Category: How to & Advice

As we all know, the stock market is the ultimate equalizer of wealth.

Partaking in the financial markets, regardless if you’re a day trader or a long term investor, can multiply your wealth to levels you didn’t even imagine was possible. Well, if you do it the right way at least.

There have been countless traders who made their fortunes by trading the markets, but there have also been MILLIONS who have lost a tremendous amount of wealth through common trading mistakes.

Through time, there have been three bad practices that have led to the financial disaster of traders:

1. NOT CUTTING LOSSES
2. OVER SIZING
3. OVER-TRADING

 

In this article, we’re going to be focusing on the third one: OVER-TRADING.

We’ve all experienced this at some point in our trading journeys; you get a loss or go through a series of losses, and it’s getting on your nerves. You’re at a pretty bad drawdown for the month, but you can’t accept being in the negative. You feel the urge to begin trading even more, to churn the motor faster, to increase your position size per trade, every chart you look at shows an opportunity, you go for Grade C setups. You fall for the urge and eventually, end up losing even more.

Sucks right? We know, we’ve all been through it. The urge to want to gain back all the losses in a short period of time is a strong force that can persuade us to do things we know is wrong. Over-trading is also another form of revenge trading, but probably even worse. Of all the symptoms, the worst would probably be going for Grade C setups; meaning you trade stocks you normally won’t but nevertheless still go for it. When you’re unable to find Grade A setups, you start settling for low probability trades which will most likely just lead to more losses.

If you don’t stop there, it gets worse. You incur more losses from taking Grade C setups, so now you’re even more frustrated compared to before. You now begin to increase your position size in the hopes of getting one home run winner to regain all your losses. Sure, you may get lucky a couple of times. However, if you do this consistently over a long period of time, we all know it isn’t going to go well.

There’s a reason why over-trading is one of the culprits for the financial ruin of hundreds of thousands, if not millions, of traders, it’s because we all go through it at some point. And those who have the psychological fortitude and intense discipline are those who are able to avoid over-trading consistently. So now, what’s the best thing to do if you’re at a drawdown?

Mark Minervini, a well known Market Wizard, and Mark Ritchie II, respected Momentum Master, both agree that it’s best to lower down activity during periods of underperformance. The reason why it’s best to both decrease your churn rate and lower down your position size is because you’re in a losing streak because you’re most probably out of sync with the market. So the focus during these losing periods is to focus on Grade A setups with a controlled position size until you get the “feel” of the market back on your side.

In contrast, the best time to ramp up exposure and increase your churn rate is when you’re winning, also for the simple fact that you’re experiencing this winning streak because your strategy and psychology are at sync with the market. As if you’re sailing the open seas, you want the wind to be at your back. You want to be one with the market and be trading at the heels of previous profitable trades.

The logic here is you’re trading your most and your heaviest when you’re winning and you’re trading your least when you’re losing. Just like a basketball player having a good shooting night, it’s as if you’re shooting the basketball in the ocean, you can’t miss. However, when he’s having a bad game, he could always focus on other things like assisting the ball or rebounding. Same goes with trading, when you’re having difficulty nailing down profitable trades then the focus should be protecting your capital and confidence.

---

In one of our previous articles, we talked about how trading or investing in any financial market isn’t all about the potential upside. There is also the potential for major financial ruin if you’re not aware of the risks involved. If you haven’t read our article on the importance of risk management, you can access it here: The Importance of Risk Management. Now let’s learn an important part of risk management – Stop loss strategies.

To keep it simple, a stop loss is basically a point in a stock’s chart where you will cut your losses with no questions asked. It’s placed at a point where the trade idea is invalidated. We’ll give some examples so you can better visualize it.

Also, it’s important for you to know that there are only a few brokers here in the Philippines that offer an automatic stop loss order. So if your broker doesn’t have this feature, you will need to manually cut your losses so it’s important to find a way to keep an eye on the market from time to time throughout the day. So now the question is, what are some basic stop loss strategies you can use?

Basic Stop Loss Strategies

Percentage Stop Loss Strategy

This basically means you’ll cut a stock that is showing a loss once it hits your chosen % threshold. William O’Neal, the author of How to Make Money in Stocks and one of the greatest investors of our time, said that his max % threshold is 7-8%. Mark Minervini also shares the same sentiment. Here are some examples:

Price Structure Based Stop Loss Strategy

Whenever you’re buying a stock you usually buy on either a bounce of support or a break of resistance. So if you bought on the bounce of support, then your stops should be a few points below the support area. Conversely, if you bought at the break of resistance, then your stop should be placed a few points below the breakout point. If you don’t know the concept of support and resistance you can check out our YouTube channel where we discuss it in depth. Here are some examples:

 

Previous Candle Low

This simply means you place your stop below the low of the previous candlestick. This strategy is usually done by shorter-term traders in order to cut losses in a much faster way. However, you may be prone to selling a position prematurely by only using this strategy in all scenarios. Here are some examples:

That’s about it! So always remember, having stops in place isn’t enough to ensure that your losses don’t get out of hand. What’s important is being DISCIPLINED enough to sell the stock once it hits your stop loss, NO QUESTIONS ASKED! The three strategies above are just the tip of the iceberg when it comes to setting stops effectively. Now the rest is up to you to continue studying more you can about the markets and finding ways to continuously refine both your buying and selling strategies.

---

Want to achieve Financial Success? Do not start with saving.

On an individual level, the Philippines is one of the countries with the lowest rate of financial literacy.

Even if we don’t base it on statistics, using our own eyes we can see that there are a lot of people who aren’t managing their finances effectively. If we zoom in on the problem much closer, we are sure that all of us know that our nation is suffering from poverty as well. Learning about financial literacy and proper handling of your personal finance may not solve the concern regarding poverty in our country, but it’s a great first step towards financial success.

MINDSET HELPS YOU ACHIEVE FINANCIAL SUCCESS

So now what do we do first? Should we learn how much of our income should we set aside, learn how to lessen our expenses, or begin investing for the future? Well, none of those are actually the first step. The first step is to believe with your mind, heart, and soul that proper handling of your personal finance is a PRIORITY. You should also set in stone that achieving FINANCIAL SUCCESS and FINANCIAL INDEPENDENCE is a must!

A lot of people try to begin on their journey towards financial freedom but meet unnecessary challenges too early. The main reason for this is a lack of self-discipline, and that lack of discipline comes from not having clear and set out goals or objectives. However, once you make it a priority to manage your finances the best way possible, those little bumps along the way that many others experience will likely disappear. Always remember, you find ways to achieve the things that are a PRIORITY to you.

PLANNING FOR FINANCIAL SUCCESS

The next thing you will need is a set of clear and decisive goals. As with anything we would like to accomplish, we will need something to motivate us. When you set out goals it need not be purely long term; make goals for the short, medium, and long term. By doing so, you can reward yourself with every short and medium-term goal achieved to keep you motivated to reach that long term goal. Write these goals down on a whiteboard or write it on a piece of paper then stick it up on your wall to see every day.

Once you’ve done the two essential things mentioned above, then you can do these nitty-gritty things that will help you achieve financial freedom.

SAVE

We’re sure this didn’t shock you, but it is essential on your way towards financial freedom. The problem is many of us fail to save in an OBJECTIVE manner. We think that as long as there’s a little bit of money left in our bank accounts that means we’re saving enough money. The first thing we will need to do is allocate a percentage of our income to savings, this is the #1 priority!

You don’t have to save 80% of your income, even saving as little as 10% to 20% of your income on a consistent basis over the long term is already enough to get you started. It’s definitely better than blindly just spending all of your income without properly allocating any money for your savings.

Most importantly, the proper equation is not income – expenses = savings. The proper thing to do is INCOME – SAVINGS = EXPENSES. By following the proper equation there should be no reason why you won’t be able to save a specific amount per month.

LOWER EXPENSES

Let us get things clear from the get-go, we’re not saying that you shouldn’t enjoy life or buy things you want. However, if you really want to achieve financial freedom then you will need to make some sacrifices and focus on the things you NEED.

Here’s one great way to think about how you can lower your expenses significantly. Let’s say you’re someone who’s an avid buyer at Starbucks, but you want to lower down your expenses. Ask yourself, “Do I really need this cup of coffee worth 160 pesos?” We all know the answer, you can probably live without having to buy a cup of coffee from Starbucks every day. Or if you really need coffee to jumpstart your day, can’t 3 in 1 coffee or a cup of coffee from 7/11 do the trick?

When you think about lowering your expenses focus on areas where you can be more practical. Find ways to look for cheaper alternatives to the things you’re already doing. Most importantly, if you don’t really need it, then find the strength not to impulsively spend on things and just add it to your savings.

CREATE AN EMERGENCY FUND

This is not something you need to begin doing immediately, you can do this after six to eight months of consistently saving a portion of your income. Now, remember, your emergency fund is SEPARATE from your savings. So if you keep your savings in a bank, you should open a separate bank account solely for the placement of your emergency fund. Why? It’s because this fund, as the name suggests, is for EMERGENCIES ONLY! We need to take out all forms of temptation to use our emergency funds unless it is really needed.

So what’s the best way to build up an emergency fund? If you’re saving 20% of your income, you can begin to allocate 5% of that to the emergency fund. So you will be saving 15% of your income then the remaining 5% will go to the emergency fund. By not buying the things you don’t actually need yet, you can also place that excess cash in the fund.

So now, how big should your emergency fund be? A good emergency fund is one that is equal to the amount of six to twelve months worth of salaries. Given that, it won’t be easy growing your emergency fund. However, by putting a portion of your income to your emergency fund consistently, you should be able to accomplish this in 18 to 24 months.

INVEST

Let’s say you’ve found a way to lower your expenses significantly, you’ve saved a good amount of money, and your emergency fund is stacked and ready. What’s the next thing you can do? The next thing you can do is to INVEST your money. So, what is investing? This is basically making your money work for you. There are many things you can invest in, there’s stocks, bonds, currencies, treasury bills, mutual funds, UITFs, and the like.

So what’s the advantage of investing your hard-earned money rather than just placing it all in the bank? If all you do is put your savings in a savings account, the value of your money is actually depreciating due to INFLATION. This is when the prices of goods go higher, and due to the low-interest rates of savings accounts your money is actually losing value relative to inflation.

By investing your money in places like the stock market, you can potentially make a bigger return on your savings which should be enough to combat factors like inflation. Now the question is, how do the above-mentioned investment options work? Know more about the investment that fits your needs and learn about effective investment strategies so you can build your wealth. Join Investa Online Summit this June 27!

For more information, visit www.investagrams.com/investasummit

---

You have been dreaming of owning your own business. Imagine being able to control your work hours and how much you can earn; imagine being your own boss; imagine the freedom. However, you do not know where to start. So you researched and found out that investing in a franchise is good for newbie investors like you. You can have a business of your own without starting from zero. Now, you are convinced. You are excited to get a franchise of your favorite brand and are already dreaming about earning a lot while being on an island somewhere.

Wait. Come back to your senses for a while. Before you write that check and put that investment up, are you really sure with what you are getting into? Before you franchise and continue your daydreaming, know these things first!

What is Franchising?

If you’ve always wanted to run your own business but the thought of having to start from scratch might be intimidating, then franchising may be the right path for you. By definition, franchising allows you to acquire the proprietary knowledge, trademarks, and processes of proven successful business and run it as your own. Basically, you are paying a fee to own a proven brand name.

Key Advantages of Owning a Franchise

The biggest advantage franchising offers, especially if you don’t want to go through the process of building your business from the ground up, is you gain access to a proven system and process that has helped the business become successful. New franchisees can avoid a lot of the mistakes startup entrepreneurs make since there’s already a laid out business and operations plan done by the franchisor.

Not only that, if you choose the right brand to franchise you will also benefit from its reputation and customer loyalty. This means you don’t need to spend a good amount of resources to get your name and product out to your customers. Choosing the right franchisor will also help boost your confidence as they will help you differentiate yourself from the competition.

Franchising also requires little investor involvement during the day-to-day operations, so if your goal is to find an alternative stream of passive income this is definitely a great option. As the franchisee, aside from choosing the right brand to franchise, the other important business decisions you will need to make will revolve around the location of your business, the proper training of your staff, and the quality of the product or service you provide.

Where You Can Learn More About Franchising

However, all of these things may sound easier said than done, which is true, but with the help from the right people, you will be able to successfully franchise yourself. That’s why for this year’s Investa Online Summit we invited RJ Ledesma, the co-founder of Easy Franchise, to help solve the common problems of first-time franchisees. With their online platform, they match the right franchise to the needs of the franchisee.

RJ Ledesma, a well-known jack of all trades, is an accomplished entrepreneur and a notable personality in show business. He currently hosts the Bright Ideas on Bloomberg Philippines/One News, a show that focuses on the local tech startup scene, and Philippine Realty TV on CNN Philippines. Also, he is the co-founder of both EnterPH (a market entry consulting firm) and Easy Franchise (a franchise marketplace that connects franchisors & franchisees).

Want to learn more about franchising and hear from one of the best in the industry?

Then reserve your slot to the first-ever Investa Online Summit this June 27, 2020.

For more details, www.investagrams.com/investasummit.

---

For the past couple of weeks not only has our local market crashed, but markets globally have also experienced the same fate as well. Trading opportunities have been hard to come by recently.

The best thing to do during times of extreme volatility and uncertainty is to sit tight and remain in cash until the opportunities arrive. Usually, the first set of trading opportunities will arise once the index hits major support levels. This happened when the $PSEi made its largest down day in HISTORY hitting back-to-back circuit breakers.

When the halt ended, names like $ALI, $AC, $BDO, $SM, and $SMPH began to show signs of recovery. Trying to pick the bottom of a market crash is no easy task, and it has resulted in countless traders losing money. However, it can be very rewarding if you’re able to accomplish it. We’re not saying that we’ve reached the bottom, but the relief rally from 4k levels towards 5,400 has definitely shown us a ton of opportunities to profit from despite the bearish environment.

The question many traders ask is what stocks should they keep an eye on during times like these?

The best way to spot potential reversals and outliers is through an objective process, we should separate our personal biases when going through the process of stock selection. Using the InvestaPRO, we have a set of algo-based generated watchlists you can take a look at while trying to spot potential opportunities in the midst of the current market environment.

If you’re looking for trading opportunities in cheap names that show value, you can take a look at these watchlists:

However, not everyone may be comfortable trying to pick the bottom or positioning in down-trending stocks. We understand that a lot of traders would rather wait for the reversal pattern to form and latch on to the market leaders in the first leg up of the next bull market. Here are some of the watchlists from the InvestaPRO that you should keep an eye on to spot the next potential market leaders:

We also took the initiative to ask a few users how their experience with the InvestaPRO has been so far. Our goal with this new feature is to make the entire process of stock screening much easier, effective, and efficient for our users. Here’s what they had to say about the InvestaPRO:

“Bago palang kasi ako sa market and hindi ko rin talaga alam kung ano nga ba dapat yun hinahanap ko. Pero salamat sa InvestaPRO, binibigyan ako nito ng solid watchlist sa mga stocks na potentially kumita. Laki ng tulong nito sa oras, performance, at lalo na sa learning ko!”

“Decided to go for the premium version of the InvestaPro so I can have access to more watchlists to be better prepared for each and every trading day. The premium watchlists filter out stocks even more which gives me the ability of choosing from only the best names based on the rankings shown. I am very grateful to the entire Investagrams team for their continuous efforts in creating products like these.”

In times like these, the worst thing you can do aside from not managing your risk is over-trading. Overtrading usually stems from allowing yourself to take low-quality trades due to the fact that you lowered the standards in your stock selection process. If you want to trade during market crashes, the thing you need to do is be ultra-selective. With the InvestaPRO and our algo-based generated smart-watchlists, choosing the right stock should not be a problem.

---

Once we take our first step into the world of the financial markets, the information we usually seek is what’s the best stock or asset to buy as of today. We immediately search for buy recommendations or strategies focused on buying a stock. Many traders come into the market with the mindset of buying the best-performing stocks in the hopes of rapidly compounding their capital. There’s nothing wrong with this, but the problem is many newcomers to the market forget that there’s also the potential for financial ruin in any market. Most of the time risk management is forgotten about.

We discover the stock market either through something we saw online, a seminar we attended, or a friend who made some money in the market. However, what we usually see or hear is all the upside we can get if we begin our investing journey. What’s failed to be given the emphasis on are the potential catastrophic losses that can occur if done the wrong way.

It’s true that the stock market is the ultimate equalizer of wealth that has the potential to exponentially compound your capital. However, besides focusing on the amount of money we can make, we need to understand the risks involved as well. Most importantly, we need to ingrain in our minds that LOSSES will always be part of the game. Countless traders try to avoid getting losses, but the problem is losses are UNAVOIDABLE.

What’s important is managing your losses effectively and cutting them while they’re small. There’s a proverbial saying in the world of trading, “Keep your losses small and let your winners run.” This is something that has been followed by some of the best traders in history, but it’s easier said than done. In the words of renowned market wizard Ed Seykota, “The elements of good trading are 1. Cutting your losses | 2. Cutting your losses | 3. Cutting your losses. If you can follow these three rules, you may have a chance.”

You may be wondering, why does Ed Seykota have to be so redundant? Couldn’t he have said cut your losses just once?” Well, the reason why he puts the utmost emphasis on cutting your losses and not finding the best buying strategy is if you fail to cut your losses even once, it could mean the end of your career as a trader. If you miss out on a stock that goes up 100%, it may hurt but there’ll always be other opportunities. However, if you fail to cut a loss while it’s still small, sooner or later you’ll be taking the mother of all losses. All it takes is one big loss to ruin years’ worth of profitability.

Whenever we close a position, we want to see only three kinds of results. Either a big win, a small win, or a small loss. There should be absolutely no room for a BIG LOSS in this equation. As mentioned above, all it takes is one undisciplined day that you don’t cut a loss while it’s small to ruin everything you worked hard for. Remember, you’re dealing with your hard-earned money here.

Do you want to see what can potentially happen when you don’t practice risk management?

These are just some of the many names in the Philippine Stock Market that have gone down -70% and more in recent memory. This doesn’t even mention the numerous stocks that have suffered the same fate in previous years. This is also something that happens in ALL financial markets: Equities, Currency, Commodities, Cryptocurrency, you name it!

You will always take losses in trading, but the best way to treat it is the cost of doing business since it’s unavoidable. If you’ve read a good amount of trading books there’s always one theme that’s present; the importance of managing your risks. The examples above should be enough justification to encourage everyone to also give enough emphasis on handling the downside and protecting your capital.

Mga ka-Investa, this article was written in the midst of the market crash due to the Covid-19. We don’t know when the dust will settle and when the market will finally reverse, but what’s important for now is to practice risk management at the highest level. Until we’ve seen a confirmed bottom, we’ll never know how much further the global markets may drop. Risk management is what will keep you alive in the markets in times like these.

Godspeed, everyone!

---

Veteran and newbie alike, no one is spared during a market crash. Well, not unless you have a stop loss and have the discipline to execute on it. If you’re someone who just came across the world of trading or investing, you may be asking yourself “What did I just sign up for?” That’s a good question, but what you need to understand is that the market always goes through these cycles. To keep it simple; the market goes through both good and bad times, it just so happens we’re in BAD times as of now.

What’s worse is in the Philippine stock market, you can only make money when prices go HIGHER. However, given the current market conditions, prices of most stocks are sinking faster as the days go by. This is unlike in global markets where you can make money while the price of the asset goes down, this is called SHORTING but will not be part of this article.

So you may be wondering, “What now?” “Is it the end of the stock market as we know it?” That’s another good question! For the benefit of the newbies out there, this is not the first or even the second time a market crash happened. There have been several crashes that have happened outside our lifetime, but the most recent one is the 2008 financial crisis.

Now the most important thing we need to know now is not when the bottom will happen, but rather what to do while waiting for the bottom to appear. In trading, you will never be able to call tops or bottoms. You may be able to do it a couple of times, but never on a consistent basis over a long period of time. However, you still need to be in sync with the market to spot potential opportunities once the reversal does come.

As Warren Buffet said, “Be fearful when others are greedy, be greedy when others are fearful.” But as we wait for the best time to get back in the market, what do we do now?

WHAT TO DO DURING A MARKET CRASH

1. CONTINUOUS LEARNING

There’s never a bad time to increase your knowledge, but now it is probably one of the better times to put even more effort into it. Instead of forcing trades while the market crashes, why not just take this time to find ways to improve your overall trading? Instead of forcefully trying to find low probability setups, it’s much better to use this time to sharpen your axe.

Your continuous learning process during this bear market can be in any form. You can consume quality content through books, online articles, videos, podcasts, and the like. Always remember, there is no one right way of learning. Everyone learns in their own ways, so find yours and go all-in! (Wag po all-in sa isang stock dedo po tayo diyan)

2. STAY IN CASH IN A MARKET CRASH

Again, in the Philippine stock market, we can only make money if prices go up. So the last thing you want to be in this dangerous market environment is fully invested. The best thing to do right now is to be patient and be at least 80% to 90% in cash. This also applies to those who trade global markets. Even if you can make money shorting assets during the crash you will need to remember that the volatility during crashes is on a whole other level.

Some people might think that staying in cash isn’t the best option since it’s basically like keeping your money in the bank with no interest. The whole reason you got into the stock market is to make your money work for you right? There’s a valid point in that argument, but what everyone needs to understand is cash is also a POSITION. Just because you’re not holding any stocks doesn’t mean you’re not doing anything.

Think about the cheetah, probably one of the fastest predators on the planet, doesn’t go for the kill unless the conditions are absolutely in its favor. So as we wait for the market to bottom, you will need to have the patience to deploy your capital once the odds are finally in your favor.

3. FOCUS ON THE OUTLIERS

Yes, it’s best to stay in cash during market downturns. However, that doesn’t mean there aren’t any opportunities at all. There will be a few stocks that may reverse much earlier than the general index, but note that it requires high-level precision to catch these plays. Also, the reason why you don’t want to totally not look at the market during deep corrections is that you want to keep an eye on the potential market leaders once the market bottoms out.

This is one of the most important lessons Mark Minervini, one of the best investors of our lifetime, shared in one of his bestselling books. The market leaders in the next bull market will be those who bottom out BEFORE the general index. Even better, those who are making NEW HIGHS or breaking out of consolidations while the index continues on its downturn. So once you see these characteristics in a stock, keep a close eye on it.

To those feeling disheartened by the difficulties in today’s market, do not give up. All of the best traders of all time went through these periods. If you lost a ton of money during this market downturn, you’re not alone. However, what matters most is how you bounce back from your losses. Even market wizards have gone through points in their trading journey when they got wiped out. What will define you as a trader will be how to persevere during the difficult times in the cycle, not the good times.

Godspeed, mga ka-Investa!