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  • 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.

  • How to Use Technical Indicators to Analyze Stocks?

    How to Use Technical Indicators to Analyze Stocks?

    How to Use Technical Indicators to Analyze Stocks?
    Trading indicators are a component of every technical trading strategy. They help traders to get full insight into price trends.

    After you learn the basics of technical analysis, it’s time to learn how to use technical indicators to analyze stocks. This will be something very concrete because we’ll discuss their real implementation. After we debunk all myths about technical analysis it’s time to go forward. Everyone who wants to trade stocks should know how to use technical indicators to analyze stocks. 

    Traders use technical analysis to examine past market data in the hope to determine future price movements. They use indicators, charts, and other tools to recognize price patterns and trends for that purpose. Future performance of the stock price is maybe the biggest mystery in the stock market, and there is no such a trader or investor that wouldn’t like to unveil where the price will go. By using tools, the chances are bigger, without them we are just guessing, and instead of trading, we are simply betting. So it is very important to know how to use technical indicators to analyze stocks.

    Technical analysis is based on the belief that price movement would repeat, so the patterns can be recognized and used to determine a market’s trend.

    Technical analysis of stocks

    To put it simply, when analyzing stocks you have to look for patterns that appear in the chart. Patterns could be similar or exact as some previous one and based on this similarity you might have some clues of how the stock’s price will act in the future. But to have a clear picture of that you’ll need to use qualitative and quantitative techniques commonly named as technical indicators. Both techniques or types of indicators have their specific purposes. You’ll use qualitative indicators to find support and resistance levels, changes in polarity, or chart patterns but quantitative indicators will tell you if the stock is in an upward or downward trend. Quantitative indicators which are market trends, moving averages, and momentum indicators will show you the pattern in stock price actions. Based on this info you’ll decide if you will buy the stock. 

    Let’s break down each of these techniques separately.

    How to use qualitative indicators

    Important qualitative indicators are 

    Support and Resistance

    The technical analysis method assumes that stock charts will show you the bottom and top levels. In most cases, the stock price is moving between these two levels. We said “in most cases” because when there is a breakout the price could break one of these levels.

    The resistance level is also seen as a ceiling. When this level is reached the stock will not rise further, and you should consider selling the stock you own and to do so as soon as possible. You will not get a better price for it. So, that is the highest price, and you’ll profit.

    The support level represents the lowest price. To explain this, when the stock price is going down, demand for the stock will increase and form the support line below which the stock price will not fall. This means the stock will bounce back and rise in price after this level is reached. That is a great time to buy a stock at that lower price.

    This is how to use technical indicators when you want to buy or sell the stock you own. To tell that briefly, buy the stock when it is near to its support level and sell when it is nearing its resistance level.

    But there is one thing you have to keep in mind. 

    These levels are not fixed. 

    They are changing during the long term. These levels can be higher or lower. That depends on how investors look at the stock. If they think the stock is a great player they will massively buy it but if they think the stock isn’t good they’ll start to sell it. 

    You should find support and resistance levels in the stock chart. Also, an important point is where prices have paused or reversed after rising or falling. That might show you what will happen in the future, once when these price points are touched.

    When a zone of support or resistance is known, use those levels as potential entry or exit points. That could be a smart decision. When the price hits one of those levels it has only two possibilities – to bounce back from the levels or to break the levels and proceed in its direction. If that direction isn’t in your favor you can close your position with a minimum loss, of course, if you do it immediately.

    Change in the polarity principle

    So, what happens when the price breaks support and resistance? Investors are very active at these levels. But a break indicates that they are not interested in buying and selling stock further. That causes the price to move violently to find new support and resistance levels. 

    When the support level is broken, the stock could enter a freefall area and form new support. It is the same when the resistance level is broken, the stock will increase in price and find a new resistance level.

    The polarity principle means that whenever the stock price breaks through the support level that point becomes new resistance.

    Hence, the resistance is broken, it becomes a support level. 

    It is very important to know how to use technical indicators and notice when the price is near support or resistance levels. That will give you a chance to react in your favor to protect your investment.

    How to use patterns as technical indicators?

    You have to watch out the other relevant chart patterns that show where the stock price will go next. These chart patterns are grouped as reversal and continuation patterns. Reversal patterns show that a trend that was leading the stock price has expired. The stock will run in the opposite direction. This means if the stock was greatly valued, it would drop. If the stocks were undervalued, they would rise in price.

    Major reversal patterns are head and shoulders, inverse head and shoulders and, double bottoms and double tops.

    Continuation patterns represent confirmation that the current trend will stay. So, the suggestion is to hold your stock if the price is rising, or to sell it if the price is dropping.

    Significant continuation patterns are rectangle pattern and flags, triangle pattern, and pennants.

    How to use quantitative indicators

    Quantitative indicators are used in combination with other indicators for predicting the stock price movements. They can be trend-following indicators, for example, moving average will give you an insight into the current trend by smoothing out price movement.

    The other quantitative indicator is the oscillator as a momentum indicator. It measures the speed of how the stock price is changing. The oscillator will signal you when the stock is overbought or oversold. Overbought stock means that the stock price is probably dropping, and oversold means that the stock price is low. 

    How to use technical indicators – Moving averages

    Moving averages are a popular indicator, especially simple moving average or SMA and exponential moving average or EMA. Calculating SMA is quite simple but the calculation is more complicated. If you draft a 50-day SMA and a 50-day EMA on the same chart, you’ll see that the EMA acts promptly to price changes than the SMA does. But there is no need to calculate them manually since you can find charting software or trading platforms that can do that for you.

    How to use technical indicators – Oscillators

    Oscillators are extremely helpful when the stock is overbought or oversold.

    When using oscillators you can see when the stock is going upside. That is the level at which the stock turns into the overbought status. This indicates that the buying volume has been decreasing and traders will begin to sell their stocks. And vice versa, when the stock is oversold that means a great number of traders are selling their stocks consistently.

    Use oscillators when your charts are not displaying a clear trend no matter in which direction.

    Bottom line

    The way of how to use technical indicators to analyze stocks and predict market trends could determine how successful an investor you are. Technical indicators will help you to decide when is the right time to buy or sell the stocks you hold. Some will aid traders to identify and confirm a trend direction. For example, trend lines are helpful to predict support and resistance levels. Oscillators will measure the strength and speed of a price movement and help you to recognize overbought or oversold zones, potential entry, and exit points. 

    By knowing how to use technical indicators you’ll be able to make more profits and reduce your losses.

  • What Is Momentum Trading and How To Start?

    What Is Momentum Trading and How To Start?

    What Is Momentum Trading and How To Start?
    Momentum trading is particularly successful in volatile markets. The main rule is “buy high and sell higher.” 

    To understand what is momentum trading you’ll need to know that this strategy is based on the recent strength of stock price. Traders that practice this trading strategy believe the price of an asset will continue to move in the same direction if there is enough force to push it higher.

    Momentum trading is an aggressive approach to trading. You have to know that before even trying to fully understand what momentum trading is.

    The simple answer to the question: What is momentum trading also can be: It is a simple buying and selling of stocks, for example, based on the recent strength of price trends. We mentioned the force behind the stock price, so let’s explain it more detailed. 

    When the stock goes up and as it reaches the higher price, more and more traders are interested to buy. Their interest is driving the stock price higher and higher. That is the so-called relation between demand and supply. As the number of stocks is the same, meaning the supply is the same, the contest among the traders will increase the stock price. And this price growth will continue with the increasing number of buying in the market. But at some point, some of them will start to evaluate if the stock is worth enough to be sold. If there are enough sellers of that stock, the momentum will change the direction and the stock will go down in price. 

    What is the momentum trading here?

    Momentum trading occurs when traders open their positions after they notice there is a strong trend in stock price. They will close their positions when the trend begins to lose strength. Momentum traders don’t need to wait until the trend hits the top or bottom. Their focus is usually the middle range of the price move which presents the main action in the stock price. This range shows the strong buyers sentiment, everyone would like to buy such a stock that has an upward trend. So, what momentum traders do? They are starting to sell the stock at a higher price.

    In other words, momentum traders will attempt to recognize how strong the trend is in a particular direction. Then, they will open their positions to take benefit of the predicted trend development while the stock price is low enough and close their positions when the trend begins to lose strength but the price is high enough to provide them a profit. Momentum traders intend to use the tendency of other traders to follow the majority and profit from that.

    The principle behind momentum trading is “buy high, sell higher.” So momentum traders will keep winning players among bought stocks but they will sell the stocks that are not. The money earned will be used to buy more stocks that were doing well.

    The essence of momentum trading is to sell the stocks that are dropping but not too much. Previously, the traders must have a confirmation that the change in stock price is real and that will continue in the direction. So the trend must be confirmed. 

    What is momentum trading else? It is an excellent strategy with great results in volatile markets where quick access is important. When it is done correctly, momentum trading could provide potentially large profits. This trading strategy requires an outstanding and quick process of decision making and that’s why this approach can provide traders more profits than some other strategy for the same time spent.

    Risks of this trading strategy

    Momentum trading is risky without a doubt and this can be one of the answers on the question of what is momentum trading. But if traders are careful and monitor the market and trends closely, they’ll be ready to buy and sell the stocks on time. It is very important to notice the main change in trend. If the traders miss them, they may suffer big losses. Entry points and exit points or profit targets are extremely important.

    Momentum traders have to recognize the point when to enter and close their trades, the level where to exit the trade. It is also important to recognize the proper time when to take any action. For example, if the trader closes the declining stock sales in time such will end up with the profit. But if the trader fails to close the sale quickly such a trader will end up in great losses caused by the stock’s decline in value.

    It is very important to notice the stock’s sharp drop in price, sell the stock on time, and avoid a dangerous influence on capital involved in the trade. So, the timing is extremely important in momentum trading. The trader has to be absolutely sure that stock is starting to decline and enter the position promptly to sell it. Otherwise, it can be almost impossible to sell it.

    And to answer the question of what is momentum trading. Momentum trading is set to be a remarkably prosperous strategy but has to be performed perfectly.

    How to start momentum trading?

    Identify the stock you are interested in, choose your momentum trading strategy, but first test it on some demo account. But keep in mind several things.

    As we mentioned above, the volume is crucial to momentum traders, because they have to enter and exit positions promptly. That means there are enough sellers and buyers in the market and the good volume shows the stock market is liquid. Volume is the number of stocks traded in the market, it isn’t the number of all transactions.

    Momentum traders seek volatility because the high volatility provides big swings in stock prices. That is an advantage for momentum traders, these short-term increases and decreases in stock’s value give the traders a chance to profit. Of course, only if they have a good risk management strategy as protection. That means they have to set stop-loss and limit orders.

    As we said, time is important. This strategy is adjusted for short-term market movements, but if the trend keeps its strength longer this strategy is useful for position trading too.

    Momentum trading in the stock markets

    To be successful in momentum trading in stocks you’ll have to follow some rules. You’ll need the protection against big losses. So, you’ll need to trail the stop-loss, that will provide you to ride the trend. Set your rules for classifying the stocks to know which stocks to buy. Buy stocks on the uptrend market. 

    For example, if some stock reaches a 50-week high you should go long. If there are many stocks of that kind, make a selection of best 15 or 20 with the biggest raise during the last 50 weeks. Set a trailing stop-loss at a minimum of 20%. Never trade more than 20 stocks at the same time and distribute 5% of capital to each of them. The saying “never put all eggs in the one basket” is relevant to the momentum trading also.

    Momentum traders are focused on price action and rely on technical analysis and indicators because they need to decide when to enter and exit each trade, as we described above. Favorite momentum indicators among traders are RSI (the relative strength index), the stochastic oscillator, moving average. Of course, you can use any other technical indicator but these are the most popular.

    Bottom line

    To be able to understand what is momentum trading you’ll need to have severe risk management. The stock market is volatile and momentum traders need to notice price fluctuations and price pitfalls in the market.
    Don’t neglect the basic elements that could lead to price changes. Sometimes it is better not to think about the next big rally. Think about profit. It might come even if there is no big rally.
    Carefully pick the stocks to trade, set stop-loss levels, place your entry at the right time, systematically monitor the market to notice possible changes, plan, and set your exits.
    Use protective rules for every trade. Momentum traders will set stop losses to protect their trades from unexpected price reversals. There is no other way to be a successful momentum trader. We hope you have a more clear picture of what is momentum trading.

  • Technical Analysis Myths Demystified Completely

    Technical Analysis Myths Demystified Completely

    Technical Analysis Myths Demystified Completely
    There are a lot of great tools and methods that can improve your trading. But first, you’ll need to clear away some myths about technical analysis.

    By Guy Avtalyon

    What do you think, do technical analysis myths exist? 

    Some traders and investors criticize technical analysis as a “shallow” reading charts and patterns without any precise, final, or useful effects. Others think it is a Holy Grail of investing. Their misconception is that once learned will provide them constant profits. These conflicting aspects have led to the wrong using technical analysis.  

    In the world of stock trading, technical analysis is a controversial system. Many traders claim that there is no value, it is inefficacy. But on the other hand, many traders are strong supporters. Common misunderstandings come from traders that only use fundamental analysis, for example. Such will be cautious with technical analysis. However, a great number of traders across the world use technical analysis to make profits. 

    But put all these disagreements aside, and let’s take a look at the myths which come along with this.

    The technical analysis myths: TA will provide you a profit

    This myth comes along with technical analysis courses. All of them are promising great success, high profits, excellent gains. Moreover, many claims that just one indicator is quite good enough to enter the trade and profit a lot. That simply isn’t the truth. To be able to use technical analysis you’ll need to learn a lot, you’ll need practice, discipline, and risk management. To become a successful trader you’ll need time, experience, and dedication. Technical analysis is just one part of it, just one tool. But you’ll need more. TA used as only one method doesn’t have super-power. It cannot provide you easy money. All the hard work you have to do, the analysis will never do it for you. 

    Technical analysis myths are that this method singly can give you a deeper insight into trends or patterns and provide you gains. You’ll need more tools and analysis to make profits. 

    That is one of the technical analysis myths. 

    It’s a rookie illusion to believe that anyone can enter the trade armed with one method. This myth can catch everyone especially if you’re a novice. They use the lovely KISS rule extremely to explain the technical analysis. But this will never lead you to be profitable. Technical analysis will show you what has happened and what is happening. This analysis will never tell what will happen in the future.

    Real knowledge requires time to build.

    Is technical analysis simply a reading charts 

    It would be nice if true, but it isn’t. Actually, this is an idiotic opinion. Charts are useful tools but you cannot find in them everything you need to be a successful trader. The point is that you cannot step into the trading field with several simple setups or indicators and make a profit. This is one of the biggest technical analysis myths. But that’s nonsense! 

    Technical analysis is helpful to understand the market’s behavior in a simple way. It is crucial for understanding market psychology. Based on TA you can make informed assumptions about future price movements. However, just a few lines in the chart aren’t sufficient. 

    The truth is that you’ll need time to build competence in trading. You’ll make a lot of mistakes, you’ll have losses, and stress before you understand how to make decisions based on knowledge, math, and logic. Keep in mind, all that line you can see on your charts are worthless without context. 

    For example, the signals have the same value but have one big difference – the context. That’s why it is important to recognize the context in which signals appear. To repeat, the signal without the context is worthless. 

    You have to understand this character of technical analysis to be able to make recognize the way in which signals turn into results. For example, some signals acted fantastic several weeks ago but today could fail. Yes, the past performances do repeat, but never exactly. So, why is that? The answer is simple – the context is changed. Hence, the result couldn’t be identical. 

    Can you understand how dangerous this kind of technical analysis myths is? If you rely on the charts only you’ll ruin your portfolio.

    Can technical analysis give valid price predictions?

    This is also one of several technical analysis myths. Of course, never expect that all clues could be 100% accurate. That is the wrong expectation, especially rookies use to have it. If you see the exact future stock price in some predictions, go away. Don’t read it anymore. Real and qualified technical analysts normally avoid quoting prices so precisely. They will give a predictive range “from” and “to” which isn’t the exact number. 

    Technical analysis is all about probability and possibilities. There are no guarantees. When you put your money following some of the technical recommendations, understand them as the range of stock price. Keep in mind, if some stock works better more often than not that still doesn’t mean it will work all the time. But yet, that stock can generate profit more often than some other.

    The winning rate is higher when using it

    Really? The truth is that you don’t need a high percentage of winning trades for profitability. That’s the myth.

    Let’s assume you made 3 winning trades out of 4, while your friend makes one winning trade out of 4. Who is more profitable? Don’t say that you are because it isn’t quite correct until you have more info to show us. Hence, we have to know what your win-rate and risk-reward ratios are. For example, you made $40 on your winning trades but you lost $120 on your losing trade. What is your profit? Zero! Your friend had one winning trade and made $100 on his win and lost $80 on losing trades, so his profit is $20. Who is a more profitable trader now?

    The winning rate in the technical analysis is higher is also one of the common technical analysis myths. You can be profitable even with fewer wins.

    Technical analysis software can make you rich

    Maybe we should ask some successful traders this. What do you think, what has made you rich? Which software do you use? The answer will probably be: Are you kidding me? 

    No such software could be effective if you aren’t a good trader. Unfortunately, that is also a technical analysis myth. Also, misunderstanding of trading software. The internet is overflowed with a lot of software, they are cheap or expensive but all will promise you that it will perform all necessary analysis for your profitable trades. They will guarantee a profit. Just be smart, technical analysis software will provide you data about trends and patterns, but couldn’t guarantee profits.

    It’s up to you to properly evaluate trends and all other data.

    You can hear very often that technical analysis is suitable for short-term traders. That is also one of the technical analysis myths. Moreover, you’ll find it is useful for algo-trading, or high-frequency trading. It simply isn’t the truth. The truth is that technical analysis advanced along with the development of technology but traders used technical analysis much before computers appeared. Traders monitored trends by using moving averages 20-day, or 50-day, and some still do the same. 

    Technical analysis works based on the theory that past tradings and stock price changes can be worthy indicators of future price movements. But only if used along with relevant trading rules. Use technical analysis in combination with other methods of research. Also, you shouldn’t limit your research to fundamental or technical analysis when you have plenty of others. The main goal is profit. Remember it.