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  • Inverted Hammer Candlestick Pattern

    Inverted Hammer Candlestick Pattern

    (Updated October 2021)

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

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

    What does the Inverted Hammer candlestick pattern tell us? 

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

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

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

    What is the Hammer candlestick pattern?

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

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

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

    The meaning of Inverted hammer pattern

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

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

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

    How much the color is important?

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

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

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

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

    The logic behind this pattern

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

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

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

    Bottom line

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

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

  • Shooting Star Candlestick Pattern

    Shooting Star Candlestick Pattern

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

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

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

    How to recognize the Shooting star candlestick pattern

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

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

    When this pattern may occur?

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

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

    What does the Shooting star candlestick pattern reveal?

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

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

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

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

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

    How to trade the Shooting star candlestick pattern?

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

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

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

    Limitations of this pattern

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

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

    Bottom line

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

  • Moving Averages As Support and Resistance Levels

    Moving Averages As Support and Resistance Levels

    Moving Averages As Support and Resistance
    Finding the key support and resistance levels is a crucial component of trading. Moving averages can help.

    By Guy Avtalyon

    Is it possible to use moving averages as support and resistance? How can they help us in trading? Is there any trick on how to use them? We know from the previous article that moving averages are an average of closing prices during the recent days. How much info we can use in the meaning of moving averages as support and resistance levels?
    If you take a look at any chart with moving averages and trend lines that are formed you’ll understand why this is the subject. Moreover, this understanding may have a great impact on your profit.

    Moving averages as support and resistance are extremely powerful and we’ll show you why and how.

    What are the moving averages as support and resistance?

    First of all, these levels are not just like conventional support and resistance. Conventional, traditional levels are visible as horizontal lines in your charts but these provided by moving averages are dynamic. They are changing according to the recent changes in price.

    Dynamic support and resistance levels are zones where the market could pull back into and get support requiring to be at horizontal support or resistance levels. Why is it dynamic? Because it measures resistance and support using moving averages that are changing as market changes.

    You can find many forex traders that use moving averages as support and resistance levels. For example, it is common among them to sell when the price increases and reaches the moving average and tests it. As a forex trader, you cannot ignore when the price often checks out the moving averages before it bounces back. You must understand that something is happening when the price reaches these levels. 

    What happens is the market is developing, evolving. So you can’t always buy or sell at previously outlined levels. Also, trends’ momentum is dynamic too due to the order flows. Momentum can often be the primary forcing power of trends or movements.

    But to sum what we had here. So-called static support and resistance levels are horizontal and can’t move. On the other hand, dynamic support and resistance levels are moving and they are not horizontal. 

    What causes support and resistance?

    When a price goes up and down, it faces obstacles on the way. If obstacles act in a way to prevent the price to drop lower, we are talking about – support. Hence, when it stops the up progress, it is resistance.

    Support is formed when more traders are selling than buying. Sellers will usually cover their short positions and take the profit. The price will go lower and lower. As it happens, buyers will start to buy at that lower price and many of them will enter the new long positions. If the number of buyers is bigger than the sellers, they will create a support level eventually. But if the price moves up that means the more traders are buying and if the number of sellers is bigger than the number of buyers it is so-called resistance.

    How moving averages help to find support and resistance levels

    The question is how do we estimate the strength of the signal we’re seeing. Is it breakout or bounce? There are moving averages as support and resistance levels on the scene to help us. One of the benefits of using moving averages for this purpose is their ability to be handy even when the market price is going through a hidden area in our charts.

    Have you ever had trouble finding key support and resistance levels when looking at the charts? Of course, you had. It is pretty much usual that when looking at charts and notice a price action, you see the price is pulling back but you cannot find support or resistance levels in that zone. But if you try to reveal how the market is valuing dynamic levels, your charts will be more clear. Moreover, you’ll find some trading opportunities you were missing before. That’s kind of an “angle-changer”. You have one perspective more to judge your trade.

    One of the best ways to estimate the ability of support or resistance levels is to watch price action around them. It isn’t hard to read price action. For example, on candlestick charts it’s easy. 

    For example, if you use the 15-minute chart and the price rises to the 50 EMA. That could be a really good dynamic support or resistance level. You’ll notice that every time the price touches 50 EMA and tests it, you’ll see a bounce back down because the price uses this moving average as resistance. Try it, it’s simply amazing. But the price will not always perfectly bounce back from the moving average. Sometimes it will go a bit above before it starts going back in trend direction.

    Sometimes the price will simply explode through it all together. Some forex traders usually leap on two moving averages and buy or sell when the price is in the middle of the zone between the two moving averages.

    Does this really work?

    The logic behind why moving averages as support and resistance work are very similar to why price moves. Let’s say that the majority of traders use 10-days, 20-days. 50-days, 100-days or 200-days moving averages. So, what do you think, what can happen when almost 90% of them use all these five? Nothin special. But if they choose to use only one of them in expectation for it to operate as support or resistance? Yes, you’re right. The price will respect that. When more traders expect something to happen and they have a common goal, it will happen.
    Let’s examine this in the case of 10 and 20 EMAs that are providing support and resistance. What can you see?

    Can you see how the 10 and 20 EMAs are providing support and resistance?  These moving averages can be a powerful help but only if used with the right assembly factors. Let’s look at a setup where they unite several other factors.

    Can you see how the pin bar marked in the red circle rejected the 10 EMA and a key price action level both? We have a clear uptrend without resistance beyond this key level. This was an example of a great setup. Feel free to test it.
    The price will rarely bounce exactly, again, and again from the same moving average. Instead, it’s more efficient to form a support or resistance zone between two moving averages.
    When the price moves into the zone between the 20 MA and 50 MA, we should ask if a reversal is going to happen. That could be a danger zone, so it may be smart to hedge the position.

    How to use moving averages to lock in profit

    If you want to lock in profit, move up your stop level in your trend-following trade only if you have a clear signal of bounce from moving averages you use as support or resistance. That is one of the tricks for using moving averages as support and resistance. But you have to keep in mind that moving averages as support and resistance levels are just saying to us what’s going on at these levels. We still have to look out for additional signals and find them. 

    The truth is that if you add MAs you’ll have additional in-trade information that may help you to maximize your trades. But like everything in Forex, you’ll have no guarantees. Consider these averages as a tool in your trading toolkit that you can adopt and use to increase your trading success.

  • How To Use Moving Averages In Trading Stocks?

    How To Use Moving Averages In Trading Stocks?

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

    By Guy Avtalyon

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

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

    Which moving average to choose? 

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

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

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

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

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

    How to trade with the SMA?

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

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

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

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

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

    How to use moving averages

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

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

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

    How to use moving averages EMA?

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

    How to calculate the EMA?

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

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

    (2 / (number of results + 1)). 

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

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

    Let’s calculate the current EMA.

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

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

    EMA strategy

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

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

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

  • Stop-loss First, Then Consider The Entry

    Stop-loss First, Then Consider The Entry

    Stop-loss First, Then Consider The Entry
    In stock trading, the essential part is to move quickly in and out of the position to profit more.

    Guy Avtalyon

    Everyone who even thinks about trading must understand the importance of stop-loss and why the Traders-Paradise team likes to say stop-loss first. 

    The stop-loss is one of the simplest tools from any trader’s toolkit. This order is connected to the stock’s movement, no matter if the fundamentals for the company have changed. The stop-loss first,  because if you use it you’ll have a greater chance to outperform the market. Let’s explain this. When the price of the stock goes down, the stock becomes more volatile, which means more risk. 

    Correlations between stocks and the market increase more when markets are dropping than when they are growing. So, the portfolio risk rises, and therefore diversification impact reduces. Increased volatility and higher risk, can expose stop-loss order as extremely important in risk exposure control. The gain could be potentially made by reducing the risk and getting a higher risk-adjusted return.
    Using stop-loss strategies you can reduce your emotional reactions while trading, and overcome the volatile market. So, the saying “stop-loss first” covers many situations when it is beneficial and we’ll show you some of them.

    Why stop-loss is the first consideration

    Stop-loss is the primary guarantee for profiting in the stock market. When you set your stop-loss order you’ll avoid risk, protect your principal, and survive the market volatility. It’s like the insurance premium.
    Risk control is the most important. For example, you just learned to ride a motorbike. What you have to know as a must?  You’ll have to know how to control the speed of falling. You’ll be safer.
    But when it comes to stop-loss orders, not every trader is confident where to set this order. Some even avoid thinking about it. Let us explain something. The stock market is a risky one, while you have one winning trade you might have up to ten losing trades. Don’t worry, that’s normal. But you cannot depend on good luck or count on it. What do you need? Skills and capacity to profit consistently. Otherwise, the stock market will dump you out. 

    Why is stop-loss important?

    One of the reasons to use stop-loss is because you trade with limited capital. That’s the rule, no matter if you are the richest trader in the world. Limited capital is required due to the necessity to protect your whole capital from losses. It is possible only if you use a stop-loss order. In other words, you must know what the maximum losses you can take per trade, per day, week, or month. That is trading discipline. You can maintain it only if you set a stop-loss order for each of your trades.

    Moreover, if you consider a stop-loss first, before your entry point, you’ll be able to profit faster and reach your financial goals. In stock trading, you don’t want to hold stock for a long time, and you’ll want to sell them. But if the desired price isn’t reached,  you’ll need to close the losing position as fast as possible and move onto another trade. Of course, you’ll have to compensate for your losing trade elsewhere. That to be said, in stock trading the essential part is to move quickly in and out of the position to profit more. Move your money quickly and with profit, that’s the point. But if you do it randomly you’ll be faced with losses. You have to ensure your trades. How to do that? By using stop-loss first, then you can think about new entries. Also, the bounce backs will be easier in case you have losses. The math can confirm that.

    For example, it is easier for $1000 to fall to $800, but a lot more difficult for $800 to bounce back to $1000. This is a loss of 20%. To compensate for this loss you’ll need about 25% appreciation and come back to the initial capital. But even after a 100% bounce, the stock will be back to its buying price. That’s why you need to use stop-loss orders. If you wait there is a chance for momentum to go more against you.

    What does stop-loss determine 

    In trading, using a stop-loss order is important to overcome the imperfection of indicators. You have to exit a trade if it goes against you. If you’re a buyer, your stop-loss order will be a sell order. Consequently, if you’re a seller your stop-loss order will be a buy order.
    If you’re a buyer, the stop-loss order is a sell order. And vice versa, if you’re a seller, it’s a buy order. For example, if you set your stop-loss order at 3%, you’re actually setting the amount of money you’re prepared to lose per trade.
    Stop-loss relates to indicators, money, or time.  It’s up to you to choose what type of stops you want to use. For instance, you’re buying a stock at $50 because the indicators you use are showing that for this particular stock potential gain could be $100. This means the stock price could reach $150. Your initial stop could be at $25 which is 50% of your initial capital and to get a chance to make $100. Here we come to the risk-reward ratio. In this case, it would be 100:25 which is 4:1. 

    In short, it determines how big a position to take.

    Why to use stop-loss first?

    To avoid the concentration of positions

    As a trader, you’ll run the risk if you extend your exposure excessively. For example, if you keep holding onto positions or average them, then the concentration can occur in your picked stocks.
    For example, you bought a stock at $50 and if it goes down to $45, you might want to average your position. You’ll want that to reduce the cost of holding, for instance. But if the stock price continues to drop, you might be motivated to average your position again. So what could happen? You’ll fall into the loop. You’ll repeat this mistake, and repeat again and again in an attempt to reduce the cost of holding. The better choice would be to use a stop-loss order at the level of the first decline and cut your position. Why would you like to keep a few positions and end up overexposed to their cumulative risks?

    Getting higher leverage  

    In stock, trading leverage is important because it provides you to trade with margin. For example, you put in a margin of $100.000 into your trading account. But you want to trade a stock whose current price is $1.800. So, you could buy about 55 shares. But your broker allows you 4 times more leverage because the company is highly liquid and you now can open positions up to $400.000. Instead of 55 shares, you can buy 220 because it’s the cover order. Let’s assume that the support level for this stock is at $1.750 and you set your stop-loss at $1.700. Let’s calculate your trading risk.

    220 x (1.750 – 1.700) = $11.000

    Since you have a margin of $100.000 in your account, the cover order reduces the risk. Yes, but only if you plan a stop-loss first.

    Advantages of this order

    If you count a stop-loss first, you’ll be able to cut your losses and you’ll be able to protect your trades against bigger losses when the stock price drops sharply. Further, the stop-loss will be automatically triggered if the stock price moves to a certain price. Moreover, you can maintain the risk-reward ratio. For example, you are willing to take a 3% or 5% or 10% risk to get a particular profit. A stop-loss order will help you to achieve that. One of the advantages is that you’ll be able to make trading decisions without emotions and despite the market noise. Also, the stop-loss will help you to execute your trades based on your trading strategy and to stick with it. 

    Disadvantages of using a stop-loss 

    Nothing is 100% sure in the stock trading so even the stop-loss has some drawbacks. For example, you set a limit order and also, you set a stop-loss order, to buy a stock on a particular date. What if your stock opens at a lower price (gap-down) during the pre-opening session? Well, your stop loss will never be triggered. You will end up with losses. Here is a possible scenario. You set a stop-loss at $25, but the stock opens on a gap-down at $23. The stock price didn’t reach your stop-loss so your sell order will not be achieved. 

    Also, a stop-loss can be triggered by short-term fluctuations. For example, the stock price first fell to $24 but then bounced and Increased to $35. But you set the stop-loss at $25 and your holdings will be traded automatically as that price is reached.
    When you calculate where to place a stop-loss order examine what was the range of the historical fluctuation for that stock. For example, you will not place a stop-loss at 3% for the stock with a daily fluctuation of 6%.

    If you want to be a profitable trader, you’ll need to plan every single action. Just like you know the buying price, you must know where to set a stop-loss first and take a profit level. If you don’t do this well, the whole process might end up in big losses. Also, poor stop-loss orders can cause them. The stock trading history is full of both great and ugly stories, so many ups and downs, winning trades and failures.
    Learn stop-loss first, then consider your entry! That’s the whole wisdom.

  • Why Forex Trading Is Hard For Some Of You?

    Why Forex Trading Is Hard For Some Of You?

    Why Forex Trading Is Hard For Some Of You?
    Experienced traders admit that the greatest problem in the Forex market is not the trading approach but discipline. 

    Many beginners in the Forex market are faced with some difficulties and usually give up and ask around why forex trading is hard. Yes, for some traders it is hard but doesn’t have to be. Once you obtain more experience you’ll see how easy it can be and you’ll never ask again why forex trading is hard because it isn’t. Don’t believe what others are telling you. Forex trading is simple. But it’s really important to learn some basics before you enter this market. It is just like riding a horse. Once you learn it, it’s impossible to forget. And as in riding a horse, you have to know and follow some rules. Yes, you can push on your horse, as you can force your trades, but what will happen? Your horse might refuse to obey. 

    You have to be in line with a horse, calm and considerate, you must have the mental strength to deal with difficulties and stay cool. You must understand your horse and predict how it will act on your commands and have patience.

    Almost the same comes to Forex trading. When we hear someone asking why forex trading is hard for most of the traders, we know such has lost its temper. 

    The other reason why forex trading is hard could be that forex traders rarely like to follow the rules. They tend to ignore them. Maybe we should ask them why. Sticking to the rules may not be so exciting but it is beneficial. Don’t listen to the scammers that offer instant solutions to great gains, strategies that are successful 100%, that work in any Forex market’s condition. Put the logic to work! It is impossible! How one single strategy can be the best for all types of traders, all circumstances, for different market conditions, personal risk tolerances? No way! Avoid such artists, Youtube is full of them.

    When you learn forex trading in a proper way and follow some rules, you’ll never ask such a question of why is forex trading hard. 

    Let’s see why Forex trading is hard for some of you? 

    We already mentioned scammers. We’re pretty sure you noticed that many websites where you can just buy a trading strategy or attend some webinar over the weekend. “Become a supreme forex trader in a few hours,” “All you need is my system-pro to become a millionaire in trading forex,” or “You don’t need to learn, just follow my most profitable strategy of all times.” We really found this on the internet.

    They are in most cases, scammers. Even if you try to watch some video on YouTube you’ll be confused in 20 seconds. Honestly, some of these so-called gurus can burn your brain in a few seconds. Their explanations have nothing with successful trading. They don’t even know what they are talking about. They are totally messed up! 

    Our two cents – If a trading guru wants to sell a fancy strategy, you shouldn’t have losses by copying it. Of course, if you strictly follow the instructions and if you have full access to his/her strategy. Well, elite traders are honest, they will tell you, they will teach you. That’s the main difference. The scammers will sell you, often it isn’t a lot of money luckily, something that isn’t working or not works for you. So that could be the reason and answer the question of why forex trading is hard. Because you got a rotten apple actually.  

    Forex trading can be difficult

    Our brain is designed to run on the principle of causality. We are all trained to understand that everything we do has a particular consequence. Action will cause a reaction. Science also teaches us the same. For example, if we went out without an umbrella on a rainy day, we can expect to get wet. Or if we jump in shallow muddy water, we can expect to get hurt. 

    Right? Yes, in real-life (even if we know some people that are not aware of causal relationships, especially in the case of shallow water), but not in forex trading. In trading, you don’t have a direct balance between the time you spent in learning and the profits you obtain. To explain this. Many beginners expect if they spent weeks and months studying to trade, they could be successful automatically. That’s not how trading is. There is more.

    Forex market is immune to control

    Can you decide if the EUR/USD will fall? How can you know if the USD/CAD will go up or down from the last price? Most people are not able even to guess it. In everyday life, there are things we don’t need to think twice. For example, 1 + 1 = 2. That’s it. Moreover, nothing can change it. But in the markets, every minute is different. So while trading forex you have to change the strategy, method, approach, decisions. Don’t try to implement the trading patterns taken in the past. Basically, it isn’t mistaken, but the fact is that historical performance has surely no relationship to current market performance. 

    The forex market creates incredibly different circumstances where we have zero chances to be sure where or when the market is going to change. Maybe that is the reason why forex trading is hard. 

    So what to do? Anything but never try to put the market under your control. You can spend nights and days watching charts, monitoring your trades but you cannot control the market. One experienced forex trader once said that one of the most important lessons he learned is to accept the randomness in the forex market.

    That isn’t the reason to avoid forex trading, that’s the reason to be ready for any possible scenario of your trades. You’ll be prepared even if your trade setup fails. Read books, learn a lot, practice a lot. That’s the key.

    Why forex trading is hard – your subconsciousness could be the reason

    The main duty of the subconsciousness in forex trading is to protect our wealth. But sometimes it operates in a strange way. In essence, trading should be simple since we have only two options: to sell and to buy. So, theoretically, we have 50 percent chances to be right. Yes, but the other 50% is against us. OMG, I’m losing my mind! That’s the first thought, right? Here is our subconsciousness in play. Let’s see what could happen in trading.

    For example, you entered the stressful position. Everything looked good but suddenly the market turned against you. That’s the stress and your subconsciousness tries to relieve you out of that situation. What are you possibly doing? Exit the position. Why? Your subconsciousness pushed you to exit prematurely. The consequence is that you lost the trade or at least, you missed the main profit.

    Let’s suppose you traded for a while and you decided to set your stop-loss target not too close as always. What happened, for God’s sake? Are you shaking? Sweating? Are you nervous? Of course, you are! Your subconsciousness is warning you’re making a mistake by this deviation from your standard trade. In prior trades by a setting stop-loss order at a particular level, you had the winning trades. So, your subconsciousness doesn’t like changes because, as we said, its primary job is to protect your gains. 

    So, why are you in conflict with your subconsciousness when you both want the same? Yes, that’s true, but you both have different ways to achieve that. To make a profit. When you want to enter a riskier position or to change the previous performances, your guts will try to stop you. And it might cause you to make emotional decisions. You might be frightened to change anything. Your subconsciousness will rather accept small gains than to allow you to take risks and make great profits. That’s why forex trading is hard sometimes. It is a constant struggle with yourself. 

    How to become a better Forex trader?

    Do you remember when you went to school, you used some tools for the lessons? The same is in forex trading. You’ll need tools to become a better trader. In Forex, trading tools are known as technical indicators. You’ll have to know how to use them when trading. Also, you’ll need to use the fundamental analysis to be able to understand the markets. And, a lot of practice. Yes, we know it is the hardest part since many would like shortcuts. Unfortunately, there is no shortcut. In forex trading, it is essential to have realistic expectations. But also, you must have a bit of courage only once you learn how to trade and what may happen after you make some move. 

    If you think you know everything after a few weeks of practicing, you’re in big trouble. That is the perfect way to lose everything you have. And to do it quickly. So, what is the proper amount of time to learn trading forex? No one can tell you that because it is different from person to person. But if you keep in mind all these things mentioned above, the odds to become a successful trader could be bigger. Be patient, learn how to profit from trades consistently. That’s the way! If you do so you’ll never ask again why forex trading is hard. It will not be for you.

    Bottom line

    Why Forex trading is hard is the question for those who want to give up, to quit, and go to sleep. Forex trading isn’t hard, it is a fantastic opportunity to increase your well-being. Don’t expect to be a great trader from the first trade. You’ll make mistakes, you’ll lose money, but you’ll learn. Sooner you accept that the sooner you’ll learn. No one became a great trader by birth. Everyone had to learn how to trade and how to adopt the whole process. It isn’t hard unless you make it hard. 

    In forex trading, as it is in trading in general, you’ll have a lot of enemies. But remember one thing, the most dangerous enemy for your success is you. Risking too much, betting, trading too often, just pick one or all of these to make losses. The forex market is tricky to read, but you have the trading rules to be able to do that. Rules will protect you from making decisions driven by emotions. Let’s go, play the market! But do it smartly.

  • Goal-based investing – How Does It Work?

    Goal-based investing – How Does It Work?

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

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

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

    Using a traditional asset allocation

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

    What is goal-based investing? 

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

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

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

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

    The value of goal-based investing

    Goal-based investing should cover three practical purposes.

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

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

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

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

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

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

    Important to know before investing

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

    The benefits of goal-based investing

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

    System for this kind of investing

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

    Bottom line

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

  • Self-directed Investing – Advantages and Disadvantages

    Self-directed Investing – Advantages and Disadvantages

    (Updated Oct. 21)

    Self-directed Investing - Advantages and Disadvantages
    You’ll pay lower fees if you choose some online broker but you have to do everything yourself

    Self-directed investing also known as do-it-yourself investing is when you as an investor build and manage your own investment portfolios. That means you manage your investment strategy on your own. You are the one who decides which investments you want to buy or sell, and when. Self-directed investor ordinarily uses some online trading platform to make the trade. These investors prefer to forego the advice of an investment adviser since they are do-it-yourself types of investors. If you are a DIY type, here some things you have to take into consideration. Also, you’ll need to follow some principles. 

    Famous investor, Warren Buffet said: “Investing is not a game where the guy with the 160 IQ beats the guy with 130 IQ.” 

    This is particularly true if you know that self-directed investing is very simple. To be honest it isn’t the easiest one but also, it isn’t a terrifying type of investing. 

    Anyone who has done simple but serious research with due diligence can count to outperform the stock market. By self-directed investing, you could do that over a long period if you know how to create an investment portfolio capable of beating the market.

    Advantages of self-directed investing

    First of all, you’ll pay lower fees if you choose some online broker. That will allow you to trade with lower commissions and fees. This comes from the fact that in self-directed investing you don’t need any advice or advisor since you choose to be a DIY type of investor. Further, you can make your own research, and, based on it, you’ll make an investment decision. You’ll have control over your investment. As we said above, self-directed investors use online trading platforms, from websites or apps. That is a very convenient strategy because the provider will often offer you researching tools, stock quotes, interactive charts, and other important trading data. For example, you’ll have an opportunity to look at how your investment is performing in real-time. 

    Disadvantages of self-directed investing

    But there are some disadvantages also. The first one is that you have to do everything yourself. In self-directed investing the whole process is done by yourself. Research, picking the stock you want to buy or sell, you have to monitor your portfolio in person, to decide when to buy or sell. To aid this process, self-directed investors diversify investments. It is a good strategy that allows them to follow investments especially when the markets are volatile. 

    The additional drawback of self-directed investing is the possibility of overtrading. Online trading offers you to trade easy and quick, but it is a double-edged sword. If you’re not disciplined enough you may take too much risk and it will cost you additional fees. Additional fees could and will reduce your returns. Also, you can make some unexpected mistakes due to the fact that trading platforms operate so quickly. You’ll need to understand the platform you’re trading with, in detail. This is necessary to avoid buying and selling stocks at prices you didn’t want, particularly when the prices are changing fast and markets are extremely volatile.

    How to become a successful DIY investor?

    Set the orders

    There are some tricks of the trade very helpful in self-directed investing. Keep in mind you can set more than one type of order. When you want to enter your stock order it is a smart decision to set the limit orders. Meaning, you’ll have to establish the minimum stock price at which you want to sell and the maximum stock price at which you’re willing to pay when buying a stock. Also, set a market order. That will provide you to get the best price no matter if you want to sell or buy the stock, but the best price possible at the moment the market receives your order. For example, if you trade while the market is closed, you’ll receive the market price on the first following trading day. However, you have to be careful with market orders. That price could be lower, at least it can vary, from the closing price on the prior trading day. Nevertheless, market orders are the fastest way to execute your order while limit orders will provide you more control over your stock’s price.

    Cyber awareness

    Self-directed investing is commonly done through trading platforms as we mentioned. Hence, look at these trades as any other online transaction. You must have cyber awareness since safety is the main thing to think about in investing. Never place your trade by using some public wi-fi, keep your sensitive data, such as banking data, secure. Here are some tips on how to have safe clicking.

    Having a strong password is MUST, never use the same one for different sites. You know what an address bar is, right? Keep attention if it hasn’t a lock symbol. Well, it’s better to avoid such websites. Find a trading platform provider that will never ask to disclose your personal information or credentials in an email. The trusty provider will allow you to send inquiries through a secure message from your account’s homepage for self-directed investing.

    Choose your stocks without emotions

    If you want to put your money into companies and investments you “love” keep in mind it is so easy getting caught up in the hype of the cool investments that could generate great returns. Yes, we know that some of you did exactly that. It’s so easy to make a mistake if you put your money into companies that are currently popular and favored.  Avoid investing in such “frenzy” companies. Hot stocks are so seductive but they could last as long as a shooting star, for a few seconds before disappearing! Think twice if it is a good choice for you.

    Recognize your goals in investing

    Goals are an extremely important part of investing. You have to analyze them and come back to them from time to time and see if you stick to them. We all are going through different stages during our lives. Some major life changes might influence our investing goals. Since we are talking about self-directed investing you’re a lonely rider. There is no advisor to tell you what to do. So, it’s very important to reconsider investing goals from time to time. Your investment portfolio has to be aligned with your goals no matter what kind of investment horizon you have, short- term or long-term. Also, examine your risk tolerance, again and again. As times go by it might be changed so adjust your investment portfolio according to new risk tolerance. Maybe you should be less in stock, more in bonds, or vice versa. That’s up to you. Maybe you would like one of the lazy portfolios now, who knows?

    What investment vehicle is best for self-directed investing?

    First of all, there is no such thing as “the best investment vehicle” for self-directed investing. That depends on you as an investor and your goals. You can choose stocks, bonds, ETFs, mutual funds, whatever you like, and trade in the markets.

    But, selecting the right investment must be made carefully. Ask yourself what is your goal with this particular investment. Further, how it will influence your other investments in the portfolio. Be careful, you are managing your investments on your own. But relax, in online investing, you have many tools available. At your disposal are many advanced tools that may help you to select the best investment for your goals. 

    Does it matter in which sector you invest?

    This is a more serious question and you’ll need more work and researching. Some sectors may be more sensitive to specific economic circumstances or have poor performances, but others can be fantastic over certain periods. Guess! In online investing, self-directed investing, you have tools that will help you to decide which sector to choose. It is the same as picking the stock. That’s the beauty of online investing. Actually, you’re not alone but all decisions you make are done on your own.

    Use margin account smart  

    Every single investor or trader will request a margin account at some point to enhance chances to increase returns. If your investment is leveraged you’re able to buy more shares. Leverage is the process of borrowing money from a broker, against the investments in your account. When the market is going in your direction you’ll generate larger returns. Remember, you’ll have to pay back the money borrowed, plus interest but the rest is your profit if any. Yes, that’s the problem. If your investment pays not, you still have the obligation to pay back the borrowed money with interest. Hence, using leverage or margin accounts could increase returns, but also could enlarge the losses.

    Bottom line

    The success of self-directed investing heavily depends on your strategy. Your strategy is your best friend in investing. A friend that will give you a hand and lead you to reach your investing goals. You can choose among many strategies or create your own if you find that one strategy may not work for you. Investing is individual, so you have to trust your strategy. It must help you reach your investing goals. Which other purposes does it have? 

    You’ll decide if self-directed investing is suitable for you. No one else. And you’ll do it based on your risk tolerance and investing goals. We are here to point some other essential principles that can help keep you on track. Nothing else.

  • Pure Play Method In Stock Investing

    Pure Play Method In Stock Investing

    Pure Play Method In Stock Investing
    Pure play method represents an approach practiced to estimate the beta coefficient of a company whose stock is not publicly traded. 

    What is a Pure Play method in investing? Have you ever heard about this? How do you estimate the companies when you want to invest your money in different stocks? What tools do you use? Do you make your investment decisions by looking at cash flow, dividends, the strength of the company? What are your criteria? Maybe it is easier for you to estimate the company that produces only one single product. If you do the latter mentioned, you already know what is a Pure Play method in investing. But do you know all Pure Play’s performances and risks?

    Before we explain them to you we’ll explain what is a Pure Play method.

    What is a Pure Play method?

    Investors use this method when estimating the beta coefficient of the company whose stock isn’t publicly traded.  

    A Pure Play company is focused on one type of product. It is different from the companies that are conglomerates, offering many products. Pure Plays are easier for investors to analyze. When investing in Pure Plays you’ll have maximum exposure to a distinct market part.  For example, if you want exposure to car makers stocks you might prefer buying Tesla stock. As compared to Yamaha Motor Co.which is engaged not only in making cars but also in many other industries. This company is producing motorcycles, boats, guitars, outboard motors, etc.

    A Pure Play method is a procedure that investors use to estimate the beta of such a company. But the Pure Play method is also a way to discover the cost of capital for a product or project that is different from the company’s principal business. 

    Many companies are pure plays. They are selling or producing one singular kind of product. So, you can understand that this kind of investing can be very risky because if interest in this particular product or service declines even a bit, such a company will be affected negatively. A Pure Play method is helpful to estimate a project’s beta or the risk of a project. For example, a Pure Play company could use this method to identify publically traded companies that are involved in projects similar to the one they want to develop. 

    Use it to estimate the cost of equity capital of a private company

    This involves examining the beta coefficient.

    When evaluating a private company’s equity beta coefficient, you’ll need a beta coefficient of a public company. The latter you can calculate when regressing the return on public company’s stock on the appropriate stock index. The resulting calculation is then applied to return the beta coefficient of a private company. Here is how to do that. Let’s mark the private company as P and public company as PB.

    In our equitation, we’ll mark debt to equity ratios as DEB and DEPB for the private and public company respectively.

    Unlevered Beta of PB = Equity Beta of PB / (1 + DEPB × (1 − Tax RatePB))

    Equity Beta P = Unlevered Beta of PB × (1 + DEP × (1 − Tax rate))

    Advantages and disadvantages of the Pure Play method 

    The stock of Pure play company is different than stocks of diversified ones. They are popular among investors who want to make a particular trade on particular products. In short, they are not interested in investing in a company that has different business lines. They found reasons to invest in Pure Play stocks and we’ll try to explain them. Firstly, these stocks are easier to analyze. Also, when you have to analyze a company with diversified businesses and several sources of income, you might have a problem evaluating the strength of the company. Its income is generated from many products, with different profit margins, and could be exposed to different growth benchmarks. 

    Further, despite the fact that investing in Pure Plays can be riskier, they can be a great opportunity for very high rewards when doing well. Should we mention Tesla? But wait! Pure Play method in investing has its disadvantages too. These companies are not diversified. What will happen if difficult times appear? When the company is focused on just one product and that one isn’t able to generate revenue, the stock price of such a company will drop, sometimes sharply. These companies don’t have other products to balance the poor production. That’s a great problem for investors.

    The risk of Pure Play method in investing

    First of all, the risk comes from some conditions that may affect the company badly. However, that isn’t the only reason. The additional risk might come from the type of investing style. Here is one example. Let’s assume the growth investors favor some Pure Play company. In periods of the bull market the company will perform well. Even more, its stock could easily outperform the market. But what will happen when the bear market appears? Well, we know that during the bear markets the value investing is a more successful strategy. The consequence is that the Pure Play method will have poor results if growth investors stick with it. 

    These companies depend on one product or one investing strategy. So they are often followed by higher risk. They are completely the opposite of diversified. However, the higher risk gives greater potential for higher profits. When circumstances are in their favor, Pure Play stocks can grow tremendously since the company is focused on a sole product with full strength. 

    Reasons to use it in investing

    We’ve been writing so many times about the importance of diversification in investing. Also, we pointed out that investing in a single company isn’t always the smartest idea. But when it comes to the Pure Play method in investing, things are a bit different. 

    There are really a few good reasons to invest in pure plays. Pure Play company is considerably easier to analyze. You have, as an investor, only one type of product or business line to analyze. Moreover, it is easier to understand the cash flow and revenue of one company than it is a case with several. Further, you can with a better result predict how it will perform in the future. 

    Pure play can be a very attractive investment. These companies work a strictly defined niche market. They are specialized for a particular one. That is a quality per se and could be extremely beneficial for investors. 

    Bottom line

    Pure play is a method used in stock trading and investing. It is all about companies with a focus on a specialized and particular product or service. The “Pure Play method” is also helpful when estimating a project’s beta, or the risk of a project.

  • When Personal Loans Are Bad For You?

    When Personal Loans Are Bad For You?

    When Personal Loans Are Bad For You?
    Personal loans are excellent products when you need cash instantly but sometimes it isn’t the best choice. 

    By Guy Avtalyon

    You don’t think that such a situation is possible when personal loans are bad? Well, they can be. It is an old wisdom that banks approve loans only to people who do not need them. It is wisdom older than money-lending is as a business and a very wrong one. Banks approve loans only to people and companies they judge to be able to return them. But every person should also judge the fact that if you are able to return a loan doesn’t necessarily mean you should get one. 

    What Are Personal Loans?

    In short, a personal loan is an installment loan that is not with a specific purpose. They are almost always unsecured, which means that when you take it you do not use some collateral against it. In other words, you do not guarantee with some property or belonging that it will be returned in full. Their term usually runs between 12 and 84 months, depending on the lender, and can usually be worth between $1,500 and $100,000. As with all other forms of borrowing, there is some annualized interest rate you need to pay on top of the borrowed amount. How much it is, depends mostly on the lender’s judgment of your creditworthiness. In other words, the lender’s opinion how likely you are to return it in full. If the lender sees you as very likely to pay it back you will get offered very low interest-rates and vice versa.

    What Are Personal Loans For?

    Personal loans are most often used in cases of unplanned need for cash and for debt consolidation. In life, things happen, and people find themself in a financial emergency. In a situation when you need cash injection very quickly they can be an excellent solution. Also, over the years the interest of various credit cards and credit lines can accumulate, and you can stumble upon a personal loan offer with much smaller interest rates. So, it may be a prudent move to consolidate all of your debts into one, and also decrease both your monthly payment rate and annual interest rate.

    When Personal Loans Are Bad?

    Personal loans are very versatile and can come very handy in some situations. But in some situations, they can be a bad solution, or even create more problems for you. So, here is when personal loans are bad for everyone. 

    Spending on wants instead of needs

    Maslow’s Theory of Human Motivation concludes that, for good mental health, a person first must satisfy needs and then wants. For your personal financial health, the same principle applies. Spending money on vacations, gadgets, and other unessential things while you have other essential things to worry about is not a smart thing to do. Taking a personal loan for such wants even doubly so. Pampering to oneself is good for any person, but it must not be done at the expense. And a piece of sound advice for borrowing is that the debt for something should never outlive that very thing.

    They are unfavorable

    Another situation when personal loans are bad.

    Because personal loans are usually unsecured, they can come with some financial drawbacks. First, and the most obvious, one is the high interest. Generally speaking, it can range from 5% to 35% per year, depending on the lender and your personal creditworthiness. Thus it is very important that you shop for the best possible rates, but also take into consideration some other financing offers, such as home equity credit lines, that could be more affordable for you.

    Many lenders do charge so-called “prepayment penalties”. It’s a fee you can be charged for paying off your loan earlier. And if you feel confident that at some point in the future you might be able and willing to pay it off, you must be careful to take into account this potential fee. Especially if you are comparing various offers. And to be aware that the higher the loaned amount, the higher this fee can be. And sometimes it can be a considerable amount.

    Some lenders also charge a so-called “origination fee”, which can be between 1% and 6%. It is often either calculated into monthly payments or take out of the loan amount. But either way, it increases your expenses of borrowing. And for short term loans, it can be a substantial increase compared to some other options.

    Fixed monthly payments and term do not suit you

    For various people, for various reasons, fixed monthly payments can be unfavorable. If you have incomes that vary from month to month, or you are used to monthly minimum fees, the fixed monthly rate might be a financial pitfall of a sort for you. If you miss a payment or two, the lender could sue you for the outstanding debt. That could bring considerable financial hardship. The main characteristic of personal loans is the fixed monthly rate, and you must keep this in mind when shopping for borrowing options. If you are not 100% certain that through the whole term of the loan you can pay that amount, it might not be the best option for you.

    Also, the term of the loan is fixed. And this inflexibility can be a hurdle if you unexpectedly find yourself in a bit of financial hardship. You will not be able to decrease the monthly rate by extending the term of the loan. This is exactly the situation when personal loans are bad for you.

    Investing

    Personal loans should never be used for investments. Borrowing money is not a sound idea, because no investment is a sure thing. No matter how safe investment might seem, things can go south in a blink of an eye. And any investment is exposing yourself to financial losses. Borrowing for such is just a doubling of financial risk. You should always invest only money you can afford to lose.

    You are not disciplined

    Personal loans are often used for consolidating existing debts. Various credit card loans and balances can seemingly be wiped off with a single personal loan. But they don’t actually disappear. They are still there but in the form of a single consolidated monthly payment. And if you are unable to prevent yourself from again racking up unsustainable credit card balances, it might be a more sound decision to continue to limp along the way. But first and foremost, you should be honest with yourself. If the credit card is burning a hole in your pocket, you should think carefully about what is better for you in the long run, before your debts spiral out of control.

    Bottom line

    Personal loans are an excellent option when you need cash and need it quickly. But in some situations, they are not the best option available for you or your needs. There could be some more affordable options and even some which give you more flexibility to cover your needs.