Category: Traders’ Secrets

Traders’ Secrets is something that everyone would like to know, right?
How is it possible that some traders are successful all the time while others fail to make a profit all the time?
That is exactly what Traders’ Secrets will show you.
Traders-Paradise’s team reveal all trading and investing secrets to you, our visitors.

What will you find here?

How to find, buy, trade stocks, currencies, cryptos. You’ll find here what are the best strategies you can use, all with full explanation and examples.
Traders-Paradise gives you, our readers, this unique chance to uncover and fully understand everything and anything about trading and investing. The material presented here is originated from the experience of many executed trades, many mistakes made by traders and investors but written on the way that teaches you how to avoid these mistakes.

Moreover, here you’ll find some rare techniques and strategies that are successful forever, for any market condition. Also, how to trade with a little money and gain consistent returns. By following these posts you’ll e able to trade with greater success. You’ll increase your profits and your wealth, of course.

The main secret of Traders’ Secrets is that there shouldn’t be any secret for traders and investors. Rise up your trade by reading these posts, articles, and analyses!

You’ll enjoy every word written here. Moreover, after all, your trading and investing knowledge will be more extensive and effective.

Traders’ Secrets will arm you with those skills, so you’ll never have a losing trade again.

  • Ratios Important To Make Profit In Stocks

    Ratios Important To Make Profit In Stocks

    Ratios Important To Make Profit In Stocks
    If you want to buy stocks, the wrong way is to follow your intuition and expect everything will work spontaneously. 

    By Guy Avtalyon

    Ratios important to make a profit in stocks is something we will explain to you why that is and how to calculate and examine them. The truth is, you have to favor investing and trading strategies to eliminate emotions. These ratios will give you insight into a company’s fundamentals and let you evaluate a company’s health.
    Stock investing demands a rigorous analysis of financial data if you want to find out the company’s real worth. Investors commonly estimate profit, losses, check business accounts, cash flow, balance sheets. You might think it is too much work and give up or, what is really dangerous, you might buy a stock without any estimation, like you are buying a lottery ticket. Yes, sometimes evaluating the right stock can be hard and eat your time. The question is why should you do that? Instead, you can find a lot of these data free on the internet.

    Understand ratios before buying

    Much more before you buy stocks, it is very valuable to know how to calculate, understand, and read ratios when you see them. It doesn’t matter if you get them from your broker or you find them on the internet. Ratios are important to make a profit in stocks because they will tell you everything about the company you want to invest in. If you don’t estimate the ratios, the possibility of making the wrong investment decision will increase. Just ask yourself, do you really want to invest in a company with debt, that hasn’t enough cash to maintain it or support the operations, and moreover, has low profitability? To be honest, estimating ratios or calculating them isn’t a foolproof method but it is a way for fast checking of the company’s health.

    What ratios are important to make a profit in stocks?

    The most common categories are related to earnings and the balance sheet since they are crucial indicators of a company’s health. The crucial ratios show the company’s income and its ability to persist solvent. But you can use a lot more ratios important to make a profit in stocks and we would like to show you how to put them to work to help you make a proper investment decision.

    So, let’s start!

    P/E Ratios Important To Make Profit In Stocks

    It is the most usually mentioned ratio. The price-to-earnings ratio is sometimes called P/E or just pE ratio. This ratio measures the share price correlated with the earnings per share. The P/E ratio is helpful when you want to compare the stock of one company with the stock of some other from the same industry. By using it you’ll be able to unveil if some stock is underpriced, overpriced, or in harmony with other companies in the same industry. This ratio is a very popular metric and the calculation is quite simple. All you have to do is to divide the value per share by earnings per share for one company. Calculate this ratio for the last four quarters (of course you can do this for several years) and if all of them were equal remember, the lower the P/E ratio is better.

    Use forward earnings

    Also, use forward earnings, which is the average of Wall Street’s projections for the current fiscal year. According to Benjamin Graham, it is proposed the stocks should trade for a P/E multiple equal to 8.5 times earnings plus doubling the growth rate of earnings. If you want to estimate some cheap stock, well, the P/E ratio maybe isn’t an adequate metric.

    For example, the S&P 500 trades for 19,47 times during the past four quarters of earnings reports. The average P/E for the last 80 years is 15.86, which means the market is a little pricey. This is just an example and figures can be inaccurate at this moment.
    So, if the P/E ratio is lower than average, it’s a sign that you’ve found a potential bargain. Well, you don’t have all the relevant data to decide whether to buy a stock or not. A lot depends on growth, so the next ratio to watch is the PEG ratio.

    PEG ratio

    The PEG ratio is a pick of growth investors. To calculate it just divide the P/E by the company’s growth rate earnings expected in the next five years (this is the most accurate). Again, Graham, of course, and efforts to gauge the size of a discount or premium you will pay for growth. If the PEG ratio is less than 1 (which is low PEG), it implies the stock can be undervalued. Contrary, if the PEG ratio is higher than 1 or more, it is an indicator that the stock is overvalued. But the PEG ratio isn’t ideal, it has some downsides. By using the PEG ratio you are not able to predict future growth rates.

    Use Price-to-Sales Ratios important to make a profit in stocks

    P/S ratio is similar to the P/E ratio and to calculate it just divide the market capitalization by the company’s total sales for the last 12 months. So, put aside the earnings. This ratio will tell you how much you will pay for every single dollar in yearly sales. To make clear why we have to put aside the earnings. Well, there are periods when the company doesn’t have earnings so the total sales can tell better about the company’s value than the P/E ratio can. Maybe even more, because no one can manipulate the sales, earnings are something that can be manipulated. If the P/S ratio is low in comparison to other companies, that means a company could be a winning investment.

    But be careful, sometimes a low P/S ratio can be spoiled if the company has a huge debt and permanent lack of profitability.

    Price-To-Book or P/B

    Use this ratio to compare the stock price to the company’s book value. A P/B is expressed as a difference between assets and liabilities, meaning assets minus liabilities. If P/B is low it may indicate a good buying opportunity. When the book value per share is higher than the stock price, it is an indicator that the stock is undervalued. The idea behind is to understand how much money you’ll have in case you sell all of it.

    This is price multiple metrics. The P/B is used when comparing current multiples to historical averages. This ratio is useful for comparing the companies that provide some kind of services, for example, meaning they don’t have a real property. For instance, the equipment company has little book value but trade at very high P/B value multiples, sometimes 25 times over book value.

    Price/Cash Flow or shorter P/CF ratio

    It measures the value of a stock’s price related to its operating cash flow per share. It is particularly helpful for evaluating stocks that have positive cash flow but have non-cash charges and are not profitable.

    The formula is

    P/CF = share price / operating cash flow per share

    You have to count the operating cash flow for the previous 12 months. Further, have a focus on cash generated by the company, forget depreciation from earnings, or amortization. This measure is better than the P/E ratio to compare the valuations of companies from different countries. You know that different countries have different depreciation charges and that may influence earnings. Lower P/CF is better, but remember, almost all companies have extra cash flow, not all is coming from the operations. 

    For example, free cash flow. It is the amount that the company owns after paying debts, dividends, buying back stock. If cash flow is negative it shouldn’t be a red alarm until it becomes a constant problem. If that is the case, the company can easily meet the solvency problem.

    Why ratios are important to make profit in stocks?

    Ratios important to make a profit in stocks are also dividend yield, dividend payout ratio, return on assets (ROA), return on equity (ROE), profit margin, a current ratio, etc.

    There are so many tools, websites, reports that are useful. You have to analyze a stock before you buy it. Also, you have to know the time frame of your investment. We always say stock trading is different, it isn’t the same as investing. Researching stock will take some time, you can’t finish it in a few minutes. But it is completely irresponsible to buy any stock without researching and evaluating by using ratios mentioned above. 

    If you are a trader maybe this can help you. Test it with our preferred trading platform virtual trading system. In investing, permanent study and examination are crucial.

  • The Stock Price Pattern How To Identify It

    The Stock Price Pattern How To Identify It

    The Stock Price Pattern How To Identify It
    The price pattern is a visual illustration of market psychology. It shows when traders are inspired and move, when they are taking a breath and when they are willing to move further.

    The stock price pattern represents a form of price movement that is recognized by a set of trendlines and curves. Changes between rising and falling trends are usually shown by price patterns. The stock price pattern is important for technical analysis because it shows the current movement but also enables traders to predict future changes. For example, if the stock price pattern shows a change in trend direction, it is a reversal pattern. But if the pattern shows a continuation that means the trend proceeds in a direction following a shortstop.

    To explain this a bit clearer, for example, you are driving your car and the traffic is heavy, and you have to drive and stop, and drive and stop. Every time when you see the brake lights in the car in front of you, you know that you have to slow down. Otherwise, you’ll crash into the other car. The unknown fact is will the car in front of you continue to move in the same direction, pull aside or stop after that slowdown. 

    The same is with the stock price pattern. 

    When you notice a stock price pattern beginning to develop on a chart that is the sign the stock is going to slow down or consolidate. At that moment you have to slow down too and estimate what may happen. Also, at that very moment, you cannot know if the stock price will breakout and continue to move in your direction or it will change direction.

    Every trader must understand how important the stock pattern is. It is a really valuable tool that you need in your trader tool kit. Recognizing and understanding patterns isn’t easy but once you learn how to do that, you’ll be able to uncover the future price action with high probability.

    Characteristics of the stock price pattern

    So, we all understand that the price pattern is an evident picture of market psychology. It shows when traders are motivated and move, when they are taking a pause and when they are ready to move further. For some image in the stock chart to be a pattern, some conditions must be fulfilled. 

    Every single pattern is composed of four parts. Firstly, the pattern has to show an old trend. This means the trend of the stock price when it started to form the pattern. Also, the pattern must show the consolidation area. The consolidation area represents the zone where the trend is channeling or undefined. It is the area defined by set support and resistance levels. Further, the pattern must unveil the breakout point. That is the level where the stock price breaks the consolidation area. And, also as a part of an image on the chart to confirm it is a pattern, you must clearly see the new trend. The new trend represents the trend of the stock price when it starts coming out of the consolidation area. That’s how you can know that the stock price creates a pattern.

    What types of stock price patterns do we have?

    Chart patterns are an essential aspect of technical analysis. You’ll need to understand them. Stock price patterns are classified into two main categories: continuation patterns and reversal patterns.

    Continuation pattern unveils you the new trend has the same direction as the old trend was going. 

    The reversal pattern shows you the new trend is in reverse directions and starts to move in the opposite direction from the old trend direction. And that is the main difference between them. – the direction in which the new trend is moving.

    Both types of patterns have the characteristics we mentioned above.

    Trendlines

    Stock price patterns are recognized using a series of lines and curves, as we said. But how to guess trendlines and draw them? It is important to locate zones of support and resistance.
    To draw trendlines just connect by straight lines the dots of highs or lows, meaning descending peaks or ascending troughs. When the stock prices have higher highs or higher lows we are speaking about an up trendline. The opposite occurs when we notice a down trendline. That means the stock price has lower highs and lower lows.

    The body of the candle bar will show where the bulk of price activity happened. So, it is a better point where to draw the trendline.

    To draw a trendline you can use closing prices instead of highs or lows. And it is maybe better because the closing prices express the traders’ decision to hold a position. But be careful, the trendline drawn with only two points may not be quite valid. Always try to find three or more points.

    Uptrend happens where the price is making higher highs and higher lows. Up trendline connects at least two of the lows and registers support level below the price.

    The downtrend is the point where the price is making lower highs and lower lows. Down trendline combines at least two of the highs and shows a resistance level above the price.

    Consolidation happens where the price is swinging between an upper and lower span, which are shown as parallel and horizontal trendlines.

    Continuation stock price pattern

    A price pattern that signifies a brief break of a current trend is a continuation pattern. It is just a break, a short time for traders to take a breath when an uptrend occurs or to relax during the downtrend. The first is in connection to the bulls, and second to the bears.

    While a stock price pattern is developing, we can’t know if the trend will continue or reverse. So, we have to take attention to the trendlines and realize if the price breaks above or below the continuation area. It is always better to suppose a trend will continue until it is verified that it has reversed. Keep in mind, if the pattern needs more time to develop and you see the large price movement inside the pattern, it is a stronger sign the price will significantly break below or above the continuation zone.

    But if the price remains on its trend, it is a continuation pattern. Continuation patterns can be pennants, flags, wedges, triangles.

    Pennants are created by using two converging trendlines.
    Flags can be drawn with two parallel trendlines.
    Wedges are created with two converging trendlines, but both have to be angled either up or down.
    Cup and handles, which is a bullish continuation pattern. When having this pattern, you can be sure an upward trend has stopped for a short but will proceed after the pattern is confirmed.

    Triangles are the most popular chart patterns in technical analysis and they occur more frequently than the other patterns since they can last from a few weeks to several months. There are three most typical types of triangles: symmetrical triangles, ascending triangles, and descending triangles.

    Reversal pattern

    It indicates a change in the current trend. This pattern indicates the period where the bulls or the bears have run out of money. This means the trend will pause and then continue in the same direction.

    For example, an uptrend backed by enthusiasm from the bulls will pause. That means the influence of both the bulls and bears, so the result is a change in trend to the downside. The reversal that happens at market tops is a distribution pattern. That means more sold than bought assets. Opposite, a reversal that happens at market bottoms is an accumulation pattern, which means there are more bought than sold assets. 

    When the stock price reverses later, we are talking about the reversal pattern. Reversal patterns can be head ad and shoulders, double tops or bottoms, gaps.

    Bottom line

    You can identify the stock price pattern when the price makes a pause which indicates the zone of consolidation. Trendlines help in recognizing the price pattern that can develop in forms of flags, pennants, and double tops. The volume will decline during the pattern’s development, and increase when the price breaks out of the pattern. To have the better trading experience you can learn more in the Two Fold Formula book but first, try it with our preferred trading platform and check it.

  • Gross Margin How To Calculate And Why It Is Important For Investors

    Gross Margin How To Calculate And Why It Is Important For Investors

    Gross Margin How To Calculate
    The gross margin helps investors to examine a company’s potential for profitability. But investors shouldn’t rely on it as the only metric.

    Gross margin represents the companies’ net sales revenue minus the cost of goods sold or shorter COGS. Why is this so important? Gross margin is the sales revenue companies keep. To put it simply, that is the money the companies left over when they pay all cost, fixed and variable related to their production but subtracted from their net sales. Fixed and variable costs are purchasing the materials needed for production, plant overhead, labor. So, the higher gross margin means that a company retains more capital. That money company usually uses for debt payments or some other costs. 

    To calculate it we need to know two figures: net sales and cost of goods sold. Net sales is calculated if subtract returns, discounts, and allowances from the gross revenue. 

    So the formula to calculate the gross margin is expressed as

    gross margin = net sales − COGS

    This is is an important metric. It enables companies to fund investments during periods of growth and be profitable when the growth declines. Many factors add to a company’s capability to keep a high gross margin. That can be products that deliver high ROI, pricing discipline, etc. It reveals how much a company is able to invest in further development, sales, or marketing and consequently, can it be the winner in the market.

    The importance of gross margin in investing

    Every single investor would like to discover the next big player in the market and invest in the company in its early days and ride those stocks to enormous gains. For example, some of them did it in the early days of Apple, Microsoft or similar. 

    Though, finding these stocks is the tricky part. Early-stage growth companies don’t have obvious and constant earnings. Some investors who invested in such companies usually end up in loss. Since there is no earnings yet, what do you have to look at? Simple, look at the gross margin and cash flow. For early-stage companies, but not for them only, these two metrics are most important. Well, you have to understand one important thing. Some companies will heavily spend to develop some products or expand their business during some period. So, it might be some losses over those periods that can last even a few years. But every investor is expecting that, right? Hence, the most important for you as an investor is to determine if the company is able to be profitable after all.

    For example, you are examining a fresh company in the market. It has fantastic revenue growth. Always ask yourself how capable is the management in turning sales into profits? Here is this important metric on the scene to help us. It is the best tool we have to examine a company’s potential for profitability. Use the formula above and calculate it before deciding to buy any stock. Never overlook the importance of gross margin.

    A real-life example

    Let’s assume a company you are estimating has $10 million in sales. The costs of purchasing materials and labor amount to $6 million. What will be its gross margin? Let’s use the formula.

    $10.000.000 – $6.000.000 = $4.000.000

    That is a 40% gross margin rate. This figure is important but you’ll need to estimate if a company is on the way to profitability. So, watch for increasing gross profit margins. The increasing gross profit margin will show if there is an uptrend.
    Also, increasing gross margin is connected to research and development. For example, biotech and technology companies need money to invest in these sectors. Companies with increasing gross margins always invest more cash in future operations.

    What does the gross margin tell investors?

    The gross margin is the part of the revenue that the company retains as gross profit. For instance, when a company’s quarterly gross margin is 40%, that means it retains $0.40 from each dollar of revenue produced. You can use any currency, of course. Since COGS has been already subtracted, the rest of the fund can be used for interest fees, debts, dividends payment, etc. Gross margin is very important for companies, not for investors only. By using this tool they can compare the expense of production with revenues. For instance, a company has a problem with falling gross margin. What can management do?

    They may try to cut labor costs or to find a cheaper supplier. The other solution is to increase the price of the products to increase revenue. But this isn’t always the best solution since the sales may drop due to increasing prices. Gross profit margins can be useful for investors to estimate company efficiency. Also, this measure can help investors to compare the companies with different market caps.

    How gross margin influence the profitability

    To explain the influence gross margin has on profitability, let’s examine an easy example. For example, two companies are the same, but their gross margins are different. They have the same revenue, distribution, operating costs, almost everything is the same. But, company ABC is generating double the operating profit of company XYZ. If we want to value these companies, we can conclude that company ABC should be valued more than twice the value of company XYZ.  

    But what if company XYZ has a temporary hard time making gross margin below, for example, 10%? What is this company is investing in research and development, and thus has an expense for that of about 30%? Does this make it less efficient and favorable? Maybe this company is doing something on the go-to-market side to get more customers? So, this part has to be examined also. What we want to say is that one metric isn’t good enough, you have to use several to get the full picture of the company’s performances. Even companies with low gross margins can be profitable in a long haul.

    Is it important in stock picking and investment?

    Some investors misunderstand the gross margin also called gross profit margin with profitability ratio operating margin. 

    Remember, different companies have different gross margins and that depends on the essence of business. That is the reason why you should never try to compare the gross margins of companies from different industries. Do it in the same industry. Of course, you can make comparisons for companies with different market caps.

    When you are estimating the gross margin willing to pick a stock to buy, remember that the majority of the companies are following the market cycles. When the market is booming the demand is very high, while in the dropping market the demand is low. During the bull market, period companies with a high gross margin will be a favorable investment. Hence, when the bear market starts such a company will suffer more. Well, how is that possible? The company with a high gross margin tends to grow faster, its profit and EPS grow faster, and higher EPS means higher returns for shareholders. But when the bear market occurs the profit of such a company will usually fall faster.

    Of course, the management has the possibility to reduce the costs and limit the operating margin decline.

    Bottom line

    Investors can use this metric while deciding to invest in some company but shouldn’t be relied on it as solely one. They have to use it along with other metrics to pick a stock they want to add to the portfolio. Companies with high gross margin can deliver strong returns but the other parameters should be included also. Keep in mind that some early-stage companies can be a good choice too, also if the other metrics show that.

  • How to Trade Stocks and Make Money?

    How to Trade Stocks and Make Money?

    How to Trade Stocks and Make Money?

    Everyone would like to know how to successfully trade stocks but only a few know how to do that. Here are some suggestions.

    There are not many people who know how to trade stocks and make money. Statistics confirm this. According to stats, only 5% of traders are successful. That means 95% of traders fail. Surprisingly, some stats show 80% of traders leave trading during their first two years. Moreover, almost half of all traders quit during the first month of trading. The other problem is that traders sell winners in a bigger percentage than losers.
    Profitable traders represent a tiny part of all traders with just 1.6% in the average year. Nevertheless, they are very active, the estimate is that they are accounting for 12% of all trading activities per day.

    Stock traders’ problems

    Maybe the biggest problem in the stock market is that traders don’t learn how to trade stocks and make money. They are gambling, to put it simply. Even when they are using some demo accounts or following elite traders, they use it to set up their trades automatically without a meaningful process or plan. We found an interesting thing, traders and investors usually overweight stocks in the industry in which they are working. That’s smart. That is the industry they know well, the companies are known to them too, so the probability of successful trades might enhance. But there can be some drawbacks too. The emotional approach to trade is one of them. Simply said, these traders may act as cheerleaders. That isn’t smart trading. Even if they have profitable trades, the percentage of such trades is small. Otherwise, there would be more efficient traders in the stock market. 

    Knowing these stats it’s understandable why traders fail. The trading decisions are not based on research or proven trading methods. They are based on emotions. Instead of learning how to trade stocks and make money, many traders view trading as a kind of game. Don’t hope to make millions with such an approach. It is more likely you will lose your shirt. Trading isn’t a game. On the contrary, it is a profession for which you’ll need skills, knowledge and continual education and development. It isn’t easy and no one should tell you it is. Hence, be careful of your trading decisions.

    How professional traders know how to trade stocks and make money?

    You might be questioning what professional traders know but you don’t. We are going to explain to you how to trade stocks and make money so you could act like a pro. It isn’t rocket science, actually, it is quite simple but we’ll need your full attention. 

    First of all, don’t think that becoming an elite trader is something you cannot achieve. You are just a few steps away from being that. All you need to unveil how to trade stocks and make money is just around the corner.

    So, let’s start!

    Successful traders usually don’t have any insider information that is unavailable to you. You can gather them also but the real question is why should you do that. In fact, all you need to have trading success is a small adjustment in how you think about trading. In simple words, it is all about your mindset. To become a successful trader you MUST change some of your trading practices if you want to know how to trade stocks and make money, of course.

    There is no secret recipe on how to trade stocks and make money

    Beginners in trading usually are looking for a secret and instant way to success. If you are not one of them, you probably don’t enjoy trading. It is possible you are looking for some tools that will guarantee the profit. Well, it isn’t wrong. There are so many tools out there. Many of them can make your life easier. But you have to love the trading process, even the charts reading and finding patterns. Yes, that isn’t the most exciting part of trading, some may say. But try to look at that from the other point of view. For example, finding just one good, steady, price pattern might enhance your trade and can be beneficial for a long time, maybe for your lifetime. 

    But let’s stay for a while on the subject of the joy of trading. The point is not to have fun (although you might have fun) but to understand what you are doing while trading and be ready to love it. There is no need to be an adrenaline addict but some dose of willingness to have excitement is necessary still. You have to understand the whole process, from the psychological perspectives, chart reading, to money management. And you have to love it. Otherwise, you will never succeed to become a really profitable trader. In other words, you need passion, knowledge, and tools.

    The importance of tools in trading

    When you start trading the stock market, you have to make three decisions: buy, sell, stay on the position. For that you need information. You have to know the stock historical performances. It is important to recognize the patterns. And that is exactly what one of the best books is giving to you. Let us introduce and recommend this particular one, the book The Two Formula: The Best Single Trading Pattern I Have Ever Used. This book doesn’t give you only theoretical knowledge. It is based on the personal experience of the author. That is the value per se. 

    What will you find in the book The Two Formula: The Best Single Trading Pattern I Have Ever Used?

    According to the author, Michael Swanson, the first time he used this trading pattern was in 1999. And how good this price pattern shows the fact he is using it for even more than 20 years. He reveals that just one single price pattern is quite enough for successful trading whatever you want stocks, funds, futures, commodities. Basically, you can use this price pattern for anything that you can draft on the technical charts. We have been reading a lot of books about trading. Also, we examined a lot of patterns but this particular one is extremely interesting. This trading strategy is completely unique. 

    Few words about trading strategies

    Essentially, a trading strategy is a method of buying and selling in the stock markets or some other markets. The trading strategy is based on rules that deem to end up with success in trading and in profit. So, most traders are guessing and trying to notice the bottom and the level where the price starts to go up in order to buy an asset in the hope it will rise further. The point is they are often wrong. Go back to the beginning of this article and you’ll see the stats. What do the majority of traders do? They are hunting price movement. But it very often turns into chaos. Why is that? They are not trading, instead, they are gambling, they place trades without a meaningful process. 

    When they see how big mistakes they have, traders use charts to figure out what is wrong and try to fix it. Sometimes they are spending hours, days even weeks, staring at the charts to predict how the price will go in the future by using technical indicators, a lot of them. And they are confused more and more. These complicated images can fry their brain but their trades will not become more successful.

    The simplicity of The Two Formula pattern

    For any trader, the simplicity of the pattern is extremely important. If you have too many indicators added to the chart you will have a blurred picture. The essence of profitable trading is to have a steady plan, something that really works when setting the position. You must have confidence in what you are doing and you have to know how your trade will end up. This “Two Fold Formula” book can help to achieve all of that.

    Where is the catch?

    This book shows how with a one price pattern setup you can make a profit while trading. Basically, it is a simple strategy and that’s why it is an effective one. Easy to understand, easy to use, without misunderstanding. Everything is explained clearly and smoothly and, what is most important, based on personal experience and proven. 

    Some traders have to lose, but you would have a chance to make a profit with this method. Any trade has only two ends: loss or profit. Why shouldn’t you profit? This may help you to trade like a pro. 

    Bottom line

    People are afraid of the risk, but these two formula pattern seems to be using some good indicators and a more “tuned” strategy. 

    Pro tip: use it with our preferred trading platform virtual trading system to see if it’s working before trying on real funds (68% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you can afford to take the high risk of losing your money)

  • A Bottom fishing As An Investment Strategy

    A Bottom fishing As An Investment Strategy

    A Bottom-fishing As An Investment Strategy
    The most popular bottom fishing strategy is value investing but traders also use technical analysis to identify oversold stocks that may be winning bottom fishing possibilities.

    Bottom fishing as an investment strategy refers to the situation when investors are looking for securities whose prices have lately dropped. Also, that are assets considered undervalued. 

    Bottom fishing as an investment strategy means that investors are buying low-cost shares but they must have prospects of recovery. This strategy also refers to investing in stocks or other securities that dropped due to the overall market decline. But they are not randomly picked stocks, they have to be able to make a profit in the future. Well, it is general hope.

    Buy low, sell high

    We are sure you have had to hear about the old market saying “buy low, sell high” as the most pragmatic and most profitable strategy in the stock market. But, also, it isn’t as easy as many like to say. You have to take into consideration several things while implementing bottom fishing as an investing strategy. Firstly, you’ll be faced with some traders claiming that it is an insignificant strategy. The reason behind their opinion is if you are buying the stocks that are bottoming you do that near its lowest value.

    The point is that almost every stock is a losing one. Usually, some momentum traders and trend followers will support this opinion. Where are they finding confirmation for this? Well, traders tend to sell to breakeven after they have been keeping a losing stock for a short time. They want to cut losses and that’s why they are selling, to take their money back and buy some other stock. Traders are moving on.

    Overhead resistance will affect the way a stock trades but it is expected when using this strategy. Moreover, overhead resistance isn’t as inflexible as some investors believe. 

    Bottom fishing is an investment strategy that suggests finding bargains among low-priced stocks in the hope of making a profit later.

    What to think about while creating this strategy

    The most important thing is to know that you are not buying the stock just because it is low-cost. Lower than ever. The point is to recognize the stocks that have the best possibility for continued upsides.

    Keep in mind that buying at the absolute low isn’t always the best time to do so. Your strategy has to be to buy stocks that have a chance of continued movement. Stock price change may occur on the news or a technical advancement like a higher high. A new all-time low can cause a sharp bounce if traders assume the selling is overdone. But it is different from bottom fishing. Bottom fishing as an investment strategy has to take you to bigger returns.

    Not all low-cost stocks are good opportunities.

    Some are low with reason, simply they are bad players. For example, some stock might look good at first glance but you noticed one small problem. Don’t buy! When there is one problem it is more likely that stock has numerous hidden problems. There is no guarantee that low stock will not drop further.

    Further, for bottom fishing strategy, you will need more time to spend than it is the case with position trading, for example. You have to be patient with this strategy. You are buying a weak stock, and they became weak due to the lack of investors’ interest. Do you know when they will be interested again? Of course, you cannot know that nor anyone else can. When you want to use a bottom fishing as an investment strategy you must be patient and have a time frame of months, often years to see the stock is bouncing back

    If you aren’t psychologically ready to stay with these trades for a long time you shouldn’t start them at all.

    The bottom fishing strategy requires discipline

    If you want to practice bottom fishing as an investment strategy you will need discipline. It requires extra effort. It isn’t easy for some aggressive traders to hold a stock for months and without any action. We know some of them that made a great mistake by cutting such stock just because they were bored. If you notice you are sitting in stocks that are dropping lower on the small volume you still can exit the position. The losses might add up quickly, so you’ll need to set a strong stop loss to avoid it. Even if you hold a stock paid $1. It can produce big losses over time if you don’t have at least basic risk management. Stop-loss and exit points are very important in this strategy.

    The two main types of bottom fishing

    There is the overreaction and the value. For example, the news of some company’s problems may cause a lot of traders eager to enter for a sharp recovery. The stock suddenly had a sharp decline but they may think the market overreacted and the stock will bounce quickly. That could be faulty thinking but what if the long-term bottom fishers start to buy that stock too? The company’s problems are temporary and as times go by, could be forgotten. 

    The point is that the bottom fishing on the news or even earnings is a good opportunity to trade a bit of volatility. But you have to be an aggressive trader and able to play the big fluctuations. These short term trades can easily become investments if you don’t pay attention to it. Before you enter the position you must have a solid trading plan with defined entry point, stop-loss, and exit point. Optimize your strategy before you jump in. There is one tricky part with cheap stocks – they can become cheaper.

    The essence of bottom fishing as an investment strategy 

    Bottom fishing is when you try to find the bottom of a stock that has a higher price. Let’s say a stock was at $200 and now it is at $20. When you try to bottom the fish stock you’re actually trying to catch its bottom and buy it and provide it to go to the upside. In simple words, you want to get a good deal, to obtain the lowest possible price or bargain on the stock. But, if you want a good bottom fishing you must understand how it works. There are too many fresh traders starting bottom fishing but ending up with stock lower or never getting out from that low level. They are spending years stacking in bad investments. Also, their money becomes locked in such bad investments. 

    A real-life example

    Nowadays, we have a big selloff in the stock market. It is a great opportunity to buy some stocks that were very expensive since they are much lower now. A high priced stock has the drawback. Everyone would like to buy but have insufficient capital. That’s why the trading volume of such stock can be small. And suddenly due to some unfortunate event, the price is going down. Buying these stocks is a very good opportunity because they have the chance to go back up to the top. But it is hard to catch the bottom for these stocks. So many investors push up the price in the hope to get out at a higher price.

    Are they right or wrong? It is obvious they’ll have to sell these stocks when they start to come back up to reduce their losses. That is the main disadvantage of bottom fishing if you don’t do it accurately.

    Bottom line

    If you want a proper approach to the bottom fishing, you’ll have to watch for higher highs and higher lows. When you notice in the chart that a trend line is moving up off of a bounce you’ll see the real bottom. Well, you might not catch it at the lowest point, but you’ll catch it in a range of 5% or 10% which is a good deal for long-term investment. That can be a good strategy for investors willing to hold a stock for several years.

    For example, the stock price had a sharp decline and fell from $300 to $100 per share over three days. You could determine it was due to market conditions. So, you are buying 10 shares for $1.000. Next week, the price returned to $300 per share. What are you going to do? Sell, of course. You can sell the share of stock that you purchased for $1.000 at $3.000 (10 shares at $300 each) and make a profit of $2.000. Really not bad.

    Bottom fishing as an investment strategy is attractive for boosting portfolio value. Also, it is good for fast making profit while the volatility in the market is present. But, keep in mind, it can be risky because you can’t be 100% sure how the stock or market will go, how the price will run as a result of investors’ behavior, or how the particular company will survive the problems in the global economy.

  • The Average Daily Trading Volume How to Calculate

    (Updated October 2021)

    A stock’s daily trading volume shows the number of shares that are traded per day. Traders have to calculate if the volume is high or low.

    The average daily trading volume represents an average number of stocks or other assets and securities traded in one single day. Also, it is an average number of stocks traded over a particular time frame. 

    To calculate this you will need to know the number of shares traded over a particular time, for example, 20 days. The calculation is quite simple, just divide the number of shares by the number of trading in a specified period. Daily volume is the total number of shares traded in one day. 

    Trading activity is connected to a stock’s liquidity. When we say the average daily trading volume of a stock is high, that means the stock is easy to trade and has very high liquidity. Hence, the average daily trading volume has a great impact on the stock price. For example, if trading volume is low, the stock is cheaper because there are not too many traders or investors ready to buy it. Some traders and investors favor higher average daily trading volume because the higher volume provides them to easily enter the position. When the stock has a low average trading volume it is more difficult to enter or exit the position at the price you want.

    How to calculate the average daily trading volume

    As you expected, it is quite simple. All you have to do is to add up trading volumes during the past days for a particular period and divide that number by the number of days you observe. It is usual to calculate ADTV (Average Daily Trading Volume) for 20 or 30 days but you can calculate it for any period if you like. For example, sum the average daily trading volumes for the last 30 days and divide it by 30. The number you will get is a 30-day average daily trading volume.

    Since the average daily trading volume has a great impact on the stock price it is important to know how many transactions were on a particular share. The same share can be traded many times, back and forth and the volume is counted on each trade, each transaction. For example, let’s say that 100 shares of a hypothetical company were purchased, and sold after a while, and re-purchased, and re-sold. What is the volume? We had 4 transactions on 100 shares, right? So, the volume in this particular case would be expressed as 400 shares, not 800 or 100. This is just a hypothetical example even though the same 100 shares could be traded many more times.

    How to find the volume on a chart?

    Thanks to existing trading platforms it is easy since each will display it. Just look at the bottom of the price chart and you’ll notice a vertical bar. That bar indicates a positive or negative change in quantity over the charting time period. That is the trading volume.
    For example (if you don’t like too much noise in your charts), you will use 10-minutes charts. Hence, the vertical bar will display you the trading volume for every 10-minutes interval. 

    Also, you will notice that these bars are displayed in two colors, red and green. Red will show you net selling volume, and green bars will let you know the net buying volume.
    You can measure the volume with a moving average, also. It will show you when the volume is approximately thin or heavy.

    Average Daily Trading Volume

    What is an average daily trading volume for a great stock?

    Are you looking for the $2 stock with an average daily volume of 90,000 shares per day? It won’t be easy. Sorry!

    The stocks that traded thinly are very risky and changeable. To put this simple, we have a limited number of shares in the market. Any large buying might influence the stock price skyrocketing. The same happens when traders and investors start to sell, the stock price will fall. Both scenarios are not beneficial for investors. So, you must be extremely careful when trading stocks with daily trading volume below 400.000 shares. You can be sure it is a thinly traded stock even if it is cheap as much as $2. The stocks with low prices carry higher risks. For example, penny stocks.

    Here we came to the dollar volume. While the daily trading volume shows how many shares traded per day, the dollar volume shows the value of the shares traded. To calculate this you have to multiply the daily trading volume by the price per share.

    For example, if our hypothetical company has a total trading volume of 300.000 shares at $2, what would be the dollar volume? The dollar volume would be $600.000. This is a good metric to uncover if some stock has sufficient liquidity to support a position.

    To decrease the risks, it is better to trade stocks with a minimum dollar volume in the range from $20 million to $25 million. Look at the institutional traders, they prefer a stock with daily dollar volume in the millions.

    Understanding Average Daily Trading Volume

    Average daily trading volume can rise or drop enormously. These changes explain how traders value the stock. When the average daily trading is low you have to look at that stock as extremely volatile. But, the opposite is with higher volume. Such stock is better to trade because it has smaller spreads and it is less volatile. To repeat, the stock with higher trading volume is less volatile because traders have to make many and many trades to influence the price. Also, when the average trading volume is high, trades are executed easily.

    This is a helpful tool if you want to analyze the price movement of any liquid stock. Increasing volume can verify the breakout. Hence, a decrease in volume means the breakout is going to fail.

    The trading volume is a very important measure.

    It will rise along with the stock price’s rise. So, you can use it to confirm the stock price changes, no matter if it goes up or down. When we notice that some stock is rising in volume but there are not enough traders to support that rise and push it more, the price will pullback. 

    Pullback with low volume may support the price finally move in the trend direction. How does it work? Let’s say the stock price is in the uptrend. So, it is normal the volume to rise along with a strong rising price. But if traders are not interested in that stock, the volume is low and the stock will pullback. In case the price begins to rise again, the volume will follow that rise. For smart traders, it is a good time to enter the position because they have confirmation of the uptrend from the price and the volume both. But be careful and do smart trading. If the volume goes a lot over average, that can unveil the maximum of the price progress. That usually means there will be no further rise in price. All interested in that stock already made as many trades as they wanted and there is no one more willing to push the stock price to go up further. That often causes price reversal. 

    Bottom line

    The average daily trading volume shows the entire amount of stocks that change hands during one trading day. This can be applied to shares, options contracts, indexes or the whole stock market. Daily volume is related to the period of time. It is very important to understand that when counting volume per day or any other period each transaction has to be counted once, meaning each buy/sell execution. To clarify this, if we have a situation in which one trader is selling 500 shares and the other one is buying them, we cannot say the volume is 1.000, it is 500. Anyway, this is an important metric that will show you if some stock is easy or difficult to trade.

  • Share Turnover Ratio – What Is It and How to Calculate?

    Share Turnover Ratio – What Is It and How to Calculate?

    Share Turnover Ratio - What Is It and How to Calculate?
    The share turnover ratio isn’t the most important measure you have to take into consideration when picking a stock but it is important to know will you need a lot of time to sell off the stock.

    Share turnover ratio shows how difficult or easy, is to buy or sell shares of some stock on the market. Share turnover ratio compares the number of shares traded during some period with the total volume of shares that available for trade during the given period. Investors often avoid the shares of a company with low share turnover. 

    Share turnover is a measure of stock liquidity. When we want to measure it we have to divide the total number of shares traded during the given period by the average number of shares available for sale. For example, if the 1 million shares are traded during the year, and the average volume of shares for sale was 100.000 then we can say that turnover was 10 times. Shares can have higher or lower turnover. The higher share turnover shows that the company has more liquid shares.

    So, we can say that the share turnover compares the number of traded shares to the number of outstanding shares. When we see a high level of share turnover, this means investors can easier and smoother buy and sell the shares.

    They often believe that smaller companies have less share turnover because they are, as investors think, less liquid than big companies. But that might be a great mistake. It isn’t rare that smaller companies have a greater amount of share turnover compared to big companies. 

    How is this possible?

    Very often the reason is the price per share. Big company’s price per share can be several hundreds of dollars and only rich investors are buying them. Yes, large companies have huge floats, thousands of shares might trade daily. But what percentage do they have? The real percentage of their total outstanding shares is small. 

    On the other side, a small company’s share is significantly cheaper and such is traded more frequently. So, they may have a higher daily trading volume.

    Possibilities of share turnover ratio

    The share turnover ratio compares sellers versus buyers of stock. To calculate it we will need two numbers to know. One is the daily trading volume of stock and the other is the number of shares available for sale. This second number is actually a daily float of stock, the total number of outstanding shares. The result is expressed in percentages. And you will see, every time when we get as a result, the high share turnover ratio we can be sure that there is a high daily volume and low float. Also, a low daily volume and the high float will always give us, as a result, a low share turnover ratio. 

    But these figures are so relative. The real share turnover ratio depends on the company and the sector it belongs to. For example, you can see from time to time that some stocks have a high turnover ratio but it can be periodically. When the demand for some stock rises, the turnover ratio will grow at the same time. So, this ratio isn’t able to show how the company is healthy. 

    The limitations of share turnover ratio

    The share turnover ratio can show how easy investors can buy or sell their shares of some stock. Literally, this ratio isn’t able to tell us anything about the company’s performance. Let’s assume you are examining a large company’s stock. You know that the company has, let’s say, 4 billion shares outstanding. It is a really large company. Also, the known fact for you is the averaged trading volume. It is, for example, 40 million per month. So, this company’s share turnover ratio is 1%. What does this number tell us? The stock is illiquid. Would you avoid this stock? Remember, it is a big, well-known company, with great history, with a permanent rise, good management, great prospect. Of course, you wouldn’t. Contrary, everyone would like to buy that stock. That is a case with Apple, for example. Would you avoid investing in that company? The point is that the low share turnover ratio shouldn’t be the most important concern when picking a stock.

    Moreover, when a stock is dropping and only a few want to buy it, that stock will have low turnover. But the same is true if the stock is expensive. If single share costs, for example, $800 only a small number of investors can afford to buy it and the share turnover ratio will be very low.

    So, do you understand why this ratio isn’t reliable when you want to estimate how good stock is? That is the reason why you should use the other parameters too. 

    Is this measure important at all?

    In short, yes. 

    It is an important measure and investors should be aware of it. A low share turnover ratio indicates that you may need a lot of time to sell off such stock and, what is also important, the stock price may decrease while you are waiting to find someone and sell it. Hence, not many investors are willing to put their money as such a risk and buy the share of the company with a low share turnover ratio. But always keep in mind, a low share turnover ratio is normal for a small market-cap company. But we owe you an explanation of what is an average daily trading volume.

    Average daily trading volume

    Average daily trading volume or short ADTV is the average number of shares traded during one day in a particular stock. Daily volume simply means how many shares are traded per day. So, we can average daily volume. It is a crucial measure because high or low trading volume triggers different kinds of traders and investors. Some investors and traders favor high average daily trading volume. It is because with high volume is easier to get into and out of the position. As we already said, when the stock has low volume it is more likely to be harder to enter or exit at the proper price since there are less buyers and sellers. But when the traders and investors start to value the stock differently ADTV can increase or decrease. For example, if the average daily trading volume is higher, that means the stock is less volatile and more investors would like to buy it. But this doesn’t mean that stocks with high volume don’t change in price because they can change a lot.  

    The higher the trading volume is, the more buyers and sellers will easier and faster execute a trade.

    This is a useful tool for analyzing the price action of any liquid stock. For example, the increasing volume may confirm the breakout. If there is any lack of volume, the breakout may fail. But that is the subject for a longer article.

    Bottom line

    Several figures and ratios deliver information about stocks and represent great help to investors when deciding whether they should buy or sell. The stock volume and the share turnover ratio are one of them. They provide valuable information about any stock.

    Share turnover ratio is an important measure for investors but shouldn’t be used as a sole criterion. If investors or traders use this one solely it is more likely they will miss out on very important data, for example about the quality of the stock, and make a wrong investing decision.

    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.

  • 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.