Tag: trading

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

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

The share turnover ratio isn’t the most important measure you have to take into consideration when picking a stock but it is important to know will you need a lot of time to sell off the stock.

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

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

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

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

How is this possible?

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

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

Possibilities of share turnover ratio

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

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

The limitations of share turnover ratio

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

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

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

Is this measure important at all?

In short, yes.

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

Average daily trading volume

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

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

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

Bottom line

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

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

One suggestion before doing anything in real: use our preferred trading platform virtual trading system and check the two formula pattern.

12th March 2020
Safe Haven Assets Where Investors Have Begun Piling Into

Safe-haven assets are a fundamental place to avoid economic downturns. They express the markets that can protect the investment from losses when the market falls.

The safe-haven assets are investments that investors start piling into during intense market volatility and uncertainty. The main goal is to take a position into investments that are recognized as safe from losses. Even more, they have the capacity to rise in price while the bulk of other assets are declining value.

Safe-haven assets provide investors to limit their exposure to losses when market downturns and protect their capital invested. Like we have now when almost all markets plunged. When the markets enter tumultuous times like this one, the value of investments falls sharply. Investors are seeking assets that are not correlated to the markets. These kinds of assets are safe-haven assets.

So, we can say that safe-haven assets are able to hold or grow in value during the market turbulence.

Do anything to minimize the risk

Risk is real if you want to invest in stock markets. But it isn’t necessary to be exposed to great risks if you can avoid it. The point is to minimize the risks all the time, during the life of your investment. But when the market is declining almost all assets become too risky. In order to protect their capital, investors leave their position in unsafe assets and start buying something safer.
Safe-haven assets are those that don’t carry a high risk of loss. Historically that was cash, real estate, mutual funds, CDs, etc. You may ask, is gold a safe-haven asset? Gold as much as silver are historically used as a hedge against market or political uncertainty or the devaluation of a currency. But having in mind that gold coins have varied during the unstable political situations, it might be a wrong choice. Anyway, commodities are risky.

Better pick s risk-free assets, such as sovereign debt instruments or hold gold and silver trough futures.

What are safe-haven assets?

Safe-haven assets are the necessary answer to economic downturns. They are the markets that can protect investors from losses when other assets and markets fall. How can they protect your investment portfolio?
Safe-haven assets are holdings where investors and traders set their money to protect against major droppings. Safe-haven assets must allow protection from losses.

But what are the characteristics of safe-haven assets?

If you want trade safe-haven assets you must pay attention to liquidity. Such assets must have high liquidity. Why is this characteristic so important? Because that will provide you to enter and exit positions at a price you determine but without slippage. Further, safe-haven markets must have limited supply. You don’t want the assets with a supply that passes their demand. It is more likely for such an asset to decrease in value. For example, gold has a deficit of supply, but higher value when demand increases.

True safe-haven assets have to hold a certain level of demand in the future. So you, as an investor, must believe in the assets’ future, you must be confident about it. For example, that is the reason why silver isn’t so good investment choice. Yes, it has many purposes now, but it can be replaced in the future by some other material. On the other side, you might recognize copper as safe-haven assets because of its importance that increases over time. Almost every day, science, the industry find new ways to use copper.

Can you see where the essence of safe-haven assets? It is permanent. We cannot ever say that some temporary high valued asset belongs to the corpus of safe-haven assets.

Is gold the ultimate safe-haven asset?

For many investors, gold is a safer asset to buy and hold, safer than cash, because it is a tangible asset. Further, no one can print more gold as it is possible with banknotes. This is important because it provides the value of gold not being changed in this way. From the historical point, gold served as insurance during unfavorable economic circumstances. Gold prices regularly rise when drastic events happen. Moreover, gold is negatively correlated to the US dollar. Meaning, when the dollar is strong it is costly to buy and hold. That drives gold prices lower. And vice versa. Investors know this. Whenever the US dollar was trading lower, they started piling into gold.

What are other safe-havens?

When the market records turbulent circumstances the value of most investments falls sharply. So, investors want to buy assets that are negatively correlated to the overall market. They are moving their investments into safe-haven assets.
That can be defensive stocks, such as consumer goods, utility, biotechnology, healthcare. These stocks tend to resist the market’s downturn. People are buying food, drugs, they need health care and groceries. Also, don’t think that real estate due to its lack of liquidity isn’t a safe-haven asset. The real estate has a constant income flow that can offset the liquidity.

Infrastructure is also safe-haven assets. So, even though the markets are going down there are plenty of ways to stay invested.

Building a safe-haven assets portfolio will need some additional attention to optimizing returns. But the results may be quite surprising. But there are safe-haven currencies also. For example, the Japanese Yen (JPY) is seen as one of the most stable safe-haven currencies.

Can we trade safe-haven assets?

Of course, we can. So after we’ve recognized safe-havens assets, want to trade them. The question is how and when to trade them. The possibility isn’t questionable. Let’s say this way, a market downturn is likely to hit due to the factors you can recognize.

If you want to move a chunk of your portfolio into safer assets there are several things you have to consider.

First of all, trading safe-haven stocks is practiced as a defensive tool. The aim is to overcome a declining economy as even defensive stocks may not generate a positive return. It’s true that the slow economy will let safe-haven stocks beat the market, but it doesn’t mean that you will profit.

When trading safe-haven stocks examine the beta of stocks before investing. Beta points the relationship between the stock and the market. If the beta is 1, that means the stock price is fully correlated with the market, but when the beta is above 1, the stock is more volatile than the market, and finally, when the beta is closer to zero the correlation with the market is smaller. Knowing the beta of the stock will enable you to hedge against volatility.

The P/E ratio will show you if the safe-haven stocks are undervalued or overvalued. The safe-haven stocks are well-known for being undervalued. Also, the stocks with high dividends, meaning greater than 6%, are a good pick for safe-haven stocks. At least, as much as the stock from a well-established company. Well-known brands or large-cap stocks will lose less in value than small-caps during the market downturns.

All these factors are important and you have to evaluate them before picking your safe-haven assets and adjust your new holdings to your risk appetite.

Currencies as safe-haven assets

Some currencies are recognized as safe-havens. In periods when the market is extremely volatile, currency traders would like to move their cash into safe-haven currencies as protection. Those kinds of currencies are the Swiss franc, the euro, the Japanese yen, and the U.S. dollar.

Forex traders have to pay attention to some currencies that might act differently to market shifts than others. Also, there is always a question of what currencies suit to be safe-havens.

Bottom line

The “safe-haven” refers to financial assets that investors turn to protect their profit from periods of market turbulence.
Safe-haven currencies, safe-haven stocks, gold, have historically preserved or increased their value during market downturns. They gave good protection against losses. Why shouldn’t they do such a thing for us now?

One suggestion before doing anything in real: use our preferred trading platform virtual trading system and check the two formula pattern.

10th March 2020
MACD Indicator – Moving Average Convergence Divergence

MACD is one of the most popular indicators used among traders. It helps identify the trends direction, its speed, and its velocity of change.

MACD is short for “Moving Average Convergence Divergence.” It is a valuable tool. Traders know how important it is to use MACD as an indicator. Also, how reliable is using this tool in trading strategies. But that can wait for a while, firstly, let’s explain what is Moving Average Convergence Divergence or shorter MACD.

It is a trend-following momentum indicator that presents the correlation between two moving averages of a stocks’ price or in some other assets. We can calculate the MACD, it is quite simple.

Just subtract the 26-period EMA from the 12-period EMA. EMA is an Exponential moving average.

Here is the formula:

MACD = 12-period EMA − 26-period EMA

The 26-period EMA is a long-term EMA, while 12-period EMA is a short-term EMA.

If you need more explanation about EMA, let’s say that the exponential moving average or EMA is a type of MA, moving average. EMA puts more weight and importance on the most recent or current data points. That’s why the EMA is also referred to as the exponentially weighted moving average.

The result we get by using the calculation is the MACD line.

The MACD is useful to identify MAs that are showing a new trend, no matter if it is bullish or bearish. But it’s the priority in trading, right? Finding the trends has a great impact on your account since that is the place where you can earn money.

To recognize the trend you will need to calculate MACD as we show you, but you will need the MACD signal line, which is a 9-period EMA of the MACD and MACD histogram that is calculated:

MACD histogram = MACD – MACD signal line

The main method of reading the MACD is with moving average crossovers. When the 12-period EMA crosses over the longer-term 26-period EMA pay attention since the possible buy signal is generated.

You can buy the stocks or other assets when the MACD crosses above its signal line.

The selling signal is when the MACD crosses below this line.

MACD indicators are interpreted in many ways, but the general methods are divergences, crossovers, and rapid rises/falls.

How the MACD indicator works

When MACD is above zero is recognized as bullish, but when it is below zero it is bearish. If MACD returns up from below zero it is bullish. Consequently, when it goes down from above zero it is bearish. When the MACD line crosses more below the zero lines the signal is stronger. Also, when the MACD line passes more above the zero lines the signal is stronger.

The MACD can go zig-zag, it will whipsaw, the line will cross back and forward over the signal line. Traders who use this indicator don’t trade in these circumstances because the risk is too high. To avoid losses they usually don’t enter the positions or close them. The point is to reduce volatility inside the portfolio.

The divergence between the MACD and the price movement is a more powerful signal when it verifies the crossover signals.

Is it reliable in trading strategies?

MACD is one of the most-used technical indicators. It is a leading and lagging indicator at the same time. So it is versatile and multifunctional, so being that it is very useful for traders. But one feature of this indicator is maybe more important. The indicator has the ability to identify price trends and direction, and forecast momentum, but it isn’t complex. It is pretty simple, so it is suitable for beginners and elite traders to easily come to the result of the analysis. That is the reason why many traders view MACD as one of the most reliable technical tools.

Well, this tool isn’t quite helpful for intraday trading but can be used to daily, weekly or monthly charts.

There are many trading strategies based on MACD but basic strategy employs a two-moving-averages method. One 12-period and one 26-period, along with a 9-day EMA that assists to deliver clear trading signals.

Operating the MACD

As we said, it is a versatile trading tool and the indicator is strong enough to stand alone. But traders cannot rely on this single indicator for predictions. They have to use some other indicators along with MACD to ramp-up success in forecasting. It works great when traders need to identify trend strength or stock’s direction.

If you need to identify the strength of the trends or stocks direction, overlapping their moving averages lines onto the MACD histogram is really helpful. MACD can be observed as a histogram alone, also.

How to Trade Forex Using MACD Indicator

If we know there are 2 moving averages with diverse speeds, we can understand the more active one or faster will react quicker to price change than the slower MA.

So, what will happen when a new trend occurs?

The faster lines will act first and ultimately cross the slower ones and continue to diverge from the slower ones. Simply, they will move away. When you see that in the charts, you can be pretty sure the new trend is formed.

When you see that the fast line passed under the slow line, that is a new downtrend. Don’t think something is wrong if you cannot see the histogram when the lines crossed. It is absolutely normal since the difference between the lines at the moment of the cross is zero.

The histogram will appear bigger as the downtrend starts and the faster line moves away from the slower line. That is an indication of a strong trend

For example, you trade EUR/USD pairs and the faster line crossed above the slower and the histogram isn’t visible. This hints that the downtrend could reverse. So, EUR/USD starts to go up because the new uptrend is created.

But be careful, MACD moving averages are lagging behind price since it is just an average of historical prices. But there is just a bit of a lag. It is not enough for MACD not to be one of the favorites for many traders.

More about MACD

As you can see, the MACD is all concerning the convergence and divergence of the two moving averages. Convergence happens when the moving averages go towards each other. Divergence happens when the moving averages go away from each other. The 12-day moving average is faster and affects the most of MACD movements. The 26-day moving average is slower and less active on price changes.

MACD was developed by Gerald Appel in the late ’70s. It is one of the simplest and most useful momentum indicators that you could find. The MACD utilizes two trend-following indicators, moving averages, turning them into a momentum oscillator. So it provides traders to follow trend and momentum. But the MACD is not especially useful for recognizing overbought and oversold levels.

Bottom line

The MACD indicator is unique because it takes together momentum and trend in one indicator. This special combination can be used to daily, weekly or monthly charts. The usual setting for MACD is the difference between the 12-period and 26-period EMAs. You can try a shorter short-term moving average and a longer long-term moving average to have more sensitivity and more frequent signal line crossovers.

The drawback of MACD is that it isn’t able to identify overbought and oversold levels since it does not have an upper or lower limit to connect these movements. For example, over sharp moves, the MACD can continue to over-extend exceeding its historical heights. Moreover, always keep in mind how the MACD is calculated. We are using the current difference among two moving averages, meaning the MACD values depend on the price of the underlying asset.

So, it isn’t possible to relate MACD values for a group of securities with differing prices.

Some traders will use only on the acceleration part of MACD, some will prefer to have both parts in order.

The one is sure, MACD is a versatile indicator and every trader should have it as part of the tool kit.

9th March 2020
Falling Knife Stocks – How To Profit From Falling Knife

(Updated October 2021)

Falling knife stocks represent a high opportunity to make a lot of money, but they have a tremendous potential to hurt the traders’ portfolio.

The falling knife stocks represent the stocks that have felt a speedy decline in the price and it happened in a short time. A ‘falling knife’ is a metaphor for the quickly sinking in the price of stocks. Also, it could happen with other assets too. We are sure you have heard numerous times “don’t try to catch a falling knife,” but what does that really mean?

That means be prepared but wait for the price to bottom out before you buy it. Why is this so important, why to wait for the stock price to bottom out? Well, the falling knife can rebound quickly. That is called a whipsaw. But also, the stocks may fail totally, for example, if the company goes bankrupt.

Even if you know nothing about investing, you know the phrase “buy low sell high.” But it is good in theory. In practice…

Okay, let’s see! Suppose we have a stock with price drops. Firstly it was just 10%. No problem, we could survive that, we can cover that loss in our portfolio with gains on other assets. Oh, wait! Our stock continues to fall more and more, by 30%, an additional 40%, 60% even 90%. All this happened in a few months, for instance. That is the so-called “falling knife.”

The falling knife definition

Falling knife quotes to a sharp fall, but no one can tell what is the precise magnitude or how long this dropping will last until it becomes a falling knife. But certainly, there is some data we can use to determine if there is a falling knife at all. So let’s say that the stock that dropped 50% in one month or 70% in five months are both recognized as a falling knife. They are both falling knife stocks.

The general advice from experts is “don’t try to catch the falling knife” and it is even more valuable for the beginners. In any case, anyone who wants to continue to invest in that stocks or wants to trade them should be extremely cautious. This kind of stock could be very dangerous since you may end up in a sharp loss if you enter your position at the wrong time. So try not to jump into stock during a drop. Of course, traders trade on this dropping. But traders don’t want to stay in position for a long time, they want to be in a short position, so they will examine all indicators to time the trades. For beginners, this is still dangerous.

How do these stocks work?

They work very simply. At first, you will read or hear some bad news about the company. When bad news appears the stock price can drop. And it isn’t something unusual in the stock market. Yet, if this degradation continues we can see investors selling in a panic. That can decrease the price further. So we have two possible scenarios. For example, after bad news, some good news may appear. Let’s say the company’s management is trained for damage control and we are sure that the stock will rebound. This situation is greatly profitable for the investors who purchased this stock at a cheaper price before it bounced back.

But what is a possible scenario if the company continues to weaken?

Even bankruptcy is possible. Well, in such a case the investors could have enormous losses.

So, the precise conclusion is that falling knife stocks can generate huge gains but also, a great loss. That depends on when you enter the position. Well, you know, some stocks never rebound. Even more, they didn’t reach the original price for years since they began to drop.

To have a real chance to make a profit from falling knife stocks you must have a firm plan. What do you want to achieve? If you want a short trade, maybe it is better to wait until the stock ends its dropping.

Falling knife as an opportunity

But you might think this “falling knife situation” is a great opportunity to buy the cheap stocks that will grow in the future. That’s legitimate, of course. But instead of investing all the money you have at once, try to buy that stock in portions. One bunch this week, the same can be bought in the next week, etc. There is another way too. Let’s assume you want to invest in this stock $10.000. The original price before dropping was $500 per share, now it is $200, so buy that $500 for $200 and wait for a while until the price drops more, to $100, for example. Then you can buy another $500 for $100, etc.

The point here is that you have a plan in place and stick to it since you will not have time to make a proper decision during the regular market hours because this kind of dropping in stock price is moving too fast. For your plan to be successful, it is MUST have an exit strategy. That is particularly important for traders that are waiting for the quick bounce. The exit strategy will provide you to protect your trade to not become an investment. The essence of knife catching isn’t to buy low and sell lower.

Make big money when the stock prices go down

There are some rules if you want to profit from a falling knife and traders should follow them.

Buying a stock that is falling sharply is a bad idea for beginners, to make this clear. Picking the bottom can generate massive gains, that’s true but only if you buy at the right time. If you miss it, it is more likely you will end up in huge losses. And that happens remarkably frequently.

But at some point, when the falling knife is so close to the bottom and when the risk of additional loss is at a minimum. So the potential gains can be enormous. So, reach it out and take it. Yes, we know it is easy to say but how to do that?

The first rule for profiting from the falling knife is: Don’t buy a stock on the first drop. You see, when the first bad news comes, it is more likely that there will be more bad news that will cause the stock price to drop further. Even if there is some good news for a short time, the more bad news will come in most cases. So, wait for that and after that happens, you can start to buy but be sure that technical requirements support the bottom. That is extremely important if you want to generate massive gains.

Use MACD

The moving average convergence divergence momentum indicator is helpful to reveal where a stock is going to head next. For example, if the stock is hitting the new lows and the MACD indicator also hits the new lows, you have a strong downtrend that is very possible to continue. But if the MACD is rising the trend is going to reverse. That means that the risk of catching a falling knife is reduced. So, we have a stock that dropped at least twice but the rising MACD shows the trend is going to reverse. Don’t wait anymore, buy it! This is a low-risk point, so traders should buy that stock since its price will rise.

That’s how you can make money from a falling knife and with low risk.

Bottom line

The falling knife stocks can be a great opportunity, but they can hurt your portfolio, also. For experienced traders, yes. But if you are a beginner, it is better to stay away from these stocks until you learn more. Even not all experienced traders are not able to handle the “falling knife” stocks and catch the falling knife and recognize the whipsaw. Sometimes, you’ll have to wait for a long time until you make any gains from this trade. Don’t expect the stocks can bounce back over the next day or week. It is more possible to wait for months after you enter the trade to see the gains. But it can be worth it. Anyway, it is worth knowing how this thing works.

8th March 2020
52-Week High or Low – Should You Buy Or Sell Stocks

(Updated October 2021)

When you see a stock going to its 52-week high or low, what is your first reaction? Do you think you should sell or buy it? This is a difficult part and we will explain why.

A 52-week high or low is a technical indicator and every investor or trader should keep an eye on these tables because it is the simplest way to monitor how our stocks are doing. For example, you want to buy some stocks and this can be the best way to check their recent prices. A 52-week high or low will help you to determine a stock’s value and usually can help to understand the future price changes.

Investors often refer to the 52-week high and low when looking at the stock’s current price. When the price is nearing the 52-week low, the general opinion is it is a good time to buy. But when the stock price is approaching the 52-week high, it can be a good sign to sell the stocks.

So, the 52-week high or low values might help to set the entry or exit point of your trade.

Prices of stocks change constantly, showing the highest and lowest values at different periods of time in the market. A number marked as the highest or lowest stock price over the period of the past 52 weeks is called its 52-week high/ low.

How to determine the 52-week high or low

It is based on the daily closing prices. Don’t be surprised if you can’t recognize some stock. Stocks can break a 52-week high intra-day, it may end up at a much lower price, a lot below the prior 52-week high. When that happens, the stocks are unrecognized. The same comes when the stock price hits the new 52-week low over the trading session but doesn’t succeed to close at a new low.

Well, the stock’s inability to make a new closing 52-week high or low can be very important.

If you watch the prices for some stock, for example, over a particular period of time, you will notice that sometimes the price is higher than others but sometimes it is lower than all others.
The 52-week high or low for the price of any actively traded stock (also any security) shows the highest and lowest price over the previous year that is expressed as 52 weeks.

For example, let’s assume you are looking at changes in the price for some stock over the prior year. You found that the stock traded at $150 per share at its highest and $80 at its lowest. So, the 52-week high or low for that stock was $150/$80.

When to buy a stock

What do you think? Is it better to buy stock from the 52-week low record or from the 52-week high record? You can find these lists on financial sites like Yahoo Finance, for example. On one side you have stocks with new highs and on the other, you have stocks with new lows. What would you choose?

This isn’t a trick question. If you follow the rule “buy low, sell high” you might think that some stock from a 52-week low list can be a great opportunity. You may consider it an unfortunate event and suppose the stock price will go up. Remember, you have only this information – highs and lows. Buying stocks at the bottom can be a good choice but you don’t have other important information about the company to make a proper investment decision. So, when making your decision based only on one info, you are gambling. You have no guarantees that the “bottomed out” stock will go up to the top or catch upward momentum. So, you will need more information to pick the stock from the list.

But the dilemma may come the same with stocks from the 52-week high list. You might think these companies are successful and the progress will continue. Well, sincerely, you might be right. The company’s management is doing something good. There are a lot of chances for that stock to keep moving forward. So, you will make a slightly better guess than buying stock from the 52-week low list.

You see, the rule “buy low, sell high” isn’t always accurate. You don’t have any hint that stock from the bottom will ever come out.

The 52-week high or low is just an indicator of potential buying or selling. To do that you will need more information.

Trading based on the 52-week high

What’s going on when stock prices are heading toward a 52-week high? They are rising, it is obvious. But some traders know that the 52-week highs represent a high-risk. The stocks rarely exceed this level in a year. This problem stops many traders from opening positions or adding to existing positions. Also, others are selling their shares.

But why? The rise in the stock price is good news, right? Profit is growing, the future earnings outlooks are bullish. This can keep prices successful, at least for a week, sometimes for a month. If the news is really good and fundamentals show the strong result the stock breaks beyond the 52-week high, share volume greatly grows and the stock can jump over the average market gains.

But how long can this effect last?

The truth is (based on research, one important is Volume and Price Patterns Around a Stock’s 52-Week Highs and Lows: Theory and Evidence, authors Steven J. Huddart, Mark H. Lang, and Michelle Yetman) shows that the excess gains decrease with time. This research reveals that small stocks initially provide the biggest gains. But, they usually decrease in the following weeks. Large stocks generate greater gains initially, but smaller than small stocks do. So, excess gains that generate small stocks far pass these the larger stocks generate during the first week or month following the cross above the 52-week highs.

This is very important data for traders and their trading strategy would be to buy small-cap stocks at the moment when the stock price is going just above the 52-week high. That will provide them excess gains in the next weeks, according to the research mentioned above.

Intra-Day 52-Week High and Low Reversals

A stock that makes a 52-week high intra-day but closes negative may have topped out. This means the price may not go higher the next day or days. Traders use 52-week highs to lock in gains. Stocks hitting new 52-week highs are usually the most sensitive to profit-taking. That may result in trend reversals and pullbacks.

The sign of a bottom is when a stock price hits a new 52-week low intra-day but misses to reach a new closing 52-week low. This happens when a stock trades is notably lower than its opening, but rallies later to close above or near the opening price. This is a signal for short-sellers. They are buying to cover their positions.

Bottom line

To conclude, the strategy of buying stocks from the 52-week high list breaks the rule buying low. Yes, but hold on! The rule “not buy at high” can be applied to stocks that unnaturally bid up some kind of market over-reach. For example, the stock whose price has surged 30% over a single day. Drop it out! Neglect them.
You want stocks with steady growth over a long time into the list. When you recognize such stocks, start to evaluate them. Examine every single detail about the company.

Buying for bargains is a good strategy, but it is also a good cause for selling a stock at or near its 52-week low.

Finding the winners can be trickier. One suggestion, start from the top and eliminate every stock with an unrealistic increase. They are on the top by mistake, trust us. Find stable winners. Do we have any valid proof that they will not continue to rise? Of course, they can.
If you want to trade based on the 52-week high effect, keep in mind, it is most functional in the very short-term. The largest profits come from rarely traded stocks with small and micro-cap.

Remember, the 52-week high or low represents the highest and lowest price at which a stock has traded in the prior year, expressed in weeks. It is a technical indicator. The 52-week high describes a resistance level and the 52-week low represents a support level. Traders use these prices to set the purchase or sale of their stock.

5th March 2020
How to Create a Trading Plan

A trading plan is a set of rules and guidelines that define your trading performance, financial goals, rules, risk management and criteria for entry and exit positions.

Why is it so important to know how to create a trading plan? Because if you know how to create a trading plan, you’ll know on which market to trade, how to cut your losses, when to take profits and find other opportunities for investing. But first, we have to understand what a trading plan is.

A trading plan is…

It is a full decision-making tool that helps you determine what, when, and how to trade. Every trader has an individual trading plan suited only for her/his style, goals, risks tolerance, capital available, motivation for trading, the market you want to trade.

A trading plan is a methodical tool that helps traders to identify and trade securities. If you want to have a successful trading plan you have to take into consideration a number of variables such as time, risk and goals. A trading plan gives you control of how you will find and execute trades, the conditions you will buy and sell assets. Moreover, it determines how large a position you will take, how to manage it. Also, your trading plan will determine what assets you can trade, as well as when to trade or when not to.

But there is also one important step more. Never invest before you make your trading plan because your capital might be at risk. A trading plan will guide your decision-making process.

To know how to create a trading plan you must understand it is different from a trading strategy. Trading strategy means you know how and when to enter and exit the trade.

The benefits of knowing how to create a trading plan

Since the trading plan defines the reasons why you are making a trade, when and how you are making a trade, it is an outline of all your trades. If you follow your trading plan, you’ll be able to minimize errors and losses.

Okay, creating a trading plan isn’t the most exciting thing you can do in your lives, and maybe that’s the reason why so many traders think about it as an irrelevant thing. How to think about the trading plan while some sexy things jump every second? News, charts, trend lines, hot stocks are more exciting, right? Wrong!

Without a trading plan, you cannot use all these sexy tools, you have to couple them with your plan to produce reliable results.

What do you think now, do you need to know how to create a trading plan?

Frankly, the trading plan is not necessary to make a trade. You can trade without a plan. But, if you want to hit the road of successful traders, you will need it. We are pretty sure you don’t want a hold-and-pray strategy because it isn’t a strategy at all. It is a sure way to lose everything you have. Maybe it’s better to go to a casino where there will be more chances to win something. Remember, trading isn’t gambling.

And without a trading plan, you’re gambling. The truth is that you may have some winning trades from time to time, but your progress will be questionable. Your losses will be bigger than gains, think about this and do smart trading. Learn how to create a trading plan, so create it.

How to create a trading plan?

Follow the old saying: If you fail to plan, you plan to fail. Every trader should follow this expression as it is written in stone. While trading you have only two choices: to follow a trading plan and have a chance to win or trade without a plan and lose with almost 100% possibility.

So, let’s create a trading plan and see what you have to take into consideration while doing that. Here are some hints.

First, set your goals.

What do you want to get from the trade? Please, be realistic about your expectations toward profits. This will come with a bit more experience. Experienced traders, for example, expect the potential profit triples the risk.

Can you see how much you have to be focused on risk? So, you must focus on risk. Your trading plan has to mirror your risk tolerance level. You have to determine how much risk you are willing to take. How much of your portfolio are you willing to risk on one trade? And you have to do that for every single trade. The regular risk range is from 1% to 5%, but usually, it is 2%. If your account is small you can take a bit more risk to get a bigger position. But if you lose a predetermined amount at any period in the day, you get out and stay out. Take a break, and then attack another day, when things are going your way.

Do your research before you enter the trade.

Explore the big winners, take a look at the stock charts and find possible spurs to the value of a stock. Be careful while doing this. Your research has to be accurate as it can help you discover if the stock is going to perform in your direction. You can’t be sure 100%, but it will be easier for you to know that you did everything possible to avoid losses.

Importance of entry and exit in a trading plan

Every serious trader plans entries and exits. This means you must have a plan on when you enter the trade and where you exit. For that purpose, we are recommending our tool.

You must give equal importance to the exit of a trade if you want to make a profit.
Set a stop-loss, to secure your pull out if things aren’t going in your direction. But you really have to get out at that point. Do you know your profit target? Get out when your profit target is met, don’t be greedy.

Take a pen and write down your plan

Exactly. It is the best way to show how responsible you are toward your capital invested. It is your hard-earned money, you don’t want to fool around with that. Put your trading plan in a visible place, stick it to your computer, for example. Yes, we are recommending your trading plan has to stare at you all the time while you are trading.

When you exit your trade, review it afterward. You will need to study how the trade went. If something was right or wrong you will be able to repeat or avoid it. So, take notes and keep them in your trading log.

What do you have to determine else?

Your stock trading plan should include additional factors to ensure it is completed.

First is liquidity

Liquidity can be a problem. When trade stocks this can be a serious element that needs to be considered because you can find a lot of stocks with very low liquidity. This doesn’t mean you should trade only large-cap stocks. You wouldn’t like to limit your opportunities.
Just filter out the stocks without enough turnover to get in and out of the market quickly. For example, you can trade stocks that have an average daily turnover of 10 or 15 times the size of the position you want to take. Don’t avoid small stocks because they can provide you to trade wider.

Second is volatility

Your trading plan should take into account the volatility of the stocks. Some stocks are more volatile some less but, generally speaking, the stocks are volatile. This should befall your trading rules as part of a trading plan. So, adjust your trend filter for the volatility of the stocks. You may have a lot of benefits using that. Your trading plan should be adjusted for what you will do if stocks go bankrupt or are taken over at a premium. You have to position yourself if it happens and you have to do so in advance to protect your overall portfolio.

Bottom line

A trading plan should consist of all these factors mentioned above. The stock liquidity, volatility, risks, goals. Consider them when writing it. But even if you do this and more, there is no guarantee that your trades will make you money. As we said numerous times, the stock market is a zero-sum game. It is a system of winning and losing. You have to be prepared for that. One day can be extremely successful but the others could be a total disaster. There is no profit without risk and you can’t always win without an occasional loss. Remember, if you lose a battle, you may win the war. Don’t expect every trade to be a success and every stock in your portfolio to be a winner. Let your profits rise and lower your losses. That’s the way to win this game.

We hope you have a better picture of how to create a trading plan now.

4th March 2020
What Is Options Trading Examples

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

By Guy Avtalyon

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

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

What is options trading?

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

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

How does options trading work?

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

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

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

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

What are the advantages of options trading?

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

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

Cost less

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

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

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

Lower risk

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

How to use options as a hedge?

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

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

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

Do options have higher returns?

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

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

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

Do you understand?

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

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

Benefits of options trading

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

Bottom line

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

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

We’re doing smart trading.

2nd March 2020
Markets Are Down – Should We Invest Further

The spread of the coronavirus has disturbed investors. The fears of new outbreaks can push down global demand. The S&P 500 closed down 3% on Tuesday, the index is deeper in the red.

Markets are down, an inverted yield curve is noticed, coronavirus is progressing and spreading all over the world. Everything tells us that we should be afraid. This inverted yield curve is proof of investors’ fears. They are starting to fear the worst and sell in panic. Almost all benchmark indexes are decreasing. While we have several things that can help- us to avoid infection by COVID-19, what can we do to protect our investments?

Stock markets suffered two big drops so far this week. Coronavirus outbreak made a great influence on the global stock markets. An economic downturn has increased quickly following China. It is the reality now in the US, Middle East, and Europe.

The best sign of how this situation is difficult is visible among the investors who are looking for safe havens for their capital. But there are so many signs that worry us. The yields on U.S. government bonds are dropping to near-record lows and showing red flags. Further, returns are higher for short-term debt in comparison to the 10-years bonds meaning, yields continue inverted. Everything is opposite to the regular situation and some of the experts think that is the sign the recession is coming.

But our intention is not to cry over this situation. We would like to discuss how to turn this market downturn to our benefit. Is it possible at all? We are receiving controversial information from our governments, experts have their interests also. That makes confusion among investors especially when it is so obvious that stock markets are down. As we said, let’s try to find the way out there. The mother of all questions is:

Should we invest when the markets are down?

In short, yes. Why shouldn’t we? We should invest in any case no matter if the stock markets are down, sideways, or they are up. The essence of investing is to reach settled financial goals. To do that we have to keep our eyes on our investments, to the stock prices, no matter what kind of market condition is. That’s a general duty while investing. Otherwise, everything will go apart.

Let’s say you are going to shop and you notice that something you planned to buy is on discount. What will you do? Step away? Will you buy it or not? Of course, you will. When it comes to stocks, why would your decision be different? As far as we remember, investors’ mantra is “buy low, sell high”, right? Actually, when everyone is selling, the smart decision is to buy. That is according to Warren Buffett. But where is the catch? Don’t buy if you didn’t plan that or just because you saw someone is doing so. Buy only after you made a consistent plan of your investment. Buying cheap stocks just because they are on sale can be the wrong move.

Buy, buy, buy

We don’t want to diminish the influence of the coronavirus outbreak. It is a horrible situation, a possible dead-ending disease, very dangerous. But what we know is the financial markets have been almost immune to the influences of earlier epidemics.

Stock prices are affected by various outside factors and some of them have nothing to do with companies’ operations, that’s true. The prices will decline on the bad news such as the coronavirus outbreak or a downturn in the overall economy. But that has nothing to do with the company, to repeat. The circumstances like this one actually represent a great opportunity. For example, you were looking at some company for a long time and its stock was too pricey for you. Due to the markets down it becomes cheaper. Maybe you have enough capital to buy it since it is such a good market player.

We have a great reason to change our position and buy more stocks

Why not? It is a good time to buy more at fire-sale prices. But what if you don’t have suitable cash to deploy? Think! Maybe you can find one or a few investments in your portfolio to sell and buy a new one.

Always keep in mind, your investment decisions should be based on your financial goals, not managed by market movements. That’s why you should buy stocks when markets are down only if you wanted particular stock and it is suitable for your goals. Don’t rush with that because buying stocks just because they are cheaper at this very moment is also an emotional reaction as much as selling when the markets are down.

What are we doing instead?

Well, we are doing smart trading. We must have a plan, investing schedule and stick with it. That means we already planned some cash reserve and we are ready for a situation like this new market downturn is. So, we are able to look at this like a buying opportunity that comes.

Buying stocks while everybody is selling isn’t a strategy without risk. There is always a chance that the market doesn’t go to the bottom. But if we buy when the markets are down, we have a chance to have larger gains when the market rebounds. More than the investors who didn’t buy.

A few days of bad news are not a reason to sell in panic

To be honest, drastic drops can be upsetting to look at. The markets trended upward for so long and suddenly we have this. But we have to consider this situation as a buying opportunity.
The worst strategy when the markets are down is to sell your portfolio. Okay, maybe the worst of the worst is to take the short positions. The stock market knows how to punish investors who are too bearish.
Rather, maintain a notable piece of your portfolio in stocks, even now when the stock markets are down. The point here is to be in position and take advantage when the markets turn forward. Of course, you would like to protect your portfolio against dangerous market forces as much as possible.

So what and how to do it?

Well, you have to reduce your stock exposure but you have to keep the main strengths. Keep the winners. You can sell the positions that are not performing well because they represent the weak part of your portfolio. So, during the market correction or situations like this one when the markets are down, those stocks or funds might get the most critical hit. Further, even when the markets are down you may have some positions that are extremely good but you assume that they will not play so well. Your actions should be – take a profit. Yes, why not? Just do it at market peaks to have profits.

Further, consider the way you invest, maybe it’s time to change something. Maybe index-based ETFs are not the best choice, they work well during bull markets, but bear markets are less safe.

Don’t follow the prevailing sentiment and sell investments. Rather sell risky positions, for example, some with a high beta. Also, think about selling some with a history of volatility. Yes, we know there are some investors who sell their positions in the most steady companies to avoid losses. What we can say is that they are very nervous. Who else wants to sell everything and sit at the sideline? You know, the market will bounce back one day. But if you sell everything you hold now you will miss big gains when it happens. Sell risky investments only, as we said. Hold blue-chip companies!

Bottom line

The keyword for overcoming the market’s downturn is advance preparation. There is no better strategy. The nature of the stock market is to experience declines from time to time. Preparations mean having enough cash to provide ourselves more opportunities in investing. Think about this downturn as a normal cycle. As said, it is so normal for the stock market to go down after it reached its peak. Savvy investors made some other preparations while the market was at the peak. They already lowered their exposure on time.

But it isn’t too late yet. At least once in life, every single investor has to deal with weak market conditions. So, we truly believe you are prepared for this one. Stay calm, lower your exposure to stocks, sell stocks that are not good players, buy more. But never try to stay at the market with knee-jerks reactions. Don’t sell in panic, that will ruin your investments, your capital, family and finally you. Stay stick with your investment goals and wait for the market to rebound. It is the only proper way to overcome the market’s downturns.

26th February 2020
Trading After And Before Regular Hours

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

By Guy Avtalyon

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

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

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

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

Stock market hours are not the same all over the world

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

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

Pre-market is…

What is Pre-Market?

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

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

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

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

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

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

Advantages of pre-market trading

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

Trading stocks after-hours is…

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

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

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

Advantages of after-hours trading

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

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

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

Also, there is a lack of liquidity.

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

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

25th February 2020
What Is Alpha In Investing – How to Beat the Market

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

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

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

What is Alpha of a portfolio?

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

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

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

How to calculate?

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

Here is the formula

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

and

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

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

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

Market risk premium = Market return – Risk rate of return

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

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

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

That was a step by step guide for this calculation.

Becoming an Alpha investor

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

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

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

What is the Alpha investing strategy?

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

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

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

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

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

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

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

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

Alpha in use

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

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

Alpha Described

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

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

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

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

What is beta?

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

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

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

Beta = Covariance/Variance

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

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

The formula for calculating beta is as shown above.

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

Limitations of Alpha

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

The other important point is to choose a benchmark index.

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

Limitations of beta

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

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

Bottom line

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

What is the difference between alpha and beta?

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

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

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

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

24th February 2020