The Art of Prediction


 

Investing is a business that relies heavily on objective knowledge, such as statistics, probability, math, historical data and trends, analysis, logical judgment, in addition to several other fields of factual knowledge.

Most investors, especially those who rely on technical analysis methods to reach buy and sell decisions, stop there. If their analysis suggested that a specific investment did not fit the mathematical model employed, they wouldn’t invest in it.

There is, however, a small camp of investors who use something else, in addition to all the above. That is intuition.

You may have come across the notion of the two hemispheres of the brain. The left hemisphere is specialized in logic, analysis, the outcome of the data feed that come from the five senses. The right hemisphere is intuitive, subjective, spontaneous  It is responsible for our emotions and spirituality.

People differ in terms of which part of the brain they use more often. Accountants, for example, are mostly left-brained. Poets, on the other hand, tend to be more right-brain oriented. A low percentage of any population can use both sides of the brain effectively. Those are hard to find. If you stumbled upon one of them, and were able to recognize the gift, I’d recommend you stick to them as long as possible!

To be a true enlightened investor, you should not ignore your right side of the brain. Although that is a gift, it could be improved with training and practice (to some extent).

So how would intuition help you make investment decisions?

Let’s tackle that tough, and interesting question in the next article.

Till then, why don’t you get more familiar with your brain/mind? Observe your daily life and see which part you utilize more. Here’s a little drill: The phone rang. It’s your best friend calling from the airport, telling you he’s in town for two days. You already had plans, yet, you’d like to see your friend and spend quality time with him. What would you do?

 

The Wealth Maker

 

How To Trade?


Trading is different from value investment in several ways. While VI is long-term in nature, trading is short-term by definition. VI focuses on the fundamentals of the business you’re investing in, trading is concerned about price movements and technical analysis.

In the last article, I talked about a special type of trading, called Binary Options (BO) Trading. In this post, I’m going to spend some time elaborating on trading in general.

Trading, as the name implies, is an exchange of two investment aspects, over a short period of time. A trader buys an investment instrument, at an attractive price, hoping that its price will go up (or down) over a certain period of time. This is an exchange between time and money.

If the instrument’s price went up, say after three hours of purchase, the trader could “long” the asset (sell it at a profit), retrieving the principal plus the difference between the original (entry) price, and the current (higher price).

If the instrument’s price went down, below the entry price, the trader would have few options here: He could “short” the trade, meaning he would sell the instrument at a loss, to avoid further loses, he could wait, if his information and best judgement expected the asset to go back up, at least to the entry price. Or he/she could set a “stop-loss” price, at which the trading platform would sell the asset automatically. Usually, the stop-loss and “take profit” prices are set at the inception of the trade. Setting these two price limits is tricky. It takes experience, knowledge of current market conditions, vision, and decisiveness (and a touch of good luck). “Take-profit” is the price at which the platform would sell (or buy) the asset, making a preset profit for the trader.

As you can trade on the way up, you can also trade when prices go down. In this case, you wait till the price reaches a point of saturation. To determine such point, you need to use your technical analysis skills. If you looked at the asset’s price vs time graph, and noticed a clear peak, that might be an indication that a price descend would follow. You would sell the asset at that high price, and then buy it back when it fell down. Your profit would be the difference between the two prices.

Some price peaks are deceiving. The price goes down for a short period of time, then moves up, reaching even a higher peak. In that situation, a trader would lose money if he/she had traded on the speculation of a price downfall.

It’s obvious that the two most important decisions here are: When to enter a trade (buy an asset or sell it), and when to exit (sell an asset or buy it).

In the next post, I’ll shed more light on these two critical calls. The successful trader never takes these two lightly. They actually distinguish a careful and wise trader from a lousy one. Since this is not gambling, lousiness and panic are the trader’s worst enemies.

The Wealth Maker

Online Investment – Binary Options


 

Binary Options (BO) trading is probably the furthest from Value Investing (VI), when it comes to investment fundamentals. While in VI we focus on the business behind the symbol, A BO trader is almost completely concerned with current price movements. Some BO platforms offer options with a 15-minute life span!

BO is a relatively new version of day trading. Most BO transactions finish within an hour. Recently, some platforms started giving the trader the option to choose longer expiration periods.

The basic concept behind BO trading is to “predict” if the “asset’s” price is going to move up or down relative to the entry price.

Here’s an example: Let’s assume the trader is interested in crude oil’s price movements. The trading platform offers crude as one of the available BO assets. The trader needs to have some funds in his or her account in order to trade. The minimum amount per BO trade varies from one platform to another. Usually between $10 and $50.

Let’s say the platform in this example requires $30 to trade one BO asset. The trader selects crude, enters the minimum trading value, which is $30, then he or she has to decide, or “predict”, whether crude price will go up or down from the current price, say at the top of the hour.

From looking at the charts; trying to forecast price movement trends, reading the latest news, and using his/her best judgement and “gut feeling”, the trader decides to choose the “UP” option. Once he hits “Buy” or “Submit”, the platform registers the price at which the trader “entered” the trade. Let’s say the price was $91.5 per barrel, and the entry time was 10:15 AM.

The trader can either wait, or look for other trades, if he or she still has funds in his/her trading account (because the $30 for the crude trade has already been deducted from the available trading balance).

Now let’s fast forward to 11:00 AM. It’s the time when the BO trade expires. If the price was above 91.5, say 91.51, or more, then the transaction is said to be “In the Money”, and the trader would gain a percentage on top of the original $30. That percentage ranges between 70% and 85%. Let’s use 80%. This means: 30 *1.8 = $54, would be returned to the trader’s BO account balance, with a net profit of $24.

On the other hand, if the price was below the entry price at the expiration (11:00 AM in our example), say 91.49, or less, the transaction is said to be “Out of the Money”. The trader would lose the trading deposit ($30), but some platforms return between 5% to 15% to the account balance. If the trader had started with a balance of $100, he or she would end up with $74.5 (assuming the returned percentage was 15%).

In rare cases, the transaction expires “At the Money”, which is exactly $91.5. In that case, the trader gets back the $30, without any gain or loss.

From the above example, we can see why this kind of short-term investment is called binary. Because it has only two possible outcomes at the expiry of the trading transaction.

BO trading is stressful. Although the potential of making huge returns rapidly is obviously there, so many traders lose all their capital, especially when they get emotional, and try to retaliate, by investing even more to recover their loses.

There is also a factor of luck, and another of speculation here. That’s why experienced traders enter several transactions simultaneously, with the hope that more than half of the trades would end in the money.

Another aspect of BO trading is its heavy reliance on technical analysis. If you lack that skill, the process becomes closer to gambling than trading.

Most, if not all, BO platforms require a minimum deposit of $100, or more, just to start trading (this is different from the amount required per trade). They also run strict verification procedures, before a trader can withdraw any profits, especially if the platform was regulated.

Before engaging in this risky investment, you should research the provider (the BO platform) extensively. Read the FAQ. Evaluate your technical analysis capability, and only use money which you’re prepared to lose! Never use your milk or bread money…

I strongly suggest that if you’re a novice trader, you should steer away from BO trading.

All the best,

The Wealth Maker