Using the VIX to Gauge the Stock Market Sentiment

Using the VIX to Gauge the Stock Market Sentiment

How to Use the VIX Index In the Market

In the past year, the investment community has been going through a difficult period. This is mostly because of the many global risks that have been going on. In the United States, there have been challenges in the growing trade deficit and the deadlock in Congress. In Europe, there are signs that the economy is slowing, and in the United Kingdom, Brexit has been a major issue. In Asia, there are concerns about a weakening China and the mini-trade war between South Korea and Japan. In this article, I will explain how investors use the VIX index to forecast risk and allocate capital.

What is the VIX Index?

In 1987, two researchers published a paper on the need to have a volatility index. Their index was known as the Sigma Index, and would be useful in guiding investors about the risks in the market. 6 years later, the Chicago Board of Exchange (CBOE) announced the launch of an index similar to that proposed by the two researchers. In 2003, the CBOE collaborated with Goldman Sachs to develop an updated version of the index. The updated index looked at the S&P 500 companies while the previous one looked at the 100 companies. The VIX index, also known as the fear index, is used by investors to gauge the fear in the market.

How the VIX Index is Calculated.

As an investor, you don’t need to understand how the VIX index is calculated. Instead, you just need to know how it is used in the real market. The VIX index is calculated by looking at the S&P 500 companies and how investors have applied options into them. The calculation takes into consideration the time to expiration, the forward index level derived from index option prices, first strike below the forward index, and the strike price of the money option. By doing this calculation, investors are able to know how investors have positioned themselves for the future. More details on this calculation can be seen here.

How to Use the VIX Index

Consider the headline below.

 

There are two primary methods in which you can use the VIX index in the market. First, you can trade or invest in the VIX index derivatives. The first VIX derivatives were started in 2004 and were listed at the CBOE. Most brokers in the United States like Schwab, Interactive Brokers, and TD Ameritrade allow you to trade the VIX index. To do this, you need to do two things. First, you need to conduct a technical analysis, using tools like the moving averages, RSI, and relative vigor index to identify areas where you can initiate the trades.

Second, you need to do a fundamental analysis, to predict whether the VIX will go up or not. In this fundamental analysis, your goal is to look at the global risks and conclude on whether you expect them to rise or not. For example, you can buy the VIX index if you expect there to be a no-deal Brexit. You can also short the index if you expect the world to be relatively calm.

The other way you can use the VIX index is to use it as a predictor of how the market will react. In this, if you expect the VIX index to keep on moving high, you can place a trade that shorts the overall stock market. Alternatively, you can buy safe havens like gold, Japanese yen, Swiss Franc, and government bonds when you think that the VIX will move high.

Summary

The VIX, also known as the fear index is one of the closest-followed indices in the financial market. Its performance is usually baked-in many models used by investment managers. It is also used by many sophisticated traders as a signal of what to expect. Therefore, as a trader, you should always consider looking at the performance of the VIX before you make any investment.

 

 

10 Methods for New Investors to Learn Stock Trading

10 Methods for New Investors to Learn Stock Trading

10 Methods for New Investors to Learn Stock Trading

Wall Street investors are some of the wealthiest people in the United States. People like Warren Buffett and Carl Icahn have made a fortune in the market. Successful entrepreneurs like Bill Gates and Mark Zuckerberg have made their money because of Wall Street. While anyone can be a successful investor, it takes effort to succeed. Here are the 10 ideal way to learn stock trading.

Read Books to learn stock trading

The best way to start investing in the market is reading books. Books will open up your mind to how the stock market works, the best strategies to invest, and the top mistakes to avoid. Most successful investors have talked about how books shaped their investment careers. Warren Buffett has talked about how a book – The Intelligent Investor – changed his life. Today, there are hundreds of books about investing that you can find on Amazon. As you start, we recommend reading books like, One Up on Wall Street by Peter Lynch, Common Sense Investing by John Bogle, and The essays of Warren Buffett by Lawrence Cunningham.

Open an Account With a Stock Broker

As you start your investing career, selecting a good broker will be necessary. A broker acts as an intermediary between investors in the market. They provide a platform in which people can easily buy and sell stocks. There are several stock brokers in the United States. Some of these companies are TD Ameritrade, Charles Schwab, E*Trade, Fidelity, and Robinhood. Consider a broker like Robinhood that offers no execution costs. Also, consider a broker with an ease to use mobile and desktop investing applications. In addition, consider a broker that offers a free demo account to help you get some practice.

Get Some Training

If you don’t have a background in finance, we recommend that you enroll in an online class that will introduce important concepts to you. Today, there are so many classes about investing that you can find online. For example, a company like Khan Academy offers free trainings on various topics, including investing. Other online learning companies like Udemy, Coursera, and LinkedIn Learning too have these lessons.

Find a Mentor

Warren Buffet had his mentor in Benjamin Graham. David Einhorn had a mentor in Warren Buffett. Many successful hedge fund managers that worked for Julian Robertson have succeeded because of his mentorship. You too need a mentor to succeed as an investor. A mentor needs to be someone who has been in the industry for a long time. Fortunately, it is possible to find excellent mentors, even through the internet.

Follow The Market

You need to be passionate about everything that you do. To succeed as a money manager, you need to be passionate and enthusiastic about it. This means that you should spend time reading the latest developments in companies. This means reading materials from the Wall Street Journal (WSJ), Bloomberg, and Financial Times. You also need to watch financial television like Bloomberg and CNBC. Doing this will help you know what is happening in the market.

Read Investment Research

As an investor, you need to have an in-depth knowledge about companies. This is the reason why investment research is so important. In fact, most successful money managers spend thousands of dollars every month on investment research. You too should have access to the best of the research. A good way is to use a broker that offers sell-side research. Another way is to read reports in the various investment platforms like Fool and Seeking Alpha.

Use a Demo Platform

As mentioned above, you need to use a broker that offers a demo platform. A demo is a tool that offers all the information and data that successful managers have at their disposal. It also gives you virtual cash. Before you invest real money, you need to take time on the demo platform. In this, you need to do a few things. First, use the exact amount that you intend to start investing in. Second, take the demo account seriously as if it was real money. Third, use a structured way of opening trades. This means that you should have solid reasons for all trades that you open and close.

Study Other Investors

As you start your trading journey, we recommend that you take time to study other successful – and failed – investors. Some of the most widely known investors you should read about are Warren Buffett, Ray Dalio, Peter Lynch, and John Templeton. Failed investors you should learn from are the likes of Bernie Madoff and Long-Term Capital Management. Also, you should learn from some of the biggest investment mistakes such as Bill Ackman’s investment in Valeant Pharmaceuticals and David Einhorn’s investment in SunEdison. There will be important lessons to be learnt from all these scenarios.

Follow Specific Companies

A common mistake many investors make is that they want to follow hundreds of stocks. This is wrong. Instead of following so many stocks, we recommend that you first assess your interests. If you are passionate about technology, you should find a small group of technology stocks that you want to follow. The same is true for all the 11 sectors in U.S. stocks like retail, energy, finance, and consumer. After finding the stocks you might be interested in, you should do your research about them and follow them closely. Focusing on a small group of stocks will be much easier than focusing on so many of them.

Use Index Funds

Finally, you should consider investing in passive and diversified financial assets like mutual funds, index funds, and ETFs. These funds will help you have a diversified portfolio. In addition, you should consider investing some of your money in low-cost robo-advisors like Betterment and Wealthfront.

Summary on How to Learn Stock Trading

Investing in stocks is an interesting thing that can make you a lot of money. However, most people who get into the industry fail. Using these tips will help you know how to invest, manage risk, and succeed in the most dynamic industries in the world.

 

Tips to Help You Get Started in Stocks

Tips to Help You Get Started in Stocks

Wall Street investors are some of the wealthiest people in the United States. People like Warren Buffett and Carl Icahn have made a fortune in the market. Successful entrepreneurs like Bill Gates and Mark Zuckerberg have made their money because of Wall Street. While anyone can be a successful investor, it takes effort to succeed. Here are the 10 ideal way to learn stock trading.

Read Books to learn stock trading

The best way to start investing in the market is reading books. Books will open up your mind to how the stock market works, the best strategies to invest, and the top mistakes to avoid. Most successful investors have talked about how books shaped their investment careers. Warren Buffett has talked about how a book – The Intelligent Investor – changed his life. Today, there are hundreds of books about investing that you can find on Amazon. As you start, we recommend reading books like, One Up on Wall Street by Peter Lynch, Common Sense Investing by John Bogle, and The essays of Warren Buffett by Lawrence Cunningham.

Open an Account With a Stock Broker

As you start your investing career, selecting a good broker will be necessary. A broker acts as an intermediary between investors in the market. They provide a platform in which people can easily buy and sell stocks. There are several stock brokers in the United States. Some of these companies are TD Ameritrade, Charles Schwab, E*Trade, Fidelity, and Robinhood. Consider a broker like Robinhood that offers no execution costs. Also, consider a broker with an ease to use mobile and desktop investing applications. In addition, consider a broker that offers a free demo account to help you get some practice.

Get Some Training

If you don’t have a background in finance, we recommend that you enroll in an online class that will introduce important concepts to you. Today, there are so many classes about investing that you can find online. For example, a company like Khan Academy offers free trainings on various topics, including investing. Other online learning companies like Udemy, Coursera, and LinkedIn Learning too have these lessons.

Find a Mentor

Warren Buffet had his mentor in Benjamin Graham. David Einhorn had a mentor in Warren Buffett. Many successful hedge fund managers that worked for Julian Robertson have succeeded because of his mentorship. You too need a mentor to succeed as an investor. A mentor needs to be someone who has been in the industry for a long time. Fortunately, it is possible to find excellent mentors, even through the internet.

Follow The Market

You need to be passionate about everything that you do. To succeed as a money manager, you need to be passionate and enthusiastic about it. This means that you should spend time reading the latest developments in companies. This means reading materials from the Wall Street Journal (WSJ), Bloomberg, and Financial Times. You also need to watch financial television like Bloomberg and CNBC. Doing this will help you know what is happening in the market.

Read Investment Research

As an investor, you need to have an in-depth knowledge about companies. This is the reason why investment research is so important. In fact, most successful money managers spend thousands of dollars every month on investment research. You too should have access to the best of the research. A good way is to use a broker that offers sell-side research. Another way is to read reports in the various investment platforms like Fool and Seeking Alpha.

Use a Demo Platform

As mentioned above, you need to use a broker that offers a demo platform. A demo is a tool that offers all the information and data that successful managers have at their disposal. It also gives you virtual cash. Before you invest real money, you need to take time on the demo platform. In this, you need to do a few things. First, use the exact amount that you intend to start investing in. Second, take the demo account seriously as if it was real money. Third, use a structured way of opening trades. This means that you should have solid reasons for all trades that you open and close.

Study Other Investors

As you start your trading journey, we recommend that you take time to study other successful – and failed – investors. Some of the most widely known investors you should read about are Warren Buffett, Ray Dalio, Peter Lynch, and John Templeton. Failed investors you should learn from are the likes of Bernie Madoff and Long-Term Capital Management. Also, you should learn from some of the biggest investment mistakes such as Bill Ackman’s investment in Valeant Pharmaceuticals and David Einhorn’s investment in SunEdison. There will be important lessons to be learnt from all these scenarios.

Follow Specific Companies

A common mistake many investors make is that they want to follow hundreds of stocks. This is wrong. Instead of following so many stocks, we recommend that you first assess your interests. If you are passionate about technology, you should find a small group of technology stocks that you want to follow. The same is true for all the 11 sectors in U.S. stocks like retail, energy, finance, and consumer. After finding the stocks you might be interested in, you should do your research about them and follow them closely. Focusing on a small group of stocks will be much easier than focusing on so many of them.

Use Index Funds

Finally, you should consider investing in passive and diversified financial assets like mutual funds, index funds, and ETFs. These funds will help you have a diversified portfolio. In addition, you should consider investing some of your money in low-cost robo-advisors like Betterment and Wealthfront.

Summary on How to Learn Stock Trading

Investing in stocks is an interesting thing that can make you a lot of money. However, most people who get into the industry fail. Using these tips will help you know how to invest, manage risk, and succeed in the most dynamic industries in the world.

 

7 of the Best Tools for Technical Analysis

7 of the Best Tools for Technical Analysis

You have likely heard about terms like moving averages and relative strength index if you are a regular watcher of financial media like Bloomberg and CNBC. These terms are used to refer to the technical indicators that Wall Street traders use to predict the future movement of assets. Their use is known as technical analysis. The other common strategy the traders use is fundamental analysis, which involves looking at the performance of the broader economy. In this article, we will look at the most popular tools that are used in technical analysis.

Fibonacci Retracement

Fibonacci Retracement is a tool that is found in most charting software. The tool is based on the old mathematical concept of the Fibonacci sequence. As a trader, you don’t need to understand the Fibonacci Retracement formula. Instead, you just need to know how it is applied on market charts. First, you need to look at a chart that is moving in an upward or downward trend. Then, you need to use the Fibonacci tool to connect the highest point and the lowest point. The one-year Facebook chart is a good example. As shown below, the stock is trading at $184, which is slightly below the 23.6% and above the 38.2% Fibonacci Retracement levels. This means that the price will likely move lower to test the 38.2% level of $175.

 Fibonacci Retracement

Elliot Wave

Elliot Wave is a tool found in most charting software. The idea behind it was developed by Ralph Nelson Elliot, who identified important trends in stocks. The tool posits that financial assets move in phases. The first phase is known as the impulse wave and includes five steps. After completing the impulse wave, the asset then moves through a corrective wave. The two – impulse and corrective waves – have several characteristics. For example, in an impulse wave, wave 1, 2, and 3 moves in the direction of the trend. Wave 2 cannot retrace to the beginning of the first wave. Wave 3 must always be the longest, wave 4 does not overlap with wave 1, and wave 5 needs to end with momentum divergence. A good way to use the Elliot Wave tool is to combine it with the Fibonacci Retracement tool. The chart below shows the impulse wave of an Elliot Wave on the Brent crude oil chart.

Elliot Wave

Moving Averages

Moving averages are popular technical indicators in the financial market. As the name suggests, the indicator is developed by adding the closing prices of the financial asset and dividing by the number of periods. There are several types of moving averages, which include simple moving averages (SMA), exponential moving averages (EMA), smoothed moving averages, and weighted moving average. Most traders use the simple and exponential moving averages. A popular way of using moving averages is to take a longer-dated and a shorter-dated average and identifying a reversal. On the 3-month EUR/GBP chart, the 14-day and 28-day EMAs have made a crossover as shown below. This implies that the downward trend will continue.

Moving Averages

Relative Strength Index (RSI)

The Relative Strength Index is an oscillator indicator, which is used to identify the overbought and oversold levels. The index is derived by calculating three parts, which are the relative strength, the average gain, and the average loss. The average gain is calculated by adding the gains over the past 14-day period and dividing it by 14. The average loss is calculated by adding the sum of losses over 14-days and then dividing by 14. Next, you do a calculation of 100 minus 100 divided by 1 and the RS. The RS is the average gain divided by the average loss. As with the other indicators, you don’t need to know the math behind it. When used on a chart, when the index passes 30 headed lower, the asset is said to be oversold. When it crosses the 70 level, it is said to be overbought.

Relative Strength Index

Money Flow Index (MFI)

Money Flow Index (MFI) is an oscillator that is calculated in a similar way to the relative strength index. The only difference is that the MFI factors in the volumes of the financial asset. As such, calculating it is relatively complex because you first need to calculate the typical price. This is done by adding the high, low, and close prices and dividing it by three. Next, you should calculate the real money flow by multiplying the typical price with the volume. Next, you should calculate the money flow ratio and the MFI. As a trader, knowing all this is unnecessary. Instead, you should learn how to use it. The chart below shows a good example of the MFI indicator at work.

Money Flow Index

Summary

As a professional trader, it is very important to understand the concepts of technical analysis. This is because these concepts work and are used by most Wall Street investors. This article has just touched on the popular indicators. You can read about more of these indicators so that you know how to use them well.

 

Basic Terms Every Forex Trader Should Know

Basic Terms Every Forex Trader Should Know

Foreign Exchange, commonly known as forex is one of the biggest industries in the world. Every day, forex transactions worth more than $5.3 trillion are made. This is much higher than the volumes of stocks that are traded every day. As a result, millions of people are interested in the industry. Sadly, data shows that only a very small percentage of people who become traders succeed. Part of the reason for this is that most of those people who start don’t have the experience and knowledge about the terminologies. In this report, we will explain the basic terms in forex you should know.

Currency Pair

In forex, currencies are usually listed in pairs. This is simply because foreign exchange transactions happen between two currencies. For example, if you are traveling to Europe, you will need to exchange your dollars to euros. Examples of popular currency pairs are EUR/USD, GBP/USD, AUD/USD. In these pairs, the first one on the left is known as the base currency while the second one is known as the counter-currency. Therefore, when the EUR/USD chart moves up, it simply means that the euro is strengthening against the dollar.

Pip

A pip is a short form of the term point in percentage. It is the smallest unit in which a currency pair can move. For example, if the EUR/USD pair moves from 1.1200 to 1.1201, the 0.001 movement is equal to one pip. Some brokers quote their currency pairs above the 4 standard decimal points. In this case, the difference is known as the pipette or a fractional pip.

Leverage

A good way to explain the term leverage is to consider a stock investment. Assume the stock price of company A is trading at $20 and you have $1,000 to invest. If you believe the stock will go up to $25, you can buy it. In this case, you will have 50 shares. If the stock reaches your target price, your total holdings will be worth $1250. Alternatively, you can borrow another $1,000 to invest. In this case, you will have 100 stocks. If the price reaches $25, your holdings will be worth $2,500. After returning the borrowed $1,000, you will have a profit of $500. In forex trading, leverage works in the same way.

Forex Margin

Margin is a popular term in forex trading and is often confused with leverage. Margin is the amount of money that you need to use the leverage. It is a good faith deposit that you need to deposit with your broker. When there is a margin call, it means that the broker will stop the trade when it makes a bigger loss than they are willing to cover.

Fundamental Analysis

Traders use several tools to predict how currencies will move. Fundamental analysis is the process of looking at the market data to predict how a currency pair will move. Some of the popular fundamental analysis data used are interest rates, employment data, inflation, and manufacturing data. For example, if traders think that US rates will rise, it could be an indicator of a strong dollar.

Technical Analysis

Technical analysis is the other popular method in which traders use to analyze currency pairs. In it, traders use a combination of technical indicators to predict how the price will move. Some of the most popular indicators are moving averages, relative strength index, and MACD.

Bearish and Bullish

As you get into trading, you will come across these terms. They are simple. Being bearish is believing that the price of a currency pair will decline while being bullish is believing that the price will move upwards.

Hawkish and Dovish

These are two terms you will experience as a trader. They are mostly used in monetary policy circles. When officials are hawkish, it means that they believe that interest rates should move up. If they are dovish, they expect interest rates to move lower.

Currency Majors, Minors, and Exotics

Currency majors are those pairs from developed countries. They must have the dollar either as the base currency or as the counter currency. Examples of majors are EUR/USD, GBP/USD, and USD/JPY. Minors are currencies of other developed countries. Examples are AUD/NZD, GBP/CAD, and EUR/GBP. Exotics are currency pairs of emerging market currencies. Examples are USD/TRY and USD/ZAR.

Carry Trade

A carry trade is one that takes advantage of low-interest rates in one country and higher rates in other countries. For example, if interest rates in Japan are at -0.20% and those from the US are 2%, traders can buy the low-yielding currencies and invest them in high-yielding currencies.

Arbitrage

This is a trading strategy where traders buy and sell two currency pairs that are negatively correlated. For example, if the EUR/USD and GBP/USD pairs move in a similar direction, a trader can buy the EUR/USD pair and short the GBP/USD pair. In this case, if the trade works out perfectly, their profit will be the spread between the two.

Take Profit and Stop Loss

A stop loss is a tool that stops a loss-making trade automatically when a certain level is reached while a take profit is a tool that stops the trade automatically when a profit level is reached.

Final Thoughts on Basic Terms in Forex

Forex trading is an exciting business that can make you a lot of money. In fact, many people make loads of money by being forex traders. Having a good understanding of these – and more – terminologies will help nurture your trading skills.

Practical Advice on Investing from Warren Buffett

Practical Advice on Investing from Warren Buffett

Practical Advice on Investing from Warren Buffett

Warren Buffett is one of the best investors of our time. The man, commonly referred to as the Oracle of Omaha, has been a successful investor for more than 60 years. He has successfully grown his company, Berkshire Hathaway – to be one of America’s best-known success story. The company is worth more than $490 billion and Buffett himself is worth more $80 billion. In this article, we will look at the top lessons we can all learn from Warren Buffett.

Have a Mentor

Warren Buffett started investing after reading The intelligent investor book by Benjamin Graham. In the book, Benjamin explained all the most important details about value investing. After reading the book, he looked for Graham and the two became friends. As a young investor, he looked up to Graham, who was a major role model to him. The lesson for investors is that they should always look for mentors and role models. Fortunately, it is easy to do this through the use of social media or finding the contact details of other successful investors.

Have a Good Investment Partner

Part of the reason why Buffett has had enormous success is because of his investment partner, Charlie Munger. Munger has been Buffett’s partner for decades. As a result, the two have become close friends, who make investment decisions together. In past interviews, Buffett has credited Munger for the success of his fund. As you start your investment career, we recommend that you try and find a partner who will help you make decisions.

Be Diversified

Berkshire Hathaway has invested in more than 50 companies. It has a 100% ownership in some companies like Business Wire and Geico. Other companies in its portfolio include Bank of America, Apple, and General Motors. The benefit of being diversified is that losses in one company are pared by the gains in other companies. This model has been replicated by other successful money managers like Ray Dalio and Ken Griffin.

Have a Long-Term Strategy

Warren Buffett has been vocal about his value investing strategy. He has written widely about the criteria that he uses to select companies to invest in. This does not mean that you too should be a value investor. The lesson here is that you should find your unique investment strategy and follow it to the end. Indeed, other investors who look up to Buffett have succeeded using other approaches to investing. For example, James Simmons, who runs a fund known as Renaissance Technologies has been successful by focusing on quantitative approaches to investing.

Find Your Happiness

Warren Buffett is one of the richest people in the world. He can afford virtually anything he ever wants. However, Buffett has never been fond of material wealth. He still lives in a small house that he acquired more than 50 years ago. He still works in an obscure office building in Omaha. He drives a relatively cheap car. Yet, he is a happy person. The lesson here is that you should not be attached to material wealth. Instead, find what makes you happy and don’t lose focus.

Don’t Retire

Warren Buffett is 88 years old. His partner, Charlie Munger is 95 years old. Yet, the two still work hard every day in the same office. Every year, the two hold their annual shareholder meeting. The lesson here is that when you find something you love you should never think about retirement. In fact, studies have shown that people who retire early tend to develop complications.

Give Back

As you succeed as an investor, you should not forget to give back to the society. Warren Buffett has pledged to give all of his wealth to charity. He has donated more than $34 billion since 2006. This makes him one of the biggest philanthropists in the world. In fact, other rich people like Buffett are also big donors. This could be the reason why Buffett has had a lot of success in his career.

Own Your Mistakes

While Buffett has been a successful investor, he has also made many mistakes. For example, a few years ago, he invested in IBM. This was his first foray into the technology industry, which he doesn’t know well. A few years later, he exited his investment at a loss. Recently, his investment in Kraft Foods has turned out sour. In his letters and interviews, Buffett has always talked about his investment mistakes and the lessons he has learned.

Summary

Warren Buffett has succeeded as an investor by following the value investment approach. He has been an inspiration to many investors and many recipients of his donations. If your dream is to be a successful investor, you should learn from these investment lessons from Buffett.