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  • Safe Haven Assets Where Investors Have Begun Piling Into

    Safe Haven Assets Where Investors Have Begun Piling Into

    safe-haven assets
    Safe-haven assets are a fundamental place to avoid economic downturns. They express the markets that can protect the investment from losses when the market falls.

    The safe-haven assets are investments that investors start piling into during intense market volatility and uncertainty. The main goal is to take a position into investments that are recognized as safe from losses. Even more, they have the capacity to rise in price while the bulk of other assets are declining value. 

    Safe-haven assets provide investors to limit their exposure to losses when market downturns and protect their capital invested. Like we have now when almost all markets plunged. When the markets enter tumultuous times like this one, the value of investments falls sharply. Investors are seeking assets that are not correlated to the markets. These kinds of assets are safe-haven assets.

    So, we can say that safe-haven assets are able to hold or grow in value during the market turbulence.

    Do anything to minimize the risk

    Risk is real if you want to invest in stock markets. But it isn’t necessary to be exposed to great risks if you can avoid it. The point is to minimize the risks all the time, during the life of your investment. But when the market is declining almost all assets become too risky. In order to protect their capital, investors leave their position in unsafe assets and start buying something safer.
    Safe-haven assets are those that don’t carry a high risk of loss. Historically that was cash, real estate, mutual funds, CDs, etc. You may ask, is gold a safe-haven asset? Gold as much as silver are historically used as a hedge against market or political uncertainty or the devaluation of a currency. But having in mind that gold coins have varied during the unstable political situations, it might be a wrong choice. Anyway, commodities are risky.

    Better pick s risk-free assets, such as sovereign debt instruments or hold gold and silver trough futures.

    What are safe-haven assets?

    Safe-haven assets are the necessary answer to economic downturns. They are the markets that can protect investors from losses when other assets and markets fall. How can they protect your investment portfolio?
    Safe-haven assets are holdings where investors and traders set their money to protect against major droppings. Safe-haven assets must allow protection from losses.

    But what are the characteristics of safe-haven assets?

    If you want trade safe-haven assets you must pay attention to liquidity. Such assets must have high liquidity. Why is this characteristic so important? Because that will provide you to enter and exit positions at a price you determine but without slippage. Further, safe-haven markets must have limited supply.  You don’t want the assets with a supply that passes their demand. It is more likely for such an asset to decrease in value. For example, gold has a deficit of supply, but higher value when demand increases. 

    True safe-haven assets have to hold a certain level of demand in the future. So you, as an investor, must believe in the assets’ future, you must be confident about it. For example, that is the reason why silver isn’t so good investment choice. Yes, it has many purposes now, but it can be replaced in the future by some other material. On the other side, you might recognize copper as safe-haven assets because of its importance that increases over time. Almost every day, science, the industry find new ways to use copper.

    Can you see where the essence of safe-haven assets? It is permanent. We cannot ever say that some temporary high valued asset belongs to the corpus of safe-haven assets. 

    Is gold the ultimate safe-haven asset?

    For many investors, gold is a safer asset to buy and hold, safer than cash, because it is a tangible asset. Further, no one can print more gold as it is possible with banknotes. This is important because it provides the value of gold not being changed in this way. From the historical point, gold served as insurance during unfavorable economic circumstances. Gold prices regularly rise when drastic events happen. Moreover, gold is negatively correlated to the US dollar. Meaning, when the dollar is strong it is costly to buy and hold. That drives gold prices lower. And vice versa. Investors know this. Whenever the US dollar was trading lower, they started piling into gold.

    What are other safe-havens?

    When the market records turbulent circumstances the value of most investments falls sharply. So, investors want to buy assets that are negatively correlated to the overall market. They are moving their investments into safe-haven assets.
    That can be defensive stocks, such as consumer goods, utility, biotechnology, healthcare. These stocks tend to resist the market’s downturn. People are buying food, drugs, they need health care and groceries.  Also, don’t think that real estate due to its lack of liquidity isn’t a safe-haven asset. The real estate has a constant income flow that can offset the liquidity. 

    Infrastructure is also safe-haven assets. So, even though the markets are going down there are plenty of ways to stay invested.

    Building a safe-haven assets portfolio will need some additional attention to optimizing returns. But the results may be quite surprising. But there are safe-haven currencies also. For example, the Japanese Yen (JPY) is seen as one of the most stable safe-haven currencies.

    Can we trade safe-haven assets?

    Of course, we can. So after we’ve recognized safe-havens assets, want to trade them. The question is how and when to trade them. The possibility isn’t questionable. Let’s say this way, a market downturn is likely to hit due to the factors you can recognize. 

    If you want to move a chunk of your portfolio into safer assets there are several things you have to consider.

    First of all, trading safe-haven stocks is practiced as a defensive tool. The aim is to overcome a declining economy as even defensive stocks may not generate a positive return. It’s true that the slow economy will let safe-haven stocks beat the market, but it doesn’t mean that you will profit.

    When trading safe-haven stocks examine the beta of stocks before investing. Beta points the relationship between the stock and the market. If the beta is 1, that means the stock price is fully correlated with the market, but when the beta is above 1, the stock is more volatile than the market, and finally, when the beta is closer to zero the correlation with the market is smaller. Knowing the beta of the stock will enable you to hedge against volatility. 

    The P/E ratio will show you if the safe-haven stocks are undervalued or overvalued. The safe-haven stocks are well-known for being undervalued.  Also, the stocks with high dividends, meaning greater than 6%, are a good pick for safe-haven stocks. At least, as much as the stock from a well-established company. Well-known brands or large-cap stocks will lose less in value than small-caps during the market downturns.

    All these factors are important and you have to evaluate them before picking your safe-haven assets and adjust your new holdings to your risk appetite.

    Currencies as safe-haven assets

    Some currencies are recognized as safe-havens. In periods when the market is extremely volatile, currency traders would like to move their cash into safe-haven currencies as protection. Those kinds of currencies are the Swiss franc, the euro, the Japanese yen, and the U.S. dollar.

    Forex traders have to pay attention to some currencies that might act differently to market shifts than others. Also, there is always a question of what currencies suit to be safe-havens. 

    Bottom line

    The “safe-haven” refers to financial assets that investors turn to protect their profit from periods of market turbulence.
    Safe-haven currencies, safe-haven stocks, gold, have historically preserved or increased their value during market downturns. They gave good protection against losses. Why shouldn’t they do such a thing for us now?

    One suggestion before doing anything in real: use our preferred trading platform virtual trading system and check the two formula pattern.

  • MACD Indicator – Moving Average Convergence Divergence

    MACD Indicator – Moving Average Convergence Divergence

    MACD Indicator
    MACD is one of the most popular indicators used among traders. It helps identify the trends direction, its speed, and its velocity of change.

    MACD is short for “Moving Average Convergence Divergence.” It is a valuable tool. Traders know how important it is to use MACD as an indicator. Also, how reliable is using this tool in trading strategies. But that can wait for a while, firstly, let’s explain what is Moving Average Convergence Divergence or shorter MACD.

    It is a trend-following momentum indicator that presents the correlation between two moving averages of a stocks’  price or in some other assets. We can calculate the MACD, it is quite simple.

    Just subtract the 26-period EMA from the 12-period EMA. EMA is an Exponential moving average. 

    Here is the formula:

    MACD = 12-period EMA − 26-period EMA

    The 26-period EMA is a long-term EMA, while 12-period EMA is a short-term EMA.

    If you need more explanation about EMA, let’s say that the exponential moving average or EMA is a type of MA, moving average. EMA puts more weight and importance on the most recent or current data points. That’s why the EMA is also referred to as the exponentially weighted moving average. 

    The result we get by using the calculation is the MACD line. 

    The MACD is useful to identify MAs that are showing a new trend, no matter if it is bullish or bearish. But it’s the priority in trading, right? Finding the trends has a great impact on your account since that is the place where you can earn money.

    To recognize the trend you will need to calculate MACD as we show you, but you will need the MACD signal line, which is a 9-period EMA of the MACD and MACD histogram that is calculated: 

    MACD histogram = MACD – MACD signal line

    The main method of reading the MACD is with moving average crossovers. When the 12-period EMA crosses over the longer-term 26-period EMA pay attention since the possible buy signal is generated.

    You can buy the stocks or other assets when the MACD crosses above its signal line. 

    The selling signal is when the MACD crosses below this line. 

    MACD indicators are interpreted in many ways, but the general methods are divergences, crossovers, and rapid rises/falls.

    How the MACD indicator works

    When MACD is above zero is recognized as bullish, but when it is below zero it is bearish. If MACD returns up from below zero it is bullish. Consequently, when it goes down from above zero it is bearish. When the MACD line crosses more below the zero lines the signal is stronger. Also, when the MACD line passes more above the zero lines the signal is stronger. 

    The MACD can go zig-zag, it will whipsaw, the line will cross back and forward over the signal line. Traders who use this indicator don’t trade in these circumstances because the risk is too high. To avoid losses they usually don’t enter the positions or close them. The point is to reduce volatility inside the portfolio. 

    The divergence between the MACD and the price movement is a more powerful signal when it verifies the crossover signals.

    Is it reliable in trading strategies?

    MACD is one of the most-used technical indicators. It is a leading and lagging indicator at the same time. So it is versatile and multifunctional, so being that it is very useful for traders. But one feature of this indicator is maybe more important. The indicator has the ability to identify price trends and direction, and forecast momentum, but it isn’t complex. It is pretty simple, so it is suitable for beginners and elite traders to easily come to the result of the analysis. That is the reason why many traders view MACD as one of the most reliable technical tools.

    Well, this tool isn’t quite helpful for intraday trading but can be used to daily, weekly or monthly charts. 

    There are many trading strategies based on MACD but basic strategy employs a two-moving-averages method. One 12-period and one 26-period, along with a 9-day EMA that assists to deliver clear trading signals. 

    Operating the MACD

    As we said, it is a versatile trading tool and the indicator is strong enough to stand alone. But traders cannot rely on this single indicator for predictions. They have to use some other indicators along with MACD to ramp-up success in forecasting. It works great when traders need to identify trend strength or stock’s direction.

    If you need to identify the strength of the trends or stocks direction, overlapping their moving averages lines onto the MACD histogram is really helpful. MACD can be observed as a histogram alone, also.

    How to Trade Forex Using MACD Indicator

    If we know there are 2 moving averages with diverse speeds, we can understand the more active one or faster will react quicker to price change than the slower MA.

    So, what will happen when a new trend occurs?

    The faster lines will act first and ultimately cross the slower ones and continue to diverge from the slower ones. Simply, they will move away. When you see that in the charts, you can be pretty sure the new trend is formed.

    When you see that the fast line passed under the slow line, that is a new downtrend. Don’t think something is wrong if you cannot see the histogram when the lines crossed. It is absolutely normal since the difference between the lines at the moment of the cross is zero.

    The histogram will appear bigger as the downtrend starts and the faster line moves away from the slower line. That is an indication of a strong trend

    For example, you trade EUR/USD pairs and the faster line crossed above the slower and the histogram isn’t visible. This hints that the downtrend could reverse. So, EUR/USD starts to go up because the new uptrend is created. 

    But be careful, MACD moving averages are lagging behind price since it is just an average of historical prices. But there is just a bit of a lag. It is not enough for MACD not to be one of the favorites for many traders.

    More about MACD

    As you can see, the MACD is all concerning the convergence and divergence of the two moving averages. Convergence happens when the moving averages go towards each other. Divergence happens when the moving averages go away from each other. The 12-day moving average is faster and affects the most of MACD movements. The 26-day moving average is slower and less active on price changes.

    MACD was developed by Gerald Appel in the late ’70s. It is one of the simplest and most useful momentum indicators that you could find. The MACD utilizes two trend-following indicators, moving averages, turning them into a momentum oscillator. So it provides traders to follow trend and momentum. But the MACD is not especially useful for recognizing overbought and oversold levels.

    Bottom line

    The MACD indicator is unique because it takes together momentum and trend in one indicator. This special combination can be used to daily, weekly or monthly charts. The usual setting for MACD is the difference between the 12-period and 26-period EMAs. You can try a shorter short-term moving average and a longer long-term moving average to have more sensitivity and more frequent signal line crossovers.

    The drawback of MACD is that it isn’t able to identify overbought and oversold levels since it does not have an upper or lower limit to connect these movements. For example, over sharp moves, the MACD can continue to over-extend exceeding its historical heights. Moreover, always keep in mind how the MACD is calculated. We are using the current difference among two moving averages, meaning the MACD values depend on the price of the underlying asset.

    So, it isn’t possible to relate MACD values for a group of securities with differing prices. 

    Some traders will use only on the acceleration part of MACD, some will prefer to have both parts in order.

    The one is sure, MACD is a versatile indicator and every trader should have it as part of the tool kit.

  • Falling Knife Stocks – How To Profit From Falling Knife

    Falling Knife Stocks – How To Profit From Falling Knife

    (Updated October 2021)

    Falling Knife Stocks
    Falling knife stocks represent a high opportunity to make a lot of money, but they have a tremendous potential to hurt the traders’ portfolio.

    The falling knife stocks represent the stocks that have felt a speedy decline in the price and it happened in a short time. A ‘falling knife’ is a metaphor for the quickly sinking in the price of stocks. Also, it could happen with other assets too. We are sure you have heard numerous times “don’t try to catch a falling knife,” but what does that really mean? 

    That means be prepared but wait for the price to bottom out before you buy it. Why is this so important, why to wait for the stock price to bottom out? Well, the falling knife can rebound quickly. That is called a whipsaw. But also, the stocks may fail totally, for example, if the company goes bankrupt.

    Even if you know nothing about investing, you know the phrase “buy low sell high.”  But it is good in theory. In practice… 

    Okay, let’s see! Suppose we have a stock with price drops. Firstly it was just 10%. No problem, we could survive that, we can cover that loss in our portfolio with gains on other assets. Oh, wait! Our stock continues to fall more and more, by 30%, an additional 40%, 60% even 90%. All this happened in a few months, for instance. That is the so-called “falling knife.”

    The falling knife definition

    Falling knife quotes to a sharp fall, but no one can tell what is the precise magnitude or how long this dropping will last until it becomes a falling knife. But certainly, there is some data we can use to determine if there is a falling knife at all. So let’s say that the stock that dropped 50% in one month or 70% in five months are both recognized as a falling knife. They are both falling knife stocks. 

    The general advice from experts is “don’t try to catch the falling knife” and it is even more valuable for the beginners. In any case, anyone who wants to continue to invest in that stocks or wants to trade them should be extremely cautious. This kind of stock could be very dangerous since you may end up in a sharp loss if you enter your position at the wrong time. So try not to jump into stock during a drop. Of course, traders trade on this dropping. But traders don’t want to stay in position for a long time, they want to be in a short position, so they will examine all indicators to time the trades. For beginners, this is still dangerous.

    How do these stocks work?

    They work very simply. At first, you will read or hear some bad news about the company. When bad news appears the stock price can drop. And it isn’t something unusual in the stock market. Yet, if this degradation continues we can see investors selling in a panic. That can decrease the price further. So we have two possible scenarios. For example, after bad news, some good news may appear. Let’s say the company’s management is trained for damage control and we are sure that the stock will rebound. This situation is greatly profitable for the investors who purchased this stock at a cheaper price before it bounced back.

    But what is a possible scenario if the company continues to weaken? 

    Even bankruptcy is possible. Well, in such a case the investors could have enormous losses. 

    So, the precise conclusion is that falling knife stocks can generate huge gains but also, a great loss. That depends on when you enter the position. Well, you know, some stocks never rebound. Even more, they didn’t reach the original price for years since they began to drop.

    To have a real chance to make a profit from falling knife stocks you must have a firm plan.  What do you want to achieve? If you want a short trade, maybe it is better to wait until the stock ends its dropping.

    Falling knife as an opportunity

    But you might think this “falling knife situation” is a great opportunity to buy the cheap stocks that will grow in the future. That’s legitimate, of course. But instead of investing all the money you have at once, try to buy that stock in portions. One bunch this week, the same can be bought in the next week, etc. There is another way too. Let’s assume you want to invest in this stock $10.000. The original price before dropping was $500 per share, now it is $200, so buy that $500 for $200 and wait for a while until the price drops more, to $100, for example. Then you can buy another $500 for $100, etc.

    The point here is that you have a plan in place and stick to it since you will not have time to make a proper decision during the regular market hours because this kind of dropping in stock price is moving too fast. For your plan to be successful, it is MUST have an exit strategy. That is particularly important for traders that are waiting for the quick bounce. The exit strategy will provide you to protect your trade to not become an investment. The essence of knife catching isn’t to buy low and sell lower.

    Make big money when the stock prices go down

    There are some rules if you want to profit from a falling knife and traders should follow them.

    Buying a stock that is falling sharply is a bad idea for beginners, to make this clear. Picking the bottom can generate massive gains, that’s true but only if you buy at the right time. If you miss it, it is more likely you will end up in huge losses. And that happens remarkably frequently.

    But at some point, when the falling knife is so close to the bottom and when the risk of additional loss is at a minimum. So the potential gains can be enormous. So, reach it out and take it. Yes, we know it is easy to say but how to do that?

    The first rule for profiting from the falling knife is: Don’t buy a stock on the first drop. You see, when the first bad news comes, it is more likely that there will be more bad news that will cause the stock price to drop further. Even if there is some good news for a short time, the more bad news will come in most cases. So, wait for that and after that happens, you can start to buy but be sure that technical requirements support the bottom. That is extremely important if you want to generate massive gains.

    Use MACD 

    The moving average convergence divergence momentum indicator is helpful to reveal where a stock is going to head next. For example, if the stock is hitting the new lows and the MACD indicator also hits the new lows, you have a strong downtrend that is very possible to continue. But if the MACD is rising the trend is going to reverse. That means that the risk of catching a falling knife is reduced. So, we have a stock that dropped at least twice but the rising MACD shows the trend is going to reverse. Don’t wait anymore, buy it! This is a low-risk point, so traders should buy that stock since its price will rise.

    That’s how you can make money from a falling knife and with low risk.

    Bottom line

    The falling knife stocks can be a great opportunity, but they can hurt your portfolio, also. For experienced traders, yes. But if you are a beginner, it is better to stay away from these stocks until you learn more. Even not all experienced traders are not able to handle the “falling knife” stocks and catch the falling knife and recognize the whipsaw. Sometimes, you’ll have to wait for a long time until you make any gains from this trade. Don’t expect the stocks can bounce back over the next day or week. It is more possible to wait for months after you enter the trade to see the gains. But it can be worth it. Anyway, it is worth knowing how this thing works.

  • How To React To The Stock Market Decline

    How To React To The Stock Market Decline

    How To React To The Stock Market Decline
    Dropping stock prices don’t have to be your enemy necessarily. Wealthy investors know how to react to dropping prices and how to find stocks that are good buys.

    When such an unpleasant event happens, the most important thing is how to react to the stock market decline. We have had many very dangerous situations in the stock market over the past several decades. Some investors were ruined, some survived and even more, they succeeded to grow their wealth. What did they do differently? How did they make it? Is there any rule about how to react to the stock market decline?

    The S&P 500 had the fastest 16% decline ever. We already wrote about the possibility of how coronavirus can affect the stock market badly. And it happened, coronavirus is a catalyst for investors’ fears. 

    This shakeout in stocks is motivated by the uncertainty caused by the coronavirus outbreak. We can be sure about that. A kind of support for this claim comes for the media, we are constantly under analysts’ opinion-fire and it is so easy to feel bad and frightened. But we have to do something! We have to protect our health in the first place but also we have to protect our capital invested. So, how to react to the stock market decline?

    Investors are fearful. Did you remember what the great value investor Benjamin Graham said for stocks?

    “In the short run, a market is a voting machine but in the long run, it is a weighing machine.”

    What does it mean? 

    This means that companies can be popular or not and that’s how markets are valuing them and fears can beat the market but in the short run. But in the long run, the market is assessing the substance of the companies, their underlying business performances. What really matters isn’t the media’s fickle opinion in the short run. 

    That makes up the stock market. Yes, we saw many cases of risks in the market but the stock market has a long history and had so many UPs on its way. So, what do we have to do NOW? How to react to the stock market decline NOW? Should we be fearful? Or maybe greedy?

    Millionaires are down on the stock market

    Some wealthy people are getting out form the stock market these days. Especially the millionaires. Some surveys reveal that investors’ confidence fell since economic conditions look like they’re worsening. The stock market strength is the factor that most changes their current investment plans. And as we know, the stock market declines.

    But there are some different examples of how to react to the stock market decline. While these investors mentioned above are getting out of the market some, also millionaires, see the opportunity. 

    Smart and reach investors are buying stocks

    They are getting in instead. Are they right? How can they see the opportunity in the declining market? Examining this was so exciting.

    Let’s say like this, the majority of average investors are not leveraged. That isn’t a disadvantage, we should look at that as a gift. If they have, and they have, available cash and enough to invest, they are putting it to work right now while the prices are cheap. Are they crazy? The others are going into cash. Well, we think they are not crazy, they are completely smart investors.

    Okay, here the explanation. 

    The major asset classes like stocks will grow over time. The advantage of buying now and holding stocks is that the value will rise faster than the value of the cash. What? Yes, the epidemic will stop one day sooner or later (sooner is better for many reasons), and everything will come to its place. The economy will recover and grow, and we will have a better place to live. Much better than we have now or we had before. Okay, if we are wrong, then we will have more important things to be worried about than the stock market is.

    Average investors should do the same

    As we said, the individual investor should buy now. Historical data shows that the global stock markets have an upward trajectory and the investments are going to grow over time. So, this theory is simple to understand. That is the philosophy of the richest investors. For example, Carl Icahn and many others. They are buying while markets sell-off on panic and uncertainty. Is that a recipe? It looks like that. This is an example of how to react to the stock market decline. The circumstances in the stock market like we have now are a great opportunity to buy stocks of high-quality companies since there are no fundamental reasons behind the market decline. Even if your stocks are going down, don’t panic! Don’t sell! Buy them more at a cheaper price. In this way, you will grow your wealth.

    How to react to the stock market decline

    Follow the example of the great Warren Buffett. What he did, how he reacted to the stock market decline?

    He advised, “being greedy when others are fearful.” 

    This kind of view while the market decline is a powerful advantage and the best investors have it. That is different, in contrast to what the majority of investors are doing. That’s why they are unique and rich. So, that attitude works. The point is to pick stocks that can outperform the market. Such stocks even when they have a double decrease, usually turn out and become winners. To make this clear, the stocks that have had bigger declines, had bigger final outperformance after they started to add their positions. That’s the fact according to a recent Harvard study. This study also reveals that wealthy investors choose stocks that exceed the wider market historically and they outperform by double figures. So, follow what really rich investors are doing and do the same.

    Pay attention to how to react to the stock market decline 

    When the stock market is down your stocks will drop, for sure. Some of your stocks will drop more, some less. But let’s assume you were a smart stock picker and you hold a stake in a stable company. But due to the market downturn, its stock dropped 30%. It was a good, steady company. What happens? This stock was one of the winners in your portfolio. Well, it happens due to the coronavirus outbreak now. The stock is down and the stock price decreased by 30%, let’s say. How much did you lose? Should you get out? If you don’t, how long and how much will it take to get back? If your stock decreased by 30% it will need to increase 60% to get back, to break even. This is just an example, remember that. So, since your investment isn’t problematic and you hold a stake in a good company, you can be pretty sure that it will recover after the market starts to rise again. Further, if you sell when the company is down, it is more likely you will miss out on a lot of money. Instead, find the sellers of that stock and buy more at a cheaper price. Just act as wealthy investors do. 

    Bottom line

    However, the stock market decline is stressful not only for the stockholders. The overall economy suffers. But instead of panic, try to use advantages. For example, you can reinvest your dividends and buy more stocks and double your holdings. Of course, the cash you have you can use to buy more stocks in some other company. This is a great opportunity, with less money you can buy more stocks at a cheaper price.

    If you need cash right now, you might have to sell your stock at great losses. But this can be a problem only if you invested all your money. If you put some of your money aside and saved it for rainy days, you are safe and can avoid this scenario. All you have to do is to follow what the best investors are doing. That’s how to react to the stock market decline.

  • 52-Week High or Low – Should You Buy Or Sell Stocks

    52-Week High or Low – Should You Buy Or Sell Stocks

    (Updated October 2021)

    52-Week High/Low - Should You Buy Or Sell Stocks
    When you see a stock going to its 52-week high or low, what is your first reaction? Do you think you should sell or buy it? This is a difficult part and we will explain why.

    A 52-week high or low is a technical indicator and every investor or trader should keep an eye on these tables because it is the simplest way to monitor how our stocks are doing. For example, you want to buy some stocks and this can be the best way to check their recent prices. A 52-week high or low will help you to determine a stock’s value and usually can help to understand the future price changes. 

    Investors often refer to the 52-week high and low when looking at the stock’s current price. When the price is nearing the 52-week low, the general opinion is it is a good time to buy. But when the stock price is approaching the 52-week high, it can be a good sign to sell the stocks.

    So, the 52-week high or low values might help to set the entry or exit point of your trade.

    Prices of stocks change constantly, showing the highest and lowest values at different periods of time in the market. A number marked as the highest or lowest stock price over the period of the past 52 weeks is called its 52-week high/ low.

    How to determine the 52-week high or low

    It is based on the daily closing prices. Don’t be surprised if you can’t recognize some stock. Stocks can break a 52-week high intra-day, it may end up at a much lower price, a lot below the prior 52-week high. When that happens, the stocks are unrecognized. The same comes when the stock price hits the new 52-week low over the trading session but doesn’t succeed to close at a new low. 

    Well, the stock’s inability to make a new closing 52-week high or low can be very important.

    If you watch the prices for some stock, for example, over a particular period of time, you will notice that sometimes the price is higher than others but sometimes it is lower than all others.
    The 52-week high or low for the price of any actively traded stock (also any security) shows the highest and lowest price over the previous year that is expressed as 52 weeks.

    For example, let’s assume you are looking at changes in the price for some stock over the prior year. You found that the stock traded at $150 per share at its highest and $80 at its lowest. So, the 52-week high or low for that stock was $150/$80.

    When to buy a stock

    What do you think? Is it better to buy stock from the 52-week low record or from the 52-week high record? You can find these lists on financial sites like Yahoo Finance, for example. On one side you have stocks with new highs and on the other, you have stocks with new lows. What would you choose?

    This isn’t a trick question. If you follow the rule “buy low, sell high” you might think that some stock from a 52-week low list can be a great opportunity. You may consider it an unfortunate event and suppose the stock price will go up. Remember, you have only this information – highs and lows. Buying stocks at the bottom can be a good choice but you don’t have other important information about the company to make a proper investment decision. So, when making your decision based only on one info, you are gambling. You have no guarantees that the “bottomed out” stock will go up to the top or catch upward momentum. So, you will need more information to pick the stock from the list.

    But the dilemma may come the same with stocks from the 52-week high list. You might think these companies are successful and the progress will continue. Well, sincerely, you might be right. The company’s management is doing something good. There are a lot of chances for that stock to keep moving forward. So, you will make a slightly better guess than buying stock from the 52-week low list. 

    You see, the rule “buy low, sell high” isn’t always accurate. You don’t have any hint that stock from the bottom will ever come out.

    The 52-week high or low is just an indicator of potential buying or selling. To do that you will need more information.

    Trading based on the 52-week high

    What’s going on when stock prices are heading toward a 52-week high? They are rising, it is obvious. But some traders know that the 52-week highs represent a high-risk. The stocks rarely exceed this level in a year. This problem stops many traders from opening positions or adding to existing positions. Also, others are selling their shares.

    But why? The rise in the stock price is good news, right? Profit is growing, the future earnings outlooks are bullish. This can keep prices successful, at least for a week, sometimes for a month. If the news is really good and fundamentals show the strong result the stock breaks beyond the 52-week high, share volume greatly grows and the stock can jump over the average market gains.

    But how long can this effect last?

    The truth is (based on research, one important is Volume and Price Patterns Around a Stock’s 52-Week Highs and Lows: Theory and Evidence, authors Steven J. Huddart, Mark H. Lang, and Michelle Yetman) shows that the excess gains decrease with time. This research reveals that small stocks initially provide the biggest gains. But, they usually decrease in the following weeks. Large stocks generate greater gains initially, but smaller than small stocks do. So, excess gains that generate small stocks far pass these the larger stocks generate during the first week or month following the cross above the 52-week highs.

    This is very important data for traders and their trading strategy would be to buy small-cap stocks at the moment when the stock price is going just above the 52-week high. That will provide them excess gains in the next weeks, according to the research mentioned above.

    Intra-Day 52-Week High and Low Reversals

    A stock that makes a 52-week high intra-day but closes negative may have topped out. This means the price may not go higher the next day or days. Traders use 52-week highs to lock in gains. Stocks hitting new 52-week highs are usually the most sensitive to profit-taking. That may result in trend reversals and pullbacks.

    The sign of a bottom is when a stock price hits a new 52-week low intra-day but misses to reach a new closing 52-week low. This happens when a stock trades is notably lower than its opening, but rallies later to close above or near the opening price. This is a signal for short-sellers. They are buying to cover their positions.

    Bottom line

    To conclude, the strategy of buying stocks from the 52-week high list breaks the rule buying low. Yes, but hold on! The rule “not buy at high” can be applied to stocks that unnaturally bid up some kind of market over-reach. For example, the stock whose price has surged 30% over a single day. Drop it out! Neglect them.
    You want stocks with steady growth over a long time into the list. When you recognize such stocks, start to evaluate them. Examine every single detail about the company.

    Buying for bargains is a good strategy, but it is also a good cause for selling a stock at or near its 52-week low.

    Finding the winners can be trickier. One suggestion, start from the top and eliminate every stock with an unrealistic increase. They are on the top by mistake, trust us. Find stable winners. Do we have any valid proof that they will not continue to rise? Of course, they can.
    If you want to trade based on the 52-week high effect, keep in mind, it is most functional in the very short-term. The largest profits come from rarely traded stocks with small and micro-cap.

    Remember, the 52-week high or low represents the highest and lowest price at which a stock has traded in the prior year, expressed in weeks. It is a technical indicator. The 52-week high describes a resistance level and the 52-week low represents a support level. Traders use these prices to set the purchase or sale of their stock.

  • How to Create a Trading Plan

    How to Create a Trading Plan

    How to Create a Trading Plan
    A trading plan is a set of rules and guidelines that define your trading performance, financial goals,  rules, risk management and criteria for entry and exit positions.

    Why is it so important to know how to create a trading plan? Because if you know how to create a trading plan, you’ll know on which market to trade, how to cut your losses, when to take profits and find other opportunities for investing. But first, we have to understand what a trading plan is.

    A trading plan is…

    It is a full decision-making tool that helps you determine what, when, and how to trade. Every trader has an individual trading plan suited only for her/his style, goals, risks tolerance, capital available, motivation for trading, the market you want to trade. 

    A trading plan is a methodical tool that helps traders to identify and trade securities. If you want to have a successful trading plan you have to take into consideration a number of variables such as time, risk and goals. A trading plan gives you control of how you will find and execute trades, the conditions you will buy and sell assets. Moreover, it determines how large a position you will take, how to manage it. Also, your trading plan will determine what assets you can trade, as well as when to trade or when not to.

    But there is also one important step more. Never invest before you make your trading plan because your capital might be at risk. A trading plan will guide your decision-making process.

    To know how to create a trading plan you must understand it is different from a trading strategy. Trading strategy means you know how and when to enter and exit the trade.

    The benefits of knowing how to create a trading plan

    Since the trading plan defines the reasons why you are making a trade, when and how you are making a trade, it is an outline of all your trades. If you follow your trading plan, you’ll be able to minimize errors and losses.

    Okay, creating a trading plan isn’t the most exciting thing you can do in your lives, and maybe that’s the reason why so many traders think about it as an irrelevant thing. How to think about the trading plan while some sexy things jump every second? News, charts, trend lines, hot stocks are more exciting, right? Wrong!

    Without a trading plan, you cannot use all these sexy tools, you have to couple them with your plan to produce reliable results.

    What do you think now, do you need to know how to create a trading plan?

    Frankly, the trading plan is not necessary to make a trade. You can trade without a plan. But, if you want to hit the road of successful traders, you will need it. We are pretty sure you don’t want a hold-and-pray strategy because it isn’t a strategy at all. It is a sure way to lose everything you have. Maybe it’s better to go to a casino where there will be more chances to win something. Remember, trading isn’t gambling. 

    And without a trading plan, you’re gambling. The truth is that you may have some winning trades from time to time, but your progress will be questionable. Your losses will be bigger than gains, think about this and do smart trading. Learn how to create a trading plan, so create it.

    How to create a trading plan?

    Follow the old saying: If you fail to plan, you plan to fail. Every trader should follow this expression as it is written in stone. While trading you have only two choices: to follow a trading plan and have a chance to win or trade without a plan and lose with almost 100% possibility.

    So, let’s create a trading plan and see what you have to take into consideration while doing that. Here are some hints.

    First, set your goals. 

    What do you want to get from the trade? Please, be realistic about your expectations toward profits. This will come with a bit more experience. Experienced traders, for example, expect the potential profit triples the risk.

    Can you see how much you have to be focused on risk? So, you must focus on risk. Your trading plan has to mirror your risk tolerance level. You have to determine how much risk you are willing to take. How much of your portfolio are you willing to risk on one trade? And you have to do that for every single trade. The regular risk range is from 1% to 5%, but usually, it is 2%. If your account is small you can take a bit more risk to get a bigger position. But if you lose a predetermined amount at any period in the day, you get out and stay out. Take a break, and then attack another day, when things are going your way.

    Do your research before you enter the trade. 

    Explore the big winners, take a look at the stock charts and find possible spurs to the value of a stock. Be careful while doing this. Your research has to be accurate as it can help you discover if the stock is going to perform in your direction. You can’t be sure 100%, but it will be easier for you to know that you did everything possible to avoid losses.

    Importance of entry and exit in a trading plan

    Every serious trader plans entries and exits. This means you must have a plan on when you enter the trade and where you exit. For that purpose, we are recommending our tool. 

    You must give equal importance to the exit of a trade if you want to make a profit.
    Set a stop-loss, to secure your pull out if things aren’t going in your direction. But you really have to get out at that point. Do you know your profit target? Get out when your profit target is met, don’t be greedy. 

    Take a pen and write down your plan

    Exactly. It is the best way to show how responsible you are toward your capital invested. It is your hard-earned money, you don’t want to fool around with that. Put your trading plan in a visible place, stick it to your computer, for example. Yes, we are recommending your trading plan has to stare at you all the time while you are trading.

    When you exit your trade, review it afterward. You will need to study how the trade went. If something was right or wrong you will be able to repeat or avoid it. So, take notes and keep them in your trading log.

    What do you have to determine else?

    Your stock trading plan should include additional factors to ensure it is completed.

    First is liquidity

    Liquidity can be a problem. When trade stocks this can be a serious element that needs to be considered because you can find a lot of stocks with very low liquidity. This doesn’t mean you should trade only large-cap stocks. You wouldn’t like to limit your opportunities.
    Just filter out the stocks without enough turnover to get in and out of the market quickly. For example, you can trade stocks that have an average daily turnover of 10 or 15 times the size of the position you want to take. Don’t avoid small stocks because they can provide you to trade wider.

    Second is volatility

    Your trading plan should take into account the volatility of the stocks. Some stocks are more volatile some less but, generally speaking, the stocks are volatile. This should befall your trading rules as part of a trading plan. So, adjust your trend filter for the volatility of the stocks. You may have a lot of benefits using that. Your trading plan should be adjusted for what you will do if stocks go bankrupt or are taken over at a premium. You have to position yourself if it happens and you have to do so in advance to protect your overall portfolio.

    Bottom line

    A trading plan should consist of all these factors mentioned above. The stock liquidity, volatility, risks, goals. Consider them when writing it. But even if you do this and more, there is no guarantee that your trades will make you money. As we said numerous times, the stock market is a zero-sum game. It is a system of winning and losing. You have to be prepared for that. One day can be extremely successful but the others could be a total disaster. There is no profit without risk and you can’t always win without an occasional loss. Remember, if you lose a battle, you may win the war. Don’t expect every trade to be a success and every stock in your portfolio to be a winner. Let your profits rise and lower your losses. That’s the way to win this game. 

    We hope you have a better picture of how to create a trading plan now.

  • How to Invest In Stocks?

    How to Invest In Stocks?

    How to Invest In Stocks?
    Investing in stocks is an outstanding approach to grow wealth. But how to start? Follow the explanation below to learn how to invest in stocks.

    There is a difference between understanding that investing in stocks is a reasonable financial decision and understanding how to invest in stocks. If you are a beginner it can be very important. Yes, investing in stocks is a reasonable decision in any circumstances. But do you know how to invest in stocks? It isn’t just about picking some stock and putting the money. For many people, the stock market is a big enigma but it hasn’t to be. Also, many people are questioning how to invest in stocks and still, this is complicated for them. So many potential investors are scared to start investing. 

    But we have to say they are making maybe the biggest mistake in their lives. There are so many benefits of investing. The effort that it takes to learn how to invest in stocks, will result in great benefit. Anyway, the advantages of investing far outweigh the efforts spent to learn. One thing is for sure, investing in stocks isn’t frustrating at all. At least, it shouldn’t be. 

    So, let’s start. 

    We are going to explain how to start investing in stocks

    First of all, you can buy and sell shares in any public company at any time. The principle is almost the same as any other business. The point is to buy a share of stocks in the company when it is cheaper than its actual value. The next step is to hold on for some time until its value has risen to the position that you feel satisfied to sell it for a profit.

    So a successful investment could be (please keep that in mind this is a made-up example) as followed. Let’s say you bought a stock of a company and you paid $20 per share. And you hold on to this company for 3 years. After that period of time, your stock has grown at $50. You wouldn’t like to miss this opportunity for profit and earn 2.5 times more than your initial investment was. Even better is if you bought a dividend-pay stock so you can gain profits along the way without selling any of its shares.

    How really to invest in stocks

    You cannot start without any knowledge about it. Therefore, you have to know the fundamentals of investing. The main goal of investing is to make money. That will not be complicated if you have a plan and investment strategy. So, we already said that investing is simply buying assets that are supposed to grow in value. That can be stocks, bonds, ETFs, mutual funds. But keep in mind that you don’t have guarantees that your investment will increase in value over time.

    You are wary of taking risks now, aren’t you? Don’t be, we know your hard-earned money can be at risk. You may choose some low-risk investments, for example, bonds. But historically, stocks generated larger returns than bonds. And you are seeking wealth. You may ask why to invest and not put your money into a savings account. Well, investments will give you higher returns, particularly over a long time.

    But you have to decide where to invest, what are your financial goals. We are talking about how to invest in stocks. And if you follow some rules it can be safe and provide you high returns.

    Let’s buy our first stock

    As a beginner investor, you can invest for the long-term or invest in companies that mean something special to you personally. It is always easier to make a success with the long term-investing. Trying to make short-term profits can be a tricky part for new investors.
    So, in short-term investing, you have to know when to buy and sell. That requires great research, education, and a bit of luck. Yes, why not say that. If you choose a long-term investing, all you have to do is pick a great company at a fair price. Your stock will increase in value over time. The possible costly errors will be reduced as the longer your investing horizon is. Invest in companies that you are already familiar with.

    Okay, let’s assume you found a company you would like to invest in. So, you can buy shares in that company through a broker. Brokers provide you to easily do that. Remember, they are charging a fee for the services. Buying stocks is simple like you are picking something from the online catalog. Just pick the stock you want, the number of shares you want, and your purchase is completed when you put money. You have great options with online brokers but you have to check them before starting working with them. Also, online brokers will charge you lower fees. How to choose a broker you will find HERE.

    Follow three basic strategies when investing 

    Start investing earlier
    If you want your money to work for you, and you start investing as soon as you can, the more chances it will have for growth.
    Stay invested as long as you can
    This is something about compounding returns. The point is to stay invested, meaning don’t go in and out of the market. If you stay invested you’re able to earn more money than you have already earned.
    Risk management
    You’ll need to spread out your investments to be able to handle the risks. Never put all your money in just one investment. It is too risky and dangerous. Diversification is the recipe for successful investing. When you have several investments added to your portfolio, the risk of losing money is lower. Some of your investments will be winners, some will not. But over a long haul, you will profit.

    Stocks pay you dividends

    That will provide you a stream of income and without having to sell even one share. We know you’ve heard how investors are interested in the drop and rise of the value of stocks. But, trust us, they are very interested in the dividends paying stocks. To make clear what dividends are. They are amounts that the companies are paying to their stockholders for each share of stock they hold. It is commonly less than one dollar, for example. But…

    Let’s say you want to buy shares in the company at $10 per share. And you want to invest $2.000. So, you’ll have 200 shares of that company. That company pays a dividend of $0.10 quarterly. What does it mean? This means you will have $20 every three months, $0.10 x 200 = $20. It isn’t much, but for one year you will receive $80 and you can reinvest it or buy some other stake of shares in different companies. Anyway, it is an additional income from one stock. When you become a large investor, dividends only could provide you a nice life. For example, instead of $2.000 investment, you were able to invest $2.000.000. In this case, you would own 200.000 shares of the stock mentioned in our example. That would mean you could have a $20.000 per quarter or $80.000 per year just in dividends. Not bad, right? Moreover, you didn’t need to sell any of your stock. 

    The companies can change their dividends. It is normal. They can pay out a smaller dividend per share or raise them. You have to know that dividends are not guaranteed. They are just a nice bonus, particularly with a solid company with a long history of raising dividends.

    How to invest in stocks in four steps

    It is very important to estimate what some company means to you. If the company has some meaning to you, you’ll be more interested in it. You’ll be more inspired to research it and you can invest with confidence. So, that will be the first step before starting investing in stocks. Find and examine a company that means something to you. 

    The second step is to examine how the company prevents its rivals to take over the control over its market. In other words, it is a so-called moat. Big companies with famous brands have a moat, for example. They are unique in the market, well-recognized, and well-positioned. The competitors can stay on the coast and cry but you will have a safe investment. 

    Also, pay attention to management. Are the people who are the leaders of the company competent? You don’t want to invest in the company which is led by corrupted managers.  

    But maybe the most important part of how to invest in stocks is to find a company with a high safety margin. It is a financial ratio that estimates the number of sales that exceed the break-even point. In other words, that is the point where the company stops being profitable.

    Also, the safety margin represents the difference between the intrinsic value and the market price of stocks. To calculate the safety margin use this formula:

    Safety margin = sales – the break-even point

    Bottom line

    You may ask how much you should invest in stocks.
    The amount of money you should invest in stocks is up to you and your financial condition. Never invest more than you can afford to lose, that’s the rule. Even the smartest and most advanced investors sometimes can be dried. Never invest in something you can’t understand. Always calculate the risks. In that way, you’ll be able to recognize the potential reward and the probability of loss.  Does the stock have a history of giving returns, how losses could occur, are important questions and you have to find the answers. 

    Don’t jump into the stock market without knowing why. Do detailed research to avoid big losses and failures.  Your most important step should be to research the companies, though. The final step is to buy a stock and start getting rewards. 

    While this article isn’t meant to cover everything you need to know about investing in stocks or everything on how to invest in stocks. That is the no-end process. For more to know, participate in our Full Trading & Investing Course.

  • What Is Options Trading Examples

    What Is Options Trading Examples

    What Is Options Trading?
    In options trading, the underlying asset can be stocks, commodities, futures, index, currencies. The option of stock gives the right to buy or sell the stock at a definite price and specified date. 

    By Guy Avtalyon

    Before we explain deeper: what is options trading, we need to understand why we should trade options at all. If you think it something fancy, you couldn’t be more wrong. Actually, the origin of options trading came from ancient times. For example, Ancient Greeks were speculating on the price of olives before harvest and traded according to that. When someone asks you: what is options trading and argues that it belongs to modern stock brokerages just tell such one about trading olives. 

    From the first day of trade existence, people were trying to guess the price of food or some item they wanted to buy. 

    What is options trading?

    We have a simple example to answer the question: “ What is options trading.”

    Let’s say we want to buy a stock at $10.000. But the broker tells us that we can buy that stock at $20 and the time is limited so we have to make our decision in a short time frame but we don’t know “ what is options trading.” This broker’s offer means that we have to pay $20 now and get a right to buy the stock after one month. Well, our right, in this case, obligates the seller to sell us that stock at $10.000 even if the price increases in value after one month. This $200 will stay in the broker’s account forever. We will never get it back. But we got the right to buy the stock at the price we are willing to pay. 

    How does options trading work?

    We understand there is a chance that the stock price will increase much over $10.200, we want to pay our broker an extra $200 to provide us the right to buy the stock at $10.000. Moreover, we saved the rest of our $10.000 so we can keep it or invest in something else while waiting for the end of the period.

    Okay, the end is here, the one-month period is over so what is the next? Well, we have the right to buy that stock at $10.000 and we noticed the price is much over that amount. Of course, we will buy it at the agreed price. But what to do if the price is below the guessed price? Remember, we have the RIGHT to BUY not OBLIGATION. So, we can buy or not depending on the stock price. 

    This is a very simple explanation on the question: What is options trading, but this is the essence. 

    The options are derivatives. That means their prices are derived from something else, frequently from stocks. The price of an option is connected to the price of the underlying stock. Options trading is possible with the stocks, bonds market, and ETFs, and the like.

    What are the advantages of options trading?

    Some investors are avoiding options because they believe they are hard to understand. Yes, they can be if your broker has a lack of knowledge about them. Of course, you can have less than need knowledge about options trading. But the truth is, it isn’t hard to learn because this kind of trading provides a lot of advantages. Keep in mind that options are a powerful tool so use them with the necessary diligence to avoid major problems.

    Sometimes, we think that characteristics like “critical” or “unsafe” are unfairly connected to the options. But when you have all the information about options you’ll be able to make a proper decision.

    Cost less

    One of the most important advantages of options trading is it will cost you less. Let’s see how it is possible.

    Yes, we know that some people will claim that buying options are riskier than holding stocks. But we want to show you how to use options and reduce risk. Hopefully, you will understand that all depend on how you will use them.

    First of all, we don’t need as much financial assurance as equities require. Further, options are relatively immune to the possible effects of gap openings. But the most important, options are the most dependable form a hedge. Are they safer than stocks though? Yes! 

    Lower risk

    Let’s say this way. When we are trading stocks, we have to set a stop-loss order to protect our position. We are the one who has to determine the price at which we are not willing to lose more. And here is the problem. Stops are designed to be executed when stocks trade at or below the limit we set. So, what if we place a stop-loss order at, for example, $36 for the stock we bought at $40. We don’t want to lose more than 10% on that stock. Our stop-loss order will become a market order and our stock will be sold when the price reaches $36 or less. This is how this order will work during the trading day but what can happen over the night? 

    How to use options as a hedge?

    Here is where the problems arise. Let’s say we closed stock at $38. Almost immediately after the opening bell, the next morning, due to the bad morning news about the company, our stock fell under $15. So that will be the price we’ll get for our stock. We’ll be locked in a great loss. The stop-loss order did nothing for us. If we bought the options as protection instead, we wouldn’t have such a great loss since the options never shut down after the closing bell. We would have insurance 24/7. 

    Can you understand how the options are a more dependable form of hedging?

    And as an additional choice to buying the stock, we could employ the stock replacement strategy. This means we would buy an in-the-money call instead of buying the stock. We have a lot of possibilities with options trading since the options mimic almost 85% of a stock’s performance. The benefit is that they cost 25% of the price of the stock. For example, if we bought an option at $25 instead of a stock at $100, our loss will be limited on that amount, not on the stock price. 

    Do options have higher returns?

    We don’t need to be a great mathematician (well, some of us are, that’s true) to understand that if we pay less and take the same profit, we have higher returns. That is exactly what options trading provides us. 

    Let’s analyze this part and compare the returns in both cases.

    For example, we bought a stock for, let’s say $100. You bought an option of that stock at $25. This stock has a delta of 70, so the option’s price will change 70% of the stock’s price movement. (This is a made-up example, please keep that in mind.)
    So, the stock price goes up for $10, and our position on this stock will give us 10% of the return. You bought an option and your position will give you 70% of the stock change (delta is 70, remember?) which is $7. 

    Do you understand?

    We paid the same stock $100, you paid $25.
    Our return on that stock is 10% which is $10; your gain on investment of $25 is $7 which is a 28% return on investment. Who made a better job?

    Of course, when the trade goes against you, options can impose heavy losses. There is a chance to lose your entire investment.

    Benefits of options trading

    Options trading can be a great addition to your existing investing strategy. They will give you leverage in your investing. You will have cheaper exposure to the stocks, increasing profits and losses when the stock price changes. One of the benefits is that options can reduce the risk in the overall portfolio. For example, a protective put trade. That is when you combine purchasing a put option to sell stock at a specified price. That will provide you the upside when the stock price rises but also, that will protect you from losses when the stock price drops. Also, you can earn by selling the options. You will receive the money even if the stock isn’t exercised. That is compensation for giving someone else the right to buy your stock but that one never did it. You’ll keep the money anyway.

    Bottom line

    Options offer more investment options. They are highly adjustable vehicles. You can use options for positions synthetics. But it is for advanced traders.
    But there are some extreme risks to options. Firstly, options can expire worthlessly. That will be a complete loss of whatever you paid for the options. Further, options are highly volatile. Many brokerages will offer options trading, but with some added requirements before they will let you trade options. 

    Also, speaking about options strategies, they will work well when you make many trades simultaneously. You have to know that options markets aren’t constantly liquid as the stock market. The simultaneous trades don’t always go ideally. So, your strategy may not work the way you expected. Many online brokerages will give you access to options trading with low commission costs. So, we all can use this powerful tool. But, take some time to learn how to use options accurately. It is still new for individual investors. 

    We’re doing smart trading.

  • How to Survive the Market Downturn?

    How to Survive the Market Downturn?

    How to Survive the Market Downturn?
    The global uncertainty due to the coronavirus outbreak forces investors to a smart allocation. Avoid companies with high debt, stay focused on the sustainability of earnings.

    By Guy Avtalyon

    How to survive the market downturn? We heard so many investors asking this. Boosting the concerns were profit warnings from the companies in Europe, the US, and all over the world. Everyone is talking that a key earnings target would take longer to meet. The reason is the coronavirus outbreak adds uncertainty in the main markets. Many well-known large companies plunged and had to mute growth for this year due to the COVID-19 outbreak. We are sure you are following what’s going one with that and also, we hope you are following WHO’s advice to protect yourselves.

    Our concern is how to survive the market downturn, what investors have to do now when the markets are down.

    Financial pandemic

    Asia Pacific markets dropped today (February, 28) due to fears about the coronavirus. These fears continue to urge a global sell-off.
    Japan’s Nikkei 225 dropped more than 3% in today’s morning trading. South Korea’s Kospi and Australia’s S&P/ASX 200  fell more than 2% each.
    Hong Kong’s Hang Seng fell 2.7%, while the Shanghai Composite fell 3.4%.
    Also, we have a historic plunge in the markets in the US. Three major US indexes slipped into correction territory on Thursday. The S&P 500 had the worst day since 2011. The Dow sank 1,191 points, which is a drop of 4.4%. This was the worst one-day point drop in its history.
    Coronavirus appears as a ‘financial pandemic’.  The global oil benchmarks, US crude, and Brent crude fell Thursday lower by 3.4% and 2.3%.
    Even China search giant Baidu warned that revenue could fall as much as 13% in the first quarter and its core business could fall by 18% compared to the same time last year.

    How to survive the market downturn?

    So, the coronavirus has continued to spread, the stock market has started to feel the uncertainty. No one knows how this situation could affect companies over the world. Or investors. This epidemic like any other came suddenly and caused a shock to the global economy. As always, this situation lead (and it did) to great changes in the stock markets. Investors’ fears became a truth. And also, this led to panic selling.

    What a great mistake!

    Why do we think it is a great mistake? Okay, we all want our wealth to grow, not to vanish. These stock market ups and downs are hard to look at for all of us. That’s why it is so easy to be caught in emotions.

    Investors are frightened and worried and that can lead to panic. And panic can lead to quick and imprudent sellings. We want to help you to avoid this mistake that may cost you very much.

    Let’s take a look at an example that may help you to learn how to keep your hands off your investments. Especially now with a major market slide. Let’s say you entered this year with $100.000 in your investments. But it is the end of February and the stock market is dropping (You have the last data above) and let’s say, you already lost $10.000. Can you afford to lose an extra $10.000 if the market continues to fall? So, how to survive the market downturn? If you want to survive this storm your first thought might be to sell off, for example, mutual funds and move into the money market. That’s a mistake, that’s wrong. Don’t do that! The stock market can rebound. Yes, it will take a few months till then, at least two, but when it does that you’ll be able to recover your losses and gain more. So, don’t keep your money on the sidelines. Investors that did such a thing extremely regretted it.

    Try to separate your emotions from the investment decisions. One day, very soon, whatever looks like a disaster now, can be just a twinkle in your investing history. 

    How to survive the market downturn by keeping fears under control?

    Do you know a saying on Wall Street? It is something like: The Dow climbs a wall of worry. What does this saying want to tell us? Dow Jones will continue to rise despite economic downturns, pandemics, natural disasters, or any other catastrophes. That’s why we have to keep our emotions under control, our fears in check. This market correction just looks like a massive disaster but it is just one short period in the market’s cycle. 

    Well, how to tell you this? When some economic slowdown appears it is so normal for the stock market to go negative. For long-term investors that means nothing. They bought their shares at a low price when the market was down. So, consider if there is a buying opportunity. Always keep in mind the old maxim “buy low and sell high”.

    Reexamine your portfolio and your investment strategy instead of panic. Choose to be strategic with actions.

    What are the benefits of a declining stock market?

    The market is down, so what? Will it be a market correction? No one knows. What do we have to do? To stick to our investment plan and goals. Don’t damage your portfolio. 

    Investors turn into stocks when the market approaches new highs. When the market drops they are running away. So, what are they doing? Buying high, selling low? The consequence is that they have poor returns. Can you see the problem? It doesn’t have to be like that. Some investors know how to benefit from the market drop, how to survive the market downturn.

    Ways to survive the market downturn

    Firstly, they know how to recognize the problem, meaning they understand the essence of investing. With that knowledge, it is more possible to avoid unfavorable investment performance. So, learn! 

    If we sell out of fear when the market is down, we are actually generating minimal returns. At least, we should think about this before executing a trade on such occasions. The next step is to change our mentality, the way we think. For example, we all like when the price of electricity goes down, right? But we are not excited when the stock price is going down. Here is the catch! 

    How can money go further?

    It can be achieved if we buy more shares since the prices are lower. We can buy more shares even if the amount of money we planned for that stays the same. So, our money will go extra. Further, we can reinvest dividends. That can be a notable portion of our returns. We found some studies that show the dividends added 5 percentage points of the entire 7.9% returns of stocks. These studies cover the period from 1802 to 2002. So, if we want better returns we need to reinvest dividends.

    One of the benefits of a declining market is a chance to sell high and buy low but through rebalancing. This means we have to sell winning assets, the assets that increased in value, and provide money to buy assets at a lower price but with a good future perspective.

    Typically, bonds are better players in everyone’s portfolios, so sell them and go into stock funds. Analysts revealed that this only step in rebalancing can increase risk-adjusted returns, even up by 21%.

    Is the dropping market a good experience?

    A dropping market provides us priceless experience. Don’t underestimate this. That new knowledge will give us a valuable answer on how to survive the market downturn in the future. At least, we’ll be able to understand how we manage our emotions. That can be the core of our future investment goals. If we feel uncertainty about every small change in stock price, we should go into a safer investment. Maybe stocks are not for us. But if we enter the fight and end up with more winners, only the sky’s the limit. 

    We don’t like to guess if this will be a market correction or not. No one can do that, whoever tells that can predict the next stock market move, lies. We don’t know.  All we know is that the best way is to stay in your investment plan. This is smart trading!

  • Calculate Portfolio Performance

    Calculate Portfolio Performance

    Calculate Portfolio Performance
    Don’t base the success of your investment portfolio on returns alone. Use these three sets of measurement tools to calculate portfolio performance.

    The main goal to calculate portfolio performance is to measure the value created by the investor’s risk management. The majority of investors will judge the success of their portfolios based on returns. But it isn’t enough. To have a sense of how our investment portfolio is well-diversified and how much risk we take we need to calculate portfolio performance. In other words, we need a measure of both risk and return in the portfolio to judge its success. Until the 1960s no one paid attention to the risks involved in obtaining returns. But today we have several ways to calculate portfolio performance and measure it. 

    Our aim is to present you with these valuable tools. 

    Sharpe, Jensen and Treynor ratios pair risk and return performances, and unite them into unique value. Well, each of them operates a bit differently so we can choose one to calculate portfolio performance or mix all three ratios.

    Calculate Portfolio Performance Using Sharpe Ratio

    Sharpe ratio is the measure of risk-adjusted return of an investment portfolio. Or in other words, by calculating it we can find a measure of excess return over the risk-free rate relative to its standard deviation. It is common to use the 90-day Treasury bill rate as the representative for the risk-free rate. This ratio is named after William F Sharpe. He is a Nobel laureate and professor of finance, emeritus at Stanford University.

    The formula is:

    ​Sharpe ratio= (PR−RFR) / SD

    ​In this formula, PR represents the expected portfolio return, RFR is the risk-free rate, while SD represents a portfolio’s standard deviation which is a measure for risk. Standard deviation reveals the variation of returns from the average return. So we can say that if the standard deviation is great, the risk involved is also great. 

    So, you can see how the Sharpe ratio is simple to calculate since it has only 3 variables. 

    But let’s calculate portfolio performance more realistic. For example, our portfolio has a 20% rate return. The whole market scored 15%. So, we may think that our portfolio is greater than the market, right? But it isn’t a proper opinion. How is that? Well, we didn’t calculate the risk we had to take to earn such a great rate return. What if we took much more risk than we thought. That would mean that our portfolio isn’t optimal. Let’s go further in this analysis. Imagine that our portfolio has a standard deviation of 15% and the overall market has 8%, and the risk-free rate is 3%. This is just a random example. Let’s calculate portfolio performance now using the Sharp ratio formula.

    Sharp ratio for our portfolio: (20 – 3) / 15 = 1.13

    and

    Sharp ratio for the market: (15 – 3) / 8 = 1.5

    Can you see now?

    While our portfolio scored more than the overall market, our Sharpe Ratio was notably less. So, our portfolio with a lower Sharpe Ratio was a less optimal portfolio even though the return was higher. This means we took an excess risk without extra bonus. But it isn’t the same case when it comes to the overall market, it is actually the opposite. When the market has a higher Sharpe ratio, it has a higher risk-adjusted return. The best portfolio is not the portfolio with the highest return. Rather, an excellent portfolio has a higher risk-adjusted return.

    Sharpe ratio is more suitable for well-diversified portfolios because it more correctly considers the risks of the portfolio. 

    Jensen ratio

    The Jensen ratio gauges how much of the portfolio’s rate of return is attributable to our capability to produce returns above average, and adjusted for market risk. 

    The Jensen ratio measures the excess return that a portfolio produces over the expected return. This figure of return is also recognized as alpha. Let’s say that our portfolio has positive excess returns, so it has a positive alpha. On the other hand, a portfolio with a negative excess return has a negative alpha.

    The formula is:

    Jenson’s alpha = PR−CAPM

    Here, PR stands for portfolio return and CAPM is risk-free rate+β( beta). We know that beta is the return of the market risk-free rate of return.

    ​By using Jensen’s alpha formula we can calculate an investment’s risk-adjusted value. It is also known as Jensen’s Performance Index or ex-post alpha. Jensen’s alpha tries to determine the unusual return of a portfolio no matter what assets it consists of. This formula was first introduced by the economist Michael Jensen. Investors use this formula to calculate portfolio performance by enabling them to discover if an asset’s average return is adequate to its risks.

    Regularly, the higher the risk, the greater the expected return. So, that’s why evaluating risk-adjusted performance is especially important for making investment decisions. It will allow doing this. 

    This Jensen’s alpha also can be expressed as 

    Jensen’s alpha = Portfolio return – ((Risk-Free Rate + Portfolio Beta x (Market Return – Risk-Free Rate))

    The alpha figure can be positive or negative. When it is higher positive values that suggest better performance in comparison to expectations while negative rates showed that the assets perform below expectations. Jensen’s alpha is expressed in percentages. 

    Let’s take the example of a stock with a return per day based on CAPM. And we see that it is 0.20% but the real stock return is 0.25%. So, Jensen’s alpha is 0.05%. Is it a good indicator? Yes, you can be sure.

    The purpose of this measure is to help investors to go for assets that grant maximum returns but with minimum risks.

    For example, you found two stocks that are offering similar returns. But one with less risk would be more profitable for investors than the one with greater risk. When calculating Jensen’s alpha you would like to see a positive alpha since that indicates an abnormal return.

    Treynor ratio

    The Treynor ratio is very useful to calculate portfolio performance. It is a measure that uses portfolio beta,  a measure of systematic risk. That is different from the Sharpe Ratio that adjusts return with the standard deviation. 

    This ratio represents a quotient of return divided by risk. The Treynor Ratio is named after Jack Treynor, the economist, and developer of the Capital Asset Pricing Model.

    The formula is expressed as:

    Treynor ratio = (PR−RFR) / β

    The symbols are well-known, PR stands for portfolio return, RFR refers to the risk-free rate and β is portfolio beta.

    We can see that this ratio takes into account both the return of the portfolio and the portfolio’s systematic risk. From a mathematical viewpoint, this formula expresses the quantity of excess return from the risk-free rate per unit of systematic risk. And just like the Sharpe ratio, it is a return/risk ratio.

    Let’s assume we would like to compare two portfolios. One is the equity portfolio and the other is the fixed-income portfolio. How can we decide which is a better investment? Treynor Ratio will help us pick the better one.

    To put this simply, assume for the purpose of this article only, the equity portfolio has a total return of 9%, while the fixed-income portfolio has a return of 7%. Also, the proxy for the risk-free rate is 3%. Further, let’s suppose that the beta of the equity portfolio is 1.5, while the fixed-income portfolio has a beta of 1.25

    Let’s calculate for each portfolio!

    Treynor ratio for a equity portfolio = (9% – 3%) / 1.5 = 0.040 

    Treynor ratio for a fixed-income portfolio = (7% – 3%) / 1.25 = 0.032

    So, the Treynor ratio of the equity portfolio is higher which means a more favorable risk/return option. Since the Treynor ratio is based on past performance it is possible not to be repeated in the future. But you will not rely on just one ratio when making an investment decision. You have to use other metrics too.

    For the Treynor ratio, it is important to know that the negative value of beta will not give exact figures. Also, while comparing two portfolios this ratio will not show the importance of the difference of the values. For instance, if the Treynor ratio of one portfolio is 0.4 and for the other 0.2, the first isn’t surely double better.

    Bottom line

    To calculate portfolio performance we have to determine how our portfolio has performed relative to some benchmark. Performance calculation and evaluation methods fall into two categories, conventional and risk-adjusted. The most popular conventional methods combine benchmark and style comparison. The risk-adjusted methods are focused on returns. They count the differences in risk levels between our portfolio and the benchmark portfolio. The main methods are the Sharpe ratio, Treynor ratio, Jensen’s alpha. But there are many other methods too.

    But one is sure, portfolio performance calculations are a key part of the investment decision. Keep in mind, portfolio returns are just a part of the whole process. If we never evaluate the risk-adjusted returns, we will never have the whole picture. That could lead to wrong decisions and losses, literally.