades. For beginners, this is still dangerous.

How do these stocks work?

They work very simply. At first, you will read or hear some bad news about the company. When bad news appears the stock price can drop. And it isn’t something unusual in the stock market. Yet, if this degradation continues we can see investors selling in a panic. That can decrease the price further. So we have two possible scenarios. For example, after bad news, some good news may appear. Let’s say the company’s management is trained for damage control and we are sure that the stock will rebound. This situation is greatly profitable for the investors who purchased this stock at a cheaper price before it bounced back.

But what is a possible scenario if the company continues to weaken?

Even bankruptcy is possible. Well, in such a case the investors could have enormous losses.

So, the precise conclusion is that falling knife stocks can generate huge gains but also, a great loss. That depends on when you enter the position. Well, you know, some stocks never rebound. Even more, they didn’t reach the original price for years since they began to drop.

To have a real chance to make a profit from falling knife stocks you must have a firm plan. What do you want to achieve? If you want a short trade, maybe it is better to wait until the stock ends its dropping.

Falling knife as an opportunity

But you might think this “falling knife situation” is a great opportunity to buy the cheap stocks that will grow in the future. That’s legitimate, of course. But instead of investing all the money you have at once, try to buy that stock in portions. One bunch this week, the same can be bought in the next week, etc. There is another way too. Let’s assume you want to invest in this stock $10.000. The original price before dropping was $500 per share, now it is $200, so buy that $500 for $200 and wait for a while until the price drops more, to $100, for example. Then you can buy another $500 for $100, etc.

The point here is that you have a plan in place and stick to it since you will not have time to make a proper decision during the regular market hours because this kind of dropping in stock price is moving too fast. For your plan to be successful, it is MUST have an exit strategy. That is particularly important for traders that are waiting for the quick bounce. The exit strategy will provide you to protect your trade to not become an investment. The essence of knife catching isn’t to buy low and sell lower.

Make big money when the stock prices go down

There are some rules if you want to profit from a falling knife and traders should follow them.

Buying a stock that is falling sharply is a bad idea for beginners, to make this clear. Picking the bottom can generate massive gains, that’s true but only if you buy at the right time. If you miss it, it is more likely you will end up in huge losses. And that happens remarkably frequently.

But at some point, when the falling knife is so close to the bottom and when the risk of additional loss is at a minimum. So the potential gains can be enormous. So, reach it out and take it. Yes, we know it is easy to say but how to do that?

The first rule for profiting from the falling knife is: Don’t buy a stock on the first drop. You see, when the first bad news comes, it is more likely that there will be more bad news that will cause the stock price to drop further. Even if there is some good news for a short time, the more bad news will come in most cases. So, wait for that and after that happens, you can start to buy but be sure that technical requirements support the bottom. That is extremely important if you want to generate massive gains.

Use MACD

The moving average convergence divergence momentum indicator is helpful to reveal where a stock is going to head next. For example, if the stock is hitting the new lows and the MACD indicator also hits the new lows, you have a strong downtrend that is very possible to continue. But if the MACD is rising the trend is going to reverse. That means that the risk of catching a falling knife is reduced. So, we have a stock that dropped at least twice but the rising MACD shows the trend is going to reverse. Don’t wait anymore, buy it! This is a low-risk point, so traders should buy that stock since its price will rise.

That’s how you can make money from a falling knife and with low risk.

Bottom line

The falling knife stocks can be a great opportunity, but they can hurt your portfolio, also. For experienced traders, yes. But if you are a beginner, it is better to stay away from these stocks until you learn more. Even not all experienced traders are not able to handle the “falling knife” stocks and catch the falling knife and recognize the whipsaw. Sometimes, you’ll have to wait for a long time until you make any gains from this trade. Don’t expect the stocks can bounce back over the next day or week. It is more possible to wait for months after you enter the trade to see the gains. But it can be worth it. Anyway, it is worth knowing how this thing works.

8th March 2020
How To React To The Stock Market Decline

Dropping stock prices don’t have to be your enemy necessarily. Wealthy investors know how to react to dropping prices and how to find stocks that are good buys.

When such an unpleasant event happens, the most important thing is how to react to the stock market decline. We have had many very dangerous situations in the stock market over the past several decades. Some investors were ruined, some survived and even more, they succeeded to grow their wealth. What did they do differently? How did they make it? Is there any rule about how to react to the stock market decline?

The S&P 500 had the fastest 16% decline ever. We already wrote about the possibility of how coronavirus can affect the stock market badly. And it happened, coronavirus is a catalyst for investors’ fears.

This shakeout in stocks is motivated by the uncertainty caused by the coronavirus outbreak. We can be sure about that. A kind of support for this claim comes for the media, we are constantly under analysts’ opinion-fire and it is so easy to feel bad and frightened. But we have to do something! We have to protect our health in the first place but also we have to protect our capital invested. So, how to react to the stock market decline?

Investors are fearful. Did you remember what the great value investor Benjamin Graham said for stocks?

“In the short run, a market is a voting machine but in the long run, it is a weighing machine.”

What does it mean?

This means that companies can be popular or not and that’s how markets are valuing them and fears can beat the market but in the short run. But in the long run, the market is assessing the substance of the companies, their underlying business performances. What really matters isn’t the media’s fickle opinion in the short run.

That makes up the stock market. Yes, we saw many cases of risks in the market but the stock market has a long history and had so many UPs on its way. So, what do we have to do NOW? How to react to the stock market decline NOW? Should we be fearful? Or maybe greedy?

Millionaires are down on the stock market

Some wealthy people are getting out form the stock market these days. Especially the millionaires. Some surveys reveal that investors’ confidence fell since economic conditions look like they’re worsening. The stock market strength is the factor that most changes their current investment plans. And as we know, the stock market declines.

But there are some different examples of how to react to the stock market decline. While these investors mentioned above are getting out of the market some, also millionaires, see the opportunity.

Smart and reach investors are buying stocks

They are getting in instead. Are they right? How can they see the opportunity in the declining market? Examining this was so exciting.

Let’s say like this, the majority of average investors are not leveraged. That isn’t a disadvantage, we should look at that as a gift. If they have, and they have, available cash and enough to invest, they are putting it to work right now while the prices are cheap. Are they crazy? The others are going into cash. Well, we think they are not crazy, they are completely smart investors.

Okay, here the explanation.

The major asset classes like stocks will grow over time. The advantage of buying now and holding stocks is that the value will rise faster than the value of the cash. What? Yes, the epidemic will stop one day sooner or later (sooner is better for many reasons), and everything will come to its place. The economy will recover and grow, and we will have a better place to live. Much better than we have now or we had before. Okay, if we are wrong, then we will have more important things to be worried about than the stock market is.

Average investors should do the same

As we said, the individual investor should buy now. Historical data shows that the global stock markets have an upward trajectory and the investments are going to grow over time. So, this theory is simple to understand. That is the philosophy of the richest investors. For example, Carl Icahn and many others. They are buying while markets sell-off on panic and uncertainty. Is that a recipe? It looks like that. This is an example of how to react to the stock market decline. The circumstances in the stock market like we have now are a great opportunity to buy stocks of high-quality companies since there are no fundamental reasons behind the market decline. Even if your stocks are going down, don’t panic! Don’t sell! Buy them more at a cheaper price. In this way, you will grow your wealth.

How to react to the stock market decline

Follow the example of the great Warren Buffett. What he did, how he reacted to the stock market decline?

He advised, “being greedy when others are fearful.”

This kind of view while the market decline is a powerful advantage and the best investors have it. That is different, in contrast to what the majority of investors are doing. That’s why they are unique and rich. So, that attitude works. The point is to pick stocks that can outperform the market. Such stocks even when they have a double decrease, usually turn out and become winners. To make this clear, the stocks that have had bigger declines, had bigger final outperformance after they started to add their positions. That’s the fact according to a recent Harvard study. This study also reveals that wealthy investors choose stocks that exceed the wider market historically and they outperform by double figures. So, follow what really rich investors are doing and do the same.

Pay attention to how to react to the stock market decline

When the stock market is down your stocks will drop, for sure. Some of your stocks will drop more, some less. But let’s assume you were a smart stock picker and you hold a stake in a stable company. But due to the market downturn, its stock dropped 30%. It was a good, steady company. What happens? This stock was one of the winners in your portfolio. Well, it happens due to the coronavirus outbreak now. The stock is down and the stock price decreased by 30%, let’s say. How much did you lose? Should you get out? If you don’t, how long and how much will it take to get back? If your stock decreased by 30% it will need to increase 60% to get back, to break even. This is just an example, remember that. So, since your investment isn’t problematic and you hold a stake in a good company, you can be pretty sure that it will recover after the market starts to rise again. Further, if you sell when the company is down, it is more likely you will miss out on a lot of money. Instead, find the sellers of that stock and buy more at a cheaper price. Just act as wealthy investors do.

Bottom line

However, the stock market decline is stressful not only for the stockholders. The overall economy suffers. But instead of panic, try to use advantages. For example, you can reinvest your dividends and buy more stocks and double your holdings. Of course, the cash you have you can use to buy more stocks in some other company. This is a great opportunity, with less money you can buy more stocks at a cheaper price.

If you need cash right now, you might have to sell your stock at great losses. But this can be a problem only if you invested all your money. If you put some of your money aside and saved it for rainy days, you are safe and can avoid this scenario. All you have to do is to follow what the best investors are doing. That’s how to react to the stock market decline.

6th March 2020
52-Week High or Low – Should You Buy Or Sell Stocks

(Updated October 2021)

When you see a stock going to its 52-week high or low, what is your first reaction? Do you think you should sell or buy it? This is a difficult part and we will explain why.

A 52-week high or low is a technical indicator and every investor or trader should keep an eye on these tables because it is the simplest way to monitor how our stocks are doing. For example, you want to buy some stocks and this can be the best way to check their recent prices. A 52-week high or low will help you to determine a stock’s value and usually can help to understand the future price changes.

Investors often refer to the 52-week high and low when looking at the stock’s current price. When the price is nearing the 52-week low, the general opinion is it is a good time to buy. But when the stock price is approaching the 52-week high, it can be a good sign to sell the stocks.

So, the 52-week high or low values might help to set the entry or exit point of your trade.

Prices of stocks change constantly, showing the highest and lowest values at different periods of time in the market. A number marked as the highest or lowest stock price over the period of the past 52 weeks is called its 52-week high/ low.

How to determine the 52-week high or low

It is based on the daily closing prices. Don’t be surprised if you can’t recognize some stock. Stocks can break a 52-week high intra-day, it may end up at a much lower price, a lot below the prior 52-week high. When that happens, the stocks are unrecognized. The same comes when the stock price hits the new 52-week low over the trading session but doesn’t succeed to close at a new low.

Well, the stock’s inability to make a new closing 52-week high or low can be very important.

If you watch the prices for some stock, for example, over a particular period of time, you will notice that sometimes the price is higher than others but sometimes it is lower than all others.
The 52-week high or low for the price of any actively traded stock (also any security) shows the highest and lowest price over the previous year that is expressed as 52 weeks.

For example, let’s assume you are looking at changes in the price for some stock over the prior year. You found that the stock traded at $150 per share at its highest and $80 at its lowest. So, the 52-week high or low for that stock was $150/$80.

When to buy a stock

What do you think? Is it better to buy stock from the 52-week low record or from the 52-week high record? You can find these lists on financial sites like Yahoo Finance, for example. On one side you have stocks with new highs and on the other, you have stocks with new lows. What would you choose?

This isn’t a trick question. If you follow the rule “buy low, sell high” you might think that some stock from a 52-week low list can be a great opportunity. You may consider it an unfortunate event and suppose the stock price will go up. Remember, you have only this information – highs and lows. Buying stocks at the bottom can be a good choice but you don’t have other important information about the company to make a proper investment decision. So, when making your decision based only on one info, you are gambling. You have no guarantees that the “bottomed out” stock will go up to the top or catch upward momentum. So, you will need more information to pick the stock from the list.

But the dilemma may come the same with stocks from the 52-week high list. You might think these companies are successful and the progress will continue. Well, sincerely, you might be right. The company’s management is doing something good. There are a lot of chances for that stock to keep moving forward. So, you will make a slightly better guess than buying stock from the 52-week low list.

You see, the rule “buy low, sell high” isn’t always accurate. You don’t have any hint that stock from the bottom will ever come out.

The 52-week high or low is just an indicator of potential buying or selling. To do that you will need more information.

Trading based on the 52-week high

What’s going on when stock prices are heading toward a 52-week high? They are rising, it is obvious. But some traders know that the 52-week highs represent a high-risk. The stocks rarely exceed this level in a year. This problem stops many traders from opening positions or adding to existing positions. Also, others are selling their shares.

But why? The rise in the stock price is good news, right? Profit is growing, the future earnings outlooks are bullish. This can keep prices successful, at least for a week, sometimes for a month. If the news is really good and fundamentals show the strong result the stock breaks beyond the 52-week high, share volume greatly grows and the stock can jump over the average market gains.

But how long can this effect last?

The truth is (based on research, one important is Volume and Price Patterns Around a Stock’s 52-Week Highs and Lows: Theory and Evidence, authors Steven J. Huddart, Mark H. Lang, and Michelle Yetman) shows that the excess gains decrease with time. This research reveals that small stocks initially provide the biggest gains. But, they usually decrease in the following weeks. Large stocks generate greater gains initially, but smaller than small stocks do. So, excess gains that generate small stocks far pass these the larger stocks generate during the first week or month following the cross above the 52-week highs.

This is very important data for traders and their trading strategy would be to buy small-cap stocks at the moment when the stock price is going just above the 52-week high. That will provide them excess gains in the next weeks, according to the research mentioned above.

Intra-Day 52-Week High and Low Reversals

A stock that makes a 52-week high intra-day but closes negative may have topped out. This means the price may not go higher the next day or days. Traders use 52-week highs to lock in gains. Stocks hitting new 52-week highs are usually the most sensitive to profit-taking. That may result in trend reversals and pullbacks.

The sign of a bottom is when a stock price hits a new 52-week low intra-day but misses to reach a new closing 52-week low. This happens when a stock trades is notably lower than its opening, but rallies later to close above or near the opening price. This is a signal for short-sellers. They are buying to cover their positions.

Bottom line

To conclude, the strategy of buying stocks from the 52-week high list breaks the rule buying low. Yes, but hold on! The rule “not buy at high” can be applied to stocks that unnaturally bid up some kind of market over-reach. For example, the stock whose price has surged 30% over a single day. Drop it out! Neglect them.
You want stocks with steady growth over a long time into the list. When you recognize such stocks, start to evaluate them. Examine every single detail about the company.

Buying for bargains is a good strategy, but it is also a good cause for selling a stock at or near its 52-week low.

Finding the winners can be trickier. One suggestion, start from the top and eliminate every stock with an unrealistic increase. They are on the top by mistake, trust us. Find stable winners. Do we have any valid proof that they will not continue to rise? Of course, they can.
If you want to trade based on the 52-week high effect, keep in mind, it is most functional in the very short-term. The largest profits come from rarely traded stocks with small and micro-cap.

Remember, the 52-week high or low represents the highest and lowest price at which a stock has traded in the prior year, expressed in weeks. It is a technical indicator. The 52-week high describes a resistance level and the 52-week low represents a support level. Traders use these prices to set the purchase or sale of their stock.

5th March 2020
How to Create a Trading Plan

A trading plan is a set of rules and guidelines that define your trading performance, financial goals, rules, risk management and criteria for entry and exit positions.

Why is it so important to know how to create a trading plan? Because if you know how to create a trading plan, you’ll know on which market to trade, how to cut your losses, when to take profits and find other opportunities for investing. But first, we have to understand what a trading plan is.

A trading plan is…

It is a full decision-making tool that helps you determine what, when, and how to trade. Every trader has an individual trading plan suited only for her/his style, goals, risks tolerance, capital available, motivation for trading, the market you want to trade.

A trading plan is a methodical tool that helps traders to identify and trade securities. If you want to have a successful trading plan you have to take into consideration a number of variables such as time, risk and goals. A trading plan gives you control of how you will find and execute trades, the conditions you will buy and sell assets. Moreover, it determines how large a position you will take, how to manage it. Also, your trading plan will determine what assets you can trade, as well as when to trade or when not to.

But there is also one important step more. Never invest before you make your trading plan because your capital might be at risk. A trading plan will guide your decision-making process.

To know how to create a trading plan you must understand it is different from a trading strategy. Trading strategy means you know how and when to enter and exit the trade.

The benefits of knowing how to create a trading plan

Since the trading plan defines the reasons why you are making a trade, when and how you are making a trade, it is an outline of all your trades. If you follow your trading plan, you’ll be able to minimize errors and losses.

Okay, creating a trading plan isn’t the most exciting thing you can do in your lives, and maybe that’s the reason why so many traders think about it as an irrelevant thing. How to think about the trading plan while some sexy things jump every second? News, charts, trend lines, hot stocks are more exciting, right? Wrong!

Without a trading plan, you cannot use all these sexy tools, you have to couple them with your plan to produce reliable results.

What do you think now, do you need to know how to create a trading plan?

Frankly, the trading plan is not necessary to make a trade. You can trade without a plan. But, if you want to hit the road of successful traders, you will need it. We are pretty sure you don’t want a hold-and-pray strategy because it isn’t a strategy at all. It is a sure way to lose everything you have. Maybe it’s better to go to a casino where there will be more chances to win something. Remember, trading isn’t gambling.

And without a trading plan, you’re gambling. The truth is that you may have some winning trades from time to time, but your progress will be questionable. Your losses will be bigger than gains, think about this and do smart trading. Learn how to create a trading plan, so create it.

How to create a trading plan?

Follow the old saying: If you fail to plan, you plan to fail. Every trader should follow this expression as it is written in stone. While trading you have only two choices: to follow a trading plan and have a chance to win or trade without a plan and lose with almost 100% possibility.

So, let’s create a trading plan and see what you have to take into consideration while doing that. Here are some hints.

First, set your goals.

What do you want to get from the trade? Please, be realistic about your expectations toward profits. This will come with a bit more experience. Experienced traders, for example, expect the potential profit triples the risk.

Can you see how much you have to be focused on risk? So, you must focus on risk. Your trading plan has to mirror your risk tolerance level. You have to determine how much risk you are willing to take. How much of your portfolio are you willing to risk on one trade? And you have to do that for every single trade. The regular risk range is from 1% to 5%, but usually, it is 2%. If your account is small you can take a bit more risk to get a bigger position. But if you lose a predetermined amount at any period in the day, you get out and stay out. Take a break, and then attack another day, when things are going your way.

Do your research before you enter the trade.

Explore the big winners, take a look at the stock charts and find possible spurs to the value of a stock. Be careful while doing this. Your research has to be accurate as it can help you discover if the stock is going to perform in your direction. You can’t be sure 100%, but it will be easier for you to know that you did everything possible to avoid losses.

Importance of entry and exit in a trading plan

Every serious trader plans entries and exits. This means you must have a plan on when you enter the trade and where you exit. For that purpose, we are recommending our tool.

You must give equal importance to the exit of a trade if you want to make a profit.
Set a stop-loss, to secure your pull out if things aren’t going in your direction. But you really have to get out at that point. Do you know your profit target? Get out when your profit target is met, don’t be greedy.

Take a pen and write down your plan

Exactly. It is the best way to show how responsible you are toward your capital invested. It is your hard-earned money, you don’t want to fool around with that. Put your trading plan in a visible place, stick it to your computer, for example. Yes, we are recommending your trading plan has to stare at you all the time while you are trading.

When you exit your trade, review it afterward. You will need to study how the trade went. If something was right or wrong you will be able to repeat or avoid it. So, take notes and keep them in your trading log.

What do you have to determine else?

Your stock trading plan should include additional factors to ensure it is completed.

First is liquidity

Liquidity can be a problem. When trade stocks this can be a serious element that needs to be considered because you can find a lot of stocks with very low liquidity. This doesn’t mean you should trade only large-cap stocks. You wouldn’t like to limit your opportunities.
Just filter out the stocks without enough turnover to get in and out of the market quickly. For example, you can trade stocks that have an average daily turnover of 10 or 15 times the size of the position you want to take. Don’t avoid small stocks because they can provide you to trade wider.

Second is volatility

Your trading plan should take into account the volatility of the stocks. Some stocks are more volatile some less but, generally speaking, the stocks are volatile. This should befall your trading rules as part of a trading plan. So, adjust your trend filter for the volatility of the stocks. You may have a lot of benefits using that. Your trading plan should be adjusted for what you will do if stocks go bankrupt or are taken over at a premium. You have to position yourself if it happens and you have to do so in advance to protect your overall portfolio.

Bottom line

A trading plan should consist of all these factors mentioned above. The stock liquidity, volatility, risks, goals. Consider them when writing it. But even if you do this and more, there is no guarantee that your trades will make you money. As we said numerous times, the stock market is a zero-sum game. It is a system of winning and losing. You have to be prepared for that. One day can be extremely successful but the others could be a total disaster. There is no profit without risk and you can’t always win without an occasional loss. Remember, if you lose a battle, you may win the war. Don’t expect every trade to be a success and every stock in your portfolio to be a winner. Let your profits rise and lower your losses. That’s the way to win this game.

We hope you have a better picture of how to create a trading plan now.

4th March 2020
How to Invest In Stocks?

Investing in stocks is an outstanding approach to grow wealth. But how to start? Follow the explanation below to learn how to invest in stocks.

There is a difference between understanding that investing in stocks is a reasonable financial decision and understanding how to invest in stocks. If you are a beginner it can be very important. Yes, investing in stocks is a reasonable decision in any circumstances. But do you know how to invest in stocks? It isn’t just about picking some stock and putting the money. For many people, the stock market is a big enigma but it hasn’t to be. Also, many people are questioning how to invest in stocks and still, this is complicated for them. So many potential investors are scared to start investing.

But we have to say they are making maybe the biggest mistake in their lives. There are so many benefits of investing. The effort that it takes to learn how to invest in stocks, will result in great benefit. Anyway, the advantages of investing far outweigh the efforts spent to learn. One thing is for sure, investing in stocks isn’t frustrating at all. At least, it shouldn’t be.

So, let’s start.

We are going to explain how to start investing in stocks

First of all, you can buy and sell shares in any public company at any time. The principle is almost the same as any other business. The point is to buy a share of stocks in the company when it is cheaper than its actual value. The next step is to hold on for some time until its value has risen to the position that you feel satisfied to sell it for a profit.

So a successful investment could be (please keep that in mind this is a made-up example) as followed. Let’s say you bought a stock of a company and you paid $20 per share. And you hold on to this company for 3 years. After that period of time, your stock has grown at $50. You wouldn’t like to miss this opportunity for profit and earn 2.5 times more than your initial investment was. Even better is if you bought a dividend-pay stock so you can gain profits along the way without selling any of its shares.

How really to invest in stocks

You cannot start without any knowledge about it. Therefore, you have to know the fundamentals of investing. The main goal of investing is to make money. That will not be complicated if you have a plan and investment strategy. So, we already said that investing is simply buying assets that are supposed to grow in value. That can be stocks, bonds, ETFs, mutual funds. But keep in mind that you don’t have guarantees that your investment will increase in value over time.

You are wary of taking risks now, aren’t you? Don’t be, we know your hard-earned money can be at risk. You may choose some low-risk investments, for example, bonds. But historically, stocks generated larger returns than bonds. And you are seeking wealth. You may ask why to invest and not put your money into a savings account. Well, investments will give you higher returns, particularly over a long time.

But you have to decide where to invest, what are your financial goals. We are talking about how to invest in stocks. And if you follow some rules it can be safe and provide you high returns.

Let’s buy our first stock

As a beginner investor, you can invest for the long-term or invest in companies that mean something special to you personally. It is always easier to make a success with the long term-investing. Trying to make short-term profits can be a tricky part for new investors.
So, in short-term investing, you have to know when to buy and sell. That requires great research, education, and a bit of luck. Yes, why not say that. If you choose a long-term investing, all you have to do is pick a great company at a fair price. Your stock will increase in value over time. The possible costly errors will be reduced as the longer your investing horizon is. Invest in companies that you are already familiar with.

Okay, let’s assume you found a company you would like to invest in. So, you can buy shares in that company through a broker. Brokers provide you to easily do that. Remember, they are charging a fee for the services. Buying stocks is simple like you are picking something from the online catalog. Just pick the stock you want, the number of shares you want, and your purchase is completed when you put money. You have great options with online brokers but you have to check them before starting working with them. Also, online brokers will charge you lower fees. How to choose a broker you will find HERE.

Follow three basic strategies when investing

Start investing earlier
If you want your money to work for you, and you start investing as soon as you can, the more chances it will have for growth.
Stay invested as long as you can
This is something about compounding returns. The point is to stay invested, meaning don’t go in and out of the market. If you stay invested you’re able to earn more money than you have already earned.
Risk management
You’ll need to spread out your investments to be able to handle the risks. Never put all your money in just one investment. It is too risky and dangerous. Diversification is the recipe for successful investing. When you have several investments added to your portfolio, the risk of losing money is lower. Some of your investments will be winners, some will not. But over a long haul, you will profit.

Stocks pay you dividends

That will provide you a stream of income and without having to sell even one share. We know you’ve heard how investors are interested in the drop and rise of the value of stocks. But, trust us, they are very interested in the dividends paying stocks. To make clear what dividends are. They are amounts that the companies are paying to their stockholders for each share of stock they hold. It is commonly less than one dollar, for example. But…

Let’s say you want to buy shares in the company at $10 per share. And you want to invest $2.000. So, you’ll have 200 shares of that company. That company pays a dividend of $0.10 quarterly. What does it mean? This means you will have $20 every three months, $0.10 x 200 = $20. It isn’t much, but for one year you will receive $80 and you can reinvest it or buy some other stake of shares in different companies. Anyway, it is an additional income from one stock. When you become a large investor, dividends only could provide you a nice life. For example, instead of $2.000 investment, you were able to invest $2.000.000. In this case, you would own 200.000 shares of the stock mentioned in our example. That would mean you could have a $20.000 per quarter or $80.000 per year just in dividends. Not bad, right? Moreover, you didn’t need to sell any of your stock.

The companies can change their dividends. It is normal. They can pay out a smaller dividend per share or raise them. You have to know that dividends are not guaranteed. They are just a nice bonus, particularly with a solid company with a long history of raising dividends.

How to invest in stocks in four steps

It is very important to estimate what some company means to you. If the company has some meaning to you, you’ll be more interested in it. You’ll be more inspired to research it and you can invest with confidence. So, that will be the first step before starting investing in stocks. Find and examine a company that means something to you.

The second step is to examine how the company prevents its rivals to take over the control over its market. In other words, it is a so-called moat. Big companies with famous brands have a moat, for example. They are unique in the market, well-recognized, and well-positioned. The competitors can stay on the coast and cry but you will have a safe investment.

Also, pay attention to management. Are the people who are the leaders of the company competent? You don’t want to invest in the company which is led by corrupted managers.

But maybe the most important part of how to invest in stocks is to find a company with a high safety margin. It is a financial ratio that estimates the number of sales that exceed the break-even point. In other words, that is the point where the company stops being profitable.

Also, the safety margin represents the difference between the intrinsic value and the market price of stocks. To calculate the safety margin use this formula:

Safety margin = sales – the break-even point

Bottom line

You may ask how much you should invest in stocks.
The amount of money you should invest in stocks is up to you and your financial condition. Never invest more than you can afford to lose, that’s the rule. Even the smartest and most advanced investors sometimes can be dried. Never invest in something you can’t understand. Always calculate the risks. In that way, you’ll be able to recognize the potential reward and the probability of loss. Does the stock have a history of giving returns, how losses could occur, are important questions and you have to find the answers.

Don’t jump into the stock market without knowing why. Do detailed research to avoid big losses and failures. Your most important step should be to research the companies, though. The final step is to buy a stock and start getting rewards.

While this article isn’t meant to cover everything you need to know about investing in stocks or everything on how to invest in stocks. That is the no-end process. For more to know, participate in our Full Trading & Investing Course.

3rd March 2020