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.

  • Concentrated Stock Portfolios – Are They Risky?

    Concentrated Stock Portfolios – Are They Risky?

    Concentrated Stock Portfolios - Are They Risky?
    A portfolio of fewer than 10 stocks can be more volatile than a portfolio of 200 stocks and riskier. But it is able to produce greater wealth.

    Concentrated stock portfolios are portfolios that hold a small number of different stocks. The aim is to reach a specific level of diversification. But it is different from diversified portfolios because concentrated stock portfolios can consist of less than 10 stocks. This kind of portfolio can increase the risks but at the same time, it increases potential gains. While we are broadly talking about the importance of portfolio diversification concentrated portfolios actually generate the highest returns. And if you examine the results of both, you’ll see that concentrated portfolios that include only a few stocks are better solutions for creating huge wealth. 

    How is that possible?

    Concentrated portfolios also allow investors to be focused on a small number of investments but high-quality. Many famous and extremely successful investors made fortunes with concentrated stock portfolios. 

    We don’t want to neglect the importance of diversification. It’s the opposite. Diversification is by far the most important lesson that we can learn. Also, the importance of spreading money across different stocks and sectors isn’t doubtful and will significantly reduce risk. But a lot of investors don’t follow that advice and are growing their wealth as a result. Warren Buffett once said “diversification is a protection against ignorance” and what is interesting, data shows that concentrated stock portfolios generate more profits. Simply, they are better performers. 

    Disadvantages of diversification

    Diversification has benefits but you’ll need a balance between risk-controls and returns. This highlights investors that diversify across concentrated stock portfolios rather than diversified. Diversified portfolios have a lot of market risk, anyone can confirm. 

    But, how much is proper?

    All investors are faced with this question and it isn’t a simple one. If you have a concentrated stock portfolio you may experience the stressful event if you don’t understand the company you are investing in completely. However, if you are ready to explore and spend time to get to grasp the companies you want to buy, the concentrated stock portfolio might be a great choice and it can generate high returns.

    But be careful, invest only in the companies that you believe you have an advantage. Concentrated stock portfolios aren’t necessarily risky but only if you are ready to work more. This means you have to be responsible for your investments and never neglect the dangers that may appear. You have to pay a lot of attention and spend time to be able to reduce the risk if you want to build a concentrated stock portfolio.

    Diversified portfolios hold stocks of numerous companies. 

    It is between 40-75 stocks. Concentrated stock portfolios hold less than 25, and it is common to hold less than 10. For example, the structure of such portfolios means that you have 5 to 10 stocks which constitute over 50% of your overall investments. It is important to follow this structure because if you don’t follow these percentages and your portfolio holds under 40%, your portfolio will be diffused.

    Diversification has some advantages. It can reduce the level of portfolio volatility and potential risk. When investments in one sector perform inadequately, other investments will offset losses. But you have to hold assets that are negatively correlated. 

    But diversification can have negative effects on your portfolio. That is a great disadvantage. A diversified portfolio can limit your potential gains and produce average returns. For example, you hold a few winning stocks but beside them, you hold 20 stocks with poor performances and they will reduce your overall gains.

    Also, diversification requires to rebalance your portfolio. If you created a widely diversified portfolio you’ll have a problem monitoring and adjusting your investments. And if you don’t pay sufficient attention the risk may increase.

    The benefits of a concentrated stock portfolios

    Conventional thinking states that diversification reduces the overall risk of investing in stocks. And what is interesting, investors support that approach but, for some reason, avoid concentrated stock portfolios as too risky. It is understandable, but having too much can be bad.

    But not all investors are opponents to concentrated stock portfolios. For example, Warren Buffet who advocates for a concentrated portfolio suggests: ‘‘An investor should act as though he had a lifetime decision card with 20 punches on it. With every investment decision, his card is punched, and he has one fewer available for the rest of his life.’’

    How to build concentrated stock portfolios

    It isn’t as hard as you may think. For example, buy stocks of companies you know well, stay focused on your main investment purpose, invest for long-term to gain the benefit of compounding. And, what is most important, research a lot to find the best stock to invest in.

    When you invest in a limited number of companies you actually have a great opportunity to invest in high-quality companies. There is no need to compromise on quality. What you have to pay attention to? Be informed and buy the stock when it is priced below its worth when the market undervalues it. This gap will provide you significant and profitable upward potential. 

    Legendary John Maynard Keynes suggested investors hold concentrated investment portfolios. In 1938 he wrote:

    1. A careful selection of a few investments (or a few types of investment) having regard to their cheapness in relation to their probable actual and potential intrinsic value over a period of years ahead and in relation to alternative investments at the time;
    2. A steadfast holding of these in fairly large units through thick and thin, perhaps for several years, until either they have fulfilled their promise or it is evident that they were purchased on a mistake;
    3. A balanced investment position, i.e., a variety of risks in spite of individual holdings being large, and if possible, opposed risks.”

    The ideas for concentrated stock portfolios

    Let’s examine two possible portfolios and compare them.

    The first one consists of all stocks in the market. You can hold such a portfolio without a problem if you use mutual funds and index-tracking investment trusts, for example. If we ignore all fees, the return of this portfolio will be an exact match of overall market returns.

    The second is a concentrated stock portfolio with one single stock. Let’s assume that stock is a great player, so its return could beat the market. Of course, if the investor made a bad pick the total loss is guaranteed.

    So where is the point of holding concentrated stock portfolios? 

    If you have a smaller stock portfolio, the possibility to have a higher return than the market average is greater. If you want to hold a smaller portfolio everything depends on your ability to identify all details of some company, you have enough time to find some low-priced stock that can outperform the market greatly. A careful selection of stocks will maximize your long-term returns. 

    But the concentrated portfolio should be balanced 

    Concentrated stock portfolios hold several stocks and as being such, are resistant to the risk of a total loss. Even if the value of a single holding falls to zero. It is possible if every stock from the portfolio performed the same. So, you should hold stocks with incompatible risks or opposed risks. For example, you could reduce the risk if you invest in some hedge funds.

    Bottom line

    No risks, no rewards is the most meaningful sentence in investing.

    When you know all the company’s details, that allows you to decide which investment concept has the highest profit potential. If you want your capital to put to work, your investments should be your top choices. Of course, you have to be selective. No one has hundreds of top choices.

    Try to think of a small portfolio with several stocks like this: a small portfolio can increase risks, but it will also maximize the returns with a few outstanding players. Always keep in mind the investors in Microsoft. Why should any of them want to hold any other stock?

  • The Importance Of A Trading Journal

    The Importance Of A Trading Journal

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

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

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

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

    What is a trading journal?

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

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

    Why keep a trading journal?

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

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

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

    What are the benefits?

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

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

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

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

    What traders do wrongly?

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

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

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

    More detailed explanation 

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

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

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

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

    What things to add to your trading journal?

    The following are basics. 

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

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

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

    Bottom line

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

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

  • The Danger of Diversification In Investing

    The Danger of Diversification In Investing

    The Danger of Diversification In Investing
    Diversification has to be a well thought out step for investors. It can boost growth and lead you to wealth. But if doing improperly, it can cause costly failures.

    Investors infrequently pay attention to the danger of diversification. All taught that the idea of diversification is to reduce the portfolio’s risk. And nothing is wrong with that. Some amount of diversification is important or investors will take too much risk that will never be neutralized for.
    But sometimes too much can be very bad. It is the same with the diversification of the portfolio if it is too diversified. And we will explain to you the danger of diversification. 

    So, in the first place, the danger of diversification may come when the diversification is done improperly but also if the investment portfolio is over-diversified. But let’s go step by step through all examples of the danger of diversification because they can be very costly. They can ruin the whole investment and leave you with your empty hands.

    The danger of diversification in investing

    Portfolio without focus

    No one will tell you that the danger of diversification is the reduced quality of your investments. In investing, one of the very important parts is to have a well-focused portfolio. That provides investors to have the best opportunities. To say this way, publicly listed companies are not all worthy to invest in. Also, what is maybe more important, you can find even fewer companies that are so-called safe investments. In order to have well-diversified portfolios, investors don’t pay enough attention when picking the stocks they could add many of them that don’t give a margin of safety to the portfolio. That will cause a reduction in the quality of investment. That would be the danger of diversification.

    A complicated mixture of assets

    The other danger may appear if investors add too many assets without truly understanding what they have. In other words, their portfolios are too complicated. The point with investing is to have control over your investments and know what they are. If you have too many assets from different classes you would be lost in attempting to follow them and to stay on top of them. 

    Portfolio volatility

    It’s very important to understand that the more stocks you add to your portfolio, it will be more correlated to the market returns. There is some logic behind and you have to understand it because portfolio volatility can lower your portfolio performance. So, it can be too risky. Always keep in mind that the number of investors that ever reach average returns is under the average. The reason is the volatility caused by risk.

    Having an index fund instead of a portfolio

    Instead of buying too many stocks and adding too many assets, it’s better to buy some index funds. If you have too many assets, your portfolio will look like an index fund anyway. So indexing can be the danger of diversification. Indexing is good when the bull market, but if it is bear you could be faced with a lot of problems and danger.

    Indexing, as well as over-diversification, represents the hidden danger of diversification. For example, if your portfolio may not have quality if you hold second-rate investments along with great investments. Sometimes, holding so-called inferior investments is the result of ef emotional buying, so avoid that. Pick stocks after you research them, never based on some emotions.

    What can put us in danger of diversification?

    The largest single danger is a surprise risk. Surprises are often part of our everyday life but when it comes to our investment it is a sign that we as investors are not cautious enough. Investors should be aware of risks and to predict them as much as possible. It is crucial in investing, due to safety, to quickly transfer our assets that show more risks than we expected or we can accept.

    Also, forget you’re able to have an excellent and perfect plan for your future. Very often some unexpected events can arise. For example, this coronavirus pandemic that we have now. These events have a great impact on our investments so if we have over-diversified portfolios how could we manage all the investment? It’s almost impossible.

    The perfect investment plan doesn’t exist. Every single investor made some mistakes. Just listen to what Warren Buffet has to say about his mistakes and wrong decisions. Yes, even him.

    The belief that you are always right isn’t only a stupidity, it is a more dangerous practice. However, it demands to keep on learning in order to modify your behavior. 

    If you never change your behavior you’ll take too many risks and you’ll put yourself in one of the dangerous situations. Moreover, you’ll never grow as an investor and, also, your capital will not grow. Sometimes it is better to give up and admit we are wrong than stay with the wrong plan and make more mistakes. 

    Comfort from following others

    We are all vulnerable and insecure at some level, whether we admit it or not. A great number of people seek help in instant solutions. The easiest way is to follow what other investors do. That’s a kind of psychological effect. If the majority is doing something, how can that be wrong? Remember, only a few investors know how to make money on the stock market. The others, the majority fail. The stats are cruel. 

    The winners represent a small part of all investors. 

    Investing is difficult but it can be very successful and profitable. All you have to do is to guess where the new gain capacity will come from. The tricky part is that you cannot do that without the knowledge and without comprehensive research. The best suggestion is: follow the standards, not the people.

    The fake feeling of security can bring us to the danger of diversification

    The truth is that many apparently diversified portfolios aren’t really diverse. For example, if your portfolio consists of stocks of 5 different companies and 5 different industries it might seem as a well-diversified one. But if all your portfolio consists of 100% stock in one market index and they are all based in the same country and have exposure to the same currency, you have a very dangerous diversification. In other words, your investment is at great risk. 

    You might think you made a great choice, but in reality, you are at risk to lose everything if some unfortunate event hit that country or currency.

    Bottom line

    Proper diversification is a matter of great importance. Smart investors allocate their money based on their own valuations, never on some prophecy or doubted predictions. Avoid over-diversification if you are invested in ETFs or mutual funds since it is a common mistake. When picking the stocks, seek the highest quality companies, to direct the chances of success in your favor.

    The bright side of portfolio management is that you can avoid the danger of diversification if you manage your portfolio on your own. Diversification is an extremely crucial concept in portfolio management, but it has to be done properly. When building your portfolio keep in mind the danger of diversification in investing. That will help you to reach optimal diversification.

  • Value Investing Tools That Every Investor Must Use

    Value Investing Tools That Every Investor Must Use

    Value Investing Tools That Every Investor Must Use
    “An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return. Operations not meeting these requirements are speculative.” – Benjamin Graham

    To find accurate value investing tools you’ll need time, a lot of it to do your homework. Finding the right tools requires a lot of research. It is the same as finding a good value stock to invest in. It can be so complicated that many investors are scared of all that job. 

    But if you don’t like to do your own research, here are some tricks to help you. 

    By having the value investing tools to value a company and evaluate its prospects, you can eliminate unsuitable stocks. Also, you can do it more quickly and focus on the best picks. One of the most accurate among value investing tools is the P/E ratio. 

    P/E ratios as value investing tools 

    The price-earnings ratio or P/E ratio is classified as a primary tool to identify undervalued or cheap stock. It is a simple metric that is easy to calculate. All you have to do is to divide a stock’s price per share by its earnings per share. Earnings per share is shortly expressed as EPS. Value investors always have the P/E ratio in their value investing tools boxes and seek a low P/E ratio. A lower ratio means that they will pay less per each dollar of the company’s current earnings.

    But this metric has some downsides. Of course, it is still a good start but if you rely on this one measure solely it is more likely your strategy will not be accurate and successful. 

    Investors are frequently attracted by low P/E ratio stocks. The problem is that they can be inaccurate and inflated numbers. Sometimes, companies report incorrectly high earnings sums or some forecasts show much higher earnings, so the low P/E ratio can be false. Everything becomes more clear after real earnings reports and the P/E ratio goes up and investors’ research result is false too.

    So, if you use the P/E ratio alone you’ll end up trapped with the wrong decision.

    Use PEG ratios as value investing tools

    If the P/E ratio is flawed, what should you do to find true value stocks? Which one of the value investing tools you have to use? PEG ratio will help you to recognize if a company with earnings growth is trading below its intrinsic value. The price-to-earnings ratio or PEG ratio can help you to avoid some traps while searching for value stocks. To calculate the PEG ratio use this formula:

    PEG Ratio = Price To Earnings Ratio / Earnings Growth Rate

    If the PEG ratio is less than 1 it is supposed to be a sign of an undervalued stock and it is possible to buy such stock at discount. So, the PEG ratio of 1 means the company is correctly valued. Contrary, if the PEG ratio is above 1 it may indicate that a stock is too expensive. But the PEG ratio shouldn’t be used as an individual metric. The valuation puzzle requires using other value investing tools to have a comprehensive picture of the stock’s value. 

    For many investors, the PEG ratio is a favorite among value investing tools due to its ability to show the stock that is at discount. However, as with all of the value investing tools the PEG ratio is useful to recognize the stock that could deserve a closer look. You’ll need more research and tools to reveal the possibility that the stock is cheap for a reason, in which case it isn’t the right choice. Simply, you wouldn’t want such stock in your investment portfolios.

    But keep in mind, for example, various industries will have different PEG ratios. So be careful when judging the company’s value.

    The company’s cash flow

    The company is worth only the amount of the future cash flows it can make from its operations. Keep this in mind. The value investors will always check the company’s cash flow before starting to invest. 

    As we noticed above, the P/E ratio is by no means a complete measure. The company’s net income is only an accounting entry and it is often influenced by numerous non-cash costs, for example, by depreciation. Also, companies use tricks to misrepresent their earnings. As a difference, cash flows measure the real money that the companies paid out or acquired over a given period. 

    Cash flows exclude the influence of non-cash accounting charges. They don’t include depreciation or amortization. So they are more objective value investing tools because they only admit the real cash that flows into or out of a company. Cash flows are a clear picture of the company’s real profitability. However, we have to repeat, it makes no sense to estimate cash flows as the only tool you use when seeking the value investment. 

    Enterprise value

    It is important to compare operating cash flow to the company’s Enterprise Value if you want a clearer picture of the amount of cash the business is generating related to its total value.

    To explain the enterprise value. 

    It is as a number that in theory outlines the full cost of a company if someone buys 100% of it. If the company is publicly-traded, this means buying up every single of the company’s shares.

    To calculate it you have to sum up the company’s market capitalization, add debt, preferred stock together, and subtract out the company’s cash balance. The result will show how much money an investor or group of them would need to buy the whole company. So, it is an outstanding picture of the total value of the company.
    When you divide a company’s operating cash flow by its enterprise value, you can easily calculate the company’s operating cash flow yield. 

    These measures are also the value investing tools. Especially cash flow yield because it presents the amount of cash that the company generates per year in comparison to the total value investors invested in the company.

    Return-on-Equity – ROE is excellent for value investing tool

    ROE is another excellent tool that can help you to find value stocks.  

    It is a profitability ratio and measures the ability of a company to generate profits from its shareholders’ investments. To put it simpler, the ROE shows how much profit generates each dollar of stockholders’ investment generates.
    The ROE of 1 indicates that every dollar of stockholders’ investments generates 1 dollar of net income. This measure shows how efficiently a company uses investors’ equity to generate net income.

    ROE is also an indicator of how efficient management is.

    The formula is 

    ROE = Net Income / Shareholders’ equity

    This measure is broadly used, and it is easy to find the ROE lists for publicly traded companies on almost all financial websites. When investors look for value investment opportunities, they are looking to find a stable or growing ROE of the company. 

    However, there are some cautions. For example, some companies can produce enormous ROE in one year, but the next one or more years later resulted in reduced profitability.

    Also, the tricky part is the relationship between ROE and debt. For example, if the company is taking higher debt loads it is possible to use debt capital instead of equity capital. Such a company will have a higher ROE. These companies with exponential and fast growth can be favorable, but also, can ruin shareholder value. Investors prefer ROE at around the average of the S&P 500. 

    Bottom line

    Sadly, there’s no fixed method that will provide investors a distinct way to reveal the best value stock for investing. Investors have to take into consideration the company’s sector and industry, also, if the company has an advantage over its peers. Look for the companies that are able to become brands, or have some unique product, the new technology, in other words, with a sustainable competitive advantage. 

    Remember, some companies operate in a cyclical market. For example, automakers. Such companies will have great growth and huge returns in periods of the rising economy but they will fail if the economy is in a slowdown. So think about the company’s profitability under all conditions. 

    These value investing tools will help you to uncover plenty of potential picks and to find a good stock to invest with trust.

  • Negative Numbers In Asset Allocation

    Negative Numbers In Asset Allocation

    Negative Numbers In Asset Allocation
    Asset allocation is one of the most efficient investment strategies. The percentage allocation shows the level of risk and the expected return. What if the numbers are negative?

    By Guy Avtalyon

    If you wonder how it is possible to have negative numbers in asset allocation we will say the shorting on the asset may cause that.
    For example, you have a long-short strategy with two classes only: equity long, and equity short. You can be sure that an equity short class will have negative numbers in asset allocation because all short investments are allocated under this class.

    Asset allocation is important because it is an individual investment strategy. The numbers of stocks, bonds, commodities, cash show the level of risk and hence, how big returns an investor expects.
    Investors use asset allocations in their factsheets that have to precisely represent their investment strategy. The asset allocation sums up to 100%,  which means that the invested volume and cash all together build total net assets.

    But if you build a portfolio that makes weightings of asset classes, you’ll have the negative numbers in your asset allocation. A good example comes from futures contracts, they can make your cash weighting appear negative.

    This is connected to the leverage of the futures and the difference between the exposure and the actual book value of futures contracts. You know the future contracts are derivatives, right? Never mind. Let’s explain it in short.

    The influence of derivatives on negative numbers in asset allocation

    Derivatives receive their value from the performance of underlying assets. The issuer can modify practically arbitrarily the exposure of derivatives to the price changes of the underlying assets. The changes in the market value of the underlying asset can be strong or weak. That is the so-called leverage effect. But, also it can be inverse. The point is that some small changes in the market value of the underlying assets may cause a really huge change in the value of derivatives.

    Maybe the most popular derivatives are futures. Futures are contracts specified for the buying or sale of a financial instrument at a pre-arranged price in the future. 

    For the buyer of a futures contract we say to go long, hence the seller goes short. Futures are traded on exchanges. The counterparty risk is close to zero. To guarantee that traders of a futures contract can cover possible losses at any time, they have to deposit an amount of the overall exposure of that futures contract. That is a margin account. 

    What happens if the futures’ price goes against the trader?

    In such a case, the trader has to cover the losses on the margin account which is known as a margin call. But if the price goes in a trader’s direction, the trader will withdraw the profit from a margin account.

    Therefore, the trader only places a part of the overall futures contract exposure in cash on the table. So, there is leverage. For example, let’s imagine a trader enters a contract with exposure in the underlying of $100.000. The requested margin for that trade, meaning the booking value of such a futures contract is $20.000. A 1% rise in the underlying asset or +$1.000,  will result in a 5% rise in the booking value of the futures contract. So, the leverage in our example is 5.

    Let’s take a look at a portfolio example

    Let’s assume you have a portfolio of $500,000 net assets. The total volume is in cash, so the portfolio allocation is 100% cash. Now let’s enter into 10 of the futures contracts we mentioned prior, for example. The portfolio will consist now of $300.000 in cash and $200.000 invested in the futures contract. Expressed in percentages it will be 60% cash and 40% futures.

    Is this an accurate picture? If we examine the booking value, this allocation is perfectly mathematically accurate. But should we base the allocation on the booking value solely? Of course not, because it is useless.

    As the $200.000 booking value describes an exposure in the underlying of one million dollars, the allocation should display 60% cash and 200% underlying. This would show the real risk and anticipated potential return of this portfolio. But it is 260% in total?

    How the negative numbers in asset allocation occur

    We have only one test left now to understand negative numbers in asset allocation. 

    It is expected the sum of all allocation positions in the calculation that use the booking value equals 100%. But if we use the interpretable exposure it doesn’t. It is a lot above 100%, actually, it is 260%! How to solve this issue that puts investors in a difficult situation? Speaking from the financial point of view, this increased exposure is based on the leverage. If you want the same exposure in the underlying assets, you will need cash. But if you don’t want to use the remaining cash,  you have to lend the amount you need to invest in underlying assets. 

    This means you have to balance the leverage by an additional position. That is known as – synthetic cash.

    In our example, this will appear as an allocation of 60% cash, 200% underlying assets, and -160% in synthetic cash. But as managers of our portfolios, we like clear stats, so we can express our allocation as follows: underlying assets 200%,  – 100% cash (synthetic cash included).

    And can you see how the negative numbers in asset allocation arise? All without shorting.

    Negative returns as negative numbers

    Negative returns are valuable in risk estimation. Investors have negative returns when the percentage of periodical return is below zero. To calculate this you have to divide the number of negative returns by the number of all returns over a given period. In this way, you can see the negative returns frequencies. 

    For example, (note the numbers are for the purpose of this example only, they are not accurate) the negative return frequencies for 6-month returns from March 1960 to December 2001 were 2% for Treasury bills, 26% for long bonds,  and 24% for the S&P 500 Index.

    The high negative return frequency for long bonds implies that bonds in the long periods present lower volatility than stocks. And this is very important info when it comes to the risk estimation.

    The investors who recognize risk from the aspect of volatility, it might seem reasonable to believe that long bonds would have several more difficult years than stocks during a 41-year period. But this is a misconception. 

    But recent data show investment returns might not be normally distributed. The normal distribution can minimize the influence of market shocks, for example, market corrections. Also, it doesn’t take into account the changes in returns within and between separate asset classes.

    Do negative numbers in asset allocation have any positive aspects?

    There is some positive aspect of negative numbers also. 

    We know it isn’t easy to stick with your long-term strategy when the markets fall sharply. But you can lose the bigger picture when such dramatic times come. Just think about the future, the time when you really will need that money. The majority of portfolios have between 10 and 30 years time horizon. Stay focused on how many shares you have, don’t think what they are worth now.

    Continue with regular investing, buy shares at lower prices, just keep investing even the share prices are dropping. Keep in mind that the markets are cyclical. So, what is bad today easily may become fantastic tomorrow. Markets are moving up and down, the negative numbers in asset allocation can turn into positive. Who can predict the time and how sharp the market can drop. The only thing is sure, the down markets always recover ultimately.

  • Mistakes in Options Trading – How To Avoid Them?

    Mistakes in Options Trading – How To Avoid Them?

    Mistakes in Options Trading - How To Avoid Them?
    Options trading isn’t difficult once you understand the basic concepts. They provide great opportunities when you use them correctly and can be dangerous when you use them wrongly. 

    By Guy Avtalyon

    You could make a profit no matter if stocks go down, up, or sideways and these great possibilities could lead you to make mistakes in options trading.  Despite the fact that this sounds great, you could also lose everything you invested in options trading. And you can do that in a short time. 

    Do you want that? Of course not. No one wants to lose money. So, what do we have to do?

    It is important to understand where mistakes in options trading can come from and how to avoid them. The truth is that even the most experienced traders can make mistakes in options trading. They can misunderstand some opportunity, have less caution, literally almost any absence of focus may cause mistakes in options trading. 

    We will examine the most frequent mistakes and how to avoid them and, also, how to overcome them.
    These mistakes are typically made by beginner options traders. So, take time to evaluate them and you can avoid making costly wrong actions.

    What mistakes can you make in options trading?

    Mistake 1: You don’t plan your entries and exits 

    Options trading is more complicated than trading stocks. When you enter the position in options trading, there are a lot more elements to watch and be aware than it is the case when trading stocks. In options trading, you cannot just enter and exit the position. You have to make a lot of adjustments if you want to profit and decrease the risks involved. 

    So the first mistake in options trading is to trade without a plan. This means you’ll enter the position and what is next? What are you going to do? Will you let your emotions to handle your trading? What if the price move against you? Will you pretend nothing is happening and like a child you’ll close your eyes until all problems go away?

    Of course, we know it’s impossible to put emotions out. But, also, we know that you can’t allow your emotions to affect your trading decisions. If you do such a thing, your portfolio could blow out and you’ll end up in losses.

    How to avoid a Mistake 1?

    Simply, trade smarter. It’s easy to say but how to avoid mistakes in options trading, particularly this one?

    Start to plan your exits. Exits are not important just to reduce the losses when things are not going in your favor. You must have an exit plan, in any case, you shouldn’t even enter the position before you have a good exit plan. Your upside exit and downside exit points must be set in advance. That means you already know the price targets. Further, a time frame for each exit is important too so you have to plan it.

    Keep in mind that options are time decaying assets. As the expiration date nears, the scope of decay grows. For example, if you are a long call or put and your expectations are more likely not to happen in the expected time frame, get out of the trade. Don’t wait, just go on to the next one.

    Time decay will not always knock your trade, of course. For example, if you sell options without having them, time decay will work for you. You’ll have a winning trade if time decay erodes the option’s price. You’ll keep the premium for the sale. Yes, that will be all you’ll earn if you are a short seller of a call or put option. The bad thing is that you may expect a great risk if the trade goes wrong.

    So, it isn’t a matter of what do you like or not, what strategy you’re running. You MUST have an exit plan for each trade. Even when you have a winning or losing trade. If your trade is winning don’t be greedy and don’t wait around for more. Exit with profit. If it is the opposite and your trade is losing, don’t wait also because you’ll need to exit the losing trade. Waiting with the hope that losing trade will turn into your favor is too risky.

    With having the plan, when you know your entry and exit points you’ll profit more consistently, you’ll reduce your losses. 

    Mistake 2: Using only the long call and long put strategies

    The important element when starting to trade options is to have a vision for what is possible to happen. In other words, you’ll have to estimate but also, your estimation must be accurate. You can use technical and fundamental analysis or a mixture of both. By using technical analysis you’ll have an interpretation of the volume and price in the charts, also you’ll look for support and resistance zones, trends because you would like to recognize opportunities for buy or sell. Fundamental analysis will show you a company’s financial audits, performance data, and current trends so you’ll be able to view the company’s value. 

    While estimating the different options strategies, you have to be sure the strategy you pick is created to take advantage of the outlook you suppose. You have to decide which is most suitable for your current situation.

    If you limit your trades to long call and long put strategies you’ll limit the probability to use some more profitable strategies. Moreover, they are unique, for options only and not implementable on stocks. 

    How to avoid mistakes in options trading?

    In trading options, you can trade an upward as well as downward move, a move in each direction, or without movement. Besides, you can trade, for example, an increase in volatility, or a decrease in volatility, etc. Is there any reason why shouldn’t you use some of these strategies and add them to your trading toolbox?

    Of course, not all options strategies will be good for every trader. There are some trading strategies that you don’t enjoy running. Maybe you didn’t have luck with them in the past. It isn’t necessary to use them but it can be useful to know them. Just try out the new strategy in a small size. That will not increase the cost per trade but new strategies might be interesting but most importantly, maybe you’ll find your next favorite strategy.

    Mistake 3: You wait too long to buy back short strategy

    This strategy can turn into a great mistake. You must be ready to buy back short strategies early. For example, if a trade is going in your favor it is easy to love the fanfare, but the trade may easily turn in a different direction. 

    We have heard numerous explanations of why traders are waiting too long to buy back options they have sold. Some were betting the contract would expire worthlessly, some didn’t want to pay the commission to get out of the positions,  or were just greedy hoping to get more profit out of the trade. The list of excuses is very long.

    How to avoid all mistakes in options trading?

    When a short option gets out-of-the-money and you want to buy it back, just do it. Don’t hesitate. 

    There’s a rule-of-thumb. If you can maintain to hold 80% or more of your original gain from the sale, think about buying it back quickly. Contrarily, a short option will come back and hurt you if you wait too long to close the position.

    Let’s say this way. For instance, you sold a short strategy for $2 and, for example, a week before the expiration date, you have an opportunity to buy it back for $1. Take it! Quite rarely it will be worth an additional week of the risk. 

    Mistake 4: You are buying out-of-the-money options

    This is common for new traders. We almost all tried this in the beginning. The reason is obvious. Out-of-the-money options are the cheapest and it looks like a great plan to start with them. Well, they are that cheap with a great reason and we understood that later. These options have very little chances of ending in the money. Most frequently they end up worthlessly. Trading these options is more a lottery game where you have to buy numerous tickets to see one that pays off and break even.

    When you buy these options, you must be accurate in timing and direction both. Even if you hold these options longer, a move in the right direction will not help you out. With approaching expiration, there is less possibility for these options to end up in the money. It’s more likely they will remain cheap.

    How to avoid this mistake?

    Try to get long calls or long puts at the money or in the money. That will increase their value since the options will be more costly than the out-of-the-money equivalent. So the probability of success will increase and it will deserve money.

    Mistake 5: Trying to overcome the past losses by doubling up

    All traders have certain absolute rules. They are playing well unless a trade turns against you. That experience is common for every single trader. Almost everyone was faced with a trade that turned against expectations. The first reaction is to break all adopted trading rules and continue trading the same option they started with. 

    Have you ever heard a saying “doubling up to catch up?” But it falls into stock trading. For example, if you bought the stock at $50 and you loved it, you’ll still love it at $30 because the lower price will give you a chance to buy more shares. This isn’t relevant in the world of options trading. It can be one of the great mistakes in options trading.

    How to avoid this mistake?

    This strategy called doubling up isn’t suitable for options trading. Don’t use it. Keep in mind that options are derivatives and that their prices don’t move the same direction as the underlying stock. 

    Yes, this strategy can lower your cost per contract for the entire position, but it can compound the risks. So when a trade goes against you, just ask yourself: “Is this a trade I would like to execute?” So, what to do in this case. Simply close the trade to cut losses and find another opportunity. To say this simply, it is smarter to take a loss now than wait and have bigger losses later.

    Everyone can make mistakes in options trading. They can be costly especially if you are trading cheap options. 

    Never think that cheap options can give you the same value as low‑priced options. Cheap options might have a bigger risk. You can lose everything you invested in them and more. the lower the likelihood is that it will reach expiration in the money. Before taking any action try to understand where the mistakes in options trading may arise.

  • Create a Forex Strategy – How to Do That?

    Create a Forex Strategy – How to Do That?

    update: 2/1/22

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

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

    You can achieve this thanks to a proven forex strategy. 

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

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

    Knowing what rules to follow

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

    Rule No 1

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

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

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

    Rule No 2

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

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

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

    Rule No 3

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

    Rule No 4

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

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

    Create a forex strategy on your own

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

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

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

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

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

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

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

    So, make a market selection.

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

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

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

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

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

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

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

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

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

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

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

    Bottom line

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

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

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

  • How Options Trading Make Money?

    How Options Trading Make Money?

    How To Trade Options And Make The Best Returns?
    Options trading strategies include the whole range from simple trades to extremely complex. No matter simple or complex, they’re based on two fundamental option types: calls and puts.

    By Guy Avtalyon

    There are unlimited ways to learn how to trade options and make money. How to find the best options trading strategy is also very important. You have to choose and find the right time to use your options trading strategy. That will result in huge profit potential for the traders. If you never learn you’ll be stuck in the question of how to trade options and miss a chance to make the best returns.

    You may ask why trade options instead of direct assets?

    Trading options have some advantages that could benefit you more than direct assets. Before we explain to you how to trade options, we want to tell you where you can do that. 

    In the US CBOE or the Chicago Board of Options Exchange is the largest exchange for trading options, actually, it is the largest in the world. Its offer is in the range from single stocks, ETFs to indexes. 

    In Europe, the situation is a bit more complex since we have a specific type of option. More about this READ HERE
    Recently, the market maker demanded from regulators to bring the new rules about derivatives trades. But if you want to trade options CME Group or Intercontinental Exchange can be the right places.

    Anyway, whichever you choose you’ll have to create the proper options strategy, one or more. You can choose from a very simple buy or sell strategy to extremely complex that require many simultaneous option positions.

    How to trade options for income?

    Traders frequently enter the trading options with limited or lack of understanding of options trading strategies. It is quite hard to explain why because they can learn how to trade options and find plenty of strategies that could limit the risk of trading and, at the same time, give the best returns. 

    That requires a little effort but gives an opportunity to take advantage. Traders who know how to trade options can enjoy the power of options trading. And they are very powerful. Having that in mind, we are giving you the shortened version of how to trade options along with the most powerful strategies you can use to generate the best returns. These strategies will teach you how to trade options and direct you on the right path.

    Basic strategies to learn how to trade options

    Options trading strategies appear in the range from simple, for example, one-legged strategies to fascinating multi-legged that seem like they are coming from the other planet but from one more advanced than ours. Simple or complex doesn’t matter. All of them are based on primary option types: calls and puts. 

    When we say “simple” that doesn’t mean there are no risks involved but that simple strategies are a good starting point to understand how to trade options. Also, they are able to give good returns. 

    So let’s start with what traders call one-legged strategies.

    The long call

    This is a strategy when you buy a call option. In other words, you go long. This strategy means that you are betting that the underlying stock price will go up, higher than the strike price by expiry date. 

    For example, the stock you want to trade is at $40 per share and the call is accessible for $2. The expiration date will come in 6 months. As you know, you have to buy 100 shares at least which is a standard option contract, so your contract is for that amount of shares. That will cost you $200.

    $2 premium x 100 = $200

    Here are three possible scenarios with your long call option.

    The key variables in our imaginary case are:

    The strike price is $45
    Initial price in the example is $2
    Current underlying price is $40

    If the underlying price is lower than the strike price at expiration, your option will expire worthlessly. The result of your long call trade will be the loss. That loss is equal to the amount of money you paid for 100 shares, in our case study it is $200 which is the initial cost. The option’s total profit or loss depends on the underlying price. For example, if the underlying price is, let’s say, $42 why should you exercise the option? That would allow you to buy the underlying asset at, for example, at $45 which is more expensive than you buy it on the market.

    But here is the good news. In the long call trade, the loss will be always limited, you cannot lose more than your initial cost was. Even in case the underlying price drop to zero. You’ll lose the $200, the amount you paid for the call option.

    The second possible scenario is when the underlying price is equal to the strike price. That is a very rare case but still. In such a case there is no reason to exercise your option. You could simply buy it on the market since the price is the same. You’ll end up the same as in the first case scenario. Your loss will be equal to the initial cost.

    But what if the underlying price is higher than the strike price?

    Actually, you are buying the long call option for this scenario. That is the best possible case. When the underlying price is higher than the strike price that meant the option is in the money and you have to exercise it.

    For example, the underlying price rose to $50. As you already know, the options give you the right to buy the underlying asset at the strike price, in our example, it is $45. What can you do? Immediately sell it at the underlying price, meaning you have to exercise the option. That will bring you a cash flow of $5 per share, and as you have 100 shares which means $500 for that option contract.

    To calculate the profit from the trade you have to subtract the amount you initially paid.

    ($5 – $2) x 100 = $300

    That is your profit from one long call trade.

    The long put

    It is similar to the long call, but in this options trade, you’re betting on a stock’s decline because you don’t want it to rise. You are buying a put option, wagering the stock will fall under the strike price by expiration.
    For example, the stock trades at $40 per share, a long put option at $40 strike is available at a $4. The date expires in 6 months, for example.

    This long put will cost you $400 for 100 shares and you bought 10 contracts.

    $4 x 100 = $400

    The long put value is the biggest when the stock is worth $0 per share. That leads us to conclude, and we’ll be right, the stock’s maximal price is the strike price multiplied by 100 shares and multiplied by the number of contracts. 

    In our example, it is $4.000.

    $4 x 100 x 10 = $4.000

    When the stock increases, you can sell the put and save part of the premium, if there’s some time to expiration. The greatest downside is a total loss of the premium or $400 in this example.

    A long put is a way to bet on a stock’s drop if you can allow the possible loss of the whole premium. If the stock drops notably, you’ll earn significantly more if you own puts than you would by short-selling the stock. The other advantage is that you can use a long put to limit potential losses. In the case of short selling, you could take an incredible risk because the stock price could continue to rise. The stock has no expiration.

    How to trade options – The short put

    The short put is the inverse of the long put. The trader is selling a put, or in other words, going short. This strategy is best to use when you assume the stock will stay the same, meaning it will be flat or increase till the expiration. That will mean the put expires worthless and the put seller will take the whole premium. A short put is similar to a long call, but there are some differences. It is, so-to-say, a modest bet that the stock will rise so the payoff is modest too.

    If you use this strategy in the best case you can expect the maximum return same as the premium but you’ll as the seller will receive that upfront. The premium will be paid as a whole if the stock price increases above the strike price or stays the same. If the stock goes below the strike price at expiration, the seller will have great losses because such will be forced to buy the stock at the strike price.

    This strategy is useful for…

    But this strategy is suitable for traders who want to generate income by selling the premium to other traders. Particularly to traders who are betting the stock will drop. Put sellers want to sell the premium, that’s all that matters.

    Traders very often use short puts to reach a better buy price on a very expensive stock. They simply sell puts at a strike price, where they would like to buy the stock. For example, with the stock at $40, a trader will sell a put with a $30 strike price for $3.

    If the stock drops below the strike price at expiration, the trader is assigned the stock and the premium will offset the buying price. The trader pays a $27 per share, or the $50 strike price lessen for the $3 premium that he/she already got. 

    But if the stock continues above the strike at expiration, the put seller will hold the cash. So such can decide to try the strategy again.

    Is trading options a good idea?

    Yes, of course, and cheaper than trading stocks. Well, it’s obvious why trading stocks is interesting. It’s somehow simple to understand and definitely there is money that traders can make. But some other financial instruments can produce the benefits that stocks do not.
    Options trading, especially, has many advantages. Trading options is a very good idea and I’ll explain why even if it is more complex than stock trading and traders have to learn so much about it.
    First of all, in trading options, traders can make meaningful profits without having a large sum of money. So, it is perfect for beginners that want to start trading with a little money. Also, it is very profitable for those with large budgets. This potential to make a big profit with a little money comes from the leverage. The leverage is what provides your capital with much more trading power.

    A real-life example

    For example, you have $500 to invest and you want to invest it in Company ABC stock. Its stock is currently trading at $10, but you expect it to rise. If you buy this stock using your $500, then you could buy 50 shares of that stock. If you were right and the stock really rose to, for example, $15 you will make a profit of $5 per share which is $250 for the total. That’s a 25% return on your initial investment.
    Let’s see what will happen if you chose to buy call options on that stock.

    Alternatively, you could choose to buy call options on the same stock, giving you the right to purchase the stock. If call options with a strike price of $10 were trading at $1.00 each, you could buy 500 options with your budget of $500. That will give you a chance to buy 500 shares if the stock rise. So, let’s say the stock rises to $15, and you might exercise your option and buy 500 shares. If you sell them quickly your profit will be $2,500.
    Deduct your initial investment of $500 used to buy options. So, you’ll pocket $2.000. So the return of your capital invested is 200%.
    This is a simple example but tells more about trading options than everything.

    There are numerous profitable strategies for options trading. Traders-Paradise introduces you just four of the many strategies and ways how to trade options.  Of course, we will continue writing about all strategies we know or find from other traders.
    As we already said, there are countless ways to learn how to trade options and we are willing to present them. 

    Stay tuned, we are here for you. 

  • Forex Strategy That Works For You

    Forex Strategy That Works For You

    Forex Strategy That Works For You
    Having discipline is a key feature of forex trading. How can you have discipline when you are in a trade? One way is to have a trading strategy that works for you. The key part is the profit. 

    By Guy Avtalyon

    It will require some time to find a forex strategy that works for you especially. Every forex trader has a unique style, risk tolerance, amount of money available, and trading goals. So, your forex trading strategy that works for you not necessarily will work for other traders. But some forex trading strategies can be suitable for everyone. 

    First of all, let’s explain what a forex trading strategy is.

    What is a forex trading strategy?

    It is a technique that a forex trader uses to discover when to buy or sell a currency pair. There are numerous forex strategies that traders can practice. For example, technical analysis and fundamental analysis. A forex trading strategy that works should provide you to analyze the market and execute trades with clear risk management systems.

    A Forex strategy that works

    Forex strategies are divided into several organizational structures which is a great help to traders to find a forex trading strategy that works for each trader the best. The main point is to locate the most suitable strategy. 

    So, we can divide forex trading strategies into main categories: Price action trading that includes Trend trading, Scalp trading, Position trading, Range trading, Day trading, Swing Trading, and Carry trading.

    Forex trading demands to put together various factors to form a particular forex trading strategy that works for you. There are innumerable strategies that traders can use. What really matters is to understand and feel comfy with the strategy you create and use. Each forex trader has individual intentions and sources. That fact must be taken into factor when you want to pick or create a forex strategy that works for you particularly. 

    You can use three criteria to analyze distinct strategies based on their convenience. To find a forex strategy that works you have to determine what time resource is required. Further, what are the frequency of trading chances? And last but not the least, what is the ideal distance to a target.

    To compare the forex strategies based on these three criteria, you have to know how efficient they are based on other traders’ experiences. It is always smart to check how a particular forex strategy works for others. 

    How to find a forex strategy that works?

    The crucial is the risk-reward ratio. So, based on historical data and traders’ experience position trading will provide you the highest risk-reward ratio. 

    Further, you have to examine how much time you’ll need to invest to monitor your trades. For example, scalp trading is a high-frequency strategy so it will require most of your time.

    In order to help you to find a forex strategy that works for you, we’ll explain how each of them works.

    What is price action trading?

    Price action trading means studying historical prices to create technical trading strategies. The advantage of this strategy is that you can use it as a stand-alone. However, you can use it in combination with an indicator. Fundamentals are rarely applied, but sometimes it is smart to include economic circumstances as a supporting part.

    The price action strategy actually covers several other strategies. 

    For example, the length of trade. The strategy gives you an opportunity to use multiple time frames in trading. It is suitable for long, medium, and short-term tradings. 

    What is most important with this strategy and the most convenient you can use it without any indicators, complex techniques. It can be used based on simple price action.

    Few more words about price action strategy

    All price action in forex trading comes from buyers (that are bulls) and sellers (that are bears). When the GBP/USD currency pair goes up it’s due to more bulls than bears. Of course, when this pair is going down it is vice versa. So, you may conclude, and you’ll be right, that we have a permanent fight between bulls and bears in the forex market.

    This forex trading strategy is all about examining who controls price, bulls, or bears and who’ll control the price. 

    When bulls are in control and you have proof they will continue that, it is the right time to go long, meaning you can buy. The opposite is when the bears are in control of price. That means it’s time to short, meaning you can sell.

    But how to examine who is in control?

    This forex strategy that works always is quite simple to use. The essential is to use just two price action methods or techniques.

    One is support and resistance zones. The buy and sell zones are easy to identify and add them to your charts. When the price hits these zones there are two possible directions: the price will halt or reverse. So you’ll know that is the right time to buy or sell.

    The price action forex strategy that works in all conditions

    It doesn’t matter if it is trending, low volatility, high volatility forex market, this strategy will work anyway, and generate profit. It is different from strategies based on indicators that are suitable for particular market conditions. For example, if you use an indicator strategy that is good for the high volatility market, it will slip in other market conditions. It is due to indicators’ inability to adjust for different market conditions. One indicator is good for one market condition. 

    Price action is what can be adjusted to the time frames, different currency pairs, market conditions, and moreover, and to many traders though. The point of this forex trading strategy is that it literally works for everyone because it keeps the trading simple.

    What is the purpose of price action strategy 

    The best forex strategies use price action. As we mentioned above it is also known as technical analysis. Speaking about technical currency trading strategies, we can recognize two main techniques: follow the trend and counter-trend trading. Both are aimed to profit by identifying and utilizing price patterns.

    To profit from price patterns, the most powerful approach is to identify support and resistance. In other words, both show the market tends to bounce back from prior lows and highs. Support means the market tends to increase from an earlier confirmed low. Resistance is the market that tends to fall from an earlier confirmed high. This happens because traders want to predict the next prices against current highs and lows.

    What happens when the market approaches recent lows? 

    It is obvious that buyers will seek what they see as cheap and buy. On the other hand, when the market nears the recent highs, the sellers will lock in a profit since it is a great opportunity to sell at expensive prices. So, recent highs and lows are measures to evaluate the current price. 

    Also, support and resistance levels. Both happen because traders predict specific price action at these points and play according to their expectations. This has a great impact on the market because their actions can cause the market to go in their direction.

    But keep in mind some rules. 

    First, support and resistance levels aren’t fixed rules. They are a consequence of the action of traders.
    When traders follow the trend they actually want to profit from support and resistance break-downs.
    Counter-trending is the opposite of trend following. The traders that use this technique will sell when a new high is touched, and buy when a new low is reached.

    The main goal in forex trading is the same as it is in any other trading: eliminate the losses and have more winning trades. You can have it if you use the forex trading strategy that works. It is essential to find the one that suits you the best. That means you have to develop a set of rules and follow them if they work. If not, simply change them. However, the best practice is to follow some proven strategy. Especially if you are planning to enter forex trading and you don’t have enough knowledge and experience. Relying on strategies that are not proven and tested might lead you to enormous losses and failures. So, the best chance for you is to find the right forex trading strategy that works and use it.

    Stay tuned, we will write more about forex trading and powerful forex trading strategies and techniques.

  • Beginner Investment Portfolio- How Should It Look Like?

    Beginner Investment Portfolio- How Should It Look Like?

    Beginner Investment Portfolio
    These tips are kind of a guide to new investors for building a good stock portfolio. Selecting stocks needs analysis, time, and the ability to estimate different parameters for the stock, industry, and overall market.

    By Guy Avtalyon

    We are going to show you how a beginner investment portfolio should look like. Of course, if you think the stock market is getting crazy, you couldn’t be more right. DJIA is going up, going down, S&P 500 Index also. The graphs are looking like ECG of some very vulnerable hearts. Maybe you don’t believe it, but this is the right time to enter the stock market. A stock market is truly a wealth-building tool. Moreover, entering the stock market is easier than ever. But, as you are new in this field, you would like to know what to buy or, in other words, how a beginner investment portfolio should look like.

    There are so many ways to invest the money and can pick the level of risk you’re willing to take. So, it is obvious the first thing you have to decide – the level of risk you can tolerate.

    High-risk investments mean greater chances for high rewards. Wait, that also means bigger chances for losses. As a beginner investor, you should avoid high-risk investments if you don’t want your capital to throw through the window. Later, when you become more experienced and earn more cash, you’ll understand how to handle the risk, for now, here are some tips of how a beginner investment portfolio should look like

    We know that a lot of beginners think of investing as attempting to get a short-term gain in the stock market. But if you want to build wealth, you have to think about long-term investing. 

    Beginner investment portfolio in 2020

    ETFs

    The world of the stock market and investing can be confused for beginners. There are individual stocks, mutual funds, bonds, mutual funds, etc.

    Our first suggestion for you is some low-cost ETF. But there is a question: is it worth it? You’ll need time to build an individual stock portfolio.

    Exchange-traded funds (ETFs) can be an excellent investment way for small investors. You can trade these funds like stocks. They can give you to expand the diversity of your portfolio and to do that without spending too much time on it. 

    Here is how an ETF works. A fund provider holds the underlying assets. Such creates a fund to follow the performance of underlying assets. At some point, such a provider decides to sell shares in that fund to other investors. As a shareholder, you’ll own a part of an ETF, but you will not own the underlying assets in the fund. 

    ETF tracks a stock index. So, as a shareholder of the ETF, you’ll get dividends, which you can reinvest, for the stocks included to the index.

    ETFs are a passive approach to investing. Brokers will not charge you trading costs for ETFs. It is zero. Just make an automatic investment each week or month, it’s up to you.

    Include the gold

    Due to the coronavirus pandemic, the global economy is suffering. In the first quarter, only five main asset classes posted gains. Among them, apart from the US dollar and yen which are currencies, the list includes gold. Gold always was a great way to protect the portfolio and historically it was known as a safe-haven investment. It is the same nowadays. You can add some gold into your portfolio while you are waiting to come into stocks because today they can be too volatile for beginner investors. So, you should grow the exposure to gold. Gold works great when the dollar is flat-to-down. Also, gold can be a great hedge against inflation.

    Moreover, it performs best when investors are worried about low growth on other assets. Basically, if we take a look at its historical performances, we’ll notice that gold played best and rose fastest when other economic measures were falling quickly. We have such a situation today.

    We have negative interest rates, bond yields are almost zero, so gold could be a very good opportunity to hold it. Add it as very good protection to your portfolios.

    A beginner investment portfolio should include mutual funds

    Mutual funds are still amazingly popular. Especially target-date mutual funds in retirement plans, so add them in your beginner investment portfolio. Mutual funds are basically a basket of investments. When you buy a share in some mutual fund you are actually investing in all holdings included to the fund with just one step. 

    A target-date mutual fund usually is a mix of stocks and bonds. 

    How to invest in target-date mutual funds? 

    For example, you plan to retire in 20 years and everything you have to do is to pick the fund with 2045 in the name. But you have to know, so don’t be surprised, the fund you choose will hold stocks essentially. How is that possible? Your retirement is far away, and stocks have higher returns in the long run, higher than any other asset. As time goes by, the fund manager will shift part of your investment toward bonds because they are less risky. You wouldn’t like to take too much risk while you are approaching the date of your retirement.

    Add Index funds to the beginner investment portfolio

    If you don’t want to employ a manager to create and manage your beginner investment portfolio, index funds are a good choice for you since they track a market index. What is the market index? It is a collection of different investments that represent a part of the market. For example the S&P 500 Index. It is a market index that covers the stocks of about 500 biggest companies in the US. So, an S&P 500 index fund will reflect the performance of the S&P 500, by purchasing the stocks in that index.

    Index funds represent another passive approach to invest just like ETFs. They carry lower fees charged based on the sum you have invested. The advantage of these funds is that some brokerages offer a range of index funds without an established minimum. So you can start investing in some index fund at $100 or less.

    Help to create the portfolio

    For example a robo-advisor. Let’s assume you would like to invest but you’re not the DIY type. Well, we have some good news for you. You have a lot of robo-advisors out there. They will handle your investment by using very complex algorithms. But don’t be worried. It will cost you less than a human advisor, usually, it will be from 0.25% to 0.50% of your account per year. Also, robo-advisers will let you open an account without the minimum required.

    Robo-advisors are an excellent way for beginners to get started investing. Look, you are a beginner and you don’t have good knowledge about investing yet. So, robo-advisors will do all that hard work for you and you’ll need a little money for them. All you have to do is to check your portfolio from time to time. So to say, it’s your money invested. Also, they will give you a chance to learn more about investing since they’ll provide you tools and educational material.

    Investment apps are also extremely helpful. You can easily find some aimed at beginners.

    Traders-Paradise recommends

    For example, M1 Finance is excellent if you want to build a free portfolio for long-term investments. This app offers commission-free investing, automated deposit, buying fractional shares, and has many other features like free maintenance of a portfolio, diversified portfolio, etc.

    Fidelity is another great app that offers full service at zero trade prices. It allows you to invest for free, a variety of ETFs that it offers can help you to build a well-balanced portfolio, stocks, or options trades and all for free.

    TD Ameritrade offers free options trading. If you want to become a trader rather than an investor, it’s a really good pick for you. We already wrote about this app but we would like to point again how excellent it is. For example, its platform “Thinkorswim” is one of the best. It will not charge you a commission for trading stocks, options or ETFs.

    After deeper investigation, you might choose to invest in the companies that offer the chance for growth. Just keep in mind, your portfolio has to be diversified. Never expect that each stock can generate great returns. That is the reason for diversification. It appears especially when we are talking about a beginner investment portfolio. But that doesn’t mean you’ll need a large collection of investments. You’ll need just a few stocks but they have to run together in your favor.

    Today’s volatile stock market offers discounts on great stocks. So, this is a great time to start investing and create your beginner investment portfolio that will generate you amazing gains in the future.