Category: Traders’ Secrets

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How is it possible that some traders are successful all the time while others fail to make a profit all the time?
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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.

  • 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.

  • 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.

  • What Is Options Trading Examples

    What Is Options Trading Examples

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

    By Guy Avtalyon

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

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

    What is options trading?

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

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

    How does options trading work?

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

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

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

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

    What are the advantages of options trading?

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

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

    Cost less

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

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

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

    Lower risk

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

    How to use options as a hedge?

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

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

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

    Do options have higher returns?

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

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

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

    Do you understand?

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

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

    Benefits of options trading

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

    Bottom line

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

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

    We’re doing smart trading.

  • How to Survive the Market Downturn?

    How to Survive the Market Downturn?

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

    By Guy Avtalyon

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

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

    Financial pandemic

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

    How to survive the market downturn?

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

    What a great mistake!

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

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

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

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

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

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

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

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

    What are the benefits of a declining stock market?

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

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

    Ways to survive the market downturn

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

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

    How can money go further?

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

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

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

    Is the dropping market a good experience?

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

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

  • Calculate Portfolio Performance

    Calculate Portfolio Performance

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

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

    Our aim is to present you with these valuable tools. 

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

    Calculate Portfolio Performance Using Sharpe Ratio

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

    The formula is:

    ​Sharpe ratio= (PR−RFR) / SD

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

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

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

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

    and

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

    Can you see now?

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

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

    Jensen ratio

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

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

    The formula is:

    Jenson’s alpha = PR−CAPM

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

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

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

    This Jensen’s alpha also can be expressed as 

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

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

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

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

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

    Treynor ratio

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

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

    The formula is expressed as:

    Treynor ratio = (PR−RFR) / β

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

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

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

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

    Let’s calculate for each portfolio!

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

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

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

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

    Bottom line

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

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

  • Trading After And Before Regular Hours

    Trading After And Before Regular Hours

    Trading After And Before Regular Hours
    Traders can trade stocks during weekday mornings and evenings. Trading on weekends is not allowed. But you can benefit from differences in time zones on international exchanges.

    By Guy Avtalyon

    Trading after and before regular hours is possible. Okay, we all know that the stock market operates through regular trading hours and that is something even new traders know. But what they don’t know is that is possible trading after regular hours, meaning before and after. That is the so-called pre-market and post-market session. 

    Let’s take the US stock market as an example. The US stock market is open between 9:30 AM and 4 PM from Monday to Friday. Those are regular trading hours. Trading after and before regular hours means you have a chance to trade between 4 PM and 9:30 AM which is called the pre-market session and between 4 PM and 8 PM which is known as post-market session.

    Over the regular trading hours, the billions of shares are traded, while trading after and before regular hours involves just a small part of it. So, it is possible to trade both before and after the bell but what result would you have? That’s something we need to discuss. 

    Let’s make clear what is pre-market and to define what is the post-market session. But there is also something you, as a new trader, has to know.

    Stock market hours are not the same all over the world

    The markets are not all open at the same time. Here are the hours of the major stock markets around the world.

    USA
    The NYSE and the NASDAQ are open from 9:30 AM to 4 PM EST (Eastern Standard Time). Both markets are not open when the main federal holidays are.
    Canada
    The Toronto Stock Exchange is open from 9:30 AM to 4 PM EST also. It isn’t open for 10 holidays per year.
    Japan
    The Tokyo Stock Exchange is open from 9 AM to 11:30 AM and from 12:30 to 3 PM JST. The Tokyo Stock Exchange is not open for 22 holidays per year.
    Hong Kong
    The Hong Kong Stock Exchange is open from 9:30 AM to 12 PM and from 1 to 4 PM HKT which is UTC+08:00 all year round. It is not open for 15 holidays per year.
    China
    The Shanghai Stock Exchange and Shenzhen Stock Exchange are open from 9:30 AM to 11:30 AM and from 1 PM to 3 PM CST ( UTC+08:00). Both are not open for 15 holidays per year.
    India
    The Bombay Stock Exchange is open from 9:15 AM to 3:30 PM IST (UTC+05:30). It is not open for 15 holidays per year.
    United Kingdom
    The London Stock Exchange Group is open from 8:15 AM to 4:30 PM GMT. It is not open for 8 holidays per year.
    Europe
    The SIX Swiss Exchange is open from 8:30 AM to 5:30 PM CET. It is not open for 12 holidays per year.
    Euronext, Amsterdam, is open from 9 AM to 5:40 PM CET. It is not open for 6 holidays per year.

    Pre-market is…

    What is Pre-Market?

    Pre-market trading is a trading activity that happens before the regular market session. It usually happens between 8:00 AM and 9:30 AM EST. Traders and investors might gather very important data from the pre-market sessions while waiting for the regular sessions. No matter how volume and liquidity are limited during pre-markets. The bid-ask spread is almost the same. So, they are able to estimate the strength and direction of the market thanks to this data.

    You can find a lot of retail brokers that offer pre-market trading but with limited types of orders. On the other hand, only several brokers with direct access will provide the possibility to trade in the pre-market sessions. You have to know you would not find a lot of activity so early in the morning but you can find the quotes for most of the stocks. There are some stocks you can trade in the pre-market. For example, APPLE is getting trades at 4:00 AM EST.

    But the stock market is very thin before opening hours so you may not have many beneficial tradings early in the morning. Actually, it is possible to take additional risks.

    Since the bid-ask spreads are large some slippage may occur. 

    So, never place a trade too early. The majority of pre-market traders enter the market at 8 AM EST. It is understandable because that is the time when the volume picks up at once over the board. The most interesting are the stocks. The morning news is already published and prices may indicate gaps based on them. This can be very tricky for the stock traders. Well, pre-market trading is tricky for stock traders in general.

    How is that? Stocks can look strong at the pre-market session, but they can reverse direction when the market starts regular working hours. So, if you are not an experienced trader, you should analyze trading in the pre-market first.

    Advantages of pre-market trading

    You can get an early view of the news reports. But remember, the amount of volume is limited. So, you may have a false understanding of weakness or strength and you may fall when the real volume comes into play. Anyway, if you want to trade at pre-market you can complete your trades with limit orders over electronic networks only. Market makers have to wait for the opening bell to execute orders.

    Trading stocks after-hours is…

    It happens after the regular stock market hours are over.  Why would anyone want to trade in the post-market trading session?

    Well, the companies report earnings before the market opens or after the market closes. That’s strategy. The companies rather avoid reporting earnings during the regular market hours because they want to avoid unwilling changes in stock price caused by investors’ and traders’ reactions. For example, some companies announced their quarterly report during the regular hours but the results weren’t as good as expected. What is possible to happen? Well, investors and traders would like to sell that company’s stock and the price could easily and sharp drop making losses. 

    The truth is that the value of the stock will move no matter if the market is open or not. But, investors are seeking that very moment to access the market – the moment when the price is changing. That’s why the after-hours sessions are important. They are waiting for the companies to announce earnings reports and trade based on fresh news. Traders will not wait for the market opening bell. They will respond to the announcements and make a trade before the opening bell causes a stock fair value. If they don’t do so, they might be too late for profitable and smart trading. 

    Advantages of after-hours trading

    After-hours trading carries a lot of risks but also has possible benefits. Traders can trade based on really fresh news. That means they can act quickly and benefit from attractive prices. Also, it is convenient, also. Some investors don’t like trading at the on-peak time. Trading after-hours grants them this opportunity.
    Further, there is a wider bid-ask spread since the smaller number of traders. After-hours sessions are mostly made up of experienced traders. Also, there is higher volatility since the volume is lower. But we know, the higher the risk the greater reward is.
    The truth is that after-hours trading allows traders the possibility of great gains.

    There is no investing or trading without the risks involved. But if you choose trading after and before regular hours you will be faced with several very important risks.

    Firstly, you will not be in a position to see or trade based on quotes. Some companies will allow you to see quotes only from the trading system the company uses for after-hours trading. 

    Also, there is a lack of liquidity.

    Further, less trading activity could cause a wider bid-ask spread. That may cause more difficulty to execute your trade or to get a more favorable price as you could get during regular market hours. The additional risk is price volatility since the stocks have limited trading activity. Also, the stock prices can rise during the trading out of the regular hours but they could drop immediately when the bell opens the market.

    Despite all these disadvantages, trading in the pre-market and after-hours trading sessions could be a great place to start. Just keep in mind that there are additional risks.

  • What Is Alpha In Investing – How to Beat the Market

    What Is Alpha In Investing – How to Beat the Market

    What Is Alpha In Investing
    Alpha represents a measure of an asset’s return on investment compared to the risk-adjusted expected return.
    Beta represents a measure of volatility. Beta measures how an asset moves versus a benchmark.

    What is Alpha? Alpha is a measure of the performance of an investment in comparison to a fitting market index, for example, the S&P 500. The base value is zero. And when you see the number one in Alpha that means that the return on the investment outperformed the overall market average by 1%. A negative alpha number shows that the return on the investment is underperforming in comparison to the market average. This measure is applicable over a strictly defined time frame.

    What is Alpha more? It is one of the performance ratios that investors use to evaluate both individual stocks and portfolio as a whole. Alpha is shown as a single number, for example, 1, 2, 5 but expressed as a percentage. It shows us how an investment performed related to a benchmark index. For example, a positive alpha of 4 (+4) suggests that the portfolio’s return outperformed the benchmark index’s performance by 4%.  But the alpha of negative 4 (-4) means that the portfolio underperformed the index by 4%. When alpha is zero that means that your investment had a return that met the overall market return.

    What is Alpha of a portfolio?

    It is the excess return the portfolio yields related to the index. When you are investing in some ETF or mutual funds you should look if they have high alpha because you will have better ROI (Return on Investment).

    But you cannot use this ratio solely, you have to use it together with a beta. Beta is a measure of investment volatility. The beta will show you how volatile one investment is compared to the volatility of, for example, the S&P 500 index.

    These two ratios are used to analyze a portfolio of investments and assess their theoretical performance.

    How to calculate?

    First, you have to calculate the expected rate of return of your portfolio. But you have to do that based on the risk-free rate of return, market risk premium, and a beta of the portfolio. The final step is to deduct this result from the actual rate of return of your portfolio.

    Here is the formula

    Expected rate of return = Risk-free rate of return – β x (Market return – Risk-free rate of return)

     and

    Alpha of the portfolio = Actual rate of return of the portfolio – Expected Rate of Return on Portfolio

    The risk-free rate can be discovered from the average annual return of security, over a longer period of time.

    You will find the market return by tracking the average annual return of a benchmark index, for example, S&P500. The market risk premium is calculated by deducting the risk-free rate of return from the market return.

    Market risk premium = Market return – Risk rate of return

    The next step is to find a beta of a portfolio. It is determined by estimating the movement of the portfolio in comparison to the benchmark index. 

    So, now when we have this result, expected rate of return, we can calculate further. We have to find the actual rate of return. It is calculated based on its current value and the prior value.

    And here we are, we have the formula for calculation of alpha of the portfolio. All we have to do is to deduct the expected rate of return of the portfolio from the actual rate of return of the portfolio.

    That was a step by step guide for this calculation.

    Becoming an Alpha investor

    There is a great discussion about should the average investor look for alpha results of a portfolio. But we can hear that investors mention alpha. This is nothing more than the amount by which they have beaten or underperformed the benchmark index. It can be the S&P 500 index if you are investing in the US stock market. In such a case, that would be your benchmark.

    For example, if the benchmark index is up 4% over the period, and your portfolio is up 6%, your alpha is +2. But if your portfolio is up 2%, your alpha is -2.

    Of course, everyone would like to beat the benchmark index all the time. 

    What is the Alpha investing strategy?

    We know that Alpha is a measure of returns after the risk is estimated. Risk is determined as beta, a measure of how volatile one investment is related to the volatility of the benchmark index.

    Alpha strategies cover equity funds with stock selection. Also, hedge fund strategies are a popular addition in alpha portfolios.

    Something called “pure alpha” covers hedge funds and risk premia strategies. The point is that by adding an alpha strategy to your overall portfolio you can boost returns of the other investment strategies that are not in correlation.

    Alpha is the active return on investment, measures the performance of an investment against a market index. The investment alpha is the excess return of investment relative to the return of an index.

    You can generate alpha if you diversify your portfolio in a way to eliminate disorganized risks. By adding and subtracting you are managing the risk and the risk becomes organized not spontaneously. When alpha is zero that means the portfolio is in line with an index. That indicates that you didn’t add or lose any value in your portfolio.

    When an investor wants to pick a potential investment, she or he considers beta. But also the fund manager’s capacity to generate alpha. For example, a fund has a beta of 1 which means it is volatile as much as the S&P index. To generate alpha, a fund manager has to generate a return greater than the S&P 500 index.

    For example, a fund returns 12% per year. That fund has a beta of 1. If we know that the S&P 500 index returns 10%, it is said the fund manager generated alpha returns.

    If we consider the risks, we’ll see the fund and the S&P index have the same risk. So, the fund manager generated better returns, so such managers generated alpha. 

    Alpha in use

    You can use alpha to outperform the market by taking more risks but after the risk is considered. Well, you know that risk and reward are in tight relation. If you take more risks, the potential reward will go up. Hence, limited risks, limited rewards.

    For example, hedge funds use the concept of alpha. They use beta too, but we will write later about the beta. The nature of hedge funds is to seek to generate returns despite what the market does. Some hedge funds can be hedged completely by investing 50% in long positions and 50% in short positions. The managers will increase the value of long positions and decrease the value of their short positions to generate positive returns. But such a manager should be a ninja to provide gains not from high risk but from smart investment selection. If you find a manager that can give you at least a 4% annual return without a correlation to the market, you can even borrow the money and invest. But it is so rare.

    Alpha Described

    What is alpha more? It is often called the Jensen index. It is related to the capital asset pricing model which is used to estimate the required return of an investment. Also, it is used to estimate realized achievement for a diversified portfolio. Alpha serves to discover how much the achieved return of the portfolio differs from the required return.

    Alpha will show you how good the performance of your investment is in comparison to return that has to be earned for the risk you took. To put this simply, was your performance adequate to the risk you took to get a return.

    A positive alpha means that you performed better than was expected based on the risk. A negative alpha indicates that you performed worse than the required return of the portfolio. 

    The Jensen index allows comparing your performances as a portfolio manager or relative to the market itself. When using alpha, it’s important to compare funds inside the same asset class. Comparing funds from one asset class, otherwise, it is meaningless. How can you compare frogs and apples?

    What is beta?

    When stock fluctuates more than the market has a beta greater than 1.0. If stock runs less than the market, the beta is less than 1.0. High-beta stocks are riskier but give higher potential returns. Vice versa, stocks with lower beta carries less risk but yield lower returns.

    Beta is usually used as a risk-reward measure. It helps you determine how much risk you are willing to take to reach the return for taking on that risk. 

    To calculate the beta of security, you have to know the covariance between the return of the security and the return of the market. Also, you will need to know the variance of the market returns. The formula to calculate beta is

    Beta = Covariance/Variance

    ​Covariance shows how two stocks move together. If it is positive that means the stocks are moving together in both cases, when their prices go up or down. But if it is negative, that means the stocks move opposite to each other. You would use it to measure the similarity in price moves of two different stocks.

    Variance indicates how far a stock moves relative to its average. You would use variance to measure the volatility of stock’s price over time.  

    The formula for calculating beta is as shown above.

    Beta is very useful and simple to describe quantitative measure since it uses regression analysis to gauge the volatility. There are many ways in which beta can be read. For example, the stock has a beta of 1.8 which means that for every 1% correction in the market return there will be a 1.8% shift in return of that stock. But we also can say that this stock is 80% riskier than the market as a whole. 

    Limitations of Alpha

    Alpha has limitations that investors should count when using it. One is related to different types of funds. If you try to use this ratio to analyze portfolios that invest in different asset classes, it can produce incorrect results. The different essence of the various funds will change the results of the measure. Alpha is the most suitable if you use it strictly for stock market investments. Also,  you can use it as a fund matching tool or evaluating comparable funds. For example, two large-cap growth funds. You cannot compare a mid-cap value fund with a large-cap growth fund.

    The other important point is to choose a benchmark index. 

    Since the alpha is calculated and compared to a benchmark that is thought suitable for the portfolio, you should choose a proper benchmark. The most used is the S&P 500 stock index. But, you might need some other if you have an investment portfolio of sector funds, for example. if you want to evaluate a portfolio of stocks invested in the tech sector, a more relevant index benchmark would be the Dow technology index. But what if there is no relevant benchmark index? Well, if you are an analyst you have to use algorithms to mimic an index for this purpose.

    Limitations of beta

    The beta is good only for frequently traded stocks. Beta shows the volatility of an asset compared to the market. But it doesn’t have to be a rule.  Some assets can be risky in nature without correlation with market returns. You see, beta can be zero. You should be cautious when using a beta.

    Also, beta cannot give you a full view of the company’s risk outlook. For short-term volatility it is helpful but when it comes to estimating long-term volatility it isn’t.

    Bottom line

    What is alpha? It began with the intro of weighted index funds. Primarily, investors started to demand portfolio managers to produce returns that beat returns by investing in a passive index fund. Alpha is designed as a metric to compare active investments with index investing. 

    What is the difference between alpha and beta?

    You can use both ratios to compare and predict returns. Alpha and beta both use benchmark indexes to compare toward distinct securities or portfolios.

    Alpha is risk-adjusted. It is a measure that shows how funds perform compared to the overall market average return. The loss or profit produced relative to the benchmark describes the alpha. 

    On the other hand, beta measures the relative volatility of assets compared to the average volatility of the entire market. Volatility is an important part of the risk. The baseline figure for beta is 1. A security with a beta of 1 means that it performs almost the same level of volatility as the related index. If the beta is under 1, the stock price is less volatile than the market average. And vice versa, if the beta is over 1, the stock price is more volatile. There is some tricky part with beta value. If it is negative, it doesn’t necessarily mean less volatility. 

    A negative beta means that the stock tends to move inversely to the direction of the overall market.