Understanding take-profit

What is a take profit order?

A take profit order is an order that closes your trade once it reaches a certain level of profit. When your take profit order is hit on a trade, the trade is closed at the current market value.

What is profit-taking?

A take-profit order (T/P) is a type of limit order that specifies the exact price at which to close out an open position for a profit. This allows a trader to apply risk management in an automated and consistent way based on any trading strategy.

Take-profit basics

Most traders use take-profit orders in conjunction with stop-loss orders (S/L) to manage their open positions. If a trade approaches the take-profit point, the T/P order is executed and the position is closed, securing any profits. If the security falls to the stop-loss point, the S/L order is executed and the position is closed for a loss.

Take-profit orders are best used by short-term traders interested in managing their risk. This is because they can get out of a trade as soon as their planned profit target is reached and not risk a possible future downturn in the market. Traders with a long-term strategy do not favor such orders because it limits their potential profits.

The benefit of using a take-profit order is that the trader doesn’t have to worry about manually closing a trade or second-guessing themselves. This lowers the possibility of human error and emotions such as greed getting the better of you, such as leaving a winning trade that has already reached your target open just to try to make more money.

Note – When you have take-profit and stop-loss orders in place is the only time you can leave a trade overnight.

Take-profit orders are often placed at levels that are defined by other forms of technical analysis, including chart pattern analysis and support and resistance levels.

How to use a take-profit like a professional trader

A take profit order is often used simultaneously with a stop-loss, which helps define your risk to reward ratio. Risk to reward and appropriate trade sizes are essential in determining how successful you are in the markets. Therefore, a take profit order allows you to limit your risk or exposure to the market by exiting your trade as soon as the an opportunity presents itself and not staying in any longer than anticipated.

Should you use a take-profit order?

Whilst every trader is different in terms of trading strategy, risk profile and the time they stay in a trade. There are a few key questions you can ask to determine whether or not you should use a take profit order.

First, if you are a long-term/ swing trader, you are likely looking to take advantage of longer-term trends. Swing-traders who use take profit targets are often frustrated when they’ve recognized a good trend and get out very early and miss out on missed potential profits.

While the market is ranging, take profit orders are often preferred. It is because resistance levels often hold back price advances and support levels often hold up price drops. Therefore, if you are buying low in price moves up to resistance in a range-bound market, a take profit order at an elevated price is desirable before the market retraces closer to or below your entry point.

Pros and cons of take-profits

There are several benefits to trading with a profit target, some of which were briefly addressed above. However, there are also some drawbacks to using them.

The positive aspects of using take-profit include:

By placing a stop-loss and a take-profit, the risk/reward of the trade is known before the trade is even placed. You will the best and worse can scenario, and based on that information you can decide if you want to take the trade.
Profit targets, if based on rational and unbiased analysis, can help eliminate some of the emotion in trading since the trader knows that their profit target is set and in a good place based on the chart they are analyzing.
If the profit target is reached, the trader capitalized on the move they forecasted and will have a reasonable profit on the trade. Assuming the trader was happy with the risk/reward of the trade prior to taking it, they should be happy with the result regardless of whether they win or lose. In either case, they took the trade because there was more upside potential than downside risk.

There are some potentially negative aspects of using take-profit as well:

Placing profit targets requires skill; they should not be randomly placed based on hope or fear. Remember the importance of not trading with emotions.
Take-profit targets may not be reached. The price may move toward the profit target but then reverse course, hitting the stop-loss instead. It can even reach 1 pip away before reversing. As mentioned, placing profit targets requires skill. If profit targets are routinely placed too far away, then you likely won’t win many trades. If they are placed too close, you won’t be well compensated for the risk you are taking.
Take-profit targets may be greatly exceeded. When a profit target is placed, further profit (beyond the profit target price) is forfeited. If you place a trade at $7.50 and place a take-profit order $7.75, you give up any profits above $7.75. Remember though, you can always get back in and take another trade if the price continues to move in the direction you expect.

Day traders should always know why and how and they will get out of a trade before they enter. Whether a trader uses a take-profit to do this is a personal choice.

Conclusion

There are multiple ways a trader can exit a trade with a profit. Using a take-profit is the most consistent way to do this automatically, removing any human error or emotional attachment to a. trade. When you use a take-profit you are estimating how far the price will move and assuring that you will close realise your profits when that trade reaches your limits, instead of gambling on additional profits.

When you calculate your take-profits and stop-loss to ensure that the rewards outway your risk before you place the trade, you will know your best and your worst-case scenario. Which will close automatically with either a profit or a loss.

What are the best currency pairs to trade?

Name a market that never closes during the working week, has the largest volume of the world’s business, with people from all countries of the world participating every day. Yes, you guessed right – the Foreign Exchange Market (Forex).

The Forex market has arisen from the need for a system to facilitate the exchange of different currencies from around the world in order to trade. It is the premier financial market in the world, which reflects the financial dynamics of world trade quite clearly.

The famous phrase ‘money never sleeps’ – coined by the well-known Hollywood movie ‘Wall Street’ – sums up the foreign currency exchange market perfectly. No matter what time of day it is, the Forex market will stay open from 5pm EST on Sundays until 4pm EST on Fridays, every week, 24 hours a day during trading days!

When you begin to trade Forex online, you may find yourself overwhelmed and confused by the sheer number of currency pairs available through the MetaTrader 4 trading terminal. What are the best currency pairs to trade? The answer isn’t straightforward, as it varies with each trader. You need to take the time to analyse different pairs against your own strategy, to determine which are the best Forex pairs to trade on your own account.

This article will briefly describe what currency pairs are, and will assist you with identifying the best Forex pairs to trade. It will also explain what Forex majors are and whether they will work for you.

What are currency pairs?

Forex trading – or foreign exchange trading – is all about buying and selling currencies in pairs. For the buying and selling of currencies, you need to have information about how much the currencies in the pair are worth in relation to each other. This relationship is what defines a currency pair. A currency pair quotes two currency abbreviations, followed by the value of the base currency, which is based on the currency counter.

There is always an international code that specifies the setup of currency pairs. For example, a quote of EURUSD 1.23 means that one Euro is worth $1.23. Here, the base currency is the Euro (EUR), and the counter currency is the US dollar. Thus, each currency pair is listed in most currency markets worldwide. If you would like to learn more about Forex quotes, why not check out our article which explores the topic in greater detail?

Are majors really the best currency pairs to trade?

Not surprisingly, the most dominant and strongest currency, as well as the most widely traded, is the US dollar. The reason for this is simply the sheer size of the US economy, which is the world’s largest. The US dollar is the preferred reference in most currency exchange transactions worldwide. It is the dominant reserve currency of the world.

The following currency pairs (listed below) are not necessarily the best Forex pairs to trade, but they are the ones that have high liquidity, and which occupy the most foreign exchange transactions:

EUR/USD (Euro – US Dollar)
USD/JPY (US dollar – Japanese Yen)
GBP/USD (British Pound – US Dollar)
AUD/USD (Australian Dollar – US Dollar)
USD/CHF (US Dollar – Swiss Franc)
USD/CAD (US Dollar – Canadian Dollar)

The values of these major currencies keep fluctuating according to each other, as trade volumes between the two countries change every minute. These pairs are naturally associated with countries that have greater financial power, and the countries with a high volume of trade conducted worldwide. Generally, such pairs are the most volatile ones, meaning that the price fluctuations that occur during the day can be the largest.

Does this mean that they are the best? Not necessarily, as traders can either lose, or make money on the fluctuations. The aforementioned pairs tend to have the best trading conditions, as their spreads tend to be lower, yet this doesn’t mean that the majors are the best Forex trading pairs.

What is the best currency pair to trade?

With over 200 countries in the world, you can find a handful of currency pairs to engage with trading. However, these currency pairs may not have the potential to deliver the best results to traders. So what is the best currency pair to trade? What do most traders trade? What currency pair is worth trading and why? Keep on reading this article to find out the answers to these questions and more!

Before analysing the best currency trading pairs, it is better to enhance our knowledge on the most popular currencies that can be found in the world of Forex trading. They include:

US Dollar (USD)
Euro (EUR)
Australian Dollar (AUD)
Swiss Franc (CHF)
Canadian Dollar (CAD)
Japanese Yen (JPY)
British Pound (GBP)

Out of these currencies you can find a few popular currency pairs. If you want to achieve success in Forex trading, you need to have a better understanding of the currency pairs that you trade. If you select any of the currency pairs we’re going to discuss below, you will make trading much simpler for yourself, as lots of expert analytical advice and data is available on them.

Analysis of the best currency pairs to trade

Let’s take a detailed look at the currency pairs below:

USD/EUR – This can be considered the most popular currency pair. In addition, it has the lowest spread among modern world Forex brokers. This currency pair is associated with basic technical analysis. The best thing about this currency pair is that it is not too volatile. If you are not in a position to take any risks, you can think of selecting this as your best Forex pair to trade, without it causing you too much doubt in your mind. You can also find a lot of information on this currency pair, which can help prevent you from making rookie mistakes.

USD/GBP – Profitable pips and possible large jumps have contributed a lot towards the popularity of this currency pair. However, you need to keep in mind that higher profits come along with a greater risk. This is a currency pair that can be grouped into the volatile currency category. However, many traders prefer to select this as their best currency pair to trade, since they are able to find plenty of market analysis information online.

USD/JPY – This is another popular currency pair that can be seen regularly in the world of Forex trading. It is associated with low spreads, and you can usually follow a smooth trend in comparison with other currency pairs. It also has the potential to deliver exciting, profitable opportunities for traders.

All the major currency pairs that can be found in the modern world are equipped with tight spreads. However, this fact is not applicable to the USD/GBP currency pair, because of its volatility. It is perhaps better to avoid the currency pairs that have high spreads. The recommended spread by the trading experts tends to be around 0-3 pips. When it exceeds 6 pips, the trading pair may become too expensive, which can lead towards greater losses.

Still, it doesn’t mean that you should totally avoid everything that has high spreads. The best way to trade sensibly and effectively in this regard would be to exercise risk management within your trading, so you can effectively manage the risks.

Exotic currency pairs

Typically the best pair for you is the one that you are most knowledgeable about. It can be extremely useful for you to trade the currency from your own country, if it is not included in the majors, of course. This is only true if your local currency has some nice volatility too. In general, knowing your country’s political and economical issues results in additional knowledge which you can base your trades on.

You can find such information through economic announcements in our Forex calendar, which also lists predictions and forecasts concerning these announcements. It is also recommended to consider trading the pairs that contain your local currency (also known as ‘exotic pairs’). In most cases, your local currency pair will be quoted against USD, so you would need to stay informed about this currency as well.

Conclusion

The dynamics of foreign exchange trading is an interesting subject to study, since it can provide a boost to the world economy, along with the rise and fall of its financial fortunes. As globalisation becomes a bigger, more pressing issue for most countries around the world, the fate of these pairs is closely interconnected. Make sure you study the foreign exchange market extensively before making an investment.

There are many Forex pairs available for trading and it is highly recommended to try trading most of them before you choose a particular one to stick with. As Forex trading is risky, try it first on a Demo account with a virtual balance, which contains virtual funds of $10,000. Identifying the best currency pair to trade is not easy. The best way to accomplish this is through hands-on experience. Simply open a Demo account, and start trading on the live markets when you are ready, and you will be well on your way to success in the Forex markets!

What is CFD trading?

CFD trading is the buying and selling of CFDs, contracts for difference. CFDs are a derivative product because they enable you to speculate on financial markets such as shares, forex, indices and commodities without having to take ownership of the underlying assets.

What is a CFD?

A CFD, or Contract for Difference, is a derivative product that traders can use to speculate on the future direction of a market’s price. You’ll never take ownership of the underlying asset, which means you can take advantage of rising and falling markets. CFDs can be traded on a wide range of over 4000 global markets.

CFD trading explained

Put simply, CFD trading lets you speculate on the price movement of a variety of financial markets such as currencies, stocks, commodities and bonds, regardless of whether prices are rising or falling. Because you are speculating on price movement rather than owning the underlying instrument, you will not pay UK Stamp Duty on any profits.

How does CFD trading work?

When you open a CFD position you select the amount of CFDs you would like to trade and your profit will rise in line with each point the market moves in your favour.

If you think the price of your chosen market will go up, you click buy and your profits will rise in line with any increase in that price.

However, if the price falls, then you will make a loss for every point it moves against you.

For example, if you think the price of oil is going to go up then you could place a buy trade of 5 CFDs at the price of 5325. If the market rose 30 points to 5355 and you closed out your position, you would make a $150 profit, 30 times the 5 contracts that you bought.

However, if the market moves against you and the price of oil falls 30 points to 5295 then you would lose $150.

Why is CFD trading popular with investors?

CFDs are a popular way for investors to actively trade financial markets. This is because CFDs are:

Tax efficient: You are not required to pay UK Stamp Duty
Flexible – you can trade on rising as well as falling markets: Trade on falling markets (going short) as well as rising markets (going long)
Leveraged products: Use a small amount of money to control a much larger value position
Hedging tools: You can use CFDs to offset any potential loss in value of your physical investments by going short

Trading on falling markets

If you believe a market will fall in value, you can sell a market – known as going short – and make a potential profit from falling prices. This is different from traditional Share dealing where you can only buy, or go long.

Example

The US 500 is trading at 2340. You believe the US 500 will fall as you expect the forthcoming US earning season to disappoint.

You open a sell position of 5 US 500 CFDs at 2340.

The US 500 falls by 65 points to 2275 and you decide to close your trade.

Hedging

As CFDs allow you to short sell and therefore make a potential profit from falling market prices, they can be used as a tool by investors as ‘insurance’ to offset losses made in their physical portfolios.

For example, if you hold £5,000 of Barclays shares and you concerned that they are due for an imminent sell-off, you can help protect your share portfolio by short selling £5,000 of Barclays CFDs.

Should Barclays share prices fall by 5% in the underlying market, the loss in value of your share portfolio would be offset by a gain in your short sell CFD trade. In this way, you can protect yourself without going through the expense and inconvenience of liquidating your stock holdings.

CFD trading is a margined product

This means you trade by paying just a small fraction of the total value of the contract.

Remember that with leveraged trading, there is a potential for your losses to exceed deposits.

In other words you can put up a small amount of money to control a much larger amount potentially magnifying your return on investment. Remember, however, that your losses will be magnified as well, so you should manage your risk accordingly.

Which CFD markets can I trade on?

Most brokers offer a choice of over 4,000 CFD markets, including:

Indices such as the UK 100, Wall St and Germany 30
FX such as GBP/USD, GBP/EUR and JPY/USD currency pairs
Shares such as Rio Tinto, Amazon and General Electric
Commodities such as oil, gold and cocoa
Other markets including bonds, interest rates and options

Is CFD trading right for me?

CFD trading is ideal for investors who want the opportunity to try and make a better return for their money.

However, it contains significant risks to your money and is not suitable for everyone. We strongly suggest trading on a demo account before you try it with your own money.

CFD trading may be ideal for people:

Looking for short term opportunities: CFDs are typically held open for a few days or weeks, rather than over the longer term
Who want to make their own decisions on what to invest in: It is not advised to allow anyone to trade for you or trade on your behalf.
Looking to diversify their portfolio: Most brokers offer over 4,000 global markets to trade on including shares, commodities, FX and indices
Be as active or passive as they want: You can trade as little or as often as you want

For more insight in understanding, trading and investing, enrol in our free online trading course, which will help guide you through your journey to become a successful trader.

What are blue chip stocks and why should you invest in them?

Blue Chip stocks have a large market capitalization, a history of growth and stability, and frequently pay dividends. But what exactly are they, and should you invest in them?

There are many different theories or compendiums of advice for would-be investors. One of the most consistent has been that if you want to have the best returns, with steady, ‘reliable’ growth, invest in the most well-known, and highest-capitalized companies. These companies are called “Blue Chip” stocks.

What is a blue-chip stock?

Blue Chip stocks are supposedly called that due to ‘blue chips’ holding the highest value in games of poker.

There is no definitive list of ‘Blue Chip’ stocks, however, most traders consider stocks listed on the Dow Jones Industrial Average as Blue-chips.

The DJIA, or Dow, as it is known, is an average of 30 large publicly-owned stocks’ performance throughout a trading day.

Those 30 publicly-traded stocks are considered Blue Chip stocks by investors. In addition to being the stocks composing the DJIA, the 30 companies are considered as the strongest U.S. companies with the best reputations for growth.

To name a few: Alphabet (GOOGL), which owns Google, Amazon (AMZN), 3M (MMM), American Express (AXP) and Apple (AAPL).

The companies comprising the DJIA have changed, but those that are listed are considered large, stable, and financially sound or well-capitalized.

However, that’s not all that makes the Blue Chip.

To be considered a Blue Chip, a company must have a large market capitalization, growth history, be a component of a market index (not just the DOW) typically a blue-chip pays dividends, though not all do.

The size and value of a company are measured as its market capitalization. Its growth history is usually impressive, with market capitalization of $10 billion or more, and it will be a part of a major market index like the S&P 500, the Nasdaq 100, or a combination of one or more.

Although not all Blue Chip stocks pay dividends, most do. Suggesting they no longer have a great need to reinvest in their own company for it to grow.

Why invest in blue-chip stocks?

Many investors look at Blue Chip stocks is because of their reputation for having stable and consistent earnings.

Companies with stable earnings over a prolonged period are seen as reliable investments. Stable, reliable earnings typically correlate to similar returns for your portfolio.

If you choose a blue-chip stock that pays dividends. Not only will you benefit from the stock’s value rising, you will also get paid something ‘extra’ for investing in the company.

For instance, a company that paid a 20% dividend on stock that had already appreciated in value works as a clear incentive to investors.

Stability also indicates the company’s financial footing is sound, not overly burdened by debt, with financial ratios such as debt-to-equity intact and within prescribed ‘safe’ limits, and the company has an efficient operating cycle. Such stability tends to protect the stock from severe volatility, limiting downside risk based on economic fundamentals.

Stability is also good to help you maintain a diversified portfolio including a means to reduce your overall risk profile, allowing you to invest in stocks with greater risk knowing there are reliable, stable, less volatile and risky stocks in your portfolio. Blue Chips tend to have multiple revenue-producing divisions and diversified business lines that help them reduce potential corporate risk from operational failures or just losses.

What are the pros and cons of blue-chip stocks?

Pros:

Stability: Blue Chip stocks sometimes do fail, or crash, like others, but far less frequently. For example, Coca-Cola (KO) which made an initial public offering in 1919 of shares on the New York Stock Exchange for $40 a share. If you had bought a single share at $40 after the IPO, which crashed to $19 because of the ‘Sugar Crisis,’ and hung onto it, it would be worth more than $15 million with dividends invested.
Strong financial performance
Potential for regular dividends
Relatively low downside risk
Low volatility
Steady long-term returns
Well-regulated and governed

Cons:

Blue Chips lose favour on the DOW. The stocks considered Blue Chips have changed as the economy shifts, with some cutting dividends and others, like General Electric Co (GE) and General Motors (GM) being removed from the index as stronger, more stable stocks took their place. Both of these stocks, like most Blue Chips, were once a household name. But its sector wasn’t growing, so another, better-preforming company, came and took their place. Stocks that were once common household names, like Kodak (KODK) Xerox (XRX) and Chrysler are no longer even considered Blue Chips.
Because Blue Chip stocks are, by definition, stable, they aren’t likely to ‘beat the market’ in terms of growth. As Blue Chips tend to be the ones driving stock averages and indexes, they aren’t likely to stray much in terms of return from the averages.
If you’re a young investor, you may want instead to invest in companies that, rather than paying dividends, invest in their own growth and increased stock value. Younger investors are more likely to want a growth stock to build wealth than a steady, stable stock.
Most potential good news is built into a Blue Chip’s stock price. Bad news can, therefore, jolt investors and damage the share price that exists because of perceived stability.
Low, though steady, returns
Poor dividend yield
Cannot beat the market
May be conservative in terms of exploring more opportunities, diversifying in products or industries.

5 Blue Chip Stocks

Here is a list of 5 Blue Chip stocks currently attracting long-term investors.

Following the company’s name is its stock symbol, so you can look at its performance and other details yourself as often as you like. We have also shown an example of how much could have been made if you were lucky enough to have invested early on, as the company went public.

This list is meant neither as investment advice nor endorsement, it is merely a factual portrayal of the listed companies’ status in terms of market capitalization at that time.

1. Microsoft (MSFT)

The computer software company that only became a public company in 1986 with its Initial Public Offering with shares priced at $20 each. Microsoft (MSFT) currently has a share price of $158.96 at the time of this lists creation.

Example:

IPO price – $20
Current price – $158.96
Investment – $1,000.00
Current capital – $7,947.99
Return % – 694.80%

2. Apple Inc, (AAPL)

The personal computer company that has since branched into several other electronic products first became a public traded company before Microsoft , with an IPO for priced at $22 a share, in 1980. Apple Inc, (AAPL) currently has a share price of $289.80 at the time of this lists creation.

Example:

IPO price – $22
Current price – $289.80
Investment – $1,000.00
Current capital – $13,172.69
Return % – 1217.27%

3. Amazon (AMZN)

Amazon – the e-commerce powerhouse started attracting investors with its IPO in 1997 offering shares at $16 each. Amazon (AMZN) currently has a share price of $1869.80 at the time of this lists creation.

Example:

IPO price – $16
Current price – $1869.80
Investment – $1,000.00
Current capital – $1272.69
Return % – 11586.25%

4 – Google Inc. (GOOG)

The world’s number one search engine, which is now a division of umbrella company Alphabet, came onto the market with an IPO as recently as 2004. The company first offered shares under the symbol GOOG at $85 each. The symbol GOOG now represents the Alphabet’s Class C shares (GOOG) Alphabet’s Class A shares trade under the symbol GOOGL, and is currently trading for 1,354.64 per share.

Example:

IPO price – $85
Current price – $1869.80
Investment – $1,000.00
Current capital – $15,936.94
Return % – 1493.69%

5 – Alibaba Group (BABA)

The Chinese e-commerce giant had the largest IPO on record in the U.S., debuting in 2014 at $68 per share and raising $21.8 billion from it. Alibaba Group (BABA) currently has a share price of $215.47 at the time of this lists creation.

Example:

IPO price – $68
Current price – $215.47
Investment – $1,000.00
Current capital – $3168.67
Return % – 216.86%

Conclusion

As you can see, Blue Chip stocks are less volatile, steady and reasonably safe stocks to invest in, if you intend on holding stocks for a long time. But they also come and go, due to the market and even societal forces that change peoples’ spending habits.

It is one of the best ways to start building a diverse and long-term portfolio, as you can rely on these stable investments to be the backbone of your portfolio and perform as the underlying company does also.

Should you hold a day trading position overnight?

If you’re a day trader (or considering it), buying and selling financial instruments throughout a specific trading session. Usually, you would close all of your trades before your respective market closes. However, it’s never always that simple. If you have a good trade running at the end of your trading session you maybe but you’re debating whether to hold this position overnight.

In this article, we will discuss and breakdown what should be done if you find yourself in this situation.

Have you ever considered holding your day trades overnight? Although many traders and investors conduct this practice, today I will explain to you why it is a bad idea if you are day trading.

There is a multitude of factors to consider with an overnight trade, and each market (forex, stocks and cryptocurrency) have a variety of factors to consider. A professional trader needs to address and consider at least one of the following:

Risk and risk management need to be addressed
as well as the capital cost of holding the position,
changes in leverage
The strategic reason (if there is one) for holding the position overnight.

Note – This article is aimed at “Day Traders”. Day traders are traders that open and close positions during the trading day, and by definition don’t hold trades overnight. Typically closing any open positions at the end of their respective trading session.

Swing traders & long-term investors typically do not worry about closing trades overnight as they are playing long term movements and have already factored in the timescale of the position.

Why would someone hold a trade overnight?

Typically, traders want to hold trades overnight either to increase their profit (has not achieved their anticipated target/ take profit), or they hope a losing trade will be reduced or turn into a profit the following day.

If you are considering holding a trade overnight, you must first consider the reason for doing it. If the reason is not sound, then close the position before you go to sleep or the market closes.

Successful day traders have clearly defined trade boundaries when they trade, stating exactly when they will take profits and losses. Often these boundaries include the use of stop-loss orders, trailing stops and profit targets. If the trade is not automatically closed by either of the boundaries by the end of the trading session, the position is manually closed.

Holding a trade overnight presents additional risk and introduces new variables which likely weren’t taken into consideration when the trade was originally placed.

Losing day trades should not be held overnight. Take the loss and begin trading fresh the next day.

If you are using proper risk management and trading with a plan then no single loss should be detrimental to your account, so there is no reason to gamble on whether a trade will turn profitable after the market closes/next day.

Holding a trade over the weekend is often a gamble because once the market closes new risks are introduced (risks vary by market, with some presenting more risk than others). There is no telling which way the market will reopen as after-hours trading often dramatically moves the market.

If you are looking to hold a trade until the next day just to achieve some additional profit, this too is a gamble.

Conditions change and while the gain could increase, it could also turn into a loss. Lock in the profit whilst you still have the chance and trade afresh the next day. More profit can be made tomorrow with a new opportunity. The hope of making more money isn’t typically a good reason for taking the risk of holding a day trade overnight.

It may also be tempting to hold a day trade if there is a big move expected the next day. For example, a company is revealing its earnings overnight which will cause the price to jump or dump the next day.

While there is big profit potential here, there is also a huge risk if the trader ends up on the wrong side of the move.

There are hardly any valid reasons to hold a trade overnight unless absolutely forced into it because of a trading halt or lack of liquidity. Only swing trades (trades that last a couple of days to a couple of months) should be held overnight, and this should be planned before the trade is placed, not once in the trade.

5 reasons it’s a terrible idea to hold trades overnight:

1. Gaps hurt

If you are a trader, you have probably noticed that when the market opens, volatile stocks and currencies will have big opening gaps from the previous days’ close.

The reason for this is there are news events that occur prior to the market open that can have a positive or negative impact on the share price.

If you do this, you are subject to the risk of an after-hours or morning gap. The gap could be bullish or bearish. Therefore, your chances are 50-50 on the trade.

2. Your stop-loss is worthless

The worst thing when holding your trade overnight is that stop-loss orders cannot protect you from the gaps. You will probably say “How is that possible? Isn’t the stop supposed to close my order immediately once triggered?

That is absolutely correct; however, when there is a gap, the price technically jumps your order, rendering your stop-loss worthless.

Once the market opens, the first price will trigger the stop loss, which will likely be well beyond where you hoped to cut ties.

3. Broker’s punishment

Yes, that is correct. Brokers can and will charge an overnight fee on someday trading accounts. This fee can run as high as a few hundred basis points.

The fewer fees you pay the greater odds of success. So, if you are that much in love with the stock, you can always reopen your position in the morning.

4. Margin size

If you would like to hold a trade overnight you should definitely have a solid bankroll. Since you plan to stay in the market with the looming risk of a gap, you should make sure you can afford any potential margin calls.

A margin call means your broker will start selling your assets in order to cover any shortfall. In other words, your overnight trades and available cash could be wiped out to cover the broker’s potential losses.

The other way to protect yourself from the aggressive margin call is pretty straight forward –deposit more money! However, cash sitting in an account just to protect against a potential margin call does not provide the best rate of return.

5. Stress

What about you? If you somehow manage to tackle the insidious market and get out unscathed, you should ask yourself this question: “Is holding a position overnight worth the stress?”

The first four reasons not to hold a position overnight all translate into stress on you.

Think about how you are going to spend the night in your bed when you have all of this on your mind.

Isn’t your bed the place where you should relax, gaining energy and strength for the next trading day?

Conclusion

Day trades should be left as day trades. Unless a trade was originally planned to be held overnight, it should be closed during active market hours or whilst you still awake and active to monitor your position. This helps avoid the common problem of holding onto a losing trade for longer in the hopes that it will return to profitability or gambling on whether a market will jump or dump overnight.

Whether day trading or holding positions overnight, be aware of high-impact news events which could render a stop loss ineffective. Day traders should close all positions before such events unless their strategy is specifically calibrated and tested to withstand substantial volatility.

By closing your trades overnight and sticking to your trading plan you are much more likely to achieve consistent results when you trade.

How long does it take to learn how to trade?

Many beginner traders often wonder how long it takes to learn how to trade. As trading has the potential to be an incredibly lucrative career, it is often the first thing novice traders want to know about. Whilst the markets are riddled with uncertainty, certain tried-and-true principles can help investors boost their chances for long-term success.

So how long does it really take to become a proficient investor and trader?

How much work are you willing to put in?

Success in the markets does not happen overnight, so it is important to establish your expectations. The more time spent improving your knowledge and refining your trading strategy will speed up the process of turning out a regular profit. It is important to build your direct knowledge of trading and your live experience of trading in the markets.

Although solid education in trading is essential before you start, actual trading experience with real money is priceless and will equip you with the skills you need. Even testing demo accounts will help you as a trader to practise placing trades and executing your trading strategies without the risk of losing real money.

By formulating trading strategies and testing them on historical live price charts, you can analyse these findings with statistical methods to see if the strategy is likely to produce a profit.

Establish your goals

Every trader will have a different metric for what constitutes success. For example, while some are just looking to beat their returns from managed investments, others are looking to obtain a healthy figure which enables them to retire earlier.

As we have already mentioned, it is important to establish your expectations, as the lower your desired rate of return, the less risk you take on and the sooner you can achieve stable probability from trading. Here at starttrading.com, we recommend gradually increasing your desired profit levels, allowing you to spend your time becoming even more profitable than you were before.

What market are you going to choose?

Every market is different, so it is important to understand that you may have to spend longer adapting your strategy. This will have a direct impact on the amount of time it takes for you to become a profitable trader. With certain markets, there are many extremely complex and sophisticated options-based strategies that require a lot of knowledge and experience to master.

Essentially, the market and trading strategies you choose to adopt will determine how long it takes before you start to see a consistent profit. Once you have developed a method, practice implementing it with precision and adapt to market conditions.

Mentorship

Especially when learning to trade, one of the biggest things we can advise is working with a mentor. This can really influence your success as a trader, as they can offer advice and input that you didn’t even know you needed.

Learn how to trade

If you are looking to learn how to trade, we can help! Simply sign up to our free online trading course and start learning how to trade today.

7 reasons why new traders fail

Most new traders fail to make money when trading. It is essential to know what these traders are doing wrong in order to avoid the same mistakes. We explain what not to do in order to be a successful trader.

Trading privately is probably one of the biggest ways to make money from the comfort of your home. The internet is flooded with tips and tricks on how to be profitable while trading, indicators and techniques to follow and even signals on when to buy or sell. Then why do so many traders still not “make it”?

1. Trading without a plan

Whether you are a Stock, Forex or Cryptocurrency trader, a consistent trading plan is of key importance to be successful. There is a saying that goes: “Failing to plan is planning to fail”. One will find that the top traders in any market never enter a trade without have a strict trading plan. This plan includes risk vs reward ratios, possible ROI’s, escapes etc. and incorporates almost any situation possible and how to react to it. Having a consistent trading plan will help you as a trader reacts to any situation the market throws your way as well as let you improve on your mistakes when the plan fails. It also acts as a method to keep you from making impulsive decisions which then depends completely on luck. If one does not follow a trading plan one may encounter the following problems:

Slow or no growth
Continuously making the same mistakes
“Luck” trading/ Impulsive trading

Creating a trading plan may sound unnecessary to a beginner and be too much effort, but let us assure you, if you take this first step, you will quickly see its benefits and not be disappointed in the long run. To know more on how to create your own trading plan/ strategy, sign up to our free online trading course.

2. Connecting emotions to trading

As weird as this sounds, this is a massive problem in why most traders fail. A majority of traders, most usually beginners, makes the mistake of attaching emotions to the results of their trades. Trading should not influence one’s emotions at all. The thing is, the moment you attach emotions to a trade, your mind immediately gets distracted in one way or another. Having emotions influencing your thoughts will lead to less focus and you may then deviate from your plan. Most people do not realise that attaching your emotions to a trade is almost always non-beneficial in either way. Let us look at some examples, speaking from experience:

If you lose a trade, you will immediately be disappointed and try to “fix “the loss. This then leads to you completely rushing a trade, putting more money on the line than usual, deviating completely from your trading plan and depending completely on luck. This is gambling. Let us assure you, that most of the time this does not work out in your favour and even if it does, you have learnt nothing by it and will just be more emotional on the next trade.

If you win a trade, you will immediately be very excited, although there is nothing wrong with this and it is completely normal to be happy when a plan works out, this is not good for trading. This usually leads to you feeling overconfidence and entering more trades. These trades are usually not thought through as well and deviate from your plan or can even be in the wrong market conditions.

We can go on and discuss a lot more examples of how attaching emotions to your trades is non-beneficial, but we cannot hold you up the whole day. The point is, DO NOT attach emotions to your trading! If you ask advice by any professional trader, you will find that they will almost always refer back to this statement.

3. Having Unrealistic Expectations

Due to social media being flooded with traders, the luxurious life of some of these traders is not a secret anymore. The problem comes in when beginner trades see the lifestyle of some of these traders and expect to achieve this through trading alone and/ore in a very short time. They may also get the idea that trading is very easy and will make you rich very quickly. I am sorry to inform you that although this is possible, this is not the case for most traders.

The unrealistic expectations traders have about trading is quickly smashed as they enter the trading ecosystem. This in turns demotivates these traders as reality hits them and they eventually quit. It is important to remember nothing in life comes without hard work and effort. There is also no quick way to make money and trading definitely supports both these statements.

4. “Bad” trading practice

When we speak about bad trading practice, it includes all the “mistakes” traders make that eventually leads to them failing in the market. One will find that most of these mistakes can be avoided by keeping in mind the first topic we spoke about, A trading plan, as all of these sectors form part of this plan and is necessary for its success.

5. Risk vs reward

It is safe to say that risk management is one of the most, “looked over” activities when it comes to trading. Risk management is the process by which one sets up the risk you are willing to take against the reward therefore, such as take profit and stop loss regions. If you as a trader does not have risk/reward ratios incorporated into your trading plan, it will be very difficult to not only know when to take profits and/or set stop losses but also to minimise your risk by managing it correctly. Risk/reward ratios are highly recommended and can have a big influence on long term success. Having no risk/reward regions in trading can lead to some trades being held longer than needs to and eventually loses the trader money. Continuously repeating this process leads to traders failing in the markets.

6. High leverage

High leverage trading is another activity which leads to a lot of traders losing a lot of money and eventually quit trading. The fact that you can make large amounts of profits on small initial investments usually sounds like a great deal, but if these trades do not go your way, you could easily lose massive amounts of money and even get liquidated. It is very tempting to know that you can make much more profits than you currently are on trades, but it is strongly advised to not trade with leverage if you are not an experienced trader. Do not fall into the trap of thinking you will make money faster this way.

7. Overtrading

Overtrading is a very common problem where a trader places too much trades, usually unplanned, in a short time period. This can be due to many reasons such as a trader trying to make up money that was lost by previous trades, a trader seeing multiple potential trades at the same time and does not want to “miss out” or even a trader which cannot wait for a “good” trade and tries to enter every move. When overtrading, one usually does not set up a trading plan as there is “no time”, or even if one does, it is very short term and not well calculated. Overtrading to make up losses is never advised as this just again shows that one either attaches emotion to their results or that one does not have the patience and or experience to wait for the right time.

Other

There is obviously a lot more reasons why traders fail, but if you focus on not making the mistakes discussed in this article, you are already ahead of the game.

Conclusion

Now that you have been through this article, we hope you as a trader now know which mistakes not to make to stay profitable in the markets. It is important to always keep a clear mind and not attach emotions to your trades and critical to have a trading plan. We wish you all the best in the markets and hope you can take something valuable from this article with you throughout your trading career.

If you are looking to learn how to trade, or you are looking take your trading to the next level. Sign up to our free online trading course and learn how to trade in a fun and interactive way.

Understanding stop-loss orders

Even the most inexperienced traders can benefit from a stop-loss order in some way. Read on to find out exactly what a stop-loss is and how to use one.

What is a stop-loss order?

A stop-loss order is simply an order that limits your risk by closing out your position at a small loss at a specific price. If you buy a stock at $20 and place a stop-loss at $19.50, when the price reaches $19.50 your stop-loss order will execute, preventing further loss.

Stop-loss orders are usually “market orders,” meaning it will take whatever price is available once the price has reached $19.50 (can be based on the bid, ask or last price touching $19.50). If no one is at that price to take your trade-off your hands, you could end up with a worse price than expected. This is called slippage. As long as you are trading Stocks, currencies in the Forex Market, or futures contracts with high volume, slippage while day trading isn’t usually an issue.

Positives and negatives of stop-loss orders?

The advantage of a stop-loss order is you don’t have to monitor how a stock is performing daily. This convenience is especially handy when you are on vacation or in a situation that prevents you from watching your stocks for an extended period.

The disadvantage is that a short-term fluctuation in a stock’s price could activate the stop price. The key is picking a stop-loss percentage that allows a stock to fluctuate day to day while preventing as much downside risk as possible. Setting a 5% stop loss on a stock that has a history of fluctuating 10% or more in a week is not the best strategy. You’ll most likely just lose money on the commission generated from the execution of your stop-loss order.

There are no hard-and-fast rules for the level at which stops should be placed. This totally depends on your individual investing style: An active trader might use 5% while a long-term investor might choose 15% or more.

Another thing to keep in mind is that, once you reach your stop price, your stop order becomes a market order and the price at which you sell may be much different from the stop price. This fact is especially true in a fast-moving market where stock prices can change rapidly.

Not just for preventing losses

Stop-loss orders are traditionally thought of as a way to prevent losses, thus its namesake. Another use of this tool, though, is to lock in profits, in which case it is sometimes referred to as a “trailing stop.” Here, the stop-loss order is set at a percentage level below the current market price, not the price at which you bought it. The price of the stop-loss adjusts as the stock price fluctuates. Remember, if a stock goes up, what you have is an unrealised gain, which means you don’t have the cash in hand until you sell. Using a trailing stop allows you to let profits run while at the same time guaranteeing at least some realised capital gain.

Advantages of the stop-loss order

First of all, the beauty of the stop-loss order is that it costs nothing to implement. Your regular commission is charged only once the stop-loss price has been reached and the stock must be sold. You can think of it as a free insurance policy.

Most importantly, a stop-loss allows decision making to be free from any emotional influences. People tend to fall in love with stocks, believing that if they give a stock another chance, it will come around. This causes procrastination and delay, when giving the stock yet another chance may only cause losses to mount.

No matter what type of investor you are, you should know why you own a stock. A value investor’s criteria will be different from that of a growth investor, which will be different still from an active trader. Anyone strategy may work, but only if you stick to the strategy. This also means that if you are a hardcore buy-and-hold investor, your stop-loss orders are next to useless.

The point here is to be confident in your strategy and carry through with your plan. Stop-loss orders can help you stay on track without clouding your judgment with emotion.

Finally, it’s important to realise that stop-loss orders do not guarantee you’ll make money in the market; you still have to make intelligent investment decisions. If you don’t, you’ll lose just as much money as you would without a stop-loss, only at a much slower rate.

Where to place a stop-loss order when buying

A stop loss shouldn’t be placed at a random level. The ideal place for a stop loss is at a location which allows the market enough room to fluctuate a little while it starts to move in your favour, but gets you out of your trade if the price turns against you.

One of the simplest methods for where to place a stop-loss order when buying is to put it below a “swing low.” A swing low occurs when the price falls and then bounces. It shows the price found support at that level.

You want to be trading in the direction of the trend. As you buy, the swing lows should be moving up. The chart shows several potential entry points along with possible stop-loss locations for each entry.

Where to place a stop-loss order when short-selling

A stop loss shouldn’t be placed at a random level. The ideal place for a stop loss is at a location which allows the market enough room to fluctuate a little while it starts to move in your favor, but gets you out of your trade if the price turns against you.

One of the simplest methods for where to place a stop order when short selling is to put it above a “swing high.” A swing high occurs when the price rises and then falls. It shows the price found resistance at that level.

You want to be trading in the direction of the trend. When looking for short trades the swing highs should be moving down. The chart shows a potential entry along with a possible stop-loss location for a short trade.

Where to place a stop loss – alternatives

Above a swing high when shorting or below a swing low when buying isn’t the only place to put a stop loss. Depending on your entry price and strategy, you may opt to place your stop loss at an alternative spot on the price chart.

If using technical indicators, the indicator itself can be used as a stop loss level. If an indicator provided you with a buy (go long) signal, a stop loss can be placed at a price level where the indicator will no longer signal it’s wise to be long.

Fibonacci Retracement levels can also provide stop loss levels.

Volatility is also commonly used to set stop-loss levels. An indicator such as Average True Range tells how much the price typically moves over a period of time. Traders can set a stop loss based on volatility, attempting to place a stop loss outside of the normal fluctuations. This can also be done without an indicator by measuring the typical price movements on a given day and then setting stop losses and profits accordingly.

Define your stop loss strategy

Stop-loss levels shouldn’t be placed at random locations. Where you place a stop loss is a strategic choice and should be based on testing out and practising multiple methods – finding which works best for you.

A trading plan is where you define how you will enter trades, how you will control risk and how you will exit profitable trades. Isolating the trend direction and controlling risk on trades is of paramount concern when learning how to day trade. When starting out, keep trading simple. Trade in the overall trending direction, and use a simple stop loss strategy that gives enough room for the price to move in your favor, but cuts your loss quickly if the price moves against you.

Conclusion

A stop-loss order is a simple tool, yet so many investors fail to use it. Whether to prevent excessive losses or to lock in profits, nearly all trading plans can benefit from utilising a stop loss. Think of a stop-loss as an insurance policy: You hope you never have to use it, but it’s good to know you have the protection should you need it.

To learn more about stop losses, aswell as other risk management trading strategies, simple enrol in our free online trading course.

What Is An Initial Coin Offering (ICO)?

What is an initial coin offering (ICO)?

Initial Coin Offerings (ICO) are the hot new way to raise funds for new blockchain based companies, but what are they? In this guide we will explain everything you need to know about ICOs and how to invest in one.

If you’ve been kicking yourself for not getting in on the ground floor of top cryptocurrencies such as Bitcoin and Ethereum, you might want to consider looking into investing in an Initial Coin Offering. An Initial Coin Offering commonly referred to as an ICO, is a fundraising mechanism in which new projects sell their underlying digital tokens in exchange for bitcoin and ether.

Investing in ICOs

Whereas Bitcoin primarily focuses on payments and moving money between ecosystems, ICOs support companies with almost limitless applications. Here’s how it works, a document is created essentially detailing exactly how the system would work and why it’s a great idea that could be very useful, usually called a white paper. Then, people are asked to send money, usually, Bitcoin or Ether, but also traditional fiat currencies, and in return investors are returned with the new cryptocurrency or virtual token created. Investors hope that the new cryptocurrency will get used a lot and be in high circulation, which would, in turn, raise the value of the currency.

Most ICOs work by having investors send funds, usually bitcoin or ether, to a smart contract that stores the funds and distributes an equivalent value in the new virtual token at a later point in time. It’s important to note that unlike an Initial Public Offering, also known as an IPO, investing in an ICO won’t result in you having an ownership stake of the company you’re giving money to. You’re gambling that the currently worthless currency you pay for now will increase in worth later and make you money.

When investing in ICOs, you often have the option to become part of the development of new, upcoming technology. They often have a network of supporters already in place, which means the investment is already in a much stronger position to see faster growth. ICOs offer the opportunity to see gains much quicker and can take profits out of the company invested in more easily.

The success of an ICO is influenced by many aspects. Despite being a relatively new fundraising model, popularity has rapidly increased in recent years. As many of the ICOs are based on new blockchain technology, you need to have a thorough understanding of what you are putting your money into, as well as your financial requirements and understanding of the investment landscape. As with any investment decision, buyers and sellers need to find out as much information as possible – establishing both the positive and negative points.

What’s the difference between ICOs and IPOs?

How is buying a token different from buying a stock? Although the concepts are very similar, ICOs and IPOs differ significantly in terms of their mechanics and regulatory frameworks. IPOs are developed and organised by established private companies who are looking to start selling shares in the public domain. On the other hand, ICOs are organised by startups to raise seed money. This investment will not result in the individual having an ownership stake of the company, instead, it is an opportunity for the token to gain value over time.

The startups often don’t have a product ready, so they conduct ICOs based on their product idea and utility. When conducting ICOs, there are not many strict regulatory guidelines to stick to and they are not restricted by international borders. Usually, a percentage of the tokens is sold to ICO participants and a percentage kept for the company’s needs – which allows investors to fund the projects they like.

When investing in a stock you are purchasing a piece of the equity and operating company. Anything the company does such as cash flows or profits, you own a portion of that. Fundamentally tokens are different. You are not buying part of the company, you are buying the money supply of the future technology project. For example, a future casino being built, and the owner wants you to invest in the casino chips before the finalisation of the casino. This is similar to token sales; the team wants you to buy the tokens before the creation of the technology and platform. If the technology or platform is well used, the value of the tokens will correlate with the value of the company.

How to choose an ICO to invest in

When looking for quality ICOs to invest in, it is important to find a strong development team, preferably individuals with cryptocurrency experience, who can exhibit past successes. The white paper is also a crucial aspect of your investment, as this is what describes every aspect of the project itself. This includes the initial concept, the technology behind it, as well as the circulation of tokens and how they will be used. This crucial information will help you understand the logistics behind the project, helping you to become part of exciting future technology advances.

There are plenty of other techniques when it comes to evaluating tokens, it’s important that you view our in-depth guide on how to evaluate different tokens like a pro.

What to look out for?

Whereas Bitcoin primarily focuses on payments and moving money between ecosystems, ICOs support companies with almost limitless applications. Here’s how it works, a document is created essentially detailing exactly how the system would work and why it’s a great idea that could be very useful, usually called a white paper. Then, people are asked to send money usually Bitcoin or Ether, but also traditional fiat currencies, and in return, investors are returned with the new cryptocurrency or virtual token created. Investors hope that the new cryptocurrency will get used a lot and be in high circulation, which would, in turn, raise the value of the currency.

How can we help you?

As an establishment, we are an incredibly dedicated team of individuals who help offer online trading courses for beginners in cryptocurrencies. If you are just learning to trade and want to know how to invest in the stock market and digital currencies, our specialists can guide and support you on your learning journey.

Are you interested in participating in embarking on a course of online trading for beginners? The starttrading.com website is where you need to be. Please feel free to complete the contact form on our website and we will get back to you as soon as possible.

Conclusion

At the bottom line, ICOs are an incredibly new way of raising money, and everyone is trying to adapt to the new ways without getting screwed over. If you think you’re able to make a killing on a promising new ICO, just make sure to do your homework beforehand. Cryptocurrency is all about high risk, high reward, and ICOs are no different.

Be warned, ICOs are highly risky even under the best of circumstances and have a high potential for scams. How can you tell what’s a scam and what’s real? The first point is that the ICO itself could be a scam or a ponsy scheme.

When looking into an ICO as an investment you need to make sure that there is a solid business plan and a product, instead of some sort of promise of financial gains or rewards. You must ensure that the ICO website or contribution page is the official project page, instead of a phishing page generated by hackers to lure investors into crowdfunding to a 3rd party. Aside from these easily avoidable scams, you need to look out for aggressive marketing tactics, such as paying influencers to positively promote the virtual token.

A lot of ICOs use bots for social media, when seeing information about the ICO make sure the engagement is coming from real followers. Using all of this information when seeing information about the token, highlights the importance of doing your own research and staying sceptical.

What is the relative strength index (RSI)

The Relative Strength Index is one of the best indicators to determine whether an asset is over or undervalued and in turn determine the best time to trade (buy/ sell).

Have you ever entered a trade or bought an asset hoping for the trade to go your way, but instead the trade has instantly gone the other? Don’t worry it happens to beginner traders every single day. If only there was a way to see how over or under valued a currency pair, stock or cryptocurrency is at any time… It’s your lucky day, this ultimate beginners guide to mastering technical analysis is going to break down the Relative Strength Index (RSI) and show you how to trade using it!

What Is Relative Strength Index – RSI?

The relative strength index (RSI) is a momentum indicator that measures the magnitude of recent price changes to evaluate overbought or oversold conditions in the price of a currency, stock, cryptocurrency or any other asset. The RSI is displayed as an oscillator (a line graph that moves between two extremes) and can have a reading from 0 to 100.

Typically traders interpret an RSI value of 70 or above as an indication that a security is becoming overbought or overvalued and may be primed for a trend reversal or corrective pullback in price. An RSI reading of 30 or below indicates an oversold or undervalued condition.

What does overbought mean?

An overbought asset means that the asset is currently overvalued and that excessive buying has lifted prices. Anytime the RSI level is above 70 it means that the asset is overbought (recently having a hard run-up).

This is usually due to the market becoming irrational, such as during news releases. Often leading to FOMO (Fear Of Missing Out), in which ‘latecomers’ will start to enter positions to try and make a quick profit.

Typically when a currency, stock, community or cryptocurrency is overbought it is not a good opportunity for you to BUY or open a LONG position. As the market will likely correct to the downside. Try to think of this as a car driving up a very steep hill and having to take regular breaks to cool off the engine, meaning the price needs to cool off before it can continue higher.

On the other hand, anytime the RSI level is above 70, this is likely a much better opportunity to SELL or open a SHORT position. When trading, especially using the RSI its important to remember the famous Issac Newton quote “What Goes Up Must Come Down”.

What does oversold mean?

An oversold asset means that the asset is currently undervalued and that excessive selling has dropped prices. Ironically, this is also usually due to the market becoming irrational, however, lower prices often lead to FUD (Fear, Uncertainty and Doubt).

This is usually due to rising sell pressure caused by news events, supply zones, market panics and selloffs. Typically when a currency, stock, community or cryptocurrency is oversold it is a good opportunity for you to BUY or enter a LONG position. As the market will likely correct to the upside in the near future.

RSI example:

When it comes to technical analysis and in particular the Relative Strength Index. No currency pair or cryptocurrency stays as strict to the RSI as Bitcoin. As shown in the example, throughout the history of Bitcoin, anytime the RSI level has been over 70 the price has seen a sharp correction back down, correlated by a drop in RSI level to below 70.

When trading Bitcoin it often drops straight into oversold territory below 30, this is when experienced traders are likely to place BUYS or LONG positions. The probability is much greater that the price will bounce from oversold levels.

Alternatively, when the price is over 70 on the RSI and considered overbought, there is a much higher probability that the price will decrease in value, as it has proven to do so time and time again.

Limitations of the RSI

The RSI compares both bullish and bearish price momentum and displays the results as an oscillator that can be placed alongside a price chart. Like most technical indicators, its signals are most reliable when analysing the long-term trend. True reversal signals are rare and can be difficult to separate from false alarms.

Since the indicator displays momentum, as long as an asset’s price momentum remains strong (either up or down) the indicator can stay in overbought or oversold territory for long periods of time. Therefore, the RSI is most trustworthy in an oscillating market when the price is alternating between bullish and bearish periods.

Conclusion

This is also how institutional investors and the “smart money” invest capital, it is extremely important to trade like the smart money and have the mindset of an institutional investor to benefit like one. Following the simple RSI strategy laid out will greatly improve how you determine whether an asset is over or undervalued and allow you to get the best results out of your trades.

Remember the aim of the game is to “buy it low and sell it high” and don’t trade with your emotions or let your emotions overcome your better judgement. It is important to note that the RSI indicator can stay overbought and oversold for long periods of time.