Author: Editor

  • Cyclical Or Non-Cyclical Stocks – Where To Invest During A Recession

    Cyclical Or Non-Cyclical Stocks – Where To Invest During A Recession

    Cyclical Or Non-Cyclical Stocks - Where To Invest During A Recession
    When we ask ourselves what is a better choice during a recession, cyclical or non-cyclical stocks we have to know, as first, the differences between them.

    A recession is not the time to make an experiment with risks on your investments, so why dilemma cyclical or non-cyclical stocks? Well, it isn’t a dilemma for most people. The crucial aspect of an investment strategy during the recession should be to play it safe. This means no one should take the big risks at uncertain times but should find the companies with stable cash flow and low debt. The terms cyclical or non-cyclical show how much a share price is related to the changes in the economy. You, as an investor, cannot control the cycles of the economy, but you can adjust your investment strategy but you first have to understand how the whole economy is connected to your investments.

    What are cyclical stocks?

    Cyclical stocks have a straight correlation to the economy. 

    Cyclical stocks represent companies that are very favorable during the times when the economy is doing well. For example, carmakers, restaurants, branded wear makers, travel, construction are that kind of companies. But when times are difficult almost everyone will cut spendings on these products and services. When people stop buying these products, the companies’ revenues will fall for sure. Also, their stock price will fall. If there is a long downturn in the economy, the company will bankrupt or go out of the business.

    Having this in mind, you should avoid cyclical stocks when the uncertainty is present in the market or in the economy. For example, during uncertain times such as a recession, you shouldn’t invest in companies that are extremely leveraged or unsafe.

    Cyclical goods are not essential things. You are spending money on them less frequently. Your spendings are maybe determined by the season of the year, the current financial situation, and many other factors that can determine when and why you would buy these products and services. They are in the first place on your stop-to-buy list. 

    The cyclical stock’s prices are affected by economic cycles, for example, recession and recovery. Hence, they will grow and drop depending on shifts in the economic cycle. Very often you can predict these changes and as a responsible investor you will sell or buy the cyclical stock. For instance, furniture manufactures. In periods when the economy is doing well, everyone would like to remodel the house and change the furniture. But when a downturn is in the economy, who will care about buying the new furniture? The buying will drop, hence the stock price will drop along with lower demand.

    To know what stock to choose, cyclical or non-cyclical stocks, we also have to know how the non-cyclical stocks perform.

    What are non-cyclical stocks?

    Non-cyclical stocks generally outperform the market when economic growth decreases. They are profitable no matter what are the trends in the economy. These companies are producing services and goods that we’ll always need. For example, utilities: water, electricity, gas. That is something we will need in any economic condition. These stocks are also called defensive stocks. The reason behind – they can be used to defend the investment portfolio against the consequences of economic downturns. It is always good to invest in these stocks when bad days come. In case of a recession they are safe-haven investments. 

    For example, toothpaste, shampoo, soap, and detergent. How can we reduce them? There is no way. Who can wait a year or two to wash the dishes? 

    We already mentioned utilities. These companies are a great example of non-cyclical stocks. We need energy, electricity, water for us and our families. Because of that utility companies increase and do not slip dramatically in any economic circumstances. 

    The disadvantage of these stocks is that they will never produce huge returns even when the economy is expanding and growing. They are safe investments but their price will never skyrocket or it could happen but rare.

    Investing in non-cyclical stocks is a good strategy to avoid losses during the recession. So, cyclical or non-cyclical stocks, where to invest during a recession?

    Investment strategy with a mix of stocks

    You have several ways to add both cyclical or non-cyclical stocks to your investment portfolio. That can be a mix of bonds, cash, and stocks, but also the mix of growth stocks and value stocks. Another strategy is to add cyclical and non-cyclical stocks to offset changing business cycles. 

    When the cyclical stock drops in value you’ll have a great defense in non-cyclical stocks. During a downturn economy, cyclical stocks are less valuable and their price starts to move very fast. The truth is that it is moving up and down almost at the same speed and dramatically, within the economic cycle. Non-cyclical stocks never move that fast and radical. We described the fundamental differences but to repeat, non-cyclical stocks are practically immune to economic changes. That is their great advantage. Returns are something else. They are not huge, but these stocks will keep your nose above the water during the recession.  

    When the markets are growing, a good investment strategy could be to buy cyclical stocks at the beginning of the economic increase. But when you have some assumptions or signals that the recession is possible to come, sell them just before it happens. Sadly, trying to predict a future recession is a lost battle. That is the reason to hold a mix of cyclical and non-cyclical stocks in your portfolio. Why should we even ask or have a dilemma with cyclical or non-cyclical stocks when we should hold them both in our portfolios.

    That way,  we can provide a well-position to benefit when the economy is expanding. But, at the same time, we will have a shield when the economy takes a turn for the worse.

    Where to find cyclical stocks?

    Since it isn’t possible to name every cyclical industry (there is not enough room here) we can give you some clues where to look at.

    For example, hotels, restaurants, carmakers, airlines, banks. They all have something in common. In periods of strong economies, they are all expanding. People are traveling, need a place for vacations, they want to stay at the hotels, they would like to buy a new car, or rather want to eat in restaurants than at their homes. Also, some high-tech stocks can be cyclical. People really want them in prosperous times. Companies tend to invest money in developing new technology, new products. Startups are growing, also. 

    Not to forget banks. They are also a good example of cyclical stocks during the growing economy.

    Where to find non-cyclical stocks?

    These defensive stocks can be found among retailers, utilities. Consumer staples stocks are one of them, also. These stocks have modest growth but they are considered safe investments, that provide stable profits, and are defensive, and dividend-paying stocks. The most important role is that they can outperform the down markets.

    These non-cycling companies work in a strong sector,  their products are always in demand. We cannot cut our needs for them. They are able to survive great challenges and economic cycles. That’s why they are so much attractive especially during the recession if you add them as defensive stocks to your portfolio.

    Strategies to choose the stocks

    It is the same as any investing strategy. You have two ways: the top-down or the bottom-up strategy.

    The top-down strategy means to observe the economy as a mass and select stocks that will perform well during specific economic conditions. When applying this strategy you must be sure you are well informed about the macroeconomy, that you understand different sectors. You have to recognize how a particular industry will perform during the various business cycles, also when the stock price will rise when it will drop.

    For both cyclical or non-cyclical stocks, this top-down strategy is the most suitable.

    The bottom-up strategy means you have to look at the stock alone and to decide what stock to buy or sell.

    This strategy is a good one when choosing cyclical or non-cyclical stocks only when they are in correlation, meaning the stocks are moving synchronized. For example, the jewelry manufacturer will have a decline in the value during the recession. People will stop buying jewelry. But at the same time, the stock of the electricity provider will perform well. So, keep in mind that you have to have both in your portfolio. 

    Bottom line

    There is no need to ask yourselves what stocks to add to your portfolio, cyclical or non-cyclical stocks. You must hold both of them if you want huge returns and protection during market downturns. 

    During economic growth cyclical stocks will increase more. Hence, during recessions, people will decrease their spending and will squeeze the budgets. They will continue to buy and spend money only on the goods they really need. So, the companies that have these products will bloom.

  • The Benefits of Online Borrowing

    The Benefits of Online Borrowing

    The Benefits of Online Borrowing
    When examining for online loans, you’ll find lots of offers for loans that are basically payday loans. Avoid them.

    By Guy Avtalyon

    Online banking is broadly used and more and more people are accepting online loans as safe and convenient with the understanding that the benefits of online borrowing are numerous. Some lenders are quite good and trusty. The procedure is similar to getting a loan wherever but more comfortable. The whole process will take just a few minutes after you provide all the info that the lender may ask. Usually, it is your address and social security number. Some lenders may ask for more information about you, for example, what is your job, position, expenses, income. You can find a lot of online lenders out there and you can easily pick some the most suitable for you since online loans are safe and convenient. 

    The benefits of online borrowing 

    The last generation of online lenders is dedicated to making borrowing easy and fast. One of the benefits of online borrowing is that you can avoid the whole long-lasting process with traditional lenders and banks. In several minutes you’ll get the information about whether you get approved or not for the loan. That’s a very important feature when you are in an urge to get cash quickly. 

    Also, one of the benefits of online borrowing is that the lender will tell you how much exactly you can borrow, everything about your payments, etc. That is something that most traditional banks can’t do even if you apply online. 

    Banks will need time to give you the answer, that has to pass several reviews and some internal procedures. So if you are in a hurry to get the cash they might not be so suitable for everyone. Also, one of the very important things, but we rarely think about it when we are in a rush – the interest rates. Online lenders will offer lower interest rates but also, smaller fees if there is any. That’s because online lenders don’t have some expenses that traditional banks have.

    Better approval chances

    What are the additional benefits of online borrowing, also? For example, if you have bad credit and traditional lenders will pay more attention to it. If so, you’ll have better approval chances with online lenders. They will approve a loan even if your credit score is lower because they’ll take into consideration some other criteria when deciding to give you a loan. For instance, how regularly you are paying utilities, what is the ratio of debt to income, etc. 

    As it is with most of the personal loans, online loans are unsecured. That can be one of the most important benefits of online borrowing. Let’s say you fail to repay this kind of loan, it may happen due to many reasons and not always intentionally. In such a case your credit score will fall for sure, but any of your assets won’t be taken from you and you’ll not experience the foreclosure.

    The internet makes it easier

    Well, applying for getting an online loan isn’t quite the same as you are ordering food online. Some risks are higher when you apply for an online loan. When applying for it, they will ask you for sensitive personal information. The problem is that you have to provide them to someone you don’t know and can’t see but you have to talk about a nearly large amount of money. Anyway, a large amount for your criteria. Yes, the internet makes it easier and the benefits of online borrowing are obvious for you but still you have to know who you’re dealing with. So you have to be sure you’re dealing with a legitimate lender. 

    The risks when borrowing money online

    The first is that you might have contact with the fake lenders and you could lose your money without getting a loan. We are pretty sure you have been reading about these scammers that leave people without money. Also, some of them will take from you more in fees and interest even if they promised it will be less.

    Maybe one of the most dangerous risks is identity theft. It can happen that you’re dealing with a website that doesn’t protect your personal info properly. Maybe they don’t want to steal your identity but your personal information may be available to the third party who can misuse your security number, address, or similar.

    How to pick the right lender with the benefits of online borrowing

    By picking a legitimate and trustworthy lender you’ll avoid a lot of problems. You should research lenders. Read both positive and negative analyses. The internet is great but at the same time a strange thing. Not all the truth is out there, so you’ll have to make the selection to whom to trust. The best source is a recommendation from someone you can trust. Never base your opinion on reviews written by employees. They are paid to write the best or some of them lost the job there and now are pissed-off. So, their reviews can’t be honest. Avoid that. 

    Always check for complaints with the U.S. Consumer Financial Protection Bureau (CFPB). CFPB holds a database of complaints and responses from the lenders. The better your source, the less likely you are to find yourself in a problem and you’ll be able to enjoy the benefits of online borrowing.

    Online lenders are rising

    About a month ago we read an article in The Guardian. Excellent as always and very dedicated to this pandemic situation and the role of online lenders. We fully recommend reading it HERE.

    But in short, the article is about online lending and how online lenders plan to satisfy customers’ requirements during and after the newest COVID-19 pandemic. This is an important issue especially after big banks “have dropped the ball.”

    The characteristics of online lenders

    Online lenders are non-traditional and unconventional. They will rarely have some other financial products except loans. So we can say they are focused on one or two types of loans. Online lenders will not offer credit cards, savings accounts, or checking. 

    In their early days, lenders were peer-to-peer services. Their business models were alike to online shopping. Everyone could apply for a loan and anybody could offer to give a loan. The lenders would choose the interest rate that they expected to get. The competition was great so the loans were given at the lowest interest rates. 

    Today, the system has changed and become more complicated. If you really want to avoid banks, check deeply because some of the biggest sharks stand behind leading lenders.

    Bottom line

    The benefits of online borrowing are various. You’ll need less time to apply, you can overcome a bad credit score, the loan will be approved in a few minutes. The additional benefits of online borrowing are that you don’t need to go anywhere. You may apply from your home, your phone walking on the street or sitting in the restaurant. But, if you want to pick the best for your needs, you’ll need to shop around and search for the most suitable. While doing so, avoid scammers even if you think they have the best offer and cannot steal your personal data, be careful. Also, avoid payday loans. If you are not sure which online lender to choose maybe you should try with some bank. You will not get the best option but the safest for sure.

  • Shapes of Recession and Recovery – Recognize them

    Shapes of Recession and Recovery – Recognize them

    Shapes of Recession and Recovery How to Recognize them?
    Recession and recovery come in different shapes, some are severe, but some are easier to survive. The examples below aren’t about the current economic situation, they are an explanation of forms in the financial charts.

    By Gorica Gligorijevic

    What are the shapes of the recession and recovery? Since no one can predict when and how the recession will occur it is important to know what can indicate it is coming. Economists have various metrics to conclude whether a recession is expected soon or it is already here. So, we can say there are several indicators that, when they happen together, might indicate that recession is possible. The same comes to the recovery since these graphs and charts can illustrate both the recession and the recovery. That is normal because each recession is followed by the recovery.

    For example, some indicators such as unemployment rates can confirm changes. Also, drops in the stock markets, fewer house sellings, or a drop in GDP may indicate that recession is going to appear.

    But, what are the shapes of the recession and recovery? To explain this. Shapes of the recession and recovery are a concept that economists use to define different kinds of recessions and recovery. The most common shapes are U-shape, V-shape, W-shape, and L-shape.

    Let’s explain each of them.

    What are the V-Shapes of recession and recovery?

    V-shapes of recession and recovery are one of the forms a recession and recovery graph could take. These graphs are economic metrics that measure the strength of the economy, meaning employment rates, GDP, and industrial production.

    When we notice these V-shapes in the graphs we know that the economy has a sharp decline, but the good news is detected too. Analysts know that after that sharp decline a sharp and quick recovery will come. Moreover, when this kind of shape occurs, the recovery will be strong. The consumers’ demand will increase, people will spend more, so the overall economy will be driven by those shifts.

    Let’s examine one example. It was 1953 in the US. The time of recession occurred after great progress in the early 1950s. But economists expected inflation and the Federal Reserve boosted interest rates. This action turned the economy into a recession. In the 3rd quarter of 1953 growth started to slow but one year later it was back at a speed a lot above the trend.
    Hence, the chart for this type of recession and recovery represents a V-shape.

    U-shape of the recession and recovery

    U shapes of the recession and recovery mean that a recession starts with a gradual drop but then rests at that seat for a long time before bounces and moves higher again. This type of economic recession mirrors a U shape in the graphs. A U-shaped recession and recovery express the shape of the graph of the same financial measures, as we mentioned above, for example, employment, GDP, and industrial production. 

    The U shapes of recession and recovery are similar to V shapes but the economy doesn’t have a sharp rebounding. When the economy has a decline in all metrics and spends more time seating at the bottom it is recognized as a U-shaped recession and recovery. Hence, in U-shaped, the economy will experience stagnation. When the economy enters this kind of recession the sides are glazed and slipping is possible. The bottom is like a wet bathtub and the economy could stay in that bathtub for a long time.

    For example, the recession from 1971 to 1978, during the seven years, with a deep bottom from 1973 to 1975, unemployment and inflation were high, growth was very low. The economy started to climb back in 1975 and it took 2 years until it was fully recovered. That is a U-shaped recession.

    W-shaped recession and recovery

    A W-shape of recession and recovery points to an economic cycle of both that mirrors the letter W in charts. All metrics we already mentioned are covered in the charts.
    This kind of shape means a sharp decline in all these metrics after which the sharp rise occurs, and a sharp decline again ending with rising. In the middle of the chart, the central part of the W letter, the bear market rally may occur. Also, recovery can happen but it could last short and might be choked by the further financial crisis. This W-shaped recession is also called a double-dip recession.

    It is characterized by falling into a recession, short recovery with some modest growth for a short time, followed by another fall and eventually recovering. This pattern matches the letter W. The early 1980s recession in the US is a great example of a W-shaped recession. In January 1980 the US economy fell into a recession that persisted to November 1982. In less than two years there were 2 declines and 2 recoveries before the US economy entered the decade of robust growth. 

    The other good example of W-shape is the European debt crisis from 2011 to 2013. Uniting several uncertain circumstances caused this recession, for example, the global economy was very weak after the Great Recession ended two years earlier. The prices of energy were high, investments low, interest rates were high, consumer spending was also low. This recession hit the majority of Eurozone countries.

    L-shaped recession  

    L-shapes of recession and recovery are recognized by a slow rate of recovery. It occurs when we have a sharp decline in the economy but without recovering with the same strength. The economic growth is stagnating, unemployment is rising. When looking at the charts, all indicators form the shape of the letter L.

    In an L-shaped period of economy, there is an abrupt decline made by falling economic growth. In the chart, this represents the line with a sharp decline without the visible possibility of a return to the trend line growth. It is accompanied by a shallow upward incline which means that a long period of stagnation in economic growth is present. In such a situation the recovery can take several years to reach a higher level. 

    The main problem with these kinds of shapes of recession and recovery is that no one can know when the economy will rebound, if ever. Economists consider this shape of recession as the most severe since during these periods the overall underperformance is present. The collapse of the economy,  lack of progress back to full employment after a recession, are the main characteristics of this period. Workers might stay unemployed for a long time or forever, the economy is unable to recover and provide them new jobs, the whole industry could be inactive or underused for a long time. 

    What shape of the recession will be due to the Coronavirus pandemic? 

    Interestingly, almost all economists predict a recession to come. And it is possible to happen because millions of people lost their jobs, markets have been down, factories all over the world have closed. But how long will it last? The answer to this question we can get from the charts but not yet. We can complete the charts only after the end of the economic changes. Will it be bad? No one knows how bad it could be. This pandemic caused a lot of problems, from healthcare and the economy at the whole to the kindergartens. 

    The true answer lies in one of these four letters: V, U, W, and L. Which one will appear to the charts no one knows, it’s too early to say because there is no clear shape yet. For now, all we have is a declining line in the graphs. There are several possible scenarios of how it will end. But there is no dilemma will the recession happens. It is obvious even for the most optimistic people.
    We aim to show you those four letters and what they could mean in case of an economic recovery with hope that we’ll never see a letter L.

    As we can see, the shapes of the recession and recovery could appear in four forms in the charts. What isn’t visible in them are our lives, our feelings, fears, and worries. But it’s individual and each of us has to find an individual way to fight with this uncertainty. Also, that is not the subject of this article.
    The main purpose of this article is to introduce the shapes of recession and recovery and how you can find them in the charts. And, keep in mind, every single recession is followed by the recovery. That’s good to know.

  • Best Lot Size In Forex – Which to Choose?

    Best Lot Size In Forex – Which to Choose?

    Best lot size in Forex - Which to choose?
    The lot size matters because it has a great impact on how much market movement will change your account.

    To know what is the best lot size in Forex we have to know what lot size is. Particularly if you just stepped to this world of currency trading. The lot represents the smallest trade size you can set on the forex market. Keep in mind that the lot size will reflect how much risk you are willing to take.

    Without a doubt, the forex market can produce unbelievable growth. For beginner traders, it sounds promising but if you don’t understand how the forex market works, your chances to have success are close to zero. Everyone would like to know what is the best lot size in Forex to start the trading. First of all, you have to know that your account must be kept safe. What does it mean?

    If you choose the wrong lot size and have several losing trades in a row, which could happen even for the experienced traders, your account is at risk. It can be closed and deleted. For that not to happen, you’ll have to choose the best lot size in Forex. At least the right one. 

    Everyone will tell you to choose the best lot size, but how to do that? For example, you can use risk management as a great tool. You have to decide what amount you are prepared to risk without consequences. The same comes both for your demo trading account and for your real trades. 

    The lot size affects how much a market move changes your accounts. For example, a 100-pip move on a small trade is not the same as a 100-pip move on a large trade. 

    What is the lot size in Forex?

    Forex is traded in precise amounts that are called lots. The Standard size for a lot is 100.000 units of the base currency. However, there are other lot sizes such as Mini lot size with 10.000 units, Mikro lot size with 1.000 units, and Nano lot size with 100 units. A lot represents the predetermined number of currency units you can buy or sell when entering the forex trade. 

    The standard lot in forex trading represents 100.000 units of the account currency. For example, if you are trading a dollar, this means your trade value is $100.000. Since the average pip value for the standard lot is roughly $10, this means every 10 pip move in the forex market will produce you $100 of profit or loss. Experts recommend trading this lot size only if your account is filled with at least $25.000.

    As we said, the mini lot size represents 10.000 units based on your account currency. If your account is in dollars, the average pip will be about $1. Do you think it is modest? Well, the forex market can move for 100 pips per day and you can profit or lose $100 in your trading in an hour or two. Experts’ recommendation is to trade a mini lot size only if you have at least $2.000 on your trading account. For beginners, they have a suggestion, also: Avoid this lot size.

    The micro lot size was the smallest lot size for a long time. It represents 1.000 units with a pip value of 10 cents. Experts highly suggest to the beginners to trade forex in this lot size. The suggested account value for trading in micro lot size is from $200 to $500, which varies depending on how many pairs you want to trade. 

    Several years ago, arrived the nano lot size with its 100 units of currency and an average pip value of 1cent. Beginners may start trading this lot size at just $25. You cannot find a lot of brokers that will offer you to trade this nano lot size but it can be useful to figure out how your new trading strategy is working, so you can use this lot size for testing it.

    How to choose the best lot size for your forex trading?

    One of the best criteria is to determine your risk. You can calculate it in percentages with regard to the rule of 1%. This means in case you have to close out your trade for a loss but your risk has to be less than 1% of your total account. For example, if you have an account with $5.000, you shouldn’t risk losing more than $50 in any position. If your limit risk is 0,5% then you can lose $25 in any position.

    Trade size is an important factor since larger lots boost profits and losses per pip. To identify how big your position size should be, use calculation cost per pip. Always calculate it.

    How to calculate the trade size?

    As with trading stocks, for every open position, you’ll need a stop-loss to set. In other words, you have to figure out where you want to exit the trade if the market starts to move against you. 

    There are numerous ways to set stops. You can use the main lines of support and resistance to place the order. For example, price action, , Fibonacci, pivots, can help to find these values. The point is to count the number of pips from your open price to your stop-loss order.  

    The last action in discovering the best lot size is to define the pip cost for your trade. Pip cost means how much you will lose, or gain per pip. When your lot size increases your pip cost will do the same and vice versa. So, how big should trade size be?

    Let’s calculate the perfect cost per pip using the 1% risk rule, a $5.000 account, and a stop-loss 10 pips away to find the best lot size in Forex trading. Let’s do some math.

    Starting balance = $5.000
    1% risk x 0,1
    Trade risk is $50
    Trade risk : Stop-loss in pips = $50 : 10 = $5
    5 : 0,0001=50.000

    This means you can trade one lot of 50.000 for $5 per pip cost.

    Determine position size when trading Forex

    In Forex trading, the position size comes before determining entry or exit levels. That is to say, it is more important. What does it mean? Despite the prevalent thinking that the most important thing in trading is to have the best possible strategy, in Forex trading position size is more important. Your position size shouldn’t be too small or too big if you want to avoid taking too much risk. The same comes with taking a too small risk. Taking too much risk could lead you to drain your account to zero and quickly.

    The position size is defined by the number of lots and the size of the lot you buy or sell in Forex trading. The risk you are taking consists of two parts: account risk and trade risk. You’ll have to fit these parts if you want an excellent position size. Your position size doesn’t depend on the market condition or your setups. It even doesn’t depend on your strategy. It is all about account risk limit per trade, pip risk per trade, and pip value.

    You can calculate it. Here is the formula

    the amount at risk = pips at risk x pip value x lots traded 

    The number of lots traded represents your position size.
    Let’s imagine you have a $5,000 account and you risk 1% of your account on any trade. Your amount at risk is $50. If you’re trading the EUR/USD currency pair, you may decide to buy at 1.2051 and place a stop loss at 1.2041. This indicates you’re willing to put 10 pips at risk or $100.

    Let’s imagine further that you are trading in mini lots. Any pip change will have a value of $1 So, put this in the formula.

    $100 = 10 x $1 x lots traded

    Let’s divide both sides of the formula by $10, and you’ll have

    lots traded = 10

    This means you are trading 10 mini lots. But this number of lots is equal to the one standard lot, so you could trade one standard lot, right? But what if the result in this formula is, for example, 7,18? That would mean that you should trade 7 mini lots and one micro lot.

    Bottom line

    The truth is that Forex traders usually trade in mini lots or micro-lots. You might think it isn’t so sexy, but it is a more secure path. When you keep your lot size as small as possible you have more chances to play this game longer and profit. The reason behind this is that these sizes of lots represent the ideal balance between capital you invest and the risk you are willing to take. Moreover, if you use a higher lot size and have less capital on your account, it is more possible to end up with empty hands than to have any profits. In other words, you will have losing trades.

    The beginners should start to trade forex in micro-lots size or mini lot size. After they gain experience and confidence, they can pass to the next level. Also, as in any trading activity, you have to maintain balance in your trading account. One of the most important actions in trading is extremely visible here, in forex trading. The usage of stop-loss and target levels is extremely important. 

    In conclusion, the best lot size in forex trading depends on your capital, experience, goals, risk tolerance. Never risk too much, or the risk you’re not able to handle. Risk management is an essential part of any trade.

  • What Is a Good Rate of Return?

    What Is a Good Rate of Return?

    What Is a Good Rate of Return?
    The rate of return measures the profit or loss of an investment over a particular time. A good rate of return shows how smart an investor you are.

    By Guy Avtalyon

    What is a good Rate of Return is the question that many people continually asked, but it is almost impossible to get an answer until we explain what the Rate of Return is. So we have to make this clear before we answer what is a good Rate of Return. 

    A Rate of Return represents both gains and losses of your investments during a particular period. To know what is the Rate of Return on the investment we have to compare these gains or losses to the cost of our initial investment. RoR is shown in percentages of the initial investment. If the Return of investment is positive, meaning over the zero, we call it the gain. But if it is negative, in the minus area, below the zero, it represents our losses on the investment.

    In essence, RoR represents the net gain or loss and can be calculated. When we do that, we are actually looking for the percentage of which the investment was changed from the beginning until the end of a particular period of investing. 

    To know what is a good Rate of Return let’s see the formula: The formula to calculate the rate of return (RoR) is:

    Rate of Return = ((Current investment value – Initial investment value)/Initial investment value)) x 100

    Deduct the initial investment value from the current investment value, divide the result by initial value, and multiply by 100. 

    For stocks and bonds, some dividends should be added. You have to calculate the RoR for stocks a bit differently.  Suppose you bought a stock for $100 and hold them, let’s say, 5 years. After 5 years you sold them at $140. Your per share gain would be $40, but you also received dividends for that stock and it was $20 per share. So, your total gain is $60.
    The RoR for this stock is $60 per share divided by the initial cost per share which was $100 and multiplied by 100. So, the rate of return on this stock is 60%.

    What is a good Rate of Return?

    First of all, you must have a realistic expectation of return on your investment, to understand how compounding works, how to calculate it, etc. That is to say, every single percentage that increases in profit can boost your wealth every year. It is all about geometric growth.

    So, you know how to calculate the rate of return on investment, but how could you know what is a good rate of return? 

    There is one interesting rule in investing, everyone who has guts to take more risks will have higher returns. 

    Stocks are maybe the riskiest investments because you will never have guarantee the company will proceed to work or exist. It could fail quickly in an uncertain environment and leave investors with empty hands. So, as being an investor you have to protect your investments and to reduce the risks. And the best way to do so is to invest in different sectors and different asset classes. In other words, you have to diversify your portfolio. And do it over a longer period, at least five years. That will not provide you the best returns of, for example, 30% but can save you from market crashes. 

    Keep in mind, the answer to what is the good RoR depends on the market condition. What was good in one period could be a complete disaster during some other. Market standards can change and what was “good” easily can turn into “very bad.”

    For example, the S&P 500 has a 7% annual rate of return, if your investment has a 9% rate of return, it is doing better and outperforming the market. Okay, RoR of 9% maybe isn’t what you wanted but still, your head isn’t under the water.

    Remember, the rate of return can be negative also. 

    What a good RoR has to beat?

    However, if you are a more aggressive investor you would like the higher RoR. So, let’s see what is a good RoR for more aggressive investors. Let’s find the answer to this eternal question. Don’t be surprised if it is quite simple.

    A good rate of return has to beat the market, must beat inflation, taxes, and fees. But, as always, there is another point of view. What is a good rate of return depends on the investment you choose. It isn’t the same for stocks, bonds, or some other asset. Generally speaking, a good rate of return has to beat inflation at least.

    We know that the average inflation rate was about 2% per year over the past 10 years. This means that you had to earn 2% or more on your investment to keep your purchasing power and to keep the real value of your investment.
    But if you invested in bonds that have 4% annual interest, your RoR will be 2%. Can you see, you have to decrease this annual interest, and for the rate of inflation and you will not have 4%, instead you’ll earn 2% of your initial investment.

    What is a good Rate of Return for aggressive investors?

    So we come up to value investing which is the best way to make money. It is a simple “buy and sell” strategy. So, you buy a good stock at an excellent price and sell it at a profit. Simple as that. The only thing you should take care of is to figure out what is the right price of a stock, in both situations, when you buy it and when you sell it.

    Figuring out the right price for a stock requires you to know how much you want to earn when you sell it. In other words, you have to know how much you would like to earn. For example, an excellent rate of return is 15% per year. It might look like an aggressive approach, but we are talking about more active investors, right? 

    How can you achieve this?

    You’ll have to look for bargains. That will take some time until you find a good stock at a bargain, but it isn’t impossible. Let’s assume you found a stock that produces the rate of return of 15% annually. After taxes and inflation, it will be about 12%. At that rate, you’ll be able to double your purchasing power after a few years and beat the market. That’s the point, that’s your intention, of course. If we know that the lowest rate of return for the stock market is about 7%, this is a really good return.

    And as we said before, if you want a higher rate of return you must be ready to take a bigger risk. But we think that repeating average returns over a long period is a better choice. Yes, it’s possible to have the great winnings from time to time, but if you take a look at historical data and your trading journal, you’ll notice that it is followed by poor performances. And it is more likely you’ll have losses than you’ll have profits in the final balance sheet.

    Maybe a better way to understand what is a good return is to recognize what the bad RoR is. We explained that a good rate of return is when it beats inflation or it is equal to it. Also, we know that a good RoR of stocks is when it outperforms the benchmark index, for example, the S&P 500 index.

    A bad rate of return is when investment returns are under the rate of inflation, or underperforms the benchmark index. No matter if the investment has a positive return, in case it is as described it is recognized as an investment with a bad rate of return. The negative rate of return is useless to talk about. This word ” negative” explains everything.

  • The CUSIP Number For Stocks, Bonds, Mutual Funds

    The CUSIP Number For Stocks, Bonds, Mutual Funds

    The CUSIP Number For Stocks, Bonds, Mutual Funds
    This nine-digit code is in use for over 50 years but not all investors recognize the benefits of using it.

    What is the CUSIP number? It is a code that consists of nine characters. These characters are numbers and letters together. A CUSIP number is giving investors a sure way of recognizing investment security, for example, stock, bond, or mutual fund. 

    A ticker symbol and a CUSIP number both identify publicly traded securities. The ticker symbol originates from the 1800s with the beginning of the New York Stock Exchange. The original name was and still is, stock symbol, but it was used for sending the prices and trades to investors and brokers info by teletype. The teletype was also called ticker. 

    Another important information about stock, bonds, or mutual funds could be found in the CUSIP number. CUSIP is an abbreviation for Committee on Uniform Securities Identification Procedures. 

    It is a code

    This 9-characters code is a kind of DNA for the assets traded in the markets. It shows the name of the company or issuer of the security and what kind of security the asset is.  Each character explains something. The first six characters are assigned by the alphabet and they identify the issuer. The 7th and 8th characters could be numerical or alphabetical but both will display the type of security. The last character is a digit and serves as a check digit.

    They look like this: 

    Facebook: 30303M102
    Microsoft: 594918104
    Apple: 037833100
    Coca-Cola: 191216AZ3
    Johnson & Johnson: 478160104
    Walmart: 931142103
    Amazon: 023135106 

    So we explained how CUSIP looks like and let’s see what a CUSIP number is, how to use it, and why it is important.

    What is the CUSIP number else?

    CUSIP number helps to ease procedures, for example, settlements and transactions trades. It is a numeric detector better adapted to computer users.

    The CUSIP number is excellent when you need to identify assets registered to be sold publicly. This standardized “language” for all participants in the stock markets is a great help because the whole clearing process and transactions are more efficient thanks to it. For private investments, this CUSIP number means nothing since they don’t have public transactions or clearing. It is important for the publicly traded assets only. 

    As we mentioned, it identifies all publicly-traded companies, assets, and all government and community bonds. Using CUSIP you can easily identify preferred stocks, certificates of deposit, loans, and listed options in the US and Canada. But what is the CUSIP number more, how can you use it else? 

    It is very helpful for investors to track security but also it is a helpful aid in managing trade clearance and settlement processes. Moreover, if you use CUSIP you can easily eliminate any mistakes that might happen when you use the ticker symbols only, for example.

    How to use CUSIP?

    Computers use the CUSIP number to recognize particular assets traded in stock markets. By using CUSIP you’ll have access to all market information such as trade data, or other information regarding securities and issuers. The CUSIP number is a great mechanism to easily and quickly locate all that data.

    When you have an investment’s CUSIP number, it is easy to examine all information about it on financial sites. It is very important to have as much as possible information before you decide to buy or sell the investment and these numbers are great to help. We are sure you already have heard how useful they are when used to identify municipal bonds, but investors can use them for other investments also.

    So, you can use the CUSIP number to identify, sell, or buy some investment. As always, savvy investors will double-check this number and examine if it matches the name of the investment. Of course, if it is visible, sometimes it isn’t and that could be a problem. Anyway, the bigger problem is that people aren’t as much concerned as they should be when it comes to examining investments. The common mistake is a mistyped name of the company or security. Try to do this precisely or you’ll end up putting your money in the wrong company. That could hurt you a lot.

    Is it easy to find a CUSIP number?

    Unfortunately, not. The American Bankers Association owns and forms these numbers. To have access to these numbers you’ll have to pay a fee to some service with access to the database. For example, S&P Global Ratings.

    However, there are some other ways. You can find this stock symbol on the company’s website, it is often displayed there. Also, you can get access to these numbers by the EMMA system (Electronic Municipal Market Access) or you can find them on confirmations of purchase or periodic financial statements. Another way is via securities dealers.

    Maybe the simplest way to access the CUSIP numbers is the quote search on some investments website. For example, the Fidelity Investments website. All you have to do is to add the company’s name and the CUSIP number will be displayed. These numbers can be found on trade confirmation, account statement, the official statement. Also, your broker can provide it for you.

    Why would you need this number?

    Well, it can help you in many ways. For example, to search the stock. Yes, it will provide you a shortcut to getting a full examination on a company or stock issuer. Also, the process of filling out financial forms after you bought stocks or any other asset is easier if you know the CUSIP number.

    A CUSIP number warrants a precise categorization of your stock buying since it can accurately identify publicly-traded stocks. So it is easier to find and document it. That secures your stock trades to be processed, cleared, and settled precisely. By using this stock symbol with nine digits you can identify who the stock owners are. 

    Alternatives to this symbol

    The CUSIP number isn’t the most convenient way to point to investment, to say honestly. It isn’t easy to memorize nine digits, moreover, it isn’t always easy for investors to recognize it. Sometimes it is easier to use some other identifier.

    For example for stocks, it is far easier to use the ticker symbol. They are more recognizable because you can find them in the media, most financial websites, etc. You will use the ticker symbol not CUSIP when you want to examine some stock or to invest. But examining using the CUSIP will give you more comprehensive information and more details about the stock. A ticker symbol is a great tool and broadly used but the CUSIP number is more accurately identifying the investment.

    How to discover the CUSIP number?

    In the past, it’s been hard for ordinary investors to obtain the CUSIP number. However, this digital world provides easy access to it. Almost all financial web-based platforms offer that. Also, almost all companies that are traded on the major exchanges have their CUSIP number on their web locations. You can find it usually on investor-relations pages, mostly under the “Questions and Answers” category.

    Bottom line

    The CUSIP number is a kind of bar code for publicly-traded securities. It provides the precise classification, record-keeping, and documentation of trading data.

    That makes CUSIP priceless to investors. By using it they have access to any security immediately and get trading information, security identification, and secure financial documentation they could need to make a proper investment decision. That is to say, investors’ life and decision-making processes are easier thanks to CUSIP.

  • How To Make Money By Trading Stocks?

    How To Make Money By Trading Stocks?

    How To Make Money By Trading Stocks?
    There are many ways of making money by trading stocks and numerous methods to find potential investments that match your trading strategy.

    It is almost normal wishing to make a lot of money in several months but do you know how to make money by trading stocks? Yes, it is possible. Everything you have to do is to make several high-risk trades buying stocks that are paying dividends. Simple as that. But it isn’t going to happen to all of us. 

    Someone can make fortune trading stocks in a short time. Some people can do that. But it is too risky. Honestly, when we talk about them we are actually talking about people who know how to make money by trading stocks. Others prefer other approaches. Many of them are less risky and safer ways to participate in the stock market. But still, it is possible to make a lot of money. That’s true. 

    Also, the truth is that some traders and investors got lucky but it isn’t a common story. Actually, it is the opposite. Most traders fail to make money on the market. So if you want to know how to make money by trading stocks you have to understand the nature of the stock market. We are not going to tell you the sad stories but what you have to know is that the stock market is a zero-sum game. Meaning, if someone doesn’t lose, you’ll never earn. Is that all? Of course not. There are more so, let’s see how to make money by trading stocks. 

    Can you make money by trading stocks?

    Why not? Thousands of people already did it and still do. Some are trading stocks every day or month but the others are more buy-and-hold types. They are sitting in the stocks for decades and today they are counting their millions. For example, risk-averse types will do that. They will choose some reputable company or the company with a promising outlook, good business plan, and stick it out for the long run.

    Also, there are some other approaches. You’ll find plenty of outstanding traders capable of making money through several quick but risky trades. Frankly, they are a minority. Great success in trading will come if you pick a day trading or short selling the stocks but it is connected to the extremely high risks. You’ll have to trade in the high-risk and volatile market. But it is one of the most important and usual features of the stock markets: they are volatile, they are risky no matter how strong or experienced you are. Let’s call statistics as help, only 20%, or even less, of traders, are successful when trading the stock market. The others constantly fail to make money.

    But this article is about how to make money by trading stocks. So, let’s go!

    As we mentioned above, one way is to adopt a strategy to hold stocks for a long time. At least five years, for example. If the stock pays dividends, it’s better.

    Quick ways to make money by trading stocks

    Making money by trading stocks, especially with a small amount, is challenging, and honestly, riskier. Of course, if you don’t know what you’re doing. But let’s try to be more creative.

    Certainly, it is ideal if you have more money to trade. But it’s not mandatory. The mandatory is to have the right strategy that works for you, to have a trading plan and trading journal. If you are a beginner in trading stocks, start modestly. Try with small amounts, test different approaches, and methods. After you did it, monitor, and examine the result you got. Don’t think about obtaining the fortune overnight. That’s not going to happen. 

    The smartest thing you can do is follow some of the rules and methods on how to make money by trading stocks and place a small amount, and over time raise it until you become ready to trade with larger sums.

    Let’s go! Play the market and earn money!

    Day trading is for traders with courage and heart. It demands to understand various forces at play in the stock market. For day trading you’ll need more experience. Well, if you are a good student and learn a lot, day trading will give you a chance to make a lot of money in several hours. The point is that you don’t need to invest a large sum, you can do it with a relatively small amount.
    But be careful, you’ll need to hedge your bet. What does it mean? You have to set stop-loss limits to cut potential losses. The advanced traders know that market makers push stocks to provoke our fear of failures or our greed. They want the stock to run for their profit, not ours.

    So you have to be very careful, to understand what you are doing, and to examine the market trends to be able to make important gains. For example, moving averages. Pay attention to them. If some stock breaks through the 200-day moving average that is the sign that potential upside or downside change in price is coming.

    Can you make money quickly by trading stocks?

    Yes, it’s quite possible. Just find companies in very volatile sectors. The other possibility is to find high-value or low-value stock with high risk but with the potential for an enormous reward. Also, you’ll have to be a short-term trader for that. That is the only way to make money quickly by trading stocks.
    For example, you’ll have to look for a high-value company that stock recently fell but you must have some clue that the stock price will rebound soon. When it happens, you’ll sell them for a higher price.

    Also, one of the possibilities is to buy a stock of some startup with the potential to produce tremendous returns. This is risky, also but can generate a great reward. The point is to hold it shortly, wait for a significant increase in price, and sell quickly. The risk here is that startups, in general, could be risky investments. A very small number of them succeed to survive a few years. They are like comets, light the sky for a while, and boom – disappear. But while they are here, in the markets, they are a great opportunity for traders to make money by trading their stocks.

    Trading stocks for a living

    People are trading stocks for a living which means they are making enough money for everyday life and over. Trading stocks can be a full-time job but also, a part-time job. What you choose depends on you. You have to find out how to make money by trading stocks from your home. Also, you may try day trading as a regular job.

    How much money you’ll make depends on your trading strategy, your skills, knowledge, etc. But not all is in your hands. You’ll have to know how the markets are doing and be familiar with many other things. Professional traders can make above $5,000 per month but that varies depending on the amount of money you put in play.
    For example, beginner traders can make several hundred or a few thousand monthly. Once, when you become more experienced with developed skills, your gain will be much higher.

    Buy low, sell high to profit from your trades 

    This approach is easy to master. It is a tested and proven formula for making a profit as a trader. But you don’t want to jump in the trade always when a stock price rises or falls. Sometimes you’ll need to stay aside and wait for your moment. It’s incredibly important not to panic when a stock falls below the price you paid. That’s the point with stock prices, they may rebound and if you exit the position too early you might miss the greater profit.
    When deciding whether the stock price is high or low enough to guarantee a trade, you should examine just a few things: the company’s earnings per share, do employees buy its stock, take a look at the company’s profit history, strength in different circumstances.

    The point is to buy low, that’s true. However, it is important to recognize the company that is able to recover and its stock will rise in price. That is exactly what would you like and as fast as possible, best right after you bought the stock. 

    The same is with the second part of the saying – sell high.

    When selling stock to reinvest the profit, you would like to ride the trend of the stock price rising as long as possible. The keywords “as long as possible.” That’s why you’ll have to learn how to recognize when the price stagnates and in which direction will go after that. In other words, you’ll have to know how to track the trends.

    In day trading or short selling, buying low, and selling high is essential to your profits. In these kinds of trading, you are dealing with highly volatile markets. The stock prices will fluctuate frequently and literally any change in stock price could end in a profitable trade. Yes, there are lots of risks but rewards might be magnificent.

    Diversification is important

    You must have a good trading plan and a diversified portfolio but not over diversified. 

    Diversifying will protect you against unpredictable changes. For example, all your stocks were in biotech, but new products have a bad influence on your stock’s prices. So, your whole portfolio could be crashed. If you have a well-diversified portfolio the influence will be protected against such trends. Also, this strategy is proper for balancing high-risk and conventional investments.  

    We have one suggestion if you really want to know how to make money by trading stocks – never walk away from trading after you made a profit. If your goal is to trade in a long time, it is smart to reinvest part of your profits or all of them.

    Bottom line

    Trading isn’t easy but practicing will help you a lot. At first glance, it may look so easy and simple. What you have to do? Just to pick a good stock and trade it. We all would like it to be that simple. The truth is that traders are carrying their knowledge to the market every single day. They can make a difference between good trades from bad trades, they are able to catch the trends, they know when to enter the position and, which is more important when to exit. Moreover, they know how long they should stick to their rules but also when it is time to break them and profit.

    Some do get lucky in the stock trading, that’s true. But it is very rare. Behind any successful trade lies great knowledge. Armed with that, you’ll make money in the stock market.

  • Is Payday Loan Riskier Than Other Loans?

    Is Payday Loan Riskier Than Other Loans?

    Is Payday Loan Riskier Than Other Loans?
    A payday loan carries high interest but doesn’t demand collateral. It is a type of unsecured personal loan. 

    By Gorica Gligorijevic

    Personal loans and payday loans are among the most popular debt products, one is riskier, so is payday loan riskier than a personal loan, for example? There are some things you have to know before deciding which one to take.

    How does a payday loan work?  

    Payday loans are short-term loans and unsecured. You find them under names the check loans and cash advance. The borrower can get fast and easy access to between $300 and $1.000 in cash. If you take this kind of loans you’ll be obliged to pay it back with a high-interest rate. 

    A payday loan is high-cost, and you’ll have to repay it with your next paycheck. To get a payday loan you’ll need to give a confirmation of your income to the lender. Also, the lender will check your account. The good thing with payday loans is that you’ll receive the cash in less than half of an hour, or if you applied online it will be available in less than 24 hours.

    In exchange, the lender will demand some guarantees, for example, the lender will ask you to sign a permission to withdraw money directly from your bank account. Such will do it after your next payday,  usually two weeks or one month later.

    If you made an appointment at a store, and you take a payday loan there, the lender will tell you when to come again and repay. It can happen that you miss the appointment and the lender will withdraw that amount from your bank account using the permission you gave it or by running your check if you deposited it. The amount will be increased by interest.

    Online lenders will launch automated withdrawal.

    Is payday loan riskier than personal loans?

    Payday loans are useful but that help comes with more cost. The charges can vary from 15% to 30% of the amount you want to borrow. Expressed in annual percentage rate (APR) on the loan it easily can be the triple-digit number. No matter if you have that loan for, let’s say, two weeks, you’ll have to pay much higher interest than it would be for a personal loan. 

    Payday loans are risky and they are chosen by borrowers who may not have cash or other alternatives easily available. 

    Maybe one of the most dangerous situations with payday loans is to fall into a series of repeatedly extending the loan. If you find yourself in such a situation you could end up unable to repay it. For example, if you cannot repay this kind of loan on payday, you may ask to extend the loan repayment period.

    And what will happen? You’ll continue to spend the money you borrowed, but interest rates and other fees will continue to accumulate more and more. At some point in time, you’ll find yourself unable to repay it. You’ll enter a vicious cycle, which is a very dangerous situation because there is no limit on how many times you can get a payday loan.

    With personal loans, you don’t have such a situation. Can you see now why do we have the question in the title of this article: Is payday loan riskier than a personal loan? 

    How much you’ll have to repay for it?

    The federal Consumer Financial Protection Bureau made research that showed that the costs of payday loans are $15 for every $100 borrowed. It isn’t a cheap loan, you have to understand. For example, if you take a payday loan for two weeks you’ll need to pay over 390% of the annual percentage rate.

    More expensive will be with online payday lenders. They usually charge higher rates, their median payday loan cost is almost $24 per every $100 borrowed, according to the federal Consumer Financial Protection Bureau. That means an APR is over 610%.

    Moreover, if you miss repaying the loan in full, you’ll be faced with additional finance charges and the whole cycle will repeat. Several months later, you’ll have more interest to pay, more than the initial loan value was. 

    Is payday loan riskier than a personal loan? 

    Of course, it is. The real danger is to fall into a cycle of debt. It could cost you a lot to get out.

    The amount you can borrow differs by state’s laws. The states that allow payday loans top the amounts between $300 and $1,000. Here are details for the US residents.

    What will you need to apply for this loan?

    To apply for a payday loan you’ll need a bank account, some ID, and proof of regular income, such as a pay stub, for example. And, of course, you have to be over 18. Even you have all of this, you can be rejected. Here are the possible reasons. For example, your income can be insufficient since the lenders regularly expect at least $500 net income per month. Also, you could be rejected due to the state’s regulations like lows that can limit how much of the income is allowed to spend. Lenders will calculate the possible risk if you cannot repay on time.

    Also, if you have some other loans can be a problem, for example, an outstanding loan. Lenders will know that even if you don’t want them to know because they use the services for tracking loans in real-time. The other reason to be rejected when applying for a payday loan could be if you have recently bounced checks or bankruptcy. Even if you are not employed long enough or you opened a bank account recently, you can be rejected. And one important thing, if you are an active member of the military, you’ll be faced with limitations. Federal law restricts payday lenders at more than 36% APR to active-duty military. Some lenders will eliminate you as a customer.

    A better solution than a payday loan

    Instead, try to create a budget sufficient for your expenses. Avoid needless expenses and focus on your emergency savings fund that you can use when you are short in cash. 

    Building savings will take you time, that’s true. Also, there are other ways to cover an insufficient amount of money. You may ask to be paid ahead of your paycheck. Or maybe your employer has some kind of emergency fund for employees that is without additional fees. 

    One of the possibilities is Payday Alternative Loans or PALs. That could be suitable even if you have a bad credit score. This method is commonly financed by local communities or could be some online loan. In other words, a payday loan should be the last option. Maybe it is hard to believe, but a pawnshop loan is more favorable than a payday loan. You can get cash for your jewelry or other things of value. The worst thing you may experience is to stay without your value things if you don’t pay on time. Anyway, it is a better option than getting an unsecured payday loan. At least you won’t be caught in extreme fees that could drive you to a risky debt cycle. Is payday loan riskier? In short, yes. And it’s riskier than other types of loans.

  • Does Trading Strategy Really Work?

    Does Trading Strategy Really Work?

    Does The Trading Strategy Work?
    Your trading strategy must have a logic behind it. Without it, your strategy is useless and won’t work in any case. 

    By Guy Avtalyon

    Does the trading strategy work? How can you know that? Developing a strategy is a lot of work. You might think that creating and developing a profitable trading strategy requires a lot of work. Yes, that is the truth. But you should never stay stick to the first version of your strategy, you have to develop and improve it all the time. In other words, it is permanent work. For the trading strategy to work, every trader will continue to work on it. So, the question: Does the trading strategy work is present all the time in your mind while executing it. Even if you have had a lot of tests, adjusted it numerous times, you will always ask this simple question because the profitable trading strategy has to make you money. Does the trading strategy work, it depends on how much it is suitable for all market conditions.

    That means it is able to produce a profit. If you expect the mathematical accurate answer, forget it. To know the answer to the question: does the trading strategy work we’ll need a large sample size. 

    But, what is a sufficient size of it?

    In trading, everything is based on probabilities which will become higher with the growing number of trades executed in profit. But why should anyone need a mathematical proof to know: does the trading strategy work? In trading, practice is crucial, no matter if it is with paper or real money. 

    And here is the catch! Who can afford thousands and thousands of trades before concluding that the same strategy doesn’t work? Also, you’ll need almost the same number of trades to test your strategy after any adjustment. And, what if you find at the end that it isn’t able to produce you a profit? So, an attempt to mathematically prove that some trading strategy works requires a lot of time, a large sample size, and a lot of hard work. 

    What you really need in order to find: does the trading strategy work, is a practical approach to this topic, not a mathematical one.

    A practical way to to find the answer to the question: Does the trading strategy work

    Since it is hard to have exact and absolute results, we’ll need a practical one. Okay, you can test your strategy on numerous virtual trades but you’ll have to be a programmer for that. So, how can we know that our strategy works and test it manually? But keep in mind, nothing is perfect in trading.

    How to check if your strategy works? 

    Let’s assume you are a beginner. In such a case, just observe your trades as groups of, for example, 20. Before you start trading, write down all the rules that you will implement to all 20 trades. Okay, you are ready to enter the position. The next step is to add all your entered trades to your trading journal. After 20 trades, check your rules and find where you didn’t follow them. Based on trades where you did follow the rules, you could find does the trading strategy work. 

    First, you’ll figure out how your strategy fits the market. Did it match the market conditions during the given time frame? The crucial info you’ll need is how well did you use your strategy, was it adjusted for particular market conditions during this test?

    When you find all these answers you might have an accurate picture.

    Let’s assume that 15 from the group of 20 trades were successful, and you stayed with your rules, plan, and you recognize when the market conditions were beneficial for your strategy and when they were not. But, we’ll suppose that your 15 trades were all profitable.

    Did you compare this group of trades and their main indicators, for example, Required Rate of Return (RRR), the average return per trade, win rate, to your backtest data? Well, it’s time to do that. Are there any differences? No? Nice, go further!

    But if you find, in that comparison, some differences, you’ll have to find what was wrong. It could be that you made some errors in the trading process or you missed something in backtesting. Remember, literally anything may have a great influence on your strategy’s profitability.

    When you find what’s going wrong, just adjust your strategy based on errors you made and trade another group of 20 trades, but follow the rules you set up. Now it’s time to compare the result of the first and second groups. You will know the result of your adjustments. If the strategy is doing well, trade another group of 20. After 100 trades or more, if you like or want, you’ll figure out: does the trading strategy work. 

    Use an out sample to find: Does the trading strategy work

    We showed you how to do that above. Keep in mind that markets are changing all the time as well as our performance. So you’ll need to know how your adjustments influenced your trades. Did you want that? If your strategy still doesn’t work as you want, you have to consider why that is. 

    For example, if you lost 20% of your account, it’s time to step away and find what you are doing wrong. Maybe your stop orders are not set properly. 

    Trading means dealing with risk every day. It is very helpful if you have all data in your trading journal and the calculations of standard deviations and ratios. You can move forward based on that data. Consider that your sample size is still small, maybe you’ll need a bigger database, so try with a group of 30 or 40 trades. 

    Remember, evaluate your most recent group of trades as an out sample and don’t add it in the overall evaluation. Even if your most recent trade was a failure, don’t panic, stay calm, and calculate everything you can. If you find something strange, change it, if not, just move further.

    How to optimize your strategy?

    Basically, you have to estimate if your strategy is suitable for the particular market condition during the given time frame you are observing. Further, are you following your own trading rules or you are flexible about it. If you follow your rules, you’ll have to check out how your rules correspond to the market. Maybe you’ll need some adjustments if your strategy doesn’t work well. You have to figure out how your most recent group of trades matches to the trades executed before that. And if there is any exceptions you have to reveal why, so you have to stop trading until you find out why that happened.

    Markets are changing and your strategy should be evolving according to them.

    Optimizing a trading strategy means making small adjustments, small changes in strategy to increase the final result of its performance. Hence, optimizing a trading strategy is crucial for your overall success as a trader. Don’t forget that optimizing a strategy means to go over the whole process of testing, otherwise, you’ll not reduce the risk of unforeseen impacts. So, you’ll need to try and check, again and again all over the process. That’s the only method. You have to make small changes, to change the value of variables for a bit, and check and check. Try out various combinations in order to find the right one.

    Trading is hard work. You’ll need to put in hours and efforts to become successful in trading. It isn’t a ticket to easy money! 

    Moreover, you’ll be faced with serious struggles. Trading will require your capital, your abilities, your trading method, technology, your knowledge, risk management, and many other things. More skills you have, more chances of success.

    Does the perfect strategy exist? 

    Forget about finding the perfect trading strategy. Such a thing doesn’t exist. But remember that your strategy could be a good servant but a bad master. It depends on you and how often you adjust it to work for you. A trading strategy should regulate and route your trading activities. It has to work for you, not you for it. Keep this in mind when creating your trading strategy and make it robust enough. 

    Also, your strategy should be easy, clear, and simple. Review it often to assess how well it is doing, does it provide you the returns, how big, etc. If your trading strategy doesn’t work for you, don’t be ashamed to change it.

    John Maynard Keynes said: “When the facts change, I change my mind.” Does the trading strategy work? Only you can know that.

  • How to Cut Losses in Trading Stocks?

    How to Cut Losses in Trading Stocks?

    How to Cut Losses in Trading Stocks?
    The first and most important lesson in trading stocks is damage control. One of the methods is by cutting losses.

    By Guy Avtalyon

    This is the essence of trading – how to cut losses immediately. You have to learn this because it is something commonly named as damage control. And if you are not ready for the worst-case scenario and you get panicked, your losses in trading stocks can be enormous. One single bad move can destroy your trading account. 

    Not all trades will be winning, so you have to know how to cut losses in trading stocks.
    First and principal, you’ll need a good trading plan. The best plan is to exit a losing position and cut losses when the trade doesn’t match your plan. So, the trading plan is mandatory.

    Every single trader in the world has had or still has losing trades. That isn’t a problem. The main problem is how to cut losses and have control of your trades. You are the one who makes decisions and we are pretty sure you wouldn’t like to have a great loss. There are some methods that will give you a chance to reduce the losses. And here is how to cut losses in trading stocks.

    How to cut losses in trading

    Learn from the kids. When they just start walking it is normal to fall but every single time they will get up and continue walking. The same is with trading stocks. Every trader at some point will experience losses but the true wisdom is how each of them controls the damage. Damage control means cutting losses quickly without hesitation and quickly. So how to cut losses in trading stocks quickly? 

    There is some unique rule: when your stock falls for 7% – 8% it’s time to exit the trade. If it is so simple why would we spend so many words to explain how to cut losses? 

    Well, it isn’t that simple. When you have a losing trade and exit after your stock drops for a significant amount, you’ll have to compensate for that somehow, you’ll have to reclaim your loss. There is some math behind losses. 

    For example, let’s say you bought a stock at $100 and after several days its price dropped 7% to $93. What you have to do? You’ll exit the position, of course, and enter the other trade to recover from the loss. But where is the math? Here. You lost $7 on a single trade, right? And now you’ll need to profit more than it is the case if you didn’t have that loss. Your available capital is $93 now and your gain has to be 8% on that capital invested to cover the previous loss. It isn’t so hard you might think. Yes, your profit is actually zero now.

    What will happen if you hold that stock?

    Let’s say you are pretty sure that your stock will bounce back and it will be worth $150. And you are brave enough to enter the next trade. But the stock market is cruel, it doesn’t take care of your wishes and says you have to think, to make calculations and not to make wishes. What if your stock drops at $50 which is possible. 

    The math behind says you’ll need a 100% gain to cover your loss. That is a bit harder than to reclaim 7%. And, be honest, how many stocks, that can double their price, you own? So it isn’t a smart decision to hold a stock further if it has a 7% or 8% decline. A smart decision is to close the trade with reduced loss and find the new winner.

    The logical move is to cut losses quickly

    The understanding of how to cut losses in trading stocks will help you to protect your overall portfolio. Put your emotions aside, you might love that stock, adore the company but you have to admit that holding a losing stock is dangerous. No, you didn’t buy that stock at the wrong time or you have bad luck, your losses come from your behavior. Your small mistakes turned into a big failure. 

    When trading stocks or any other asset, the main goal is to profit. So, why would you like to hold a loser? 

    If you avoid selling such a stock you are avoiding blame, right? You have to understand that every single human makes mistakes and bad choices. All the time. So, what? It isn’t a problem. The true problem is when you don’t want to admit yourselves you are making mistakes and they cost you a lot. 

    Why would you stay to hold such a losing position? 

    Maybe you hope your stock will bounce back to the buying price and sell it? That isn’t going to happen. Well, it will happen one day in the future but your losses will be bigger and bigger. Nothing will help you to “delete” this mistake. Why? What had a tendency to fall, will continue to fall. In most cases.

    That’s why it is very important to understand how to cut losses in trading stocks.

    If the pattern doesn’t work, exit your position

    It is possible for a pattern to turn against you. There is no other way than to take a loss. Don’t hesitate to exit the position. You don’t need to wait for your trade to become a loss. Even a small gain is better than a small loss. Frankly, small gains are what beat markets every day. Many experts will advise you to get out of the trade with a small gain in case your pattern is working against you. If your stock doesn’t do what you expected and planned, just cut it. In this way, you’ll stay in control of your trades. 

    For example, you bought some high-tech stock in a high spike of your interest. Let’s say it is a new company with a great prospect, with a new product, everything is excellent. In theory, such a stock should skyrocket immediately. Excellent pattern, you may think. But what if the stock misses rising? What if you expected the price could rise up 30% and it hit 25% and suddenly stopped rising? Will you wait for it to fulfill your expectations? If you’re smart enough you’ll get out.  

    Why are we so resolute about this? 

    We assume you have a trading plan before you enter the trade and you shouldn’t care if you could make $1 or $100 if your pattern is working against you. It has to work what you require. Otherwise, get out because you don’t have control of your trade. That is how to cut losses in trading stocks by following your trading plan. If you do that you’ll don’t need to wait for the trade to become a loss. You’ll be able to exit exactly on time and cut potential losses.

    A few ways of how to cut losses in trading stocks

    First of all, you must have a trading strategy. That means you must have all rules on-hand, no matter if you want to buy or sell the stock.
    Further, you must know why you are buying a particular stock, but also, it is mandatory to know why you are selling it. You have to have a criterion. So, set rules for each situation.
    The most important action in trading is to set stop-loss orders. And here is one suggestion, be smart and never adjust stop-loss order when the stock price is dropping, do it when it is growing.
    Analyze your portfolio on a daily basis. Consider why you are still holding some stocks. If you can’t find any reason, sell it, sell them more.

    Controllers when trading stocks 

    Even before entering the position, you’ll have to know how to control your emotions. This is extremely important when you are faced with losing trades and have to cover losses. Always keep in mind that losses are part of trading stocks and learn how to handle your emotions when the bad time comes. For that to achieve, you have to be prepared for every trade with understanding that you may have losses. You are expecting them. That will help you to defeat your emotions. During this long run, you’ll have failures, successes, difficulties, and you have to know how to handle them.

    Further, invest only the amount you can afford to lose. In short, always protect your capital. If the stock price runs against you, cut it. It is better to exit the position than to suffer a bigger loss. Limit the risks. For each trade, you must estimate the risk/reward ratio.

    If your trade goes exceeding the risk you planned, cut it, cut the potential losses. And do it quickly, especially if the stock price reaches your stops. Just don’t hold the position and follow your plan. Never think you can wait a bit more. In a few seconds, your small loss could easily turn into huge losses. Give yourself the space to come back to the game.

    Successful traders aren’t unreasonable and think ahead. By doing so they are prepared to adjust their position size if necessary.

    In trading, it isn’t always possible to avoid losses. Honestly, it is almost impossible. But you can reduce them only if you learn how to cut losses in trading stocks. There is nothing wrong with selling a stock at a loss but do it on time to minimize it. When you cut losses with a clear head you’ll be ready to return to the market. Yes, we know, it’s hard to have a sharp mind when you are faced with the potential loss of thousands of dollars. Just follow your trading plan, stay with it, and follow the basic rules of trading. Nothing more, nothing less. The market always recovers. You will too.