Category: How to Start Trading – Beginners

  • Pure Play Method In Stock Investing

    Pure Play Method In Stock Investing

    Pure Play Method In Stock Investing
    Pure play method represents an approach practiced to estimate the beta coefficient of a company whose stock is not publicly traded. 

    What is a Pure Play method in investing? Have you ever heard about this? How do you estimate the companies when you want to invest your money in different stocks? What tools do you use? Do you make your investment decisions by looking at cash flow, dividends, the strength of the company? What are your criteria? Maybe it is easier for you to estimate the company that produces only one single product. If you do the latter mentioned, you already know what is a Pure Play method in investing. But do you know all Pure Play’s performances and risks?

    Before we explain them to you we’ll explain what is a Pure Play method.

    What is a Pure Play method?

    Investors use this method when estimating the beta coefficient of the company whose stock isn’t publicly traded.  

    A Pure Play company is focused on one type of product. It is different from the companies that are conglomerates, offering many products. Pure Plays are easier for investors to analyze. When investing in Pure Plays you’ll have maximum exposure to a distinct market part.  For example, if you want exposure to car makers stocks you might prefer buying Tesla stock. As compared to Yamaha Motor Co.which is engaged not only in making cars but also in many other industries. This company is producing motorcycles, boats, guitars, outboard motors, etc.

    A Pure Play method is a procedure that investors use to estimate the beta of such a company. But the Pure Play method is also a way to discover the cost of capital for a product or project that is different from the company’s principal business. 

    Many companies are pure plays. They are selling or producing one singular kind of product. So, you can understand that this kind of investing can be very risky because if interest in this particular product or service declines even a bit, such a company will be affected negatively. A Pure Play method is helpful to estimate a project’s beta or the risk of a project. For example, a Pure Play company could use this method to identify publically traded companies that are involved in projects similar to the one they want to develop. 

    Use it to estimate the cost of equity capital of a private company

    This involves examining the beta coefficient.

    When evaluating a private company’s equity beta coefficient, you’ll need a beta coefficient of a public company. The latter you can calculate when regressing the return on public company’s stock on the appropriate stock index. The resulting calculation is then applied to return the beta coefficient of a private company. Here is how to do that. Let’s mark the private company as P and public company as PB.

    In our equitation, we’ll mark debt to equity ratios as DEB and DEPB for the private and public company respectively.

    Unlevered Beta of PB = Equity Beta of PB / (1 + DEPB × (1 − Tax RatePB))

    Equity Beta P = Unlevered Beta of PB × (1 + DEP × (1 − Tax rate))

    Advantages and disadvantages of the Pure Play method 

    The stock of Pure play company is different than stocks of diversified ones. They are popular among investors who want to make a particular trade on particular products. In short, they are not interested in investing in a company that has different business lines. They found reasons to invest in Pure Play stocks and we’ll try to explain them. Firstly, these stocks are easier to analyze. Also, when you have to analyze a company with diversified businesses and several sources of income, you might have a problem evaluating the strength of the company. Its income is generated from many products, with different profit margins, and could be exposed to different growth benchmarks. 

    Further, despite the fact that investing in Pure Plays can be riskier, they can be a great opportunity for very high rewards when doing well. Should we mention Tesla? But wait! Pure Play method in investing has its disadvantages too. These companies are not diversified. What will happen if difficult times appear? When the company is focused on just one product and that one isn’t able to generate revenue, the stock price of such a company will drop, sometimes sharply. These companies don’t have other products to balance the poor production. That’s a great problem for investors.

    The risk of Pure Play method in investing

    First of all, the risk comes from some conditions that may affect the company badly. However, that isn’t the only reason. The additional risk might come from the type of investing style. Here is one example. Let’s assume the growth investors favor some Pure Play company. In periods of the bull market the company will perform well. Even more, its stock could easily outperform the market. But what will happen when the bear market appears? Well, we know that during the bear markets the value investing is a more successful strategy. The consequence is that the Pure Play method will have poor results if growth investors stick with it. 

    These companies depend on one product or one investing strategy. So they are often followed by higher risk. They are completely the opposite of diversified. However, the higher risk gives greater potential for higher profits. When circumstances are in their favor, Pure Play stocks can grow tremendously since the company is focused on a sole product with full strength. 

    Reasons to use it in investing

    We’ve been writing so many times about the importance of diversification in investing. Also, we pointed out that investing in a single company isn’t always the smartest idea. But when it comes to the Pure Play method in investing, things are a bit different. 

    There are really a few good reasons to invest in pure plays. Pure Play company is considerably easier to analyze. You have, as an investor, only one type of product or business line to analyze. Moreover, it is easier to understand the cash flow and revenue of one company than it is a case with several. Further, you can with a better result predict how it will perform in the future. 

    Pure play can be a very attractive investment. These companies work a strictly defined niche market. They are specialized for a particular one. That is a quality per se and could be extremely beneficial for investors. 

    Bottom line

    Pure play is a method used in stock trading and investing. It is all about companies with a focus on a specialized and particular product or service. The “Pure Play method” is also helpful when estimating a project’s beta, or the risk of a project.

  • Online Tools for Stock Trading and Investing

    Online Tools for Stock Trading and Investing

    Online Tools for Stock Trading and Investing
    If you are risk-averse but want to become a successful trader and investor choose online tools for trading as an aid to reach your goals.

    Online tools for stock trading and investing must tell you the information needed to make a successful trade and provide you advanced research to boost your profit. By using online tools for trading and investing in the stock market, or any other market can streamline the whole process, from choosing a stock to exit with profit. For example, when the ups and downs, even small changes, in the market are present you’ll need a tool to time them. Some of these online tools for stock trading can be very useful, valuable, and profitable for beginners. 

    What online tools for stock trading to add to your trading toolbox?

    The most powerful tool is your knowledge of technical and fundamental analysis, that’s the truth. But some advanced technology can aid your trading. These online tools for stock trading are extremely important in your decision-making process, in buying and selling stocks. The technical analysis will show you the price trends of stock. So, you’ll need it to know to recognize trends for the particular stock to be able to decide will you buy it or not. But technical analysis isn’t enough. You’ll need more tools for stock trading.

    You’ll need fundamental analysis. This tool will help you to evaluate the company’s strength to grow further. This information is also very important before you make any decision on whether to buy or sell the stock.

    The importance of online tools for stock trading

    In fundamental analysis, tools for stock screening are a good starting point. When you pick the stocks and add them to your investment portfolio, you’ll need tools to track them and manage your portfolio.

    Tools for stock screening 

    Stock screening tools can identify companies according to your investment goals. They can provide you information about the company, industry, market capitalization. Stock screeners allow you a fast search for a stock based on the rules you’ve set. Almost all trading platforms have screeners. But you would like some with in-depth screening capacities that will help you to really recognize all trade opportunities. Also, you’ll need charts, market maps, and quotes. Moreover, by using them you’ll be able to examine revenue growth, valuation ratio, and many other ratios. 

    Portfolio tools

    For example, portfolio tools. They will allow you to maintain the balance in your portfolio. Let’s say, the small-capitalization stock has a strong run. What is the role of the portfolio tool here? It will allow you to cut that stock and allocate your funds to other assets.
    For technical analysis, the most important is to use interactive and advanced charting tools. If you use charts as one of the online tools for stock trading you can easily set trendlines and moving averages to determine the wanted pricing pattern. 

    Charting is essential for traders that use technical analysis. It gives them a possibility to evaluate past movements and to predict future performance by recognizing the patterns. When you can dig deep into the history of some stock, you’ll be able to understand when and why the stock was volatile, what forces them to move in a particular way. Some online brokers offer charting. When you do so you’ll be able to decide to buy or sell stock in an easy and trustworthy way.

    Take advantage of stock trading technology

    If you don’t use them, you are missing out maybe the best trade in your entire life. Everyone would like to boost returns. Some strong trading platforms could help you. Find a broker with a robust platform. Well, there can be some disadvantages. For example, brokers with superior trading platforms will charge you higher trading commissions. Maybe they will limit the number of trades, or demand the minimum number of your trades. Even more, some will require a minimum account balance to give you access to the platform.

    Traders-Paradise fully recommends TD Ameritrade. Read more HERE.

    Tools for idea generation

    You might have different ways to come up with trade ideas. But you can also subscribe to some online services. In this way, you’ll have market updates in real-time, which is extremely important. This kind of service will provide you previews to initial public offerings, reports about rising growth stocks, stock trends.

    Online tools for stock trading cover financial statements, company news, and reports that are written by experts. When you use them, you ‘ll have a precise idea of how the company is doing. Maybe you get some new trading ideas. The more analysis is available, the better.

    The other online tools for stock trading

    Choosing the right online tools for stock trading isn’t an easy task. You have to know what you want to get. Also, an important point is to recognize what you are not scared to lose. 

    But remember, not one tool will help you make an investment decision. Some online tools you should use to analyze your investments. For example, if you want to evaluate stock use assets valuation, discounted cash flow, P/E ratio, or EV/EBITDA (enterprise multiple) to determine the value of the company. Also, debt to equity, current ratios, and quick ratio are important tools. The next group of online tools for stock trading could be sales turnover, returns on equity and on capital, and assets turnover. All of them you can find also online. 

    Bottom line

    These are some of the online tools for stock trading used for estimating the position of the company. But there are some tricky parts. Even if the company shows great results in all criteria you apply, you still don’t have to invest in it. You’ll need more, let’s say, tools. That’s your ability, your sense, your guts, feelings. Someone said that trading is more an art, not a science. If you aren’t an artist in the trading, you’ll end up with the poor results from your trades. Relying on online tools only can be wrong, almost the same if you never use them. 

    We don’t want to say you’ll need an esoteric, spiritual knowledge, but you have to feel the spirit of trading. You must have it in your bones to be really successful. Otherwise, you’ll be one in a crowd. But you would like to be exceptional. Remember, trading or investing doesn’t lie in an Excel sheet or trading platform. It lies in your heart, lives in your mindset, survives in your mind. Don’t get us wrong, results, numbers, all that math, algos are important. But you must feel trading. You have to live it.

  • Trading Bonds – How to Start Making Money

    Trading Bonds – How to Start Making Money

    Trading Bonds - How to Start Making Money
    A bond is a loan that the bondholder gives to the bond issuer. Governments, corporations, and municipalities issue bonds when they need cash.

    Trading bonds may seem unusual and difficult. But it isn’t. Actually, the whole process can be quite simple. Anyone interested in trading bonds shouldn’t have a problem getting started. You can find plenty of opportunities in trading bonds and the bond markets. But some things are special for trading bonds and bond markets. If you are not familiar with them, trading bonds might be very confusing. Honestly, it is important to trade bonds so let’s see how to do that.

    First of all, bond markets are much bigger than, for example, stock markets. One of the most important differences between bonds and stocks is that there is no exchange for trading bonds; it is done on the “over-the-counter” market but some kinds of bonds can be traded on exchanges. For example, convertible bonds are possible to trade on exchanges. Actually, trading bonds can happen anywhere where the buyers and sellers can make a deal.

    Trading Bonds: The participants in trading 

    There are two types of participants in trading bonds: bond dealers and bond traders.

    Traders can trade bonds among themselves, but trading is customarily done through bond dealers. Well, to be more precise, these places where you can trade bonds are dealers’ bond trading desks. Bond dealers are kind of intersection points. They have all types of connections available. Phones, computers are on their desks. But also, they are connected with some traders whose job is to gather all information about bonds, they are quoting prices for buying or selling bonds. To make the story short, these traders are responsible for creating the market for bonds.   

    Dealers and traders

    Dealers’ job is to provide liquidity for bond traders and make it easier to buy and sell bonds with a limited concession on the price. But they have some other possibilities to take part in trading bonds. Dealers can also trade bonds between each other. Sometimes they do so through bond brokers, meaning anonymously. Dealers make money from the spread between the bonds buying and selling price. This also the way how they can lose money.

    Bond trading can be very lucrative. That’s the reason why pension and mutual funds, financial organizations, and also governments are involved in trading bonds. When you have such powerful players in the market, it isn’t surprising that $1 million worth of bonds is small initial capital. The bond markets don’t have any size limit, trades may worth over $1 billion but also $100 million. That isn’t the rule for the institutional markets, there are no size limits for individual traders, also. Their trades are ordinarily below $1 million.

    Trading bonds strategies

    Trading bonds can be passive or active. Both approaches are legit and can produce you the gains.

    You can make money from bonds in two ways. You can invest in them and hold and receive interest payments after the maturity date. It is usually twice per year. That is a passive way of trading bonds.

    The other way to make money from bonds is by trading them. You can sell your bonds at a higher price than you bought them. For instance, you bought bonds at a nominal value of $20.000. After some time, their market value increases by 20% and you can sell them at $24.000. You’ll earn $4.000.

    Bond laddering is also one of the more active strategies and very convenient to start trading if you hold bonds with different maturity dates. You can use the profit from bonds with shorter maturity dates to buy bonds with longer maturity dates. This is named “income stream” and you don’t need a lot of money to use this strategy. It is pretty much economical and cheap. 

    Bond swapping is another active approach to trading bonds and very attractive for skilled traders. Where is the catch? Let’s say one of your bonds isn’t a good player and it is more likely a losing one, it’s not going to recover. Traders usually are selling these bonds to get a tax write-off for the loss. The money gained from the selling bond they reinvest in high-yielding bonds. That helps them to build a firm portfolio.

    The differences between the trading bonds and investing

    In trading bonds you are actually speculating on the price changes during a short period in time. You are buying bonds only when you believe they will increase in price. And vice versa, you are selling them only when you believe their prices will drop. So, your profit is coming from the bonds’ price movements. Trading bonds is also when you use the advantage of leverage. To be honest, that might magnify your profits but also, you may be faced with great losses. 

    Investing in bonds means that you are holding bonds for a long time. You decided to hold them whatever is happening and you are taking the risk to lose your money if bonds prices decrease. When investing in bonds the profit will come from interest payments. Further, on the maturity date, you will put down the total value of your position. 

    Should you trade stocks or bonds?

    Bonds and stocks are the most traded assets but in different separated markets. When trading stocks, you are actually buying ownership in some companies. When the company or companies are doing well, the value of your shares will grow.
    When trade bonds, you are actually lending money to the issuer of the bonds for a fixed period of time. For that you’ll charge interest. Bonds are often seen as safer than stocks. People use them as saving for retirement, for example.
    So, trading bonds is an investment strategy. You can use them as we mentioned above, but also, bonds are very useful if you want to diversify your portfolio.

    What to look out 

    Buying bonds can be a difficult path when you aren’t purchasing them right from the underwriter or you are buying used bonds. What to look out, how to know you’re making a good deal?
    Look out for the credit rating. It is important to know if the company can pay its bond. Standard and Poor’s and Fitch use a rating system that ranks bonds, the best quality is marked as AAA and the worst as D. Between these two marks you’ll find, in range of quality from good to less good, AA, A, BBB, BB, B, CCC, CC, C bonds.

    Further, you’ll need to know the bond duration. That is an indicator of how unstable the bond can be in terms of changes in interest rates. If the duration is longer, that means a higher fluctuation when interest rates shift. The problem is in the nature of the bonds. If interest rates increase, the price of a bond decreases. Also, be careful when buying bonds through the brokerages. They will charge you the fees. Check it before any bond-buying. Use publicly available data on the pricing of bonds, or bonds with equal maturities, interest rates, and credit ratings.

    Why trade bonds?

    Trading bonds can boost the yield on your portfolio. The yield represents the total return you’ll receive if you keep a bond to its maturity, but you’ll want to maximize it. The point is to sell bonds with lower yield and buying bonds with better. You are selling bonds with low yield and buying another to earn from the spread. For example, you hold a bond that yields 4,75% and you noticed a similar bond but it yields 5,25%. That is 0,50% more. So, you can sell your bond and buy this better yielding one and you’ll have a spread gain – yield pickup of 0.50%.

    Credit-upgrade trade is used when a trader assumes that a particular debt problem will be upgraded soon. When an upgrade happens on a bond issuer, the price of the bond will rise and the yield will decline. A credit-upgrade means that the company is marked as less risky. Traders want to catch this expected price increase and buy the bond before the credit upgrade. For this type of trade you’ll need some skills for credit analysis. 

    You might like to take credit-defense trade.

    It is very popular. When uncertainty in the economy and the markets increase, some sectors are weaker to fulfill their debt obligations. If you hold this kind of bond, just take a more defensive position. Pull your money out of that sector, don’t hesitate to get out.

    Also, you can trade your bonds to adjust a yield curve and change the duration of the bond portfolio you are holding. In this way, you’ll get an increase or decrease in sensitivity to interest rates, whatever you prefer. Keep in mind that the price of the bond is inversely correlated to the interest rate.

    The reason for trade bonds might be the sector-rotation. For example, you want to reallocate your capital to bonds from the sector that is supposed to outperform the industry or some other sector. If you are trading bonds in the same sector, one strategy could be to switch bonds form cyclical to the non-cyclical sector or vice versa.

    Bottom line

    To trade bonds, you’ll need an account. Choose your bond, when trading bonds, you can buy or sell assets from all over the world.
    Now, decide when you would like to open the position. Timing the opening and closing of trades plays the greatest role in how you are successful in the markets.
    Open your position by using some online trading platform. Determine how much you want to put on the position and do you want to go short or long. Add stops and limits orders.
    If your trade isn’t closed automatically by stops or limits, close it yourself to take profits or cut the losses. To calculate your profit or loss, subtract the opening price of your position from the closing price. 

    Simple as that.

  • Does Trading Strategy Really Work?

    Does Trading Strategy Really Work?

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

    By Guy Avtalyon

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

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

    But, what is a sufficient size of it?

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

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

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

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

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

    How to check if your strategy works? 

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

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

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

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

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

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

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

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

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

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

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

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

    How to optimize your strategy?

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

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

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

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

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

    Does the perfect strategy exist? 

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

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

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

  • Technical Analysis Myths Demystified Completely

    Technical Analysis Myths Demystified Completely

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

    By Guy Avtalyon

    What do you think, do technical analysis myths exist? 

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

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

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

    The technical analysis myths: TA will provide you a profit

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

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

    That is one of the technical analysis myths. 

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

    Real knowledge requires time to build.

    Is technical analysis simply a reading charts 

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

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

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

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

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

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

    Can technical analysis give valid price predictions?

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

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

    The winning rate is higher when using it

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

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

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

    Technical analysis software can make you rich

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

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

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

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

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

  • Trading Mistakes and How to Avoid Them

    Trading Mistakes and How to Avoid Them

    Trading Mistakes and How to Avoid Them
    If you have losing trades it is possible you have too many trading mistakes. Recognizing mistakes is half of the battle. The other half is how to avoid them. 

    Trading mistakes are common both for traders and investors, for the novice and experienced traders. Even though traders and investors practice different styles of trading, they often make the same trading mistakes. Some of the mistakes are more costly for investors, some for traders. For both kinds of market participants, it is essential to understand these common trading mistakes and avoid them. Think about bad trades as a process of learning and after you collect a significant number of them you’ll be more experienced and able to perform better trades. But this process can be shorter if you have an upfront understanding of where trading mistakes could arise. 

    That could give you a chance to react correctly and quickly enough to protect your investment portfolio. 

    Here are some trading mistakes that happen to both experienced and novice traders. These suggestions could help you to recognize them and give you a chance to avoid or correct them. So you should be able to gather the profits!

    Trading mistakes that traders shouldn’t do when trading

    Never risk a huge amount of your capital or going all-in. We all have a great expectation to earn a huge amount of money but one of the trading mistakes is putting all capital into a single trade and expect that could provide you great profits. How is that possible if every single trader, when asked, knows about the 1% rule. That means you should never put more than 1% of your capital into one trade. This is one of the common trading mistakes because traders constantly try to gain it all back. Mostly without a risk management trading plan. But even if you have a trading plan, sometimes you’ll be pushed to ignore it. You could be motivated to take a large trade which usually you wouldn’t. Don’t do that, try to resist. Stay stick to your risk management trading plan. The temptation can be a very bad companion in stock trading.

    Even if you think you are ready for a big portion in a single trade. Trust us, you don’t want to jump into the deep end. Especially if you are not skilled enough. Going all-in may cause unpredictable damages, financial and emotional, so great that you may decide to give up the stock trading forever. 

    The much better approach is to trade gradually at regular intervals and slowly increasing the amount per trade. In this kind of approach, you have two benefits: you won’t put all investment capital at risk and you’ll remove emotions when deciding when to buy a stock. 

    Not having a trading plan is a great mistake in trading stocks

    Among trading mistakes, this particular is maybe the most dangerous. If you don’t have a trading plan how will you know when to enter the trade or exit the trade. Skilled traders get into a trade with an outlined plan. They know their precise entry and exit points, how much capital to invest in the single trade, and what is the highest loss they want to take.

    Novice traders usually don’t have a trading plan before they start trading. Even if they have a trading plan, beginners could be more apt to turn out of the plan and take more risks and reverse the course totally.

    For example, they enter the trade with the belief that the stock price will rise shortly after they enter the position. That isn’t going to happen! But this fact is known to experienced traders, beginners don’t know that. And what happens the next is the trade is going against them. But most of them will not exit the position, they will hold in the hope that the price will go up. And the price continues to fall more and more but they don’t want to sell the stock, they don’t want to take the loss and end up losing everything. That is one of the most dangerous trading mistakes. 

    Further, even if they found a great entry point and the price starts to rise. Honestly, it could be a matter of luck, not knowledge. What do beginners do? They become greedy. Instead of selling stock and taking a profit, they hold the position. Very soon, the trade turns against them, and a winning trade shifts into a losing trade.

    Shorting stocks too early 

    If you short the stock too early it is more likely you’ll be destroyed on your shorts. Everything that flew always landed. This is especially true of stock trading and pumps and dumps. 

    For example, you notice a stock in the early stage of a pump. You are happy to buy and drive along as it increases. But at some point, it starts to drop, and you may profit by selling short. But when is that moment? When you have to go short? The timing is extremely important. What if you sell too soon? How to recognize that exact moment for short selling? First, you have to find the top on the stock. That means you have to recognize the resistance level. That is the point where buyers are leaving, but also the point where the sellers appear and begin to take over the stock.

    Short selling is dangerous anyway and only experienced trades should use it. If you practice this strategy or want to, be careful. Without proper knowledge and experience, you’ll jump into one of the biggest trading mistakes.

    Use stop-loss orders to avoid trading mistakes

    Cutting losses is a very serious issue. If you don’t cut your losses quickly you could lose everything. This mistake apparently takes most of the money. Avoiding to admit that we’re sometimes wrong, we are actually admitting we’re human beings. Nothing is wrong with that. People are doing that all the time. Sometimes it can be good. But not in trading stocks. 

    The main problem with trading and you cannot find many people that would like to admit that, is that there is no possibility to be correct on your trades 100%. The best traders are correct under 80%. How do they manage to not blow up their accounts? Simply, they know when they are wrong, they recognize that and admit that. When wrong trade occurs just get out fast. Why will you wait? To make more losses? No one would like that. Just admit you are wrong and exit the trade while you still have a chance to reduce losses. 

    But you must decide about your risk before you enter a trade. You have to know your risk to reward ratio and how much you are comfortable to risk.

    When you identify what you’re ready to risk, enter the trade. But that is not the end. 

    Set a stop-loss order 

    You have to set the stop loss. For some traders, it sounds unnatural to enter the winning trade and promptly set stop-loss order. We have one question for them. Is it natural to lose all capital invested? And, yes, there is a possibility to lose everything without setting a stop loss. In this way, you’ll avoid making huge losses to your account. 

    Never neglect stop-loss orders. That will prevent you from extreme losses and lock in profit when you have winners. You have to set a stop loss for every single trade.

    You might think you don’t need this order while you are sitting in front of your computer all the time. But you don’t have that single one trade to monitor, sooner or later you’ll have more of them. It’s almost impossible to monitor several trades at the same time. Changes are speedy and it could happen that you don’t notice the stock is losing support. In that situation, everyone would like to get out as fast as possible. The stock price could fall a lot faster than you are able to set your sell order in. And what did happen? All your profits are wiped in a second. By setting stop-loss orders at the moment when the trade is filled. 

    Bottom line

    Trading stocks is not an easy job. It takes discipline, time, and knowledge. Some traders can’t handle it and gave up. Also, there is one thing you must know before entering this marvelous world, the most important part of trading is preparation to execute it.

    You cannot find a lot of people out there to help you figure out what trading mistakes to avoid. We pointed several but there is much more. To be prepared to avoid them, you have to learn and not be greedy. 

    As we said, trading isn’t easy but can be very profitable if performed properly. It’s okay to be wrong from time to time, but if you are wrong all the time you’ll never become a successful trader. Just admit your trading mistakes, examine what went wrong, and continue with success. While trading, your emotions must be under control. Okay, some level of fear is favorable, it can protect you from meaningless and harmful moves. But you have to be honest with yourselves and admit when you made mistakes. To remember them better, write it down in the trading journal. That will make things easier in the future.

  • Most Traders Fail When Trading Stocks, Why?

    Most Traders Fail When Trading Stocks, Why?

    Most Traders Fail When Trading Stocks, Why?
    Lack of knowledge is the biggest reason behind unsuccessful trades. Searching the internet can give you some clues but also a poor education. The consequence is that you’ll be among 90% of losers. 

    By Guy Avtalyon

    Most traders fail when trading stocks, why is that? The stats are cruel. Only 10% of all traders make money permanently. That means the rest of the 90% of traders fail to make significant success. To break it down and be more precise, 80% suffer losses, 10% give up over time and only 10% are profiting permanently. 

    How is that possible, why do most traders fail when trading stocks? We have to find out the reasons behind because everyone wants to be in that 10% of successful traders. It doesn’t depend on gender, age, nationality, it simply depends on how much you are resolute to dedicate your time and effort to achieve success and make money on the stock market.

    Since the stats show that most traders fail when trading stocks, why do the majority simply copy losing traders? Why don’t they do just the opposite? The information is all around us thanks to the internet, but how can some inexperienced trader know what to use, what to do? 

    So, let’s start and explain why most traders fail to make money on the stock market. Also, we’ll give you some hints on how to avoid unsuccessful trades.

    Why most traders fail when trading stocks?

    Because they neglect the rules.

    If you want to become a successful trader you’ll need knowledge, experience, and hard work. Only when you gain all these three ingredients you may count on success eventually. You have to forget the luck factor. Trading the stock market isn’t a lottery game. You can’t just pick a ticket and pray. Trading stocks is a serious job so you’ll need to study a lot and acquire knowledge. When you acquire knowledge, you can start developing experience. You’ll walk a thorny path but if you put some effort you’ll reach your goals and finally enter in that 10% of successful traders. 

    But you’ll need time. Some surveys show that you’ll need form three to five years of learning to obtain experience. You have to go out the whole way, there are no shortcuts. The good news is that trading stocks aren’t rocket science so don’t be afraid of it, it isn’t complicated. Keep in mind that most successful traders like to look as they have the key to a great secret. They are acting like they revealed the Philosopher’s Stone. 

    Nothing is that complex and mysterious on the stock market but some traders are frightened by the attitude of successful traders. Remember, knowledge and experience are something that they obtained over time. They aren’t born with that.

    Of course, you’ll find numerous agencies offering instant solutions with no knowledge and experience required. Just don’t trust and avoid them. the only thing they want is your money.

    Most traders fail when trading stocks because of lack of knowledge

    This is the biggest reason behind the unsuccessful trades. Where do you try to learn more about trading stocks? You’ll need to learn from the respectable investors, they wrote so many books. Searching the internet can give you some clues but if you rely on that only it is more likely you’ll end up getting a poor education. The consequence is that you’ll still be among 90% of losers. 

    Are you impressed with graphs? How much do you really understand what you are looking at? Do you have a trading plan? What do you know about risk or money management? 

    Successful traders know how to develop an effective trading plan. The fact that you are buying a stock and selling it, doesn’t mean you are a trader. 

    Okay, to put more pain into your life we have to ask you. Let’s assume you have a trading strategy which means you are not that much inexperienced. Do you know why your trading strategy stopped working? How do you know it stops working? 

    What is an outstanding strategy for trading stocks?

    Most traders fail when trading stocks because of different reasons but the most common reason is that they are constantly seeking an outstanding strategy. So, what will happen when they find it? Will they use that one single strategy during the whole trading career? What a dangerous mistake! When trading strategy stops working you have to adjust it or replace it. There is no other way. But first, you have to understand why your strategy doesn’t work anymore. 

    As being a trader you know that the stock market is changing. One single strategy cannot be suitable for all market conditions. The trading strategy must be in sync with these market changes. It has to be adjusted for the new condition in the market. If your strategy stops working that means it is unable to meet the current market.

    The good news is that you could adjust your strategy and reduce failure.

    How to recognize that your strategy doesn’t work anymore?

    We are pretty sure you have a great strategy that passed all backtesting. Also, we believe you made money with it. But what if your strategy suddenly doesn’t work and you have a sizable drawdown? Will you get panicked? Well, don’t! That is part of trading. Sometimes you’ll even not be able to notice that but sometimes it will cause great losses. And you’ll start to examine your trading strategy. How will you know that your strategy doesn’t work anymore?

    The problem is that you can’t know if it is temporary or permanent. Some experts suggest setting stop-loss on the whole strategy level. So, when your strategy nails that level, you’ll stop trading it. If your strategy starts working again be patient and wait until you see that the continued strength isn’t temporary. Also, there are some tests to help you to assure that your strategy is still working. For example, in-sample and out-of-sample testing can be very useful to check the validity of your strategy. Check it by the training tools firstly, and then confirm on the validation set.

    The idea behind this is that real market performance will continue on both sets. Random market noise will not be registered. Use walk forward analysis to perform differently in and out of sample tests. Forward testing is also a good method to examine how your strategy will perform going forward.

    Most traders fail when trading stocks because they think their strategy isn’t working anymore and stop to use it.

    Poor risk management cause failure trades 

    You might have a winning trading strategy but if your risk management is poor your trade will fail. 

    Risk management assists to cut down losses. It will protect your account from losing the money. If you know how to manage the risks, you’ll make money. Most traders fail when trading stocks because of overlooked requirements for successful trading. One bad trade without risk management strategy can end up in great loss. 

    How to develop the best system to control the risks of stock trading?

    First of all, you have to plan your trading. Stop-loss and take-profit points are keys to planning. That means you’ll need to know what price you are prepared to pay and at what price you are ready to sell. If the return is fairly high, you can execute the trade. 

    Even with the best trading strategy in the world, without proper risk management, you’ll end up with poor trades

    Trading with poor risk management could reveal why most traders fail when trading the stock market. If you want to stay in this game, the best advice you can get is to learn everything possible on risk management.

    Most traders fail due to unrealistic expectations 

    Trading stocks naturally include some level of risk. But it is completely understandable why so many traders are taking high risks. A few books that you had read or one or two webinars are not guarantees for winning trades. There are no instant solutions in trading stocks. Also, if you think that using some complex strategy will bring you more profits we have to say you couldn’t be more wrong. 

    Unfortunately, traders are still losing their hard-earned money thanks to unrealistic expectations. 

    We already said that knowledge is extremely important in trading but proper implementation of it is more important. When you hear that someone had great trade during the bull market, for example, you have to know that it isn’t always thanks to great knowledge. It is easy to trade bull markets since they can cover the mistakes caused by a lack of knowledge. But what will you do when the bear market occurs?

    To define yourself as a trader you must have at least two or three years of continuous success. Don’t ask for easy and easy solutions. That is a blind way. You’ll be among 90% of unsuccessful traders.

    Trading is a professional career and as being that it takes years of dedication and work to be good at it. While learning you can do that from your mistakes but also, from other traders’ experience. That is the beauty of learning to trade. With the decreasing number of trading errors, you are closer and closer to become a successful trader. Most traders fail when trading because they avoid learning. And to be honest, that is the easiest part. The troublesome part is understanding your own psychology. That will determine how you will enter the stock market.

  • The Importance Of A Trading Journal

    The Importance Of A Trading Journal

    The Importance Of A Trading Journal
    If you want to become a successful trader you will do what is obvious, you’ll start keeping a trading journal. That will give you a lot of benefits.

    The importance of a trading journal isn’t arguable. A trading journal is helpful for every trader to track trades. Using a trading journal is one of the essential components for trading success. Even the most successful traders understand the importance of a trading journal and use it all the time.

    But still, some traders don’t understand the importance of the trading journal and use it inefficiently. The reason for doing so is quite hard to understand because using a trading journal is a great tool. Without it, you will not be able to execute your trades with higher efficiency. The importance of a trading journal is obvious if you know what kind of important data it can provide you. It could show you the info about what were the market conditions and you went through them, where you were panicked and wrong or had successful trades and under which conditions. Another importance of using a trading journal is that it can give you a clue for your future trading strategy since you have recorded your prior strategies.

    Keeping a trading journal is an exceptional strategy to improve performance and grow confidence in trading. Success in trading doesn’t matter if it is stock, options, forex trading demands a high level of planning and discipline. If you want to be successful in trading, you’ll need to go through a full learning process. And here we come to the importance of a trading journal, one of the best tools that will guide you and help to optimize your trading system and can drive you towards profitable trades.

    What is a trading journal?

    As we said, a trading journal is one of the most powerful tools for trade management. It is the place where you have recorded all your trades and you can always check for better output and for future trades. By using a journal you can track development as a trader but also examine mistakes you made when you enter or exit your trades. Without it, you cannot act. It is your best base for better future executions.

    The importance of a trading journal is that you have all data records ordered by the date with all trades that you ever take. You’ll have all entries, meaning every single trade ever taken. So, you’ll have a prompt overview of all trades you made, every entry and exit prices, the prices’ direction,  the size of all your positions, all trade results. Of course, you can add to your trading journal all data you want and find they can be useful for your trading success.

    Why keep a trading journal?

    The same as it is important to have a trading strategy, one or several of them, risk management, it is also important to keep a trading journal as a part of your trading plan.

    It is important to keep a quantifiable record of your trading performance and learn from past winnings and losers. However, past performance cannot predict future performance, but you can use a journal to learn from your trading history, to recognize the emotional actions, why did you or the price go against your strategy. So, your trading journal should include all your profitable trades, also unprofitable, market records, the reasons behind all your buying or selling the stock, and many other details. 

    At first glance, it looks very complicated and you may think it’s better to give up before even starting, but when you start it and recognize how beneficial it can be to keep a trading journal, you’ll stick with it throughout all your career. 

    What are the benefits?

    Your trading journal is the most important statistic of your trades. It keeps tracking your progress and it is by far the best way to estimate how successful you are. By keeping a trading journal you’ll have valuable feedback on your performances but also, you’ll have the patterns that will provide you important and accurate information about what you did well and what you have to change.

    As we mentioned above, it may seem like a complex work but in essence, a trading journal is a simple diary where you have to write down all your trades, the reasons behind them, and how it ended up. 

    We say the end is very important, we say it deliberately.

    If you plan to become a successful trader, all ends are important and should find their places in your trading journal. Never add only the winning trades or ignore the losing ones. You’ll need a valuable tool that will provide you accurate feedback into your trading method. That’s the main goal of keeping a trading journal.

    What traders do wrongly?

    There are several major mistakes (more about “option trading” mistakes in this article) in keeping a trading journal. Some traders will just add the stocks they trade but forget to write down how the trade ended, did they have the winning or losing trades. That is a common mistake that leads to keeping a journal incorrectly. You have to know whether you executed your trades in profits or losses and you’ll need that information documented later to recognize the patterns.

    Add to your journal what were your reasons before entry, where you placed the stop-loss, where was your target profit. Also, it is important to add how much risk you planned to take and write it down in money. The next step is to follow your own rules, right? That will show how you manage your trades.

    But let us explain why it is so important to add market conditions to your journal. If you don’t, there will be a great possibility to continue trading out the market context. Moreover, you’ll not be able to seek new approaches and ideas of trading. 

    More detailed explanation 

    If you have data about market conditions added to your journal you’ll be able to recognize the markets with a high possibility for more aggressive trades. In case you aren’t that kind of trader, you’ll just stay away because you’ll know when not to be in the market. On the other hand, if you like that kind of trade you’ll be ready to take a risk.

    Additionally, the trading journal will give you a great chance to monitor movements and risks, to recognize the strength and weaknesses in your portfolio. It will give a clear indication which stocks or other assets you trade well and which you don’t manage well. If you ignore this information you’ll not earn the money. It is more likely you’ll have consistent losses. What really you would like in such a case is to get your money back. 

    There is a difference between a bad trade and a bad stock and you have to realize that. Maybe the stock is quite good but you don’t trade it well. 

    The journal will show you which stocks you have to focus on.

    What things to add to your trading journal?

    The following are basics. 

    Add the stock price action before you enter the trade. It can be a one or two hours time frame. That will be the context in which you’ll open the position. Further, include a text note of your starting time to know if you enter the trade too early or too late. Also, why maybe you did miss some signals.

    One thing is also important and it is smart to add it. Add, it can be a kind of reminder, what are the market circumstances that could force you to stay away from trading or you missed the trade. When such a circumstance occurs, write it. Write down that you didn’t trade because of the news, for example.

    Write a note about the trends you saw. If you made a mistake, write it also. Do the same if you miss a trade or how many trades you made, make a note of it. Note how many winning or losing trades you had, calculate expressed in money how much you earned and loss, and write down the net result. But this method may have some disadvantages so it could be better if you, instead of money to use points for the futures, or cents for stocks, as well as pips for forex trades.

    Bottom line

    Keeping a trading journal makes a difference between amateur traders and professionals. Professionals understand the importance of a trading journal. You can count on a lot of benefits when you start keeping your trading journal. First of all, your whole comprehension of trading will be changed and you’ll get a better direction, of course. Moreover, you’ll be able to make progress from the very first day. You will have confidence and trust in your strategy and your skills when your journal backs you up with the statistics that verify that your strategy works.

    These are only a few benefits of a trading journal. If you want to become a successful trader just use this number one tool for professional traders. That will improve your trading.

  • Create a Forex Strategy – How to Do That?

    Create a Forex Strategy – How to Do That?

    update: 2/1/22

    Create a Forex Strategy - How to Do That?
    Almost everyone can set up the rules but stick with them when things go bad means that you have confidence in your forex strategy. 

    Yes, the question of how to create a forex strategy is maybe the most tricky part for all you would like to know more about forex trading before entering the forex market.
    The main goal of finding how to create a forex strategy is to choose the one which will provide you the protection against the losing trades but give you a chance to have more winning ones. Otherwise, you’ll lose your money invested in the forex market.

    You can achieve this thanks to a proven forex strategy. 

    To know how to create a forex strategy you have to follow some rules. Well, it’s maybe better to call them steps. By using this set of rules you’ll be able to create any forex trading strategy, from the simplest one to the most complex.
    The main problem for the majority of forex traders is that they rely on some strategy that isn’t well tested. That leads them to great losses and failure. Even if you spend hours, days searching the internet, it may happen you’ll not find any suitable for you.

    The only solution is to learn how to create a forex strategy that can meet your goals.

    Knowing what rules to follow

    As we said, there are some rules you have to follow when you start to create a forex strategy. But firstly, we have to highlight one thing. It doesn’t require too much time to come up with a forex strategy, but it does take time and effort to test it. As you can see, you have to be patient with that because it can benefit you. If you create a forex strategy and test it extensively and you see it works for you, it could lead you to earn potentially a lot of money.

    Rule No 1

    The first rule is that you have to know what kind of forex trader you want to be. Do you want to be a day or swing trader? So, knowing the time frame is the first rule when you start to create a forex strategy.

    How to do that, how can you know what kind of trader you want to be?

    From the very beginning, you have to decide if you would prefer to look at charts every day, week, month or maybe every year. Also, the time frame rule will answer you about how long you would like to hold on to the positions. So, you have to define which time frame you want to use to trade. It’s true that you will look at various time frames, but this particular one will be your main time frame and the trade signal will come from there.

    Rule No 2

    The next rule is to detect indicators that will help you to identify a new trend. One of the main goals in forex trading is to recognize trends earliest possible. For that, you’ll need indicators.

    For example, the moving average is one of them. As we learned from elite traders and according to our experience, the best way is to use two indicators. It is quite simple. Just use one fast and one slow. All you have to do is to wait until the fast indicator crosses under or above the slow indicator. This is a so-called crossover. Moving average crossover is the simplest and fastest way to notice a new trend. There are many other indicators but this one is more comfortable to use and the easiest one.

    But be careful, the last thing you’ll need is to pick a fake trend so you’ll need a confirmation of the trend. For that, you have to use some other indicators. For example, RSI, MACD or Stochastic. It’s up to you to find the one that suits you the best but it will come after you gain more experience in forex trading.

    Rule No 3

    You have to know your risk tolerance. Before you implement any trading strategy or develop your rules, it is very important to define how much risk you want to take in each trade. In other words, how much money you can afford to lose per trade. However, no one would like to talk about losing trades, but it is crucial for everyone to consider potential losses much before you imagine how big your winning trade can be. So, you’ll have to learn about risk management. Risk tolerance is individual and differs from trader to trader.

    Rule No 4

    You have to know when to enter and exit the trade, so entry and exit points are extremely important. After you define how much money you are ready to lose per trade, it is time to figure out where to enter and exit the trade to get profit. Basically, you enter the trade as soon as your indicators provide you a sure signal. Some traders enter the trade before the candle in their charts is closed, some will enter when it is closed. It’s up to you and your trading style, meaning are you an aggressive trader or not. 

    What really matters is to stick to your practices. After all, you are the one who developed it.

    Create a forex strategy on your own

    When you are looking to create a forex trading strategy, you would like to know how to do that and how to develop trust in the strategy you created. Your forex trading strategy MUST give you a strongly rooted belief that you can trade it and profit. Otherwise, you’ll fail.

    So, before you use it, you’ll have to test it.

    Before you even start to create a forex strategy you must have some presumptions. You’ll need a feeling that it might work for you. Yes, it will be a struggle but once when things get going you’ll be unbelievably satisfied.

    Frankly, creating a forex strategy isn’t an easy job. You’ll have to define what exactly you need. This is extremely important because you’ll need to test your strategy precisely. That means you’ll need to know both entries and exits. But it is a small part of creating a forex strategy.

    What should you know before starting to create a forex strategy?

    Here are some questions that you may follow to find the answers and when you have done it, you’ll see that you have your strategy. Maybe not all fall into creating a strategy but they will surely help you a lot to create a forex strategy. 

    First, you have to decide on which currency pairs you can trade your strategy.

    So, make a market selection.

    The other question you should ask and find out the answer is will your strategy work on different market conditions. For example, is it useful in trending markets, high volatile markets, bull or bear markets?

    Also, as we mentioned above, the entry time frame is important. Ask yourself which time frame to use to enter the trade. Would you prefer a lower time frame to entry or high time frame for trend direction? What circumstances have to be met to enter a trade? When it comes to exits you have to figure out do you want to use a fixed take profit level or profit level based on average true range. That is a technical indicator invented to read market volatility.

    The decision of which chart setup you’ll use can be of great importance.

    The type of chart, what indicators to include, which settings for the indicators, etc.

    Further, you’ll have to choose a position sizing strategy. That means you’ll have to decide will you use a percentage-based position sizing. Maybe you would like to increase your position size periodically. Will you use some fixed lot or contract sizes?

    Also, just to repeat, define your risk tolerance and money management. You have to determine the risk-reward ratio you want to get. Will you use a trailing stop-loss? Which one: based on percentages, volatility-based, fixed pips values or ticks values? Will you use stop-loss orders and how will you move them? 

    Do you plan to enter various correlated currency pairs at once? How will you hedge your position? By using inversely correlated pairs or something else? Are you planning to monitor your trades constantly? Would you hold your trades over the weekends?

    Maybe the last but for sure not the least, do you follow the news and how frequent? 

    If you want to create a forex strategy, you’ll need the answers to all these questions. So, take your time.

    The next step is backtesting. To get accurate information about how good your strategy is you have to follow your strategy, never change the rules while testing or your data will not be accurate. For testing use a representative sample of your trades based on the questions above. Examine how your strategy is working in different market conditions for different currency pairs. 

    And you’ll be able to trade for real after you have done all of this. But keep in mind that live trading with real money can differ from your tests because the real money is involved.

    Bottom line

    So, you started to create a forex strategy. Is it simple? Of course, it isn’t for good reason. But you must have the confidence to trade your strategy and to incorporate it into your trading plan.

    Traders-Paradise recommends starting with the smallest lot size your picked platform permits. If it shows the profitability you may keep using your forex trading strategy. Later, you can increase your position size. The strategy you created should work in the long run.

    If you prefer to trade stock patterns we are recommending to learn it more from the “Two Fold Formula” book and. Also to test it with a virtual trading system.

Traders-Paradise