Tag: trading

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Insider Trading Is It Legal At All?

Insider trading can be legal or illegal depending on if the information used is public.

By Guy Avtalyon

Insider trading means that someone buys or sells stock based on information that is not freely available to the public. An insider could be someone from the management or simply someone who has access to non-public information. Insider trading can be legal or illegal depending on if the trade is executed on the information that is available to the public or not.

To be honest, everyone likes inside information and rumors. The problem is that most of the time they are just useless gossip. Still, we are all seeking the inside information and have something that is unknown to the majority. If it is possible, to no one.

When it comes to trading, this method of playing based on inside information is seen as insider trading. And it can be legal. Well, in some cases.

What is insider trading

Insider trading is trading based on information that is not accessible to the public. In most cases it illegal but in some specific cases, it is perfectly legal.
Insider trading is illegal when info is received from the insider and traded by traders who received that info and do it before info becomes known to the public. Insider will always give you a hot tip. But is it trustworthy? How will you know that?

That is a crucial difference for insider trading. To make insider trading, the secret information being given must be issued by an insider.

How to recognize the right insider?

Such has access to important non-public information about a company. Usually, it is some from the high-level executives, that have almost all the information about the company’s operations. Well, not all of the high-level management recognize the fiduciary interest and put it ahead of its own. Also, an insider very often owns a big stake in the stock.

In insider trading, an insider can be a trader who acts based on inside info that is not public data.

A legal insider trading

That is a completely different story.

According to the US Securities and Exchange Commission, insider trading can be legal but under some circumstances. For example when a CEO of some company purchases stock of the company he is obliged to report to the Securities and Exchange Commission. Also, legal insider trading is when workers exercise their stock options and buy shares of stock in the company that they work for.

How does illegal insider trading work?

Illegal insider trading is different than legal insider trading. But when it is in violation of the law?

For example, a friend of the CEO of a company heard that his friend could be accused of fraud soon. That info he uses to short shares of his friend’s company because he had the info about bad news that will occur in the future and that will cause the stock price to go down.

The other example is, let’s say, a board member of a company and woman. She knows that the merger is going to be declared in the following days and she assumes the company’s stock price will go up after that. What she is doing? She is buying more shares but not always in her name. Such can buy shares in her husband’s name or parents. That is illegal insider trading.

We are pointing only a few examples of illegal insider trading that may occur. Don’t do that, you may end up in prison.

Does insider selling suggest it’s time to sell?

Acts speak louder than words could ever do. Management is motivated to tell you why should you have to buy the shares of their company. But the insider will tell the true story about the company’s worth. A trend of selling or buying among insiders could give us a clue about the company’s future in the market.

The information that insiders are selling their stocks might give some benefits. Traders may use them to estimate where a stock’s price might go and how insiders price a stock since they have better insight. But remember all data must be public and available.

Anyway, be careful, it isn’t a precise formula. Think about the drawbacks too.

It will take you time and energy to find trends. Moreover, insiders are not always right. Don’t blindly believe in them because they might have some special reasons to sell or buy. And finally, you will get only a small part of large info and that may confuse you, so you may make a bad trade.

Where to find insider info

Speaking about the US stock markets, insiders are obliged to file SEC forms created particularly for insider stock trade reporting. But still, take your time to examine insider trades before you enter your buy or sell positions. Insiders’ information isn’t everything you need to make the right investment decision. You’ll need more.

The SEC made the EDGAR system to provide public access to the insiders’ activity. You can find it on the NASDAQ website. The point is to have the same data from a minimum of two insiders’ sources. Never rely only on one.

How to use insider information

Okay, your search gives you several reports on the company.

So, you can examine the data and find a trend. If your search of insider list displays buying actions, that should be a signal that the company’s management thinks the stock price will go up and want to profit from it as stockholders. But if you see that there is a lot of selling it is usually a sign that the stock price will go down. Insiders will always try to sell before stock prices drop. Anyway, it is only one info and you shouldn’t rely on just one. While you are looking for insider information try to read annual reports, statements, etc. Find other sources to support what you found as an insider trend. Then, you’ll be able to make a proper investment decision.

When you see the executives getting stock option grants and then selling a large part, you shouldn’t be worried. But if you see massive selling and without a visible cause, it’s time to think. Think because you have two options. One is to be a part of the crowd and sell your share or take advantage and buy a share at a bargain. And add to your portfolio to diversify it better.

Famous insider trading cases

The Wall Street Journal writer R. Foster Winans was sentenced to 18 months in prison in 1985 of giving information about stocks he was planning to write about. Two stockbrokers made about $690,000 thanks to his insider information. They were also sentenced.

Ivan Boesky paid $100 million to the Securities and Exchange Commission to compensate insider-trading charges that he made. He earned $50 million in illegal profits. Boesky pleaded guilty and was sentenced to 3½ years in prison in 1987.

Martha Stewart was sentenced. The problem was about her sale of ImClone stock based on a tip that she received from a broker at Merrill Lynch. She was sentenced to 10 months (prison and home confinement). Her stockbroker was also sentenced.

Also, a football player Mychal Kendricks was accused of insider trading after trading based on information he received from a friend. Friend? Yes, a friend who was a broker with Goldman Sachs.

And many others but don’t follow these examples, please. It’s too risky as you can see.

24th January 2020
Risks Of Investing In The Stock Market And Strategies to Avoid Them

Investing in stocks is a risky game. On some of them, you can have full or partial control.

Risks of Investing in the stock market is a necessary part of investing. If investors want great returns, it is necessary to take great risks. However, the greater risks will not guarantee you will have greater returns. So, additional risks will not always bring you huge returns. But if you are long-term-type investors, you must understand that there will be some periods of underperformance in the investments. And you have to be prepared for that and not panic. If you cannot handle your emotions while investing you are likely to have a smaller chance in the stock market. Taking a risk means to have a higher tolerance for risk. Well, if you are not comfortable with it, you will probably make lower returns. But one thing is in your favor – you will never make great losses.

Anyway, you must understand that there is a necessary trade-off between investment and risk. Greater returns are linked with risks of price changes.

So, it is crucial to decide what is your risk tolerance and you have to do so before you enter the stock market.

What do you want: to protect your initial capital or you are ready for a wild ride with all the ups and downs in the stock market to reach higher returns?
If you can take a low or zero portion of the risk, be prepared that your returns will also be very low. On the other hand, if some investment generates huge returns, think twice is there some high risk you cannot accept.

High-risk investments require to hold a position for a long time, not less than 5 years. Do you have a stomach for that? Why the time matter?

As an investor, you must have the capacity to hold it longer to give shorter-term issues time to fix themselves. But remember, higher levels of risks will not always result in high returns.

There are special risks which investors should be aware of.

What are the risks of investing in the stock market?

We will point on some of them. The risk can be a capital loss. Let’s say you picked up some stock of the company with suddenly poor performing and the market recognizes it as negative. The consequence is that stock price could drop, a lot under the price you paid for them. The stock may even end up worthless. Zero! In such a case, the company’s stock will not trade. Moreover, the company may be delisted.

Further, there is always volatility risk. Stocks are volatile assets, their price may shift significantly in price in a short time. And, also, there is an exceptional market risk influenced by external factors. In such circumstances, the whole market could decline and the stock prices will be affected too. Also, not the whole market has to decline but the sector could. For example, a specific sector may experience downturns. Well, while some will catch the losses but at the same time, such periods are a great chance to buy stocks at a lower price. You see, the stock market is a zero-sum game. You can profit only when some others lose.

Also, the risks of investing in the stock market could come from the nature of the stock. To be honest, the stock price is extremely sensitive to bad news or investors’ sentiment toward some companies. For example, the company issued a poor earnings report or published management changes. The investors may disagree with that and could start selling the stocks.

Very specific risks of investing in the stock market may appear if you try to sell or buy stocks at the wrong time. You must have the right entry but more important, you must have a great exit. The last is the hardest part of the stock market but doesn’t have to be. Check HERE.

As we said, these are just a few risks you can meet while investing in the stock market. The crucial part is to understand what kind of risks you may have with your investments and how you can handle them.

Strategies to avoid risks of investing

Frankly, it’s impossible to entirely avoid risks. What you as an investor can do is put them under control. Actually, you can control your exposure to risks to the agreeable level. The risk you can handle and want to take. For that to do you have to know exactly what are you investing in and identify the possible issues all of these before entering the market and buying a stock. When you identify the risks involved you’ll be able to handle them.

How to manage the risks?

Firstly, define your investment goals, risk tolerance, and limitations, and plan according to what you found. Invest only in a sector that carries a lower risk than you are prepared to take. Go below your possibilities when it comes to risks.

The other solution is a diversified investment portfolio. It will give you good support. Your investment portfolio must contain several different assets. Spread your investments on bonds, utilities, mutual funds, cash, along with the stocks. Never put your whole capital into one single investment.

Combine them, long-term investment, short-term, but be careful about changes in your fundamental investment.

Also, a good decision could be to add derivatives to your portfolio. You can use them as a hedge against the risk. For example, the stock price is dropping, instead of selling them you can avoid losses by shorting futures. Of course, you have to choose futures of underlying assets that match your holdings. The hard part here is the value of futures compared to your stock portfolio. Exchange-traded futures have standard sizes of the contract. Hence, sometimes they will not give you a perfect hedge and you can over-hedge or under-hedge your stocks.

The other stock market risk management possibilities

You can also adopt a maximum portfolio drawdown rule. What does it mean? You have to set limits to the size of the drop in your portfolio value you can allow. In other words, determine how much of your portfolio you can bear to lose. This will decrease your personal ability to make emotional changes at the wrong time.

Keep your focus on stock price, and the value of an investment. Of course, plan ahead. The valuation is actually the heart of long term risk. Smart investors may have the advantage of volatility if they use tactical asset allocation. Follow their example. That will give you a chance to buy more assets when the prices are low but also, to hold fewer stocks when the prices are expensive.

Historical data shows stocks purchased while valuations are low, provide higher returns in the long run. Contrary, buying while valuation is expensive, generates the returns below average.

Bottom line

Risks of investing are part of being in the stock market. Sometimes, you will need to take bigger risks to reach your goals.
Learn the risks of investing in the stock market and do your homework. Make choices that will help you meet your investing plans.
Examine the risk of your investments from time to time. You have to know they still satisfy your risk tolerance.
Once some phrase appeared, we’ll paraphrase it: Be willing for the best, but act like the worst is coming soon.
You must be able to shift fast if suddenly something wrong appears. And, never give up!

13th January 2020
Value Investing Is Coming Back

Value stocks have underperformed since the beginning of 2007. But Goldman Sachs and Morgan Stanley claim that they have great potential.

Value investing is coming back according to data from the last autumn. This granddaddy of all investment types was set up in the first half of the 20th century and it is still actual.

For example last year, value investing has gotten fired by a typical value sector, energy. Last September made value investors satisfied, as returns of winners among cheap stocks outperformed big companies by a wide margin. The value-stock rally was exciting, unexpected, and fabulous. The past 10 years weren’t good for value investing. Actually, the value stocks were underperformed the growth stocks. They had weaker performances than it was the case with growth stocks. Moreover, some fund managers didn’t want to invest in utilities. What a great mistake! Utilities are the value stocks backbone. Their explanation was the value stocks are too expensive. Really? The fact is that utilities had a great performance last year and those managers suffered in a loss.

Why value investing is still a good opportunity?

Historically, they beat Grand Depression, played well during recessions, and inflation periods. Moreover, growth stocks have not become more profitable. So, the value stocks should finally be better. The reason is simple. They are unfairly cheaper. And that’s the point of value investing – finding under-appreciated stocks trading at low prices.

The stock market analysts found that stocks traded with low P/E and P/B ratios can easily beat the wider market. This opinion is supported by the facts.

A historical outlook

At the time of the financial crisis in August 2007, the S&P 500 index has returned 175%. The total return of value stocks in the US market was 120%. The return of growth stocks was fantastic 235%. Let’s go in the past more. Almost 20 years ago, value investors were devastated. For example, in 1999 and 2000 were so bad years for the value investing that some value investors had to step out of the market and retired.

But let’s stay for a while in 2007 and analyze growth investing deeper. What did happen?

That growth-strategy outperformance ended with the fall of the dot-com bubble. Value stocks came out of favor after the 2007 Global Financial crisis. On the other hand, growth stocks are performing remarkably well. Value stocks became unfairly cheap. You can notice that investors are expecting this global trend to continue since the global economic growth is slow. So, value stocks are trading at a discount compared to its more expensive growth peers.

But, is this discount a reason to invest in value stocks? It looks like that because value investing builds up. Slow economic growth caused value stocks to continue to produce stable free-cash flows. Yes, their businesses have slowed, but not damaged. At the same time, some of the growth stocks become extremely expensive. Moreover, the risk of failure in growth stock investing during slow economic conditions has grown.

Value Investing continues to make the headlines and not only in the US but also in Europe. We all can witness an increased number of headlines and publications, most recently, on the coming death of value investing. But now, something has changed.

Value investing is not dead

Timing the market seems to be difficult for investors. The intraday volatility grew over the last year, therefore, investors prefer not to bet as it will hurt long term goals. But this situation is beneficial for value. The value stocks start to outperform.

That will be a major market change. Value stocks’ years-long downtrend begins to turn. For some, it may seem a bit strange because investors in more cases neglect bargains. Everyone is trying to catch the major winners, famous companies, expensive stocks. They prefer to overpay some stock because of excitement. Oh, how wrong they are! But as we said, value stock investing is coming back.

Firstly, value stocks are cheap.

Value investing is the main principle for equity managers. There is long-term potency to buying cheap stocks over expensive growth stocks. Value investing was attractive over the entire history. Why shouldn’t it continue?
No one could say value investing is dead.

Goldman Sachs predicts a new life for value investing

Value investing has been decayed after years of underperformance. But Goldman Sachs says there’s still great growth possibilities in this classic factor strategy. And here are some reasons behind.

Value stocks will come back in favor very soon.

David Kostin, Goldman’s chief U.S. equity strategist explained that during the last 9 years the difference in valuation of expensive and cheap stocks was wider than ever.

Kostin said: “A wide distribution of price-to-earnings multiples has historically presaged strong value returns. However, a rotation into value stocks would require a sustained improvement in investor economic growth expectations, potentially driven by global monetary policy easing.”

The renaissance is coming

Value investing has gone out of favor particularly because the economic expansion gets stretched longer. Value brands continue to falter due to modest GDP.

But this course could start to change for value stocks. In the US an easier monetary policy from the Federal Reserve could increase growth expectations. Also, a rate cut could support the economy additionally. Bankers announced that possibility. Also, we already saw signs of resilience in US value stocks last September. Analysts predict that value stocks could finally enjoy a rebirth in 2020. Value investing means buying stocks that are trading below their value in the hopes of notable profit when the company comes into favor.

By default, value stocks have underperformed since the financial crisis. The investors have shifted into more energetic growth stocks, for example into technology. But last autumn, growth stocks were trading at high valuations and they became too expensive. In the same period, value stocks have shown important strength.

From October last year, the Russell 3000 Value index has dropped 2.4%, and the Russell 3000 Growth index has experienced a worrying 7.1% reversal.

Yes, growth stocks had a bounce, and outperformed value stocks. But there is some rule pointed by Morgan Stanley’s analysts. The markets are in the process of a regime change. That means the investors’ willingness to buy growth stocks will decrease as interest rates rise.

Goldman’s High Sharpe ratio

For investors assured on value stocks comeback, Goldman has selected value stocks with “a quality overlay.” Do you understand what does it mean?

These stocks could easily generate three times bigger returns than the average S&P 500 company with similar volatility. It is Goldman’s Sharpe ratio basket composed of 50 S&P 500 stocks with the highest ratios. This ratio measures a stock’s performance related to its volatility.

Goldman named the stocks with the highest earnings-related upside to consensus target prices. That are Qualcomm, Western Digital, Marathon Petroleum, Halliburton, Facebook, and Salesforce.

Bottom line

Many of the world’s most successful investors hold value stocks. They are buying cheap value stocks and benefit as the companies manage to work better.

For this to work, the stock has to stay cheap, so the company spends money on tremendous dividends and buybacks. The other option is the company be re-valued at a more relevant valuation, meaning more expensive. That is happening when the market recognizes the previous mistake in valuation.

For example, take a look at Altria (MO).

When the evidence about how toxic smoking is, appears to the public and more and more people stopped to smoke, investors had a feeling that cigarette producers will have a problem, the stock valuation was low. Well, something different happened to the company. The fundamentals remained strong. These stocks had good returns and still have.

How is this possible?

The stocks had higher dividend yields and investors reinvesting their dividends. Very good play. Tobacco companies also reinvested. They were buying back their cheap stocks and increased their earnings-per-share and dividend-per-share.

Smart investors know that value stocks can outperform most other factors. Some of the cheapest stocks in the market today are banks, oil companies, and so on. Keep it in mind.

So is value investing coming back? Do we really need to think better what the definition of value is?

12th January 2020
Stocks Reached New Records in the First Five Days This Year

Stocks rose in the first five trading days in January. There is an old tale of the January Effect but is that true or myth?

Stocks reached new records in the first five days of this year. And when stocks play well in the first several sessions in some years like it is in this one, investors like to recall the “first five days” rule. The point is that this rule is, therefore, able to predict the market is often up at year-end. But is this true?

Stock Trader’s Almanac, which analyzes the market phenomenon since 1950, discovered that if the first five days have a good track record it is a good prediction for the whole year meaning it will be well in the stock market.

Actually, it is an old Wall Street “first five days in January” indicator and as we know the brokers are superstitious. They believe if the stock market during the first 5 days of the year reaches record, that represents the potential for the strong performance in the given year.
So, stocks are sending a bullish signal for this year, according to that old indicator. Well, it is a good way of pumping stocks. Bulls in the market do that.

Will the whole year be like this?

But is this a reasonable way to make predictions for the whole year? We think it is an absurd way to estimate valuations.
Yes, stocks reached new records but if you take a serious look at the indicator you will find some drawbacks. Frankly, stocks are overvalued more than ever.

The stocks reached new records

Yes, in the first five days in 2020 but few days will last forever and maybe it’s time to consult the historical data just to compare what could happen next.

According to Dow Jones, historical data shows that the S&P 500 index has completed the year in the same trend as it started it in 82% of presidential-election years. It occurred from 1950 to today every time. In the first 5 days of 2020, the S&P 500 rose 0.7% and if the mentioned historical pattern is correct that should suggest that this year will finish with higher gains.

But be serious. We will need a deeper look at this indicator and on what it shows. Otherwise, you can easily read your horoscope (pay attention to the “sex” section better than “finance”) it will make more sense.

The ‘first five days of January’ indicator

January in the stock market has a strong influence on predicting the trend of the stock market for the rest of the year. The January Effect occurs when investors’ selling off their losing positions at the end of the prior year to realize the tax losses. Usually, these stocks are at a discount during January. And what we have there? Bargain hunters! They step in with their buying pressure in the market.

Statistics show when the S&P 500 rise in the first five trading days, there is around 86% possibility that the stock market will rise in that year. But this indicator isn’t very reliable due to the fact that we cannot find what happens when the gains in the first 5 days in January are below expected or in comparison to previous January or whatever. All we have is data for periods when the January Effect is triggered. But markets exist even without the January Effect. Even more, the markets exist even beyond January.

With a little help of stats, we can see that this effect had good predictions in 31 out of the past 36 years. Stocks reached new records in the first five days of 5 exceptions, 4 were war years and one was a flat market.

So, this was a confirmation of the January Effect.

Statistical answer as confirmation of something different

Let’s use more current data and divide the past 34 years into two sections separated, from 1984 to 2000 and from 2001 to 2017.

Let’s observe the period from 2001 to 2017. Data shows that, for example, the December effect produced an average return of 2.62% or a return of 36.5% during the observed years. But if you take a look at January for the same period, you will find poorer results. The average returns in that month were at 2.48% or 34% pre the whole year.

This seems to be a strong approval for the January effect. Nevertheless, whoever tried to use the January effect, and bought an S&P 500 index fund on January 1 and sold it on January 31, and kept cash for the rest of the year and did it in the next years to the end of 2017 made losses of 0.84% per year.

Stocks reached new records but ignore the January effect.

The using the January effect can be dangerous. This phenomenon is based on limited data and adjustments for confirmation. So, you shouldn’t believe that every time when the stocks reached new records in the first five days of the year were great gains in the market.

The conclusion about the January Effect came from small samples. So, it has low statistical reliability if it has at all. You cannot make a conclusion based on limited data. Yes, some financial press reports will try to assure you how these “five days effect” is important and you will find a lot of catchy titles but it’s fishing and fake news also.

Even the month of January was great for the stocks, what about the other months? If it is the only one-month effect what are you going to do with your investment over the rest of 11 months? Would you make decisions based on superstitions? Cash-out? We don’t think it is a smart investment strategy.

Common sense tells us something different. This isn’t a hypothetical situation, this is reality. Try to figure out why this phenomenon isn’t part of any extremely advanced computer software? Some software, and even not so sophisticated, will be able to identify the phenomenon and profit on it.

The reason is obvious. There is no unusual market’s phenomenons, that’s nonsense. If there is any phenomenon that is simple to be explained to the inexperienced trader or investor you can be sure it isn’t real. It is superstition.

Bottom line

This was another old tale to neglect, just like many others. Who can really believe that the first 5 trading days in January could predict the stock market’s direction for the full year? Yes, this old “indicator” gets much attention every year. As we said, the bulls are trumpeting it right now.

But nothing is that easy, especially the stock market.

If you have a problem to accept all of this, examine what did happen over the last 40 years. You will find that this pattern was a reversal. The fact is, since the 1970s every time when the Dow was down during that mythical period of 5 days in January, the whole year had higher gains.

To be said, any investor who admits the extraordinary influence of this superstition has a lack of knowledge and self-confidence. On the other hand, newspapers and financial reports enjoy cheating people when insisting on this.

We would like to point one thing at the end. The words written above doesn’t mean the stock market will not rise this year. It can do it very well and produce great gains, but what does it have with “First Five Days of January”?

Nothing!

10th January 2020
Leveraged ETFs – How to Trade, Guide, Tips and Strategies

(Updated October 2021)

Two times leveraged ETF is a vehicle calibrated to 200% or double the gain or loss of the price movement

Did you come across something called a leveraged ETFs? What is leveraged ETF and how it is different from other ETFs? We found a lot of questions like these thanks to visitors to our website. We’ll try to make this closer to you especially if you are a beginner in this field.

Let’s take time to jump in and explore these somewhat new securities.

Firstly, leveraged ETFs aren’t for long-term investors.

When you are buying a leveraged ETF, you must know that you have to make short-term trade. As we said, it isn’t a long-term investment. For newbies, a short-term trade lasts from one day to several weeks, not longer. Don’t try to buy a leveraged ETF for a long-term investment.

They became one of the most successful varieties of ETFs in recent times. So, we can easily say that leveraged ETFs are a novelty. However, they can be difficult innovation. Well, they are not either good or harmful, all you need is to know them better to be able to trade. Here are some basics about leveraged ETFs.

Let’s say the traditional ETF tracks one security in its underlying index, 1:1. As a difference, with leveraged ETF, you can strive for a 2:1 or even 3:1 ratio. A leveraged ETFs use financial derivatives to magnify the returns of an underlying index.

Leveraged ETFs are possible for the Nasdaq 100 and the Dow Jones Industrial Average, for example.

Where is the advantage?

Leveraged ETFs can help you to capitalize on the short-term momentum of a particular ETF. The main question is how to add leveraged ETFs into your portfolio?

For example, the trader is assured that a particular stock will drop. And trader is shorting that stock. Besides, shorting stocks are bought on margin and the trader has to borrow the money from the broker. That is leverage.

With leveraged ETF, you don’t need to buy the securities on margin, since it allows you to amplify your returns by multiples of over 1 up to 2 or 3 times. That depends on the ETF product you are trading. The amount of leverage will depend on your experience or temperament. Some less-experienced traders will choose lesser leverage, for example.

But be aware, they are designed to return three times the inverse of the S&P 500 index. So, if the S&P 500 drops by 1%, this fund should rise by approximately 3%. And contrary, if the index rises by 1%, this fund should drop by about 3%.

Leveraged ETFs have the aim to outperform the index or stock they track.

Also, there are inverse leveraged ETFs. They give multiple positive returns if some index decreases in value. They operate the same as normal inverse ETFs but designed for multiple returns.

Leveraged ETFs are not suitable for beginner’s portfolio

Please, don’t make a mistake. Yes, it is fascinating to have amplified returns but you should never add leveraged ETFs into your long-term portfolio. By buying them as a long-term investment you are making a foolish decision. To repeat, leveraged ETFs are not investments, they are speculation. Don’t mislead yourself.

Moreover, the payoff may not be as bright as you predict. So, they are risky. You will have to pay management fees, brokerage commissions, taxes on capital gains.

Leveraged ETF surely has its purpose for short-term investing. For example, you can use it as a hedge to protect a short position. Yet, long-term investors should be careful with leveraged ETFs.

Definitely, when things are going fabulous, leveraged ETFs are excellent investments. Over the first 6 months in 2017, the S&P 500 has returned a bit over 10% but the 3 times amplified leveraged ETF has returned approximately 30%.

But, think about what happens when the market turns down. For example, the S&P 500 falls by 10%. A leveraged ETF tracking the index could fall by approximately 30%. Just think about these figures.

How to make success in trading leveraged ETFs

As experts recommended, start with small if you aren’t experienced enough. When your portfolio becomes larger add more shares. There will be more risks, of course. But you will diversify your trades. Some elite traders recommend starting with an account of $25.000 minimum. Less isn’t recommended due to trading ability and margin rules for smaller accounts. Moreover, a smaller amount may cause conflicts in your decisions. You’ll need space to make them.

Further, trade when the sentiment is low. It is the best opportunity to profit. Set a stop-loss to, let’s say, minus 2% or 2.5%. Follow the trend and enter the winning position. If your profit goes up, sell some of your winning positions. Do it on spikes. If you reach 2% of profit very quickly, sell half of your shares to move stops up to breakeven. This can be a no-lose trade.

Read a lot about ETFs and leveraged ETFs and test some free trials to find the accurate one. Do your own homework, it is the best way.

Always monitor leveraged ETFs on a daily basis. If you have to use a limit order on a position it is reasonable to sell your position since you can’t follow market makers strictly. If you want to turn trade, it is better to trade traditional ETFs. that will give you less profit, but more freedom. For leveraged ETFs, you will need to sit and look at the screen or phone almost all day long. Trading isn’t for everyone, at all. That job can be addictive. Take a break from time to time but don’t give up. If you made some mistakes, keep in mind why, when, what caused them. And learn how to avoid them.

And buy when the ETFs are positive.

Disagreements

The leveraged ETFs are new and still developing, and the disagreements will change as time goes by.

Yes, they will provide you 2 times bigger returns but not always.

The typical fault is that leveraged returns are on a yearly basis. This is false. They provide multiplied returns on a daily basis. So, don’t look at the index’s yearly return of say 2% because the leveraged ETF will seemingly not have a return of 4% per year. Rather take a look at the daily returns during the year. However, something is more important. The multiple returns don’t mean you will have multiple profits. You may have multiple negative returns also.

Leveraged ETFs are high-risk due to their design. Also, some index-tracking malfunctions may occur as well as some other limitations.

Bottom line

These the most attractive ETFs in the market today have a great advantage of using. Traders can overcome some of the risks through diversification and leveraged ETFs are very suitable for that. Still, they are still adjusted for stocks only. Therefore if the stock market falls the ETFs will fall too. Anyway, you can enhance your trades if you spread the risk across other assets besides stocks. It’s easy to find ETFs assets like currencies, bonds, or commodities. That will help you to improve your portfolio diversification buying power (the last mentioned is for really aggressive traders).

Leveraged ETFs are new products but they are providing more choices to manage risks and take profit.

They are a good option but what if you don’t want to enhance your buying power if the bear market is in play? That would require short positions to take advantage of the downside potential in the market. A leveraged ETF could be a great answer in this situation, also.

9th January 2020
Trading Exit Strategy App – Where to Find It

Here’s a look at the best trading exit strategy app to avoid your losing trades

Do we really have the trading exit strategy app? Only when you can assure yourself that you are not holding a wrong position you can be confident that you hold a good trade. Every single trade must have its own exit strategy, that takes into account both price rises and price drops. In other words, risk management. So you MUST plan your exit and you must have the best trading exit strategy that is possible.
Well, how to create a good risk management system? How to choose a good exit strategy? How to determine it?
That’s science. It is difficult and mostly depends on your feelings which is the riskiest part of every trade.

Identify when to take profit from trading

Having an effective trading exit strategy app means to have the opportunity to identify when to make a profit from trading. Sometimes you will close your position too early and miss the bigger profits, other times you may lose if you stay too long on position.

When is the right time, how to know when to take a profit?

It is crucial, before entering the trading setups, every trader MUST have an exit strategy. It isn’t a matter of traders’ will, it is a matter of protecting from losing trades.

If you don’t have a trading exit, you’re trading without a strategy, you’re trading based on guesses or emotions. So, the chances of making a loss instead of profiting, are more likely.

What is the best trading strategy?

Basically, a trading strategy is a plan of buying and selling in the stock markets. It is based on rules that have to provide successful trading and make a profit.

When you are trading the stock market, you have to make a decision to buy or sell an asset, or to stay on the position. To be able to make a decision you’ll need information.

Trading strategies MUST assist you to simplify the process of analyzing all information and making decisions.

The stock market works simply. It is like an auction house. It provides to both buyers and sellers to set prices and make trades. The stock market operates thanks to a system of exchanges but it is a zero-sum game. Meaning, some traders have to lose, so you would have a chance to make a profit. There is no other way. Any trade has only two ends: loss or profit.

What is necessary to identify when to take profit from trading?

You should consider at least two exits: stop-loss and take-profit in your trading exit strategy.
Stop-loss is the point where you exit the position when the trade isn’t going in your favor. Take-profit is the point where you exit the trade in profit.

Getting out of losing trades

Losing trades is a reality. They are coming together with winning trades. Yet you are never sure is your trade losing or winning one. This can discourage many traders and they may give up.
But, wins and losses don’t need to come randomly. You don’t need to trade like that.
Yes, the stock prices may go up and down and nobody knows exactly why the stock price makes changes. The stocks are volatile and their price may extremely and rapidly change.

That’s the reason to have the best trading exit strategy app and keep the investment safe.

Traders choose different strategies depending on the time frame of the trade and how long they want to keep the trade opened.
Today, if you want to trade successfully, you will need to pay for hardware and software to use available strategies. But still, you have no guarantees and (this is more important) you don’t have any chance to check will your chosen strategy end with loss or in profit.

Reasons for seeking the trading exit strategy app

If traders have a good entry, it is more likely to reach the stop-loss or take-profit target faster. That will give you a chance to make another trade. And another, and so on.

But, if you don’t have a good entry you will need time to see the result. That may hurt your profit. Of course, some winning trades will take a bit of time to develop.

When you have a good entry you may increase the number of trades you want to take and you will have more advantages. To this point, everything sounds logical. But how to avoid premature trading exits and losses?

For all traders, this should be the last warning!

When it comes to the exit strategy the things are not so clear to many people. Having the best trading exit strategy (as much as it is possible) is important. Even more than planning for entry. Why? Your exit strategy shows how you have hedged your trade.

Do you really know when and how to exit the trade?

Most of the traders think that the entry point is the most important. Yes, it is important without doubts. But are you sure your trade will go in your direction? Do you have something to protect you from sudden price changes? That is the exit strategy. And if you don’t plan your trades you may end up with big losses.

If you didn’t think of an exit strategy, here is what you have to do.

Set Trailing stop-loss

A trailing stop-loss will help you to manage risk while optimizing possible peaks. By setting a trailing stop-loss you will secure your profits and accumulate more. Firstly, you must set levels for profit and loss. You will do that in a percentage, for example, 1.75% stop-loss and 3% take profit levels. What will the trailing stop loss do for your trade?

It will close your trade when it has created the set peak and the trend begins to reverse.

A trailing stop order means to set a limit on the maximum potential loss but without setting a limit on the maximum potential profit. We can identify “buy” and “sell” trailing stop orders.

Use time-based exit strategy

This exit strategy is when you appoint the maximum time you want to spend on a trade. This is a good strategy because if your trade isn’t successful after a given time, the smart choice is to exit the trade. Well, how much time you will give a trade is up to you.

Time-based exits are good when the trend is moving against you. It is a simple strategy that can help you control your losses.

Stop-loss/take-profit strategy

The truth is, there is no other way to get out of the trade than with loss or with profit. The last mentioned is better, right?
One of the best exit strategies is applying stop-loss/take-profit.

The goal of stop-loss is to keep you in a trade and limit losses while take-profit will secure profits by closing the trade when the profit target is reached. It isn’t easy to calculate adequate risk/reward ratios for stop-loss/take-profit orders. You’ll need time and effort to master it.

For example, how to identify the stop-loss position based on the money you are ready to risk at each trade? Stop-loss totally depends on the money invested.

Stop-loss and take-profit work almost in the same way but you have to define their levels differently. To make this more clear, the stop-loss will minimize the cost of the failed trade but the take-profit order will give you a chance to take the profit at the peak of the trade. You have to recognize the right moment to exit with profit.

The market swings all the time. One positive trend can easily turn into a downturn in a second. You may think it is better to exit the trade with profit right now. Why risk potential earnings? Well, it isn’t a good option. If you don’t let your profit to grow enough and you exit the trade prematurely, you will lose a great part of potential gain. But, also, waiting for too long can be equally harmful.

The drawback of stock trading apps

Trading apps that you can find currently on the market are good for some things. They will give you a real-time market data or will help you to find new stocks. Yes, there are some apps for charting but still, you will need to write it down to Excel. Additionally, those apps can be costly and out of reach.

The majority of stock trading apps you can find don’t give the variabilities in a meaningful way. Moreover, they don’t include one of the most important features for every single trade – examining and testing on where to set a stop-loss and take-profit level and when to exit the trade.

But, even if you decide to purchase them, will you have an opportunity to check the efficiency of your strategy? So, they are useless for the execution of your trades.

You need an effective and accurate exit strategy app

We were examining almost all apps, spent many years on research to find valuable tools or apps that would give traders a chance to check their exit strategies.
We couldn’t find any. There was no such app.

Until now.

Here is Traders Paradise’s best trading exit strategy app.
What our app is doing?

Traders Paradise developed a trading exit strategy app, a unique tool for optimizing the exit strategy.

This unique and easy-to-use trading exit strategy app will do all the hard work and complicated math operations for you and performs it all on its own.

All you have to do is to choose the stock you want to trade. We have a long list of the companies and you simply have to mark any by clicking on the name or to type the ticker name or the name of the company. But HERE you can find the full explanation.

8th January 2020
Is Coca Cola Overvalued – Trick Or Treat

Coca-Cola has performed very well in 2019. The stock isn’t cheap but also, not overvalued. The increasing margin and investors seeking yield couldn’t be a problem for the company to continue great performing.

The question Is Coca Cola overvalued could be a trick. Why do we think so? If we take a cash flow at a consideration we can see that Coca Cola is trading at 24.4 times operating cash flow and 31.3 times earnings. Further, the forward price-to-earnings ratio is at 24.6%. and the latest price is $54.69 (data from January 3th, source Yahoo Finance). Although, the company is not expensive.

Further, if you have in your mind that most government bonds are trading under 0% yield, the negative interest rate in the EU, currently inflation is low, KO that provides a 2.9% yield, you must understand that it isn’t expensive.

Of course, it will be better if the stock can provide a higher yield but for that, we have to wait for additional dividend increases. On April 9, the stock traded at $55.77, the current price is at $54.69 but we all have to admit it isn’t a sharp decline in the stock price. Coca Cola management may reinvest the company’s operating cash in capital expenditures (CapEx) to get, improve, and keep the property, improve technology, or equipment. Further, the company can reinvest in development such as innovation to improve the product portfolio, marketing or M&A to maintain the business like it was in the past 20 years or more.

Also, Coca Cola can use the operating cash to further improve profitability. That would influence its P/E ratio.
Having all these indicators in mind it is easy to conclude that Coca Cola isn’t overvalued stock.

It has a high debt

Coca Cola has raised debt levels. The company has a slightly low liquidity position as the current ratio is at 0.92. The sustainable level should be 1.00 but the current debt levels are not something to be worried about. Boosted debt came from the fast increase of long-term debt and falling sales. But as we said, the company plans to improve sales and operating cash flow will likely grow. That could easily cover the debt. Moreover, the company’s bonds are doing very well.

Why do some investors think that Coca Cola is overvalued?

Some investors avoided this stock due to its valuation. But try to be honest, it isn’t expensive. The company is paying a stable dividend yield and, according to its statements, it plans to have strong sales in the future. Coca Cola isn’t in the phase of low operating cash flow. Experts’ opinion is the stock hasn’t sell signal. It is contrary, with 31.3 earnings it has “hold” or even “buy” signal. Moreover, some estimations and predictions show that stock may hit over $60 (close to $65) this year. Well, Coca-Cola is a solid dividend-paying stock and it will likely continue to produce stable profit for its shareholders.

The profitability of the company

Let’s see is Coca Cola overvalued. Over the last four years, the company had a total revenue drop of $10 billion to $34.3 billion. Operating margin was improved by 560 points up to almost 29% and income dropped to about $10 billion which is a difference of just $400 million. The good sign is that the company increased cash by almost $10 billion from its operations while dividend payments hit a new record of $6.74 billion.

This year, Coca Cola has got back $3.4 billion through dividends and distributed stock worth $233 million. Yes, it is lower than for the same period last year due to several factors and the dividend increase of 3% may not be so visible. But the stock has had a great play in 2019 with a return of over 16%. So, what do you think, is Coca Cola overvalued? We think it isn’t. The company has a great product portfolio that could boost sales. So, KO could be one of the best investments in the next year since, as we can see, there is still a lot of potentials. Maybe the better question could be is Coca Cola undervalued rather that is Coca Cola overvalued stock.

Coca Cola through the history

After 133 years of existing Coca Cola isn’t a woman-body-shaped-bottle. More about the company you can find in its fresh statements updated for Q3 earnings result for 2019.

The Coca-Cola Company is an American corporation established in 1892. It is primarily recognized as a producer of a sweetened carbonated beverage. It is a global brand not only the US trademark. The company is also focused on producing and sells soft and citrus drinks. Its product portfolio consists of more than 2,800 products available all over the world. That makes it one of the largest beverage producer and seller in the world and, also, one of the biggest corporations in the US. The company is headquartered in Atlanta, Georgia.

Almost 55% of its sales come from carbonated soft drinks. The rest 45% goes to juice, dairy, tea, coffee, etc. The interesting part is that Coca Cola is a market leader in almost all of these areas selling its products through over 28 million customer stores.

Speaking about its stock, Coca Cola could be everything but not overvalued. Moreover, it is a growing brand after 133 years. And the company still has great ambitions to meet consumers’ demands. Respect.

And don’t be worried if this famous producer is able to meet them. Despite the increasing competition, the company has transformed into an asset-light company. It manages to improve supply chains and modernize its packagings, the concentration of sugar and modern tastes.

Don’t ask is Coca Cola overvalued. It isn’t.

Bottom line

Coca Cola is consumer staples stocks. It provides goods that people need on a daily basis. That fact makes it an excellent investment in practically every economic condition exceptionally winning during economic slowdowns. People will always need these products no matter what economic or financial status is or if there is inflation or market downturns. The whole industry’s total return in 2019 was 27.3%. Compare this data with the 12-year average annual return of 10.4% and you will understand why it is still a good investment choice. Yes, it is 3% points below the S&P 500. Nevertheless, if the market gets rough, and especially if we will face the market correction, this industry will shine.

In the face of this context, Coca Cola is one of the best consumer staples stocks to buy in 2020. This pick should be proficient if the market is turbulence in 2020.

So, KO could be a good addition to investors’ portfolios.

5th January 2020
What to Expect From the Stock Market in 2020?

Create portfolios that will work no matter what the next year is going to bring. The recession will come or not, but your investments have to be protected.

By Guy Avtalyon

What to expect from the stock market in the year ahead? The stock market could correct itself during the early days of 2020. But, despite some dark predictions, the stock market may keep rising over the long run.
This is the last day (at the moment of writing) of the year during which the market was so unpredictable. At least, it was surprising.
For example, Uber’s IPO was followed by fanfare, and what happened? Great disappointment.
But many other stocks hit their highest-ever highs and quickly dropped to the lowest lows. The only truth in the stock market is that there will always be shocks.

Okay, that year is behind us so let’s take a look at what to expect in the stock market for 2020.

The stock market will rise more

The stock market boomed in 2019. The S&P 500 recorded a gain of 29.2% in 2019. Some analysts already told us the market will be down in 2020 but, to be honest, they could be wrong. Since the stock market rose over 20% in 2019 it is more likely in 2020 to see even greater returns than it was in the previous year.

What you have to do? the answer is simple. If you had good returns in 2019 and your investment portfolio was doing well, just stay with it. Why would you change the winners?

But…

Nothing related to the stock market is for sure and forever. There is always something to worry about. It’s our money. If you hold cash and not invest in stocks or somewhere else, your money will go anyway. So, don’t be frightened, come back to the market, and invest smartly. The year ahead could be promising. Build your portfolio, mix the assets, and avoid emotions. Yes, the stock market could be more volatile in the next year could since 2019 was much less volatile than the prior year.

Some unpleasant occasions may arise over the coming year.

Firstly, in January due to the January Effect. What is this? The January effect is an increase in stock prices during that month. But is a seasonal increase. Usually, In December, the stock market records an increase in buying, and the stock price is dropping. In January, stock prices will increase as always.

In fact, the January effect is a theory and calendar-related effect. Some small caps could be affected more than any other. But according to history, it was a case until several years ago. Since then, markets seem to have adjusted for it.

What to expect from the stock market

The stock market is pretty much unpredictable, we can only guess. Maybe the right question is what to expect from the investors. So far the majority showed spectacularly bad timing when it comes to stocks. They are selling and buying at the wrong time. Many of them are selling just before rallies or accumulate stocks when they have to sell.

If you believe that the market is increasing and that it is a predominant trend, adjust your portfolio for the ups and downs in 2020. But it is the same as always. Your actions will depend on what your expectations are toward the stock market in the next year. Maybe, you will invest more money when the markets are more volatile with the expectation that pullback is temporary, who knows?

The value stocks will come back

Yes, stocks are growth or value type. Growth stocks are so attractive and popular. Everyone is talking about them, they are in the headlines, media are paying a lot of attention to them and burn our brains too. The whole world is watching the stocks of Amazon, Facebook, Uber, and many others because the growth stocks are giving great returns, they are well-known companies, famous brands.

On the other side, we have value stocks. They are mostly companies form the utility industry, or energy or something else less attractive. Such stocks don’t have spectacular prices, the companies are not fast-growing.

Yes, the growth stocks are performing better results in growing markets but the value stocks will always do better in down markets.

To be told, the growth stocks are increasing their value year-to-year and some experts are expecting a reversal in 2020. So, growth stocks may change their prices and decrease.

A diversified portfolio will be helpful as always. If you hold any of these great players just sell part of it if you follow the experts’ estimations. At least, your portfolio will be less volatile.

What to expect from the stock market: The bear market is coming for sure

This prediction was wrong for many prior years. But, maybe the next year may confirm market bears’ expectations. We have a bull market and it showed a great strength over the year. It was faced with a yield curve inverted, trade war, Brexit, the possibility of a recession. Well, to add more pain into your lives, the bull market has to end at some point. Some experts expect that 2020 is that time.

So, what investors have to do is to hedge the risk and take some profit, of course. As the market motto advises “you will never go broke taking profits.” Maybe it is really time to take some profit from your investment. If you believe the downturn in the stock market will come for sure, be ready to reinvest big gains. What different could you do when the important selloff comes in 2020?

Will the recession surely come?

Recession is an element of any business. So, we can expect it to come at any time, sooner or later. It may happen in 2020 or 2021 or 2022, literally anytime. Many circumstances have an influence on it, we are witnesses of some, that’s true.

Investors shouldn’t adjust their portfolios based on guessing. However, it is smart to analyze your allocation. Maybe some stocks are out of balance. Let’s say you wanted to hold 50% in stocks but you noticed that suddenly you hold 70%. That would be a clear sign that is clever to exit some positions. Just adjust your portfolio with your risk tolerance and investment goals.

We all know that the stock market forecasts are useless. No one can predict how the market will perform. But still, we click on them to see and compare them with our opinions. The reduction of difficulties is in the essence of human nature.
However, investing in the stock market certainly includes difficulties and risks. Seeking out for expert opinions about what to expect from the stock market in 2020 can be the wrong way to lessen risks or uncertainty.
Investors must do their own examination. If you think the crypto will go up, just buy some of them or parts of them, or if you think Uber is a great investment, just buy some shares of it. A small portion will be quite enough notwithstanding that experts are expecting a big increase.

One is a-hundred-percent sure, you will make at least one mistake. Take it as certain. But that’s life and also, that’s investing, be prepared for that.
Just do your best to secure your right calls overpass your wrong ones.

Happy New Year!

31st December 2019
Stock Market Correction – The Storm Is Coming

A lot of mergers and acquisitions, drop trade investment and lack of business trust indicate a coming stock market correction Bear in mind that markets will not disappear, so you can get back

By Guy Avtalyon

The dark sign of an upcoming stock market correction might be when the companies are buying back their stocks and use them for buying other companies. In this example, the stocks are used as currencies. We can see that so many companies are doing exactly that. Further, we are witnesses of a lot of mergers and acquisitions. The companies are uniting to survive something. But what? What they are expecting?

Is the logical answer that they are expecting stock dumping and the stock market correction?

Some analysts say YES.

The first sign of possible stock market correction they see in companies buying other companies, in mergers with rivals and financed by shares exchange is the signal that the market is close to the end of its bullish period. The opposite opinion befalls when the companies invest in new activities, new operations, development. That would be a good signal for the stock market. But when the companies are using their own shares to buy growth it only can be a sign of the lost confidence.

Yes, the economy runs in cycles. The sunny days will always follow after rainy days. But we have to be worried when the economy’s condition pattern indicates the coming storm just as we are in a hurry when the real storm is coming.

How to manage the stock market correction?

A stock market correction is an alarming condition but quite normal. Some might be surprised, but it is a sign that the market is healthy. Well, in most cases.

How could we know that the stock market correction is coming? When the stock prices are dropping 10% or higher from their most current peak but not more than 20%. In such a case, we would have a bear market.

Firstly, don’t try to “time the market.” Avoid swing trading even though trading the ups and downs may give you some profit but for a short while. Many investors are trying to avoid losses by putting money in some other investments where they think there is a better possibility of profiting.

Most people lose money by trying to move their money around to participate in the ups and avoid the downs. This is a documented behavior studied by academics around the world. The field of study is called behavioral finance. That is a behavioral bias.

Our two cents

When you build your investment portfolio it should be based on knowledge and your education, not on prejudices. It is normal to expect that for every quarter of the year, you will have some negative returns. Tn order to lessen those negative returns or to control them you have to have a diversified portfolio. That means you need to combine your investments. Pick a mix of assets that have more potential for upsides and fewer chances for high returns because that means less risk.

During the market correction, savvy investors have more discipline, less fear, and stay with their investing playbook. Don’t trade at those times because you may catch larger losses. Behind these words lies the stats, you can easily check it.

Follow the old Wall Street pattern: Never catch a falling knife.

Be mentally prepared

A market crash may happen. When? It doesn’t matter. You have to be mentally prepared for that because the markets are unpredictable and it had happened before. Yes, we all like to be rich even on the paper and it’s really hard to chew a big bite. And the stock market correction is just that – a big bite. Some investors might feel fears, be frightened, and start selling their stocks at the worst time.

If you are a long-term investor type, you must have trust that the stock market will adjust eventually.

Corrections can last from several days to months or longer but the last mentioned are rare. Remember, a correction may damage your investment for short, but it is a great opportunity for adjusting overvalued stocks. So, buying opportunities are undoubted. So, just keep adding stocks to your investment portfolio while others are selling in a panic.

Can we predict a stock market correction

Nope. No one can predict a stock market correction. They aren’t predictable. Moreover, they can be generated by different matters. For example, we know the Great Recession has erupted on the housing bubble. But we know that after everything was finished. But predicting the main cause of the next correction just isn’t possible.

What we know for sure comes from research. According to one conducted on the example of the Dow Jones, the average correction lasted about 72 trading days or three and a half calendar months. And the correction is when the overall stock prices drop more than 10% and if the decline of more than 20% it is a so-called market crash. That’s all.

For whom the market correction matters?

Stock market correction matters for short-term traders. If you stay focused on the long term you will survive anyway. When correction occurs those who’ve adjusted their trading as the short term or those who have leveraged their account with the use of margin, should be worried.

Traders that used margin had bigger losses during the market downturn. Also, active traders had increasing costs united with their losses during the correction. Holding long-term investment was the best way to survive the stock market correction. At least such investors had a peaceful life.

Don’t be afraid of a stock market correction. It is usually a great time to buy high-quality companies at a lower price. So, you can add stocks to your portfolio for long-term investments, even the one that previously appeared to be a bit too pricey. Also, a market correction is a good time to examine again what you hold. Sell your position only if you see that your investment, but each in your portfolio, couldn’t meet the cause of keeping it.

A stock market correction doesn’t need to be terrifying. If you don’t want to taste it, it is best to stay away from investing in the stock market. Instead, stick with safe investments.

Keep your balance.

27th December 2019
A Good Entry Point, the More Chances of Profit

The entry point is very important and can determine the end of your trade both in losses or in profits.

Having a good entry point is the first round in reaching a prosperous trade.
What is the entry point? It is actually the price investors have to pay to buy/sell a stock. The exit point, on the other hand, represents the price at which investors exit the trade with loss or in profit.

While the entry point has been extensively examined from the divergence/convergence aspect, the exit point has not got full attention.

Why is that? Well, exits may have hidden tendencies.

But let’s stay on a good entry point.

Traders’ successes or failures depend a lot on trade entries. One wrong entry can destroy your trading, for example. Yes, traders are using stop-loss to lessen the risk in case the market makes big moves.
But let’s talk about how the risk-reward potential can be enhanced by a better trade entry.

First of all, never enter the trade when the market is near to extreme highs or lows from the recent position. That fault may ruin your trade.
We already have seen traders that decided to enter the trade when the trend broke the final high with the hope that the stock price will continue running up.
That was the wrong decision because when the price reaches its highs, in most cases the only way it can go further is down. The price will drop into the previous range. So, you will make a loss.
The reason behind this is that markets never move in one direction forever. Especially after the trend reaches extreme highs and lows. If you place the entry point when the trend reaches the highest, it will always result in losses.
But if you like to take more risks in trading you can do that but be sure where you want to set the stop-loss to lower your losses when exiting the trade.
The wrong entry may occur if you are trying to enter the trade at the point where a large move is, but you are not sure what caused this move is. The direction may shift quickly in the opposite direction and your trade will end in losses.

Reversal strategy for a good entry point

Some traders like to set entry using reversal strategy. What does that mean?
In this entry strategy, the traders are taking the trade with the hope that the market will make changes its trends. They are using pivot point levels, so-called Fibonacci levels. This entry is useful only when the market isn’t trending in an obvious, clear direction.
Don’t use this in all trading.

The real role of a good entry point

The role of a good entry point is to allow you to identify high probability trades. You need the confirmation that you have an edge by reducing emotions.
You need a trading strategy that makes sense and where you can execute entry orders with confidence. It is very important and your good entry point should provide you that. Otherwise, it isn’t good.
Eventually, with a good entry point, you are more likely to enter the profit target or stop-loss. And the chance to look for other opportunities is here also.
A good entry will help you to repeat your trades and increase your advantage. But don’t be too focused on your entry point. Overoptimizing is never good.

Bottom line

A good entry point is very important for the success of your trade. But the exit point is what will control your profit. So, you will need to optimize it. To be honest, the best way is backtesting and finding out what works best for you. There are two ways to do that. You can use complicated calculations, charting, etc. or you can use Traders Paradise’s unique and simple app for optimizing your exit strategy. It’s up to you.

Remember, all is important. But as you can see, you can enter the trade in many situations but you can end your trade with only two: profit or loss.

Trading is a game, you have to make the best move at the right moment.

25th December 2019