When we talk about personal finances, we refer to the management of the economic resources you have, with an eye on future planning.
The financial risks, the goals, the savings instruments, and the net worth that you have available are the aspects that you must consider to organize your money.
Personal finances must be understood as a professional matter because we often make the mistake of seeing personal expenses as something of little importance. However, they are an area of our lives that we should tread carefully since our future depends on them.
The last thing we want is not to reach our goals or lose money in the face of any emergency, no matter how small.
But, how should you take care of your personal finances? Here are some tips to get you started:
➡️ Save and Invest Your Money
Saving is crucial for the conservation of one’s finances. One of the most effective ways to save is to keep at least 10% of your total income per month.
But, the key is also to invest. The money saved only keeps its value if the interest rate acquired is higher than the inflation rate.
Investing money is an excellent way to make your capital profitable and save it more effectively since it won’t lose real value with time.
➡️ Only keep assets that increase in value.
Most assets lose value over time, such as cars or appliances. To maintain your financial health so that the numbers do not get out of control, try to keep only those assets that increase their value.
These assets might be stocks, bonds, or other financial instruments or be subject to increases in price thanks to inflation. If we have one of these goods that increase in price over time, in the long run, if we decide to sell the good, we will make a profit.
Gold is an excellent hedge for inflation, to put a clear example. GLD is an ETF we normally recommend.
➡️ Use your credit card wisely.
Cards are a good financial resource if they are taken advantage of and used well.
Take advantage of your credit cards for those purchases that allow you to pay in installments without interest. For example, when buying some furniture for your home.
Try to look at the number of installments and the corresponding value and make sure that your personal finances allow you to assume that debt each month. On the other hand, we also advise you to learn to read the account statement, so you understand each of the concepts detailed.
The important thing is that you are regularly checking your expenses and available credit limits.
Never use your card as extra money, as it is a financing instrument that includes a price for using it (interest).
“Forex” is derived from foreign exchange, is also used the term FX Market. “Foreign Exchange” is the buying of one currency and selling of another simultaneously through forex brokers.
Currencies are traded in pairs, for example, Euro / US Dollar (EUR / USD) or U.S. Dollar / Japanese Yen (USDJPY). FX Market – FX Exchange – is considered a market “over the counter” (OTC). Transactions are carried out either by telephone or by electronic networks. Unlike stocks or futures markets, forex trading is not centralized on an exchange.
You may have heard a lot of buzz recently about online forex trading but what exactly is an online forex broker? If you’re looking to get involved in international trading on your own, forex trading may be a great place for you to start because it is simple, global, and practically always available.
Forex brokers for beginners provide traders a Forex trading platform – an application, a working environment, where the trader buys and sells currencies, dealing online – in other words, he speculates to make money on the difference of currency rates.
Who trades currencies, and why?
Daily volume on the currency market comes from two sources:
Foreign trade (5%). Companies buy and sell items from/to abroad and convert profits from foreign trade into their own currency.
Speculation for profit (95%).
Most speculators focus on the most traded / liquid currency pairs, called “The majors – major. Today, more than 85% of daily transactions involve trading of major currencies, including the U.S. Dollar, Japanese Yen, Euro, British Pound, Swiss Franc, Canadian Dollar, and Australian Dollar. The Forex market is the most traded world market, with transactions 24 hours a day.
Certain parts of the world have part of their Saturday to trade, as it’s still Friday in other markets. Financial institutions in these countries may be dealing with the Forex market during their work hours, the Forex market is open and trading 24 hours, 5 days a week.
With an average daily trading volume of over 3.2 billion U.S. dollars, the forex market is traded in world markets. Open 24 hours from 24, started trading on the FOREX market every day in Sydney, and moves around the globe depending on the opening day in each financial center, first to Tokyo, then London and New York.
Unlike other financial markets, investors (speculators Forex) can respond to currency fluctuations caused by economic events, social and political, which would occur anytime – day or night.
It doesn’t take a large initial investment, and it doesn’t take any special training (although making yourself more knowledgeable is helpful!) and these are two of the reasons it is becoming more popular and gaining more attention. Using some of the most popular and easy-to-understand forex systems, a person can trade directly with real live forex markets, without the intervening middle-man influencing decisions.
One of the most popular methods in recent years is the use of Expert Advisor software (also known as “EAs,” “Electronic Advisors,” or “Robot traders”). This software is programmed to monitor the market for specific movements and conditions set by the user, then used to capture market opportunities. The most exciting thing about being your own online forex broker is that regardless of market conditions – whether the market is rising (“Bullish”) or falling (“Bearish”) an individual still has the potential to make a profit.
This huge, influential market allows for unlimited profit potential because it is based on market movement alone, not on positive or negative conditions specifically. So this means that as long as an individual is monitoring the movement of the market that person has the potential to make profits. Check this blackbull markets review to understand how a broker that cares for beginners in forex investment can be beneficial to your career as a forex trader.
Traditional Online Forex Broker
If you choose to use a traditional brokerage firm, which would act on your behalf and according to your direction when trading in the forex market, you will develop a relationship with an advisor or money manager. He or she is the contact go-between for you (the client) and the market and will watch the market very closely for price levels. Then, the advisor will execute your orders based on the direction you give them. It must be remembered that in this type of situation, the advisor cannot act to engage in trades with your money of their own accord and would have to have clearance from you to do so, and this also makes you solely responsible for the outcome of the trade.
When you’re beginning to find out more about being an online forex broker, you may be afraid that your EA software won’t be used properly, or that you might miss some valuable opportunities. Many people have the tendency to look at these situations as “mistakes” and can begin to second-guess what their software tells them, or the signals that they receive in regards to the parameters they set up for the software. The truth is, it is virtually impossible to “win” every trade, so even a trade that loses money can be seen as valuable if it increases your confidence in your software, or teaches you something about how to set the parameters of the software to your benefit.
The fact is, only 5% of all traders achieve the goal of being consistent with their profits, and that average is established by looking at both the high and the lows of trading. Learn from your mistakes, and don’t see these experiences as “failures” but instead, for what they are – chances to learn more and do better next time. The only real “mistake” would be to ignore the signals of your EA entirely. If you begin to second guess your own system, the entire thing can unravel.
The foreign exchange market began with the need to convert payments received in foreign currency to home currency, and an online forex broker helps large banks, small companies, and investors around the globe do this quickly and efficiently. This is why the market is available virtually all day, every day. The market is the most “fluid” (or “liquid”) because it is not based on “real money” and its value. Instead, it is based on the exchange rate between currencies with the purpose of cashing in on the value change between those currencies.
A currency speculator (someone who estimates the values and attempts to foresee what they will do) can benefit from endless trading opportunities because the number of members involved in forex trading is so high, the volume of money is so vast, and there is virtually no end to the demand. Currently, the daily transactions are reported to be in the trillions, meaning that a large amount of money flowing, and the solid foundation of the exchange, have created the forex market as an asset class of its own – not subject to the same troubles as “real world” commodities.
If you’re interested in learning more about becoming an online forex broker, it is wise to conduct additional research and learn all you can before dipping your toe in the market with an initial investment. Although it does not require any special training or certification, it is a fast-paced and constantly moving market, and having some initial knowledge will give you the advantage over other novices. If you have worked with an advisor or money manager before and have some knowledge of the basics, a good piece of advice to begin in your own investment portfolio is to start out speculating and becoming intimately familiar with two particular currencies and their exchanges and rates.
Once you have become a bit of an expert at those currencies, you can begin to expand and see what other currencies and foreign exchange rates seem to perform well and deserve your time, attention, and investment. It may take some time to become the successful online forex broker that you dream of, but with a little work and determination, you can make it be the most profitable investment in your life.
In simple words, it is an exit from the current profitable transaction. While the transaction (position) is open, the profit on it is floating, it changes depending on the fluctuations of the quote. When a trader closes a trade, the profit is fixed.
Profit-taking in trading is the most pleasant process when, after closing a transaction, the balance increases due to the fact that floating profit is transferred to it as the financial result of the transaction. This scheme is the same in different markets. Profit-taking on stocks, futures, and cryptocurrencies occurs similarly.
At the same time, it is important to note that a trader can fix a floating profit both with the help of a take profit order (automatically) and manually.
What is take profit in trading?
This is a pending order that must be executed when the market price reaches a certain level. When this happens, a market order is sent to the exchange, which is directed against an open position, which leads to its closure.
For example. You have a long position open on the oil market, yesterday you bought it at 40.00. Today the price fluctuates around 41.00. You send a take profit to the broker at 42.00. This means that if the quote reaches 42.00 tomorrow, a market order for sale will be sent to the exchange. Thus, the take profit will work, your contracts will be sold, the position will be closed, and you will fix the profit from the transaction.
How can take profit be calculated?
In the most general case, there are 2 ways:
Mathematical. In this case, take profit is calculated according to formulas and proportions. For example, a trader sets a stop loss for 10 ticks. Then he can set a take profit for 15 or 20 ticks. Then the ratio of profit to risk will be 1:1.5 or 1:2 (excluding commissions). This is a rational ratio that you can work with.
Discretionary. In this case, the trader conducts an analysis, the purpose of which is to identify where it is better to set a take profit.
One of the effective ways is to use the volume analysis and functionality of the ATAS platform to track the activity of large market participants, and then come to a logical conclusion where to put take profit.
What is the difference between a take profit and a stop loss?
These are two very similar pending orders, they are both waiting for their time. In order for them to activate, you need a condition – the price reaches a certain level. Then they are triggered as triggers and send market orders to the exchange opposite to the open position, which leads to its closure.
An important difference is that a stop loss fixes a loss (so that it does not reach catastrophic proportions), a take profit fixes a profit.
There are still some differences between take profits and stop losses. It is believed that:
Take profits slow down the market, and stop losses accelerate the market;
Take profits are often placed before important levels, stop losses are placed behind important levels
How to set a take profit?
Take profit can be set:
during the opening of a position or after its opening;
manually or automatically;
There are defensive strategies in the ATAS trading platform. There you can set up a take profit so that it will be set automatically together with the opening of a position at a given distance.
How to set take profit
What happens when a large number of taking profits are triggered?
At the points where a large number of taking profits are triggered, the market slows down.
For example, large traders are in purchases. They placed take profits below an important peak. When the price reaches the take profit level, sell orders begin to enter the market to close previously opened purchases. As a result, the uptrend may slow down, or even reverse. Because of this, sometimes there are ”shortfalls” of the price to the previous important levels.
Where are take profits often placed?
A popular place to place take profits is a price zone located near some important level, but not reaching it.
Where to place take profits
Sellers at point 1 are likely to place their stop losses for the previous high. And buyers at point 2 are likely to place their take profits before the previous high.
Another place to place take profits may be the levels at which stop losses are presumably set. Then stop losses will be reduced to take profits.
Where to place Profit Taking
Take profits placed in this way to have increased profit potential, but also a lower probability of execution.
When taking profits and stop losses are triggered massively, you can see a noticeable drop in open interest.
How Profit Taking works
What do we see in the picture above? When the previous low was broken, a large number of market sales were sent to the market (this is evidenced by the red clusters). Obviously, numerous stop-losses of buyers have been triggered. Some of them were combined with the sellers’ take profits.
As a result, we are seeing a sharp drop in open interest, which indicates the exit of a large number of traders from the market.
Principles of Profit Taking
The general principle that will help in using take profit is“ “Cut losses, and let profits grow.”
The first part of this principle refers to the ”brother” of take profit – stop loss.
Stop loss should be clearly limited, and if the market goes against your position, then losses should be cut without regret, closing a losing trade. Sitting out losses, hoping for a price return, or emotionally averaging an open position, while also increasing the volume– is the way to lose the deposit. Losses need to be cut at the lowest possible level.
The second part of this principle already directly concerns take profit.
Place the take profit in such a way that the profit has the opportunity to grow. You need to give the market the opportunity to move in the direction of your transaction.
It is desirable that the take profit exceeds the stop loss several times. Give the market time to bring you a significant profit, set take profit at sufficiently remote levels.
Learn the trailing stop technique. This is a method of tracking a successful transaction, in which the trader moves the stop loss following the price going in his direction. So the trader protects the achieved profit, but does not limit the potential for its further growth.
Of course, there are different trading systems for exiting trades, but the main principle “cut losses and let profits grow” has passed the test of time and has been used by many well-known traders.
Correct profit taking is very important in trading. So don’t forget that:
Take profit (exit from a trade with a profit) should be clearly described in the trading system, and its effectiveness should be tested on history;
Indicators for volume analysis in the ATAS trading platform help to find levels for effective take profit setting;
It is desirable to set a take profit according to the general principle“ “Cut losses, and let profits grow.”
All of us who venture into the stock market should possess certain basic qualities that will help us to be successful in trading. Without any exception, everyone who ventures into stock trading is interested in making some quick money. Here are some basic qualities that you must have to be a successful trader.
First, you should be patient with yourself and give yourself some time to learn the basics of stock investing. Many people when they begin their stock trading career, they try to plunge into it immediately in their enthusiasm to make money. However, by doing this you will be subjecting yourself to great financial risks.
Secondly, when you enter into stock market, you are bound to make some wrong decisions in the beginning and this should not discourage you. Loss in the beginning is inevitable and you should be mentally prepared for it only then, you will be able to survive in this field. You must always keep long-term profit in mind. Even if you make a wrong decision in a particular instance, you will be able to make up for the loss at a later stage.
Thirdly, you must never get to your trading desk without making thorough stock market research. You will have to be faithful to your market research daily. Lot of things could have happened when you closed the previous day and get back to your trading desk the next day morning. If you do not keep yourself informed of the latest developments in the market, your decisions for that day will not be sound stock investment decisions.
Speculation is the key to stock trading. However, speculation should be based on statistics and other facts. Any speculation that does not take into consideration factual details will only be random speculation and this will not help you in the long run. The prevailing market trends should guide your decisions.
The next important quality for a successful stock trader is discipline. It is everyone’s weakness to give in to the temptation to wait longer to see a greater profit. But decisions that are postponed will push you to unnecessary loss. On the other hand, you must be content with your reasonable profit. To avoid loss, once you reach the cut-off that you set for yourself you must sell those stocks. This applies to day trading in particular.
Yet another crucial quality required is the ability to think clearly in the midst of stressful trading day. The market can be highly volatile and in the beginning when you see the stocks being so volatile you will tend to panic. Once you give into your fear, you will tend to make hasty decisions hoping to save the loss. If you give yourself some time, you will see the market stabilizing itself. You must not make investment decisions or selling decisions when you are tensed. Such decisions will often be faulty decisions because your reasoning faculty is no more supporting your decision-making efforts.
These are some of the essential qualities that will set you apart as a successful trader in this field.
There is hardly a week that the topic of investing in cryptocurrencies such as Bitcoin or others does not come up in a conversation. Sometimes because they go up meteorically and others because they go down. There are opinions for all tastes.
Personally, I believe that we cannot ignore crypto assets or Bitcoin as if they did not exist. It would be a kind of denial of reality. It is a new type of asset, but one that falls within alternative investments. And as such, it can have a place in a portfolio to de-correlate, but for other reasons as well.
Investing in cryptocurrencies for the long term. My point of view
In my opinion, I think anyone could consider investing in cryptocurrencies for the long term. Obviously, not as a core investment asset of a portfolio, but as a complement or satellite investment.
As we have seen these weeks and in other moments, cryptocurrencies are a very volatile asset. Do not suitable for all audiences. Or of course, not suitable for a significant amount of money within our heritage.
But you can invest in cryptocurrencies with little money. For a $100,000 portfolio let’s say 1-5%. Depending on the ability to take risks and personal circumstances, I think that is the range of capital that I would assign to an estate of that amount. Each particular case would have to be seen.
If it goes wrong. Nothing that the global investment strategy sinks you. And if it goes well. Certainly, an asset to add alpha to the portfolio in the long term.
How to invest in cryptocurrencies
You have to look for a reliable and safe intermediary. With many users. Where you can contrast opinions and references of other people who have invested through these platforms.
The key, as always, is to diversify. Cryptocurrencies are still an unregulated asset, which is still surrounded by a lot of uncertainty. And when I talk about diversifying, I don’t just mean investing in different digital currencies. I also think about investing in 2 or 3 different brokerage platforms. Which can be brokers or directly specialized cryptocurrency platforms. I give you some examples.
Coinbase is perhaps the best-known platform, for having made the leap to the markets and starting to trade on the Nasdaq. It is one of the largest platforms. The volume of digital currencies traded on this platform is skyrocketing. Some say that you can end up dying of success. And the experiences of some clients have not been very good lately, due to the great collapse of new account openings that they have suffered recently. For that reason, it is not strange to read some bad opinions.
EToro – If you are in Spain then an eToro ad is almost ubiquitous on YouTube video. They come on at all hours. This is a very popular platform for buying and selling stocks at zero cost, but also for trading cryptocurrencies. Personally, it is not the one I like the most. I prefer other more specialized ones.
Bitpanda – those who know about these new alternative investments say that Bitpanda is one of the best platforms to invest in cryptocurrencies, due to its reliability and security. It is by the way also, one of the platforms in which you can invest in precious metals with physical support. Not just annotation.
Most cryptocurrency exchanges are preparing for the future leap to payments and have begun to offer cards with which to use digital currencies on a day-to-day basis.
And well, I could list many more cryptocurrency platforms or brokers such as Binance, Kraken, Bit2me, etc. There are quite a few wallets and exchanges. Here the key you have to look at is the differential between supply and demand that each applies. And then I would look at security a lot. Although that also depends on you as a user. But every time, news of robberies of digital currency warehouses is read. So be careful with passwords and security protocols.
Disadvantages of investing in cryptocurrencies
One of the worst things about any of the 6,000 digital currencies that you can invest in today is that you cannot calculate a fair value for it. Because they do not generate future flows. They are not backed by anything. They cannot be used (yet) in our day-to-day operations. It is simply the supply and demand that sets prices. That, and the tweets of an influential person. See Elon Musk.
This aspect makes cryptocurrencies a kind of long-term lottery ticket. Hence, yet another reason to diversify into different crypto assets.
It is not yet known how they will be regulated. If a digital currency has a virtue, it is that it is out of the control of central banks and traditional financial circuits. But that also makes them attractive as a hiding place for money from illicit activities.
It will end up being regulated, I’m sure. Regulatory development always lags behind innovation. At the time that money laundering control rules are put in place, it is regulated how to tax the profits in the sale of cryptocurrencies and the rest of legal varnishes, it will be one more asset, in which, probably, investment funds and others collective investment systems, can enter in a generalized way. And it will no longer be such an alternative market. Something that can happen in the next 3-5 years.
It is also unclear whether central banks will end up imposing their digital currencies ahead of Bitcoin, Ethereum and many others that have emerged from private initiatives. Some more serious than others. There is the risk, but also the opportunity. That is why I believe that investing in cryptocurrencies now that they have collapsed is a good time to sow for the future. The key: investing little money and diversification in every way.
The issue of cryptocurrencies has many discrepancies since, just as many important figures promote these digital currencies, many others entirely oppose their development.
For this reason, many people wonder if cryptocurrencies are good long-term stores of value or if it is not worth investing in cryptocurrency. We will explain some factors that slow down the adoption of cryptocurrencies and the reasons that will allow their expansion.
Some think that cryptocurrencies are very speculative assets
It is not a secret that many do not like the idea of cryptocurrencies since they feel that “they can threaten the monetary sovereignty of any country,” as mentioned by the senior advisor to the former director of the International Monetary Fund, Christine Lagarde.
Some crypto-skeptics believe that it is a highly speculative asset. Others think that it has been created solely for criminal purposes. Andrew Bailey, Governor of the Bank of England, warns that when buying cryptocurrencies, all the money invested will be lost.
Many say that cryptocurrency is still the future.
But, just as the price of Bitcoin fell considerably, after a few days, it began to rise and was recovering some value, reaching around 36 thousand dollars. This is how many promoters of cryptocurrencies assure that, although this famous digital currency has collapsed, it will recover its value over time for various reasons and will become an excellent long-term investment opportunity.
Jack Dorsey, CEO of Twitter and Square, thinks that Bitcoin cannot be stopped by anything or anyone, like Changpeng Zhao, CEO of Binance, who feels that cryptocurrencies exist to offer greater “money freedom.”
Some known as investment giants believe that Bitcoin is an asset to invest in, just as Goldman Sachs said.
Institutional support has grown.
One of the reasons that cryptocurrencies continue to be the future is the increase in investments by institutions. In addition, there will be more and more tools that will facilitate the management of the cryptocurrency system, and there will be more offers that will benefit users.
All of these seem to be reasons enough to attract more users in the long term. In fact, in Latin America, there has been increased adoption of cryptocurrencies, especially in the first four months of the year; And although it is barely recovering from the last drop, experts say it will soon reach mass adoption.
The easyMarkets broker was recently surprised with the launch of a new μBTC account, with which its users can deposit and trade CFDs with cryptocurrencies on all the assets that the broker has to offer.
The μBTC account automatically creates a Bitcoin wallet address, allowing easyMarkets users to deposit, trade quickly, and withdraw Bitcoin funds when they see a convenient transaction.
Factors that slow down the adoption of cryptocurrencies
Apart from crypto-skeptical people, a part of the population is still very uninformed and does not dare to invest in cryptocurrencies because they do not know how it works and their benefits.
Other reasons that slow down the adoption of cryptocurrencies are the numerous regulations and restrictions by many governments on financial institutes and companies that wish to operate with cryptocurrencies.
In addition, the significant volatility of Bitcoin generates a lot of distrust since, just as you can earn twice the amount invested in a short time, you can also lose half of the fund. As happened in previous weeks, after reaching a historical record with a value of over $ 60,000 in April, its price fell to $ 30,000 in May.
Conservative estimates place it around 70%… while others believe it is closer to 95%… the number of investors who “fail.” I suppose it shouldn’t shock us… after all, whenever you talk with a Mutual Fund representative, if they’re doing well, they will point you to the fact that they are in the 1st or 2nd Quartile – meaning, the fund they manage has returned more than 75% or 50% of the other fund managers’ portfolios. Obviously, there must be several then who are in the 3rd or 4th Quartiles (the bottom).
There are several reasons why investors fail and today I thought I’d share a few more.
It’s perplexing… the number of investors who continually lose money trading, but for some inexplicable reasons, continue to trade. I suppose a variety of reasons exist, including poor money management (high commissions on small positions eat away at any profits), the delusion they have the skills and knowledge to trade (after all, isn’t everyone else getting it?), or addiction to trading (like gambling, just “sanctified.”).
Some, in sheer frustration, choose to pay hundreds and even thousands of dollars for trading software that promises every success… so they get split screens, subscribe to live news feeds, etc. and still struggle to make money trading. Then they flood their email inboxes with a plethora of free newsletters… worth every penny!
I’m not slamming these individuals… after all, most of us have had experiences like these somewhere along the line. But I am concerned for you if this is your current experience… and I’d like to help.
I think one of the most fundamental reasons why investors fail and why people are losing money in the stock market is because they are trading rather than investing. Perhaps this is so subtle you think I’m trying to create something out of nothing… but hear me out for just a moment. When you think of the term “trading”, what comes to mind? A transaction, a swap, buying and selling, dealing, etc.
Now, when you consider the term “investing” what comes to mind? Yes, some of the same elements of purchasing and transaction but with an added component of you having to “put something into” the transaction. Investing seems to require more than to merely trade. And you’d be right…
If making money in the markets was as easy as trading this stock for that one, and then exchanging it again for another one, we’d all be successful… but very few do this well. Instead, the average Weekend Investor needs to do less “trading” and more “investing.” You’re going to have to put something extra into the transaction… considering the fundamentals of a stock, watching the technical indicators, and keeping track of your “investments” because these investments of time, work, thought, consideration, management, etc. will all determine how successful you’ll be as a financial investor.
I realize most of you don’t have the time to do this on your own… hence, you should stop trading and simply buy the index when you have the money you can spare.
Doctor Stock has experienced some excellent trading success so far. Much of that success is due to his disciplined use of market risk management techniques. In his quest to help you make money on the markets every morning, he has often emphasized the need to balance risk vs. reward.
There are many ways that traders and investors can manage market risk in their portfolios. Here’s a sampling of 5 of the most common ones:
The trend is your friend until it ends. This is a crucial component of Doctor Stock’s strategy, and he tracks it for you at the top right corner of this site. It’s tough to make money by anticipating a change in trend. It’s better to wait for the turn and buy once it’s confirmed. “The market can stay irrational longer than you can stay solvent.” That trading axiom, coined by economist John Maynard Keynes, has become a cliché for a good reason. Many a trader has gone bankrupt fighting the tape.
I know that Doctor Stock makes fair use of these as well. Before you enter a position, it’s essential to know when you will exit. You can set one or more profit targets, but it’s even more important to limit your losses. A stop-loss order or trailing stop can help you do just that. There are tons of ways to choose a stop loss level, from percentages, trend lines, and moving averages to the true average range or simple dollar amounts. You need to find the method that works for you and your trading psychology. It’s less important how you use them. It’s more important that you use them. Set a stop loss level before you trade and stick to it.
One way to limit the amount of market risk you take is to limit the amount of money you invest. If you are placing a highly speculative trade, or one in which you have less confidence, you may want to limit your risk by taking a smaller than normal position. Similarly, if you are uncertain about market momentum, it may be wise to trade smaller until a more well-defined trend emerges. Always set rules for yourself on the maximum amount of money you are willing to risk on each trade as a percentage of your total investable capital.
You’ve heard about this one before. It’s essential to diversify your capital by investing it in asset classes that aren’t correlated with one another. Unfortunately, there are times (like the recent market crash) where most asset classes move in unison. That’s why it’s important to keep at least some liquid cash on hand. There are many different ways to diversify your holdings: geographically, by asset class, sector, market capitalization, and many others. The key is to put your eggs in a few different baskets so that if one company, region, or asset class gets destroyed, your losses will be limited.
This strategy pertains more to market risk management for investors as opposed to traders. Many traders only actively trade a portion of their capital. They invest the rest of it (often their retirement funds) more conservatively, with a longer time horizon in mind. One risk management strategy for investors is to set an asset allocation (50% stocks, 30% bonds, and 20% cash, for example) and rebalance it periodically. If the equity portion of your portfolio has performed very well and it now constitutes 60% of your holdings, you would sell some of those holdings to bring your allocation back to 50%.
If your bond holdings have performed poorly and now makeup only 25% of your portfolio, you might consider buying more to rebalance your bond allocation. This is one way to buy low and sell high automatically.
Disciplined market risk management, in whichever form(s) you choose to implement, is the key to successful investing and trading. What kinds of strategies do you use to manage risk?
In this book, Mr. Bernstein starts off with an overview of financial theory illustrated with relevant bits of financial history, then takes readers on a tour of the behavioral traps they might stumble into and concludes with the mechanics of building a portfolio. If this synopsis sounds familiar, it is because Four Pillars dealt with similar themes: the theory, history, psychology, and business of investing.
As you might expect of a brilliant writer like Mr. Bernstein, his writing is so quotable. Here are some examples:
“Investors cannot earn high returns without occasionally bearing great loss. If the investor desires safety, then he or she is doomed to receive low returns”.
“… the rewards of equity ownership are paid for in the universal currencies of financial risk: stomach acid and sleepless nights.”
“Much has been made lately of “black swans”: rare and supposedly unexpected events that roil society and the financial markets. In the world of finance, the only black swans are the history that investors have not read.”
“You are not as good looking, as charming, or as good a driver as you think you are. The same goes for your investing abilities. In an environment filled with incredibly smart, hard-working, and well-informed participants, the smartest trading strategy is not to trade at all.”
Mr. Bernstein is a wise investor and talented writer and while The Investor’s Manifesto is a very good book, I feel that it doesn’t quite achieve the brilliance that The Four Pillars did. If you’ve read the previous book, you can re-read it and safely skip this one. If you haven’t read Four Pillars, perhaps that’s the Bernstein book you should be reading. The Investor’s Manifesto is published by John Wiley.
William Bernstein, a practicing physician, has written an excellent guide to invest (affiliate link) that contains important (as the sub-title says) “lessons for building a winning portfolio”. The Four Pillars of Investing that the title refers to are theory, history, psychology, and business of investing.
Often, books on investing are dry, and reading them is a bit like working through a dense textbook, but fortunately, this scholarly book is not one of them. Even the driest theoretical concepts are illustrated with historical examples.
In the section on history, Dr. Bernstein tells the tales of bubbles and busts past and present and points out that lack of historical knowledge hurts investors the most. I realized that this is an area I need to learn more about and helpfully, the author provides a list of useful books in Chapter 11 (no pun intended). The book concludes with practical ideas for assembling your portfolio.
I can’t hope to do a better job of summing up the contents of this book than the author himself:
The overarching message of this book is at once powerful and simple: With relatively little effort, you can design and assemble an investment portfolio that, because of its wide diversification and minimal expense, will prove superior to most professionally managed accounts. Great intelligence and good luck are not required. The essential characteristics of the successful investor are the discipline and stamina to, in the words of John Bogle, “stay the course”.
I think “The Four Pillars of Investing” is worth reading and would also make a nice addition to your bookshelf (I am adding it to my list of recommended books).