Futures Trading

Introduction

The Futures market is an integral part of the Financial Derivatives world. `Derivatives` as they are called is a security, whose value is derived from another financial entity referred to as an `Underlying Asset`. The underlying asset can be anything a stock, bond, commodity or currency. The financial derivatives have been around for a long time now. The earliest reference to the application of derivatives in India dates back to 320 BC in `Kautilya`s Arthashastra`. Kauutilya of the ancient Arthashastra scripture (economics), A standing plant that can be harvested at some point in the future. Apparently he used this method Paying a large amount of money in advance to the farmer, thereby building a true "forward contract". Given the similarities between futures and futures markets, I think it's the best way possible. To introduce the futures market, you first need to understand the "futures market". Understanding the futures market provides a strong foundation for learning about the futures market.

Forward contracts are the simplest form of derivative. Think of a forward contract as an old avatar of a futures contract. Both futures and forward contracts share a common trading structure, except that futures contracts have been the trader's default choice for many years. Forward contracts will continue to be used, but are limited to a small number of participants such as industry and banks.

Simple Forward Transaction as an Example

The forward market was established mainly to protect the interests of farmers from disadvantages. Price fluctuations. In the futures market, buyers and sellers enter into exchange contracts Goods for cash. The exchange will take place at a specific price on a specific future date. Price, the breakdown of the product will be decided by both parties on the contract conclusion date. Similarly the date and time of the delivered item is also specified. The agreement is face-to-face.

There is no third party intervention. This is called an "over-the-counter or OTC" contract. Futures contracts are only traded in the OTC (over-the-counter) market where individuals / institutions trade. Through one-on-one negotiations. Consider this example. Two parties are involved. One is a jeweler whose job is to design and create jewelery. Let's call it "Company A Jewelers". The other is a gold importer whose job is to sell gold to jewelers at wholesale prices. He `Company B Gold Dealer`

On December 8, 2014, Company A signed an agreement with Company B to purchase 15 kilograms of gold at a specified price in 3 months (March 8, 2015). They fix the gold price at the current market price of say $1200.00 per gram. Therefore, Agreed, March 8, 2015, Company A and B ($42.32 / gm * 15Kg) in exchange for 15kg of gold. This is a very simple and typical business contract that is widely used in the market. This type of contract is called a "forward contract" or "reservation contract". The contract will be signed on December 8, 2014, so regardless of the price of gold. A few months later, On March 8, 2015, both Company A and Company B are obliged to comply with the contract. Next, let's understand each party's thinking process and what to understand.

Why do you think Company A signed this deal? Well, Company A thinks the price of gold will go up for the next three months, they will want to fix the market price of gold today. Obviously, Company A wants to protect itself from the unfavorable rise in gold prices. In a futures contract, a party who agrees to purchase an asset at some point in the future "Forward Contract Buyer", in this case Company A a Jeweler. Similarly, Company B believes that the price of gold will fall in the next three months, so he want to benefit from the high prices of gold available on the market today. At the forward contract he forced him to sign this contract.

Under the terms of the agreement, the party who agrees to sell the asset at some point in the future is referred to as the "seller of the futures contract", in this case Company B the Gold Dealer. Both parties have opposite views on gold. Therefore, they have this agreement their future expectations.

There Are Three Possible Scenarios

Both parties have their own views on gold, but there are only three possible scenarios. It may expire at the end of 3 months. Understand these scenarios and how they are performed by both parties.

Scenario 1 - Gold Price Rises

Suppose on March 8, 2015, the price of gold is trading at per gram. clearly, Company A The Jeweler's view on the price of gold has come true. At the time of the agreement, the transaction is much higher to $42.32. Under the terms of the agreement, Company A The Jewelers have the right to purchase gold from Company B The Gold Dealers. The price they previously agreed on, namely $42.32 / per gram. But company B the Gold Dealer enjoys the price at his favor.

Scenario 2 – Gold Prices Go Down

Suppose on March 8, 2015, the price of gold is trading lower than $42.32 / per gram. Under these circumstances, Company B the Gold Dealer's view on the price of gold has come true. At that time the agreement was valued at $42.32 but the deal was closed due to the fall in gold prices worth $41.17. This time Company A the Jewelers enjoys the price at his favor.

Scenario 3 - Gold Prices Go As Agreed

Suppose on March 8, 2015, the price of gold is trading sideways which means that the price remains $42.32 / per gram. In this case both seller and buyer meet enjoys its favor.

A Brief Note On The Reconciliation

The price of gold on March 8, 2015 suppose it is $41.17 / gram. Certainly for now As you can see, at $42.32 / per gram, Company A The Jewelers are in a position to benefit from the deal. In At the time of the agreement (December 8, 2014), 15 kg of gold was worth $42.32 / gram, but same as 8th March 2015 15kg of gold is valued at $41.17. Approved at the end of 3 months, March 8th. In 2015, both parties will comply with the agreement. Here you have two options for reaching an agreement.

Physical Reconciliation – The full purchase price is paid by the purchaser of the futures contract. The actual asset is provided by the seller. Company B buys 15kg of gold from the open market by paying actual market price, the same will be delivered to Company B upon receipt of the agreed amount. That is called physical processing.

Cash Reconciliation - With cash settlement, there is no actual delivery or acceptance of the security. In cash settlement, the buyer and seller simply exchange the monetary difference. Under the terms of the agreement, Company B The Gold Dealer is obliged to sell gold to Company B for $42.32 / per gram. In other words, Company B pays actual cost in exchange for 15kg of gold on the actual date March 8, 2015. However, instead of making this transaction, Company A will pay $41.17 / per gram. Gold is worth $42.32 and both parties can agree to exchange only the cash difference.

What About The Risks?

The structure (conditions) of the contract and its meaning are clear, What about the price deviations between the two and the risks involved? The risk is Price movements and futures contracts have other major drawbacks.

Liquidity Risk – This example conveniently assumes that Company A carries a certain level of risk. Gold View finds the opposite party Company B. The activity in the real world, it's not that easy. In a realistic situation, the parties will resolve as they approach an investment bank and discuss its intentions. The investment banker will probe the market to find an opposing party. Of course, investment banking does it because of a fee they will get from the buyer or seller.

Default Risk / Counterparty Risk – take this into account and assume that the price of gold has been hit $41.17 / per gram at the end of 3 months. Company A will be proud of their financial decisions. It took 3 months ago. You expect Company B to pay. But what if Company A fails?

Regulatory Risk - Forward contract arrangements are carried out by mutual agreement It is a stakeholder and there is no regulatory body to control the contract. In the absence of regulatory bodies, a sense of lawlessness creeps in, which in turn incentive to default.

Rigidity – Both Company A and Company B signed this agreement on December 8, 2014 under a specific agreement. Look at the gold. However, what if their views changed dramatically when they half of the deal? The rigidity of the term agreement is such that they cannot rule out a midterm agreement.

Forward contracts have a number of disadvantages and therefore futures contracts have been designed to reduce the risk of futures contracts.

Highlights of This Article

• 1. Forward contracts establish the basic foundation of futures contracts
• 2. Forwards are OTC derivatives that are not traded on the exchange.
• 3. The forward contract is a private contract, and the conditions vary from contract to contract.
• 4. The structure of the forward contract is fairly simple.
• 5. In futures contracts, the party who agrees to purchase the asset is called the "future buyer".
• 6. In futures contracts, the party who agrees to sell the asset is called the "futures seller".
• 7. Price changes affect both buyers and sellers of futures contracts. 8. Settlement occurs in two ways with futures contracts. Physical reconciliation and cash reconciliation.
• 9. Future contracts reduce the risk of forward contracts
• 10. Forward contracts and futures contracts have the same essence.

References:

• Forward Contracts
• Futures Contracts
• Liquidity Risks
• Regulatory Risks
• Default Risks
• Rigidity

What is a stock exchange?

Investing in equities is an important investment we make to generate inflationary returns. This was a conclusion drawn from the previous chapter. But how do you invest in stocks? Of course, before jumping into this topic, it's important to understand the ecosystem in which stocks work.

Go to PSEthe stock market and shop (read as a transaction) to invest in stocks, much like going to a nearby Kirana store or supermarket. Anyone who wants to trade stock will be open to the public. Simply put, Transact means buying or selling. Stocks of public companies like PSE cannot be bought or sold without trading on the stock market for convenience.

The main purpose of the exchange is to support the transaction. Therefore, if you are a stock buyer, the stock market will help you meet the seller and vice versa. Unlike supermarkets, stock exchanges do not exist in the form of bricks or mortar. It is in electronic form. You can access the market electronically from your computer and trade (buy and sell stocks). It is also important to note that you can access the stock market through a registered agency called a stock broker. Later, we will explain in detail about the stock broker. Philippines has one major stock exchange that make up the stock market, The Philippine Stock Exchange.

Who Are The Market Participants?

The stock market attracts individuals and businesses of all backgrounds. Everyone operating on the stock exchange is known as a market participant.

Exchange

An exchange is an organized market or facility that connects buyers and sellers and facilitates the buying and selling of stocks. The only exchange operating in the country is the Philippine Stock Exchange (PSE). This ensures that trade transactions are conducted in an efficient, orderly, fair and transparent manner. Enforce rules and regulations that listed companies and trading participants must adhere to. Therefore, PSE acts as a "guardian" of the Filipino stock market.

Investor

An investor, also known as a shareholder or shareholder, is the person who owns the shares of a listed company. You are granted certain privileges such as the right to fair and equal treatment, the right to exercise voting and related rights, and the right to receive dividends and other benefits to shareholders. They are classified as retail or institutional, and either local or foreign.

Stock Broker

The stock broker or trading participant is licensed by the Securities and Exchange Commission (SEC) and is permitted to trade on the exchange. They act as an intermediary between buyers and sellers of stocks in the market. For services as a stock broker, you will receive a purchase or sales commission from the customer.

PSE initially issued 184 trading rights. To date, PSE has 133 active stock brokers.

Representatives of these approved stock brokers (approved sellers) meet daily at specific times on the 'trading floor' of the stock exchange, where they buy and sell stock for the customer's account. They place orders in the market to get the maximum profit possible for their customers by buying at the lowest possible price or selling at the highest possible price.

There are two types of stock brokers:

• Traditional-Hire a licensed seller to manage your account and accept written instructions or orders over the phone
• Online-The main interface is the Internet, where customers place orders and access market information online

Listed Company

A listed company, also known as an "issuer", is a company on which stock is traded on the stock exchange. These companies meet the strict approval and reporting requirements of PSE and have undergone an initial public offering (IPO) or initial public offering. As of August 2011, PSE has 249 listed companies. They are grouped into six different sectors: finance, industry, holdings, real estate, services, mining and oil.

Clearinghouse

Philippine Securities Settlement Corporation (SCCP) SCCP is a wholly owned subsidiary of the stock exchange. It was established to ensure the orderly settlement of stock transactions taking place at PSE. SCCP uses the Central Clearing and Central Settlement (CCCS) system obtained from Belgian Capital Markets Co. (CAPCO).

SCCP is responsible for determining the liabilities and claims of Clearing Members' cash and securities and synchronizing the settlement of funds with the transfer of securities under the delivery-to-payment or multilateral net settlement model. It guarantees the settlement of transactions in the event of a trading participant failure and ensures the finality and irrevocability of all exchange transactions through a failed management process. Implement appropriate risk management measures to mitigate the risks inherent in the clearing and settlement of exchange transactions, as well as maintain and manage the Clearing and Transaction Guarantee Fund (CTGF).

Depository

Philippines Depository and Trust Corp. (PDTC) PDTC acts as a securities account or "custodian bank" for listed stocks traded on PSE. Established Central Custodian Bank in the Philippines and organized to conduct paperless transactions. PDTC performs an accounting transfer of securities.

1. From the seller's account to the buyer during the settlement of a stock exchange transaction.
2. From one PDTC subscriber to another for each customer instruction.
3. A lender-to-borrower account for a loan transaction.

Billing Banks

PSE has three authorized banking institutions where trading participants pay and receive stock transactions. Settlement Bank receives cash deposits for payment of purchased securities, confirms payment of legitimate clearing obligations to SCCP, debits from buyer's cash account and seller's cash account during settlement, by Receive and / or return the cash security sent. Clearing members were provided to cover the daily negative trading risk.

Transfer Institution

Share Transfer Agent is the "official custodian" of the shareholder's company file. The stock exchange agent provides the issuer or listed company with a list of securities holders. Performs a transfer of substantive owners and handles corporate actions such as stock or cash dividends, stock rights, stock splits, and the creation of a power of attorney.¹

Who Regulates The Exchange?

A joint mission of the World Bank and the International Monetary Fund visited the Republic of the Philippines from October 8th to November 6th, 2001 as part of the Financial Sector Assessment Program (FSAP). The objective was to assess the effectiveness of securities regulation, the soundness of market intermediaries, and the prospects for capital market development, including the objectives of the International Organization of Securities Commissions (IOSCO) and compliance with securities regulation principles.

The Securities and Exchange Commission (SEC) is the primary regulator of capital markets and their participants. Bangko Sentral ng Pilipinas (BSP) is a non-bank financial institution as long as it has an ownership relationship with a bank, performs quasi-bank functions and trustee business, and is permitted to provide foreign exchange products and services. (NBFI) also supervises. The Securities Regulation Code (SRC) is the most important legal basis for regulating the market. The SRC has narrowed and redefined the SEC's authority to help regulators focus on regulating the securities market, especially on implementing it.

However, further rationalization of the scope seems to be necessary and is expected. The SRC has also stipulated the non-mutualization of the Philippine Stock Exchange (PSE). This addressed, among other things, the conflict of interest of PSE as a self-regulatory body (SRO). The Philippine regulatory and supervisory framework is broad but complex. This is because regulatory agencies remain fragmented, while the financial industry and services are becoming more complex and generalized by functional regulation. The SEC is the most important regulatory authority for capital markets and their participants. NBFI is regulated and regulated by the SEC.²

Highlights of this Article

• If you want to trade stocks, the stock exchange is the best choice
• The exchange exists electronically and is accessible through stock brokers
• There are different types of market participants working in the stock market
• All companies doing business in the market are regulated and need to do business only within the framework set by the regulatory agency
• PSE is the regulator of the Philippine securities market. They set up a legal framework and regulate all companies interested in the market

Notes:

¹PSE Academy ²World Bank. 2002. Philippines : IOSCO Objectives and Principles of Securities Regulation. Washington, DC. © World Bank.

Why We Need To Invest?

 

Why Invest?

Before we get into the question above, let's understand what would happen if one did not choose to invest in. Let's say you earn $ 20,000 a month and spend $ 15,000 on your living expenses, which include housing, food, transportation, shopping, care medical, etc. The balance of 5,000 is your monthly surplus. For the sake of simplicity, we ignore the effect of income tax in this discussion.

To get the message across, let's make a few simple assumptions. Your employer is kind enough to grant you a 10% raise each year. Cost of living is projected to increase 8% year over year. You are 30 years old and planning to retire at 50. This gives you 20 years to earn. You have no intention of going back to work after you retire.

Your expenses are fixed and do not cover any other expenses. The remaining cash of 5,000 per month is held in the form of cash. By deciding to invest the surplus money, your available cash has increased significantly. Cash balance has increased from 5% to 5000%. This is a staggering 5000 times the normal amount of. This means that you are in a much better position to face your life after retirement. Invest at 5% Compounding Going back to the original question, why invest? There are some good reasons to invest.

• Fight Inflation: Investing is a better way to deal with the inevitable rising cost of living
• Create wealth: through investments you can aspire to a better aggregation of savings at the end of the defined period.

In the example above, the period was until retirement, but it could be anything: educating your children, getting married, buying a house, retiring, and so on. To fulfill life's financial aspirations.

Where to Invest

Now that you have discovered the reasons to invest, the next obvious question would be: Where would you invest and what returns can you expect from an investment?

When it comes to investing, one has to choose an asset class that matches the risk temperament and return of the person. An asset class is an asset class with special risk and return characteristics.

Below are some of the most popular asset classes.

• Fixed Income Instruments
• Equity
• Real Estate
• Exchange Traded Funds (ETFs)
• Fixed Income Instruments

They are investment instruments with minimal risk for the Principle and the return is paid to the investor as interest on the respective

Fixed Income Instrument

The interest paid can be quarterly, semi-annual, or annually. At the end of the deposit period (also known as the term), the principal is returned to the investor. Typical fixed income investments include:

• Time deposits offered by banks
• Banko Sentral Government Bonds
• Local Government Treasury Bonds
• Mutual Fund Bonds

In December 2011, the typical yield of a fixed income instrument fluctuated between 4% to 8%

Equity

An investment in stocks involves the purchase of shares in publicly traded companies. There are 271 listed companies in the Philippine Stock Exchange (PSE). Unlike a fixed income instrument, when an investor invests in stocks, there is no capital guarantee. However, as a compromise, the return on equity investments can be good if you can do your homework to choose the right company to invest in that offers good value. Investing in some of the best and best managed companies in the Philippines has produced a good percentage of long-term returns. Identifying such investment opportunities requires skill, hard work, and patience. Capital gains from the sale, exchange or sale of shares in domestic corporations are subject to a final tax rate of 15 percent.

Real Estate

Real estate investment comprises the transaction (purchase and sale) of commercial and non-commercial real estate. Typical examples would be transactions in land, apartments, and commercial buildings. There are two sources of income from real estate investments, namely: rental income and appreciation of the amount invested.

The transaction process can be quite complex and involve a legal review of documents. Cash outlay on investment property is usually quite high. There is no official metric to measure real estate returns.

Commodity

Investing in gold and silver is considered one of the most popular investment options. Gold and silver have increased in value over a long period of time. Investments in these metals have paid off for the past 20 years. There are several ways to invest in gold and silver. It is possible to invest in Exchange Traded Funds (ETFs). Going back to our initial example of investing excess cash, it would be interesting to see how much you would have saved at the end of 20 years, considering that you could invest in investments and fixed-income stocks.

Investing in fixed income securities at an average interest rate of 48% per year will multiply your savings or hard-earned money with compound interest if you do not withdraw the interest and transfer your interest to principal.

Investing In Stocks at an Average Interest Rate of 15% Per Year

Obviously, you get the best returns on stocks, especially if you have a multi-year investment perspective. Not depending on the sale of the shares, but on the long-term holding that generated dividend income. You can transfer the dividend income to your capital and do it over time in, say, 20 years. You'll be surprised at the compound interest you get on.

A Note on Investments

Ideally, investments should have a strong mix of all asset classes. It is advisable to diversify your investment between different asset classes. The technique of dividing money into 4,444 asset classes is known as "asset allocation." For example, a young professional may be at greater risk given his age and the years of investment available. Typically, investors should invest about 70% of their investible amount of in stocks, 20% in precious metals and the rest in fixed income.

For the same reason, a retiree could invest 80 percent of his savings in fixed income, 10 percent in stocks and 10 percent in precious metals. The ratio of, with which investments are distributed among asset.

Lesson 5: Education

As Warren Buffett said, “The best investment you can make, is an investment in yourself. The more you learn, the more you'll earn.”

Innovation and automation are ubiquitous in many industries around the world. It looked shocking, but some problems followed. More and more people were replaced by robots and had to be retrained or entered another field. In order for people to do these things, most people tend to choose to go back to school instead of considering other options. Although going back to school may help, you can always consider studying on your own. Perhaps that option was unrealistic a long time ago, but with high-quality information and other factors, it is now worth considering educating yourself.

What does self-study mean?

The meaning of educating yourself is to have a series of habits to promote how to educate yourself. Go into the finer details. These habits are part of the system and can help you stay up to date with related topics that you are passionate about. As I mentioned before, this method has only merged as an effective option in recent years. The reason for this is that the information is not available. Decades ago, our information came from newspapers, radio and television.

But now, every day, thousands of people create information through blog posts run by professionals or large companies. Due to the Internet and its greater expansion, the quality and quantity of information has increased. Indeed, the meaning of self-education lies in the use of information on the Internet.

1. Keep Up With Finance and Investment Industry News

Not only news from your industry, but also from other areas of your interest. As I said, the industry is changing because something will always happen. One way of self-education is to understand what is happening in the industry. Like in my case I always update myself with the current prices of local stocks through https://www.pse.com.ph/ Philippine Stock Exchange or through my broker website. The only thing you need to remember is that there are many ways to keep up you can have your own search say not only stocks but currencies, and commodities too. You don’t need to pay to subscribe to multiple brokers to keep up. Go to social media and search for related hashtags or keywords, or sign up for a media distribution list. There are many free options.

2. Enroll In Online Courses

The information is very rich, there are all kinds of courses. Today, online learning is also a very effective way to learn. You can turn to sites like Udemy or Skillshare, which offer thousands of courses particularly trading and investment. There's also education that you get from your online brokers and banks.

3. Find Mentors

One good thing with Finance and Investing industry has technical talents who are willing to teach others. With years of experience in this field, they can impart valuable experience that other classrooms cannot teach you. This is another reliable method, because the instructor is likely to stay ahead. Your years of experience and knowledge of the industry can lead to more specific suggestions. After all, traditional colleges and universities tend to focus on general information rather than the information you really need to know. Mentors are another way to get a personalized experience.

4. Develop These Learning Habits

4.1 Have A Learning Environment.

You don't have a classroom, so it's best to turn the place you often go to a study place. It can be a library, a room at home, or a coffee shop. In any case, there must be a place where you can study and study with determination.

4.2 Highlight Information.

If you like to buy books or e-books, use a stabilo pen. You can also consider other note-taking apps where you can store specific bits of information. Applications like Evernote or Google Keep are perfect for this.

4.3 Learn From Various Media.

We can use different learning methods, although we like one or two of these methods best. Find out which ones you like and challenge yourself to learn in different ways.

4.4 Set Goals.

To learn as a way of life, it is important to maintain this habit. The goal is a great way to keep up with the habits you want to have. Consider tutoring. Not only can you get paid by tutoring others, but you can also consolidate what you have learned. Guidance is also a way to verify and ensure that what you have learned is also with you.

Final thoughts

Self-study is about various methods of how to educate yourself. Although going to webinars, on-line classes, or joining a Facebook finance and investing group is still an effective option, the vast amount of information available allows anyone to learn about any subject. Therefore, you can save a lot of time, money, and consider the waste of these habits. Over time, these habits will pay off.

Lesson 4: Don't Understand The Risk

 

Lesson 4: Don't Understand The Risk

Risk is one of the most important factors to consider when trading. Everyone has a different tolerance for risk. If you are a long-term trader and the market has fallen by 20%, can you calm down and survive the plunge? If not, you may wish to diversify to add bonds to your investment.

Are you investing in more than one pair of stocks? If you do not properly diversify your investment, you will take a lot of risk and should be spread across many different stocks, not just a few stocks.

If you are a trader, do you limit your capital exposure by using stop losses and sufficient risk for each transaction? As far as the risk of each transaction is concerned, many traders determine their maximum risk, and will not assume more than that maximum risk for any stock. For example, the risk of many traders in a single transaction does not exceed 1% of their total investment portfolio capital. This means that you will add a stop loss and sell any positions that fall by more than 1% of your total portfolio (1% risk per transaction). For example, if your account balance is P 100,000, you will not risk losing more than P1,000 in any transaction. If you buy P 100,000 of Jollibee stock and the price of your position drops to P95,000, you will sell your position to avoid an additional loss of more than 1% of your capital.

By limiting the percentage of portfolio loss for a transaction, you can avoid huge losses in any transaction. Proper risk management can determine the success or failure of the stock market.

Lesson 3: No Strategy

Whether you are a long-term investor or a trader, developing a strategy is the key to your success. Investors and traders have different strategies. Here are a few important strategies to remember.

Long-term Investor Strategy

Pesos Average Cost

Pesos average cost is the process of investing a certain amount of capital each month regardless of market changes. The average cost of pesos helps investors obtain higher returns during a bear market and reduces the volatility of overall returns. In the table above, if you have the average cost of pesos in 2015, your return will be greater than 3.26%. We'll talk about it later in our succeeding series of this blog about averaging and different types of strategies in which averaging is one of them.

Diversification

Diversification is the process of buying multiple shares instead of buying a single share. Building a diversified equity portfolio is important because the stock market is unpredictable. If you buy a stock, the company goes bankrupt or performs poorly, you may lose a lot of money. Conversely, if you buy ten stocks and one of them fails or performs poorly, you have nine or more stocks to rely on. Diversification to diversify your investment risks.

Trader Strategies

Develop a Trading Plan

Your trading method will depend on your risk tolerance, your personality, the amount of money you can invest, and so on. Because every operator is different, it is important to develop a business plan that you will stick to. The trading plan should include everything from the maximum allocation of your investment portfolio and the risk of each transaction to your preferred risk/reward ratio.

Win Rate

As mentioned above, a healthy win rate is an important strategy for traders. Of course, it is difficult to increase your profit margin, but if you plan your trading strategy and the technical indicators you follow, you can maintain a constant profit margin through a suitable strategy. All other things being equal, traders who profit from 25% of trades will do better than traders who profit from 50% of trades but have a lot of losing trades.

Risk/Reward Ratio

The risk/reward ratio is closely related to the winning ratio. If you can create a healthy profit margin and a healthy risk/reward ratio, it can help you become a successful trader. For high risk/reward ratios, you can pair trades with high-profit potential with suitable stop losses. By limiting the amount you can lose while increasing the amount you can earn, you can make huge profits through trading. Combine a high rate of profit with a high rate of risk-return, and you can become a trader.

Lesson 2 Unrealistic Expectation

 

Children are often burdened by unrealistic academic expectations throughout their lives. However, parents, teachers and mentors must teach them that there is more life beyond the scorecard. All the work is worthwhile if they grow up and become kind, considerate, and helpful people to those in need. Because life is more than just numbers. What matters is the journey and the quality of the journey.

Similarly, when making an investment, return is not the only thing you need to consider. I hope something big is a good thing, but achieving financial goals based on unrealistic assumptions can make it go downhill.

In the past, many stocks may have performed very well. However, remember that your future performance does not depend on your historical temperament. Consider the following points to fully understand the investment situation with the following:

The trade-off between risk and return. In the past, sometimes you were attracted by investment products provided by account managers and investment agents only by considering the rate of return provided. However, as an investor, you should also evaluate many other factors. One of the most important factors is risk. You will see that everything has a price, including your return on investment. In order to obtain greater profits, you must have sufficient risk tolerance. In other words, the high return on your investment is the premium you get for taking high risks. This is the so-called risk-benefit trade-off. Almost all investment products face various risks, but at different levels. Therefore, before investing your hard-earned money, it is important to understand the risk-return tradeoffs of each asset class and the investment path in it to assess whether it is appropriate for your risk profile. It is not advisable to rely solely on rewards.

Properly allocation of assets. Pay attention to asset allocation. Define your asset allocation based on age, income and expenses, assets and liabilities, risk appetite, investment goals, investment scope and financial goals. Asset allocation refers to the allocation of investable surplus among asset classes (such as stocks, debt, gold, real estate or even holding cash). Therefore, when allocating assets, you are actually adopting an investment strategy that can balance the risks and returns of your portfolio, taking into account your risk profile, financial goals and investment time frame. As mentioned above, every asset has a certain degree of risk and expected return.

Investment time frame. Asset allocation varies with the time frame available before the financial goal occurs. For those who have a short-term investment period of less than 3 years, it is recommended to allocate them to fixed-income securities, and to avoid assigning them to asset classes such as stocks and gold due to their variable rate of return, so the risk is higher. Due to the short investment time. For the medium-term investment period like 5 years, you can allocate a portion of the investable surplus to stocks and gold to take advantage of the higher risk-return ratios provided by these categories, but you will not be enthusiastic.

For longer investment periods like 10 years above, you can allocate a larger proportion of the funds to higher-risk asset classes in order to use the power of compounding over a longer time frame. That is to say, maintain some (if not too high) exposure to bonds and gold so that the risk can be mitigated to some extent. For investors, it is crucial to recognize the risk-return trade-offs of any asset class, and to be realistic in the expected returns, and to wisely evaluate the performance of their investment portfolios.

"Time to market" instead of "timed market". Everyone wants to enter when the market is low and exit when the market reaches its peak. However, regardless of market research and analysis, it is impossible to always accurately predict the direction of market development. Take 2010 as an example Philippine Stock Exchange (PSE). When valuations were really cheap, many investors missed the stock market's reversal and missed buying opportunities. On the other hand, in 2011, when the market was in trouble, many retail investors left the market. I believes that you should focus on long-term financial goals and commit to a fund that continues to invest in order to optimize the level of risk return. Achieving your life goals requires a disciplined investment method and perseverance to ignore market momentum. Trading is meaningless, because it may endanger your wealth and health. Remember, traders are good commodities only before the last transaction. The bottom line to achieve your financial goals, first assesses your risk appetite. Once is determined, stable investment will begin. In addition, diversify your investment in all asset classes and monitor your investment portfolio every six months.