Many investors find it hard to understand bond prices and the possible returns from bond investments. Many new investors will be shocked to learn that the value of bonds changes every day, just like the value of any other publicly traded security. The yield is the amount of money someone can expect to make from investing in bonds. The easiest way to figure this out is to use the formula yield = (coupon amount) / (price). If the bond is bought at face value, the yield may be the same as the interest rate. So, the yield changes along with the price of the bond. Another yield that investors often figure out is the amount of money they get back when their bonds mature. This more complicated calculation will give the expected total yield if the bond is held until it matures. What are the parts of market bonds? If you want to learn more about the different kinds of bonds you can invest in, you can choose from a wide range of bonds on the market. The bonds you choose to buy in the end will depend on how well you can handle risk and how much money you have to invest. Even though bonds are safer than stocks, they come in many different types, so you should learn about all of them before you invest. Most bonds can be broken up into: Government bonds: These are bonds that the government itself gives out. Because the Indian government paid for them, they are safe. Most of the time, the interest rate on these bonds is not very high. In the Reserve Bank of India's list of "government bonds," there are other differences between fixed and floating bonds. You should know a little bit about these subcategories because they might affect the investments you make. Fixed-rate securities: These are bonds with a fixed interest rate. This rate won't change as long as the bond is in effect. Even if market rates change, this fixed rate will still apply. When the market is doing well, you can expect small returns, but you are also protected. Bonds with variable rates: As their name suggests, the interest rates on these bonds will change based on the highs and lows of the market. If the market changes in a good way, you could make money, but if they change in a bad way, you could lose your profits. Corporate bonds: bonds from private companies are called corporate bonds. The bonds that these companies give out can be secured or not. When choosing a market, you should be aware of the different types of corporate bonds. Corporate bonds that are backed by collateral are safe. This means that the issuer will pay back the investment if the bond goes bad before or at the time it is due. Debentures are basically unsecured corporate bonds, and all they are is a promise from the company to pay back the bond. In other words, businesses promise to pay interest on time and pay it when it's due. These bonds could be a bet on the value of "faith" more than anything else. Bonds that save people money on taxes: The Indian government gives out bonds that save people money on taxes or are tax-free. Aside from the interest, the owner would also benefit from a tax point of view. Seniors and anyone else who wants to pay less in taxes over time might want to look into these bonds. Bank and financial institution bonds are bonds that banks and other financial institutions give out. Many of the bonds in this category come from this business sector. The financial institutions that back these bonds have been rated by the government and have a history of making good financial decisions.
Sep 10, 2022
When most people think of investments, they think of putting money into the stock market. It's true that the stock market is exciting, and it's not uncommon to hear stories about people getting rich overnight. Even though many people think bonds are a good way to invest money, they are not as appealing as stocks. Even when there are exciting bull markets, many people don't find things interesting because the language is hard to understand. But because bonds have a reputation for being stable and safe, many people choose to invest in them. What are bonds, how do you invest in them, and what are the risks of doing so? Let's find out what the answers are to the above questions. What is a bond you buy to invest in? Businesses need money to grow, the government needs money for projects like building roads and providing social services. Most of the time, the amount needed is more than what banks are willing to lend. Because of this, these groups sell bonds on the open market. So, a number of investors help raise the money by lending some of the money that is needed. To put it simply, bonds are loans where the investor is the lender. The company or other group that sells the bonds is called the "issuer." Bonds can be thought of as promissory notes that the issuer gives to the lender, in this case the investor, for the amount of the bond. No one would lend money for free, so the bond issuer pays an extra fee in the form of interest for using the money. The interest on the bonds is paid on a set schedule and at a set rate. When talking about bonds, people often say that the interest rate is a "coupon." The loan's face value is the amount being borrowed, and the maturity date is when the money is due. Bonds are called "fixed income assets" because the investor knows exactly how much money they will get when the bond matures. Bonds are less risky than stocks, but they also give you less money back. Why is it important to buy bonds? As you try to figure out what an investment bond is, you might also want to learn why bond investments are such an important part of your overall financial portfolio. Diversify your holdings. This is the first rule of every smart investment plan. Investors must be careful not to lose their money because, for the vast majority of investors, their hard-earned money is often spread out among many different instruments. Not only is it important to make more money, but it's also important to keep what you have. Bonds offer stability, and if you've never invested before, they may be a good place to start. Bonds offer a steady stream of income that is easy to plan for, and in many cases, they pay interest twice a year. Since the investor gets the full amount of the principal if the bond is held until maturity, it is thought that this is the best way to protect one's capital. Bonds can also reduce a person's risk of owning stocks that go up and down a lot. Even before the bonds mature, they can give you a steady stream of income in the form of interest. In simple terms, bonds are usually backed by the government and give you peace of mind about your investments. Bonds can be used to lower risk if you have a portfolio of direct stocks and want to do so.
Sep 09, 2022
In the past few years, investors with a lot of money have been more interested in tax-free bonds. Large infrastructure players can raise money at the end of the fiscal year by selling tax-free bonds. By offering these tax-free bonds, the government can help pay for infrastructure. There are two main types of bonds that don't have to pay taxes. Let's try to understand them better. First, there are Section 54EC bonds. If you buy them with the money you made from a sale, you can get a tax break. Because of the benefit in Section 54EC, you won't have to pay tax on your capital gains. The interest that investors get from Section 54EC bonds will be fully taxed in their hands. Second, there are bonds that the investor doesn't have to pay any taxes on. This means that interest is paid on them regularly. If you are in the 30% tax bracket, a 6% tax-free bond will give you an effective yield before taxes of 8.57 %. Does it make sense to buy Section 54EC bonds? HNIs seem to want these bonds a lot because they see it as a good way to lower their capital gains tax. But there are a few important things you should remember about buying these bonds. To make up for the tax benefit, the returns on these bonds are much lower than on regular bonds and bank FDs. So, it only makes sense if you really have capital gains that you need to pay less tax on. Second, to get a tax credit under Section 54EC, you must invest the whole amount, not just the capital gains. There is a cost to that in the form of missed chances to invest in other things. So, unless capital gains make up a big part of your total sales profits, these bonds aren't very helpful. Taking into account the indexing benefits of long-term holding might be a better way to figure out how much capital gains tax you have to pay. If, after accounting for indexing, your total tax bill is less than 10% of your income, it makes sense to pay down the tax and put the rest of the money into investments that will make you more money. You can also use Section 54 to your advantage if you use the money to buy another property. Taking into account the lock-in period and the opportunity cost of investing the whole return, the tax savings bond may not be worth much to investors. Are bonds that don't get taxed a good choice for investors? As was already said, these tax-free bonds involve investing in a business that focuses on infrastructure and will allow you to get interest without having to pay taxes on it. When taxation is taken into account, the effective returns are at first higher than those of taxable bonds. During the lock-in period, however, your bonds are pretty much just sitting in your demat account. This can be quite discouraging. Since this asset doesn't really make money over time, the key question is whether or not the lock-in period is worth it. The bond's value hasn't changed much, so it would be better to stick with traditional bonds and fixed deposits (FDs), which don't have lock-in periods and can be quickly and easily turned into cash. Why not think about debt funds as a better option? Through debt, you should be able to meet your basic needs for security and guaranteed profits. Choose debt funds if you want to make the best choice. First, you won't have to pay taxes on the dividends you decide to get. Second, debt funds are easy to cash out because they are liquid and can be sold in less than two days. Third, investors worry about interest rates and the chance of a default. The risk of interest rates will be looked at separately, but the risk of default can be cut down by focusing on risk-free G-Sec funds. Now, let's talk about the risks that come with interest rates. In the current economic situation, rates have stayed low, which means that they should help with debt funds. When market rates go down, the NAV of debt funds goes up, so investors can make money from both interest and capital gains. Even bonds that don't have to pay taxes don't help in this way. In the end, it's easy to get sucked in by how appealing tax-saving bonds seem, but you need to do the math right. Before you decide whether or not to buy these tax-free bonds, look at what else you can do.
Sep 08, 2022
A bonus share is an extra share of stock that a company gives to its current owners for free. The company gives its owners new or extra shares in the form of bonus shares when it doesn't have enough cash to pay cash dividends to its shareholders, even though its sales are good. Bonus shares are given to shareholders in proportion to the number of shares and dividends they own, and corporations don't charge their shareholders extra fees for giving out bonus shares. Even if a company has a lot of money, it can still give out bonus shares to avoid the high dividend distribution tax. When companies declare dividends, they have to pay this tax. Offer of Bonus Shares When a company gives its shareholders bonus shares, this is called a "bonus issue of shares" or a "bonus share issue." Companies give out bonus shares based on a constant ratio formula that lets them give each shareholder the same number of shares no matter how many shares they already own. Take the case of a shareholder who owns 100 shares of business ABC. The company has now decided to give bonus shares at a 2:1 ratio, which means that for every share a shareholder has, they will get two bonus shares. So, in exchange for their original 10 shares, the shareholder will now get 20 bonus shares. When bonus shares are given out, the dividend per share goes down because there are now more shares. When a bonus issue happens, the share price goes down, but the investment value of the shareholder doesn't change because they now own more shares than they did before. What's good about bonus shares Bonus shares are good for the company's shareholders because they give the company more equity and make it easier for shareholders to get along with each other. Investors may be willing to let the value of their shares go down because of the bonus share offering. When a company makes a lot of money, the price of its stock goes up. So, when bonus shares are traded on secondary markets for liquidity, they give their owners a lot of money. Record date and their ex-date The record date is a cutoff date set by the company, and investors must be shareholders of the company before this date in order to be eligible for bonus share issues. Also, the ex-date is one day before the record date of the company. In India, shares are put into a Demat account two days after the day they start trading. The company could give existing shareholders bonus shares before the Ex-Date and the Record Date. You must buy the business’ stock before the ex-date in order to be eligible for bonus shares. Since the investor can't buy the shares before the record date, any shares bought on the ex-date won't be eligible for the bonus shares. Conclusion Bonus shares are added to a shareholder's Demat account within 10 to 15 days of getting a new ISIN (International Securities Identification Number). Shareholders can log in to their online Demat accounts to see a statement that says bonus shares were delivered on a particular day, or they can wait for an SMS or email to tell them that bonus shares have been added to their Demat accounts.
Sep 07, 2022
You might know what swing trading is, but might not know where to begin. A good swing trading strategy starts with learning how to find stocks for swing trading. Swing traders carefully choose stocks that have a good chance of doing well in the future. This lets them take a much larger share of the market. How do they do that, though? Let's look into swing trading's mysteries. With swing trading, you can make money from market changes that happen over a few days or weeks. Like day trading, it gives traders the chance to make money when the market moves in their favour. Your strategy for trading will be built on your ability to pick the right stocks. Like day trading, you would also have to choose stocks with high liquidity and the chance of big changes in price and volume. So, let's talk about how to find stocks that are good for swing trading. How to Pick Stocks for Swing Trading: The Simple Rules Swing traders will always swear by a few general rules. Of course, you can make your own plan and put it into action, but having one or two of these is a great place to start. Market direction When trading, traders follow a rule that says if a stock's value is going up in the current market, it will keep going up if the market stays the same. You can find the best-performing stocks in a number of ways, such as by reading company news, looking for the best stocks on the market, or keeping an eye on stock indices. Orientation bias Swing traders look for possible buy or sell signals to find opportunities. They use a mix of basic information and technical analysis to find industries and stocks that do better than indices for a large part of the trading day. They sort through the stocks to find ones that have the right amount of volatility and volume to store their expectations. This process, called "screening stocks," is made up of the following steps. Liquidity is a very important metric for swing traders. The number of times a stock trades each day shows how popular it is on the market. How often a stock trades on the exchange tells you how liquid it is. If a stock trades a lot every day, it is considered liquid enough for swing trading. Stocks with a lot of trading show less risk. Performance is a way to compare how well a stock has done compared to other stocks in the same industry. The goal is to find the best stocks in each sector that have done better than sector indices. Swing traders look for stocks that trade in the same way over and over again. They think that a pattern that keeps coming up is more reliable. Experienced traders will wait for the stock to break out of its trading range before they decide when to buy or sell. They might make a few small profits while they wait by trading in the direction of the trend. Some swing traders may like stocks that are less volatile and have a clear uptrend. They stay away from stocks that are prone to big drops and selling for no reason. Instead, they would keep holding on to stocks whose prices didn't change much and had no gaps in the price line. Correlation and volatility: Stocks that go against the market trend may look good, but most swing traders will stay away from them. It makes sense to stay away from stocks that aren't stable and instead focus on those that track key market indices. Look at how a stock has been acting in the past to figure out why it is acting the way it is. Another important factor is how volatile the market is. Volatility is a way to figure out how much a stock price will change, if the target and stops are reasonable, or if the risk criteria are good enough for the amount of time the trader wants to keep the position open. Conclusion After we've talked about how to swing trade stocks, it's important to know that swing trading is riskier than day trading because it involves keeping stocks for a longer time. You need a strong strategy to help you find trade opportunities and possible red flags. When picking stocks for swing trading, investors should keep in mind that there are other ways to do things besides the ones described in this article. Every trader needs to come up with a plan that works for them. Whether you swing trade or not, it will help you a lot in the stock market to know how to find stocks to swing trade. You can use this information to make trading plans that will make you money and to learn more about how stock prices move.
Sep 06, 2022
Let's start by understanding the different ways of trading. The main differences between the two ways of trading are investment, commitment, and time. Traders choose different trading strategies based on time, money, and psychological factors. Intraday Trading The Financial Regulatory Authority (FINRA) says that day traders are people who do many "round trips," at least four of which happen every five days. Day trading might be the most common way to trade. Most traders are day traders, which means they make money from the price changes on the market during the day. All-day trading takes place in a single day, as the name suggests. Traders open a number of positions during trading hours, which they all close before the end of the day. Day traders use technical analysis and tools to get real-time updates. They often trade full-time and keep a close eye on the market for business opportunities. At least in terms of percentages, day trading gives people with small trading accounts more chances to make money. They don't try to make a lot of money from one trade. Instead, they should do a number of transactions to make enough money. In the end, day trading is a type of high-frequency trading that involves small amounts and always buys stocks for less than what they sell for. Swing Trading The main difference between day trading and swing trading is the length of time. During a swing trade, days or weeks can go by. Swing traders don't make a trade until they see a pattern. They don't trade full-time, but they use both fundamental and technical research to spot trends as they happen and trade in line with them. They would look for stocks that could make them the most money quickly. There is more risk, but there is also more chance of making money. Differences between day trading and swing trading that are important to know Swing trading and day trading are both types of trading, but they are not the same. Here are some of the most important differences between the two ways of trading. • Day traders buy and sell a lot of different stocks in the same day. Swing traders buy and sell a number of stocks over a longer time period (usually between two days to several weeks). So that they have a better chance of making money, they look for a pattern of trends. • Day traders will close out all of their positions before the closing bell rings. Swing traders would hold their position for at least one night before settling it the next day. • Swing traders only work for a few hours each day. They don't spend the whole day tied to their computers. Day trading takes a lot of time and commitment. • Day traders make a lot of trades every day, which increases their odds of making money. Gains and losses, on the other hand, are smaller. Swing trading has fewer wins and losses, but they are often bigger. • Day traders need the newest hardware and software. Day traders must have extremely rapid trigger fingers. You don't need complicated or cutting-edge software to do swing trading. A trader's main goal is to make as much money as possible. So, between swing trading and day trading, which is better? Even though both ways of trading have many pros, you should be aware of their cons before choosing one. The list that follows goes over the pros and cons of each one. • Swing trading needs less attention because it takes place over a longer period of time. Day trading, on the other hand, requires regular market watching and quick decisions. • Day traders try to make as many trades as possible to make the most money in a single day, while swing traders try to make a big profit. • Swing traders take on more risk when they leave their position open overnight. On the other hand, day traders close their trades at the end of the day. So, there is no longer any risk. • Swing traders wait until a deal has been going on for a while before using that time to watch how the market moves. It helps make things safer. Day trading is easier for most traders to do because it needs less capital than swing trading. Day traders have to make trades quickly because one loss could wipe out their whole day's profit.
Sep 05, 2022
An index future is a futures contract on a market-wide or sectoral index. For example, the NSE has futures on the market-wide Nifty index and liquid futures on the Bank Nifty index (which is a sectoral index of liquid banks). Both of these indices are very liquid, which means that they are traded a lot by both individual and institutional investors. Why are index futures becoming very popular in India? What are the pros of trading in index futures? The once-famous Badla system on the BSE, which involved trading in stock futures, led to the growth of index futures trading in India. Let's talk about how to trade index futures, but let's also think about how trading index futures might help traders. 1. Stock risk can be avoided by taking a broad view of things. Let's say you've decided to invest in banking stocks, but it's hard to know which ones to buy. Private banks are having trouble with valuation, and PSU banks may be worried about nonperforming assets (NPA). A better plan would be to look at the banking industry as a whole, which will naturally diversify your portfolio. You can do that by buying Bank Nifty Futures and joining the trend of banks going up. The benefit is that you can keep this position open for as long as you want by rolling it over every month for a marginal cost of about 0.50%. 2. You can trade both long positions and short positions. If you are long, which means you are buying, it is fine. What if you don't like banks? You can sell short banking stocks on the stock market, or you can sell the stocks you already own. But because rolling settlements are used on Indian markets, you can only short stocks during the day. The other option is to sell stock futures of specific banks, but this time you run the risk of losing money on a specific bank. All of these problems might be solved if you just sold the Bank Nifty index futures. If you think the Indian market as a whole will go down, you can just sell Nifty futures. 3. You can trade index futures with less money When you trade futures, keep in mind that you need to trade on margin. But margins on indices like the Nifty and the Bank Nifty are usually lower than margins on individual stocks. This is because an index is made up of several stocks, which gives it a natural way to spread out risk. Because there is less risk, you need less margin to buy an index futures position. By doing this, it will be made sure that less money will be locked up. 4. You can lower your risk with index futures. This is a very important part of how you manage your portfolio. As a private or institutional investor, you can hold a large number of stocks in your portfolio. You think that the market will correct by 10% to 12% once the US Fed raises interest rates. You are also sure that the drop in the value of your stocks will only last a short time and that they will go back up in value in a few months. You could keep your money, but selling Nifty futures would be the best way to lower your risk. When the market goes down, you can make money by selling Nifty futures contracts. This will lower the average cost of the stocks you own. You will be in a better place in three months, for sure. 5. The risk of not being able to sell these index futures is low We frequently observe liquidity problems in particular equities or stock futures. Index futures, on the other hand, almost never have liquidity risk because institutional investors like them. Because of this, the bid-ask spreads are also not very big. Because of this, it's usually safe to trade in these index futures because you won't run out of cash. This is one of the main reasons why people trade index futures all over the world. 6. Index futures can help you spread out your investments. Even though this point is more about taking advantage of opportunities, it is related to the one about minimising risks. You have a portfolio that is mostly made up of financial assets right now. You think the RBI rate hikes pose some risk, so you want to make your money safer by investing in industries that don't change as much, like FMCG and IT. Even though it is possible to buy these stocks, it will cost money and tie up money if this is a short-term opportunity. A better plan is to use FMCG index and IT index index futures to spread out your portfolio. You can structure your portfolio to be more diverse in this way with little risk and cost. 7. Trading in index futures costs a lot less. This doesn't need to be said again. The commission and STT rates for index futures are much lower than those for stocks or even stock futures. In fact, most brokers also offer fixed brokerage packages for indices, which makes them cheaper than stock futures. Take full advantage of the fact that index futures cost less. You might do well trading index futures because they have less risk and could give you a bigger return. But index futures are useful for more than just trading!
Sep 03, 2022
An investor can use a stock market index to measure the performance of a market, like the Bombay Stock Exchange or the National Stock Exchange, or a sector, like the energy, infrastructure, or real estate markets. In India, SENSEX and NIFTY are the two most important stock market indices that are used to measure the market. Indian investors can keep an eye on how the index value changes over time and use it as a benchmark to measure how well their own portfolios are doing. Investors now talk about the stock market as having indices for different parts of the market that don't always move together. Because if they did, there would be no need for different stock market indices. By learning how stock market indexes are made and how they change, you can make sense of the daily changes on the Indian market. SENSEX S&P BSE (also called BSE 30 or SENSEX) SENSEX was the first stock market index for equities. It was created in 1986. It is made up of shares from 30 companies that are listed on the BSE and are well-known and financially stable. These companies are a good example of the major industrial sectors of the Indian economy. How to measure the SENSEX SENSEX has switched to the market capitalization weighted method, which gives weights to companies based on how big they are. The weight goes up as the size goes up. Now, it is thought that the total market share was 100 points when the index was made. This shows the change in terms of % in a way that makes sense. So, if the market capitalization goes up by 10%, the index goes up by 10% as well, from 9 to 10. Let's imagine that there is only one stock on the market. Let's say that the stock is now trading at 200 and that its basic value is 100. If the price of the stock is 260 tomorrow, it has gone up by 30%. So, the index will go from 100 to 130, a 30 point jump. If the stock price goes down from 260 to 208, that's a 20% drop. To reflect the drop, the SENSEX will be changed from 130 to 104. CNX NIFTY S&P (also called NIFTY 50 or NIFTY) The National Stock Exchange has 50 shares of NIFTY, which was started in 1996. It gives investors access to the Indian market through a single portfolio and includes 24 different parts of the Indian economy. NIFTY calculation The same formula that the Bombay Stock Exchange uses to figure out the SENSEX is also used to figure out the NIFTY. But there are three major differences: NIFTY is made up of 50 stocks that are actively traded on the NSE (SENSEX is calculated on 30) On both the SENSEX and the NIFTY, there is a separate index for each sector. This makes it easier for investors to keep track of changes in the market every day. Please think about this helpful advice: if you want to play on the stock market, you need to learn how to keep an eye on the scorecard, which is made up of two stock market indices. Zebu’s platforms give you real-time price moves about all of Nifty and Sensex’s prices. Open a trading account with us to find out more.
Sep 02, 2022
Buying the breakout is a strategy in which you wait for an asset's price to turn around and then try to invest in the early stages of its rise. (Some traders also use the word "breakout" to describe sharp price drops that happen after a time when prices went up or were stable.) When the decline stops and things start to get better again, this is called a "breakout." The goal is to come together before the asset gains a lot of value. A retest happens when a stock price breakthrough is followed by a trend reversal and a return to a predetermined price range, such as the area around its 21-day simple moving average. Most of the time, the price goes back to where it was before the breakout. After that, it goes back to the way it moved before it broke out. When you buy the retest, you wait until after the breakout and buy the asset when it goes back into the range it was in before the breakout. This is helpful because it lets you move more methodically. You don't have to invest right away because you don't want to miss out. A retest also usually means that prices will be more stable in the future. The second breakthrough price range is more likely to hold. The problem with buying the breakout is, of course, that you can't be sure when a breakout will happen until it has already happened. Even if an asset continues to lose value, its price can change from time to time. Sometimes, though, the asset has been revalued over a long period of time. In this case, any price changes will be made within a range of the new normal. You try to be right by making the best guess you can about what will happen to the price. And the problem with waiting for a retest is that it may never come. A very powerful breakout might be so strong that the price might breakout of a range and never move back inside if it. That is why, it is important for you to perform your own backtests and ensure that you choose a versatile strategy that lets you make the most of it. The most common indicator that intraday traders use to trade retest breakouts is the VWAP. It is the Volume Weighted Average Price that the price often moves to before moving again. For example, you mark the high and low of the 15 minute range of Nifty, and see a breakout happening at the high, then wait for it to come back to the VWAP before initiating a long trade. This will give you an attractive Risk:Reward Ratio. If you would like to start trading breakout strategies, open your best trading account with Zebu today.
Sep 01, 2022
Sharpe Ratio: The risk-adjusted returns, or reward-to-risk ratio, is found by dividing the annualised return by the annualised volatility. With the Kindino Ratio, negative returns are taken into account by dividing the annualised return by the annualised volatility of negative returns. In the last section, we talked about how volatility was a way to measure risk. We have these two measurements because we know that not all risks are bad. Sharpe looks at all kinds of volatility, while Sortino only looks at downside volatility. Here is where they part ways. Most of the time, you want a high Sharpe and a high Sortino. The right way to count costs When analysing trading techniques, it's also important to think about how much it costs to make the trades that need to be made. One of the main reasons for this is that beginners often think their techniques are better than they really are. Many quants think that the only costs of a trading strategy are the commissions that have to be paid to brokers. Two more important examples are: Commissions As you may already know, it's hard to trade without a broker. In exchange for money, brokers provide transaction services and act as an exchange. Brokers sometimes add on extra costs and fees that you might not expect. This includes any extra services, fees set by the exchange, and taxes the government might charge for the financial transaction. Slippage Slippage is a key feature that is often overlooked when evaluating. Slippage is when the price you wanted to trade at is different from the price you actually trade at. Why do these prices vary from each other? There could be many things going on. For example, you might have wanted to buy 100 shares of Apple at $100 each, but only 50 people were willing to sell at that price and another 50 at $101. Your loss would have been 50 cents, and the price you would have traded at is 100.50. Slippage, which is part of transaction costs, can quickly turn a strategy that should be profitable in theory into one that doesn't work. In the previous example, if you had planned to sell your shares for 102 dollars, slippage would have cut your profit by 25%. Slippage can be reduced by making a good plan for execution, but it's important to know how it might affect your deals. A few words about the biases we all have Everything comes from within, including both profit and loss. Even though the market and how volatile it is play a big role in how much money we make or lose, we always let an inner voice guide us when we make a trade. Some of these voices can be helpful, but most of the time they come from people's biases. We often feel a wide range of emotions and have to make decisions we weren't supposed to make because of these kinds of personal biases. We need to control our emotions and personal preferences if we want to know when to stop a trade and when to keep going with it. We can't make good decisions when we're feeling a lot of different emotions, so these are important things to look at when judging a trading strategy. Some emotions that can make it hard to think straight are excitement, thrill, hope, fear, worry, and panic. These are the emotions that drive us, so keeping an eye on them when it makes sense will always help us do better in a trade. If you want more information on this, we also have a page about biases in backtesting and risk management. This will tell you more about your own biases and how to avoid them so you can trade better. Most of the time, these are some of the things that are used to judge a trading strategy. Don't be afraid to write things down as you try to use them in your plan. Once you've looked at the results, you can start making changes to improve the way your transactions work.
Aug 31, 2022
Backtesting is a very useful way to figure out how our trading algorithms might work in real life (might is the key word). But it can be hard for a data scientist who doesn't have a background in finance to understand what it all means. Sharpies or Sortinos? Returns or profitability with money? This shouldn't stop you, though, because some of the best funds in the world are run by people who aren't in finance. Instead, it's time to learn. In this article, we'll talk about some of the most important ways to tell if your trading strategy is working or not. If you really understand these basic indicators, you'll have a good basis for judging different strategies. Setting Up Performance Measures These are some of the first criteria or measures you could use to figure out how well your trades are going. Most of the time, the measurements focus on two important parts of a strategy: the change in the value of the portfolio and the risk of making those gains or losses. By understanding these two things, you can figure out what it does well and where it falls short. Financial metrics All of the metrics in this section tell you how much money you made (or lost) when you used a certain strategy. The final amount of money is a good place to start, but there are other signs that give us more information: Annualized Return: The average annual percent profit from your trading strategy (or loss). Win/Loss, Average Win/Loss: Total (or Average) (or Average) Profits from Trades That Work The total (or average) amount of money lost on trades that go wrong. % Profitability is the number of profitable trades out of all of them. When we talk about return on capital as a percentage, we usually mean that the strategy is a multiplier on your initial capital. This is helpful most of the time, but we should remember that it's only partly true. Next, if we want to fully understand a strategy, we need to know how we are making money. For instance, do we consistently make tiny wins or do we consistently make small wins followed by massive losses? By looking at different combinations of profitability, win/loss, and profit/loss, we might start to understand how our plan will work. Metrics that focus on risk It's just as important to see big profits as it is to know that the method could lose money in the long run. "No risk, no reward" is a saying that only winners use. The vast majority of people whose risky bets didn't pay off don't say it. Here, the following crucial metrics are important: Annualized Volatility: The standard deviation of the model's daily return over a year. Since volatility is used to quantify risk, a model with a higher vol indicates greater risk. Highest Drawdown: The most negative change in the value of the whole portfolio or the biggest drop in PnL. It is based on the biggest difference between the high and the next low before a new high is set. Since our backtest will always cover the whole period, drawdown is an important risk factor to think about, but we're much less likely to keep a losing trade open in real life. If you had bought Amazon stock in 1998, it would have been smart to keep every share and buy as much as you could during the dotcom bust. In reality, not many people would keep going with a deal if their money dropped by 10%, 20%, 40%, 80%, etc.
Aug 30, 2022
Continuing our key takeaways from the Psychology Of Money, here is part 2 of the series. The power of compounding is surprising Making versus saving money "To make money, you have to take risks, have faith, and stand up for yourself. But taking risks needs to be stopped if money is to be kept. It requires humility and the fear that everything you've worked for could be taken away from you just as quickly. You can't always count on repeating past success, so you have to be thrifty and realise that at least some of what you've made is due to luck. Money management is different from money management. To make money, you have to take risks, work hard, and keep a positive attitude. Keeping money is a different skill. It requires you to take less risk, not be greedy, and remember that things could be taken away from you at any time. Money is not the enemy A plan is only useful if it can stand up to the real world. The truth is that everyone has a future that is full of unknowns. If you're still young and have more income than expenses, the best way to get the most out of your long-term investments is to put most of your money into a diversified portfolio of low-cost index funds. Cash loses value over time, so it's not smart to keep more than a small amount of your net worth in cash. Instead, you should invest in assets like stocks, which have historically grown at a rate of 10-11% per year. Even though it might seem appealing to invest in ways that will give you the best returns, these ideas often don't take your personality into account. Think about having 95% of your money in stocks and bonds and only 5% in cash. The market falls 20 to 25%. Having such a small amount of cash on hand may make you more likely to sell some of your stocks in a panic when the market goes down, depending on how that drop makes you feel. And if you sell in a panic, you can lose out on a lot more money than if you kept a bigger part of your portfolio in cash and didn't sell because you felt safer. Spreadsheets are not like people! Even though the models say you should only keep 1% to 5% of your assets in cash, you may want to keep 10% to 20% to protect yourself from having a bad attitude when bad things happen. It can also be the best choice for your portfolio if having more cash on hand keeps you from making one big mistake. Long Tail In finance, a small number of events can be responsible for most of the outcomes. This is where long tails, or the ends of a distribution of outcomes, have a big effect. Most of the time, your choices about investing don't matter. What happens depends on the choices you make on a few days when something important happens, like a severe downturn, a frothy market, a speculative bubble, etc. Warren Buffet has held between 400 and 500 stocks over the course of his life. Most of his money came from just 10 of them. Highest level of wealth Having the freedom to do what you want, when you want, with who you want, and for as long as you want is very valuable. This is the best return that money can buy. Being more flexible and in charge of your own time is much more useful than staying up late or making risky bets that keep you from sleeping just to boost your returns by 2%.
Aug 29, 2022