Best of the Week
Most Popular
1. Stock Markets and the History Chart of the End of the World (With Presidential Cycles) - 28th Aug 20
2.Google, Apple, Amazon, Facebook... AI Tech Stocks Buying Levels and Valuations Q3 2020 - 31st Aug 20
3.The Inflation Mega-trend is Going Hyper! - 11th Sep 20
4.Is this the End of Capitalism? - 13th Sep 20
5.What's Driving Gold, Silver and What's Next? - 3rd Sep 20
6.QE4EVER! - 9th Sep 20
7.Gold Price Trend Forecast Analysis - Part1 - 7th Sep 20
8.The Fed May “Cause” The Next Stock Market Crash - 3rd Sep 20
9.Bitcoin Price Crash - You Will be Suprised What Happens Next - 7th Sep 20
10.NVIDIA Stock Price Soars on RTX 3000 Cornering the GPU Market for next 2 years! - 3rd Sep 20
Last 7 days
Can Trump Still Win? US Presidential Election Forecast Matrix 2020 - 30th Oct 20
Why a Biden Win will Keep Metals Prices Rocking - 30th Oct 20
Is Silver the Next Bitcoin? - 30th Oct 20
A New World Monetary Order Is Coming - 30th Oct 20
Do These Explanations Make Sense for This Intraday Stock Market Turn - 30th Oct 20
US Presidential Election Forecast Matrix, Stock Market Uncertainty - 29th Oct 20
Stock Market Turning? Look For These Support Levels - 29th Oct 20
Silver: A Conceivable Dead-Cat-Bounce on the Cards - 29th Oct 20
Stocks are Strong but be Aware of this Continuing Pattern - 29th Oct 20
The Most Profitable Way To Play The Gold Boom - 29th Oct 20
Why You Should Hire An Accountant To Complete Your Tax Return - 29th Oct 20
Global Banking: Some Sectors Look as "Precarious as Ever" - 28th Oct 20
Silver Price Minor Dip Possible Before 2nd Major Upleg Starts - 28th Oct 20
�� How to Carve a Simple and Scary Pumpkin Face for Covid Halloween 2020 �� - 28th Oct 20
Gold Price One Last Dip Likely Then Major Upleg to New Highs - 28th Oct 20
Smart Money Is Going All-In On This New Gold Frontier - 28th Oct 20
Gold Stocks Still Correcting - 27th Oct 20
Gold and Crypto: Is This How Charts Look Before A Monetary Collapse? - 27th Oct 20
Silver's Coming Double Trigger Shotgun Price Explosion - 27th Oct 20
The $126 Billion Gold Opportunity in Australia - 27th Oct 20
Tips to Breeze through Your Spanish Classes Online - 27th Oct 20
Try The “Compounding Capital Gains” Strategy Today - 26th Oct 20
UK Coronavirus Broken Test and Trace System, 5 Days for Covid-19 Results! - 26th Oct 20
How the Coronavirus is Exacerbating Global Inequality, Hunger - 26th Oct 20
The Top Gold Stock for 2021 - 26th Oct 20
Corporate Earnings Season: Here's What Stock Investors Need to Know - 25th Oct 20
�� Halloween 2020 TESCO Supermarkes Shoppers Covid Panic Buying! �� - 25th Oct 20
Three Unstoppable Forces Set to Drive Silver Prices - 25th Oct 20
Car Insurance And Insurance Claims and Options - 25th Oct 20
Best Pressure Washer Review - Karcher K7 Full Control Unboxing - 25th Oct 20
Further Gold Price Pressure as the USDX Is About to Rally - 23rd Oct 20
Nasdaq Retests 11,735 Support - 23rd Oct 20
America’s Political and Financial Institutions Are Broken - 23rd Oct 20
Sayonara U.S.A. - 23rd Oct 20
Economic Contractions Overshadow ASEAN-6 Recovery - 23rd Oct 20
Doji Clusters Show Clear Support Ranges for Stock Market S&P500 Index - 23rd Oct 20
Silver Market - 22nd Oct 20
Goldman Sachs Likes Silver; Trump Wants Even More Stimulus - 22nd Oct 20
Hacking Wall Street to Close the Wealth Gap - 22nd Oct 20
Natural Gas/UNG Stepping GAP Patterns Suggest Pending Upside Breakout - 22nd Oct 20 -
NVIDIA CANCELS RTX 3070 16b RTX 3080 20gb GPU's Due to GDDR6X Memory Supply Issues - 22nd Oct 20
Zafira B Leaking Water Under Car - 22nd Oct 20
The Copper/Gold Ratio Would Change the Macro - 21st Oct 20
Are We Entering Stagflation That Will Boost Gold Price - 21st Oct 20
Crude Oil Price Stalls In Resistance Zone - 21st Oct 20
High-Profile Billionaire Gives Urgent Message to Stock Investors - 21st Oct 20
What's it Like to be a Budgie - Unique in a Cage 4K VR 360 - 21st Oct 20
Auto Trading: A Beginner Guide to Automation in Forex - 21st Oct 20
Gold Price Trend Forecast into 2021, Is Intel Dying?, Can Trump Win 2020? - 20th Oct 20
Gold Asks Where Is The Inflation - 20th Oct 20
Last Chance for this FREE Online Trading Course Worth $129 value - 20th Oct 20
More Short-term Stock Market Weakness Ahead - 20th Oct 20
Dell S3220DGF 32 Inch Curved Gaming Monitor Unboxing and Stand Assembly and Range of Movement - 20th Oct 20
Best Retail POS Software In Australia - 20th Oct 20
From Recession to an Ever-Deeper One - 19th Oct 20
Wales Closes Border With England, Stranded Motorists on Severn Bridge? Covid-19 Police Road Blocks - 19th Oct 20
Commodity Bull Market Cycle Starts with Euro and Dollar Trend Changes - 19th Oct 20
Stock Market Melt-Up Triggered a Short Squeeze In The NASDAQ and a Utilities Breakout - 19th Oct 20
Silver is Like Gold on Steroids - 19th Oct 20
Countdown to Election Mediocrity: Why Gold and Silver Can Protect Your Wealth - 19th Oct 20
“Hypergrowth” Is Spilling Into the Stock Market Like Never Before - 19th Oct 20
Is Oculus Quest 2 Good Upgrade for Samsung Gear VR Users? - 19th Oct 20
Low US Dollar Risky for Gold - 17th Oct 20
US 2020 Election: Are American's ready for Trump 2nd Term Twilight Zone Presidency? - 17th Oct 20
Custom Ryzen 5950x, 5900x, 5800x , RTX 3080, 3070 64gb DDR4 Gaming PC System Build Specs - 17th Oct 20
Gold Jumps above $1,900 Again - 16th Oct 20
US Economic Recovery Is in Need of Some Rescue - 16th Oct 20
Why You Should Focus on Growth Stocks Today - 16th Oct 20
Why Now is BEST Time to Upgrade Your PC System for Years - Ryzen 5000 CPUs, Nvidia RTX 3000 GPU's - 16th Oct 20
Beware of Trump’s October (November?) Election Surprise - 15th Oct 20
Stock Market SPY Retesting Critical Resistance From Fibonacci Price Amplitude Arc - 15th Oct 20
Fed Chairman Begs Congress to Stimulate Beleaguered US Economy - 15th Oct 20
Is Gold Market Going Back Into the 1970s? - 15th Oct 20
Things you Should know before Trade Cryptos - 15th Oct 20
Gold and Silver Price Ready For Another Rally Attempt - 14th Oct 20
Do Low Interest Rates Mean Higher Stocks? Not so Fast… - 14th Oct 20
US Debt Is Going Up but Leaving GDP Behind - 14th Oct 20
Dell S3220DGF 31.5 Inch VA Gaming Monitor Amazon Prime Day Bargain Price! But WIll it Get Delivered? - 14th Oct 20
Karcher K7 Pressure Washer Amazon Prime Day Bargain 51% Discount! - 14th Oct 20
Top Strategies Day Traders Adopt - 14th Oct 20

Market Oracle FREE Newsletter

How to Get Rich Investing in Stocks by Riding the Electron Wave

Understanding Trading Risks Is Crucial For Your Success

InvestorEducation / Learn to Trade Sep 03, 2019 - 04:54 PM GMT

By: Chris_Vermeulen

InvestorEducation

This article will most likely open your eyes and see a side of trading you usually don’t think about or possibly don’t understand, even though it is critical for your long term success as a trader and investor.

Not many people talk about trading risks and for a good reason. It’s not that exciting to most, and its a real sobering topic because its the reality of trading: trading is risky, and that you need to know how to manage risk appropriately and we don’t know how to do this. Most of us are generally too lazy to want to learn dry/boring subjects, especially when we don’t know much about them in the first place, and I’m guilty of this as well.

I urge you to take 4 minutes and read this trading risks explained in laymen terms below. At worst is a good refresher and will make you look at your current positions and see all your capital carries the same risk and if you are positioned for steady growth or potential account implosion if the asset class moves against you.


Understanding Trading and Investing Risk Types

RISK

noun

·        1.a situation involving exposure to danger: “flouting the law was too much of a risk” synonyms: possibility, chance, probability, likelihood, danger, … more antonyms: impossibility

verb

·        1.expose (someone or something valued) to danger, harm, or loss:

There are many ways to define risk and different, disparate types of risk depending on investing in a home, doing business with a bank or investing in stocks, bonds, ETF’s, mutual funds, etc. 

We know inherently, given my last week’s piece on the increasing amount of foreclosures occurring in the largest cities in the US, where housing has been robust, cities like San Jose, CA, San Francisco, Phoenix, Chicago, etc, that there is currently increasing risk in purchasing real estate at lofty prices and hoping that the market stays hot; that if you had to resell the real estate in the next few years one could get out at a similar price to the purchase price or even higher. 

Given that we are towards the end of a boom housing cycle, this is probably not a reasonable risk to take, unless of course, one would be in it for the long haul. We call this liquidity risk or also buying an asset at a very high price as compared to its historical prices in a given market. 

Another risk is if an investor, flush with cash, sat in cash and inflation were to take off or the price of goods and services continue to increase even without rampant inflation. This risk would be defined as purchasing power risk and puts the investor (or holder of cash) in an undesirable position of having their money NOT grow while the cost of goods and services around them grows. This can and does occur even if we are told that inflation is flat. 

How does purchasing power risk show up? Look at the cost of food in the past few years. How much does it cost to feed a family today? When one has investable cash and does not keep it up with the increasing costs of “living,” this is the real definition of purchasing power risk. 

If on the other hand, an investor decides to enter into the bond and stock market and invests in the wrong asset class, this is the best-known risk defined as asset class risk. One invests in the fixed income markets, and rates go up and while the coupon may stay the same the principal amount of the investment goes down. 

Likewise, someone decides to invest in technology stocks, and they go through a correction or decline, then that sector goes down, and one’s investment is negatively impacted. This is a sector or industry-specific concentration risk. 

Another potential risk asset class or even sector-specific risk is if someone decides to invest only in small-cap stocks because they like the growth rates, and this area of concentration is enticing. However, there is an inherent risk: 

a) interest rates go up which puts pressure on smaller companies; 

b) the economy goes into a downturn and these stocks lose value and 

c) most importantly, they want to get out of these stocks at some point (perhaps due to a and b above) and they cannot get out at a fair price because too many people are selling and there is not enough volume in the stock. 

Then the problem for the small-cap investor may be getting out of these thinly traded stocks when the correction ensues. This is known as liquidity risk and can have a detrimental effect on the original portfolio value.  

Perhaps one decides to invest in stocks and decides to appropriately diversify their investment into a longer-term buy and hold strategy and does so with high quality, dividend-paying stocks. This seems like a reasonable investment thesis and one that both institutions and individuals participate in every day.

However, what happens when we go through normal corrections or even enter a bear market and have a steady trending downward market. What does one do? Buy more as the stocks are going down? Wait until they seemingly bottom and then put more $ to work? We call this market and price risk, and it is from having $ invested in a down-trending market with no clear plan of getting out and not being sure of what the targets are that one should exercise to get out. 

Then, as an investor playing in a professional market, you always have knowledge risk and unforeseen surprise risk. Knowledge risk is not knowing the “full” story and investing in a company that you may know little about and what the forward earnings projections are. Some that come to mind in recent time is GE, XOM, BBY, JCP and many others that seemed like very good, quality companies only to announce reorganizations, problems with their business or worse, potential bankruptcy. 

The unforeseen surprise element, while similar, includes accounting errors (WorldCom), corruption (ENRON), and other factors that an investor may have little to no knowledge of. 

Other investors like to trade and invest where they have little or no knowledge in emerging markets like Russia, China or Brazil only to surprised when political upheaval, slowing economies, currency risk or other factors can and will hit these markets hard and decimate speculative investor capital.  

Investing in individual issues or sectors like marijuana stocks, biotech stocks, and country ETF’s can be treacherous and best left up to professionals and analysts who cover these companies, industries, and markets.

Very important facts about investing:

If you lose 10% on your investment capital, it takes at least 11% to get back to even       

If you lose 20%, it now takes 25% just to get back to even

If you lose 50%, it takes 100% just to get back to even

Facts About Growth:

FIFTEEN 5% WINNERS = 107% ROI

$500 PROFIT PER/MONTH = 30% ROI WITH $20K ANNUALLY

POSITION SIZING = TRADING SUCCESS

Technical Traders strives to accomplish critical things:

ONE: Make it easy for you to follow our trading suggestions and take the trades. We refrain from using exotic and hard to understand instruments, stocks, or ETF’s that are not readily available and have sufficient liquidity. 

In other words, we trade things that we can enter (buy) and exit (sell) easily and quickly and do not depend on us getting an exact price. If we take the trade we usually get our order filled within a few cents from our original suggestion, by design, the trade can earn a significant profit. It does not depend on split-second timing like many other trade alert newsletter services.

TWO: We are very strict and very aware of position sizing. This is ONE of the most important ways to manage our risk and put the trader/investor (YOU) in a position that if the trade does not work, it will not hurt the overall portfolio too much and, more importantly we typically diversify with other positions at a similar time which diversifies the portfolio and allows you to reap the rewards from other disparate trades.

THREE: We have a set goal in mind when we put on the trade. These are well-defined targets as well as STOPS. If the trade works, we know where it is headed and what we will do along the way, usually resulting in taking off part or all of the trade with our targets being reached. If the trade does not work, we are out rather quickly with minimal damage to the overall portfolio.

FOUR: We always back up our rationale for why we put on the trade. One only need to watch our pre-market daily videos to get a view of why the trade set-up is occurring and what our expectations of the market are.

FIVE: We trade in a wide variety of markets and with a wide variety of instruments, mostly ETF’s that are 1x, 2x, and 3x leveraged. 

If we have a strong conviction about the trade or a limited amount of capital left to put into a trade, we would instead use a levered 2x instrument, or 3x occasionally because we want to capture the move with some extra juice (leverage) to hit the target and get out. Many of our subscribers have seen us go into SSO or SDS inverse SP500 ETF’s for a day or two turnaround in the markets and experience a 1-3% move. We typically get out on those trades quickly, and YOU have benefitted from the use of leverage. 

SIX: We like small but quick winning trades knowing that this helps compound wealth in the portfolio. Are you aware that short cab rides (or UBER) are much more profitable for the driver than all of the long runs, say to the Airport? Making a quick profit from a few swing trades lasting 2-20 days over and over is much more profitable than taking a long-term position. Nothing more frustrating than watching a long term position you have had for months or years turn south and give up all the profits. Months of mental stress and risk on your portfolio for little to no gain. Not our cup of tea.

SEVEN: We minimize Risk and Utilize Capital efficiently by making precision trades that have a high outcome of success and keeping our powder dry (in cash) while waiting to take advantage of optimal technical set-ups consistent with our approach of finding markets that present an excellent opportunity. If we have high conviction, then we may recommend you use a 2x or 3x levered ETF instrument with ample liquidity to get in and out of the trade. Examples of these would include our recent trade on SDS 2.5% (2 days), UGLD 24% (2 weeks), and plenty of others.

Please note that our suggested ETF trade recommendation portfolio from January 1, 2018, to June 30, 2019, produced a 70% return, non-compounded and close to a 100% return if you compounded the trades. 

However, we did so on a capital base of approximately 50%. Meaning, that we took probably half of the risk a similar, fully participating portfolio in the market (buy and hold) might take. Our capital efficiency was extremely high since we were sitting in a safe asset class, about 50% of the time without incurring risk. Most of the time, the whole portfolio might have been 100% in cash when there was too much uncertainty, and trends were changing. 

Factor in that there were occasions when we only had 25% or 50% invested and other times when we were fully invested. We guess that we were sitting in cash with part or all of the portfolio upwards of 50% of the time. That also means that we had a BETA of 0.5% to the market (for you technical gurus), and a return on equity probably close to 150% on invested capital during that 18 months which factors out to risk to about 1/3 to ½ less than an S&P 500 index fund, and an ALPHA so high it would be off the charts and our telling you what it is would be far too boastful.

I hope this detailed explanation of risk has helped you see risk in a new light and just how vital risk and position sizing are to the long term growth of your trading and investing account.

Our Wealth Building ETF Newsletter and our Professional Technical Wealth Advisor Newsletter and Trading Indicator Tools make trading and investing simple, logical, and profitable. With customers from over 182 countries of all types from individual traders with a few thousand dollars to billionaire money managers, we have the markets covered for you.

Get our world-class market analysis each day and our low-risk ETF trade alerts today!

Chris Vermeulen
www.TheTechnicalTraders.com

Chris Vermeulen has been involved in the markets since 1997 and is the founder of Technical Traders Ltd. He is an internationally recognized technical analyst, trader, and is the author of the book: 7 Steps to Win With Logic

Through years of research, trading and helping individual traders around the world. He learned that many traders have great trading ideas, but they lack one thing, they struggle to execute trades in a systematic way for consistent results. Chris helps educate traders with a three-hour video course that can change your trading results for the better.

His mission is to help his clients boost their trading performance while reducing market exposure and portfolio volatility.

He is a regular speaker on HoweStreet.com, and the FinancialSurvivorNetwork radio shows. Chris was also featured on the cover of AmalgaTrader Magazine, and contributes articles to several leading financial hubs like MarketOracle.co.uk

Disclaimer: Nothing in this report should be construed as a solicitation to buy or sell any securities mentioned. Technical Traders Ltd., its owners and the author of this report are not registered broker-dealers or financial advisors. Before investing in any securities, you should consult with your financial advisor and a registered broker-dealer. Never make an investment based solely on what you read in an online or printed report, including this report, especially if the investment involves a small, thinly-traded company that isn’t well known. Technical Traders Ltd. and the author of this report has been paid by Cardiff Energy Corp. In addition, the author owns shares of Cardiff Energy Corp. and would also benefit from volume and price appreciation of its stock. The information provided here within should not be construed as a financial analysis but rather as an advertisement. The author’s views and opinions regarding the companies featured in reports are his own views and are based on information that he has researched independently and has received, which the author assumes to be reliable. Technical Traders Ltd. and the author of this report do not guarantee the accuracy, completeness, or usefulness of any content of this report, nor its fitness for any particular purpose. Lastly, the author does not guarantee that any of the companies mentioned in the reports will perform as expected, and any comparisons made to other companies may not be valid or come into effect.

Chris Vermeulen Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules