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.

  • Investment Portfolio Rebalancing – Why Should We Do That?

    Investment Portfolio Rebalancing – Why Should We Do That?

    Investment Portfolio Rebalancing - Why Should We Do That?
    Even if you’re a less aggressive investor, you should rebalance your portfolio at least once a year.

    By Guy Avtalyon

    You invested your hard-earned money for the long term, you added your lovely stocks, bonds, whatever, and thought everything is done and suddenly somebody told you’ll need investment portfolio rebalancing. What? Should you find an accountant? What you have to do? How to perform that investment portfolio rebalancing? What does it mean, at all?

    That is the main key, the fundamentals of investing. You have to do two main things: building it and investment portfolio rebalancing. 

    The investment portfolio is a collection of your investments. You hold stocks, bonds, mutual funds, commodities. The allocation of the assets you own has to be done based on your risk tolerance and your financial goals. But nothing is finished with the moment you bought your lovely assets. It is just a beginning. After a few years or sooner you’ll notice that different assets generate different returns and losses as well. Some stocks may have nice and high returns, so they become a large part of your portfolio. Much bigger than you wanted. 

    Assume you built up a 60/40 portfolio where 60% were in stocks. But after some time, you found that the value of those stocks represents over 80% of your portfolio’s overall value. What you have to do? Honestly, it is the right time for investment portfolio rebalancing.

    Investment portfolio rebalancing means that you have to adjust your investments, you have to change the asset allocation of the portfolio to obtain your desired portfolio outlook.

    Why is investment portfolio rebalancing important?

    It will help you to keep your desired target asset allocation. In other words, to keep the percentage of assets you want to hold adjusted to your risk tolerance and to earn the returns you need to reach your investment goals. If you hold more in stocks, you’re taking on more risks since your portfolio will be more volatile. That might have a bad influence on your portfolio because the value will change with changes in the market. 

    But stocks look like a better investment than bonds due to their ability to outperform bonds as a long-term investment. That is the reason to hold more stocks than bonds in your portfolio but as a reasonable portion to avoid additional risk.

    In periods when the stock market performs well, the portfolio’s money value that’s come from stocks will grow along with stock price rise. We already mentioned this possible scenario when your 60% of holdings in stocks rise to over 80%. This means your portfolio can become riskier. So, you’ll need investment portfolio rebalancing. How to do that? Simply sell stocks until you manage them to represent 60% of your portfolio. For the money received from that selling, you can buy some less volatile assets such as bonds, for example. 

    The drawbacks of investment portfolio rebalancing

    However, there are some problems if you rebalance your portfolio during the time when the markets are doing well. Even more, it can be hard to sell stocks that are doing well, they are your winners and their prices might go even higher. What if you miss huge returns?

    But consider this. What if they drop and you lose an important amount of money? Are you okay with that? 

    Remember, every time you sell any asset that is an excellent player, you are actually locking in gains. That’s real money and you can use it to obtain some stocks that are not such a good player but you’ll buy them at a bargain. Do you understand what you actually did? You sold high and bought low. You’re every single investor’s dream. You made it happen! 

    The real-life example 

    Our example of rising to 80% is rather drastically than a realistic one. Investment portfolio rebalancing ordinarily means selling 5% to 10% of your portfolio. We are pretty sure you are able to choose 5% of your winners and to buy some current losers but in the long run also winners. Investors usually buy bonds instead of stocks when rebalancing their portfolios. 

    Investment portfolio rebalancing is important because it provides you balanced asset allocation and, what is also important, in this way you’ll avoid additional volatility of your portfolio. If you’re the risk-averse type of investor this added risk might produce bad investment decisions. For example, you might sell stocks at a loss.

    Investment portfolio rebalancing is the best way to follow your financial plan and obtain the best returns adjusted to your risk tolerance. Anyway, you don’t need to be overweight in stocks because the markets are cyclical, and it could be a matter of time when the next reverse will come.

    Why rebalancing your investment portfolio?

    Let us ask you. Are you having a car? Do you change the oil or broken parts from time to time? The same is with your investment portfolio even if it is the best created. As we said, the markets are cyclical and some parts of your portfolio might not play well in every circumstance. Why should you want to hold a stock that isn’t able to meet your investing goals or you bought it by mistake?
    It isn’t hard to rebalance your portfolio, at least once per year. In short, that is investment portfolio rebalancing. If you think your investment portfolio is well-diversified among asset classes, just think again. Maybe it is diversified among asset classes but is it diversified within each asset class?

    For example, why would you like to hold only Swiss biotech stocks? There is no reason. Moreover, it can be dangerous. It can hurt your investment portfolio a lot. It is better and safer if you hold a mix of different stocks, domestic and foreign from different sectors.

    What if some of the investments grow in value while others decline? 

    In the short term, it is good. In the long run, it can be a disaster. That is the reason to rebalance your portfolio promptly and properly. Otherwise, your portfolio will be hurt as well as your overall returns.

    For example, you own 50% in stocks and 50% in bonds. Sometime later, your stocks performed unsuccessfully and their value is lower now, but bonds performed outstandingly. So, what do we have here? Bad performers – stocks at lower value and bonds as excellent players at a higher value. Would you think to change the proportion in your portfolio? Of course, you would. So, what do you need to achieve that? 

    Let’s examine a different mix. For example, you may rebalance your portfolio and now it will be 40% in stocks and 60% in bonds. But what is the consequence if you don’t rebalance your portfolio and stay with your initial mix? You will not have enough capital invested in stocks to profit when stocks come growing back. Your returns will be below expected.

    What if stocks were growing in value while bonds did unsuccessfully? Or, what if your portfolio turned into a collection of 60% stocks and 40% bonds, and quickly the stock market dropped? You’ll have greater losses, much bigger than it is possible with rebalanced the 50/50 mix. In short, you had more money in stocks. Your long-term gains are in danger.

    To make a long story short, when rebalancing, you have to cut the over-performing stocks and buy more underperforming assets. The point is to sell overvalued stocks and buy less expensive but with good prospects. Do you understand this? We came up again to the winning recipe: buy low, sell high.

    How often should you do that?

    The answer is short, once or twice per 12 months mostly. Markets are cyclical and unpredictable. However, if you rebalance at an uncertain period of the year you’ll put your money at risk. Never avoid rebalancing your portfolio after significant market moves. Follow a 5-percent rule. Your investments should be within 5% of where they were when you build your portfolio. For example, if your initial portfolio was with 60% in stocks (you were smart to buy good players) and after several months they changed to 65% or over, it’s time to rebalance. In case you weren’t so smart and you bought poor performers and they changed to 55% or below, it is also time to rebalance. You have to prevent your portfolio from fluctuating more than 5%.
    That’s the whole wisdom.

  • Trading Bonds – How to Start Making Money

    Trading Bonds – How to Start Making Money

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

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

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

    Trading Bonds: The participants in trading 

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

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

    Dealers and traders

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

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

    Trading bonds strategies

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

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

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

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

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

    The differences between the trading bonds and investing

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

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

    Should you trade stocks or bonds?

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

    What to look out 

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

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

    Why trade bonds?

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

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

    You might like to take credit-defense trade.

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

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

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

    Bottom line

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

    Simple as that.

  • Cyclical Or Non-Cyclical Stocks – Where To Invest During A Recession

    Cyclical Or Non-Cyclical Stocks – Where To Invest During A Recession

    Cyclical Or Non-Cyclical Stocks - Where To Invest During A Recession
    When we ask ourselves what is a better choice during a recession, cyclical or non-cyclical stocks we have to know, as first, the differences between them.

    A recession is not the time to make an experiment with risks on your investments, so why dilemma cyclical or non-cyclical stocks? Well, it isn’t a dilemma for most people. The crucial aspect of an investment strategy during the recession should be to play it safe. This means no one should take the big risks at uncertain times but should find the companies with stable cash flow and low debt. The terms cyclical or non-cyclical show how much a share price is related to the changes in the economy. You, as an investor, cannot control the cycles of the economy, but you can adjust your investment strategy but you first have to understand how the whole economy is connected to your investments.

    What are cyclical stocks?

    Cyclical stocks have a straight correlation to the economy. 

    Cyclical stocks represent companies that are very favorable during the times when the economy is doing well. For example, carmakers, restaurants, branded wear makers, travel, construction are that kind of companies. But when times are difficult almost everyone will cut spendings on these products and services. When people stop buying these products, the companies’ revenues will fall for sure. Also, their stock price will fall. If there is a long downturn in the economy, the company will bankrupt or go out of the business.

    Having this in mind, you should avoid cyclical stocks when the uncertainty is present in the market or in the economy. For example, during uncertain times such as a recession, you shouldn’t invest in companies that are extremely leveraged or unsafe.

    Cyclical goods are not essential things. You are spending money on them less frequently. Your spendings are maybe determined by the season of the year, the current financial situation, and many other factors that can determine when and why you would buy these products and services. They are in the first place on your stop-to-buy list. 

    The cyclical stock’s prices are affected by economic cycles, for example, recession and recovery. Hence, they will grow and drop depending on shifts in the economic cycle. Very often you can predict these changes and as a responsible investor you will sell or buy the cyclical stock. For instance, furniture manufactures. In periods when the economy is doing well, everyone would like to remodel the house and change the furniture. But when a downturn is in the economy, who will care about buying the new furniture? The buying will drop, hence the stock price will drop along with lower demand.

    To know what stock to choose, cyclical or non-cyclical stocks, we also have to know how the non-cyclical stocks perform.

    What are non-cyclical stocks?

    Non-cyclical stocks generally outperform the market when economic growth decreases. They are profitable no matter what are the trends in the economy. These companies are producing services and goods that we’ll always need. For example, utilities: water, electricity, gas. That is something we will need in any economic condition. These stocks are also called defensive stocks. The reason behind – they can be used to defend the investment portfolio against the consequences of economic downturns. It is always good to invest in these stocks when bad days come. In case of a recession they are safe-haven investments. 

    For example, toothpaste, shampoo, soap, and detergent. How can we reduce them? There is no way. Who can wait a year or two to wash the dishes? 

    We already mentioned utilities. These companies are a great example of non-cyclical stocks. We need energy, electricity, water for us and our families. Because of that utility companies increase and do not slip dramatically in any economic circumstances. 

    The disadvantage of these stocks is that they will never produce huge returns even when the economy is expanding and growing. They are safe investments but their price will never skyrocket or it could happen but rare.

    Investing in non-cyclical stocks is a good strategy to avoid losses during the recession. So, cyclical or non-cyclical stocks, where to invest during a recession?

    Investment strategy with a mix of stocks

    You have several ways to add both cyclical or non-cyclical stocks to your investment portfolio. That can be a mix of bonds, cash, and stocks, but also the mix of growth stocks and value stocks. Another strategy is to add cyclical and non-cyclical stocks to offset changing business cycles. 

    When the cyclical stock drops in value you’ll have a great defense in non-cyclical stocks. During a downturn economy, cyclical stocks are less valuable and their price starts to move very fast. The truth is that it is moving up and down almost at the same speed and dramatically, within the economic cycle. Non-cyclical stocks never move that fast and radical. We described the fundamental differences but to repeat, non-cyclical stocks are practically immune to economic changes. That is their great advantage. Returns are something else. They are not huge, but these stocks will keep your nose above the water during the recession.  

    When the markets are growing, a good investment strategy could be to buy cyclical stocks at the beginning of the economic increase. But when you have some assumptions or signals that the recession is possible to come, sell them just before it happens. Sadly, trying to predict a future recession is a lost battle. That is the reason to hold a mix of cyclical and non-cyclical stocks in your portfolio. Why should we even ask or have a dilemma with cyclical or non-cyclical stocks when we should hold them both in our portfolios.

    That way,  we can provide a well-position to benefit when the economy is expanding. But, at the same time, we will have a shield when the economy takes a turn for the worse.

    Where to find cyclical stocks?

    Since it isn’t possible to name every cyclical industry (there is not enough room here) we can give you some clues where to look at.

    For example, hotels, restaurants, carmakers, airlines, banks. They all have something in common. In periods of strong economies, they are all expanding. People are traveling, need a place for vacations, they want to stay at the hotels, they would like to buy a new car, or rather want to eat in restaurants than at their homes. Also, some high-tech stocks can be cyclical. People really want them in prosperous times. Companies tend to invest money in developing new technology, new products. Startups are growing, also. 

    Not to forget banks. They are also a good example of cyclical stocks during the growing economy.

    Where to find non-cyclical stocks?

    These defensive stocks can be found among retailers, utilities. Consumer staples stocks are one of them, also. These stocks have modest growth but they are considered safe investments, that provide stable profits, and are defensive, and dividend-paying stocks. The most important role is that they can outperform the down markets.

    These non-cycling companies work in a strong sector,  their products are always in demand. We cannot cut our needs for them. They are able to survive great challenges and economic cycles. That’s why they are so much attractive especially during the recession if you add them as defensive stocks to your portfolio.

    Strategies to choose the stocks

    It is the same as any investing strategy. You have two ways: the top-down or the bottom-up strategy.

    The top-down strategy means to observe the economy as a mass and select stocks that will perform well during specific economic conditions. When applying this strategy you must be sure you are well informed about the macroeconomy, that you understand different sectors. You have to recognize how a particular industry will perform during the various business cycles, also when the stock price will rise when it will drop.

    For both cyclical or non-cyclical stocks, this top-down strategy is the most suitable.

    The bottom-up strategy means you have to look at the stock alone and to decide what stock to buy or sell.

    This strategy is a good one when choosing cyclical or non-cyclical stocks only when they are in correlation, meaning the stocks are moving synchronized. For example, the jewelry manufacturer will have a decline in the value during the recession. People will stop buying jewelry. But at the same time, the stock of the electricity provider will perform well. So, keep in mind that you have to have both in your portfolio. 

    Bottom line

    There is no need to ask yourselves what stocks to add to your portfolio, cyclical or non-cyclical stocks. You must hold both of them if you want huge returns and protection during market downturns. 

    During economic growth cyclical stocks will increase more. Hence, during recessions, people will decrease their spending and will squeeze the budgets. They will continue to buy and spend money only on the goods they really need. So, the companies that have these products will bloom.

  • Best Lot Size In Forex – Which to Choose?

    Best Lot Size In Forex – Which to Choose?

    Best lot size in Forex - Which to choose?
    The lot size matters because it has a great impact on how much market movement will change your account.

    To know what is the best lot size in Forex we have to know what lot size is. Particularly if you just stepped to this world of currency trading. The lot represents the smallest trade size you can set on the forex market. Keep in mind that the lot size will reflect how much risk you are willing to take.

    Without a doubt, the forex market can produce unbelievable growth. For beginner traders, it sounds promising but if you don’t understand how the forex market works, your chances to have success are close to zero. Everyone would like to know what is the best lot size in Forex to start the trading. First of all, you have to know that your account must be kept safe. What does it mean?

    If you choose the wrong lot size and have several losing trades in a row, which could happen even for the experienced traders, your account is at risk. It can be closed and deleted. For that not to happen, you’ll have to choose the best lot size in Forex. At least the right one. 

    Everyone will tell you to choose the best lot size, but how to do that? For example, you can use risk management as a great tool. You have to decide what amount you are prepared to risk without consequences. The same comes both for your demo trading account and for your real trades. 

    The lot size affects how much a market move changes your accounts. For example, a 100-pip move on a small trade is not the same as a 100-pip move on a large trade. 

    What is the lot size in Forex?

    Forex is traded in precise amounts that are called lots. The Standard size for a lot is 100.000 units of the base currency. However, there are other lot sizes such as Mini lot size with 10.000 units, Mikro lot size with 1.000 units, and Nano lot size with 100 units. A lot represents the predetermined number of currency units you can buy or sell when entering the forex trade. 

    The standard lot in forex trading represents 100.000 units of the account currency. For example, if you are trading a dollar, this means your trade value is $100.000. Since the average pip value for the standard lot is roughly $10, this means every 10 pip move in the forex market will produce you $100 of profit or loss. Experts recommend trading this lot size only if your account is filled with at least $25.000.

    As we said, the mini lot size represents 10.000 units based on your account currency. If your account is in dollars, the average pip will be about $1. Do you think it is modest? Well, the forex market can move for 100 pips per day and you can profit or lose $100 in your trading in an hour or two. Experts’ recommendation is to trade a mini lot size only if you have at least $2.000 on your trading account. For beginners, they have a suggestion, also: Avoid this lot size.

    The micro lot size was the smallest lot size for a long time. It represents 1.000 units with a pip value of 10 cents. Experts highly suggest to the beginners to trade forex in this lot size. The suggested account value for trading in micro lot size is from $200 to $500, which varies depending on how many pairs you want to trade. 

    Several years ago, arrived the nano lot size with its 100 units of currency and an average pip value of 1cent. Beginners may start trading this lot size at just $25. You cannot find a lot of brokers that will offer you to trade this nano lot size but it can be useful to figure out how your new trading strategy is working, so you can use this lot size for testing it.

    How to choose the best lot size for your forex trading?

    One of the best criteria is to determine your risk. You can calculate it in percentages with regard to the rule of 1%. This means in case you have to close out your trade for a loss but your risk has to be less than 1% of your total account. For example, if you have an account with $5.000, you shouldn’t risk losing more than $50 in any position. If your limit risk is 0,5% then you can lose $25 in any position.

    Trade size is an important factor since larger lots boost profits and losses per pip. To identify how big your position size should be, use calculation cost per pip. Always calculate it.

    How to calculate the trade size?

    As with trading stocks, for every open position, you’ll need a stop-loss to set. In other words, you have to figure out where you want to exit the trade if the market starts to move against you. 

    There are numerous ways to set stops. You can use the main lines of support and resistance to place the order. For example, price action, , Fibonacci, pivots, can help to find these values. The point is to count the number of pips from your open price to your stop-loss order.  

    The last action in discovering the best lot size is to define the pip cost for your trade. Pip cost means how much you will lose, or gain per pip. When your lot size increases your pip cost will do the same and vice versa. So, how big should trade size be?

    Let’s calculate the perfect cost per pip using the 1% risk rule, a $5.000 account, and a stop-loss 10 pips away to find the best lot size in Forex trading. Let’s do some math.

    Starting balance = $5.000
    1% risk x 0,1
    Trade risk is $50
    Trade risk : Stop-loss in pips = $50 : 10 = $5
    5 : 0,0001=50.000

    This means you can trade one lot of 50.000 for $5 per pip cost.

    Determine position size when trading Forex

    In Forex trading, the position size comes before determining entry or exit levels. That is to say, it is more important. What does it mean? Despite the prevalent thinking that the most important thing in trading is to have the best possible strategy, in Forex trading position size is more important. Your position size shouldn’t be too small or too big if you want to avoid taking too much risk. The same comes with taking a too small risk. Taking too much risk could lead you to drain your account to zero and quickly.

    The position size is defined by the number of lots and the size of the lot you buy or sell in Forex trading. The risk you are taking consists of two parts: account risk and trade risk. You’ll have to fit these parts if you want an excellent position size. Your position size doesn’t depend on the market condition or your setups. It even doesn’t depend on your strategy. It is all about account risk limit per trade, pip risk per trade, and pip value.

    You can calculate it. Here is the formula

    the amount at risk = pips at risk x pip value x lots traded 

    The number of lots traded represents your position size.
    Let’s imagine you have a $5,000 account and you risk 1% of your account on any trade. Your amount at risk is $50. If you’re trading the EUR/USD currency pair, you may decide to buy at 1.2051 and place a stop loss at 1.2041. This indicates you’re willing to put 10 pips at risk or $100.

    Let’s imagine further that you are trading in mini lots. Any pip change will have a value of $1 So, put this in the formula.

    $100 = 10 x $1 x lots traded

    Let’s divide both sides of the formula by $10, and you’ll have

    lots traded = 10

    This means you are trading 10 mini lots. But this number of lots is equal to the one standard lot, so you could trade one standard lot, right? But what if the result in this formula is, for example, 7,18? That would mean that you should trade 7 mini lots and one micro lot.

    Bottom line

    The truth is that Forex traders usually trade in mini lots or micro-lots. You might think it isn’t so sexy, but it is a more secure path. When you keep your lot size as small as possible you have more chances to play this game longer and profit. The reason behind this is that these sizes of lots represent the ideal balance between capital you invest and the risk you are willing to take. Moreover, if you use a higher lot size and have less capital on your account, it is more possible to end up with empty hands than to have any profits. In other words, you will have losing trades.

    The beginners should start to trade forex in micro-lots size or mini lot size. After they gain experience and confidence, they can pass to the next level. Also, as in any trading activity, you have to maintain balance in your trading account. One of the most important actions in trading is extremely visible here, in forex trading. The usage of stop-loss and target levels is extremely important. 

    In conclusion, the best lot size in forex trading depends on your capital, experience, goals, risk tolerance. Never risk too much, or the risk you’re not able to handle. Risk management is an essential part of any trade.

  • What Is a Good Rate of Return?

    What Is a Good Rate of Return?

    What Is a Good Rate of Return?
    The rate of return measures the profit or loss of an investment over a particular time. A good rate of return shows how smart an investor you are.

    By Guy Avtalyon

    What is a good Rate of Return is the question that many people continually asked, but it is almost impossible to get an answer until we explain what the Rate of Return is. So we have to make this clear before we answer what is a good Rate of Return. 

    A Rate of Return represents both gains and losses of your investments during a particular period. To know what is the Rate of Return on the investment we have to compare these gains or losses to the cost of our initial investment. RoR is shown in percentages of the initial investment. If the Return of investment is positive, meaning over the zero, we call it the gain. But if it is negative, in the minus area, below the zero, it represents our losses on the investment.

    In essence, RoR represents the net gain or loss and can be calculated. When we do that, we are actually looking for the percentage of which the investment was changed from the beginning until the end of a particular period of investing. 

    To know what is a good Rate of Return let’s see the formula: The formula to calculate the rate of return (RoR) is:

    Rate of Return = ((Current investment value – Initial investment value)/Initial investment value)) x 100

    Deduct the initial investment value from the current investment value, divide the result by initial value, and multiply by 100. 

    For stocks and bonds, some dividends should be added. You have to calculate the RoR for stocks a bit differently.  Suppose you bought a stock for $100 and hold them, let’s say, 5 years. After 5 years you sold them at $140. Your per share gain would be $40, but you also received dividends for that stock and it was $20 per share. So, your total gain is $60.
    The RoR for this stock is $60 per share divided by the initial cost per share which was $100 and multiplied by 100. So, the rate of return on this stock is 60%.

    What is a good Rate of Return?

    First of all, you must have a realistic expectation of return on your investment, to understand how compounding works, how to calculate it, etc. That is to say, every single percentage that increases in profit can boost your wealth every year. It is all about geometric growth.

    So, you know how to calculate the rate of return on investment, but how could you know what is a good rate of return? 

    There is one interesting rule in investing, everyone who has guts to take more risks will have higher returns. 

    Stocks are maybe the riskiest investments because you will never have guarantee the company will proceed to work or exist. It could fail quickly in an uncertain environment and leave investors with empty hands. So, as being an investor you have to protect your investments and to reduce the risks. And the best way to do so is to invest in different sectors and different asset classes. In other words, you have to diversify your portfolio. And do it over a longer period, at least five years. That will not provide you the best returns of, for example, 30% but can save you from market crashes. 

    Keep in mind, the answer to what is the good RoR depends on the market condition. What was good in one period could be a complete disaster during some other. Market standards can change and what was “good” easily can turn into “very bad.”

    For example, the S&P 500 has a 7% annual rate of return, if your investment has a 9% rate of return, it is doing better and outperforming the market. Okay, RoR of 9% maybe isn’t what you wanted but still, your head isn’t under the water.

    Remember, the rate of return can be negative also. 

    What a good RoR has to beat?

    However, if you are a more aggressive investor you would like the higher RoR. So, let’s see what is a good RoR for more aggressive investors. Let’s find the answer to this eternal question. Don’t be surprised if it is quite simple.

    A good rate of return has to beat the market, must beat inflation, taxes, and fees. But, as always, there is another point of view. What is a good rate of return depends on the investment you choose. It isn’t the same for stocks, bonds, or some other asset. Generally speaking, a good rate of return has to beat inflation at least.

    We know that the average inflation rate was about 2% per year over the past 10 years. This means that you had to earn 2% or more on your investment to keep your purchasing power and to keep the real value of your investment.
    But if you invested in bonds that have 4% annual interest, your RoR will be 2%. Can you see, you have to decrease this annual interest, and for the rate of inflation and you will not have 4%, instead you’ll earn 2% of your initial investment.

    What is a good Rate of Return for aggressive investors?

    So we come up to value investing which is the best way to make money. It is a simple “buy and sell” strategy. So, you buy a good stock at an excellent price and sell it at a profit. Simple as that. The only thing you should take care of is to figure out what is the right price of a stock, in both situations, when you buy it and when you sell it.

    Figuring out the right price for a stock requires you to know how much you want to earn when you sell it. In other words, you have to know how much you would like to earn. For example, an excellent rate of return is 15% per year. It might look like an aggressive approach, but we are talking about more active investors, right? 

    How can you achieve this?

    You’ll have to look for bargains. That will take some time until you find a good stock at a bargain, but it isn’t impossible. Let’s assume you found a stock that produces the rate of return of 15% annually. After taxes and inflation, it will be about 12%. At that rate, you’ll be able to double your purchasing power after a few years and beat the market. That’s the point, that’s your intention, of course. If we know that the lowest rate of return for the stock market is about 7%, this is a really good return.

    And as we said before, if you want a higher rate of return you must be ready to take a bigger risk. But we think that repeating average returns over a long period is a better choice. Yes, it’s possible to have the great winnings from time to time, but if you take a look at historical data and your trading journal, you’ll notice that it is followed by poor performances. And it is more likely you’ll have losses than you’ll have profits in the final balance sheet.

    Maybe a better way to understand what is a good return is to recognize what the bad RoR is. We explained that a good rate of return is when it beats inflation or it is equal to it. Also, we know that a good RoR of stocks is when it outperforms the benchmark index, for example, the S&P 500 index.

    A bad rate of return is when investment returns are under the rate of inflation, or underperforms the benchmark index. No matter if the investment has a positive return, in case it is as described it is recognized as an investment with a bad rate of return. The negative rate of return is useless to talk about. This word ” negative” explains everything.

  • How To Make Money By Trading Stocks?

    How To Make Money By Trading Stocks?

    How To Make Money By Trading Stocks?
    There are many ways of making money by trading stocks and numerous methods to find potential investments that match your trading strategy.

    It is almost normal wishing to make a lot of money in several months but do you know how to make money by trading stocks? Yes, it is possible. Everything you have to do is to make several high-risk trades buying stocks that are paying dividends. Simple as that. But it isn’t going to happen to all of us. 

    Someone can make fortune trading stocks in a short time. Some people can do that. But it is too risky. Honestly, when we talk about them we are actually talking about people who know how to make money by trading stocks. Others prefer other approaches. Many of them are less risky and safer ways to participate in the stock market. But still, it is possible to make a lot of money. That’s true. 

    Also, the truth is that some traders and investors got lucky but it isn’t a common story. Actually, it is the opposite. Most traders fail to make money on the market. So if you want to know how to make money by trading stocks you have to understand the nature of the stock market. We are not going to tell you the sad stories but what you have to know is that the stock market is a zero-sum game. Meaning, if someone doesn’t lose, you’ll never earn. Is that all? Of course not. There are more so, let’s see how to make money by trading stocks. 

    Can you make money by trading stocks?

    Why not? Thousands of people already did it and still do. Some are trading stocks every day or month but the others are more buy-and-hold types. They are sitting in the stocks for decades and today they are counting their millions. For example, risk-averse types will do that. They will choose some reputable company or the company with a promising outlook, good business plan, and stick it out for the long run.

    Also, there are some other approaches. You’ll find plenty of outstanding traders capable of making money through several quick but risky trades. Frankly, they are a minority. Great success in trading will come if you pick a day trading or short selling the stocks but it is connected to the extremely high risks. You’ll have to trade in the high-risk and volatile market. But it is one of the most important and usual features of the stock markets: they are volatile, they are risky no matter how strong or experienced you are. Let’s call statistics as help, only 20%, or even less, of traders, are successful when trading the stock market. The others constantly fail to make money.

    But this article is about how to make money by trading stocks. So, let’s go!

    As we mentioned above, one way is to adopt a strategy to hold stocks for a long time. At least five years, for example. If the stock pays dividends, it’s better.

    Quick ways to make money by trading stocks

    Making money by trading stocks, especially with a small amount, is challenging, and honestly, riskier. Of course, if you don’t know what you’re doing. But let’s try to be more creative.

    Certainly, it is ideal if you have more money to trade. But it’s not mandatory. The mandatory is to have the right strategy that works for you, to have a trading plan and trading journal. If you are a beginner in trading stocks, start modestly. Try with small amounts, test different approaches, and methods. After you did it, monitor, and examine the result you got. Don’t think about obtaining the fortune overnight. That’s not going to happen. 

    The smartest thing you can do is follow some of the rules and methods on how to make money by trading stocks and place a small amount, and over time raise it until you become ready to trade with larger sums.

    Let’s go! Play the market and earn money!

    Day trading is for traders with courage and heart. It demands to understand various forces at play in the stock market. For day trading you’ll need more experience. Well, if you are a good student and learn a lot, day trading will give you a chance to make a lot of money in several hours. The point is that you don’t need to invest a large sum, you can do it with a relatively small amount.
    But be careful, you’ll need to hedge your bet. What does it mean? You have to set stop-loss limits to cut potential losses. The advanced traders know that market makers push stocks to provoke our fear of failures or our greed. They want the stock to run for their profit, not ours.

    So you have to be very careful, to understand what you are doing, and to examine the market trends to be able to make important gains. For example, moving averages. Pay attention to them. If some stock breaks through the 200-day moving average that is the sign that potential upside or downside change in price is coming.

    Can you make money quickly by trading stocks?

    Yes, it’s quite possible. Just find companies in very volatile sectors. The other possibility is to find high-value or low-value stock with high risk but with the potential for an enormous reward. Also, you’ll have to be a short-term trader for that. That is the only way to make money quickly by trading stocks.
    For example, you’ll have to look for a high-value company that stock recently fell but you must have some clue that the stock price will rebound soon. When it happens, you’ll sell them for a higher price.

    Also, one of the possibilities is to buy a stock of some startup with the potential to produce tremendous returns. This is risky, also but can generate a great reward. The point is to hold it shortly, wait for a significant increase in price, and sell quickly. The risk here is that startups, in general, could be risky investments. A very small number of them succeed to survive a few years. They are like comets, light the sky for a while, and boom – disappear. But while they are here, in the markets, they are a great opportunity for traders to make money by trading their stocks.

    Trading stocks for a living

    People are trading stocks for a living which means they are making enough money for everyday life and over. Trading stocks can be a full-time job but also, a part-time job. What you choose depends on you. You have to find out how to make money by trading stocks from your home. Also, you may try day trading as a regular job.

    How much money you’ll make depends on your trading strategy, your skills, knowledge, etc. But not all is in your hands. You’ll have to know how the markets are doing and be familiar with many other things. Professional traders can make above $5,000 per month but that varies depending on the amount of money you put in play.
    For example, beginner traders can make several hundred or a few thousand monthly. Once, when you become more experienced with developed skills, your gain will be much higher.

    Buy low, sell high to profit from your trades 

    This approach is easy to master. It is a tested and proven formula for making a profit as a trader. But you don’t want to jump in the trade always when a stock price rises or falls. Sometimes you’ll need to stay aside and wait for your moment. It’s incredibly important not to panic when a stock falls below the price you paid. That’s the point with stock prices, they may rebound and if you exit the position too early you might miss the greater profit.
    When deciding whether the stock price is high or low enough to guarantee a trade, you should examine just a few things: the company’s earnings per share, do employees buy its stock, take a look at the company’s profit history, strength in different circumstances.

    The point is to buy low, that’s true. However, it is important to recognize the company that is able to recover and its stock will rise in price. That is exactly what would you like and as fast as possible, best right after you bought the stock. 

    The same is with the second part of the saying – sell high.

    When selling stock to reinvest the profit, you would like to ride the trend of the stock price rising as long as possible. The keywords “as long as possible.” That’s why you’ll have to learn how to recognize when the price stagnates and in which direction will go after that. In other words, you’ll have to know how to track the trends.

    In day trading or short selling, buying low, and selling high is essential to your profits. In these kinds of trading, you are dealing with highly volatile markets. The stock prices will fluctuate frequently and literally any change in stock price could end in a profitable trade. Yes, there are lots of risks but rewards might be magnificent.

    Diversification is important

    You must have a good trading plan and a diversified portfolio but not over diversified. 

    Diversifying will protect you against unpredictable changes. For example, all your stocks were in biotech, but new products have a bad influence on your stock’s prices. So, your whole portfolio could be crashed. If you have a well-diversified portfolio the influence will be protected against such trends. Also, this strategy is proper for balancing high-risk and conventional investments.  

    We have one suggestion if you really want to know how to make money by trading stocks – never walk away from trading after you made a profit. If your goal is to trade in a long time, it is smart to reinvest part of your profits or all of them.

    Bottom line

    Trading isn’t easy but practicing will help you a lot. At first glance, it may look so easy and simple. What you have to do? Just to pick a good stock and trade it. We all would like it to be that simple. The truth is that traders are carrying their knowledge to the market every single day. They can make a difference between good trades from bad trades, they are able to catch the trends, they know when to enter the position and, which is more important when to exit. Moreover, they know how long they should stick to their rules but also when it is time to break them and profit.

    Some do get lucky in the stock trading, that’s true. But it is very rare. Behind any successful trade lies great knowledge. Armed with that, you’ll make money in the stock market.

  • Does Trading Strategy Really Work?

    Does Trading Strategy Really Work?

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

    By Guy Avtalyon

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

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

    But, what is a sufficient size of it?

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

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

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

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

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

    How to check if your strategy works? 

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

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

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

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

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

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

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

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

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

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

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

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

    How to optimize your strategy?

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

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

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

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

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

    Does the perfect strategy exist? 

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

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

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

  • How to Cut Losses in Trading Stocks?

    How to Cut Losses in Trading Stocks?

    How to Cut Losses in Trading Stocks?
    The first and most important lesson in trading stocks is damage control. One of the methods is by cutting losses.

    By Guy Avtalyon

    This is the essence of trading – how to cut losses immediately. You have to learn this because it is something commonly named as damage control. And if you are not ready for the worst-case scenario and you get panicked, your losses in trading stocks can be enormous. One single bad move can destroy your trading account. 

    Not all trades will be winning, so you have to know how to cut losses in trading stocks.
    First and principal, you’ll need a good trading plan. The best plan is to exit a losing position and cut losses when the trade doesn’t match your plan. So, the trading plan is mandatory.

    Every single trader in the world has had or still has losing trades. That isn’t a problem. The main problem is how to cut losses and have control of your trades. You are the one who makes decisions and we are pretty sure you wouldn’t like to have a great loss. There are some methods that will give you a chance to reduce the losses. And here is how to cut losses in trading stocks.

    How to cut losses in trading

    Learn from the kids. When they just start walking it is normal to fall but every single time they will get up and continue walking. The same is with trading stocks. Every trader at some point will experience losses but the true wisdom is how each of them controls the damage. Damage control means cutting losses quickly without hesitation and quickly. So how to cut losses in trading stocks quickly? 

    There is some unique rule: when your stock falls for 7% – 8% it’s time to exit the trade. If it is so simple why would we spend so many words to explain how to cut losses? 

    Well, it isn’t that simple. When you have a losing trade and exit after your stock drops for a significant amount, you’ll have to compensate for that somehow, you’ll have to reclaim your loss. There is some math behind losses. 

    For example, let’s say you bought a stock at $100 and after several days its price dropped 7% to $93. What you have to do? You’ll exit the position, of course, and enter the other trade to recover from the loss. But where is the math? Here. You lost $7 on a single trade, right? And now you’ll need to profit more than it is the case if you didn’t have that loss. Your available capital is $93 now and your gain has to be 8% on that capital invested to cover the previous loss. It isn’t so hard you might think. Yes, your profit is actually zero now.

    What will happen if you hold that stock?

    Let’s say you are pretty sure that your stock will bounce back and it will be worth $150. And you are brave enough to enter the next trade. But the stock market is cruel, it doesn’t take care of your wishes and says you have to think, to make calculations and not to make wishes. What if your stock drops at $50 which is possible. 

    The math behind says you’ll need a 100% gain to cover your loss. That is a bit harder than to reclaim 7%. And, be honest, how many stocks, that can double their price, you own? So it isn’t a smart decision to hold a stock further if it has a 7% or 8% decline. A smart decision is to close the trade with reduced loss and find the new winner.

    The logical move is to cut losses quickly

    The understanding of how to cut losses in trading stocks will help you to protect your overall portfolio. Put your emotions aside, you might love that stock, adore the company but you have to admit that holding a losing stock is dangerous. No, you didn’t buy that stock at the wrong time or you have bad luck, your losses come from your behavior. Your small mistakes turned into a big failure. 

    When trading stocks or any other asset, the main goal is to profit. So, why would you like to hold a loser? 

    If you avoid selling such a stock you are avoiding blame, right? You have to understand that every single human makes mistakes and bad choices. All the time. So, what? It isn’t a problem. The true problem is when you don’t want to admit yourselves you are making mistakes and they cost you a lot. 

    Why would you stay to hold such a losing position? 

    Maybe you hope your stock will bounce back to the buying price and sell it? That isn’t going to happen. Well, it will happen one day in the future but your losses will be bigger and bigger. Nothing will help you to “delete” this mistake. Why? What had a tendency to fall, will continue to fall. In most cases.

    That’s why it is very important to understand how to cut losses in trading stocks.

    If the pattern doesn’t work, exit your position

    It is possible for a pattern to turn against you. There is no other way than to take a loss. Don’t hesitate to exit the position. You don’t need to wait for your trade to become a loss. Even a small gain is better than a small loss. Frankly, small gains are what beat markets every day. Many experts will advise you to get out of the trade with a small gain in case your pattern is working against you. If your stock doesn’t do what you expected and planned, just cut it. In this way, you’ll stay in control of your trades. 

    For example, you bought some high-tech stock in a high spike of your interest. Let’s say it is a new company with a great prospect, with a new product, everything is excellent. In theory, such a stock should skyrocket immediately. Excellent pattern, you may think. But what if the stock misses rising? What if you expected the price could rise up 30% and it hit 25% and suddenly stopped rising? Will you wait for it to fulfill your expectations? If you’re smart enough you’ll get out.  

    Why are we so resolute about this? 

    We assume you have a trading plan before you enter the trade and you shouldn’t care if you could make $1 or $100 if your pattern is working against you. It has to work what you require. Otherwise, get out because you don’t have control of your trade. That is how to cut losses in trading stocks by following your trading plan. If you do that you’ll don’t need to wait for the trade to become a loss. You’ll be able to exit exactly on time and cut potential losses.

    A few ways of how to cut losses in trading stocks

    First of all, you must have a trading strategy. That means you must have all rules on-hand, no matter if you want to buy or sell the stock.
    Further, you must know why you are buying a particular stock, but also, it is mandatory to know why you are selling it. You have to have a criterion. So, set rules for each situation.
    The most important action in trading is to set stop-loss orders. And here is one suggestion, be smart and never adjust stop-loss order when the stock price is dropping, do it when it is growing.
    Analyze your portfolio on a daily basis. Consider why you are still holding some stocks. If you can’t find any reason, sell it, sell them more.

    Controllers when trading stocks 

    Even before entering the position, you’ll have to know how to control your emotions. This is extremely important when you are faced with losing trades and have to cover losses. Always keep in mind that losses are part of trading stocks and learn how to handle your emotions when the bad time comes. For that to achieve, you have to be prepared for every trade with understanding that you may have losses. You are expecting them. That will help you to defeat your emotions. During this long run, you’ll have failures, successes, difficulties, and you have to know how to handle them.

    Further, invest only the amount you can afford to lose. In short, always protect your capital. If the stock price runs against you, cut it. It is better to exit the position than to suffer a bigger loss. Limit the risks. For each trade, you must estimate the risk/reward ratio.

    If your trade goes exceeding the risk you planned, cut it, cut the potential losses. And do it quickly, especially if the stock price reaches your stops. Just don’t hold the position and follow your plan. Never think you can wait a bit more. In a few seconds, your small loss could easily turn into huge losses. Give yourself the space to come back to the game.

    Successful traders aren’t unreasonable and think ahead. By doing so they are prepared to adjust their position size if necessary.

    In trading, it isn’t always possible to avoid losses. Honestly, it is almost impossible. But you can reduce them only if you learn how to cut losses in trading stocks. There is nothing wrong with selling a stock at a loss but do it on time to minimize it. When you cut losses with a clear head you’ll be ready to return to the market. Yes, we know, it’s hard to have a sharp mind when you are faced with the potential loss of thousands of dollars. Just follow your trading plan, stay with it, and follow the basic rules of trading. Nothing more, nothing less. The market always recovers. You will too.

  • How to Use Technical Indicators to Analyze Stocks?

    How to Use Technical Indicators to Analyze Stocks?

    How to Use Technical Indicators to Analyze Stocks?
    Trading indicators are a component of every technical trading strategy. They help traders to get full insight into price trends.

    After you learn the basics of technical analysis, it’s time to learn how to use technical indicators to analyze stocks. This will be something very concrete because we’ll discuss their real implementation. After we debunk all myths about technical analysis it’s time to go forward. Everyone who wants to trade stocks should know how to use technical indicators to analyze stocks. 

    Traders use technical analysis to examine past market data in the hope to determine future price movements. They use indicators, charts, and other tools to recognize price patterns and trends for that purpose. Future performance of the stock price is maybe the biggest mystery in the stock market, and there is no such a trader or investor that wouldn’t like to unveil where the price will go. By using tools, the chances are bigger, without them we are just guessing, and instead of trading, we are simply betting. So it is very important to know how to use technical indicators to analyze stocks.

    Technical analysis is based on the belief that price movement would repeat, so the patterns can be recognized and used to determine a market’s trend.

    Technical analysis of stocks

    To put it simply, when analyzing stocks you have to look for patterns that appear in the chart. Patterns could be similar or exact as some previous one and based on this similarity you might have some clues of how the stock’s price will act in the future. But to have a clear picture of that you’ll need to use qualitative and quantitative techniques commonly named as technical indicators. Both techniques or types of indicators have their specific purposes. You’ll use qualitative indicators to find support and resistance levels, changes in polarity, or chart patterns but quantitative indicators will tell you if the stock is in an upward or downward trend. Quantitative indicators which are market trends, moving averages, and momentum indicators will show you the pattern in stock price actions. Based on this info you’ll decide if you will buy the stock. 

    Let’s break down each of these techniques separately.

    How to use qualitative indicators

    Important qualitative indicators are 

    Support and Resistance

    The technical analysis method assumes that stock charts will show you the bottom and top levels. In most cases, the stock price is moving between these two levels. We said “in most cases” because when there is a breakout the price could break one of these levels.

    The resistance level is also seen as a ceiling. When this level is reached the stock will not rise further, and you should consider selling the stock you own and to do so as soon as possible. You will not get a better price for it. So, that is the highest price, and you’ll profit.

    The support level represents the lowest price. To explain this, when the stock price is going down, demand for the stock will increase and form the support line below which the stock price will not fall. This means the stock will bounce back and rise in price after this level is reached. That is a great time to buy a stock at that lower price.

    This is how to use technical indicators when you want to buy or sell the stock you own. To tell that briefly, buy the stock when it is near to its support level and sell when it is nearing its resistance level.

    But there is one thing you have to keep in mind. 

    These levels are not fixed. 

    They are changing during the long term. These levels can be higher or lower. That depends on how investors look at the stock. If they think the stock is a great player they will massively buy it but if they think the stock isn’t good they’ll start to sell it. 

    You should find support and resistance levels in the stock chart. Also, an important point is where prices have paused or reversed after rising or falling. That might show you what will happen in the future, once when these price points are touched.

    When a zone of support or resistance is known, use those levels as potential entry or exit points. That could be a smart decision. When the price hits one of those levels it has only two possibilities – to bounce back from the levels or to break the levels and proceed in its direction. If that direction isn’t in your favor you can close your position with a minimum loss, of course, if you do it immediately.

    Change in the polarity principle

    So, what happens when the price breaks support and resistance? Investors are very active at these levels. But a break indicates that they are not interested in buying and selling stock further. That causes the price to move violently to find new support and resistance levels. 

    When the support level is broken, the stock could enter a freefall area and form new support. It is the same when the resistance level is broken, the stock will increase in price and find a new resistance level.

    The polarity principle means that whenever the stock price breaks through the support level that point becomes new resistance.

    Hence, the resistance is broken, it becomes a support level. 

    It is very important to know how to use technical indicators and notice when the price is near support or resistance levels. That will give you a chance to react in your favor to protect your investment.

    How to use patterns as technical indicators?

    You have to watch out the other relevant chart patterns that show where the stock price will go next. These chart patterns are grouped as reversal and continuation patterns. Reversal patterns show that a trend that was leading the stock price has expired. The stock will run in the opposite direction. This means if the stock was greatly valued, it would drop. If the stocks were undervalued, they would rise in price.

    Major reversal patterns are head and shoulders, inverse head and shoulders and, double bottoms and double tops.

    Continuation patterns represent confirmation that the current trend will stay. So, the suggestion is to hold your stock if the price is rising, or to sell it if the price is dropping.

    Significant continuation patterns are rectangle pattern and flags, triangle pattern, and pennants.

    How to use quantitative indicators

    Quantitative indicators are used in combination with other indicators for predicting the stock price movements. They can be trend-following indicators, for example, moving average will give you an insight into the current trend by smoothing out price movement.

    The other quantitative indicator is the oscillator as a momentum indicator. It measures the speed of how the stock price is changing. The oscillator will signal you when the stock is overbought or oversold. Overbought stock means that the stock price is probably dropping, and oversold means that the stock price is low. 

    How to use technical indicators – Moving averages

    Moving averages are a popular indicator, especially simple moving average or SMA and exponential moving average or EMA. Calculating SMA is quite simple but the calculation is more complicated. If you draft a 50-day SMA and a 50-day EMA on the same chart, you’ll see that the EMA acts promptly to price changes than the SMA does. But there is no need to calculate them manually since you can find charting software or trading platforms that can do that for you.

    How to use technical indicators – Oscillators

    Oscillators are extremely helpful when the stock is overbought or oversold.

    When using oscillators you can see when the stock is going upside. That is the level at which the stock turns into the overbought status. This indicates that the buying volume has been decreasing and traders will begin to sell their stocks. And vice versa, when the stock is oversold that means a great number of traders are selling their stocks consistently.

    Use oscillators when your charts are not displaying a clear trend no matter in which direction.

    Bottom line

    The way of how to use technical indicators to analyze stocks and predict market trends could determine how successful an investor you are. Technical indicators will help you to decide when is the right time to buy or sell the stocks you hold. Some will aid traders to identify and confirm a trend direction. For example, trend lines are helpful to predict support and resistance levels. Oscillators will measure the strength and speed of a price movement and help you to recognize overbought or oversold zones, potential entry, and exit points. 

    By knowing how to use technical indicators you’ll be able to make more profits and reduce your losses.