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  • How Options Trading Make Money?

    How Options Trading Make Money?

    How To Trade Options And Make The Best Returns?
    Options trading strategies include the whole range from simple trades to extremely complex. No matter simple or complex, they’re based on two fundamental option types: calls and puts.

    By Guy Avtalyon

    There are unlimited ways to learn how to trade options and make money. How to find the best options trading strategy is also very important. You have to choose and find the right time to use your options trading strategy. That will result in huge profit potential for the traders. If you never learn you’ll be stuck in the question of how to trade options and miss a chance to make the best returns.

    You may ask why trade options instead of direct assets?

    Trading options have some advantages that could benefit you more than direct assets. Before we explain to you how to trade options, we want to tell you where you can do that. 

    In the US CBOE or the Chicago Board of Options Exchange is the largest exchange for trading options, actually, it is the largest in the world. Its offer is in the range from single stocks, ETFs to indexes. 

    In Europe, the situation is a bit more complex since we have a specific type of option. More about this READ HERE
    Recently, the market maker demanded from regulators to bring the new rules about derivatives trades. But if you want to trade options CME Group or Intercontinental Exchange can be the right places.

    Anyway, whichever you choose you’ll have to create the proper options strategy, one or more. You can choose from a very simple buy or sell strategy to extremely complex that require many simultaneous option positions.

    How to trade options for income?

    Traders frequently enter the trading options with limited or lack of understanding of options trading strategies. It is quite hard to explain why because they can learn how to trade options and find plenty of strategies that could limit the risk of trading and, at the same time, give the best returns. 

    That requires a little effort but gives an opportunity to take advantage. Traders who know how to trade options can enjoy the power of options trading. And they are very powerful. Having that in mind, we are giving you the shortened version of how to trade options along with the most powerful strategies you can use to generate the best returns. These strategies will teach you how to trade options and direct you on the right path.

    Basic strategies to learn how to trade options

    Options trading strategies appear in the range from simple, for example, one-legged strategies to fascinating multi-legged that seem like they are coming from the other planet but from one more advanced than ours. Simple or complex doesn’t matter. All of them are based on primary option types: calls and puts. 

    When we say “simple” that doesn’t mean there are no risks involved but that simple strategies are a good starting point to understand how to trade options. Also, they are able to give good returns. 

    So let’s start with what traders call one-legged strategies.

    The long call

    This is a strategy when you buy a call option. In other words, you go long. This strategy means that you are betting that the underlying stock price will go up, higher than the strike price by expiry date. 

    For example, the stock you want to trade is at $40 per share and the call is accessible for $2. The expiration date will come in 6 months. As you know, you have to buy 100 shares at least which is a standard option contract, so your contract is for that amount of shares. That will cost you $200.

    $2 premium x 100 = $200

    Here are three possible scenarios with your long call option.

    The key variables in our imaginary case are:

    The strike price is $45
    Initial price in the example is $2
    Current underlying price is $40

    If the underlying price is lower than the strike price at expiration, your option will expire worthlessly. The result of your long call trade will be the loss. That loss is equal to the amount of money you paid for 100 shares, in our case study it is $200 which is the initial cost. The option’s total profit or loss depends on the underlying price. For example, if the underlying price is, let’s say, $42 why should you exercise the option? That would allow you to buy the underlying asset at, for example, at $45 which is more expensive than you buy it on the market.

    But here is the good news. In the long call trade, the loss will be always limited, you cannot lose more than your initial cost was. Even in case the underlying price drop to zero. You’ll lose the $200, the amount you paid for the call option.

    The second possible scenario is when the underlying price is equal to the strike price. That is a very rare case but still. In such a case there is no reason to exercise your option. You could simply buy it on the market since the price is the same. You’ll end up the same as in the first case scenario. Your loss will be equal to the initial cost.

    But what if the underlying price is higher than the strike price?

    Actually, you are buying the long call option for this scenario. That is the best possible case. When the underlying price is higher than the strike price that meant the option is in the money and you have to exercise it.

    For example, the underlying price rose to $50. As you already know, the options give you the right to buy the underlying asset at the strike price, in our example, it is $45. What can you do? Immediately sell it at the underlying price, meaning you have to exercise the option. That will bring you a cash flow of $5 per share, and as you have 100 shares which means $500 for that option contract.

    To calculate the profit from the trade you have to subtract the amount you initially paid.

    ($5 – $2) x 100 = $300

    That is your profit from one long call trade.

    The long put

    It is similar to the long call, but in this options trade, you’re betting on a stock’s decline because you don’t want it to rise. You are buying a put option, wagering the stock will fall under the strike price by expiration.
    For example, the stock trades at $40 per share, a long put option at $40 strike is available at a $4. The date expires in 6 months, for example.

    This long put will cost you $400 for 100 shares and you bought 10 contracts.

    $4 x 100 = $400

    The long put value is the biggest when the stock is worth $0 per share. That leads us to conclude, and we’ll be right, the stock’s maximal price is the strike price multiplied by 100 shares and multiplied by the number of contracts. 

    In our example, it is $4.000.

    $4 x 100 x 10 = $4.000

    When the stock increases, you can sell the put and save part of the premium, if there’s some time to expiration. The greatest downside is a total loss of the premium or $400 in this example.

    A long put is a way to bet on a stock’s drop if you can allow the possible loss of the whole premium. If the stock drops notably, you’ll earn significantly more if you own puts than you would by short-selling the stock. The other advantage is that you can use a long put to limit potential losses. In the case of short selling, you could take an incredible risk because the stock price could continue to rise. The stock has no expiration.

    How to trade options – The short put

    The short put is the inverse of the long put. The trader is selling a put, or in other words, going short. This strategy is best to use when you assume the stock will stay the same, meaning it will be flat or increase till the expiration. That will mean the put expires worthless and the put seller will take the whole premium. A short put is similar to a long call, but there are some differences. It is, so-to-say, a modest bet that the stock will rise so the payoff is modest too.

    If you use this strategy in the best case you can expect the maximum return same as the premium but you’ll as the seller will receive that upfront. The premium will be paid as a whole if the stock price increases above the strike price or stays the same. If the stock goes below the strike price at expiration, the seller will have great losses because such will be forced to buy the stock at the strike price.

    This strategy is useful for…

    But this strategy is suitable for traders who want to generate income by selling the premium to other traders. Particularly to traders who are betting the stock will drop. Put sellers want to sell the premium, that’s all that matters.

    Traders very often use short puts to reach a better buy price on a very expensive stock. They simply sell puts at a strike price, where they would like to buy the stock. For example, with the stock at $40, a trader will sell a put with a $30 strike price for $3.

    If the stock drops below the strike price at expiration, the trader is assigned the stock and the premium will offset the buying price. The trader pays a $27 per share, or the $50 strike price lessen for the $3 premium that he/she already got. 

    But if the stock continues above the strike at expiration, the put seller will hold the cash. So such can decide to try the strategy again.

    Is trading options a good idea?

    Yes, of course, and cheaper than trading stocks. Well, it’s obvious why trading stocks is interesting. It’s somehow simple to understand and definitely there is money that traders can make. But some other financial instruments can produce the benefits that stocks do not.
    Options trading, especially, has many advantages. Trading options is a very good idea and I’ll explain why even if it is more complex than stock trading and traders have to learn so much about it.
    First of all, in trading options, traders can make meaningful profits without having a large sum of money. So, it is perfect for beginners that want to start trading with a little money. Also, it is very profitable for those with large budgets. This potential to make a big profit with a little money comes from the leverage. The leverage is what provides your capital with much more trading power.

    A real-life example

    For example, you have $500 to invest and you want to invest it in Company ABC stock. Its stock is currently trading at $10, but you expect it to rise. If you buy this stock using your $500, then you could buy 50 shares of that stock. If you were right and the stock really rose to, for example, $15 you will make a profit of $5 per share which is $250 for the total. That’s a 25% return on your initial investment.
    Let’s see what will happen if you chose to buy call options on that stock.

    Alternatively, you could choose to buy call options on the same stock, giving you the right to purchase the stock. If call options with a strike price of $10 were trading at $1.00 each, you could buy 500 options with your budget of $500. That will give you a chance to buy 500 shares if the stock rise. So, let’s say the stock rises to $15, and you might exercise your option and buy 500 shares. If you sell them quickly your profit will be $2,500.
    Deduct your initial investment of $500 used to buy options. So, you’ll pocket $2.000. So the return of your capital invested is 200%.
    This is a simple example but tells more about trading options than everything.

    There are numerous profitable strategies for options trading. Traders-Paradise introduces you just four of the many strategies and ways how to trade options.  Of course, we will continue writing about all strategies we know or find from other traders.
    As we already said, there are countless ways to learn how to trade options and we are willing to present them. 

    Stay tuned, we are here for you. 

  • Forex Strategy That Works For You

    Forex Strategy That Works For You

    Forex Strategy That Works For You
    Having discipline is a key feature of forex trading. How can you have discipline when you are in a trade? One way is to have a trading strategy that works for you. The key part is the profit. 

    By Guy Avtalyon

    It will require some time to find a forex strategy that works for you especially. Every forex trader has a unique style, risk tolerance, amount of money available, and trading goals. So, your forex trading strategy that works for you not necessarily will work for other traders. But some forex trading strategies can be suitable for everyone. 

    First of all, let’s explain what a forex trading strategy is.

    What is a forex trading strategy?

    It is a technique that a forex trader uses to discover when to buy or sell a currency pair. There are numerous forex strategies that traders can practice. For example, technical analysis and fundamental analysis. A forex trading strategy that works should provide you to analyze the market and execute trades with clear risk management systems.

    A Forex strategy that works

    Forex strategies are divided into several organizational structures which is a great help to traders to find a forex trading strategy that works for each trader the best. The main point is to locate the most suitable strategy. 

    So, we can divide forex trading strategies into main categories: Price action trading that includes Trend trading, Scalp trading, Position trading, Range trading, Day trading, Swing Trading, and Carry trading.

    Forex trading demands to put together various factors to form a particular forex trading strategy that works for you. There are innumerable strategies that traders can use. What really matters is to understand and feel comfy with the strategy you create and use. Each forex trader has individual intentions and sources. That fact must be taken into factor when you want to pick or create a forex strategy that works for you particularly. 

    You can use three criteria to analyze distinct strategies based on their convenience. To find a forex strategy that works you have to determine what time resource is required. Further, what are the frequency of trading chances? And last but not the least, what is the ideal distance to a target.

    To compare the forex strategies based on these three criteria, you have to know how efficient they are based on other traders’ experiences. It is always smart to check how a particular forex strategy works for others. 

    How to find a forex strategy that works?

    The crucial is the risk-reward ratio. So, based on historical data and traders’ experience position trading will provide you the highest risk-reward ratio. 

    Further, you have to examine how much time you’ll need to invest to monitor your trades. For example, scalp trading is a high-frequency strategy so it will require most of your time.

    In order to help you to find a forex strategy that works for you, we’ll explain how each of them works.

    What is price action trading?

    Price action trading means studying historical prices to create technical trading strategies. The advantage of this strategy is that you can use it as a stand-alone. However, you can use it in combination with an indicator. Fundamentals are rarely applied, but sometimes it is smart to include economic circumstances as a supporting part.

    The price action strategy actually covers several other strategies. 

    For example, the length of trade. The strategy gives you an opportunity to use multiple time frames in trading. It is suitable for long, medium, and short-term tradings. 

    What is most important with this strategy and the most convenient you can use it without any indicators, complex techniques. It can be used based on simple price action.

    Few more words about price action strategy

    All price action in forex trading comes from buyers (that are bulls) and sellers (that are bears). When the GBP/USD currency pair goes up it’s due to more bulls than bears. Of course, when this pair is going down it is vice versa. So, you may conclude, and you’ll be right, that we have a permanent fight between bulls and bears in the forex market.

    This forex trading strategy is all about examining who controls price, bulls, or bears and who’ll control the price. 

    When bulls are in control and you have proof they will continue that, it is the right time to go long, meaning you can buy. The opposite is when the bears are in control of price. That means it’s time to short, meaning you can sell.

    But how to examine who is in control?

    This forex strategy that works always is quite simple to use. The essential is to use just two price action methods or techniques.

    One is support and resistance zones. The buy and sell zones are easy to identify and add them to your charts. When the price hits these zones there are two possible directions: the price will halt or reverse. So you’ll know that is the right time to buy or sell.

    The price action forex strategy that works in all conditions

    It doesn’t matter if it is trending, low volatility, high volatility forex market, this strategy will work anyway, and generate profit. It is different from strategies based on indicators that are suitable for particular market conditions. For example, if you use an indicator strategy that is good for the high volatility market, it will slip in other market conditions. It is due to indicators’ inability to adjust for different market conditions. One indicator is good for one market condition. 

    Price action is what can be adjusted to the time frames, different currency pairs, market conditions, and moreover, and to many traders though. The point of this forex trading strategy is that it literally works for everyone because it keeps the trading simple.

    What is the purpose of price action strategy 

    The best forex strategies use price action. As we mentioned above it is also known as technical analysis. Speaking about technical currency trading strategies, we can recognize two main techniques: follow the trend and counter-trend trading. Both are aimed to profit by identifying and utilizing price patterns.

    To profit from price patterns, the most powerful approach is to identify support and resistance. In other words, both show the market tends to bounce back from prior lows and highs. Support means the market tends to increase from an earlier confirmed low. Resistance is the market that tends to fall from an earlier confirmed high. This happens because traders want to predict the next prices against current highs and lows.

    What happens when the market approaches recent lows? 

    It is obvious that buyers will seek what they see as cheap and buy. On the other hand, when the market nears the recent highs, the sellers will lock in a profit since it is a great opportunity to sell at expensive prices. So, recent highs and lows are measures to evaluate the current price. 

    Also, support and resistance levels. Both happen because traders predict specific price action at these points and play according to their expectations. This has a great impact on the market because their actions can cause the market to go in their direction.

    But keep in mind some rules. 

    First, support and resistance levels aren’t fixed rules. They are a consequence of the action of traders.
    When traders follow the trend they actually want to profit from support and resistance break-downs.
    Counter-trending is the opposite of trend following. The traders that use this technique will sell when a new high is touched, and buy when a new low is reached.

    The main goal in forex trading is the same as it is in any other trading: eliminate the losses and have more winning trades. You can have it if you use the forex trading strategy that works. It is essential to find the one that suits you the best. That means you have to develop a set of rules and follow them if they work. If not, simply change them. However, the best practice is to follow some proven strategy. Especially if you are planning to enter forex trading and you don’t have enough knowledge and experience. Relying on strategies that are not proven and tested might lead you to enormous losses and failures. So, the best chance for you is to find the right forex trading strategy that works and use it.

    Stay tuned, we will write more about forex trading and powerful forex trading strategies and techniques.

  • Growth Stock Investing Strategy

    Growth Stock Investing Strategy

    Growth Stock Investing Strategy
    Growth investing strategy can be a great way to get high returns, but the key is to understand what growth stocks are. Your time horizon and risk tolerance are major factors.

    By Guy Avtalyon

    This is all about the growth stock investing strategy. It is the art of science implemented in investing. Investing requires significant research. But to create the growth stock investing strategy you’ll need a really good understanding and knowledge about growth stocks and underlying business. 

    Why did we say it is the art of science?

    Well, buying a stock is the art itself. Growth stocks are elite stocks because they are what could make a lot of money for you. So, you will need a great growth stock investing strategy to ensure the great gains they are able to provide. Growth stock’s value can be boosted and some careless traders could be faced with its decreased price with no warnings. To avoid losses you’ll need a stable growth stock investing strategy.

    What is growth stock investing strategy? 

    Growth stocks are a popular investment. The reason is quite clear: If some investors can make money by investing in them, why shouldn’t you? But if you want that, you’ll need knowledge, system, growth stock investing strategy to know when and how to react when the right time comes.

    To recognize the right time for investing in the growth stocks the essential part is to know when some company can grow. It could happen due to organic growth, expansion, and in case of an acquisition. But keep in mind, not all growth is a good one.

    Let’s make clear all of these cases of growth.

    When the company improves its operations and capabilities from year to year we can talk about organic growth. But organic growth can shift negative if circumstances change. So, since it is changeable it is still good but not the best growth.

    The growth caused by the expansion of the company means the company is reinvesting. It is actually expanding its operations. For example, the company may invest in its equipment, facilities, new branches, etc. As a result, you’ll notice low or no EPS and a high debt ratio. Sometimes both are visible. Of course, you can ignore low EPS if it is caused due to the company’s development and you see the company is reinvesting.

    We are talking about acquisition and growth caused by that when one company buys the other one. For example, two companies have had a problem with organic and expansionary growth for many years. To solve the problem they bought smaller companies to increase revenue and earnings. This type of growth is very good for dividend investors. 

    But is it good for growth stock investors? We are afraid it isn’t. Growth stock investors prefer expansionary growth. That may give them high returns. That is exactly happening, for example, with companies that started as small but with the potential to expand a big.

    How to develop a growth stock investing strategy

    Growth investing is an investment strategy directed on capital appreciation. Investors who implement this style are recognized as growth investors. But how to get in the race? How to know when is the right time? For that, you’ll need a growth stock investing strategy. 

    First of all, you have to be able to make a difference between the normal market and the situation when the market is not normal. The worst growth stock investing strategy is to jump into the market and make a mess and losses. You will need time to build knowledge when the market is normal. Hence, you’ll need the practice to know when the market is normal to be able to recognize when it isn’t. 

    Why is it so important to know when the market isn’t normal? What are you supposed to do in the markets that are not normal? This part may sound like nonsense but the periods when the markets are not normal are the best time to buy or sell stocks. That’s all wisdom.

    So, you have to maintain your trading journal. That may include everything you read and learn about investing and trading. For example, you can follow economic data for determined periods. No matter if they are weeks or months. Also, your journal should include the market’s movements and investment decisions. 

    Do it effortlessly. You have to know what’s happening in the market, you need to watch how the stocks on your watchlists are performing.

    That will arm you against the emotional risks of trading and making bad trades. Also, that will give you a chance to build an objective, repeatable trading strategy, so your portfolio will perform better.

    You have to understand how the market movements are driven. For example, the market movements are handled by fundamental conditions which are long term, economics which is midterm but also the news which is short term. Economic and fundamental conditions are crucial for growth stocks. What do you mean, how the company can grow if the fundamental or economic conditions are against its progress? It’s impossible. 

    How to select stock for growth investing

    Choosing stocks is not the way you may become rich. That is a mistake and don’t fall into that. You are not just picking a stock, you are choosing it after you estimate it well. In other words, you have to be familiar with stock. So, that to say, choosing stock is a very good way to obtain more education. When you get good knowledge about the market, you’ll be in harmony with the market. 

    Being in harmony with the market will provide you to know when is the right time to enter or exit the position. With this fine-tuned sense of market movements, you will know why the market is doing what it is doing, why it is better to buy or sell, why some stock is going up or dropping down.

    While you are picking stocks, you are actually creating your watch list. Of course, you’ll add only the stocks you are interested in, meaning they meet your investment criteria.

    Making a watch list can improve your growth stock investing strategy. Selected stocks are what you want to know more about, nothing else matters. 

    Of course, it is absolutely okay if you have more than one watch list. You can create it depending on types of stocks, investing style, etc. Also, you can find growth stocks in almost every industry or sector, so you can make a watch list for each sector, for instance, and update them after the earnings cycles end.

    Indicators important for growth stock investing strategy

    That to say, it is always better to follow the trend, not the other investors. Sometimes you’ll need to be patient with your watch list and pay attention constantly. You have to follow the prices’ changes, also the news, and to wait. Always keep in mind that growth stocks are impressive and exciting. Media makes a big noise sometimes about growth companies publishing good information and avoiding bad. That could lead to the stock’s price to rise because the fresh money is coming. But try to avoid following the masses. If you follow the crowd you will never get a favorable price. 

    Wait for the right time to pull the trigger. Sometimes the hardest part of growth stock investing is to recognize when it is the right time to buy. During hype, the prices will go up. But everything will be changed when bad news is on the scene. They will cause the stock price to go down. 

    The growth stocks are flying higher by optimism, desires, and exaltation. Well, investing isn’t based on current earnings. It is based on future earnings.

    For a successful growth stock investing strategy is a more important report that suggests the changes in the future outlook. As a growth investor, you would like to see that the market can reset its expectations. If there is confirmation of such changes you’ll know that the price will drop, sometimes very quick and sharp. That’s the moment when you are going to buy the stock because the price is low. Oh, yes! The reward will come later.

    Using indicators

    Just use technical analysis. You have literally thousands of techniques to analyze the market by using technical analysis. The most important is the trend, support, and resistance levels. If these levels are not clear enough,  check the trading volume. It is maybe the best indicator of the direction of a stock price. 

    When the volume is rising along with the increasing prices it represents the expanding demand and a high possibility the trend will remain to rise. The big secret of growth investing in comparison to the value investing is that growth will win each time.

    Other indicators for growth stock investing are stochastic and MACD. MACD measures the momentum of a stock’s move by the convergence and divergence of two moving averages. Stochastics believe that daily price movement is random inside a general trend. 

    A drop in stock prices inside the uptrend that is supported by bullish signals in MACD and stochastic is one of the most powerful technical entry signals. 

    Is growth investing strategy hard?

    It may seem difficult to create a growth stock investing strategy but it is quite simple. The goal is to discover and invest in growth stocks. Buying them is easy but selling can be the trickier part. Until you sell the stock you’ll not earn money. That’s a simple rule. At least it should be simple unless your emotions are involved. It can be hard to sell the stock that makes a profit. Don’t be greedy. Do it in the peaks. Never think you can do more because in most cases you never do.

    Take profit when you can. Set the take profit point and stop-loss point. 

    At the end of the day, all that matters is profit. 

    Be patient with your growth stock Investing strategy. It is key. Never hunt the higher prices, you can lose money. When you enter a position, wait for prices to go higher. When you notice a selling opportunity, always take the possibility to profit.

  • Beginner Investment Portfolio- How Should It Look Like?

    Beginner Investment Portfolio- How Should It Look Like?

    Beginner Investment Portfolio
    These tips are kind of a guide to new investors for building a good stock portfolio. Selecting stocks needs analysis, time, and the ability to estimate different parameters for the stock, industry, and overall market.

    By Guy Avtalyon

    We are going to show you how a beginner investment portfolio should look like. Of course, if you think the stock market is getting crazy, you couldn’t be more right. DJIA is going up, going down, S&P 500 Index also. The graphs are looking like ECG of some very vulnerable hearts. Maybe you don’t believe it, but this is the right time to enter the stock market. A stock market is truly a wealth-building tool. Moreover, entering the stock market is easier than ever. But, as you are new in this field, you would like to know what to buy or, in other words, how a beginner investment portfolio should look like.

    There are so many ways to invest the money and can pick the level of risk you’re willing to take. So, it is obvious the first thing you have to decide – the level of risk you can tolerate.

    High-risk investments mean greater chances for high rewards. Wait, that also means bigger chances for losses. As a beginner investor, you should avoid high-risk investments if you don’t want your capital to throw through the window. Later, when you become more experienced and earn more cash, you’ll understand how to handle the risk, for now, here are some tips of how a beginner investment portfolio should look like

    We know that a lot of beginners think of investing as attempting to get a short-term gain in the stock market. But if you want to build wealth, you have to think about long-term investing. 

    Beginner investment portfolio in 2020

    ETFs

    The world of the stock market and investing can be confused for beginners. There are individual stocks, mutual funds, bonds, mutual funds, etc.

    Our first suggestion for you is some low-cost ETF. But there is a question: is it worth it? You’ll need time to build an individual stock portfolio.

    Exchange-traded funds (ETFs) can be an excellent investment way for small investors. You can trade these funds like stocks. They can give you to expand the diversity of your portfolio and to do that without spending too much time on it. 

    Here is how an ETF works. A fund provider holds the underlying assets. Such creates a fund to follow the performance of underlying assets. At some point, such a provider decides to sell shares in that fund to other investors. As a shareholder, you’ll own a part of an ETF, but you will not own the underlying assets in the fund. 

    ETF tracks a stock index. So, as a shareholder of the ETF, you’ll get dividends, which you can reinvest, for the stocks included to the index.

    ETFs are a passive approach to investing. Brokers will not charge you trading costs for ETFs. It is zero. Just make an automatic investment each week or month, it’s up to you.

    Include the gold

    Due to the coronavirus pandemic, the global economy is suffering. In the first quarter, only five main asset classes posted gains. Among them, apart from the US dollar and yen which are currencies, the list includes gold. Gold always was a great way to protect the portfolio and historically it was known as a safe-haven investment. It is the same nowadays. You can add some gold into your portfolio while you are waiting to come into stocks because today they can be too volatile for beginner investors. So, you should grow the exposure to gold. Gold works great when the dollar is flat-to-down. Also, gold can be a great hedge against inflation.

    Moreover, it performs best when investors are worried about low growth on other assets. Basically, if we take a look at its historical performances, we’ll notice that gold played best and rose fastest when other economic measures were falling quickly. We have such a situation today.

    We have negative interest rates, bond yields are almost zero, so gold could be a very good opportunity to hold it. Add it as very good protection to your portfolios.

    A beginner investment portfolio should include mutual funds

    Mutual funds are still amazingly popular. Especially target-date mutual funds in retirement plans, so add them in your beginner investment portfolio. Mutual funds are basically a basket of investments. When you buy a share in some mutual fund you are actually investing in all holdings included to the fund with just one step. 

    A target-date mutual fund usually is a mix of stocks and bonds. 

    How to invest in target-date mutual funds? 

    For example, you plan to retire in 20 years and everything you have to do is to pick the fund with 2045 in the name. But you have to know, so don’t be surprised, the fund you choose will hold stocks essentially. How is that possible? Your retirement is far away, and stocks have higher returns in the long run, higher than any other asset. As time goes by, the fund manager will shift part of your investment toward bonds because they are less risky. You wouldn’t like to take too much risk while you are approaching the date of your retirement.

    Add Index funds to the beginner investment portfolio

    If you don’t want to employ a manager to create and manage your beginner investment portfolio, index funds are a good choice for you since they track a market index. What is the market index? It is a collection of different investments that represent a part of the market. For example the S&P 500 Index. It is a market index that covers the stocks of about 500 biggest companies in the US. So, an S&P 500 index fund will reflect the performance of the S&P 500, by purchasing the stocks in that index.

    Index funds represent another passive approach to invest just like ETFs. They carry lower fees charged based on the sum you have invested. The advantage of these funds is that some brokerages offer a range of index funds without an established minimum. So you can start investing in some index fund at $100 or less.

    Help to create the portfolio

    For example a robo-advisor. Let’s assume you would like to invest but you’re not the DIY type. Well, we have some good news for you. You have a lot of robo-advisors out there. They will handle your investment by using very complex algorithms. But don’t be worried. It will cost you less than a human advisor, usually, it will be from 0.25% to 0.50% of your account per year. Also, robo-advisers will let you open an account without the minimum required.

    Robo-advisors are an excellent way for beginners to get started investing. Look, you are a beginner and you don’t have good knowledge about investing yet. So, robo-advisors will do all that hard work for you and you’ll need a little money for them. All you have to do is to check your portfolio from time to time. So to say, it’s your money invested. Also, they will give you a chance to learn more about investing since they’ll provide you tools and educational material.

    Investment apps are also extremely helpful. You can easily find some aimed at beginners.

    Traders-Paradise recommends

    For example, M1 Finance is excellent if you want to build a free portfolio for long-term investments. This app offers commission-free investing, automated deposit, buying fractional shares, and has many other features like free maintenance of a portfolio, diversified portfolio, etc.

    Fidelity is another great app that offers full service at zero trade prices. It allows you to invest for free, a variety of ETFs that it offers can help you to build a well-balanced portfolio, stocks, or options trades and all for free.

    TD Ameritrade offers free options trading. If you want to become a trader rather than an investor, it’s a really good pick for you. We already wrote about this app but we would like to point again how excellent it is. For example, its platform “Thinkorswim” is one of the best. It will not charge you a commission for trading stocks, options or ETFs.

    After deeper investigation, you might choose to invest in the companies that offer the chance for growth. Just keep in mind, your portfolio has to be diversified. Never expect that each stock can generate great returns. That is the reason for diversification. It appears especially when we are talking about a beginner investment portfolio. But that doesn’t mean you’ll need a large collection of investments. You’ll need just a few stocks but they have to run together in your favor.

    Today’s volatile stock market offers discounts on great stocks. So, this is a great time to start investing and create your beginner investment portfolio that will generate you amazing gains in the future. 

  • Time To Buy Stocks Is Right Now!

    Time To Buy Stocks Is Right Now!

    Time To Buy Stocks Is Right Now!
    The advantage of buying stocks right now is that you can get more for your money. If you are young, the more you do with your money now, the more it will be able to grow throughout your lifetime.

    By Guy Avtalyon

    Yes, this is time to buy stocks.  That would be a short answer but here is why this is a time to buy stocks. 

    Stock prices are changing violently because of the economic slowdown caused by a new coronavirus outbreak. So, the volatility makes it especially challenging to answer this question because it may vary on a daily basis. Maybe the most critical part of any investment decision is the stock valuation on which we base our decisions, should we buy or sell the stock. Moreover, that can tell us a lot about other investors’ feelings toward some particular stock. So, you need an explanation of our observation that this is time to buy stocks.

    Here are some real examples but we have to go back in the old days. 

    The historical overview

    It was the year 1974.

    In the period of 1973-1974 bear market ultimately bottomed. It marked a 43% decline for the Dow Jones in a time frame of two years or even less. This bear market ended December 6, 1974, when the Dow Jones hit 577.60. The large sell-off caused a lot of damage to the U.S. market and it took approximately 20 years to entirely recover. But, at the same time, every investor who had guts to buy stocks then, had great returns later.

    The second occasion was in 1982. 

    The Bear Market of 1982. The market had been falling for almost one year and two months, actually exactly 451 days. In just one day, it was February 22, the S&P 500 Index was down for almost 21%. Inflation in the US was at 13.58% but also, it was a rough year for the rest of the world. But some investors were smart and made their life-time investment by buying stocks.

    The next was the stock market crash of 1987. 

    This market crash originally came from the US but had a great impact on the global economy. In October that year, DJIA fell by 22,6%. It was a well-known Black Monday. Until then, Dow Jones never had such a drop in one day. And as in previous cases, some investors made smart choices,  and bought stocks rather than sell them and it was a very profitable decision for them.

    Horrible 2008/09

    The most recent event, before 2020, happened in 2008 and 2009. This bear market actually lasted from October 9, 2007, to March 9, 2009. 

    The S&P 500 Index lost about 50% of its value, and the DJIA fell 777.68 points in intraday trading. It was the largest drop point fall until this year’s market crash. Also, some were smarter than others and they bought the stocks instead of selling them. In other words, during the market’s crashes during history, the most successful investors were buying.

    What do these events have in common?

    They were all connected to some kind of crisis. And each market situation was characterized by capitulation. 

    The stock market capitulation means giving up. It is the point when investors are giving up on attempting to recover lost gains caused by falling stock prices. For example, a stock you own has dropped by 20%. You have two alternatives: to wait it out with hope the stock starts to appreciate again, and the other solution is to compensate for your loss by selling the stock. When most of the investors choose to wait it out, the stock price will probably continue almost stable. But if most of the investors choose to give up on the stock, the stock price will decrease further and sharply. When this event is relevant to the entire market, it is a market capitulation.

    What else is in common for these market crashes? The most profitable investors were buying stocks. It looks like selling wasn’t the right option for them.

    So, we can easily conclude that time to buy stocks is right now. This is an amazing chance to buy stocks because they are cheap now.

    When is the right time to buy stocks?

    The truth is that almost all investors are scared. The possibility of losing all capital is enormous and some of them are starting to get out of the market. Everyday volatility, stock prices changes in milliseconds, have a great influence on investors’ emotions.

    The markets’ crashes, we mentioned above, weren’t quite severe as this one is. This bear market marked a 20% drop from the recent market highs. So, despite the fact that this drop is so sharp, it could be a good time to buy stocks.

    Yes, we know that investing in this time may sound strange and nonsense for someone. But, at the same time, if you are seeking long-term investment it could be the best time. For example, you can buy some blue-chips at a very favorable price. Such are, for instance, Walt Disney, or Coca-Cola. Just follow the KIS rule and look at the most prominent. These companies and similar survived through previous market crashes and came out stronger providing great returns.

    You can create real wealth in stocks now. Just don’t watch from the sideline. React and do it now.

    Is this time good to buy stocks?

    Stop dreaming and guessing. Listen to good advice only. Have an investing plan.
    Start investing with an edge, that will give you an advantage over other investors. Buy the stocks that were the best players last year. 

    Watch what the world’s billionaires do, the path they made. Allow them to show you what stock to buy. They are strong enough to fight for their investments, but at the same time, they will increase the value of yours. 

    It isn’t time yet to estimate the accurate impact the coronavirus pandemic will have on the companies. The results will differ by company. Some will manage better than others, but that’s how things go. What we can do is to find the company built to last. Take a look at their revenues for the past several years or at least for the last one. Some did great. So buy its stock at a discount. 

    You have to know that this pandemic will have influence over the next several years. Just don’t panic. This is not the time for that. This is a time to buy stocks if you have some extra money that you’ll not need in the coming years. Just invest it in brands. This lesson came from history. 

    Investing is more available than ever. That means you don’t have to rely on some difficult strategy to start earning money. You can buy options, you have help from free trading platforms, apps to create an investment plan that matches your goals, and risk tolerance. You are investing for the long haul. Ignore the panic and understand why it is the right time to buy stocks. Set clear goals, and recognize your limits. Keep in mind, investing in stocks is one of the easiest ways to put your money to work.

  • Day Trading Stocks – Most Profitable Type Of Trading

    Day Trading Stocks – Most Profitable Type Of Trading

    For day trading stocks you need volume, volatility, and a trend or range tendency. When using a stock screener, enter your rules into the relevant fields to narrow the surplus of stocks down to a few.

    Maybe it is too difficult to explicitly say that one type of trading stocks is more profitable than the others but Day trading stocks is the choice of active traders because of its profitability. Why did we say it is difficult to point to the special one? Because it depends on what kind of trader someone is and, maybe much more, on which strategy the trader chooses to use. Also, it isn’t the same which market you trade and what assets you are trading. 

    The individual traders can make a few trades per day since it isn’t hard to enter and exit several trades daily. Of course, big investors would prefer long-term opportunities. 

    One is sure, getting into day trading stocks is a decision that no one should make in a hurry. You should take time to examine all difficulties, to learn them since day trading stocks requires very careful planning. Only in that way, you’ll be able to earn your life-time capital in just a few hours. Yes, it is possible because day trading stock is one of the most profitable types of trading.

    Before we jump into the day trading stocks we have to explain what day trading is.

    What is Day trading stocks? 

    Day trading stocks means the trader is opening and closing the position during one trading day. When a trader opens a trade at 10 PM and closes it before 2 PM we are talking about day trading. You can find the traders who trade day only, some will perform it depending on the situation and opportunities, but also, so many traders never implement day trading stocks.

    How does a day trader pick the stock?

    Of course, a day trader is very careful and never just picks a stock no matter which one. Day traders always estimate the reasons to trade a particular stock. And as the reasons are different, traders have different criteria and strategies.

    Since there are thousands of stocks in the market to choose from, the main question is how to do that? What is the best criterion, measure, method? It differs too. And if we try to figure it out, we can get confused. Look, some traders can find a new stock every single day. They are seeking stocks that are breaking out of patterns. Some are looking for the most volatile stock or the stocks that breakout of support or resistance levels. Also, some traders have the favorite stock or two and trade them every day for months or years. This isn’t without a good reason behind. If you know the particular stock very well, you’ll need less research on it. Since you already have the chosen one, you don’t need to search further for new stocks and breakouts or volatility. 

    How to find a stock for day trading?

    If you want to become a day trader, you have to pay attention to several things.

    Volume

    For a day trader, a stock volume is important to enter and exit trades. To explain this more. When the volume of the stock is high it is much easier to enter and exit the position and to do without slippage or with very little. Why is it important to avoid slippage or to lessen it? Slippage happens almost all times but generally during periods of high volatility when traders use the market orders. 

    It happens when a trader gets a different price than expected, no matter if such a trader is on an entry or exit from a trade. Slippage occurs when the market order or your stop-loss point shifts somewhere between the time of your entry and the time of the execution. This is especially noticeable during periods of higher volatility when orders are bigger than the usual amount of shares on the bid or offer.

    While choices vary, but many day traders will trade stocks with a daily volume of several million, some have over 90 million. That is a big number and it is hard to manage that. So day traders usually narrow the number of stocks down by using a stock screener. If they still have too many stocks to observe, the traders commonly reduce it to stocks with a volume of 3 of 4 million on a daily average.

    Volatility

    Volatility is important too because day traders need stocks with strong change during the day. The stocks have different volatility. Some will move 0.5% daily but others will move 5% or more per day. Picking the stock may depend on many factors, for example, reflexes, a trading style, your temper, etc. For the majority of traders, the stocks that shift 0.5% to 2% daily are the best choice since they can handle that volatility. Volatility over 5% daily is hard to handle. Only the most experienced traders trade these stocks.

    Trend and range

    These two components are important in day trading stocks. Traders differ by what they are trading, so we have trend traders, range traders and some that use both excellently. As you know, the trend is the direction of stock’s price, while the range is the difference between low and high prices over a particular trading time. The stock price is moving all the time. It can go down or up showing a downtrend or uptrend. A stock screener is very helpful here and will separate stocks with trend or range depending on your setups for the strategy you chose.

    How to learn day trading stocks?

    There are many ideas and methods to maximize profits from day trading. Nevertheless, managing the risks connected to day trading is most important.

    First, trade only the amount you can afford to lose. You must have aside some amount of money for day trading. Don’t rent money for day trading because it’s possible to lose it. Start with a small amount and keep strong control over losses until you get some knowledge and experience. Don’t think you can quit your day job immediately. Day trading is seductive, we know that. But you need to test your strategy when the markets get rocky, for example, during the recession. If you are profitable, you can easily shift to day trading.

    When to buy?

    Day traders try to make money by using small price movements in assets. They have to leverage vast amounts of money to do so. They are focused on liquidity. That allows them to enter and exit a stock at a favorable price. Further, they keep an eye on volatility, higher volatility leads to greater profits or losses. Trading volume is another thing that they are considering. High volume means there are a lot of people interested in the particular stock. When the volume is increasing that is a sign that the price will drop or go up. After you choose a stock you want to trade you have to learn how to recognize the entry point. Some tools can help you. For example, some news services, but it has to be a real-time service because the stock prices can be influenced by news.

    Quotes are important too. Electronic communication networks, for example, display the best open bid and ask quotes from various market players and can automatically pair and execute orders. 

    Intraday candlestick charts are useful but provide a rough analysis of price action. 

    Your entry point has to be defined very accurately, you have to know the exact point when you are going to enter the position. For example “during the downtrend” isn’t precisely defined. You have to define more specifically and test it too and find if there is a chance for that to be generated each day or more often. 

    Also, the direction has to be tested. You would like the price to go in your expected direction. After you check and test everything you may have a potential entry for your strategy. 

    After finding an entry point you’ll need to judge how to exit, or sell, your trades.

    When to sell?

    There are many ways to exit a winning position. For example, trailing stop and profit target. The profit target is the most popular. The other well-known price target strategies are scalping, fading, daily pivots, momentum. The best time to exit is when the interest in the stock is decreasing. The volume will show that. Your profit target should provide you more profit on winning trade than you would have a loss in a bad trade. For example, if your stop-loss is 2% away from your entry price, your take profit level should be more than 2% away. You have to know your exit before you even enter the trade. The exit level has to be precise.

    Bottom line

    Day trading means to take advantage of small price changes. It can be a profitable game if you play it carefully. Hence it can be a risky game for new and inexperienced traders who don’t have a strong trading strategy. This type of trading is connected to the high volume of trades. So you have to respect some general principles if you want to become a day trader.

    You may have profitable trades by following the patterns. More about it learn from the “Two Fold Formula” book, we recommend. But we also recommend to test it by using our preferred trading platform firstly.

    You might find these interesting too:

     >>> Is Day Trading Like Gambling?

    >>> Swing Trading and Day Trading – The Difference

    >>> The pattern day trader rule

    >>> Day Trading the Best Methods – Day Trading for Beginners

    >>> Day trading stocks – How to find best trading platform

    >>> What is the best day trading strategy?

    >>> Money Required to Start the Day Trading

     

     

  • The Global Recession – How to Survive?

    The Global Recession – How to Survive?

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

    By Guy Avtalyon

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

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

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

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

    How can we know the global recession is here?

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

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

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

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

    Something is very wrong in the global economy right now

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

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

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

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

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

    How to survive the global recession?

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

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

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

    May the global recession last for a long time?

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

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

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

    Bottom line 

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

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

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

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

    Stay safe! #StayHome

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

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

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

    By Guy Avtalyon

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

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

    First of all, temper your expectations. 

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

    What are good returns on investment?

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

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

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

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

    Your expectations must be fair

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

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

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

    How to calculate the rate of return

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

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

    Let’s do it.

    $2,850×0.96×0.96=$2,626.56 

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

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

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

    (300/1000)x100 = 0,3×100 = 30%

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

    Can the stock market give you good returns on investment?

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

    What are the good returns on investment today?

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

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

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

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

  • Open Interest Strategy And How To Use It

    Open Interest Strategy And How To Use It

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

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

    What is the open interest?

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

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

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

    How to calculate?

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

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

    Volume and open interest

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

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

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

    Analyze open interest strategy

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

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

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

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

    The importance of reports

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

    Using open interest strategy

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

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

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

    Bottom line

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

    But they fail to catch really valuable information.

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