Author: Editor

  • The Global Recession – How to Survive?

    The Global Recession – How to Survive?

    The Global Recession Is Here
    Are we deep in the global recession? Yes, we are, and if we are not yet, we will be in a short time. There is no doubt about that.

    By Guy Avtalyon

    It isn’t a question, the global recession is here without a doubt. But how long will it last? Will it be short-living or painful? Is there any chance of recovery by the end of the year? What will come in the aftermath of this recession? What will the world look like when the coronavirus outbreak ends? So many questions!

    The COVID-19 pandemic is making changes to the global economy very quickly. Hence, giving any prediction is extremely challenging. One thing is so obvious, this is a shock with a great impact on the economy. 

    Some economists are expecting the global economy to decline by almost 2%. The GDP is down, unemployment is growing, inflation is rising almost all over the world. It looks like the whole world is on its knees. 

    The rapidity with which this COVID-19 pandemic is growing has required another cycle of huge cuts to any GDP predictions. 

    How can we know the global recession is here?

    First of all, no one expected that the virus would spread this fast and only rare economists warned of the impact of the coronavirus outbreak on the global economy. Today, we can claim with the high level of certainty that we entered the global recession. 

    We have lockdowns across Europe, the US, parts of Asia, and many other countries. That has to be the baseline for any predictions. These lockdowns could degrade GDP across the EU and US, for example, by 7% to 8% this year, experts said. 

    Moreover, the global GDP for this year is equal to the planetary financial crisis. The direct stroke to enterprises and jobs in the first six months of this year will be much worse, stated economists.

    The lockdown policies have prompt and dramatic effects on daily economic activity reducing them daily by about 20% from their regular levels. For example, the three-month crisis with a five-week lockdown period reduces GDP by 20% a day. That means a 7% to 8% drop in quarterly GDP.

    Something is very wrong in the global economy right now

    The coronavirus crisis has sent the global economy into a fall. So many industries have ground to a halt. For example, tourism, restaurants are closed, hotels, air travel. Also, many factories reduced production and fired their workers. Unemployment is rising almost everywhere. Everybody stays at home. Almost the whole world is producing less and we’re spending less. 

    The stock market suffered huge losses and enormous daily changes. The trading has been almost halted. 

    So, the global recession is here. But what are the full magnitudes of this? It is pretty obvious we cannot know that now and the question is will we be capable of estimating it soon? Some experts are trying to explain the situation in which the global economy is right now. Also, some of them warned before the coronavirus outbreak there is a possibility of the recession to come this year. Of course, no one could predict the coronavirus pandemic. That just gave speed to the downturn. 

    The economic consequences of the exponential spread of the virus is shocking financial markets all over the world. Market volatility exceeded its peak during the global crisis 2009 and equity markets and oil prices falling to their lowest lows.

    Large drops in asset prices and high volatility will impact economic actions, for example, through credit and investment flows. Lower stock prices can grow the debt-to-equity ratio and restrict their access to credit. The logical end can be bankruptcies. Banks can reduce lending because companies’ and customers’ defaults of loans rise. The result in banks’ balance sheets will be worse. Do you understand that the global recession is already here?

    How to survive the global recession?

    Recession is defined as two consecutive quarters with negative economic growth. It can be caused by, for example, monetary panic. That caused the Great Recession, for instance. Also, the recession may come due to the rising oil price which is defined as an economic shock. One of the reasons behind the recession can be something that John Maynard Keynes described as “animal spirits.” We experienced it with the dot-com bubble. Also, the mixture of all three may cause a recession. 

    Today it is coronavirus and lockdowns caused by its outbreak and the focus on health protection due to it. The companies halt, workers are fired, demand and revenue fall. The only thing that increases is our concern on how to overcome the global recession we have now. But there are several ways to decrease the loss.

    In the article “Roaring Out of Recession,” Ranjay Gulati, Nitin Nohria, and Franz Wohlgezogen noticed that through the recessions of 1980, 1990, and 2000, 17% of the 4,700 public companies they examined done terribly: some went private or went bankrupt, or were sold. Nevertheless, 9% of the companies did manage to recover in the next three years after a recession. They succeeded to exceed rivals by 10% or more in the meaning of sales and profits growth. Moreover, their earnings rose regularly and the companies remained to rise.

    May the global recession last for a long time?

    Almost the whole world is caught in the recession caused by the coronavirus pandemic. The fears are growing. As long as people’s physical communication is a possible danger, companies cannot move to regular conditions. And once, when this pandemic ends, maybe the regular condition before the pandemic will not be regular. What if people start to avoid shopping malls, cinemas, theatres, restaurants, crowded concert halls? Even after the virus is contained or the vaccine is available? The economic recovery may take years and years. The global economy is frozen, the global recession is on the scene. But life will bounce back. The coronavirus will be tamed and put under control, and people will come back to their factories, offices, and shopping malls, of course. 

    But even after that, the new world that will begin will be gagged with stress. And, when that will be? No one knows. Millions of people lost their jobs and that affects the societal costs. What if bankruptcies leave the industry in a vulnerable status, exhausted from investment and reforms?

    The families may stay upset and risk-averse. What if this pandemic makes them tend to save? Some social distancing measures could remain indefinitely. If this situation endures and people continue to hesitate to spend, the whole world will have a big problem. Yes, life will bounce back, but psychology cannot just like that. It is more likely the recovery will be very slow and last for a long time.

    Bottom line 

    Developing countries have severe consequences already. The money is running away, commodity prices are falling, oil for example. This scenario is visible in Chile, Mexico, and many other countries. China is a slowdown and that has a great impact on countries where the factories with components are. Europe is in recession, the US is still fighting with the coronavirus pandemic. 

    People are lonely now, but they will be starting to return to normal life. But if they had to spend all their savings, and if they destroyed the credit ratings or declared bankruptcy, then they will not be capable back to normal life. 

    No one can say with a hundred percent certainty how long the global recession will last. We are pretty much sure that the recession started in March in the US but we cannot say when it will end. Well, the recession in the US or the global recession isn’t officially declared nor it can be. We all hope it is a remarkably deep but short-lived recession. 

    If your days are too long try to short them, learn something new, for example. Read the “Two Fold Formula” book, it may give you some interesting ideas. But before you start to implement the new knowledge, test it by using the our preferred trading platform.

    Stay safe! #StayHome

  • Good Returns On investment – How To Know Where To Invest?

    Good Returns On investment – How To Know Where To Invest?

    Good Returns On investment - How To Know Where To Invest?
    The long-term returns seem attractive, and it is easy to start investing. But you must have realistic expectations.

    By Guy Avtalyon

    Good returns on investment is what every single investor wants. But some have unreasonable expectations. Especially beginners. They are hunting stupid high returns on investments and lose money. No matter what asset class is, they are looking for high rates of return. Nothing is wrong with that, but a dose of reality is necessary for investing. Dreaming is okay, of course since it can motivate us to reach our goals but if our dreams are unrealistic it can deliver us the stress when we unveil that reality isn’t like our dreams. 

    So, everyone including beginners in the stock market must understand what are good returns on investment. We would all like to become rich overnight, that is a legit dream but the real-life is something different. One of the main problems is that beginners don’t understand the effect of compounding nor how it works. Most of them don’t know what good returns on investment means, how much it is.

    First of all, temper your expectations. 

    Over almost the last 100 years, the stock market’s average return is about 10% per year. But returns are infrequently average. So, if you are one of the new investors you have to know several things about what good returns on investment is. 

    What are good returns on investment?

    You have to know that historical data shows that the average stock market return is 10%. Are you surprised? What did you expect? Oh, we know! You heard the stocks are among the riskiest investments and the high risk may provide you a high potential reward, right? That’s true but it will not happen overnight. Let’s go back to average stock returns. 

    The S&P 500 Index is the benchmark measure for annual returns. When we said the average annual return is 10% it wasn’t quite true. The truth is that you have to reduce this 10% by inflation. For example, if you start to invest now you can expect to lose buying power of 2-3% per year which is caused by inflation.

    The stock market is directed on long-term investments. That means you can invest your extra or saved money you will not need for the next five years or longer. If you don’t like this you may prefer a shorter investing period, for example, a year or two. Well, then the stock market isn’t for you. Choose one of the lower-risk alternatives. For instance, a savings account. Yes, you will have the lower returns, but you’ll be protected from stock’s volatility.

    As we mentioned above, the average return per year is 10%, but it is actually far away from average. There were periods when it was dramatically lower but also the periods when the returns were much, much higher. That’s due to the stock’s volatility. We have to say and this may sound illogical for beginners, but even during the volatile market’s years, returns can be good.

    Your expectations must be fair

    Honestly, you have to learn this. Especially if you’re a new investor. You may think you can earn 25% on your stock investments over several decades. We have to tell you, your expectations are extremely big. It’s not going to happen. Maybe this is rude to say, but that’s insane. Yes, we know you found someone out there who promised you that high returns, but you have to understand cush lied to you. Such is counting on your lack of experience, and on your greed. Are you greedy? Go to the casino! Start gambling! Stock investing is a serious job, hard work, also connected with a lot of pleasure and passion with one single most important goal – to have good returns on investment and over time, to provide financial security for yourself. Well, and maybe, just maybe you’ll become rich. 

    So, your financial foundation should never be based on dangerous opinions and actions. Don’t be irresponsible. What you really need is your investment to provide you a nice retirement, you wouldn’t like to end up with less money than you expected.

    The meaning of good returns on investment can be confusing for someone, particularly young investors because when you enter the stock market you might know only about a 10% annual return rate. But keep in mind, you don’t have guarantees that they are going to repeat themselves. The returns on investments never were a smooth or upward path. remember, markets are volatile and you may suffer great losses over time. But what is important and everyone should know that that’s the nature of the free-market. Over a long-time period, you’ll beat the market if you follow some rules.

    How to calculate the rate of return

    Let’s say you already have determined your investing goals. You clearly know what your target is. Also, you have to identify the amount of capital and time you have to invest. All information you need is in front of you. So, let’s see the magic of compounding.

    For example, you have $2.000 to invest. Assume that the annual rate of return is 10%. After one year you’ll have $2.200, right? But what if you want to sell your whole investment after 2 years, for example, for $3.000. Super done! Your profit is $1.000 which is a 50% return. Amazing! Oh, wait! You have to pay capital gains taxes. Take away 15% from your gain. Well, your profit isn’t $1.000, it is $850. You’re left with $2.850. Well, you still have good returns on your investment after two years. It is 42,50% now. Did we have inflation? Of course, we did. So, you have to count inflation of 4% for 2 years. 

    Let’s do it.

    $2,850×0.96×0.96=$2,626.56 

    That is 31.32% real return of your investment. This $2.626 amount still isn’t bad but it’s far away from your $3.000 and 50% where we started this calculation.

    Look, the annual rate represents the profit you earn on your investment per year, or how much will you get in return for each dollar invested every year.

    There is a simpler calculation. Just find a simple percentage. For example, you invested $1.000 and your gain is $300. What will your return be? 

    (300/1000)x100 = 0,3×100 = 30%

    This approximative value. But if you want to know the exact you’ll need the first calculation we showed you. That is a well-known ROI, return on investment.

    Can the stock market give you good returns on investment?

    The stock market is unstable and unpredictable, so you’ll never have any guarantees there. But if you consider this 10% average return you’ll understand that investing in stocks may provide you financial security in the long run.

    What are the good returns on investment today?

    Well, the answer is pretty complex but to make it simpler, use this rule of thumb: If the recent returns were higher than average, the future returns will be lower. 

    That’s why it is much better to calculate, for example, 6% or 7% of the average annual of return when estimating your returns over time. Because, as you can see, this average return is rare. It is higher or lower. Also, there is some psychological effect, if you expect too high returns you’ll be disappointed if your investment never gives you that. Also, you’ll be glad if your investments beat your expectations.

    The best approach in the stock market, if you want to make real money, is to buy stocks at good prices and sell them at a profit.  What is a good price? To figure it out you’ll have to know how much money you want to get when you sell it.

    Good returns on investment for an active investor is 15% per year. For this to reach you’ll need to be aggressive in looking for bargains. It isn’t hard to achieve. For example, your buying power can be doubled every 6 years if you have average annual returns of 12% after you pay all taxes, also, count the inflation for each year. This is one way to beat the stock market. The other is to become a trader but a smart one. The coronavirus is causing people from almost all parts of the globe to halt their activities. People are urged to stay home, schools are moving to online learning. Take this as an advantage and learn something useful, why not?

  • Open Interest Strategy And How To Use It

    Open Interest Strategy And How To Use It

    Open Interest Strategy And How To Use It
    Open interest strategy is based on indicators that traders use to confirm trends and trend reversals for the stock futures and stock options markets. 

    Do you use an open interest strategy in trading options? What? No? Maybe that is the reason behind your losses. Well,  you are not alone, to be honest. Many traders don’t use open interest strategy while trading options. Yes, if you want to be a profitable trader you have to analyze open interest. It is a very important momentum indicator. So, let’s see how you could have better chances to reach profitable trading by using an open interest strategy in trading options. But first, we have to understand open interest. 

    What is the open interest?

    Open interest represents the number of active contracts. It shows how many contracts for options and futures are for the given market. This important indicator shows the strength of the market and measures how actively traded the market is. Someone could say we have the volume for that estimation. Wait! It isn’t the same as volume. There are some differences. 

    You can notice this data along with current prices, volume, and volatility. But still, so many options traders overlook active contracts, so that can lead to shocking results. They are losing too much money and have too many lost trades.

    So, open interest shows the cumulative number of options or futures contracts that are currently traded but not yet cashed by an exercise, offsetting trade or assignment.

    How to calculate?

    There is simple math to do that when running an open interest strategy. The calculation is: add all contracts connected with opening trades and subtract all contracts connected with closing trades. For example, let’s assume we have 3 traders. Okay, we will give them the names: Anna, Bob, and Connie.

    Assume they are trading the same futures contract, in our case study. When Anna buys one contract and enters the long trade, open interest will increase by 1. When Bob buys 5 contracts and goes long too, the open interest will increase to 6. Connie picks to short the market and decides to sell 4 contracts, open interest will increase to ten. Open interest will stay the same until one of them or all exit their positions. In such a case open interest will decline. For example, Anna sold 1 contract and open interest declined to 9. Also, Bob decided to exit his position, he buys back his five contracts, so open interest will be down to 4 and will remain at 4 until Connie decides to sell her 4 contracts. 

    Volume and open interest

    And here is where the volume is different from open interest. While the volume counts all contracts traded, open interest shows how many contracts stay open in the market. So, we can say they are related concepts but different in what is taken into account. Open interest also shows how much money is in the futures or options market. When open interest rises, more money is flowing and when open interest decreases money is going out of the options or futures contracts.

    It can be more complicated since the traders are buying or selling from other traders who are selling or buying. You will find that both sides can open their trades and increase open interest. If both sides close their trades, open interest will drop. But if one side of traders is opening the trades and the other is closing that will have no influence on open interest.

    That is another difference from the volume. The volume will increase caused by both entries or exits, open interest will increase caused by entries and decrease caused by exits.

    Analyze open interest strategy

    Open Interest is relevant for both stock futures traders and stock options traders. It displays you where the traders are allocating their money. Therefore, you must have an open interest strategy. To be able to create an open interest strategy you have to analyze the open interest data. We can find a lot of option sellers in the market. It is due to the time decay of the premium of stock options.

    Their profit is maximum the premium value of the sold option, but the possibility of losing is extremely big. The option sellers are generally very agile and ready to close their positions quickly in case of any unfavorable change. In the market, we can see the bullish traders selling their put options since they get premium if the price doesn’t run under the strike price. In the same sense, the bearish traders are selling their call options since they get premium if the price doesn’t run over the strike price. 

    If we notice a high open interest in any stock’s strike price of calls and puts, we should understand these levels as support or resistance areas. It will depend on if the option is put or call.

    So, the open interest will confirm the strength of a trend. Rising open interest is a confirmation of the trend. On the other side, reducing open interest can be a signal of a failing trend. Traders are supporting the trend when they enter the market and that raises the open interest. Hence, when traders don’t believe or when they lose confidence in the trend open interest will decrease.

    The importance of reports

    At the end of each trading day, the open interest data report is published. This report includes all details about open interest from all market players, are they holding long or short positions. These reports provide important info about what all players are doing in the market for futures and options contracts. Traders use open interest strategy to support their decisions. For example, if a trader notices a big move in the open interest he or she knows that particular market players are entering or leaving the position. That may give hints to market direction.

    Using open interest strategy

    In trading futures, for example, the initial stage of a trend, post-breakout, is not started by trend followers. It is driven by traders who had to liquidate their positions because they were on the wrong side and had to catch the direction of the old trend. The more traders on the wrong side mean the more violent the move post-breakout. Well, you have to understand, if open interest increases during a range-bound action, the transit post-breakout in any direction will be violent. So, if the open interest falls at the start of a new trend, that is the sign that losers are covering their positions.

    For example, the price is moving inside the 6 months average levels, but you notice that operating loss has started growing massively. What’s going on? Is the price still in the range? Oh, yes. Let’s examine this more. For example, the company’s average operating loss per share was $5, last week it reached $8 but the price is still in the same range. How is this possible? It is possible by creating new positions but buyers and sellers are in balance, there is no pressure from one or the other side. That’s how the price stays in the same range. For every long trade, there has to be one short trade. What will happen if the price breaks out on the upside?

    Short-side traders will hurry to cover their short trades and start the rally. Before long-side traders start the rally. When uptrend is created, comes the trend-followers.

    Bottom line

    Indicators are important. They tell you what other market players are doing and can provide you to create your trading strategy. An open interest strategy can be used to recognize trading possibilities you might miss. It allows you quickly to enter and exit a trade at the best price. Many traders don’t use this profitable strategy because when they are looking at the whole open interest of an option, they cannot know if the option is sold or bought. 

    But they fail to catch really valuable information.

    Trading means to have all the valuable data before you enter or exit the position. It isn’t gambling. There are some trading patterns and more about some profitable you can read in the “Two Fold Formula” book. Our suggestion is – test it with the our preferred trading platform.

  • How Long Will The Bear Market Last?

    How Long Will The Bear Market Last?

    How Long Will The Bear Market Last?
    Stock markets over the world experienced great losses from the beginning of this year due to a massive sell-off caused by the COVID-19. 

    How long will the bear market last? We believe not forever. In fact, the bear markets are much shorter than bull markets. Especially when they are driven by some event. Coronavirus outbreak is such an event. like this one is. But if we take a look at historical data we may conclude that the question of how long will the bear market last, pretty naive. How is that? Well, this kind of bear market recovers very fast.

    How can we be so sure?

    Let us explain. If we want to put different types of a bear market into categories, we will see we can put them into 3 key categories based on the type of drivers. 

    The first type of bear market is caused by the business cycle. That is when growth leads to inflation, interest rates increase too fast, the yield curve inverts, demand decreases, loan activity decreases, etc. They are so-called cyclical bear markets.

    The second type is caused by market bubbles, much more leverage, turbulences, and disruptions on the credit markets. In other words, this structural type of bear market occurs when we have structural asymmetries in the market or economy. So, we are pointing to another type of bear market, the so-called structural bear market. We already saw it in the 2008-2009 market downturn.

    But also, we can recognize a bear market driven by some event which is this one, caused by a coronavirus outbreak and global pandemic. Of course, this kind of bear market can be triggered by some crises, wars, political instabilities, etc.

    How long will the bear market last?

    This month can be an important test for stock-market investors. Everyone is looking for hints that the worst of this stock market massacre is ended. But the coronavirus outbreak moves on and demands at least short-term economic distress. In the next several weeks we will be faced with more and more bad news as a pandemic is spreading. That may cause further sellings. Bad news has such an influence on the stock market. Also, a surge of business failures can occur. 

    The experts sound pretty sure that the stock market’s bounceback last week is a good sign even though all markets are volatile. The stock market was dropping with great speed into the bear market. But yet, there is a hope that March lows for main indexes may be kept from further declines. That is just our opinion, based on the reaction of central banks. 

    Well, this bear market isn’t easy for any investor. Even the most optimistic investors claim that further decline is possible before the stocks find the bottom. That is true especially if we know that sharp rebounds are possible before retesting new lows. But as we said, there is a logical chance that recent lows can be the last we saw and rebounds can be better than in former significant selloffs.

    Predictions for the stock market

    Robert J. Shiller, a Nobel laureate is exactly certain about the stock market in the long run. His concerns are about how long will the bear market last, where the stock market is heading.

    He wrote for The New York Times:

    “It is too simple to assume that with its steep decline, the market has already discounted epidemiologists’ forecasts for COVID-19. By this logic, the stock market would fall further only if the virus turns out to be worse than forecast.”

    Yes, but we are dealing with an entirely unknown situation. We never have had before such a massive lockdown of everything companies, whole industries, millions of people, the numerous countries. This is a totally unique event.

    But Robert J. Shiller added in his column:

    “People are seeking reassurance from homespun investment advice, like the old nostrum that the percentage of stocks in your portfolio should be equal to 100 minus your age, come what may. If you are 60, for example, you should hold 40 percent stocks, under this rule.”

    And also admitted that “this advice isn’t grounded in any scientific truth about financial markets.”

    Well, this advice isn’t bad, it is good advice. It isn’t against common sense. While people are doing something, taking action they may feel better. That is from a psychological point of view. Also, it is a quite reasonable decision to risk less in such a market downturn but yet inspires you to take action. 

    Shiller advises further “buying just enough to restore the stock balance after market declines.”

    Bear markets rule a short time

    Maybe this is the answer to the question of how long will the bear market last. Bear markets rule for a short time. What we can expect is the market data will be weak in the weeks ahead. The problem is what are we expecting.

    Stocks in March entered a bear market with record speed. After March 23 they were bouncing sharply. But DJIA has the biggest first-quarter decline of -1.68% on record with a 23.2% fall. The S&P 500 Index had a decline of -1.51% on a 20% first-quarter fall this year. It is the biggest since 2008. After March 23 both indexes had a rebound and for example, DJIA had its biggest three-day gain, which had been seen last time in 1931.

    Let’s see how long this bear could market last?

    As we said we can recognize three main types of bear markets: caused by the business cycle, caused by some event (like this one) and a structural bear market.

    The most severe is the structural bear market because it is the result of problems in the financial system and capital markets.

    A cyclical bear market is bad also but tends to fix itself over a short time and sufficient policy answers.

    And last but not the least, the bear market caused by some event. According to historical data, this kind of bear market was shorter, less critical on the downside. Such a market took less time to recover. It is quite logical. Before the market was hit with a drastic event such as a coronavirus outbreak, the markets all over the world were in good condition. And you see, that’s why we think that it does not take as long for the economy to recover once the shock of this event disappears. It’s true that so many people lost jobs in the early stage of the pandemic, the companies are faced with shutdowns and limitations. But when this kind of problem disappears, everything can return in normal pretty quickly.

    Bottom line

    How long will the bear market last? There is no way to predict that, honestly. Who can predict when the market will bottom? From what we know, the bear market will end even before bad news stops coming up to us. For investors, the main point is to be ready for that first day of recovery, they have to adjust their positions for that to join the rebound when it happens. We believe it can happen sooner than many investors expect or predict.

    In the meantime, we recommend investors wait for it calmly. Stay focused on long-term investments and don’t let your emotions take control of your decisions. Use this period to learn something new and expend your horizons.

  • Stock Market Bottom And How To Recognize It

    Stock Market Bottom And How To Recognize It

    Stock Market Bottom And How To Recognize It
    Nobody can with certainty predict a stock market bottom. Still, it’s worth at least thinking about different entry points to let your money work for you.

    By Guy Avtalyon

    The questions for the past several weeks mainly were all about the stock market bottom. Did the stock market hit the bottom? Will the stock prices stop dropping? Have stocks reached support levels? When will prices stop falling? 

    Stock traders have so many questions these days and weeks. But do they really know where to look? 

    Maybe one of the most terrifying jobs related to investing is about the stock market bottom and how to recognize it. The idea to predict when a given stock will hit the bottom is old as much as investing and trading. The point is to recognize the point where the stock will no longer drop. The rule of thumb is: buy low, sell high. The problem arises when we have some unpredictable events in the market such as this one, coronavirus pandemic. That has an influence on the global economy, almost all economic and political events, and decisions. So, with a high level of certainty, we can say finding the stock market bottom can be a discouraging job.

    Well, this kind of question traders ask almost every day but are they looking in the right place to find the answer? For example, investors are looking at Dow Jones. Is it the right place? We are afraid that the value of DJIA isn’t able to alarm you when the stock market hits the bottom. Okay, it will tell you but after it happened. 

    So what to do? 

    How to recognize the stock market bottom? 

    If you want to find it, you’ll need some indicators. Indicators can tell you when is the stock market going to hit a bottom but also when it is going to recover. By using indicators you’ll not miss the beginning of the wave. When buying a stock you want to do so at the lowest possible price but you wouldn’t like to hold falling stocks. You would like them to start rising after you bought them, right? That’s why it is so important to recognize the stock market bottom. The point where the stock can find support.

    That knowledge can give you huge profits and prevent huge losses. So, how can we know with certainty that a stock has touched a low point? To be honest, no one can do that with 100% certainty and consistency, but traders and investors have some tools, fundamental and technical trends, and indicators. They arise in stocks when they are about to tap the bottom.

    The indicators of stock market bottoms

    Some indicators can help us determine when the stock market is going to form a bottom. What we really need to have are indicators of the health of a global economy and what the main participants in the market are doing with their money. But keep in mind, there is no such thing as a magic indicator to identify a stock market bottom. We have to look at several indicators to have an idea of the economy’s and stock market’s health.

    Second, we have to look at history because it will tell us that the average bear market persists about 17 months. Also, it corrects around 35% from the maximum. But keep in mind that you cannot find the two bear markets alike 100%. All we can do is to suppose that the next will be similar. 

    Further, we have to understand the valuation. For example, the S&P 500 has a P/E ratio and earnings. The P/E ratio will move up and down depending on the market period. It will be up when we have good earnings growth, all ratios including the P/E ratio will go up. But when the circumstances are changed, with rising pessimism the valuation is likely to go down. 

    For example, when the S&P Index was above 2.500 the P/E ratio was at 19.

    Also, the higher the VIX is, the chances for the stock market to hit the bottom are growing. These first two days in April this year, VIX traded between 54 and 57. If we take a look at historical data we can see that in 2008, the VIX was somewhere between 70 and 95. During the March this year, VIX traded over 75.

    Other indicators of the stock market bottom 

    The stock market fell over 25% in 3 weeks. This is the sharpest drop in history. The biggest decline occurred on March 12th, the biggest since the market crash in 1987. Many investors thought that a stock market hit a bottom. 

    If you want to recognize when the stock market bottom is, check out your emotions. Did you feel fear at that time? If yes, you were one of the millions with the same emotion. Fear was so obvious in the middle of March. To be honest, almost all were panicked.

    But we have to try to be reasonable. Just take a look at the charts and the technical levels for those days. Can you notice the major pivot? Do you notice a bottoming tail and a huge volume? 

    Okay! A major pivot, bottoming tail, and a huge volume on the same day and combined with a market 3-weeks decline of 25%, are indicators there was some at least short-term bottom.

    What to do when the stock market is near the bottom?

    The most intelligent investors started to buy those days. Small chunks, nothing big. Smart investors are doing such a thing to accumulate their full positions. The point is to buy 25% or 30% even 50% of the total position. That will keep your potential stress down and provide you an all in all a better average. But remember, don’t buy some small-cap, go for the brands. 

    Where is the market bottom now? 

    That is the most frequently asked question since coronavirus appeared. 

    Market experts like to say that it’s impossible to time the market. Well, it isn’t the truth. If we can see the market tops, why shouldn’t we see the market bottoms? Institutional investors know that. Follow what they are doing. Their actions could be the key bottoming signal. Follow-through has been noticed at almost every stock market bottom. This signal is extremely important because it can provide you profits when the early stages of a new market uptrend is confirmed.

    The quest for a stock market bottom

    This signal works quite simply. When there is a sustained stock market downturn, the first rising day from the index low is most important. That could be the beginning of a rally attempt. No matter which index you are using S&P 500, Dow Jones or Nasdaq. 

    According to some experts, the gain expressed in percentages isn’t important at this point. Also, don’t pay attention to the trading volume. What you have to look at is a down session and the moment when the index bounces after a great drop and closes close to session highs. Some experts deem that closing in the top half of the day’s trading range is adequate also.

    Further, find a bigger percentage gain in higher volume than the prior session several days in the rally attempt. This time period is making it possible for short covering to resolve and for a rally attempt to gain ground. The rally will be halted in place only if the index reaches a new low.

    How will the market react after the pandemic?

    It is good if the market supports the new buyings, but if it doesn’t, just be patient. Sometimes, breakouts are visible on the charts after a few weeks. This market crash caused by the coronavirus outbreak has a large supply of stocks making the new base. But a lot of them have yet to bottom.

    If an index suffers a decline in higher volume shortly after the follow-through day, the signal will fail in most cases. If close below the low of the follow-through day, it is almost the same. It is more the sign to start selling the stocks you bought recently.

    These signals don’t mean you should rashly jump into the market since they tend to fail after indexes have dropped clearly in a short time. That happened with the stock market correction in February. The more suitable is to buy a few stocks, maybe one or two, and test how they will work. If there is a real uptrend your stocks will rise.

    Every investor wants to know when trends are going to make a significant change. Will they reach tops or bottoms. The truth is no one knows that for sure. Only the big volume spikes, and staying stick to the chosen sector, will give you some clue if the stock has reached the lowest level from which it will not decline more. We pointed just one of the numerous scenarios. There are many others. 

  • Greeks In Trading Options As A Risk Measure

    Greeks In Trading Options As A Risk Measure

    Greeks In Trading Options As A Risk Measure
    Using Greeks in trading options can confuse a trader but can be extremely helpful. 

    By Guy Avtalyon

    Greeks in trading options can provide helpful information, but also they can add a bit of complexity that can confuse options traders. Greeks in trading are a measure of how some option’s price is sensitive to its basic parameters, volatility, or price of the underlying asset. This measure is important when you analyze the sensitivity of your options’ portfolio or single option. So many traders and investors think this is a vital measure for decision making in options trading.

    The key Greeks are Delta, Gamma, Vega, Theta but some will include Rho too. Also, you’ll find some other Greeks derived from these four or five.

    Greeks in trading options can indeed hide the most important part, the difference between the stock price and strike price and the value decrease with reducing time to expiration on the option. For these reasons some options traders never examine the Greeks at all when making trades. But they are important and we will show you why.

    The importance of Greeks in trading options

    It isn’t easy to have an accurate prediction of what is going to happen to the price of the option especially when the market is moving. Even more difficult can be to predict the options positions that efficiently couple multiple individual positions. That is the case with options spreads, for example. 

    The problem is that most options trading strategies require the spreads, anything that can help you to predict the option position is important and you have to know them better. These measures can be very useful when you have to predict the future of the option price since they measure the sensitivity of a price related to the price of the underlying assets, interest rates, volatility, and time decay. By having all this information you can be in a much better position because you will know when and which trades to make. 

    How is that possible?

    The Greeks in trading options will provide you a hint of how the price of your options will run related to how the price of the underlying asset changes. Also, the Greeks will help you forecast how much time value an option is losing daily. Moreover, by using Greeks in trading options you will have a valuable tool for risk management. In other words, you can use these measures to understand the risk for each position and where the risk will appear. Greeks will help you to recognize which risk factors you have to remove from your position and your positions’ portfolio. Also, they can show you how much hedging you need for that. 

    Keep in mind, you can use Greeks as an indicator of how the price will go related to different factors but they are theoretical. To make this more clear, Greeks are actually values based on mathematical rules and can be accurate only if they are calculated according to the exact mathematical model.

    How to calculate Greeks?

    It is possible to do yourselves but, we have to warn you, the process is complex and you’ll need a lot of time for that. Usually, traders use some software to do that for them and get accurate calculations. The serious online broker will automatically present values for the Greeks in the options they display. That makes the use of Greeks in trading options a lot easier.

    Anyway, we will show you how to calculate the four most popular Greeks.

    Calculate Greek Delta

    Delta, the sign is Δ, can measure the sensitivity of price changes related to the moves in the price of the underlying assets. So, for example, when the price of the underlying asset grows by some amount in money, the price of the option will change by Δ amount. Here is the formula to calculate that Δ amount

    Δ = ∂V/∂S

    ∂  represents the first derivative
    V  represents the option’s price which is the theoretical value
    S –represents the price of the underlying asset

     Why did we take the first derivative of the option and price of the underlying asset? Because the first derivative is a measure of the rate change of the variable over a determined period.

    The delta is visible as a decimal figure from -1 to 1. For example, call options will have a delta from 0 to 1, but puts will have a delta from -1 to 0. We have to point one important thing here, to give you a better perception of how to understand Delta numbers. When you see the option’s delta is close to 1 or -1, you will know the options are deep-in-the-money.

    Also, you can calculate delta for your options’ portfolios. It is the weighted average of all deltas of options added to the portfolio. As one of the Greeks, delta can be a hedge ratio, also. When you know the amount of delta, you can hedge your position if you buy or short the number of underlying assets multiplied by delta. It’s quite simple, don’t you think? 

    Gamma as one of the Greeks in trading options

    Gamma or Γ is a measure of the rate of change of its delta per 1-point move in the price of the underlying stock.

    The formula to calculate is expressed as:

     Γ = ∂Δ/∂S = ∂2V/∂2S

    The gamma can be expressed as a percentage also. And as same as delta, gamma is changing even with very small moves of the underlying asset price. Gamma is at its peak when the asset price is near to strike price of the option. It drops when the options go deeper out of or into the money. When the option has gamma value close to 0 that means it means the option is very deep out of or into the money. 

    Long options will have positive gamma values. When the options strike price is equal to the price of the underlying stock gamma will have the maximum value.

    One of the Greeks in trading options is Vega

    Vega or ν is also an option Greek. It measures the influence of changes in the underlying volatility on the option price. In other words, it measures the sensitivity of the option price in comparison to the volatility of the underlying stock. Vega will show the change in the price of the option for each change in underlying volatility, for every 1% of it.

    Here is the calculation:

    ν = ∂V / ∂σ

    ∂  represents the first derivative
    V  represents the option’s price  which is the theoretical value
    σ  represents the volatility of the underlying asset

    The vega is shown as a money amount.

    Options will be more costly when volatility is higher. So, when volatility rises, the price of the option will rise too. Consequently, when volatility decreases, the price of the option will drop also. Hence, when you want to calculate the new option price caused by volatility changes, you have to add the vega when volatility goes up. This means, to subtract it when the volatility decreases.

    Theta

    Theta symbol is θ. It is a measure of the sensitivity of the option price relative to the option’s time decay. If the date of expiry is closer by one day, the option’s price will change for the theta value. The theta is related to the option’s time to maturity.

    The formula is:

    θ = ∂V / ∂τ

    ∂ represents the first derivative
    V is the option’s price in sense of theoretical value
    τ represents the option’s time to maturity

    Generally speaking, the theta is expressed as a negative figure and it is negative for the options. Well, for some European options it can be positive. This is possible because theta describes the most negative value when the asset is at-the-money and shows the value by which the option’s price will decrease every day.

    Long-term options will have theta of near 0 because they do not lose value daily. Hence, theta is higher for short-term options, particularly at-the-money options. The reason is that short-term options have more premiums and a chance to lose every day. Theta will dramatically increase when the option is near to the date of expiry and time decay is greatest during those periods.

    Rho

    Rho or ρ. It measures the sensitivity of the option price related to interest rates. When a benchmark interest rate rises by 1%, the option price will switch by the rho value. The rho isn’t too important as other  Greeks are. Interest rates don’t have such a big influence on option prices and they are less sensitive to interest rate changes.

    Nevertheless, here is the formula to calculate:

    ρ = ∂V / ∂r

    ∂ is the first derivative
    V is the option’s price meaning the theoretical value
    r is the interest rate

    The call options will have a positive rho, but the rho for put options will be negative.

    Why using Greeks in trading options?

    In real trading, the Greeks will all change and develop their changes over the other variables. Every single change in the underlying asset’s price, interest rates, the expiry date may influence all variables simultaneously. So, it’s a smarter decision to use some software to calculate the final result.

    But it is very important to know why and how the Greeks can help and provide you a measure of position’s risk and reward. When the Greeks in trading options become familiar to you, apply them to your trading strategies. It is necessary to use all types of risk-exposure measures. This may bring your options trading to a higher level.

    Meanwhile, learn more about pattern trading from the “Two Fold Formula” book and check it with the our preferred trading platform.

  • Risk Management Strategy For Buying Stocks

    Risk Management Strategy For Buying Stocks

    Risk Management Strategy For Buying Stocks
    Risk management is the most important thing that you can learn if you want to trade stocks. That will provide you with staying in the game.

    By Guy Avtalyon

    A risk management strategy for buying stocks means you have a plan. It seems a bit fishy to suggest that you can simply search for  “high yield” and “low risk” and find trading opportunities that will beat the odds in the stock market for sure and do it with minimum risk. If it is so simple, why do we have losing trades? How is it possible that no one is doing that?  What forces you to choose low yield stock with high risk? Must we really be a genius to be able to find a risk management strategy for buying stocks?

    To be honest, smart trading or investing isn’t that simple. In other words, buying stocks requires a risk management strategy among other things. 

    Risk management for some unknown reasons is low placed on the list of the priorities for the majority of stock traders. Every single trader would rather seek the best indicator than to create a risk management strategy for buying stocks. There is no reason to put this very important issue so low. It is the opposite. 

    A risk management strategy for buying stocks has to be on the top of a stock trader’s priorities. Without knowledge about risk management, no one can be a profitable trader. As a trader, you must understand how to manage your risk, how to size your position, how to set the orders accurately. 

    Of course, only if you want to be a profitable trader. In case you don’t stop reading this. For those who want, here is a risk management strategy for buying stocks. Actually, several suggestions. 

    What is a risk management strategy for buying stocks?

    A risk management strategy for buying stocks helps to lower losses. If you have a risk management strategy or you improve it, you’ll avoid most of the problems that can arise and cause you to lose money.

    One of the tips is, determine where you will set your stop loss and take profit order but before you enter the position. At the same moment when you find a good entry point, you have to decide where you’d set these important levels: stop loss and take profit points.

    When you have recognized the right price levels for your orders, you have to measure the risk/reward ratio. If it doesn’t match your goals, stay away from the trade. Never try to stretch your take profit order or squeeze your stop loss to reach a higher risk/reward ratio. Keep in mind that the reward is always potential, it isn’t 100%-sure. What you can control for sure is a risk. 

    Yes, we know very well some beginners in stock trading who do this thing totally opposite. They think it is possible to randomly find a risk/reward ratio and then adjust stop loss and take profit orders to reach the desirable ratio. Well, it is possible but what really you’ll get is a losing trade.

    Can a trader who has made solid profits waste it all in one bad trade?

    Yes, it is particularly true if you don’t have a proper risk management strategy for buying stocks. 

    Failed traders enter a trade without having any idea of break-even stops or what does it mean at all. Somewhere and somehow they picked that phrase and wanted to implement. Please, avoid it. First of all, if you move the stop loss to the level of your entry wanting to create a trade without losses you are entering one of the most dangerous trades. Moreover, such a trade will often end up as unprofitable. Yes, you have to protect your position but this tactic is going to put you into various problems. It is particularly true if you base your trades on technical analysis. How is that possible? Your entry point is very often evident for other traders too. So many of them will have the same or similar entry point. And what can happen? Well, the elite traders will eat you. 

    For example, you enter a short trade when support breaks, and the stop loss point is above the support level. But you move your stop loss to a break-even point in order to protect your trade. What happened? The price goes back into support and takes out your stop loss. Support held but you miss profits. Yes, support validated your trading idea but your risk or, in this case, stop loss management fired you out. You moved too soon. That’s a possible danger which amateurs almost never notice. One bad trade and you lost all your money.

    Set stop-loss points more effectively

    You can do this by using technical analysis, but fundamental analysis can help in timing. For example, you are holding a stock ahead of earnings and drama grows. But you may want to sell before expectations become too high. Use the moving average. For experienced traders, it is maybe the most popular method to set stop loss and take profit points. It’s easy to calculate. Main averages are 5-days, 9-days, 20-days, 50-days, 100-days, and 200-days moving averages. Just apply them to your chart and check how the stock price reacted to them previously, both as support or as a resistance level.

    Also, you can set stop-loss or take-profit levels on support or resistance trend lines. Just connect the prior highs or lows that befell above-average volume. The point is to find the levels at which the stock price responded to the trend lines and on volume. For more volatile stocks use a long-term moving average. This will minimize the possibility of an unimportant price move to execute your stop-loss order before it’s time. 

    Also, you have to adjust moving averages to your target price. For long targets use longer averages. In this way, you’ll reduce the number of generated signals. This will reduce the noise too. If the stock price is changing too much it is the sign of high volatility, set a stop loss adjusted to the market’s volatility. The great help is to know when some major event may occur. For example, earnings reports can be a good time to be in or out of the trade because the volatility can arise.

    Pay attention to extremely low P/E stocks as a risk management strategy for buying stocks

    Don’t think that playing the stock market is easy. Beating it is more difficult. All you need is to find a stock that is trading at fantastic bargain levels. Well, how to find such opportunities?

    One way is to use the P/E ratio. Calculate it by dividing the share price by the number of earnings per share. If the stock is making a high-profit but its share price is low, the stock is undervalued. Beginners may think it is a good opportunity but if they never calculate the P/E ratio they could increase their risk.

    A trick of finding low-priced stocks

    For example, the stock made $4 per share of profit last year. But this stock is still cheap, its share price is $8 and the P/E ratio is, for example, 4. The average P/E ratio for the industry is, let’s say, 16. And you may think this stock should be trading at least over 4 times higher based on this ratio. But remember, that is just one single ratio. 

    This stock doesn’t have such a low P/E ratio without the reason. For example, the earnings are unsteady and the company may have problems paying a debt. So, the stock can be cheap if you look at the P/E ratio as a sole metric but traders noticed an increased risk and volatile stock. That affected its share price and the stock is trading at a lower price with the possible high risk involved.

    So, you’ll need to analyze other earning ratios or numbers. For example, compare the company’s share price to its cash flow per share. Find the industry average.  Only than you’ll if the stock is fairly valued. One note more, if the company boasts a low P/E ratio, be cautious. There is an added risk.  

    Traders-Paradise wants to show you how to do smart trading. A risk management strategy for buying stocks is one of the most important parts of trading. As far as you learn this, the more successful your trades will be. 

  • Coronavirus Is Crashing The Global Markets

    Coronavirus Is Crashing The Global Markets

    Coronavirus Is Crashing The Global Markets
    COVID-19 is crashing the global markets but history has shown that the markets bounce back again and again over time.

    Coronavirus is crashing the global markets but investors are returning to China. It looks like the appetite for Chinese shares is rising again. For example, Pinebridge Investments from New York. According to CNBC this firm “had total assets under management of $101.3 billion as of the end of last year, including $25.5 billion in stocks and $64.3 billion in fixed income.”

    Despite the fact that the novel coronavirus is crashing the global markets fund managers start buying Chinese assets again. And all Asian markets rise moderately.

    Major markets in Asia were up nearly 1% yesterday (Tuesday, March, 30) and Hong Kong and South Korean shares rose about 1.5%.  

    Fund managers have recently boosted China A-shares. It was “a small single-digit” starting position and now is “a low double-digit weighting.”  So we can conclude the Far East, led by China, is already showing recovery.

    China President Xi Jinping presented strong growth signals. Goldman Sachs reported the Chinese policy is concentrating on demand. Also, the government’s concern is to sustain employment, financial markets, trade, and foreign capital. 

    Russian financial market

    On the other hand, the Russian economy has been shaken by the coronavirus pandemic. The main impact on the Russian economy came from the breakdown of the production pact between Russia and Saudi Arabia. This was a shock for traders all over the world. The consequence was intense volatility on the Russian stock markets which dropped around 20%. The value of the ruble also is down around 20% from the beginning of this year.

    The price of oil futures is rising 

    Coronavirus is crashing the global markets but recently the analysts showed some optimism toward financial markets. 

    Oil futures surged on Tuesday after dropping to their lowest levels since 2002. Maybe the oil prices allow the best check of how investors anticipate the economy to function. The rising price of oil futures is probably a weak sign because on the other side we have gold as a standard safe-haven investment but the price of gold dropped significantly in trading on March 30. 

    When coronavirus is crashing the global markets it looks like there is no safe place to put money. Another safe place was longer-term U.S. Treasury bonds, also known as T- bills, but it dropped also.

    Investors’ worries have not gone away yet. The stock market is still volatile. The VIX index is still at historically high levels. It fell a bit two days ago but this level still shows an extreme stock market volatility.

    Coronavirus is crashing the global markets – what investors should do?

    Here is what investors should do while the coronavirus is crashing the global markets. First of all, every single investor must understand the value of the overall portfolios is lower. But it is a paper loss, why would you transfer it in true loss? That is exactly what you would do in case you try to sell. So, sit back and do nothing. Don’t check your portfolio every single day. Put away your desktop or laptop computer and turn off notifications on your phone. The time for your reaction has passed anyway. You can’t do anything now. Just try to stay calm and avoid stress. As a serious investor, you should be prepared for market volatility. Even for this extreme one, that we have now. 

    Market volatility is a good time to start investing

    If you can’t sit in peace, start small and not frequently. For example, buy a small chunk of stock per week. And repeat it until you buy what you want. Diversify your investments across major asset classes, don’t buy from the single one. 

    This period when the coronavirus is crashing the global markets is a good time to enter the market. The stock prices are low, you don’t need too much money to buy them and you can start with small parts buying from time to time. This is a great time to estimate your personal risk tolerance. But you have to follow some rules.

    The rules to follow when the markets are down

    As we pointed before, invest gradually. This means you have to invest a predetermined amount into the same asset over a long time. In this way, you’ll be able to buy more chunks at lower prices (we suppose you want to buy stocks when the price is low, that’s the rule of investing – buy low, sell high, right?) Thus this method will allow you to buy less when the price is high. So, even if you are a total novice in the stock market by doing this you’ll implement one of the most efficient strategies – a dollar-cost averaging. 

    When you estimate where to invest try to find and pick the stock for long-term investment. That’s the reason you shouldn’t start investing if you don’t have saved and put aside cash equal to at least three months’ salary. You will need that money for rainy days. You can invest the rest of your money. 

    Compound interest and diversification

    Keep in mind the advantage of compound interest. That’s when you earn interest on the interest you receive, but you must have an investing plan and stick to it. And the mother of all investments, diversify.

    Diversification will give you more exposure to a wide range of stocks.

    Remember, the current market drop can give you a very good opportunity for young and new investors who can play for a long time. All researches highlighted the young people who invested systematically during market corrections and during the market downturns done better than the others who withdrew. 

    The existing investors should hold their investments tight. Remember, this period when coronavirus is crashing the global markets is just a stress test. Nothing more. Don’t let your emotions lead you, don’t sell your shares in a panic. Sell only if you have some urgent need for cash.

    It’s impossible to pick the market bottom. Resist those thoughts. If you want to trade the stocks you can learn more in the “Two Fold Formula” book. Also, you can check it with our preferred trading platform.

    Bottom line

    Coronavirus is crashing the global markets, that’s the reaction of the market to the spreading of a pandemic. From some point of view, it was expected. A virus outbreak can cause many problems. From day-to-day individual activity to global productivity. This new COVID-19 virus changes the economic outputs since it is progressing in almost every part of the globe. 

    The investors are reasonably worried. The broad disruption to global trade could have a large influence on global growth. Along with these fears in the financial markets, the fears for individual safety is due to the threat of the virus itself. This level of fear may cause even the most rational investors to play by emotions. As negative news appeared the investors with lower risk tolerance started to sell in panic. And as it was expected, they caused a market correction. Just keep in mind, the market corrections are normal even in a bull market. The market needs to neutralize bad behavior. For example, FOMO. But the market will move forward despite anything. The markets will bounce back again. Also, it will be more sustainable. It just needs some time to catch a breath.

  • Volatility Trading – How To Trade Volatility Profitably?

    Volatility Trading – How To Trade Volatility Profitably?

    (Updated November 2021)

    Volatility Trading - How To Trade Volatility Profitably?
    Volatility traders do not pay attention to which direction stock prices move, they are interested in the level of volatility itself.

    Volatility trading describes trading the volatility of the price of an underlying asset. Make a note of the difference, it isn’t trading of the price itself. Or in other words, volatility trading indicates trading the assumed future volatility of the index. Hence, it is buying and selling the anticipated future volatility of the asset. Every single asset in which price changes, actually manifests price volatility. So, traders that trade volatility looks at how much change, in any direction, will happen. They don’t pay attention to the price, they don’t want to predict the price itself. Such traders just think about how much the price of some asset will move in the future, in the stock price, for example. No matter if it will go up or down. And it isn’t random trading. They have developed strategies which we’ll present to you.

    But firstly, we would like to make clear what volatility trading is.

    For example, options are a favorite tool for volatility trading. Why is that? Well, many factors can affect the value of the option but a crucial for its value is the expected future volatility of the underlying asset. Hence, options with higher expected volatility are more valuable than options on instruments with low expected volatility in the future.
    Therefore, options represent an easy way to get exposure to the volatility of the underlying instruments. Basically, that expected future volatility of the underlying instrument of an option is a very important part when traders’ valuing the option.

    Factors important to determine the volatility

    We can recognize seven factors that determine the price of an option and they are also called variables. While all of them are variable only one is an estimate and represents the most important part. The known factors are the current price of an underlying asset, strike price, also the known part is calls and puts, meaning what is the type of an option. Further, we always know what is the risk-free interest rate, and the dividends on the underlying assets. But what we don’t know is volatility. The volatility is the most important variable to determine the price of an option. So we need to know what indicates volatility. 

    First of all, it is one of the “Greeks” – Vega. 

    It is the measure of an option’s price sensitivity to shifts in the volatility of the underlying instrument. Vega outlines the value that an option’s price changes as a response to a 1% move in the expected volatility of the underlying asset. This “greek” will show the change of an option for every 1% of the change in volatility. 

    Main points related to volatility trading

    Traders should pay attention to two main points related to volatility.

    One is relative volatility. It refers to the current volatility of the stock in comparison to its volatility over a given period. For example, ABC stock options that expire in one-month historically showed expected volatility of 15%, but current volatility is 25%. Let’s compare it with XYZ stock options that had expected volatility of 25% but now grown to 30%. If we want to estimate absolute volatility it is obvious that XYZ stock has a greater. But the stock ABC gained a greater change in relative volatility. 

    The volatility of the overall market is important too. The most used is VIX ( the CBOE Volatility Index) that measures the volatility of the S&P 500. VIX is also known as the investors’  fear gauge. When the S&P 500 experiences a sharp decline, the VIX increases sharply. Every time when the S&P 500 is rising gradually, the VIX will be pacified. 

    Strategies for volatility trading

    Straddle strategy

    As we said, traders who trade volatility are not interested in the direction of the price changes. They make money on high volatility, no matter whether the price goes up or down. 

    One of the most popular strategies for volatility trading is the Straddle strategy with pending orders. This strategy provides a profit when the price goes considerably in one direction, no matter if it is up or down. The best time to use this strategy is when the traders expect an extreme increase in volatility.  

    We said it has to be used with pending orders. The pending orders are orders that were not yet executed, hence not yet becoming a trade. They’ll become market orders when certain pre-specified conditions are met.
    If you want to use this strategy, you’ll need to identify a market in consolidation before some significant market release. Further, set a buy stop pending order above the upper consolidation resistance. A sell stop pending order you should set below the lower consolidation support.  

    In Forex trading

    For example, you are trading Forex and have a currency pair that entered a consolidation stage with low volatility. Just put buy stop orders a few pips above the upper resistance,  so a sell stop order should be a few pips below the lower support. No matter in which direction the price will change, it will trigger one of these orders and when the volatility continues, the trade will end up in a profit.

    The real trigger for pending orders is volatility. Volatility occurs a bit before important reports in the market and traders usually schedule this kind of trades before them.
    In a straddle strategy, the traders write or sell a call and put at the same strike price wanting to receive the premiums on both positions. The reason behind this strategy is that the traders await expected volatility to decrease significantly by option expiry. That allows them to hold most of the premiums received on short put and short call positions.

    Ratio Writing

    Ratio writing is simply writing more options than are bought. Use a 2:1 ratio, just two options, sold or written for every option bought. The aim is to profit on a large fall in expected volatility before the date of expiry.

    Iron Condors in volatility trading

    In this strategy, the traders combine a bear call spread with a bull put spread of the same expiration. They hope to profit on a reversal in volatility. The result would be the stock trading in a tight range during the life of the options.
    The iron condor strategy has a low payoff, but the potential loss also has a limitation.

    Go long

    During the high volatility, traders who are bearish on the stock can buy puts on it. Keep in mind the saying “the trend is your friend.”
    “Go long” strategy or buy puts is expensive. It requires, from traders who want to lower the costs of long put positions, to buy more put out-of-the-money or, the other way is to add a short put position at a cheaper price to meet the cost of the long put position. You can find this strategy under the name a bear put spread.

    Go Short

    The other name for this strategy is “write calls”. The traders who are bearish on the stock but think the level of expected volatility for options could decrease may write naked calls to pocket a premium.
    Writing or shorting a naked call is a very risky strategy, keep that in mind. There can be an unlimited risk if the underlying stock boosts in price before the expiry date of the naked call position. In such a case, you can end up with several hundred percent of the loss. To reduce this risk, just combine the short call position with a long call position at a higher price. This strategy you can find under the name “a bear call spread.”

    Use VIX to predict the volatility 

    Yes, you can recognize market turns by using VIX. To be more specific,  you’ll recognize the bottoms. Well, the stock market regularly rises gradually and the VIX will decrease in the same manner. So very low levels can occur. The investors don’t feel they need any protection. If these periods last longer, the VIX as a sell signal can be useless. 

    But, the nature of the S&P 500 is long-biased. If index declines investors start to buy protection (simple put options) fast. That pushes up the VIX. Can you see how great the “fear barometer” VIX is? When you notice a high VIX you can be sure the investors and traders are overreacting because the market drops. The VIX during times of market drops will behave as the spike. That is a good signal to discover when selling is overdone and the market is moving higher due to bounce or even bottom for a longer-term.

    This strategy is suitable when the VIX ‘sign’ appears during a bullish trend in the S&P 500.

    Bottom line

    Volatility trading is an excellent way to get profitable trades even if you are wrong about the direction of the price. Volatility is the main interest of volatility traders. They are seeking big changes in any direction. Use the VIX index as a measurement for volatility in the stock market. A rising VIX index indicates fears in the market. But it is a good time to buy stocks. The most popular trading strategy to trade volatility is the Straddle strategy.
    Also, traders use the Short Straddle strategy when they expect a lack of volatility, for example, the prices continuing with steady change.
    No matter which of these strategies you want to use, just keep in mind that you can profit no matter what is the direction of the price movement.

  • A Dead Cat Bounce – How To Trade It

    A Dead Cat Bounce – How To Trade It

    A Dead Cat Bounce - How To Trade It
    Dead cat bounce appears when the markets are in free fall. Is it possible to profit from it?

    A dead cat bounce is a phenomenon that occurs when a stock gap is lower by a remarkable percentage. For example, 5% represents that phenomenon. When the stock is always volatile within a continued period of downside this gap is over 5%. But when the stock isn’t volatile this gap of 5% must be taken into consideration.
    The pattern occurs during bearish moves and it is visible on the charts. A dead cat bounce pattern is an expected correction of a bearish trend.

    To put this simple

    Assume we have a stock that is in a strong downtrend. When it happens we can notice a lot of short-sellers in that stock. But not all are short selling. Some traders will believe that the stock has touched its cheapest possible price, it reached the bottom. So, they would like to close their short trades but some will hold the position longer. And what we have here is increasing buying pressure. The consequence is that such a stock will find its bottom and a short bounce will occur. But the stock proceeds in the direction of its initial trend and that will lead to a quick sell-off. 

    So, we can say, a dead cat bounce is a short recovery of the stock price from a long dropping. But it is followed by the increase of the downtrend. This recovery in stock price is a short-living one. If you take a close look at such a stock’s chart, you will notice that the downtrend is broken by short periods of recovery. They are very small rallies and the stock price can rise for a short time. 

    Why is this phenomenon called a dead cat bounce? Well, there is a belief that even a dead cat would bounce if it falls fast and far sufficient.

    How to identify a dead cat bounce pattern?

    First of all, it is a price pattern and often a repeating pattern. Don’t be naive and think it is a reversal of the current trend because this first bounce will stop and the prior downtrend will continue so the stock price will continue to drop. It is important to understand that a dead cat bounce isn’t a reversal. It appears after a stock price drops below its previous low. When the price of such volatile stock temporarily rises you’ll see it as short periods of recovery. That is due to traders’  short-sellings, they are closing out short positions or maybe buying on the hope that the stock touched the bottom.

    The problem is that we cannot identify this price action before it happens. We can recognize a dead cat bounce as a pattern after it occurs. We can try to predict if the recovery will be temporary by using some analytical tools as analysts do but there are no guarantees. Identifying the exact pattern before it happens is difficult even for experienced traders. We can see a dead cat bounce in the stock price for individual stock or for the group of stocks. Moreover, it can occur for the economy in general, for example, during the recession.

    A real-life example of this pattern

    We have it now, these days. The indexes had the greatest drops last week, three days in a row. The biggest drops after the Great Recession. Last month, February marked several days when the market has grown, but it fell under the pressure. The investors sold some of their positions when they noticed the market has risen after a long decrease. And they unloaded. But the downtrend continued so we have a typical dead cat bounce. During the first four days of last week, for example, Dow Jones declined by almost 18%. The indexes, in general, are oversold. The overall trend indicates further losses in the stock market. Coronavirus caused so much uncertainty.

    The stock price fell, short traders started to look for a point to take profits. Some others started to buy at a discount. And the buying pressure occurred since both groups pushed the price back up. Well, buying pressure isn’t able to maintain the stock price at the current rate. When we have too many short selling in the market and no one left to buy, the downtrend is going to continue. The stock prices are going to drop more. This unbalanced relation in supply and demand causes a dead cat bounce.

    How to recognize a dead cat bounce 

    First of all, a dead cat bounce is a retracement, it isn’t a reversal. So the rebound is short and unstable. Traders can notice in their chart the existence of intent bias coming amid a clear period of failing. That should help to identify a pattern. By using fundamental and technical analysis traders are able to discover if they are set for a leg lower or a broader recovery. This is an important issue for traders. Is a rebound going to form a significant bottom or it will be a short-living rebound? After a short rebound, the stock price will continue to decrease. As we said, if traders notice a sign of rapid selling and it lasts for a longer time, there will not be a bottom. It is a dead cat bounce.

    How to trade a dead cat bounce?

    A dead cat bounce is the reverse of a buy the dip thinking. While “buy the dip” means the traders are sure that the full uptrend is going to come back into play notwithstanding current losses, a dead cat bounce is different.
    For example, your chart highlights the run-up to $100 and each fall is met by buyers. Well, they are taking advantage of drop thinking that history can repeat and produce further highs. 

    But markets recognize each leg lower as being a forerunner to further losses. Periods of selling are longer, the rebounds are short, they may not last. The use of Fibonacci retracement levels can give us a tool. A shallower retracement is characteristic of a market that is prepared for added dead cat bounce.
    The sharp declines show that the market in free fall will see shallow retracements every time where there isn’t enough trust in any rebound. To notice a dead cat bounce, it is important to look for a breakthrough in the previous swing low, hence a continued downtrend. 

    Where to place a stop-loss order?

    Traders can look onto these shallow retracements as a method to start risk-to-reward trades. Your stop loss should be sized smaller. That could provide you a greater chance for a high risk-to-reward profile. Timing is extremely important when you trade this pattern. You need to stick to the trading rules of this pattern. Otherwise, you are at risk to lose everything. So, as we said, short the stock only when the price move breaks the last bottom formed.

    Use the previous swing low as an entry point to ensure the trade is opened upon verification that a dead cat bounce has happened. Then look at the dead cat bounce for a lead on where to place your stop loss. Stop-loss should be proportionately small due to the shallow nature of that rebound. Don’t place a stop loss at the peak of a dead cat bounce. It’s better to place it above. You will need a higher high to neutralize the bearish appearance.

    If you don’t use a stop-loss order you’ll end up in pain. What if the pattern you think you notice isn’t a dead cat bounce pattern? Are you short selling a stock, which reached a significant bottom? So it was ready to make a big move higher. This means you made the wrong decision.

    Don’t trade on margin and always set a protective stop-loss order when you want to trade this pattern.

    Timing is important

    When you see this pattern, you should intend for a minimum price move equal to the prior trend movement. Simply, if the price starts falling quickly and you verify a pattern, you should assume the price to fall at least with the same size. There you should take your profit.

    It is important to highlight that timing is essential when trading this pattern. If you don’t enter the market at the right time, there is a big chance that you’ll miss an important part of the bearish move. You have to be sure you short the stock exactly at the moment when you notice a candle closing below the last low of the stock.

    Bottom line

    When the stock drops more than 5% from the prior closing price but soon the price is back close where it opened, and the price then falls again, we have a dead cat bounce. It isn’t a bargain at discount. But you can make money on it
    The fundamental level in a dead cat bounce trade is near the open price of the initial gap down day. Usually, the price will retest this level during the same day. That will give traders the possibility to go short. This level will stay notable for days or weeks in the future. If you go short and the stock price falls more after that, the price can come back a week later again to test the same level. That would be a second dead cat bounce.

    One single gap may have three cat bounce trades. It is risky to trade this pattern but may give you a high profit.