Tag: Traders

All traders related articles are found here. Educative, informative and written clearly.

  • Lies That Traders Like To Tell To Competitors

    Lies That Traders Like To Tell To Competitors

    Lies that traders like to tell
    Some traders’ and investors’ lies will confuse you; the other will take your money. Be aware!

    By Guy Avtalyon

    Maybe it’s tough to say, but there are too many lies that traders and investors like to tell. It doesn’t matter if they are lying to their rivals or the audience. I’m always astonished how people pinch every cent at the supermarkets but will let someone they hardly know take their money. Why would you believe anyone you barely know?

    Actually, I can’t even imagine why anyone likes to tell me lies. Do such people want to make a false picture of themselves? What do they think after telling some lies? Are they bigger in their own eyes? More successful? Smarter? Someone might say they are not lying; they are creating a parallel reality. But why? 

    Keep in mind, you have to check everything, or you’ll end up losing your assets. 

    This post aims to unmask the big lies that traders and investors like to tell, yes. All the little lies, the myths, and misleads of traders and investors. I’ll give you the list of traps, so you’ll avoid falling in them.

    What are the lies that traders like to tell?

    Most of us are self-taught traders. We are learning to trade by reading books on trading; we are watching videos, we like to talk with successful traders and investors. In other words, we’re gathering knowledge from every possible source. And we believe they are trustworthy. 

    On the other hand, I’m up for the challenges. When someone tells me that something cannot be performed, I’ll spend hours and days showing how wrong such thinking is. That’s in my nature.

    When I hear someone is picturing him or herself as a professional trader, my alarm turns red. I know they are convinced they are the best, but the truth is something else. For example, some traders would tell lies to give excuses for their lack of profit. Such traders will tell you that some strategy isn’t good enough or impossible to perform, only because they failed to succeed. If you believe them, take a step back, and think twice. Don’t let other traders’ failures stop you. It could cost you money, or, at least, you could waste your precious time.

    If anyone in the world did it, then the contrary is a lie. I always tried to show them how wrong they are. Never believe when someone tells you, “you cannot do it.” Try it; instead, never leave the battlefield. If you know that anyone did it before, find out how it is possible and explore the strategy, method, and approach.

    You will never make money in a short time

    This is a true lie. Why shouldn’t you make money in a short time? You can do it in any trading period of time. We’re living in a high-tech era; we have computers, phones, laptops, we can trade from any place on the Earth at any time. For some trades, you’ll need a few seconds; for others, you’ll need months or years. Where is the problem? 

    Remember, you’re the one who chooses the timeframe. Choosing your trades’ timeframe depends on your budget, personality, trading style, goals, etc. That’s why we have short-term traders and traders with long-term timeframes. It’s completely great to have a trading strategy that combines the short timeframes. So, of the lies that traders like to tell is that you cannot make money in a short timeframe.

    Lies that traders like to tell: you have to analyze the market full-time

    C’mon! Once you understand how the market price is acting, it’s totally possible to turn on your computer at any time and enter the trade. It is actually recommended when you notice the price in the right position or see a good candlestick bar. What is the other way to make a good trade? There is no other way. Just turn on your computer at the right time, enter the trade, and make a profit with the right settings.

    Of course, you’ll need to know a lot about price action and trading to enter the trade at the right time. But the truth is, you don’t need to look at your screen all day long or to study the market full-time. All you need is a good strategy to have more wins than losses. Keep in mind; trading has nothing with certainty; it’s all about probability.

    You can’t profit with a small trading account

    Really? When I hear something like this, I have to ask: Can you tell me what is the right trading account, please? For some traders, $100.000 is nothing. Well, guys, during my early days as a trader, $100 was big money for me. Honestly, it was all I can put into the trade. 

    Moreover, some of the most successful traders started with much less money. And look at them now!

    The truth is that you need to know how to manage your trades to protect your capital invested. Always keep in mind the size of your position. That’s the key. Your primary goal should be to protect your capital. Your account will grow with the winning trades. As the old song says, the winners take it all.

    Automated trading algorithms control the markets

    The truth is that automated trading algorithms do over 70 percent of all trades. Also, the truth is that they are not the largest part of the trading volume. Large institutions do account for the majority of the trading volume in the market. No one can say that algorithms control or run the market. That would be stupid. But it is one of the lies that traders like to tell when they fail. 

    How many times did you hear: What can I do against algorithms? They are smarter than I am? Oh, dear man, algorithms are made by people, like you and me, but they are smarter, that’s true. No jokes, these guys are programmers, developers very familiar with complicated mathematical operations, but there is a different case with the markets. Every second of a trading day, you can see traders taking the bull or bear side on every trade. What can you do as a home-based trader? Follow them. Copy their actions. The main goal in trading is to take the winning side—nothing less, nothing more.

    One of the lies that traders and investors like to tell, especially to their competitors, is that they can’t learn to trade. They will try to discourage you by saying that you do or do not have the talent or abilities for successful trading. It’s BS, trash, pardon my French! Everyone can lose money; it’s the part of trading. No one is profitable all the time. Losing trades are normal. The goal is to have more winning than losing trades in sum.

    Take your time, don’t waste it on lies that traders like to tell, build your confidence, learn as much as you can, and enter the trade.

  • How to Find a Stock Worth Trading?

    How to Find a Stock Worth Trading?

    How to Find a Stock Worth Trading?
    To find a stock worth buying several parameters should be estimated and examined. Here is what really matters.

    By Guy Avtalyon

    If you want to know how to find a stock worth trading, think about the stock’s valuation, strategy, plans for diversification, and your appetite for risk.

    The first consideration on how to find a stock worth trading should be the company’s earnings. Profitability is important because when you buy a stock, you’re buying a part of the company. Calculate its P/E ratio, just divide the share price by a company’s annual net income. 

    For example, if a stock trades at $30 and has an annual net income of $3 the P/E ratio is 10. The general rule of thumb: if the stock’s P/E ratio is higher than the broader market P/E, it is considered expensive and vice versa.

    But the P/E ratio isn’t a perfect measure. For example, a small, fast-growing company may have an extremely high P/E ratio but earnings are poor while the stock price can be high. You have to gauge if there is any potential for strong growth and if there is, such stock may not seem expensive.

    So, look for trends in a company’s earnings growth. Find do the earnings regularly increase. If you have a confirmation for that, get it as a good indication that the company is operating well. There is no need for an incredible increase, even a small increase can be an indicator of a positive outlook, but only if it is consistent over a long time.

    Volatility matters

    The volatility in the stock market is natural. The companies are losing value in the markets from time to time but also could increase the value. Every trade you make in the stock market is actually kind of betting on the market direction, on the volatility, or both.

    For stocks trading, volatility is good for the long term because you have to make a profit. And you can do that only if the stock price fluctuates. If you really want to find a stock worth trading, seek the high volatile stocks.

    If the stock has a high volatility the value could be spread over a large span of values. This means the price of the stock could fluctuate drastically in a short time, which is ideal for fast-moving trading. Contrary, if the volatility is low, the stock’s price will stay almost steady which offers fewer chances for a quick profit.

    Beta as a measure of volatility

    Use beta as a measure to unveil how volatile the particular stock is.

    The beta can predict the total volatility of a stock’s returns against the returns of a related benchmark, for example, the S&P 500. If you find that beta value is, let’s say 1,3 that means the stock price moved about 130% for each 100% in the related benchmark index. Hence, if the beta value is 0.6 that would mean that stock has moved just 60% for each 100%  in the related benchmark.

    Trade volume matters

    Volume is the total number of shares traded in a market during a particular period. Each transaction adds to the total volume. For example, if during one trading day there are 100 transactions, the trade volume for that day would be 100. How to find a stock worth trading when using trade volume? Volume works as a great indicator that adds weight to the market move. For example, if some sudden spike appears, the strength of that movement depends on the volume during the time observed. 

    When picking a stock worth trading, pay attention to how great is volume. The greater volume, the more important the move is.

    How to find a stock worth trading?

    So finding a stock worth trading is a matter of combing for stock with large volume, a current spike in volume, and a beta higher than 1.0. The stock that lacks these elements will be very difficult to trade successfully.

    The way you use these factors will affect your possible profit. The trading style depends on your trading strategies. You have to find a stock whose price changes to profit from that fluctuation. It is impossible to profit from trading stocks if there are no changes in price. Also, the same comes if the volume is low. The low volume shows a lack of buyers and sellers. How to profit from that?

    Stock Price

    You may consider the stock price. Some companies could distribute additional shares and increase the number of available shares but lower the price per share in the market. Some will never do that. It is considered better for investors because such stock could rise more in price and worth more after some time. Anyway, the stock price will show you how many shares of a particular stock you can buy for the capital you have. Pay attention to stock price historical performances. That will give you a clue how the stock is possible to play in the future and is your chosen stock worth buying.

    But active traders will prefer, for example, stocks in play but they’ll need to carefully watch the news because such stocks are not the same every day. 

    How to find a stock in play worth trading?

    These stocks are suitable for day traders because they are changing dramatically sometimes during the trading day. Also, they carry enough volatility to generate favorable risk and reward trading ratios.
    Day traders will normally look for stocks that have big price changes during the one trading day. These stocks are not a good choice for investors with a long time investment horizon.
    Active traders expect more action. They exit the trade much before the end of the trading day, sometimes a few minutes after they enter the trade. These trending stocks can be found on many broker’s trading platforms. There you’ll find stock worth trading.

    Bottom line

    Trading, even if it is considered as a risky strategy, can be highly profitable. Of course, if you know how to find stock worth trading. As we mentioned above, pay attention to trading volume, volatility, liquidity, and price. All of these criteria together will help you to find the stock worth trading.  

  • Is Trading Stocks A Zero-Sum game?

    Is Trading Stocks A Zero-Sum game?

    Is Trading Stocks A Zero-Sum game
    Trading stocks is not a zero-sum game and both sides can be winners.

    By Guy Avtalyon

    Is trading stocks a zero-sum game is sometimes more rhetorical question than it is related to trading. But shouldn’t be. In stock trading, we have two different sides. One is represented by winners, the other includes losers. On any transaction in the stock market, the chances of winning and losing are near even. So, who are the winners and losers of this zero-sum game?

    Winners have better portfolios, they are usually long-term traders, they can sustain seldom losses because their investment horizon is larger. On the other hand, traders that frequently place trades, have losses more often. So, the profits and losses of all traders should sum to zero if trading stocks is a zero-sum game, right? 

    Trading stocks is mathematically a zero-sum game is a logical conclusion. However, it is more complicated.

    Who wins and who loses when trading stocks?

    Trading is a zero-sum game only when you measure gains and losses relative to the market average. In the zero-sum game, there is always one winner and one loser. The amount that one trader profit has to be equal to the amount the other loses. That would mean the winners can profit only the amount that losers are ready to lose.  

    This is true, but we come to something known as market capitalization. That’s the number of company’s shares outstanding and times by its market price per share. The volume of transactions is comparably small related to shares outstanding. The stock price could appreciate or depreciate only if traded below or above the market price. When traders hold their positions no one could lose or win. But when traders choose to exit their positions, some will be winners while the other will be losers. Yes, to this point everything is clear but trading isn’t a poker game where the winner takes it all. It is the opposite a bit. 

    Is trading stocks a zero-sum game?

    The stock market is an open system. The presumption that trading stocks is a zero-sum game comes from another presumption that the stock market is established by a constant and non-changeable number of securities traded. That would mean no stocks or other assets enter, no exit. As we know the reality is different. Publicly traded companies can issue more stocks and also they can buy back their shares to increase the price while diminishing the number. Also, some companies declare bankruptcy and become not publicly traded or bought by other companies. So, the stock market is a kinda living being. It isn’t constant or fixed.

    Trading stocks is a zero-sum game if one trader gains only what the other loses, both expressed in money. When both buyer and seller strive for the same thing, we can say it is a zero-sum game. But trading stocks is connected with liquidity, risk management, etc. It isn’t just about money. There is something in the character and outlook of the participants. If they are similar the aims will be similar too, and the trading could become a zero-sum game.

    Trading stocks is zero-sum only when the competition is excellent, only when it is perfect. That would mean the traders on both sides, buyers and sellers, have the same information and make decisions that lead in the same direction to the same conclusion. For example, the ABC company’s stock price is going to drop. Buyers and sellers both have that information and buyers would like to buy that stock at a lower price while the sellers would like to sell it at a higher price. When their particular interests match each other the trade occurs. Only then, we can talk about trading stocks as a zero-sum game.

    Is day trading a zero-sum game?

    Day trading could be a zero-sum game. Here we can find an equal number of winners and losers. The most popular markets among day traders are options and futures markets which are zero-sum markets. How does this work?

    Let’s say you\re the one who holds the option that makes a profit. On the other side is the trader who wrote the option. The second trader, the seller of that option will lose the same amount. 

    Who are the winners and who are the losers in a zero-sum market? 

    You may think that all depends on luck. But you’re wrong. The real winners are traders with discipline. The winners have a trading plan, they know where and when to set limits, and never trade based on emotions. Instead, they use accurate data. So, the futures and options markets are zero-sum game markets. 

    But when we come to the stock market it could be real nonsense to claim it is a zero-sum game.

    Where is the difference?

    Let’s say, for example, if the economy is growing, companies’ profits rise, what is going to happen? How could this condition influence the stock price? Of course, the stock price will increase. In such circumstances, we will have more winners than losers among traders. Especially among long-term participants. Of course, some days it is possible to see more losers. That is the reason why some people understand the stock market as a zero-sum game.

    Trading stocks isn’t a zero-sum game

    All trades in the stock market are based on future expectations. Every single trader has different risk tolerances. The market always counts on it. If part of traders are selling their stocks that does not necessarily mean they are losers. Every trader has a particular and different goal when trading. For example, one can decide to hold the position until making a particular profit. So, what does a trader have to do when reaching it? Such a trader will exit the position to book profit, it’s so natural. The trader who is buying that stock may end in losses since there is no guarantee he/she will profit also. But what if the second trader proceeds profiting? Can you see, both sides, seller and buyer are winners.

    Bottom line

    So, trading a stock market is a more win-win situation than a zero-sum game. When trading stocks always keep in mind that some stocks pay dividends. That is an important factor when discussing stock trading as a zero-sum game. It isn’t rare for investors to get more money from dividends, even more than their initial investment was. The stock trading isn’t just a relation among sellers and buyers, it is more. That’s why we can’t say stock trading is a zero-sum game.

  • Shooting Star Candlestick Pattern

    Shooting Star Candlestick Pattern

    Shooting Star Candlestick Pattern
    The shooting star pattern represents one of the most important candlesticks patterns in trading. It can decide the entries and exits of your trades.

    Shooting star candlestick pattern is a bearish reversal pattern that appears at the top of uptrends. How does this pattern appear? A Shooting star candlestick pattern is formed when the price of the open, low, and close is approximately the same.  

    A shooting star candlestick pattern is actually a bearish candlestick. It’s easy to notice it.  It has a long upper shadow, small lower shadow or there is no this shadow at all, but there is a small solid body close to the low of the given day. To make a long story short, a shooting star candlestick pattern appears when the security opens, develops notably, but again closes near the open. Traders-Paradise wrote a lot about how to trade patterns, but this one is extremely important.

    How to recognize the Shooting star candlestick pattern

    To be sure it is a shooting star pattern, some conditions have to be fulfilled.  Firstly, the configuration must be created while the price rises. The other condition is that the shooting star candlestick’s body has to be half the size of a distance between the highest price on the given day and its opening price is. And, the last condition, as we said, there shouldn’t be any shadow near the real body or it can be a bit, barely visible.

    The bearish Shooting star candlestick pattern is created only if the low and the close are around the same. Traders recognize this pattern as very strong. When we notice this pattern in the charts it is confirmation that the bears were strong enough to defeat the bulls. Also, it is a confirmation that the bears closed the price below the opening price which means they pushed the price more. The Shooting star candlestick pattern isn’t a hundred percent bearish pattern, but nonetheless it is bearish when the open and low are approximately the same. Remember, they had to close the price BELOW the open. This means the bears were strong enough to halt the bulls but were not capable of sending the price back to what it was worth at the open. 

    When this pattern may occur?

    A shooting star candlestick pattern occurs when the market price is pushed up pretty notably, but then rejects and closes near the open price. This creates a long upper candle, a small lower candle, and a small body.

    Why is the shooting star candlestick pattern often seen as a possible signal of bearish reversal? Because the uptrend might not continue, meaning the price may fall. Don’t confuse the shooting star with the inverted hammer candlestick pattern.  Yes, both have a longer upper candle and small body. The inverted hammer flags bullish which is opposed to bearish reversal, and it is visible at the bottom of a downtrend, not on the top of an uptrend.

    What does the Shooting star candlestick pattern reveal?

    A Shooting star candlestick pattern indicates a possible price top and reversal. It is an extremely powerful signal when it occurs after a group of three or more continuous rising candles with higher highs. However, this pattern may happen during a phase of rising prices, even if a few candles were bearish.

    When the price advances strong to the top, a shooting star opens and continues to rise greatly over the day. This is a result of strong buying pressure during several periods. What is possible to happen? The sellers will come up to the scene in an attempt to push the price back down, close to the open price, and delete all gains for that day. If they succeed that will mean the buyers don’t have control anymore by the close of the day, and it’s possible the sellers will take over.

    In trading charts, the buyers are visible as a long upper shadow.

    They are buying during the day but it looks they are losing their positions since the price drops back to the open.
    After the shooting star, the candle forms. That is the confirmation of the shooting star candle. If you take a look at the chart you’ll notice the next candle’s high is under the high of the shooting star. Also, you’ll see how the price moves down and close near the close of the shooting star. On heavy volume, the first candle after the shooting star will be lower or will open around the previous close after which it will move lower.  That could indicate the price could go down further. In such circumstances, the traders may look for a short sell.

    In case the price increases after a shooting star, the price span could serve as resistance. For instance, if the price consolidates in the zone of the shooting star. If the price eventually remains to rise, the uptrend stays unreached, the traders should choose the long positions overselling or shorting.

    How to trade the Shooting star candlestick pattern?

    For example, the stock is growing in an overall uptrend. The uptrend becomes faster just before the appearance of a shooting star. The shooting star displays the price opened and pushed higher. In charts, it will be visible as an upper shadow, then closed near the open. The next day the price may close lower, which is a confirmation of a possibility for the price to move even lower. If the high of the shooting star wasn’t passed, the price could move in a downtrend for the next few weeks. When trading this pattern, it is a smart decision to sell long positions after the confirmation candle becomes visible.

    Let’s say you’re following the Tesla Inc. stock price and it opens the trading day at $990. Well, the price starts going down at $970 but suddenly good news generates the stock price to rise quickly, and it reaches a high of $1.020. Finally, it closes at $1.000. These changes create a shooting star candlestick.

    If you want to trade the shooting star candlestick pattern keep in mind that it could indicate a negative reversal, also. In short, market prices may go down.

    Limitations of this pattern

    Just one candle isn’t important in a major uptrend. Prices are changing. If in one short period the sellers are taking control, it could be irrelevant. That’s why traders need confirmation. They have to sell just after the shooting star, but even with confirmation, they have no guarantees the price will continue to drop. Not even how long. One of the possible scenarios is the price could increase after some short drop and continue to rise in a long-term uptrend.

    When trading this pattern you have to use stop-loss orders if you want to reduce the risk. One of the smart decisions is to use this candlestick pattern in combination with other methods of analysis.

    Bottom line

    The Shooting star candlestick pattern can indicate the end of an uptrend, so traders may decide to reduce the long positions or exit the trades. It is smart to use some other indicators with this pattern to determine potential sell signals. For example, you could wait a day to test if prices will proceed to fall. Also, you can use the break of an upward trendline. More aggressive traders can use the Shooting star candlestick pattern as a sell signal.
    The bullish version of the Shooting star pattern is the Inverted hammer pattern. Stay tuned, that’s the next.

  • The Settlement Period For Stocks – What is T+1, T+2, and T+3 Timeline?

    The Settlement Period For Stocks – What is T+1, T+2, and T+3 Timeline?

    The Settlement Period For Stocks - What is T+1, T+2, and T+3 Timeline?
    When trading stocks, the settlement refers to the approved, an official shift from the buyers’ account to the sellers’ accounts. This never happens quickly, it will take a few days.

    By Guy Avtalyon

    The settlement period for stocks means that the trade became official at the end of one, two, or three days. For example, you aren’t an official owner of the stock on the day you bought it, you have to wait for 3 business days while your purchase becomes official, meaning to settle. The settlement period for the stocks refers to a period after the trade date. Terms T+1, T+2, T+3, are broadly used to indicate the settlement period is one, two, or three days after the trade of any type of security is executed.

    Today, when almost all trades are done electronically, these terms are used to show that the stock you bought doesn’t yours officially until the third-day from the purchasing day. So, technology does not influence this, it is an exchange rule. To be honest, this is an important rule because it could happen that you bought or sold by mistake or you made some errors, so you’ll need some time to fix that. 

    Without a doubt, some people buy stocks accidentally, random. Later they would like to cancel their purchases when they notice a mistake or change their mind. In case the trade is a real mistake, both participants are agreed to correct the problem. And they would like to do that at the less cost possible.

    Also, there is another group of people in the stock market that don’t want to pay stocks with some weird idea that their buying will be characterized as a mistake if they prolong the time to settle them. In short, they are expecting to obtain these stocks for free. Hence, the settlement period for the stocks is an important period for the sellers or exchanges to clear up such a trade.

    The basics of the trade

    There are three phases of any trade. First is the execution which is an agreement between buyers and sellers to buy or sell a stock for a specified price. When the buyers and sellers are agreed, the exchange registers the trade on its ticker tape. 

    The next step or phase is clearing. It is an accounting process. When you bought your stock, meaning the trade is executed, the exchange should send the detailed report to the National Securities Clearing Corporation to verify the accuracy.

    The last step is the settlement. On the settlement date, the buyers execute payment for the stock and the sellers deliver it to the buyer. Typically, the settlement period for the stocks happens three days after execution.

    Purpose of settlement period for the stocks

    The settlement period for the stocks provides both sides of the trade to fulfill their side of the settlement. For example, the buyer will get more time for payment to do, also the seller might need time to fix something, like to deliver the stock certificate. Even today when the whole trading process is done digitally, the trade is official only after the number of days assigned by trade settlement rules. When the last day of the settlement period comes, the buyer becomes the true owner of the stock and registered as that.

    What are T+1, T+2, and T+3?

    Every time you buy or sell a stock, or some other asset, you’ll have two dates to keep in mind: the date of the transaction and the settlement date. This T refers to the date of the transaction. The figures T+1, T+2, and T+3 point the settlement dates of stock transactions that happen on a day of the transaction plus one, two, or three days

    The day of the transaction or the transaction date is the day when you traded a particular stock, no matter if you bought or sold it. For example, you sold your stock on May, 29. That date is the transaction date. and nothing will change it.

    The settlement period for the stocks is important for investors interested in companies that are paying dividends. The settlement date can decide which party will receive the dividends. If you are a buyer of the stock, keep in mind to settle the trade before the date of the dividend payment to get the right to receive the dividend.

    The end in the settlement period for the stocks, the last day, is the day when the new owner is assigned and the ownership is transferred. The transaction date and settlement date will not occur on the same day. It depends on the type of security.

    Consequences during the settlement period for stocks

    You have to understand what the two-day settlement period for stocks means. Let’s say you are selling the stock and expect money immediately. That is not going to happen. Yes, you’ll see that money in your brokerage account but it will not be available until the trade settles. Only after the T+3 period, you can withdraw your money.

    What could happen if you are the buyer and the stock price dropped during the settlement period? Or you don’t pay in the three days? That will not get you out of the trade and the consequences are serious. 

    If you do not pay for the stock during the three days, the broker will sell it at any price. So you’ll have to pay for losses and penalties.

    Also, selling stock through the 3 days to profit and not paying for the stock is outlawed. It’s a so-called freeriding and refers to cash accounts. It’s better to use a margin account if you trade frequently.

    Stockholder of record and dividends

    When you buy stocks, you are not the stockholder of record until settlement completes. The investor who purchases stock, for example, two days before a dividend record date will not get the dividend. So you have to buy a stock at least three business days before the record date. In investors’ lingo, such a stock goes “ex-dividend”. 

    To decide which investor is qualified to get a dividend, the record date is part of a dividend announcement. The amount of the dividend and the payment date are included also. You must own the stock on the record date. Meaning the settlement date must be before or on the record date. The dividend payment date will occur a few days (sometimes a few weeks) after the previous date, the record date.

    For example, a company declared a $0.50 dividend payable to stockholders of record as of Jun 4, 2020. To have the right to the dividend, you should buy stock on or before Jun 1, 2020. That is three business days earlier. The following day, Jun 2, is recognized as the ex-dividend date. It will be the first day when the stock will trade without that dividend attributed.

    Why the settlement period for stocks is important?

    There are several reasons. This rule is important to limit the probability of errors, even today in this digital world. Also, it keeps the markets in order. For example, if the market is in a downturn too long settlement times might cause your failure to pay for your trade. When we have a limited time for the settlement period for stocks, the risk of financial difficulties and losing money is reduced.

  • 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.

  • 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.

  • Day Trading Stocks – Most Profitable Type Of Trading

    Day Trading Stocks – Most Profitable Type Of Trading

    For day trading stocks you need volume, volatility, and a trend or range tendency. When using a stock screener, enter your rules into the relevant fields to narrow the surplus of stocks down to a few.

    Maybe it is too difficult to explicitly say that one type of trading stocks is more profitable than the others but Day trading stocks is the choice of active traders because of its profitability. Why did we say it is difficult to point to the special one? Because it depends on what kind of trader someone is and, maybe much more, on which strategy the trader chooses to use. Also, it isn’t the same which market you trade and what assets you are trading. 

    The individual traders can make a few trades per day since it isn’t hard to enter and exit several trades daily. Of course, big investors would prefer long-term opportunities. 

    One is sure, getting into day trading stocks is a decision that no one should make in a hurry. You should take time to examine all difficulties, to learn them since day trading stocks requires very careful planning. Only in that way, you’ll be able to earn your life-time capital in just a few hours. Yes, it is possible because day trading stock is one of the most profitable types of trading.

    Before we jump into the day trading stocks we have to explain what day trading is.

    What is Day trading stocks? 

    Day trading stocks means the trader is opening and closing the position during one trading day. When a trader opens a trade at 10 PM and closes it before 2 PM we are talking about day trading. You can find the traders who trade day only, some will perform it depending on the situation and opportunities, but also, so many traders never implement day trading stocks.

    How does a day trader pick the stock?

    Of course, a day trader is very careful and never just picks a stock no matter which one. Day traders always estimate the reasons to trade a particular stock. And as the reasons are different, traders have different criteria and strategies.

    Since there are thousands of stocks in the market to choose from, the main question is how to do that? What is the best criterion, measure, method? It differs too. And if we try to figure it out, we can get confused. Look, some traders can find a new stock every single day. They are seeking stocks that are breaking out of patterns. Some are looking for the most volatile stock or the stocks that breakout of support or resistance levels. Also, some traders have the favorite stock or two and trade them every day for months or years. This isn’t without a good reason behind. If you know the particular stock very well, you’ll need less research on it. Since you already have the chosen one, you don’t need to search further for new stocks and breakouts or volatility. 

    How to find a stock for day trading?

    If you want to become a day trader, you have to pay attention to several things.

    Volume

    For a day trader, a stock volume is important to enter and exit trades. To explain this more. When the volume of the stock is high it is much easier to enter and exit the position and to do without slippage or with very little. Why is it important to avoid slippage or to lessen it? Slippage happens almost all times but generally during periods of high volatility when traders use the market orders. 

    It happens when a trader gets a different price than expected, no matter if such a trader is on an entry or exit from a trade. Slippage occurs when the market order or your stop-loss point shifts somewhere between the time of your entry and the time of the execution. This is especially noticeable during periods of higher volatility when orders are bigger than the usual amount of shares on the bid or offer.

    While choices vary, but many day traders will trade stocks with a daily volume of several million, some have over 90 million. That is a big number and it is hard to manage that. So day traders usually narrow the number of stocks down by using a stock screener. If they still have too many stocks to observe, the traders commonly reduce it to stocks with a volume of 3 of 4 million on a daily average.

    Volatility

    Volatility is important too because day traders need stocks with strong change during the day. The stocks have different volatility. Some will move 0.5% daily but others will move 5% or more per day. Picking the stock may depend on many factors, for example, reflexes, a trading style, your temper, etc. For the majority of traders, the stocks that shift 0.5% to 2% daily are the best choice since they can handle that volatility. Volatility over 5% daily is hard to handle. Only the most experienced traders trade these stocks.

    Trend and range

    These two components are important in day trading stocks. Traders differ by what they are trading, so we have trend traders, range traders and some that use both excellently. As you know, the trend is the direction of stock’s price, while the range is the difference between low and high prices over a particular trading time. The stock price is moving all the time. It can go down or up showing a downtrend or uptrend. A stock screener is very helpful here and will separate stocks with trend or range depending on your setups for the strategy you chose.

    How to learn day trading stocks?

    There are many ideas and methods to maximize profits from day trading. Nevertheless, managing the risks connected to day trading is most important.

    First, trade only the amount you can afford to lose. You must have aside some amount of money for day trading. Don’t rent money for day trading because it’s possible to lose it. Start with a small amount and keep strong control over losses until you get some knowledge and experience. Don’t think you can quit your day job immediately. Day trading is seductive, we know that. But you need to test your strategy when the markets get rocky, for example, during the recession. If you are profitable, you can easily shift to day trading.

    When to buy?

    Day traders try to make money by using small price movements in assets. They have to leverage vast amounts of money to do so. They are focused on liquidity. That allows them to enter and exit a stock at a favorable price. Further, they keep an eye on volatility, higher volatility leads to greater profits or losses. Trading volume is another thing that they are considering. High volume means there are a lot of people interested in the particular stock. When the volume is increasing that is a sign that the price will drop or go up. After you choose a stock you want to trade you have to learn how to recognize the entry point. Some tools can help you. For example, some news services, but it has to be a real-time service because the stock prices can be influenced by news.

    Quotes are important too. Electronic communication networks, for example, display the best open bid and ask quotes from various market players and can automatically pair and execute orders. 

    Intraday candlestick charts are useful but provide a rough analysis of price action. 

    Your entry point has to be defined very accurately, you have to know the exact point when you are going to enter the position. For example “during the downtrend” isn’t precisely defined. You have to define more specifically and test it too and find if there is a chance for that to be generated each day or more often. 

    Also, the direction has to be tested. You would like the price to go in your expected direction. After you check and test everything you may have a potential entry for your strategy. 

    After finding an entry point you’ll need to judge how to exit, or sell, your trades.

    When to sell?

    There are many ways to exit a winning position. For example, trailing stop and profit target. The profit target is the most popular. The other well-known price target strategies are scalping, fading, daily pivots, momentum. The best time to exit is when the interest in the stock is decreasing. The volume will show that. Your profit target should provide you more profit on winning trade than you would have a loss in a bad trade. For example, if your stop-loss is 2% away from your entry price, your take profit level should be more than 2% away. You have to know your exit before you even enter the trade. The exit level has to be precise.

    Bottom line

    Day trading means to take advantage of small price changes. It can be a profitable game if you play it carefully. Hence it can be a risky game for new and inexperienced traders who don’t have a strong trading strategy. This type of trading is connected to the high volume of trades. So you have to respect some general principles if you want to become a day trader.

    You may have profitable trades by following the patterns. More about it learn from the “Two Fold Formula” book, we recommend. But we also recommend to test it by using our preferred trading platform firstly.

    You might find these interesting too:

     >>> Is Day Trading Like Gambling?

    >>> Swing Trading and Day Trading – The Difference

    >>> The pattern day trader rule

    >>> Day Trading the Best Methods – Day Trading for Beginners

    >>> Day trading stocks – How to find best trading platform

    >>> What is the best day trading strategy?

    >>> Money Required to Start the Day Trading

     

     

  • Volatility Trading – How To Trade Volatility Profitably?

    Volatility Trading – How To Trade Volatility Profitably?

    (Updated November 2021)

    Volatility Trading - How To Trade Volatility Profitably?
    Volatility traders do not pay attention to which direction stock prices move, they are interested in the level of volatility itself.

    Volatility trading describes trading the volatility of the price of an underlying asset. Make a note of the difference, it isn’t trading of the price itself. Or in other words, volatility trading indicates trading the assumed future volatility of the index. Hence, it is buying and selling the anticipated future volatility of the asset. Every single asset in which price changes, actually manifests price volatility. So, traders that trade volatility looks at how much change, in any direction, will happen. They don’t pay attention to the price, they don’t want to predict the price itself. Such traders just think about how much the price of some asset will move in the future, in the stock price, for example. No matter if it will go up or down. And it isn’t random trading. They have developed strategies which we’ll present to you.

    But firstly, we would like to make clear what volatility trading is.

    For example, options are a favorite tool for volatility trading. Why is that? Well, many factors can affect the value of the option but a crucial for its value is the expected future volatility of the underlying asset. Hence, options with higher expected volatility are more valuable than options on instruments with low expected volatility in the future.
    Therefore, options represent an easy way to get exposure to the volatility of the underlying instruments. Basically, that expected future volatility of the underlying instrument of an option is a very important part when traders’ valuing the option.

    Factors important to determine the volatility

    We can recognize seven factors that determine the price of an option and they are also called variables. While all of them are variable only one is an estimate and represents the most important part. The known factors are the current price of an underlying asset, strike price, also the known part is calls and puts, meaning what is the type of an option. Further, we always know what is the risk-free interest rate, and the dividends on the underlying assets. But what we don’t know is volatility. The volatility is the most important variable to determine the price of an option. So we need to know what indicates volatility. 

    First of all, it is one of the “Greeks” – Vega. 

    It is the measure of an option’s price sensitivity to shifts in the volatility of the underlying instrument. Vega outlines the value that an option’s price changes as a response to a 1% move in the expected volatility of the underlying asset. This “greek” will show the change of an option for every 1% of the change in volatility. 

    Main points related to volatility trading

    Traders should pay attention to two main points related to volatility.

    One is relative volatility. It refers to the current volatility of the stock in comparison to its volatility over a given period. For example, ABC stock options that expire in one-month historically showed expected volatility of 15%, but current volatility is 25%. Let’s compare it with XYZ stock options that had expected volatility of 25% but now grown to 30%. If we want to estimate absolute volatility it is obvious that XYZ stock has a greater. But the stock ABC gained a greater change in relative volatility. 

    The volatility of the overall market is important too. The most used is VIX ( the CBOE Volatility Index) that measures the volatility of the S&P 500. VIX is also known as the investors’  fear gauge. When the S&P 500 experiences a sharp decline, the VIX increases sharply. Every time when the S&P 500 is rising gradually, the VIX will be pacified. 

    Strategies for volatility trading

    Straddle strategy

    As we said, traders who trade volatility are not interested in the direction of the price changes. They make money on high volatility, no matter whether the price goes up or down. 

    One of the most popular strategies for volatility trading is the Straddle strategy with pending orders. This strategy provides a profit when the price goes considerably in one direction, no matter if it is up or down. The best time to use this strategy is when the traders expect an extreme increase in volatility.  

    We said it has to be used with pending orders. The pending orders are orders that were not yet executed, hence not yet becoming a trade. They’ll become market orders when certain pre-specified conditions are met.
    If you want to use this strategy, you’ll need to identify a market in consolidation before some significant market release. Further, set a buy stop pending order above the upper consolidation resistance. A sell stop pending order you should set below the lower consolidation support.  

    In Forex trading

    For example, you are trading Forex and have a currency pair that entered a consolidation stage with low volatility. Just put buy stop orders a few pips above the upper resistance,  so a sell stop order should be a few pips below the lower support. No matter in which direction the price will change, it will trigger one of these orders and when the volatility continues, the trade will end up in a profit.

    The real trigger for pending orders is volatility. Volatility occurs a bit before important reports in the market and traders usually schedule this kind of trades before them.
    In a straddle strategy, the traders write or sell a call and put at the same strike price wanting to receive the premiums on both positions. The reason behind this strategy is that the traders await expected volatility to decrease significantly by option expiry. That allows them to hold most of the premiums received on short put and short call positions.

    Ratio Writing

    Ratio writing is simply writing more options than are bought. Use a 2:1 ratio, just two options, sold or written for every option bought. The aim is to profit on a large fall in expected volatility before the date of expiry.

    Iron Condors in volatility trading

    In this strategy, the traders combine a bear call spread with a bull put spread of the same expiration. They hope to profit on a reversal in volatility. The result would be the stock trading in a tight range during the life of the options.
    The iron condor strategy has a low payoff, but the potential loss also has a limitation.

    Go long

    During the high volatility, traders who are bearish on the stock can buy puts on it. Keep in mind the saying “the trend is your friend.”
    “Go long” strategy or buy puts is expensive. It requires, from traders who want to lower the costs of long put positions, to buy more put out-of-the-money or, the other way is to add a short put position at a cheaper price to meet the cost of the long put position. You can find this strategy under the name a bear put spread.

    Go Short

    The other name for this strategy is “write calls”. The traders who are bearish on the stock but think the level of expected volatility for options could decrease may write naked calls to pocket a premium.
    Writing or shorting a naked call is a very risky strategy, keep that in mind. There can be an unlimited risk if the underlying stock boosts in price before the expiry date of the naked call position. In such a case, you can end up with several hundred percent of the loss. To reduce this risk, just combine the short call position with a long call position at a higher price. This strategy you can find under the name “a bear call spread.”

    Use VIX to predict the volatility 

    Yes, you can recognize market turns by using VIX. To be more specific,  you’ll recognize the bottoms. Well, the stock market regularly rises gradually and the VIX will decrease in the same manner. So very low levels can occur. The investors don’t feel they need any protection. If these periods last longer, the VIX as a sell signal can be useless. 

    But, the nature of the S&P 500 is long-biased. If index declines investors start to buy protection (simple put options) fast. That pushes up the VIX. Can you see how great the “fear barometer” VIX is? When you notice a high VIX you can be sure the investors and traders are overreacting because the market drops. The VIX during times of market drops will behave as the spike. That is a good signal to discover when selling is overdone and the market is moving higher due to bounce or even bottom for a longer-term.

    This strategy is suitable when the VIX ‘sign’ appears during a bullish trend in the S&P 500.

    Bottom line

    Volatility trading is an excellent way to get profitable trades even if you are wrong about the direction of the price. Volatility is the main interest of volatility traders. They are seeking big changes in any direction. Use the VIX index as a measurement for volatility in the stock market. A rising VIX index indicates fears in the market. But it is a good time to buy stocks. The most popular trading strategy to trade volatility is the Straddle strategy.
    Also, traders use the Short Straddle strategy when they expect a lack of volatility, for example, the prices continuing with steady change.
    No matter which of these strategies you want to use, just keep in mind that you can profit no matter what is the direction of the price movement.

  • A Dead Cat Bounce – How To Trade It

    A Dead Cat Bounce – How To Trade It

    A Dead Cat Bounce - How To Trade It
    Dead cat bounce appears when the markets are in free fall. Is it possible to profit from it?

    A dead cat bounce is a phenomenon that occurs when a stock gap is lower by a remarkable percentage. For example, 5% represents that phenomenon. When the stock is always volatile within a continued period of downside this gap is over 5%. But when the stock isn’t volatile this gap of 5% must be taken into consideration.
    The pattern occurs during bearish moves and it is visible on the charts. A dead cat bounce pattern is an expected correction of a bearish trend.

    To put this simple

    Assume we have a stock that is in a strong downtrend. When it happens we can notice a lot of short-sellers in that stock. But not all are short selling. Some traders will believe that the stock has touched its cheapest possible price, it reached the bottom. So, they would like to close their short trades but some will hold the position longer. And what we have here is increasing buying pressure. The consequence is that such a stock will find its bottom and a short bounce will occur. But the stock proceeds in the direction of its initial trend and that will lead to a quick sell-off. 

    So, we can say, a dead cat bounce is a short recovery of the stock price from a long dropping. But it is followed by the increase of the downtrend. This recovery in stock price is a short-living one. If you take a close look at such a stock’s chart, you will notice that the downtrend is broken by short periods of recovery. They are very small rallies and the stock price can rise for a short time. 

    Why is this phenomenon called a dead cat bounce? Well, there is a belief that even a dead cat would bounce if it falls fast and far sufficient.

    How to identify a dead cat bounce pattern?

    First of all, it is a price pattern and often a repeating pattern. Don’t be naive and think it is a reversal of the current trend because this first bounce will stop and the prior downtrend will continue so the stock price will continue to drop. It is important to understand that a dead cat bounce isn’t a reversal. It appears after a stock price drops below its previous low. When the price of such volatile stock temporarily rises you’ll see it as short periods of recovery. That is due to traders’  short-sellings, they are closing out short positions or maybe buying on the hope that the stock touched the bottom.

    The problem is that we cannot identify this price action before it happens. We can recognize a dead cat bounce as a pattern after it occurs. We can try to predict if the recovery will be temporary by using some analytical tools as analysts do but there are no guarantees. Identifying the exact pattern before it happens is difficult even for experienced traders. We can see a dead cat bounce in the stock price for individual stock or for the group of stocks. Moreover, it can occur for the economy in general, for example, during the recession.

    A real-life example of this pattern

    We have it now, these days. The indexes had the greatest drops last week, three days in a row. The biggest drops after the Great Recession. Last month, February marked several days when the market has grown, but it fell under the pressure. The investors sold some of their positions when they noticed the market has risen after a long decrease. And they unloaded. But the downtrend continued so we have a typical dead cat bounce. During the first four days of last week, for example, Dow Jones declined by almost 18%. The indexes, in general, are oversold. The overall trend indicates further losses in the stock market. Coronavirus caused so much uncertainty.

    The stock price fell, short traders started to look for a point to take profits. Some others started to buy at a discount. And the buying pressure occurred since both groups pushed the price back up. Well, buying pressure isn’t able to maintain the stock price at the current rate. When we have too many short selling in the market and no one left to buy, the downtrend is going to continue. The stock prices are going to drop more. This unbalanced relation in supply and demand causes a dead cat bounce.

    How to recognize a dead cat bounce 

    First of all, a dead cat bounce is a retracement, it isn’t a reversal. So the rebound is short and unstable. Traders can notice in their chart the existence of intent bias coming amid a clear period of failing. That should help to identify a pattern. By using fundamental and technical analysis traders are able to discover if they are set for a leg lower or a broader recovery. This is an important issue for traders. Is a rebound going to form a significant bottom or it will be a short-living rebound? After a short rebound, the stock price will continue to decrease. As we said, if traders notice a sign of rapid selling and it lasts for a longer time, there will not be a bottom. It is a dead cat bounce.

    How to trade a dead cat bounce?

    A dead cat bounce is the reverse of a buy the dip thinking. While “buy the dip” means the traders are sure that the full uptrend is going to come back into play notwithstanding current losses, a dead cat bounce is different.
    For example, your chart highlights the run-up to $100 and each fall is met by buyers. Well, they are taking advantage of drop thinking that history can repeat and produce further highs. 

    But markets recognize each leg lower as being a forerunner to further losses. Periods of selling are longer, the rebounds are short, they may not last. The use of Fibonacci retracement levels can give us a tool. A shallower retracement is characteristic of a market that is prepared for added dead cat bounce.
    The sharp declines show that the market in free fall will see shallow retracements every time where there isn’t enough trust in any rebound. To notice a dead cat bounce, it is important to look for a breakthrough in the previous swing low, hence a continued downtrend. 

    Where to place a stop-loss order?

    Traders can look onto these shallow retracements as a method to start risk-to-reward trades. Your stop loss should be sized smaller. That could provide you a greater chance for a high risk-to-reward profile. Timing is extremely important when you trade this pattern. You need to stick to the trading rules of this pattern. Otherwise, you are at risk to lose everything. So, as we said, short the stock only when the price move breaks the last bottom formed.

    Use the previous swing low as an entry point to ensure the trade is opened upon verification that a dead cat bounce has happened. Then look at the dead cat bounce for a lead on where to place your stop loss. Stop-loss should be proportionately small due to the shallow nature of that rebound. Don’t place a stop loss at the peak of a dead cat bounce. It’s better to place it above. You will need a higher high to neutralize the bearish appearance.

    If you don’t use a stop-loss order you’ll end up in pain. What if the pattern you think you notice isn’t a dead cat bounce pattern? Are you short selling a stock, which reached a significant bottom? So it was ready to make a big move higher. This means you made the wrong decision.

    Don’t trade on margin and always set a protective stop-loss order when you want to trade this pattern.

    Timing is important

    When you see this pattern, you should intend for a minimum price move equal to the prior trend movement. Simply, if the price starts falling quickly and you verify a pattern, you should assume the price to fall at least with the same size. There you should take your profit.

    It is important to highlight that timing is essential when trading this pattern. If you don’t enter the market at the right time, there is a big chance that you’ll miss an important part of the bearish move. You have to be sure you short the stock exactly at the moment when you notice a candle closing below the last low of the stock.

    Bottom line

    When the stock drops more than 5% from the prior closing price but soon the price is back close where it opened, and the price then falls again, we have a dead cat bounce. It isn’t a bargain at discount. But you can make money on it
    The fundamental level in a dead cat bounce trade is near the open price of the initial gap down day. Usually, the price will retest this level during the same day. That will give traders the possibility to go short. This level will stay notable for days or weeks in the future. If you go short and the stock price falls more after that, the price can come back a week later again to test the same level. That would be a second dead cat bounce.

    One single gap may have three cat bounce trades. It is risky to trade this pattern but may give you a high profit.