Blog

  • The Hottest Investing Trend Today – ESG

    The Hottest Investing Trend Today – ESG

    The Hottest Investing Trend Today - ESG
    ESG investors who combine these stocks with traditional assets and generate better returns. ESG stocks become the hottest investing trend.

    By Guy Avtalyon

    Everyone would like to know what is the hottest investing trend today. Despite many expectations that it easily could be pharmaceuticals or biotech stocks due to the current pandemic, the new investing trend is quite surprising. Some would expect that developing a new vaccine for the new coronavirus could attract investors’ attention. But it looks that some other industry has more potential. Some other stocks are able to generate better returns. We are talking about ESG investing. 

    Yes, that’s true. ESG stocks generate better returns than the overall market all the time. And it is pretty interesting if we know the ESG stocks carry less volatility then many many other stocks. Even if it is surprising, ESG investing is a fast-growing trend. So if anyone asks you what is the hottest investing trend today, you\re free to say ESG and you’ll be right.

    What is ESG investing?

    ESG investing is also known as sustainable investing. It is all about environmental, social, and governance. These three classes are massively under investors’ attention and a lot of money is already invested in this sector. We can discuss whether it is a smart investment decision or not but data shows it is. Take a look at this chart below. 

    The chart shows the S&P 500 ESG index’s relative performance. We can see that it has outperformed its benchmark by approximately 3 percentage points during the past 52-weeks.

    Investing is related to the future. No matter what are you looking for the main goal of investing is to improve your future. Stocks also want to develop their better performances in the future, so it looks like they have the same goal as investors. But why is ESG the hottest investing trend today? How does it become such a profitable class for investors? As we said, ESG stocks generate better returns, they generate profits and hence, reward all investors involved. 

    Why is ESG the hottest investing trend now?

    The global trend for many years is sustainability. That means the sustainable company plans the future and plans to be present in the future, not just to shine for a few years, to get a few bucks and turn all operations off.
    ESG investing is a common term for investments that seek better returns. The other goal is the long-term impact on the environment, society. Sustainable investing comes in forms of ESG, impact investing, socially responsible investing or SRI, and also, values-based investing. The other school of thought adds ESG under the umbrella of SRI where there is also, ethical investing and impact investing.

    The Financial Times describes ESG  as “a generic term… used by investors to evaluate corporate behavior and to determine the future financial performance of companies.” 

    Today, almost the whole of civilization is working on sustainability, and the businesses that do the same are popular and supported. Bank of America published a study that shows that 86% of customers believe companies should consider ESG problems. For example, data from that study reveals that 94% of Generation Z and 87% of Millennials are very interested in this issue. For them it is important, (well, not only for these two generations), that the companies’ focus is on renewable energy, waste management, diversity. Also, consumers showed a great level of determination in the answers about the company’s reputation toward their focuses on the environment. How the companies treat it is maybe one of the main criteria when customers have to decide if the company has a good or bad reputation. 

    Sustainable investing strategies

    ESG is the hottest investing trend today. It outperformed the market in recent years. So it looks the gap in returns will only grow as time goes by.
    ESG investing is influential, and it’s only increasing. Bank of America estimates that $20 trillion is going to flow into ESG funds in the next two decades. For the purpose of comparison and to have a real picture how big is that amount you have to know that the entire S&P 500 is worth about $25.6 trillion. 

    ESG investing strategies are not new but here are some tips.

    Choose the best in the class. This strategy includes the selection of the best performing or most modernized companies recognized by ESG analysis. 

    Investing strategy based on engagement activities such as active ownership of shares, voting on company governance is one of them, for example. The goal of this long-term process is to influence the behavior of the ESG company. 

    ESG integration into traditional financial analysis and investment decisions. This strategy focuses on the possible impact of ESG issues on company outlook. That in turn may change the investment decision. For example, if the impact of ESG is positive, the company is likely to look more favorable as an investment opportunity. 

    As you can notice, momentum is growing. Shareholders are demanding action more and more. The consequences arise for companies that fail to adjust.
    Conscious capitalism is a management strategy that highlights adjusting the business with shareholders to share success. A company that matches that goal not only runs for profits to shareholders, but also takes care of employees, the environment, clients, and community. That generates long-term profitability.

    How to trade  ESG stocks

    First, do your research. Open an account to trade ESG stocks. Fund your account and pick the company. You can use your account to invest in ESG stocks by buying shares or trade on the price movement using spread betting or CFDs. You can go long or short on ESG stocks like with any other stock. Also, you don’t need to take ownership of any shares.

    Where to find the hottest investing trend?

    For example, tech startups are some of the hottest investing trends. They broadly implement sustainable practices and make up a respectable part of ESG investing. Innovation-focused companies that develop advanced technologies, do it in a way that is in the best interest of civilization. For example, Microsoft or Apple, both are among the largest sustainability-focused companies. They generated great returns to their investors in the past few decades. And also, the important part is their reputation among customers. It’s excellent. 

    Since ESG investing isn’t all about the environment, something is about community impact or employee satisfaction. These companies are recognized as employee-friendly, also. These characteristics will drive their share prices in the future to stay on the top in the investment world.

    Still, some will argue that taking this approach in investing could mean reducing returns. But some researches advise otherwise. For example, you can choose the easiest approach and buy ESG-focused ETFs that track the index. Some of them outperformed their benchmarks last year and continue this year also. ESG investments had record amounts of capital inflows in Q1 this year.

    ESG has a great influence on reducing risk. Adding ESG stocks in investment portfolios can help investors to reduce risk. Consider ESG and prioritize stocks. They have to align with the values most important for you. Use the ratings from an ESG agency to examine the company.
    One note, climate change ruled the headlines at the beginning of this year. Seizing fossil fuels is an issue per se, many companies announced that would limit investment in coal, for example. So, ESG investments are possible to have strong growth in the coming years and decades. ESG investing is the hottest investing trend today and an excellent way to profit.

  • Low-risk Options Trading Strategy

    Low-risk Options Trading Strategy

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

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

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

    Covered call as low-risk options trading strategy

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

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

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

    Collared Stock

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

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

    How much put to buy?

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

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

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

    Short Put or Naked Short Put

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

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

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

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

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

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

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

    Risk Reversal as low-risk options trading strategy

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

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

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

    Put Spread 

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

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

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

    Low-risk Options Trading Strategy

    How can you make money?

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

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

    More articles on this subject:

    >>> Low-risk Options Trading Strategy

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

    >>> How Options Trading Make Money?

    >>> Greeks In Trading Options As A Risk Measure

    >>> What Is Options Trading Examples

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

    >>> Short Call Option Strategy Explained

     

  • What is GARP And GARP Investing?

    What is GARP And GARP Investing?

    What is GARP And GARP Investing?
    The definition of GARP stock can vary but is based on the P/E to PEG ratio, which divides the P/E ratio by the growth rate.

    What is  GARP or longer, Growth At a Reasonable Price? Growth at a reasonable price or short GARP is an investment strategy. This strategy unites the principles of both growth and value investing. How does it do that?  When you find the companies that have consistent earnings growth but don’t sell at too high valuations. This term was introduced by investor Peter Lynch.  

    While combining principles of growth investing and value investing it serves traders to pick individual stocks. GARP investors look for companies with steady earnings growth that is higher than market levels. That means they are eliminating companies that have very high valuations. The general goal is to avoid the extremes in any type, growth, and value investing.

    GARP investors invest in growth stocks but such that have multiples low price/earnings (P/E) in average market conditions.

    What is GARP Investing?

    GARP investing or growth at a reasonable price is a combination of value and growth investing, as we said. GARP investors seek companies that are slightly undervalued but with sustainable growth potential. Their criteria are almost the mixture of those that the value and growth investors use. Stable earnings growth is still on top position as one of the most important features but also valuation has a great influence on whether they pick a particular stock or not.

    Building such a portfolio that consists of “Growth At a Reasonable Price stock” isn’t just picking the stocks with an equivalent amount of growth and value. The point is to choose the stock that each has qualities of both, value and growth.

    Aggressive growth investors never pay too much attention to the value of the stock. Here are some reasons why they should consider the value of the stock. Let’s say that growth investors profiting from stocks with excellent earnings growth. Such companies are beating all earnings estimates all the time. Do they have any guarantee that the companies will resume performing with success and how long? They could make a profit only if the company proceeds to generate high profit and grow constantly. But what will happen if it stops to do so? 

    Here we have the value in the scene. Value is important to understand the level of investors’ expectations related to the particular stock. Also, value is helpful to gauge how far some growth stock could drop if it starts to sink. To put this simple, value adds a portion of reasonable thoughts and exact estimates into the calculation. 

    How does GARP work?

    A basic formula for finding GARP is the PEG ratio. It is aimed to measure the balance between growth and value. The optimal PEG ratio should be one or under the one.

    Here is how it works. Let’s say the company is trading at $50 per share with EPS forecasted to rise for15% over the year. 

    P/E ratio = $50/$5 = $10
    PEG ratio = 10/15 = 0,66

    This PEG which is less than 1, makes this company a good candidate for GARP.

    Why does Growth At a Reasonable Price matter?

    This could be an added explanation of what is GARP. GARP helps investors to avoid the possible problems or traps that they may have with complete investing in growth or value stocks. If growth stocks rise too high they may create a bubble that could burst in a minute. On the other hand, value stocks can stay the same in the price for a long time. With GARP investors could find the golden middle zone. The investment stability where they can benefit from rising prices of growth stocks but, at the same time, they’ll be protected with value stocks if the growth starts to fall.

    Some may say that GARP stocks will underperform growth stocks in a growth market. Also, such will notice that GARP stocks will underperform value stocks too but in the value market. Despite these criticisms and objections, GARP could easily outperform in combined markets and could do it over a long time.

    What is a GARP strategy?

    It is a mixed approach to growth and value stock-picking. This kind of investor obtains a combination of returns. In other words, the GARP investing strategy is hybrid.
    In GARP investing it is necessary to look for low price/book ratios and a PEG ratio of less than one, as we said.

    P/B ratio = current price/book value per share
    PEG ratio = P/E ratio/predicted growth in earnings

    We said a GARP investor will obtain a combination of returns. This actually means, when markets are dropping it is better for value investors. Hence, markets are rising. It is better for growth investors. On the other hand, GARP investors could benefit from any market condition because they are somewhere between the mentioned types of investors but unite characteristics of both.

    What is it in essence?

    Growth At a Reasonable Price investing doesn’t have inflexible limits for adding or eliminating stocks. The basic benchmark is the PEG ratio. The PEG presents the ratio between a company’s valuation (P/E ratio) and its required earnings growth rate for the next several years, for example. If stocks have a PEG of 1 or less,  that means the P/E ratio is in line with predicted earnings growth. This helps to find a stock that is trading at a reasonable price.

    During a bear market or other declines in stocks, the returns of GARP investors could be higher than the growth investors can get. However, in comparison to the value investors, GARP investors may have average or under average returns. But since GARP investors hold stocks with characteristics of both growth and value stocks, the average returns they get is higher than average returns for growth and value investors can get from their investments separated.

    Bottom line

    GARP stocks are picked by a joining of earnings growth and valuation when investors want to evaluate the right picks. The idea behind this is to recognize cheap stocks with a growing possibility in the future. Hence, the earnings growth of GARP stocks is notable above that of the market.

    GARP is the abbreviation for “growth at a reasonable price” and represents truly a combination of value and growth investing. So, GARP investors seek for a stock that is trading for somewhat less than its predicted value but has earnings growth potential. GARP stocks are slightly lowered but can grow soon. So, what is GARP? It’s all about how to find stocks that have a future.

  • How to Identify Trend Reversal?

    How to Identify Trend Reversal?

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

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

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

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

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

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

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

    Use Moving averages to identify trend reversal

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

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

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

    How to identify a trend ending? 

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

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

    Bullish and Bearish – how to identify trend reversal?

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

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

    Different time frames

    How to identify trend reversal on different time frames? 

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

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

    How to trade trend reversal

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

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

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

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

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

    How to have a proper execution?

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

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

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

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

    Bottom line

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

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

  • Defensive Stocks Are Excellent Investment But…

    Defensive Stocks Are Excellent Investment But…

    Defensive Stocks Are Excellent Investment But...
    Defensive stocks provide dividends and stable earnings but the low volatility may cause fewer gains during bull markets.

    By Guy Avtalyon

    Several days ago, the website U.S.News posted an article about defensive stocks. As always, great and concrete suggestions.  You can find their suggestions with an explanation of why the proposed defensive stocks are best picks for this June.
    Here is one quotation about these stocks.

    “More conservative investors who value both capital appreciation and preservation of capital might look to these stocks.” was written The U.S. News. 

    This might mean this kind of stock is less risky than most of the stocks in the market.

    Further, in the same article, you’ll find a short description of what criteria investors should use when picking defensive stocks. For example, market capitalizations should be above $50 billion, such companies should have at least a 10-year track of continuous paying dividends, etc. All is followed by the list of these stocks that look like the best choice for June this year.

    That simply imposed the topic, what are these stocks. Why buy them? How to choose? Where to look for them? 

    What are defensive stocks?

    A long time ago it would be very easy to answer. You could be easily trapped listening to some financial experts saying how defensive stocks are boring investments. Moreover, you could hear they are too conservative. It might be true, even today. These stocks come into utilities, healthcare, and staples sectors. Well, one could think: Yeah, these sectors are not excited, not at all, so why should I invest there. We would like to ask you something. Would you like to invest in some company that generates steady cash flow, pays dividends regularly? Yes? We didn’t expect any other answer.  Would you be surprised if we tell you that, for example, tobacco companies were viewed as defensive stocks?

    But recently, investors changed their views of what these stocks are. Today, you can see that some technology companies are considered defensive stocks. Even if the definition is changed, the purpose isn’t, these stocks still have to play well during the recession. Nevertheless, these stocks have, as it always was, to provide stable earnings and regular dividends no matter what condition is the overall market. Period! 

    Are the defensive stocks less risky?

    Since there is a constant demand for such companies’ products, these stocks seem much more steady and strong during many different aspects of the business cycle.

    And here is the confusing part for some investors, especially if they are beginners. They aren’t the same as defense stocks. Do you know what we mean? Defense stocks are stocks of the companies that are producing munition, guns, war jets, etc.

    Nowadays, companies with stable earnings growth, but also with innovative goods, pricing strength, are recognized as defensive stocks. Don’t be surprised if they can stir the waters. If we consider cash flow and the company’s power, nowadays Alphabet could be such a company, for example. 

    How to recognize defensive stocks

    When uncertain time in the market comes everyone would like to protect the investment portfolio, the capital invested. Especially if it is connected to high volatility. Investors are looking for stable investments during such rough times. They would like, for sure, to increase their exposure to these stocks. For example, giants like Coca-Cola are recognized as defensive stocks. Non-cyclical stocks are recognized as defensive stocks also.

    These companies have stable performances and the ability to overcome weak economic circumstances. They are also paying dividends. That might be a good reason to choose them primarily because dividends can mitigate the influence of the stock’s price dropping. These companies will rarely go bankrupt during the market downturn.

    When things in the stock market get insecure, why would you like to own any stock? Honestly, you could find more safe places out there to invest in. The answer is profit. Defensive stocks provide a higher dividend yield than you can get with safe-havens. For example, Treasury bills will never provide you such an amount in interest rate. Moreover, defensive stocks mitigate investors’ fears because they aren’t as risky as other stocks. Take a look at what investment managers do when uncertain economic times come. They are moving to defensive stocks.

    Better isn’t always the best

    Defensive stocks are better performers than the overall market during recessions, for example. But nothing is so perfect even these stocks. Due to their low beta, when everything is blooming in the market, they could perform below the market. Less risk, less profit, that’s it.

    For example, suppose a stock has a beta of 0,5 and the market falls for 2% in one week. Not a big deal, you’ll lose 1% of your investment. But what if we have the opposite situation and the price increases 2% in one week? Well, the defensive stock with a beta of 0,5 will increase by only 1%.

    Beta shows the stock’s vulnerability or risk. Defensive stocks have beta under 1 which means they are less volatile. A conservative investor, who is, by default, with less risk-tolerance type, will choose defensive stocks that will deliver stable returns.

    Advantages and disadvantages of Defensive stocks

    They are often suitable for long-term investors because they are less risky than other stocks. These stocks together have a higher Sharpe ratio than the entire stock market. With less risk involved, you could beat the market. What else we need to understand is that defensive stocks are better investment choices than other stocks. 

    But there are some disadvantages also.

    The low volatility of these stocks is one of them. This means smaller gains when the market is bullish. That could be the reason why some investors if not many, don’t like defensive stocks. These stocks usually cannot outperform the market in such a period. So, when investors need them most to profit more, they could betray them. There is one interesting thing about defensive stocks. When the market downturn is finished, some investors move to these stocks, but the truth is they had to do that earlier. After the market downturn is too late. The only thing that investors could catch is a lower rate of return. Think ahead of these stocks.

    Why should you choose to invest in them?

    For example, you don’t have a decent knowledge of the market condition. Also, if you are the risk-averse type of investor. Seeking for dividend-paying stocks is one of the reasons because these stocks provide regular dividends. Additionally, defensive stocks are a great choice when the markets are volatile. 

    These stocks managed to perform well even during the recessions. There are some goods that people will always need no matter what the economic situation is. For example, electricity, soap, or gas, everyone would need gas or soap even if the apocalypse is coming.

    To summarize, defensive stocks have beta lower than 1, they are less volatile, they provide regular dividends. The main drawback is that they usually couldn’t generate high returns. But during the recession, they are excellent as protection for your other investments. Beta indicates the stock’s vulnerability or risk factor. This kind of stock has beta lesser than 1 which implies that they are less volatile. A conservative investor who is afraid of taking risks can invest in defensive stocks that will give stable returns.
    These stocks are also recognized as non-cyclical stocks because they are not deeply associated with the business cycle. Here are a few types of defensive stocks. Such stocks are utilities, consumer staples, healthcare, gas, electricity, pharmaceuticals.

  • Morning Star Pattern How To Trade It?

    Morning Star Pattern How To Trade It?

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

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

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

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

    Therefore, understanding of candlesticks and their purposes is essential.

    What is a Morning Star pattern?

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

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

    How strong is the reversal? 

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

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

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

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

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

    How to trade Morning Star Pattern?

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

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

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

    Bottom line

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

  • Lies About Stock Investing And Trading

    Lies About Stock Investing And Trading

    Lies About Stock Investing And Trading
    To know about stock investing is something that will pay you off for the rest of your life. 

    By Guy Avtalyon

    Several years ago Forbes published an interesting article on the topic lies about stock investing and trading. The headline wasn’t exactly like ours but something similar. If you’re interested to read the whole article try to find it in the archive.  

    Brokers, financial gurus, even governments lie to us about global warming, the national economy, giving us false promises, lie about the stock market, taxes, or the national debt. We are also faced with so many lies about stock investing and trading. What we really need is the truth even if it isn’t pleasant.

    Since the Traders-Paradise team thinks that an honest approach is necessary to this topic, we collected several unbelievable lies about stock investing and trading. Investing and trading are very serious jobs and any investor or trader doesn’t deserve to get lies instead of the whole truth. They have to survive this tough business. However, it’s impossible without telling the truth. 

    What are lies about stock investing and trading?

    The first lie is that we should beat the stock market! Why should anyone want that? Why is it such a big deal? Theoretically, when you pick the stock randomly you have 50/50 chances of beating the market. Your stock will perform better or worse compared to the overall market. Yes, we know! The point is to hold some stock with a better return than investing in, for example, some index fund. When you want to buy the stock that is advertised as winning one, count how much fees you have to pay when buying and later, when selling. This means the return on that stock has to be much higher than you can see it at first glance.

    Beating the market means the great risk involved. If we know that only 2% of stocks can match the market well, so your stock may not be able to beat the market all the time. So, be prepared to lose money most of the time. The main problem is in your capability to gather the true information about the company which stock you’re buying.

    Honestly, it is almost impossible unless you’re an insider. No matter if you’re buying a hot-stock. You’ll have zero guarantees that it’s able to beat the market. Past performances will not guarantee you a big future return. This led to the stock buying to the level of casino games. Meaning, you can beat the market from time to time but you’ll fail to do that in the long run. If nothing else, the transaction costs will get you. So, beating the market all the time is one of the lies about stock investing and trading.

    Investing and trading are risky, the stock market is volatile

    The stock market is fluctuating, it will go up and down. Investing is risky but there are so many strategies to reduce investment risks. The possibility to make money on the stock market is bigger than the possibility to lose. What you have to do is to follow some rules and avoid randomly picking the stock. Also, with a strongly created investment portfolio, diversification, and strong risk management, your chances to profit from stock market volatility are bigger. 

    We wrote about risk management so many times. Also, if you add new info for every trade in your trading journal, you’ll have the pattern in hand. Hence, you’ll be able to act on time and protect your investment if it is necessary or place the trade at the right time and exit in profit.

    If you hold a large portfolio of stocks over a long period, for example, 20 years, you’ll be able to significantly reduce the risk of losing your capital. There still will be some risk but reduced.

    Also, traders and investors should consider how realistic it is to ride out the ups and downs of the market over the long-run. What will you do when the economic downturn comes, for example? Will you sell your stocks to fulfill the gap made by a potential job loss? Some life events could make it difficult for some of you to stay invested. But if you have a trading plan and stick to it, everything is easier. So, stocks are risky investment is another lie from the corpus of lies about stock investing and trading. The stock market is volatile, also, it is a lie because that risk is part of your plan and you’re counting on that when trading or investing.

    In the stock market, you’ll lose all your money

    This is one of the biggest lies about stock investing and trading. Behind this lie stand incredible lack of knowledge and misunderstanding of where the money is going. The stock market is a zero-sum game. The total amount of money invested is what you have there. If you want to profit, someone else has to lose. That’s the whole wisdom. The truth is that you’re not going to lose your money there. Yes, from time to time the price of your stocks will change in value. The prices will go up and down, that’s the way the stock market operates based on supply and demand. 

    Also, the truth is that stocks can be a good way to earn an investment return over a longer time. If you take a look at historical data you’ll find that, for example, that market indexes, for instance, the S&P 500 have been better than average. When you look at long periods, there were fewer negative years than positive. 

    What investors have to do is to find a balance. This means understanding how the risk of investment works and how much risk you’re willing to take to earn a satisfying return.

    It’s difficult to invest

    This is also, one of the lies about stocks investing and trading. This is a story about Average Joe. Well, Average Joe is completely capable of managing his investment, and, for him, it isn’t difficult to invest. Moreover, he has done decent research and trade according to them. In the stock investing, you could have a lazy portfolio or any other that will never confuse you. But let’s go back to the first among many other lies about stock investing and trading. When you hear someone claiming that it is hard to invest in stocks, just recall the first lie mentioned above – beating the market. It’s hard to beat the market constantly if not impossible. But in a long-term investing or active trading you can easily cover your losses. 

    Yes, you can find some surveys out there that show the average investor has underperformed the market during the past two decades. But the point is that you can’t be a professional trader if you spend a few hours per week analyzing the market and stock performances. You’ll need more time to dedicate to it. You’ll have to be fully focused on your investments. 

    But you don’t need to beat the market. Keep in mind data. Data shows that the most successful investors are not right all the time, they are right below the 60% of the time. Isn’t it interesting when you know that Warren Buffet is wrong 40% of the time? So, why should you be right all the time and beat the market constantly? To be honest, it’s impossible. 

    Investing requires a lot of time – No!

    This is completely one of the greatest lies about stock investing and trading. This particular lie can be true if you look at professional traders, people whose job is to trade stocks every day. For the average investor as the majority is, one hour per week to start investing in the stock market is quite enough. Don’t even think that you don’t have that time. If anybody thinks that investing requires a lot of time it is due to a lack of knowledge about how the stock market works.  

    Yes, investing means engagement but your effort will be prized by profits. Actually, investing is a much better way to earn than savings. That was good news. The bad news is that you can’t learn to invest while sitting in the pub and drinking beer, for example. But here’s another good news. To learn how to trade or invest all you need is a little bit of time, basically, the rest is so simple. And the most important, investing could make you rich. Are you ready to drop it? 

    Did you ever catch yourself thinking:
    “I’m too old to learn new things.”
    “I’ll never reach my goals.”
    “I was born this way, I’ll never change?”

    The thing is, many people believe that once we hit a certain education, our personality becomes so rigid that it’s hard for us to grow and learn more. But this is nothing but a lie! When it comes to investing in stocks all you need is a bit of time and willingness. Investing doesn’t require a lot of time. Face these lies about investing.

    The biggest lie about stock investing and trading

    Maybe the biggest lie is that you have to know a lot about investing. Having in mind the way of investing today, you have to know nothing about it. Nothing at all. What you must have is an investing goal. The investing itself is actually automatic, you can find so many investment services available online. For example, start with some robo-advisor. You’ll pay the fee but not too much. Also, one of the lies about stock investing is that you need a lot of money to start. The truth is that today you can easily find a trustworthy investment platform that will allow you to start investing with a little money, for example, $100.

    Don’t let these lies about stock investing keep you from investing. The consequences of not investing are bigger.

  • 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.