The Philippines presents one of the most spectacular comeback stories in recent times. The country, which had been lagging far behind its regional peers, is now making its presence know among the world's most vibrant economies, and is now spoken of as a ‘tiger cub’ and ‘Next Eleven economy.’
The leadership of President Benigno Aquino III has provided needed stability for the archipelago nation, which has been known for its political tumult. That has allowed a revival in domestic and international business confidence for a nation that once was second only to Japan in prosperity. Need proof? The Philippines recently hosted the World Economic Forum on East Asia, where corporate leaders, policymakers and the press from across the globe met to talk business.
The Philippine economy has witnessed a tremendous transition to growth over the last decade. It has managed stellar returns and amassed huge foreign exchange reserves while keeping inflation and interest rates under check. Despite Typhoon Haiyan (known as 'Yolanda' in the Philippines), which hammered the country in 2013, the Philippine economy grew by 7.2% last year, making it the fifth-largest in Southeast Asia. That compares to to a 4.7% average from 2008-2012. According to research by IHS Inc., the Philippines economy is projected to have a long-term economic growth of 4.5-5% (per year) from 2016 to 2030, reaching $1.2 trillion by 2030.
Stocks Respond to Growth
Backed by strong economic growth, Philippine stocks have outpaced regional peers. In fact, the Philippine market has been in an extended uptrend over the last four years, and has withstood global headwinds and weakening confidence in emerging markets. The market’s PSEi Index posted YTD returns of over 16% as of early June 2014, led by sectors such as business process outsourcing (BPO), cement and consumer products.
The availability of a skilled and educated work force that is proficient in English – along with low labor costs – make the Philippines a preferred BPO destination. The BPO sector is expected to grow rapidly and offer employment to approximately 110,000 additional workers over the next two-to-three years. Interestingly, there is no publicly listed company that derives the bulk of its revenue from the BPO business. Instead, investors can allocate to companies that merely benefit from BPO, such as real estate. Leading names in this category are Robinsons Land Corp. (RLC), SM Investments Corp. (SM), SM Prime Holdings, Inc. (SMPH), Megaworld Corp. (MEG) and Ayala Land, Inc. (ALI).
Rising infrastructure investment, along with need to rebuild after last year's typhoon and earthquakes (the nation sees frequent seismic and volcanic activity), means that cement companies could be a good play. Companies like Holcim Philippines, Inc. (HLCM) and Lafarge Republic, Inc. (LRI) stand to benefit.
And in a nation of roughly 100 million people, the consumer products sector should not be ignored. Companies to study include Universal Robina Corp. (URC), Pepsi-Cola Products Philippines, Inc. (PIP) and RFM Corp. (RFM). Similarly, energy producer First Gen Corp. (FGEN) should be considered.
How to Gain Access?
One way international investors can access individual Philippine stocks is through a local brokerage house that serves international clients. Investors content with paying the higher commissions by going this route can access a wide array of sectors and stocks, not to mention have more flexibility on entering and exiting positions. Some well-known brokers include Citiseconline, FirstMetroSec and BPItrade.
- American Depositary Receipts (ADRs)
Access via ADRs is a more conventional route, but your choice is limited to the Philippine Long Distance Telephone Co. (PHI), the only Philippine company currently trading on NYSE. There are many companies that trade on the pink sheets or over the counter (OTC), however.
Conservative investors interested in accessing the Philippine market, albeit somewhat indirectly, can choose diversified Asia-focused mutual funds, as there are no funds that invest exclusively in the Philippines. Most funds have small allocations to the Philippines, though, because market values in the country tend to be small by comparison.
- Exchange-Traded Funds (ETFs)
Gaining access to the Philippines market through an ETF is a convenient option. Investors can pick either a general ETF that features the Philippines or a Philippine-focused ETF that offers exclusive exposure to the country. The only ETF focused solely on the Philippine markets is the iShares MSCI Philippines Investable Market Index Fund (EPHE), which offers exposure to around 44 companies and has a net asset value of about $354 million. The fund's top-five holdings are Ayala Land, Inc. (ALI), Universal Robino Corp. (URC), BDO Unibank, Inc. (BDO), JG Summit Holdings, Inc. (JGS) and Philippine Long Distance Telephone Co. (TEL). (For more on this topic, see: Five Minute Guide To Philippines ETF Investing)
The Bottom Line
The challenge for the Philippine economy lies in the sustainability of economic growth. Its economy is primarily driven by what's arguably an overreliance on the BPO sector and remittances from over 11 million overseas Filipino workers. Poverty and unemployment remain salient issues, as well as an uneven distribution of wealth. The country’s business climate needs to be improved to attract foreign direct investment FDI – namely into into manufacturing and tourism – and to mobilize domestic investment. With newfound political stability and a large, skilled, and motivated workforce, many are betting that the Philippines will rediscover past prosperity.
Talking Points:
- Capital flows calculates money moving in and out of a currency
- Traders follow rates to maximize yield
- As rates change, money will flow between currencies
There are many fundamental factors to consider when trading your favorite Forex pairs. While many traders may be quick to dismiss fundamentals these underlying factors have the ability to cause shifts in buying and selling patterns of traders. As demand increases for a currency so does its value. Likewise as money flows out of a currency its value begins to decrease.
To get a better understanding of market fundamentals, today we will look at capital flows and interest rates. Let’s get started!
What is a Capital Flow
Capital flows are the basics of Forex fundamentals. Just as the name implies this describes the flow of funds from one designated currency to another. Normally this flow is directly related to capital investments inside of a particular country. One typical example of this is if a foreign investor wanted to invest in stocks on the S&P 500, it would require Dollars to do so. This means money would flow into the USD from another currency to make the purchase.
The logic from here is one of supply and demand. If capital inflows exceed outflows that means there is a demand for countries currency. This can provide fundamental trading opportunities as for traders as prices rise to accommodate the new demand. This is also true with a net capital outflow. As there is less demand for a particular countries currency, we would expect a fundamental opportunity to place new sell orders.
Why Interest Rates Matter
Interest rates are one of the primary reasons for the international flow of capital. As investors, speculators, and traders all look to maximize their returns they tend to look towards higher yielding investments. That means countries with the highest interest rates coupled with strong economic data tend to see their countries currency strengthen due to capital flows.
Keeping an eye on the economic calendar can help traders become aware of potential changes in interest rates. Central banks are charges with setting the banking rates for their designated region, and will periodically hold meetings to make any changes to this policy. As these changes take place, demand for a specific currency can fluctuate based off of the decision. Let’s take a look at an example of this theory in action.
NZDUSD & Interest Rates
Below we can see a 1Hour chart for the NZDUSD. This is a great example of capital flows at work. As of 21:00 GMT on Wednesday the RBNZ (Reserve Bank of New Zealand) released their rate decision. The outcome was a rate hike of .25%, moving their central bank target rate to 3.25%. Almost immediately after the event prices of the NZD (New Zealand Dollar) began to rise. Why did this happen?
When the RBNZ raised rates, they also made it more attractive to hold the NZD relative to lower yielding currencies. When compared to the USD, the differential between their respective rates expanded to 3.00%! Traders and investors looking to take advantage of this yield differential were actively selling the USD (US Dollar) while purchasing the NZD (New Zealand Dollar). As demand for the NZD increased, money quickly began to flow out of the USD causing the prices and momentum on the chart depicted below to rise.
Learn the Market
As a fundamental trader, it is important to know how different events affect the valuation of a currency. To learn more about the flows of the currency market, make sure to sign up for “New to Forex” course presented by CGM Education. Registration is free, and the course will include videos and a variety of topics to help you with your trading.
There's something about the idea of doubling one's money on an investment that intrigues most investors. It's a badge of honor dragged out at cocktail parties, a promise made by over-zealous advisors, and a headline that frequents the cover of some of the most popular personal finance magazines.
Perhaps it comes from deep in our investor psychology; that risk-taking part of us that loves the quick buck. Whatever the source though, it is both a realistic goal that investors should always be moving towards, as well as something that can lure many people into impulsive investing mistakes. Knowing some of the most trusted avenues to doubling your money is something that all investors should have in their toolboxes.
1. The Classic Way - Earn It Slowly
Investors who have been around for a while will remember the classic Smith Barney commercial from the 1980s, where British actor John Houseman informs viewers in his unmistakable accent that they "make money the old fashioned way – they earn it."
Perhaps the most tested way to double your money over a reasonable amount of time is too invest in a solid, non-speculative portfolio that's diversified between blue-chip stocks and investment grade bonds. While that portfolio won't double in a year, it almost surely will eventually, thanks to the old rule of 72. (To learn more about the rule of 72, check out the answer to our frequently asked question, What is the 'rule of 72'?)
Considering that large blue-chip stocks have returned roughly 10% over the last 100 years, and investment grade bonds have returned roughly 6%, a portfolio that is divided evenly between the two should return about 8%. Dividing that expected return (8%) into 72, gives a portfolio that should double every nine years.
2. The Contrarian Way – Blood in the Streets
Just like great athletes go through slumps when many fans turn their backs, the stock prices of otherwise great companies occasionally go through slumps because fickle investors head for the hills. These instances can bring about situations where good investments become oversold, which presents a buying opportunity for brave investors who have done their homework.
Perhaps the most classic barometers used to gauge when a stock may be oversold, is the price-to-earnings ratio and the book value for a company. Both of these measures have fairly well established historical norms for both the broad markets and for specific industries. When companies slip well below these historical averages for superficial or systemic reasons, smart investors will smell an opportunity to double their money.
3. The Safe Way
For those investors who are afraid of wrapping their portfolios around a telephone pole, bonds may provide a significantly less precarious journey to the same destination. But investors taking less risk by using bonds don't have to give up their dreams of one day proudly bragging around the lunchroom about doubling their money. In fact, zero-coupon bonds (including classic U.S. Savings Bonds), can keep you in the "double your money" discussion.
One hidden benefit that many zero-coupon bondholders love is the absence of reinvestment risk. With standard coupon bonds, there's the ongoing challenge of reinvesting the interest payments when they're received. With zero coupon bonds, which simply "accrete" or grow towards maturity, there's no hassle of trying to invest smaller interest rate payments or risk of falling interest rates.
4. The Speculative Way
While slow and steady might work for some investors, others may find themselves falling asleep at the wheel. For these folks, the fastest ways to super-size the nest egg may be the use of options, margin or penny stocks. Stock options, such as simple puts and calls, can be used to speculate on any company's stock going up or down, and can turbo-charge a portfolio's performance.
For those who want don't want to learn the ins and outs of options, but do want to leverage their faith (or doubt) about a certain stock, there's the option of buying on margin or selling a stock short.
Lastly, extreme bargain hunting can quickly turn your pennies into dollars. Whether you decide to roll the dice on the numerous former blue-chip companies that are now selling for less than a dollar, or you sink a few thousand into the next big thing, penny stocks can double your money in a single trading day.
5.The Best Way
While it's not nearly as fun as watching your favorite stock on the evening news, the undisputed heavyweight champ of doubling your money is that matching contribution you receive in your employer's retirement plan. Making it even better is the fact that the money going into your 401(k) or other employer-sponsored retirement plan comes right off the top of what your employer reports to the IRS.
Before you start complaining about how your employer doesn't have a 401(k) or how your company has cut its contribution because of the economy, don't forget that the government also "matches" some portion of the retirement contributions of taxpayers earning less than a certain amount.
Conclusion
There's an old saying: "If something seems too good to be true, then it probably is." That's sage advice when it comes to doubling your money, considering that there are far more investment scams out there than sure things. While there certainly are other ways to approach doubling your money than the ones mentioned so far, always be suspicious when you're promised results. Whether it's your broker, your brother-in-law or a late night infomercial, take the time to make sure that people are not using you to double their money.
While it may be true that in the stock market there is no rule without an exception, there are some principles that are tough to dispute. Let's review 10 general principles to help investors get a better grasp of how to approach the market from a long-term view. Every point embodies some fundamental concept every investor should know.
Sell the losers and let the winners ride!
Time and time again, investors take profits by selling their appreciated investments, but they hold onto stocks that have declined in the hope of a rebound. If an investor doesn't know when it's time to let go of hopeless stocks, he or she can, in the worst-case scenario, see the stock sink to the point where it is almost worthless. Of course, the idea of holding onto high-quality investments while selling the poor ones is great in theory, but hard to put into practice.
Don't chase a "hot tip"
Whether the tip comes from your brother, your cousin, your neighbor or even your broker, you shouldn't accept it as law. When you make an investment, it's important you know the reasons for doing so; do your own research and analysis of any company before you even consider investing your hard-earned money. Relying on a tidbit of information from someone else is not only an attempt at taking the easy way out, it's also a type of gambling. Sure, with some luck, tips sometimes pan out. But they will never make you an informed investor, which is what you need to be to be successful in the long run.
Don't sweat the small stuff
As a long-term investor, you shouldn't panic when your investments experience short-term movements. When tracking the activities of your investments, you should look at the big picture. Remember to be confident in the quality of your investments rather than nervous about the inevitable volatility of the short term. Also, don't overemphasize the few cents difference you might save from using a limit versus market order.
Granted, active traders will use these day-to-day and even minute-to-minute fluctuations as a way to make gains. But the gains of a long-term investor come from a completely different market movement - the one that occurs over many years - so keep your focus on developing your overall investment philosophy by educating yourself.
Don't overemphasize the P/E ratio
Investors often place too much importance on the price-earnings ratio (P/E ratio). Because it is one key tool among many, using only this ratio to make buy or sell decisions is dangerous and ill-advised. The P/E ratio must be interpreted within a context, and it should be used in conjunction with other analytical processes. So, a low P/E ratio doesn't necessarily mean a security is undervalued, nor does a high P/E ratio necessarily mean a company is overvalued.
Resist the lure of penny stocks
A common misconception is that there is less to lose in buying a low-priced stock. But whether you buy a $5 stock that plunges to $0 or a $75 stock that does the same, either way you've lost 100% of your initial investment. A lousy $5 company has just as much downside risk as a lousy $75 company. In fact, a penny stock is probably riskier than a company with a higher share price, which would have more regulations placed on it.
Pick a strategy and stick with it
Different people use different methods to pick stocks and fulfill investing goals. There are many ways to be successful and no one strategy is inherently better than any other. However, once you find your style, stick with it. An investor who flounders between different stock-picking strategies will probably experience the worst, rather than the best, of each. Constantly switching strategies effectively makes you a market timer, and this is definitely territory most investors should avoid. Take Warren Buffett's actions during the dotcom boom of the late '90s as an example. Buffett's value-oriented strategy had worked for him for decades, and - despite criticism from the media - it prevented him from getting sucked into tech startups that had no earnings and eventually crashed.
Focus on the future
The tough part about investing is that we are trying to make informed decisions based on things that are yet to happen. It's important to keep in mind that even though we use past data as an indication of things to come, it's what happens in the future that matters most.
A quote from Peter Lynch's book "One Up on Wall Street" (1990) about his experience with Subaru demonstrates this: "If I'd bothered to ask myself, 'How can this stock go any higher?' I would have never bought Subaru after it already went up twentyfold. But I checked the fundamentals, realized that Subaru was still cheap, bought the stock, and made sevenfold after that." The point is to base a decision on future potential rather than on what has already happened in the past.
Adopt a long-term perspective
Large short-term profits can often entice those who are new to the market. But adopting a long-term horizon and dismissing the "get in, get out and make a killing" mentality is a must for any investor. This doesn't mean that it's impossible to make money by actively trading in the short term. But, as we already mentioned, investing and trading are very different ways of making gains from the market. Trading involves very different risks that buy-and-hold investors don't experience. As such, active trading requires certain specialized skills.
Be open-minded
Many great companies are household names, but many good investments are not household names. Thousands of smaller companies have the potential to turn into the large blue chips of tomorrow. In fact, historically, small-caps have had greater returns than large-caps; over the decades from 1926-2001, small-cap stocks in the U.S. returned an average of 12.27% while the Standard & Poor's 500 Index (S&P 500) returned 10.53%.
This is not to suggest that you should devote your entire portfolio to small-cap stocks. Rather, understand that there are many great companies beyond those in the Dow Jones Industrial Average (DJIA), and that by neglecting all these lesser-known companies, you could also be neglecting some of the biggest gains.
Be concerned about taxes, but don't worry
Putting taxes above all else is a dangerous strategy, as it can often cause investors to make poor, misguided decisions. Yes, tax implications are important, but they are a secondary concern. The primary goals in investing are to grow and secure your money. You should always attempt to minimize the amount of tax you pay and maximize your after-tax return, but the situations are rare where you'll want to put tax considerations above all else when making an investment decision.
Conclusion
There are exceptions to every rule, but we hope that these solid tips for long-term investors and the common-sense principles we've discussed benefit you overall and provide some insight into how you should think about investing.
Hedge funds spend loads of money and time trying to find great trade ideas. On a quarterly basis hedge funds (over $100 million) are required to reveal their positions--and thus what they are most interested in--to the public. Until recently poring through all those hedge funds positions likely wouldn't have been of much use. It took as much time to go through the data as it did to do some personal research. A series of "guru" ETFs is changing that. The ETFs invest in stocks which are being accumulated by hedge funds, using filters and proprietary methods to supposedly find the best of the best. The idea behind of the funds is to give everyday investors a way to make hedge fund-like returns, hopefully.
The Global X Guru Index ETF (ARCA:GURU) is comprised of U.S. listed securities and has a 0.75% expense ratio. Over the last year GURU is up 24.24%, versus the S&P 500 SPDR (ARCA:SPY) which is up 18.69%. The holdings within the ETF are stocks which the fund believes hedge funds are accumulating based on hedge fund position disclosures. Top holdings currently include Nationstar Mortgage Holdings (NYSE:NSM) and American Airlines (Nasdaq:AAL). The ETF has moderate volume, averaging more than 210,000 shares per day.
Another fund in the guru series is Global X Guru Small Cap Index ETF (ARCA:GURX), focusing on small cap U.S. listed securities which the ETF believes hold the highest conviction with hedge funds. It has an expense ratio of 0.75% and began trading on March 11 2014, so historical performance is limited. Since inception, the fund is up 0%, compared to the iShares Russell 2000 ETF (ARCA:IWM)--which focuses on small caps--which is down 1.18% over the same time period. Volume is still very light in this new fund, averaging about 4,700 shares per day. This may make it difficult to enter or exit large positions, and therefore it is not suitable for short-term trading. If the volume deters you, top holdings in the fund include Vanda Pharmaceuticals (Nasdaq:VNDA) and Halozyme Therapeutics (Nasdaq:HALO); both are actively traded and in short-term uptrends.
The Global X Guru International Index ETF (ARCA:GURI) acquires U.S. listed international stocks that the ETF views as being held in high regard by hedge funds. This fund also has limited historical performance, as it began trading on March 11, 2014. The expense ratio is 0.75%. Since inception the fund is up 4.42%. Volume is still very light in this new fund, averaging about 1,600 shares per day. This may make it difficult to enter or exit large positions, and therefore it is not suitable for short-term trading. Top holdings in the ETF include Canadian Pacific Railway (NYSE:CP) and Baidu (Nasdaq:BIDU); both are actively traded and in uptrends.
The Bottom Line
These funds actively seek out stocks which hedge funds are accumulating and holding. The GURX and GURI funds still lack volume, therefore simply looking at the ETF holdings provides insight into which stocks hedge funds are accumulating. The GURU ETF is better established and has higher volume. Invest in the fund if you are a passive investor who wants to (hopefully) benefit from the insight and trading activity of top hedge funds. Active traders can take a peak inside the fund's holdings too see which stocks are likely to outperform based on hedge fund buying. Unfortunately, just because a hedge fund purchased a stock in the past--they only report quarterly--doesn't mean that stocks or these ETFs itself will continue to rise in the future.
As the S&P 500 makes new highs, these stocks are lagging behind and hesitating near former highs. If these four stocks can break beyond their former highs it will keep the uptrends alive. Failure to reach new highs though will create large topping patterns which will ultimately lead to much lower prices.
Time Warner Cable (NYSE:TWC) has been struggling to get above the $143 area since March. A break above that threshold on June 6 could be enough to push the stock toward the high at $147.28. The long-term trend is up, but for that to continue, the stock needs to exceed that high watermark. If the price can't break and hold above $147.28, watch for a retest of $134. Given the long-term trend, the $134 region presents a buying opportunity as strong support is present. On the other hand, if the price continues to decline below $132.58 (April low) a top is in place, and at least a short-term downtrend will be underway.
United Postal Service (NYSE:UPS) made its last high on December 31, before losing 10% of its value in January. Since February the stock has been climbing back toward the high at $105.37. The strong short-term trend could push the price above the level, continuing the long-term uptrend. Given the sizable correction in January, which was much stronger and quicker than the rally since February, its questionable whether the stock can reach and stay above $105. Buying at this point is a gamble because resistance in the $105 region could force the stock back toward trendline support at $98. The $98 area provides a better entry for the bulls, as it will be along a newly created triangle pattern; risk can be kept quite small with a stop below $96. An upside breakout targets $115, while a break below $96 could push the price to support at $88.
Verizon (NYSE:VZ) has been creeping back up to the October high at $51.49. Despite the breakout of a triangle near the $50 area, the price is still likely to meet resistance near $51.50. If exceeded, expect a test of the April high at $54.31. The triangle is about $8 in height, which, added to the breakout price, gives a target near $57 over the long-term. An inability to climb back above the June high at $50.33 means the triangle stays in place and signals a move back toward the $46 support area. Bulls can go long with a stop below $48, while bears can go short with an initial stop above $51.50.
Walmart (NYSE:WMT) has been moving predominantly sideways since mid-2013. Since February the trend has been up, but $81 is a key resistance area which could halt the rise. The sharp decline off $80 also makes it a likely resistance area. While the price has room to run toward these areas, being long at the top of this large range is risky. It will take very significant volume and momentum to push the price up and out of this range, and currently the signs aren't there (but they can develop quickly). Waiting for a deeper pullback toward $73 or $72 provides a better buy point, as there is well established support down to $71. The current price isn't particularly attractive for short positions either; $80 to $81 provides a better short entry, especially if the price tries to move above these areas but quickly fails.
The Bottom Line
Significant highs overhead put these stocks in a precarious position. By not being at new highs, they are already showing signs of relative weakness compared to the broader market (S&P 500) as of late, and deep corrections off the prior high show there is strong resistance in the area of those former highs. Long-term trends remain up, but if bullish on these stocks, waiting for a pullback and a lower risk trade is more prudent than buying at current levels. Bears can look for shorting opportunities if these stocks fail to make new highs or break higher but the breakout quickly fails, which indicates downside to come.
More money has been lost by trading impulsively than by any other means. Ask a novice why he went long on a currency pair and you will frequently hear the answer, "Because it has gone down enough - so it's bound to bounce back." We always roll our eyes at that type of response because it is not based on reason - it's nothing more than wishful thinking
We never cease to be amazed how hard-boiled, highly intelligent, ruthless businesspeople behave in Las Vegas. Men and women who would never pay even one dollar more than the negotiated price for any product in their business will think nothing of losing $10,000 in 10 minutes on a roulette wheel. The glitz, the noise of the pits and the excitement of the crowd turn these sober, rational businesspeople into wild-eyed gamblers. The currency market, with its round-the-clock flashing quotes, constant stream of news and the most liberal leverage in the financial world tends to have the same impact on novice traders.
Trading Impulsively Is Simply Gambling
It can be a huge rush when a trader is on a winning streak, but just one bad loss can make the same trader give all of the profits and trading capital back to the market. Just like every Vegas story ends in heartbreak, so does every tale of impulse trading. In trading, logic wins and impulse kills. The reason why this maxim is true isn't because logical trading is always more precise than impulsive trading. In fact, the opposite is frequently the case. Impulsive traders can go on stunningly accurate winning streaks, while traders using logical setups can be mired in a string of losses. Reason always trumps impulse because logically focused traders will know how to limit their losses, while impulsive traders are never more than one trade away from total bankruptcy. Let's take a look at how each trader may operate in the market.
The Impulsive Trader
Trader A is an impulsive trader. He "feels" price action and responds accordingly. Now imagine that prices in the EUR/USD move sharply higher. The impulsive trader "feels" that he has gone too far and decides to short the pair. The pair rallies higher and the trader is convinced, now more than ever, that it is overbought and sells more EUR/USD, building onto the current short position. Prices stall, but do not retrace. The impulsive trader, who is certain that they are very near the top, decides to triple up his position and watches in horror as the pair spikes higher, forcing a margin call on his account. A few hours later, the EUR/USD does top out and collapses, causing Trader A to pound his fists in fury as he watches the pair sell off without him. He was right on the direction but picked a top impulsively, not logically.
The Analyzer
On the other hand, Trader B uses both technical and fundamental analysis to calibrate his risk and time his entries. He also thinks that the EUR/USD is overvalued, but instead of prematurely picking a turn at will, he waits patiently for a clear technical signal - like a red candle on an upper Bollinger Band® or a move in the relative strength index (RSI) below the 70 level - before he initiates the trade. Furthermore, Trader B uses the swing high of the move as his logical stop to precisely quantify his risk. He is also smart enough to size his position so that he does not lose more than 2% of his account should the trade fail. Even if he is wrong like Trader A, the logical, Trader B's methodical approach preserves his capital, so that he may trade another day, while the reckless, impulsive actions of Trader A lead to a margin call liquidation.
Conclusion
The point is that trends in the GCM market can last for a very long time, so even though picking the very top may bring bragging rights, the risk of being premature may outweigh the warm feeling that comes with gloating. Instead, there is nothing wrong with waiting for a reversal signal to reveal itself first before initiating the trade. You may have missed the very top, but profiting from up to 80% of the move is good enough in our book. Although many novice traders may find impulsive trading to be far more exciting, seasoned pros know that logical trading is what puts bread on the table.
