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What is the Bid and Ask?

The bid and ask prices are the most important ones to consider when trading in any market. This article will cover the way trading instruments are traded and how the bid and ask prices are relevant to trading strategies, trading costs, liquidity and the timeframe being traded.

What is a Bid Price, and What is an Ask Price



What is the Bid Price?

The bid price is the highest price the market is willing to pay for that trading instrument in any given market. If several buyers are willing to pay a different price, the highest of those prices will show as the bid.

What is the Ask Price?

The ask price is the lowest price at which the market is willing to sell a given trading instrument. Also known as the offer price. If several sellers have limited orders in the market, the order with the lowest price will show as the market's ask price.

What's the difference between the bid and ask price?

The following is an example of a forex quote:

GBPUSD: 1.27256/1.27272

In this example, the first price shown is the bid price, which will always be the lower of the two prices in a quote. As a seller, this will be the price at which you'll sell GBP for USD.

The second price in the example is the ask price, which is also the higher of the two. If you are a buyer, this is the lowest price at which you can buy GBP for USD.

On a trading platform, you may sometime sell prices quoted as follows, which can cause some confusion:

SellBuy

GBPUSD1.272561.27272

In this case, the bid price is labelled 'Sell', and the ask price is labelled 'Buy' because these are the prices you can sell and buy at.

Quote-Driven Versus Order-Driven Markets

To properly understand where bid and ask prices come from, you need to understand the two types of markets; quote-driven markets and order-driven markets.



Quote-Driven Markets

A quote-driven market is run by a market maker or broker. Their job is to maintain an orderly market by continuously quoting the bid and ask prices for each instrument they make a market for.

Order-Driven Markets

An order-driven market is made up entirely of buy and sell orders from market participants. There is no intermediary; instead, all orders are processed by a broker who charges a commission. Most stock markets are order-driven.

What is the Bid-Ask Spread?

The Bid-Ask Spread

The Bid-Ask spread is simply the difference between the ask and bid prices. In quote-driven markets, the spread is determined by a market maker or broker, whereas the spread for an order-driven market is determined by supply and demand.

Liquidity and the Bid-Ask Spread

A tighter spread signifies a more liquid market. Higher liquidity means more buyers and sellers and more market makers. As buyers compete with one another, the bid price rises, and the ask price falls as sellers compete. The result is a tighter spread between the bid and ask prices.

Orders Types and the Bid-Ask Spread

- Limit Orders

A limit order is placed in the market at the limit price and can only be executed at the limit price or better. All visible bid and ask prices in the market are limit orders.

If a limit buy order is entered, the order will be executed immediately if its price is equal to or greater than the market ask price. If it's lower than the ask price, it will be placed in a queue behind any existing limit buy orders with the same price. The opposite applies to limit sell orders.

- Market Orders

A market order is a buy or sell order which is immediately executed at the best available price in the market. A market buy order will immediately be executed at the market ask price. A market sell order will immediately be executed at the market bid price.

Which Type of Order Should You Use?

You can use a limit price to get a better price, but doing so may mean you miss a trade if the price moves away from you. A market order will ensure that you don't miss an opportunity, but your execution price won't be as good.

For this reason, it's important to look at the bid and ask prices and the last traded price, which is usually labelled 'Last' on trading platforms.



The table above shows the Bid, Ask and Last prices for four currency pairs on MetaTrader 5. By looking at the Last price, you can see whether the price is being traded on the bid or ask side of the bid-ask spread.

The top two currencies each had their last trade at the bid price. That means other traders were selling at the bid price. For the bottom two pairs, the last trades were at the ask price.

The colours also indicate whether the Bid, Ask and Last prices are higher or lower than their previous level. Blue means the price is higher, and red means it is lower.

Understanding the Bid and Ask in the Forex Market

When trading in the forex market, the bid-ask spread will have an impact on the strategies you use and the timeframes you trade on.



The above example from MetaTrader 5 shows the bid and ask prices for the EUR/USD pair, which is very liquid, and for the USD/TRY pair, which is far less liquid. The spread for the first pair is 0.9 pips, while the spread for the second is 90 pips.

For a trade to be profitable, the price needs to first move enough to cover the bid-ask spread. In the above example, if you buy at the ask price, the bid must move that much higher before you break even. For the EUR/USD pair, the bid needs to only move 0.9 pips, but for the USD/TRY pair, it needs to move 90 pips just for the trade to break even.

The tighter a spread, the lower the timeframe that can be traded. The EUR/USD pair can be traded on timeframes as low as 1 minute as the pair will move enough in a short space of time. A less liquid pair like the USD/TRY will need to move a lot further, probably taking a lot longer.

When considering a trading strategy, you need to consider the spread. If the average profit is less than the spread, you may not be able to trade the strategy profitably.

How to Use the Bid-Ask Spread when Trading CFDs

What is a CFD?

CFDs, or contracts for difference, are a type of trading instrument that allows traders to easily gain exposure in any market. CFDs can be traded on stocks, indices, commodities and cryptocurrencies. They can be used to open long and short positions, with or without leverage.



How the Bid-Ask Spread Affects CFD Trading

In most cases, when you trade CFDs on a trading platform, the quote you see will be a market maker quote. This means CFDs can be traded exactly like forex.

In some cases, you may be able to trade stock CFDs in the underlying stock market. You will see multiple bids and offers in this case, meaning the market is order-driven. An order-driven quote will look something like this:

Apple Inc. 800 194.57 194.60 600

400 194.56194.61 200

1000 194.55194.62 300

This example shows the best 3 bids and offers for Apple Inc's stock, along with the quantity being bid and offered at each level. In this case, the bid-ask spread is $194.57-$194.60. The bid volume is 800, and the ask volume is 600. If a trader wanted to buy more than 600 shares, they would have to buy 600 shares at $194.60 and then pay more for any other shares they wanted to buy.

Conclusion

The best way to learn about the concepts covered in this article is by following various trading assets and entering different types of orders. You can do that for free and without risk by opening a demo trading account (https://libertex.com/blog/bid-and-ask#modal-demo).

You can open a free demo account with Libertex, an award-winning platform. Libertex is a broker which offers CFD trading on stocks, commodities, indices, ETFs and cryptocurrencies with leverage of up to 30 times for retail clients. The platform also offers free trading tutorials and state-of-the-art trading tools.

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Bitcoin down over 50% as crypto market big chill sets in

Cryptocurrencies — and Bitcoin, in particular — have been in the headlines this week for all the wrong reasons. To the chagrin of investors, the original digital coin dipped to a low of $29,330 to record a decline of 55-57% from its November ATH of $69,000. This flirtation with its key support of $30,000 has prompted many analysts to suggest that we ought to be strapping in for a full-on 'crypto winter' with much more downside ahead. Indeed, in typical bubble-bursting fashion, we're already seeing altcoins dropping like stones, with Terra LUNA plummeting 97% literally overnight (10-11 May). Even more worrying, it appears as though this has even spread to Terra's algorithmic stablecoin UST, which is currently trading at around half its supposedly guaranteed value of $0.49.

These developments have now led many to question the future of the entire cryptocurrency market, or at the very least, its short-term prospects. But what are the reasons for this sudden decline, and how long can it be expected to persist? Read on to find out the answers to these questions and more.

So, should we be preparing for a long winter?

To put it bluntly, it all boils down to your definition of 'long'. Rising central bank interest rates and general instability mean that the world is currently risk-off, for the most part. And with the Fed seemingly ramping up its hawkish rhetoric, there could well be more downside to come. It's no coincidence that Bitcoin's Spring 2021 peak of $63,000 came exactly as the Treasury yield curve began flattening amid the US regulator's normalisation of the country's monetary policy. Since then, the tech-overweight Nasdaq has lost more than 25% of its overall value, with many of the index's smaller-cap stocks losing over 80%. With the Fed now preparing for a cumulative full percentage point rate hike in the next two months, it's hard to envisage a scenario where crypto and tech stocks don't incur further losses. The only question that remains is whether this is the end of the line for crypto or whether — like so many times before — it will ultimately rise again from the ashes, stronger and more resilient than ever.

Light at the end of the tunnel

While things might look bleak at the moment, it's always darkest before the dawn. Remember how bad things looked in early 2018 when BTC corrected by 85%? Bitcoin eventually hit a low of around $3,100 in December of that same year but is now worth almost ten times that today. At some point, the speculators will be driven out of the market, leaving only active crypto users and genuine long-term HODLers, laying the foundation for the green shoots of stable, sustainable growth. That is, of course, not to say that every single project will make it to the other side. If a Top 10 coin like LUNA can lose 97% in the span of just 24 hours, there will definitely be scores of other altcoins that don't survive. The most probable scenario is not unlike the Dotcom Bubble of the early 2000s, meaning we can expect significant bloodletting and a multi-year slowdown in capital investment in the space. However, when the next leg up comes — and it will — the growth will be much more viable and enduring as it will be driven by proper fundamentals and a loyal user base.

Have your say with Libertex

Whether you think the crypto market is headed for more pain or is priming for a resurgence, Libertex's selection of long and short positions helps you invest your money accordingly for either choice, although profit is not guaranteed. Libertex's extensive crypto CFD offering consists of over 50 digital coins and tokens, including Bitcoin, Ethereum and more.

The experienced EU-based broker also offers unbeatable no-commission trading on all its digital asset CFDs, which means you only pay the spread (difference between the Bid and Ask prices) on any cryptocurrency CFD transactions completed on the platform.


Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 70.8% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

Available for retail clients on the Libertex Trading Platform.

[Libertex]

Everything You Want to Know About Social Trading

Social trading is a relatively new but incredibly useful concept for new traders. It incorporates everything that works about social networking and applies it to trading. By being active on social platforms, you have direct access to experts and the methods they employ. Let's talk about how to use social trading to your benefit.

What Are the Basics of Social Trading?

Social trading is a trading method where investors can observe their peers or expert trading behaviour. The technique allows beginners with little to no prior knowledge to learn trading strategies using copy trading or to follow a mirror trader.

What Is Copy Trading And Why Do Traders Use It?

The actual method varies depending on the platform used, but the basic principle remains the same:

- Trade according to the scheme of your chosen trader.
- Copy their trades in a percentage-based manner.

Most sites do not allow you to invest any more than 20% of your portfolio with a single trader, which is a great policy to prevent you from losing too much if said trader hits a bad streak.

There have been a few studies done on this tactic to measure how successful people are when using copy trading. Results show that those who invest in carefully chosen traders based on previous statistics and portfolio experience up to 10% more success than people who choose traders based on personal preference or trade manually.

Copy trading is a great method that enables beginner traders since it allows you to dip into trading using the experience other traders have.

How Are Copy and Social Trading Different From Each Other?

Social and copy trading share the same basis but differ in many ways. Copy trading is a part of social trading but not vice versa. In fact, copy trading is a very strict type of social trading where your trading account is bound to another trader's account. Their trade and decisions are reflected in your trading account. Their profits and losses are shared with you, and your trading account changes in the same way theirs does.

Your trading account automatically changes depending on the trader you follow, and you do not have the choice to make any trades or changes. The only change you're entitled to is to stop following the trader. In its simplest form, copy trading means your trading account mirrors each move the other trader makes – hence the name!

Social trading differs because not all types of social trading allow someone else to manage your trades. Instead, you can use information from other traders you follow to base your investing decisions on, meaning the ultimate decision is yours.

How Do You Use Social Trading?

Social trading is quite similar to social networking that you probably already use, but the information you come across is more deliberate and directly useful. You will still come across trading topics, but the platform is lively and easy to be part of. You are quickly connected to traders on the network and can trade in collaborations with them or use readily provided information to improve your trading strategies.

If you come across a trader whose advice you appreciate, you can follow them. Following them gives you access to their moves, comments, and updates, allowing you to learn from them in real time. If they make a trade you are unfamiliar with; you can easily ask them to explain the process and how their idea will play out.

Other than commenting on their profiles, you can also privately message traders when you want to learn more about different strategies. Once you are more skilled, you can help fellow traders on the same platform.

Why Is Social Trading So Popular?

The method's popularity stems from the unique access new traders have. Social trading platforms cut down on the time spent searching the internet for trading information by giving you access to expert traders you can interact with.

Getting access to their techniques also means you do not have to spend money on tutorials. These platforms allow you to earn while you're still learning which strategies work, and in time, you can build a community of investors that you trust.

What’s an Example of Social Trading?

The above terms may be difficult to conceive without being an active part of the process, so let's look at an example:

Let's say there was a domestic market crash in Brazil around the time you wanted to get some exposure to the Brazilian real. This is the first time you are attempting to understand local economics, banking policies, and politics with the aim of coming to an informed investment decision. You turn to a trading platform and look for traders who are talking about trading with Brazilian real and either follow, get in touch with them, or both. You use this opportunity to learn market sentiment. This is what social trading is all about.

Let's say you want to begin trading sooner rather than later. Instead of following traders to watch their strategies, you choose to copy trade with a trader whose methods work for your local market.

How Do You Copy Trade?



Copy trading connects part of your portfolio (usually up to 20%) with a trader's portfolio. As soon as you do, their opened trades get copied to your trading account, and their future actions are automatically copied onto your trading account. Most times, your trading account does not contain the same amount as the traders, so the trades are made as percentages of each other instead of actual amounts.

For example, let's say you invested $100 in your trader, which happens to be 10% of their portfolio. If they then invest $200 somewhere else, you will make the same trade but with only 10% of that amount, which comes to $20.

The method can be intimidating, but once you understand the patterns, it can be a very successful approach to trading. Since you're not actively trading, you can focus on learning while making some money. Each time they make a good decision, you benefit from it in knowledge and in funds. Just be sure to choose a reputable trader.

You Can Copy The Traders Experience

Copying a world-leading trader may be the best way to learn as a beginner. The process is the same as above, but the people on the platform are different. Since you may not have a lot of prior trading knowledge, you are investing in people who make good decisions instead of stocks.

Traders are experts in reading the market's implied volatility (VIX) and saving their commodities from a bearish market. They may not have as much time to reply to questions you have, so you'll need to pay attention to how they trade and why it was a good choice. They also make the kinds of investments that require constant attention (as they are usually high risk, high reward).

What's great about the technique is you're in the middle of the action without having to study technical analysis or fundamentals. If you're quick to learn and good at reading profiles, it's a method that might work for you.

What Are Some Social Trading Types?

- Copy trading is the most used social trading on Forex's Meta Trader 4 (MT4) platform, but it's not the only one:
- Tips/signals: the easiest way to find information or strategies is to find tips across the platform. The advice is usually free-floating instead of targeted to a specific audience, but still helpful.
- Profiles and forums: Forums allow traders of all experience levels to share information or to get to know one another. Good platforms can provide full profiles with details on other traders' styles.
- Bots: most platforms allow you to use customisable trading bots, so you do not need to monitor trades at all times. You can use autochartist to monitor trends in Forex.

What Are the Pros and Cons of Social Trading?

Now that we've covered the various terms, let's talk about some advantages and limits to social trading.

Potential benefits of social trading:

- Earn while you learn. It is possible to make money by following or copying others and increase your capital quickly.
- Awareness of market sentiment. You can see market movements both as a newbie and also through the eyes of an expert. You get to immerse yourself in the market and quickly get information not accessible elsewhere.
- Take your time back. By creating quick access to experts, you save time on combing the internet for these tips and can spend your time doing something else.
- Diversify your portfolio. Getting access to different traders (and investing in traders rather than stock).

Drawbacks of social trading:

- Little to no agency. If you rely on social trading, you are relying on other people's experience and skills to make trading decisions and then cross your fingers to hope it was a good decision. If you copy trade, you have no say in where the trades are made even if you know they might be bad trades which is a large drawback of social trading.
- Constant monitoring. As with most techniques, you need to constantly monitor the market to know what is happening. This is true even if you're copy trading, as it's a good idea to know what the traders you entrust with a part of your portfolio are actually doing.

Social Trading: Fundamental and Technical Analysis

Technical analysis refers to the process of analysing data to allow you to make good predictions about an asset's future price movements. The method is based on the asset's past movements that show hints of how it will do in the future. That also means you need to know what you're looking at for the information to be useful to you. You'll need to be able to read and interpret charts and patterns and move from there.

Fundamental analysis goes deeper than looking at previous past movements. The analyst's aim is to determine the actual intrinsic value of the commodity. Any factor that can provide a specific inducement to the asset and its price is taken into consideration: the company's revenue,CFD*, NFA, profits, etc. Their idea is that the general price of an item does not always reflect the intrinsic value.

Each of these techniques takes some time to learn and then more time to dive into each commodity before engaging in a trade. So why are we talking about this? You need to understand these methods in order to understand how the traders make decisions, especially if you are using someone else's advice instead of copying their trades. Knowing how fundamental and technical analysis differs from one another will also help you evaluate different traders. Whichever analytical method you choose to adopt, learning about the pros and cons of each is a good idea.

*Please note that trading CFDs with leverage can be risky and can lead to losing all of your invested capital.

Managing Risk While Social Trading

Risk management is an important factor to consider while trading. In most cases, your money management is closely tied to risk management and leads to successful trades. Risk management is a set of rules that you set to help you determine whether a situation is risky or not. Good risk management is the root of responsible trading.

- Understanding risk: Studying short-term and long trends can help you evaluate what is low or high risk. The mood of financial markets can definitely change at any moment, but studying previous trends can help you gauge how the price changes at least within the next few hours.
- Mitigate risk: Diversifying your portfolio means you invest in different fields and trades. Each new trade improves your chance of success but also prevents you from losing too much if one of your fields hits a bad streak.

In Conclusion

Sharing information on platforms and learning from experts is just the beginning of social trading. Now that you've read this article, you are almost ready to put this knowledge to the test. You can test your skills using a Libertex demo account to try different techniques before you begin live trading. A Libertex demo account allows you to try the statistics without risk.

[Libertex]

What Is the Dow Jones Index?

Large companies inevitably affect the entire economy, especially when it comes to the top blue-chip companies. By combining and tracking stocks of these companies, traders can get a good view of how the American market is performing as a whole. This is the exact reason the Dow Jones Industrial Average (DJIA) index exists.

Let's see what makes the Dow Jones one of the most well-known stock market indices, how the index is constructed and calculated, and what you should know before trading on it. Additionally, we'll take a more in-depth look into what makes it an attractive investment tool and what drawbacks you need to be aware of.

Dow Jones Industrial Average Definition

The Dow Jones Industrial Average, often referred to as 'the Dow', is an index consisting of 30 well-established and financially sound US companies. It serves as a benchmark for stock market performance and sentiment.

Initially, the index listed just 12 companies. These days, the Dow Jones has 30 components from all major sectors of the economy, except for transportation and utilities. There aren't any strict rules of what companies are eligible to be included. But the primary condition is to be a publicly-owned company listed on the Nasdaq and the New York Stock Exchange (NYSE).

Understanding the Dow Jones Industrial Average



The DJIA is the second-oldest US market index, following the Dow Jones Transportation Average from 1884. At the time of its inception in 1896, the Dow Jones Industrial Average reflected the performance of companies only within heavy industries, like oil, machinery manufacturing and construction. The name and composition were decided by the editors of the Wall Street Journal.

Over time, the name transformed into something remote from its original meaning. Very few Dow Jones companies are related to industrial goods. Now, it mostly acts as a measure of the activity of the biggest companies in the US market, as stated previously. The top 10 companies in the index include:



How Is the Dow Calculated?

The Dow 30 is price-weighted, which means the member companies are weighted based on their price per share. Higher-priced stocks have a more significant impact on lower-priced ones. For example, if the issuing company's stock is $100, it'll be weighted more than a $50 stock.

This method is contrasted to weighing by market capitalisation of the index constituents. Examples of capitalisation-weighted indices include the S&P 500, FTSE 100, Nikkei 225, etc.

Share price weighting has some downsides, and it raises the question of whether it's just a holdover from the past. Share price mostly depends on the volume of issued shares. To put it simply, it mostly measures the cake by the number of slices rather than how big it is.

This is the reason why DJIA 30 isn't the true average of its constituents. The resulting index is calculated with a special divisor, which initially was taken arbitrarily. To ensure the continuity of the Dow index, the divisor adjusts to component the stock structural changes.

How Does the Dow Divisor Work?

To illustrate how the Dow divisor works, let's use an example:

1. A company trading at $100 undergoes a 2-for-1 split; it'll reduce the stock price to $50.
2. If our divisor remains unchanged, the index will drop, despite no fundamental changes in the stock.
3. To compensate for the effects of the split, the divisor is adjusted downward.
4. The overall index remains the same as it should.

The divisor is currently at around 0.1474. It accounts for such events as a stock split or a stock dividend for the index components to accurately reflect the value. Traders don't necessarily need to know the divisor, but it's still listed on the Dow Jones Indices' website and the Chicago Board of Trade.

Advantages and Disadvantages of Dow Jones

Does investing in DJIA fit into your financial plans? Here are some reasons that make this index a compelling instrument to trade:

- Convenience. You don't need to do as much research to make an investment decision. With the Dow index, you select only one instrument rather than pick many individual stocks. And all further actions will be executed easily, which isn't the case when you have multiple different stocks.
- Simplicity. This kind of trading activity doesn't require much technical knowledge, so investors can build a diverse portfolio without doing much work. Although, it may mean your profits are unlikely to skyrocket. But if you don't want to leave room for mistakes, this index is well worth it.
- Solid returns. The historical return on US stocks yields is close to 7% a year, which is a decent amount. Considering there are fewer and less impactful risks, many traders are inclined to use that to their advantage. For conservative investors, taking a familiar, less risky path is a better deal.
- Little room for emotions. Index investing is a rather sensible approach that doesn't encourage rushed and heated decisions. Unlike other trading methods, indexing takes a more measured, peaceful approach, without such an emphasis on trying to outsmart and outperform others.

At the same time, despite being one of the most crucial stock market performance trackers, Dow Jones has limitations and drawbacks related to this index:

- Flaws of a price-weighted index. DJIA gives some listed companies an unfair advantage. For example, a $100 stock has twice as much influence on the index as a $50 stock. However, the latter may have a more significant effect on the American economy.
- Insufficient representation. There are more than 5,000 common stocks listed on the Nasdaq and NYSE. The Dow tracks only 30 of them, which is a little part of it. So, an index measuring less than 1% of companies may give you misleading information on the activity of the entire market.
- Too rigid. In most cases, picking individual stocks will give you more flexibility. You have better control of your portfolio allocation, and you can buy/sell assets here and there. However, you get a bulk deal with indexing, and you're forced to invest in all companies on the constituent list.

How to Trade Dow Jones Index CFDs



Stock index CFDs are a speculation tool that allows for tracking larger sectors of the overall stock market rather than individual shares. Let's see why CFDs are considered to give great exposure to global financial markets and whether they have any risks.

What Is CFD Trading?

CFD is short for Contracts for Difference. This form of trading allows you to speculate on the underlying assets without actually owning them. However, actions with the purchased contract work are similar to as if you owned the asset.

By taking a CFD position, you either profit or lose money due to the price difference of the index during a specific period. If traders think the index will appreciate in value, they open a long position, i.e., buy the asset. On the contrary, if the market is expected to fall, you can go short, i.e., sell it.

You can utilise leverage, which allows you only to use a portion of the trade value and borrow the remaining amount from your broker. However, it can go either way. You can increase your profits or expose yourself to more substantial losses.

Advantages and Disadvantages of DJIA CFD Trading



There are numerous arguments in favour, as well as against CFD trading. We'll discuss all aspects to help you in your decision-making process and start with the CFD benefits:

- Potential benefits from both rising and falling markets
- You are not limited to one market or asset
- Amplified gains due to leveraged positions
- Minimised tax liabilities
- Stamp duty exemptions

Having said that, you should also consider a few drawbacks and decide in advance how you are going to mitigate them:

- Greater losses when trading with leverage
- Growing costs over long-term
- Risk of overtrading

Conclusion

The Dow Jones Industrial Average is one of the most widely followed market indicators for a good reason. It provides insights into the 30 blue-chip companies, as well as the US economy on the whole. But even if you have a useful tool measuring stock market performance, it's essential to approach it correctly.

Any market or financial instrument requires knowledge and appropriate skills. It's time to start practising to gain valuable experience on Libertex. Get a free demo account (https://libertex.com/blog/what-is-dow-jones-index#modal-demo) and sharpen your skills without risking real money, which is the best way to start trading.

[Libertex]

Crypto winter or just another cold snap? Libertex explains

The past few weeks and months have brought carnage to the crypto markets. That's undeniable. Bitcoin is down more than 50% from its all-time highs, while ETH has bombed by almost 60%. And just when crypto investors thought they could at least rely on stablecoins to protect their digital wealth, we saw a totally unpredictable catastrophe hit UST (Terra) and DEI (Deus). Even the sector leader, Tether, has lost nearly 10% in the span of a week. You could be forgiven for thinking that this marks the beginning of an intractable bear market for digital assets, but haven't we been here before?

Circle of life

It may have seemed as if cryptocurrencies' extreme volatility was a thing of the past. After all, we were in a seemingly endless bull market, institutional investors were finally getting on board en masse, and ancillary markets like DeFi and NFTs were expanding at a rapid rate. However, this wouldn't be the first time we've seen leading digital currencies lose over 50% of their value. Everyone remembers 2018, but what about 2013 (-83%), 2012 (-56%) and 2011 (-99%)? The fact that the last major crash was a whole 4 years ago should really be taken as an optimistic sign for the future. At the end of the day, all asset classes are vulnerable to major drawdowns of 50% or more. Ups and downs are an inevitable part of every market's life cycle. As long as they aren't too frequent and remain relatively short-lived, we shouldn't be overly concerned.

Bear necessities

While passive investors and HODLers can take solace in the idea that crypto may have a very bright future ahead of it, active traders may wish to benefit on the way down as well as from the eventual recovery. They can potentially do so by buying the dip and investing regularly throughout the downtrend, thus reducing the average price paid and possibly maximising their potential percentage gain over time. Another solid bear market strategy is staking, which involves locking crypto into the blockchain for a period of time, generating a passive income. Indeed, following the demise of Terra, stablecoin staking yields have risen as high as 40% (USDD). But for those looking for the biggest risk-to-reward ratio available, shorting is by far the most potentially lucrative option. You can do this via options or futures, but have you ever thought about an interesting alternative way through Contracts for Difference (CFDs)?

So, what are CFDs?

CFDs or Contracts for Difference are unique financial products that allow you to trade on changes in the price of a given underlying asset without having to physically own the said asset. Best of all, this means you can just as sell an underlying asset as buy it. As a consequence, you need not worry about finding a physical buyer or crypto transaction speeds. As soon as you close out your position, the price you receive is guaranteed. There are many CFD providers out there, but Libertex has been recognised on multiple occasions as one of the most awarded and client-focused brokers on the market.

Why Libertex?

Apart from the annual awards and industry accolades, Libertex is renowned as a broker that puts its customers first. And because Libertex offers CFDs in a range of different underlying assets from virtually every asset class imaginable, users are able to store their entire holdings in one easy-access location. In fact, Libertex clients can maintain a diversified portfolio of CFDs on stocks, indices, gold and, yes, crypto – all in a single account.

If all that wasn't enough, Libertex even offers zero commission fees on all cryptocurrency CFDs, no swaps and exchange fees you’ll have to pay. All you'll be asked to pay is the spread (the difference between the Bid and Ask prices). Nothing more.


70.8% of retail investor accounts lose money when trading with this provider. You should consider whether you understand how derivatives work and whether you can afford to take the high risk of losing your money.

Available for retail clients on Libertex Trading Platform.

[Libertex]

Definition of FTSE 100: Meaning, Composition and Strategies

The FTSE 100 index is one of the most popular choices for traders around the world. It represents the UK's top 100 companies and serves as a measure for the broader UK market. Since it comprises a large number of individual stocks, it produces a reliable signal compared to the American Dow Jones or the German DAX.

What Does FTSE Stand For?

FTSE is short for Financial Times and Stock Exchange, which refers to their joint ownership over the company. The FTSE Group maintains financial indices to measure sections of the overall stock market. Information on how a particular market segment is performing gives traders and investors invaluable insight.

The most well-known index produced by the FTSE Group is the FTSE 100. It embodies the overall performance of the 100 major companies in the UK listed on the London Stock Exchange (LSE). It provides a snapshot of the most highly capitalised 'blue-chip' companies, which are trusted and recognised.

Understanding the FTSE 100



Every constituent of the FTSE 100 Index participates in the London Main Market. Combined, they account for about 80% of the total value of all publicly traded companies within the LSE. Currently, the top 10 companies that belong to the index include:



The composition of the FTSE 100 index is revisited every quarter. The review usually takes place on Wednesdays following the first Friday in March, June, September and December. Any numbers and values used in the calculation are taken from the night before. The methodology relies on price changes of underlying constituents.

Market capitalisation is a defining factor by which companies make the cut. However, there are other conditions for being featured in the index:

- Being quoted on the LSE
- Staying compliant with the company's origin and liquidity ratio
- Remaining publicly traded stocks.

If it turns out a company doesn't meet all of the requirements, it gets taken out. The composition always includes 100 companies, so a new one is added to the list. Obviously, it must meet all the rules mentioned above.

Factors Influencing the FTSE 100 Index Price



The price of the FTSE can be affected by a variety of events around the world. The most influential factors include:

- News regarding GDP
- UK manufacturing statistics
- Events in the Middle East
- Any global news, especially somehow relating to specific industries from the list
- Economic and political shifts.

Advantages and Disadvantages of FTSE 100

Just like any financial asset and instrument, the discussion around FTSE 100 has arguments both in favour of and against it. The upsides include:

- You receive instant exposure to the top companies in the UK with established positions in their respective industries
- It allows you to diversify your portfolio
- FTSE 100 tends to be cheaper to track
- There's no stock-specific risk since you have a composition of 100.

It's also essential to mention the downsides associated with this style of trading:

- Some stocks have high levels of debt
- There's minimal technology representation in the composition
- You may be conflicted about investing in the companies that make warships, produce tobacco and alcohol.

What Is FTSE 100 CFD Trading?

If you want to trade FTSE with CFDs, there aren't drastic differences from traditional trading strategies. You can set stop loss and limits, enter short or long trades, etc. Depending on your predictions, you can speculate on the index price in either direction.

What Is CFD Trading?

The acronym CFD stands for contract for difference. It's a financial instrument that allows you to trade assets, which in our case is the FTSE 100 index. One of the main distinguishing features of CFDs is that there's no actual delivery of the instrument being traded. When a trader acquires CFDs and then sells the contract, they make a profit due to price fluctuations for this asset.

Advantages and Disadvantages of FTSE 100CFD Trading

Let's take a quick look at what makes CFD an attractive way to work with the FTSE index. Major benefits for a trader include:

- Leverage. For example, if you have a 1 to 100 leverage, you can make 100 times more money than you would without it
- Suits beginners. You only need to place a small deposit to start. Leverage helps you significantly increase your investment capital when the market is not moving in your favour
- Varying contract sizes. Until you're confident in your skills and knowledge, you can start trading with smaller amounts. It allows you to minimise the consequences of any mistakes you make
- Provides flexibility. The instrument offers you opportunities for different future values of the asset. Whether you expect an increase or decrease, you can use it to your advantage.

Keeping all the pros in mind, it's crucial to be aware of the risks involved. The biggest risk is the downside of using leverage. If the market behaves differently than you anticipated, your losses may increase. Another disadvantage is large spreads, which can also affect your losses. However, if you apply the right approach, you can manage and offset these risks.

FTSE 100 CFD Trading Strategies



When trading FTSE 100, you always need to make a thorough analysis and accurate charting. It's recommended that you use the moving average and RSI in your analysis. Be cautious when choosing a particular strategy:

- Bullish strategy. Use the indicators mentioned above and always apply a stop loss. You can use this strategy when the price has reversed or is already going down. However, the latter is riskier and more aggressive.
- Bearish strategy. You can use it for short- and long-term trading. A stop-loss would also be useful; you can also move the stop-loss if you have enough deposit.

Conclusion

The FTSE 100 gauges the overall sentiment in the UK market based on the most capitalised companies. It has great prospects, which makes it such a widely traded instrument.

If you want to try it out on CFDs without risking money, open a free demo account on Libertex (https://libertex.com/blog/definition-ftse-100-meaning-composition-and-strategies#modal-demo). Having theoretical knowledge is essential by practising. Develop your skills in a controlled environment.

[Libertex]

What Is the CAC 40 Index: Meaning, History and Trading Tips

The CAC 40 is one of the stock market indices you'll always see included in business news round-ups. It represents the overall performance and the economic health of Europe and France in particular.

When it officially launched in 1988, it coincidentally was registered at an all-time low. An all-time high was recorded in September 2000. But what about the CAC 40 index now, and is it worth investing in? Let's explore what purposes this index serves, how it's calculated, and what trading strategies can yield good profits

What Is the CAC 40 Index?

The CAC 40 is a free-float capitalisation-weighted index. It quotes 40 of the largest and most actively traded shares in France and is considered a measure of the economy and the Paris stock market. It's similar to what Dow Jones represents for the United States, FTSE 100 is for the UK, Nikkei 225 is for Japan, etc.

Originally, the acronym CAC meant Compagnie des Agents de Change. It was a group of brokers that operated the Paris Stock Exchange since at least the 16th century. The initial sentiment was transformed, but the acronym stayed.

Companies within the CAC 40 composition account for about 20% of market capitalisation in Europe, which shows how influential it is. It's also tightly connected to the Euro Stoxx 50 index, where they have almost 20 companies in common. CAC often catches the attention of international investors, with almost half of CAC 40 shares held by non-residents and a quarter owned by investors outside of the Eurozone.

What Are CAC 40 Companies?



The CAC 40 represents various industries within the French economy. Some sectors include personal products, pharmaceuticals, banking, industrial materials, telecommunications, publishing, media and entertainment, chemicals, etc.

The composition of the index is reviewed multiple times a year by the Conseil Scientifique. They study market capitalisation and turnover of constituent companies. They make their selection after the close of the third Friday of March, June, September and December.



It's not uncommon for companies to be taken away from the list. Here are some criteria companies need to meet to be admitted to the CAC 40 listing:

- Euronext Paris as a market of reference
- Significant activities and presence in the French economy
- Members of staff and/or headquarters located in France
- Sizable trading volumes.

Factors Influencing the CAC on the Stock Exchange

The key factor you need to understand about CAC 40 is that it relies on French economic activity. In addition to that, multiple accompanying influences affect its price and general market sentiment. To make the right decisions, you should stay informed on:

- National events (GDP, the employment and unemployment rates, trade balance)
- Global events (international politics, related indices, Eurozone governance)
- Performances of quoted companies (capitalisation, turnover, etc.)
- Major changes in companies' structures and policies.

Advantages and Disadvantages of the CAC Index



These days, you can find hundreds of assets that you can trade with. Below are some arguments favouring the CAC 40 Index:

- Indices are more liquid than equities.
- CAC 40 traders are exposed to lower risks because it's made up of several stocks.
- France remains one of the leading economies in Europe, so it makes sense to invest in French indices.
- It's easier to keep track of one index rather than many individual companies.

There's no such thing as a perfect trading asset. So, for transparency reasons, let's take a look at the downsides of CAC 40:

- You have no control over individual index components.
- This index doesn't provide exposure to smaller-cap companies.
- The index price calculation isn't always fair.

CAC 40 CFD Trading

As a trader, you can't buy indices, including CAC 40, because they're just benchmarks. However, it doesn't mean it's unfit for trading at all, this is where you should go for CFDs. There are many perks to using this particular instrument, and you will see why.

What Is CFD Trading?

CFD stands for contract for difference and acts as a form of derivative trading. In recent years, CFDs have become a popular method for online investing. It can be applied to indices, commodities, currencies and stocks.

When you work with CFDs, you aren't actually purchasing an underlying asset directly. Instead, you engage in a contract with a CFD broker and buy/sell a number of units for a particular financial instrument. No matter which way the market goes, CFDs are suitable when you expect prices to go up or down.

Advantages and Disadvantages of CFD CAC 40

If you're interested in working with CAC 40, it makes sense to enter the market using CFDs. With CFDs, you can:

- Use CFDs as a quicker and more accessible medium for trading.
- Gain exposure with less capital by using leverage.
- Take advantage of all market movements.
- Save money from stamp duty exemption.

At the same time, you shouldn't overlook some downsides associated with this technique:

- There are additional risks when trading with leverage.
- You still have to pay fees: spread, holding costs and commission.

CAC 40 CFD Trading Strategies



When you trade the CAC 40 with CFDs, you can use leverage to increase gains in a relatively small amount of time; at the same time, leverage also increases potential losses, up to your entire capital. You can only do so if you pick the right strategy. You can employ regular strategies, but remember to consider specific characteristics of CFDs. Here's how you behave during:

- Bullish market. Even during rising markets, prices inevitably go through occasional consolidation or retracement periods. Try swing trading to benefit from these small reversals and get maximum returns
- Bearish market. Since CFDs allow you to trade in all directions, you can go short when prices are falling. So, even in tumultuous periods, you have the option of buying in through CFDs.

Takeaways on the CAC French Stock Index

The CAC 40 is a great asset to diversify your portfolio. It exposes to a variety of the most prominent French companies and provides decent potential profits (when done right). It suits all kinds of traders; you can trade as much or as little as you want.

Before you're ready to enter the real market, you need to learn the basics. At Libertex, we offer a wide range of resources to build your trading skills. Sign up for a free demo account (https://libertex.com/blog/what-is-cac-40#modal-demo) to ensure you'll be managing your future CFD portfolio properly.

[Libertex]

Crypto’s meteoric rise: exploring the history with Libertex

It wasn’t too long ago that crypto was such a niche asset class that nobody other than computer whizzes and insiders had even heard of it. However, all that changed in 2017 when these little-known instruments began to dominate headlines following unprecedented gains in the space of just a few months. Indeed, by the end of that same year, Bitcoin had risen 2000% to reach a day high of $19,650. Nevertheless, it still took another three years before digital currencies became a regular fixture in most institutional portfolios.

In this article, we’ll track cryptocurrencies’ journey from obscurity to the limelight as we explore how they made their way through early adopters, young retail investors, and finally, into the holdings of pension funds, changing the lives of many along their way.

The early days (2009-2012)

Immediately following Satoshi’s launch of the original cryptocurrency in 2009, prices hovered around zero for nearly two years. It wasn’t until 2011 that BTC eventually reached parity with the US dollar. What followed was not unlike what we saw in the big boom and bust of 2017. Prices on Mt. Gox rose from $1.00 to $30.00 in the space of a few months before crashing back down to $5.00 by the end of 2011. Despite the percentage gains being equally as impressive as those seen in recent bull markets, this whole episode went more or less unreported in the media. Why? Well, back then, Bitcoin’s market cap could be counted in the tens of millions of dollars, and adoption was virtually non-existent. Beyond early crypto aficionados and dark web criminals, barely anybody actually owned BTC or even knew what it was. In fact, in 2010, BitcoinTalk user SmokeTooMuch tried to auction off 10,000 BTC (currently worth $350 million) for just $50…but couldn’t find a buyer.

A turning point

Ten years ago, the only big-name company accepting Bitcoin was WordPress (added in 2012). And unless you wanted to buy something from a handful of independent BitPay merchants, using BTC legitimately was quite difficult. But all of this changed in early 2013 when the Internet Archive started accepting Bitcoin donations and even offering to pay part of its employees’ salaries in the digital currency.

A short time later, OkCupid and Foodler began allowing users to pay for services in BTC. This was followed by the opening of the world’s first Bitcoin ATM in Vancouver. The University of Nicosia in Cyprus even started letting students pay their tuition fees in the cryptocurrency! All of this then paved the way for many more companies to add Bitcoin to their payment methods in the years that followed, but that was not all. It also served as a watershed moment that saw the first wave of ordinary retail investors pile into the market at an average price of around $500.

The Great Bitcoin Boom 1.0

Bitcoin started 2013 at around $13.00, but by December, it was worth over $1000. Despite short-term fluctuations and corrections, it’s safe to say that any hodlers that got in back then have made life-changing returns in the space of less than a decade. Nonetheless, it wasn’t until 2017 that BTC really made it onto the mainstream media radar. Sure enough, the gains were indeed spectacular: Bitcoin went from a price of around $900 in January to a 15 December high of $19,650, doubling its 1000% rally from four years prior. The key difference this time around was that, even after the typical post-bubble >80% correction, Bitcoin never revisited its pre-2017 lows. The extensive coverage of this year-long bull run saw large numbers of new retail investors enter the space. While many of these did make significant paper losses in 2018, those who held on would be more than happy with their gains today. Furthermore, the buzz around Bitcoin also helped nascent projects like Ethereum (2015) and Cardano (2017) attract new users and capital as a so-called ‘altcoin’ market began to take shape.

A world of possibilities

Perhaps the most interesting facet of this most recent crypto boom was that it was largely driven by the long-awaited arrival of institutions and legacy investors. Indeed, a staggering $9.3 billion of institutional capital flowed into digital asset classes in 2021, marking a near 36% jump against $6.8 billion in 2020 and virtually nothing in 2017. Meanwhile, Bitcoin has been made legal tender in economically challenged El Salvador, while the original cryptocurrency has taken on new roles as a store of value in inflation-stricken Turkey and a secure means of free, cross-border exchange in war-torn countries across the world.

But one of the most exciting ongoing industry developments since 2020 has to be the emergence of the DeFi and NFT segments, which have respective CAGRs of 47% and 35%. What’s more, this market is virtually all altcoin. Bitcoin is barely present; instead, it’s Ethereum, Cardano, Solana, Terra Luna and other smart contract-enabled coins and tokens that rule the space. It could well be that these are the kinds of projects that see the most growth going forward, and many future-minded investors are already stockpiling these like the pioneer Bitcoin hodlers of the early 2010s.

Libertex is a wise option for exploring crypto CFDs

For many traditional traders wishing to add crypto to their portfolios, the biggest barriers are security and ease of access. Luckily for them, experienced CFD broker Libertex has fully incorporated CFDs on digital assets into its standard instrument offering. Libertex now offers over 50 CFDs on coins and tokens to its user-friendly app.

Best of all, Libertex has recently made its zero-commission crypto offer a permanent fixture, which means that Libertex clients no longer pay any fees or charges on cryptocurrency CFD purchases, sales or exchanges. All they have to pay is the spread (the mid-point between the Bid and Ask prices for a given asset). For long-term hodlers, this can translate to massive savings and have a significant impact on the size of any returns potentially earned. As for convenience, it’s probably unbeatable. Libertex clients’ crypto CFD transactions are stored alongside their other trades and investments in the Libertex trading platform and are thus accessible at any time, day or night.


Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 70.8% of retail investor accounts lose money when trading CFDs with this provider. Tight spreads apply. Please check our spreads in the platform. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money. Cryptocurrency instruments are not available to retail clients in the UK.

Available for retail clients on the Libertex Trading Platform.

[Libertex]

What Is A Stock Split? Definitions, Types, Pros and Cons

At face value, a stock split is supposed to make a stock more affordable for investors. Sounds good, right? Well, it's a little more complicated than that. You have to consider the type of split, of which there are several.

And what if you already own shares in that company? Should you sell them off prior to the split, or should you hold off?

It can be confusing, but this article will break down stock splits. Read on to learn about the stock split, different kinds of splits, their pros and cons and how a split will affect you if you already hold stock in the company.

What Is a Stock Split?

Here's the basic split stock definition: when a company splits its stocks, it increases the number of shares it has issued, which boosts liquidity. It's important to note that the split doesn't change the company's value. Therefore, even though the number of shares outstanding increases, their total dollar value stays the same.

So, if you own shares in a company that splits its stocks, is your investment suddenly cut in half? Well, yes and no. In a basic 2-for-1 stock split (which we'll explain in more detail later), the price of one share halves. BUT, as an investor, your one share becomes two shares, so you still have the same dollar amount invested.

If you're confused, don't worry! We'll walk you through an example.

How It Works: Example

Let's take a look at a real-life stock split. In August 2020, Apple carried out a 4-for-1 stock split. Prior to the split, a share was worth about $540. Because the company did a 4-for-1 split, the share amount was divided by 4. $540 divided by 4 is $135, so that's what the new share price was.

If you held five shares of Apple before the split, it would have been worth $2,160. After the split, you still would have owned $2,160, but you would have twenty shares instead of five.

When Does a Company Decide to Split Stock?

So, if your dollar amount invested stays the same before and after a stock split, what's the point?

It's more of a benefit for the company and for investors with less capital. By splitting its stock, a company is able to make its share price more attractive to a greater number of people. In the example above, Apple's shares were originally $540 each, which would be a daunting figure to many amateur traders. But after the 4-to-1 split, the new price was $135, which was much more attainable for a wider pool of investors.

That's the driving force behind a stock split, but a company can also carry out a reverse stock split. We'll cover it in great detail later in this guide, but we'd like to give you a brief overview now. With a reverse stock split, a company does the opposite: they reduce the number of shares and increase the value of each one.

A company might choose to do a reverse stock split if they are in danger of being removed from an exchange. Stock exchanges require a minimum share price. For instance, the Nasdaq requires a minimum price of $4 per share.

Will It Influence Your Taxes and Cost Basis?

A stock split is not a taxable event. After all, the company's total market value is the same, and you're not making any gains. After you sell the stock, you'll be taxed on profit made, but this would happen regardless of the split.

Something to keep in mind, though: even though a stock split doesn't change your overall basis, your 'basis per share' will be adjusted. You'll need to calculate the new per-share basis, so you can calculate losses and gains correctly when you decide to sell your stock.

It's a pretty easy process, though. Your original per-share basis is found by dividing the amount you paid by the number of shares purchased. So, if you paid $100 to buy 10 shares of a company, your per-share basis is $10.

If the stock experienced a 2-for-1 split, you would then own 20 shares instead of 10. So, just divide $100 by 20 (or divide $10 by 2 since it was a 2-for-1 stock split), and your new per-share basis is now $5.

Types of Stock Splits

Now that you know how stock splits work in general, let's take a look at each kind. When a company undergoes a stock split, you'll see a certain number template: X-for-Y. It represents a ratio of shares, with X being the new amount and Y being the original amount.



4-for-1

The company's shares are split into 4. Let's say a company has 100 million shares outstanding, and each share is worth $100. After the split, they will have 400 million shares outstanding, and the share price will be $25.

2-for-1

The company's shares are split into 2. Following the example above, the company's 100 million shares will be split into 200 million shares. And the share price would decline from $100 to $50 per share.

10-for-1

It's the same thing here! The company's shares are split into 10. Instead of 100 million shares, they now have 1 billion shares. And in this 10-to-1 stock split, the share would drop from $100 to $10.

3-for-2

So, a company announces a 3-for-2 stock split, meaning shares will increase by 1.5x. So, the 100 million shares increase to 150 million. To get the share price, you'd divide the original one by 1.5. $100 divided by 1.5 is $66.66, which would be the new share price.

What Is a Reverse Stock Split?

A reverse stock split works very similarly to a forward split. The one exception, of course, is that it moves in the opposite direction: the number of shares decreases while the price increases.

We previously mentioned that a company might do a reverse stock split if they need to increase the price per share to stay listed on an exchange. There are also a couple of other reasons: perhaps they want a higher price to gain more attention from analysts or to boost their company's image. In general, a company's reasons for reverse splits are related to improving its reputation.

What Does a Reverse Stock Split Mean for Shareholders?

As with a stock split, the company's market capitalisation will be the same afterwards unless they decide to pay fractional shares out as cash. To illustrate this, let's say you own 10 shares in a company that does a 1-to-3reverse split. After the reverse split, rather than ending up with 3.33 shares, you'll have 3 shares and receive the cash equivalent for the remaining 0.33.

This scenario does have tax implications; the cash paid out will be subject to capital gains or losses, dependent on your holding period and cost basis.

Is a Reverse Stock Split Good or Bad?

There's no clear-cut answer here, as every company's situation is different. It helps to know, however, that reverse stock splits have a negative connotation, as companies that use this scheme are often in distress.

However, if the company makes operational changes along with the reverse split, they stand a decent chance of turning things around. So, an upcoming stock reverse split isn't always a signal to sell. If you hold stock in a company that's announced a reverse split, do some research before selling your shares in a panic. Read press releases, compare earnings reports, get up to speed on new initiatives within the corporation and carefully review recommendations from investment analysts.

To prove this point, let's look at some reverse splits that have turned out really well for their companies:

- Laboratory Corporation of America (NYSE: LH) turned to a 1-for-10 split in 2000. The company experienced great success after the split and ended up doing a forward split two years later. The company has not needed to perform a split again since 2002.
- Priceline.com (now Booking Holdings Inc) performed a 1-for-6 reverse split in 2003. Unlike LH, Priceline did not do a forward split later. However, the company has excelled over the last two decades, and its share price has grown from a mere $20 to over $2,000!

Forward Stock Splits vs Reverse: Pros and Cons

Before we close out this article, let's take a look at the pros and cons of forward and reverse stock splits.

Forward Split



Reverse Split



Conclusion

A stock split — forward or reverse — doesn't change the market capitalisation of a company. It does, however, alter public perception, make share prices more affordable or more expensive and (in the case of fractional shares in a reverse split) may come with tax implications.

Generally, a forward split is seen as a positive sign, while reverse splits indicate poor financial health.

However, this isn't always the case: there are companies that have flourished after reversals and companies that have struggled after forwards. Before buying or selling shares from a company that's splitting stock, make sure to study the reasons behind this choice. Is the company exceeding or falling short of revenue projections? What is the market sentiment? Just make sure to do plenty of research!

[Libertex]

How to Read Stock Charts When Trading

If you're new to trading, you may have some questions about where you should begin. With so much information on trading and the stock market in general, getting started can often feel daunting.

This article will take you through the basics of how to read charts for trading. If you can read stock charts and correctly interpret the information represented on them, this increases your chances of placing wise trades.

So, if you want to know more about how to read charts and how to understand the data presented on them, read on!

Types of Stock Chart

There are four main types of stock charts: bar charts, candlestick charts, line charts and point and figure charts. Each type has its benefits, and as you learn more about them, you may find that you prefer one type over another.

This section will explain a little about each chart type and why they are useful.

Bar Charts



Bar charts allow you to determine four bits of information for the trading day:

- The opening price
- The closing price
- The highest price
- The lowest price

Bar charts can be used to display different lengths of time. They might break down price action over weeks or over minutes. It all depends on what's more useful for the trader.

You should be able to learn how to read bar charts fairly quickly because they have a clear, stripped-back layout. Each day is represented by a vertical line. This line shows the trading range of that day (or week, or hour, depending on the timeframe the chart covers). Two horizontal lines stick out from the vertical bar, one pointing left and one pointing right. The former indicates the opening price of the day, while the latter indicates the closing price.

These types of charts are particularly useful for analysing trends. You can use them to try and find possible trend reversals or to keep an eye on price movements and volatility.

Candlestick Charts



Candlestick charts present the exact same data as bar charts, but the information is displayed in a different format. Each period of time is depicted as a candlestick made up of two parts. The first part is a rectangle, called the "real body", that shows the range between the opening and closing prices. If the closing price is higher than the opening price, the real body is green; if it is lower, then the body is red.

The second part is a thin line extending from this that shows the high-low price range, known as "the shadow". You'll notice that the shadow sticks out both the top and bottom of the real body; the part that sticks out the top is known as "the wick", while the part that sticks out the bottom is called "the tail".

Candlestick charts are used fairly often by traders. This is because they impart a lot of information. The length and colour of a candlestick can instantly let you see what direction the market is moving in and whether it is weakening or strengthening.

Line Charts



Line charts are the most straightforward form of stock market chart out of the four we have considered. A line chart can only be used to show daily closing prices. Closing prices are plotted onto a chart and connected with a single line.

Even though a line chart doesn't convey as much information as a bar or candlestick chart, line charts are still quite useful. They allow traders to instantly get an idea of a security's overall performance over a given time period without being overwhelmed by irrelevant pieces of information.

That said, some traders need the additional information provided by charts like bar and candlestick charts to deploy their methods well. Line charts may be useful to some but not to others. When it comes right down to it, the matter is entirely subjective.

Point and Figure Charts



The final type of chart this article will consider is the point and figure chart. This type of chart is solely concerned with the price of a security and doesn't take into account volume or time.

Point and figure charts use Xs to symbolise price increases and Os to symbolise price decreases. Using this method, it can be easier for traders to identify trends and trend reversals. That said, since this type of chart doesn't record time, it can't be used to determine how long it may take for certain goals to be met.

There are several benefits to point and figure charts, even despite this limitation. For one thing, because these charts are limited to showing price increases and decreases, they can help traders focus on important market movements and visualise support and resistance levels.

Basic Stock Chart Terms You Should Know

Now that we've gone over the different types of stock charts you might come across, this section will explain a few basic stock chart terms you should know. Having a firm grasp of these ideas is essential to explore the market:

Open, high, low and previous close

These terms are used to describe price movement during market hours. The open is the initial price a security trades at when the market opens. As you may have guessed, high and low refer to the highest and lowest price points the stock reaches during market hours. Finally, the previous close is a term used to refer to the final price of the security in question at the end of the previous trading day.

Market cap

Short for "market capitalisation", the market cap of a company is a measurement of its size based on the number of outstanding shares it has on the market multiplied by the company's share price. A company's market cap represents the total market value of a business' outstanding stock.

PE ratio

PE ratio stands for price-to-earnings ratio. Sometimes traders use the PE ratio to decide whether or not a stock has been fairly valued.

Dividend yield

An annual dividend yield is the amount of money a trader receives annually from dividends — profits distributed from a company to its shareholders. It's given as a percentage of the company's current share price.

Bid and ask

A bid is a term used for the maximum price a trader will pay for a particular stock. If you see a price listed as the bid, that means traders are willing to pay that current price for a share. While a bid is the highest price a trader will pay for a stock, the ask price is the opposite. The ask price represents the absolute lowest price a trader will sell a particular stock for. You might see the term "bid-ask spread" mentioned regarding stocks. This is the difference between the bid and the ask.

Volume, average volume and day range

Volume refers to the number of shares that have been traded during the market day. As the name implies, average volume refers to the average daily volume of shares traded during a specific duration of time. The day's range refers to the stock's highest and lowest prices on a given market day.

Beta

A stock's beta value is a measurement of its volatility when compared with the market. The beta gives traders an idea of how risky it is to purchase shares in that stock. If a stock's beta is more than one, this indicates that it has been relatively volatile in the past when compared to the market. If the beta value is less than one but more than zero, this shows that when compared to the market, it has been less volatile.

Earnings per share

Otherwise known as EPS, a company's earnings per share is the amount of profit per outstanding share made over the past year. You can figure out a company's EPS by dividing its most recent company earnings by the number of shares they have listed on the market.

Ex-dividend date

To get dividends from a company for the next business period, you have to make sure to purchase stock before the ex-dividend date. If you become a shareholder after this date, or even on the day, you'll miss out on that period's dividend.

One-year target estimate

This term is quite self-explanatory. A one-year target estimate is an approximation of what a stock's value might be in a year's time. While such forecasts can sometimes prove useful, a one-year target estimate is just that: an estimate, not a guarantee.

How to Read and Interpret Charts Using Technical Analysis

This section will explain how to read and understand trading charts by analysing statistical trends to try and identify potential entry and exit points. For example, traders might examine fluctuations in stock volume or price, using trends and patterns to determine how the stock might behave going forward.

Patterns in stock market movements can be categorised into two groups: continuation and reversal patterns.

Continuation Patterns

Continuation patterns indicate that a particular price trend will probably remain steady. They are found in the middle of a trend and signal to the trader that the trend will most likely continue once the pattern has been completed. Continuation patterns can be found on daily charts, weekly charts, and even tick charts.

Let's now consider five commonly occurring continuation patterns that traders look for and work with: pennants, flags, wedges, triangles and cup and handle.

Pennants



Pennant charts are plotted with two trendlines — an upward and a downward trendline — that converge at a point. They are drawn when the volume or value of a security sees a particularly dramatic movement and is then followed up by a consolidation period and a further breakout period where the market moves in the same direction as before. Converging trendlines are drawn during the stock's consolidation period to try and determine when the next peak in value or volume will be.

Flags



With flag charts, two parallel lines are plotted onto a chart. These lines may slope up, down or diagonally. A flag chart that slopes downwards usually indicates a pause in an up-trending stock market, while the opposite is true of upward-sloping flag charts. Flag charts are used to try and determine the likelihood of a previous trend continuing.

Wedges



Like pennant charts, wedges are also drawn with two sloped, converging trendlines. Unlike with pennant charts, however, the trendlines on a wedge chart both move together in the same direction. Wedge charts that slope downwards indicate a pause in the middle of an uptrend, and the opposite is true of upward-sloping wedge charts. These types of charts are especially useful for forecasting future price reversals.

Triangles



Triangles are an extremely popular type of chart among technical analysts. This is because, compared to other patterns, triangles appear relatively frequently. There are three kinds of triangles most typically encountered by stock chart analysts: ascending triangles, descending triangles and symmetrical triangles.

Ascending triangles include an ascending lower trendline that converges with a flat upper trendline. These types of triangles suggest that an upward breakout is quite likely. Descending triangles are instead characterised by a downward sloping upper trendline and flat lower trendline and usually suggest that a breakdown is imminent. Finally, symmetrical triangles are characterised by two sloped, converging lines. These types of triangles indicate that a breakout may occur but not in the direction one will occur.

Cup and Handle



A cup and handle chart is a pattern that appears when an upward trend has momentarily paused but will soon continue. The name refers to the shape of the chart, with the "cup" referring to a U-shaped line on the chart and the "handle" referring to a breakout that sticks out from the cup in a similar shape to a flag chart. Traders use cup and handle charts to determine whether or not they should go long on a particular stock.

Reversal Patterns

Reversal patterns are chart patterns that indicate a change in a particular trend. This trend will come to a stop before heading in a new direction — rising or falling depending on whether the market is bullish or bearish. When stock prices reverse after this pause, the resultant pattern is known as a reversal pattern.

This article will now consider four different kinds of common reversal patterns: head and shoulders, double top, gaps, and bull and bear traps.

Head and Shoulders



Head and shoulders appear either at the top or bottom of the market. They are characterised by a small peak or dip, followed by a larger one, and finally a smaller one again that appears similar to the first. A head and shoulders pattern may indicate a trend reversal and is widely considered one of the most reliable types of trend reversal patterns.

Double Top



A double top pattern on a market chart indicates a point where the market has tried two times to breach a resistance or support level and has failed. Double tops look similar to the letter M, while the inverse, the double bottom, looks more like the letter W. The former indicates that the market has tried to push up through a resistance level. The latter signals that it has instead attempted to push down through the support level.

Both double tops and double bottoms serve as useful indicators of trend reversals.

Gaps



Gaps can be observed on stock charts when a relatively large decrease or increase in value causes a break between two separate trading periods. There are three kinds of gaps to be aware of: breakaway, runaway and exhaustion gaps. Breakaway gaps occur at the beginning of a new trend, runaway gaps in the middle of one and exhaustion gaps towards the end. While it's not difficult to identify gaps in the market, it's a great deal more difficult to determine what sort of gap it is, meaning you won't be able to play the gap each time.

Bull and bear traps



Bull and bear traps are false indications that a particular asset is bullish or bearish, often induced by companies. In the case of the former, the security appears to be climbing higher and higher in value, tempting traders to join. When the trend abruptly reverses, however, traders must pull out of the trade or else get caught in a long position.

Bear traps are the opposite of bull traps. The market appears to be declining, and so traders make short plays in hopes of making a profit off the asset's drop in price. In the end, though, the security continues increasing in price, which means these traders miss out.

Since bull and bear traps are by their very nature unpredictable, it can be difficult to spot them. However, with rigorous application of technical and fundamental analysis, you can hopefully avoid falling for potential traps.

The Bottom Line

To identify stock chart patterns, it's important to pay attention to the movement of trendlines. Through the application of technical analysis, you can use stock chart patterns to forecast future market behaviour.

There is no guarantee your prediction will be 100% accurate, but if you practice technical analysis, you may one day be able to successfully predict trend reversals and continuations.

Conclusion

This article has gone over the basics of how to read technical charts and has provided a few common examples of stock chart patterns. We'll leave you now with a few common practices for reading and analysing stock market charts:

- Identify the trendline. You can't find patterns in stock market charts without first identifying the trendline. Practice looking at different sorts of graphs and trying to interpret them to get comfortable with them.
- Look for lines of support and resistance. Another important feature to be able to identify is support and resistance lines. The support line is the point at which the market stops falling and starts to rise again. The resistance line is the point at which the market stops increasing and begins to drop again.
- Know when dividends and stock split occur. When dividends and stock split occur, the overall value of a business isn't affected, but its share price might be. Oftentimes, when a stock split comes about, the share price drops, so you'll usually see an increase in the trendline.
- Understand historical trading volumes. There isn't always a direct correlation between trading volume and stock value, but it's still useful to have an understanding of previous trading volumes.

[Libertex]

Technical Analysis: Directional Movement Index

Get ready for another instalment in our technical analysis educational series. After a multi-week hiatus, we’re back and ready to share even more knowledge and practical skills on this highly useful, frequently underestimated trading tool. Both short-term traders and long-term investors can potentially benefit greatly from using technical analysis properly. Doing so can help market participants pick optimal entry and exit points, which makes technical analysis a useful string to anyone’s bow. After covering the Average True Range in our last piece, this week, we decided to shed light on a little-known indicator known as the Directional Movement Index (DMI).

What is the DMI?

The directional movement index, or DMI for short, is a trend indicator developed by legendary market analyst J. Welles Wilder in 1978. It works by identifying the direction in which the price of an asset is moving. It does this by comparing prior highs and lows and drawing two lines: a positive directional movement line (+DI) and a negative directional movement line (-DI). There is also an optional third line called the average directional index (ADX), which can also be used to gauge the intensity of the uptrend or downtrend. Basically, when +DI is above -DI, it means upward price pressure is greater than downward pressure. On the other hand, when -DI is above +DI, this means the greater pressure on the price is downward. In the Libertex app, it’s possible to calculate and overlay the DMI directly onto any chart, sparing us significant mathematical gymnastics.

Given DMI’s use when it comes to establishing the direction and strength of trends, long-suffering Bitcoin could be an interesting instrument to apply it to on the monthly chart. Of course, you can use it with any instrument and timeframe you like, but let’s try this one. All you need to do is go to your Libertex account, enter full-screen mode on the chart timeframe of your choice, place your cursor over the indicators tab, select ‘Trend’ and then click ‘Directional Movement Index’ as shown below:



Why use DMI?

Whilst not the most famous indicator we’ve looked at, DMI is an excellent method for reliably assessing both the direction and strength of a given trend. When used in conjunction with some of the other TA tools we’ve reviewed (notably the ATR and RSI), it becomes an even more powerful predictive tool.

Crossovers are the main trading signal generator with the DMI. For instance, when the +DI crosses above the -DI, it indicates an uptrend. Conversely, a sell signal is generated when the +DI instead crosses below the -DI. Like any technical analysis method, it is far from flawless and should typically be combined with other complementary indicators, as mentioned above.

Practical applications

The most practical use of the indicator is as a trade confirmation tool. Essentially, if the -DI is well above +DI, the trend has serious strength on the downside. Naturally, this will provide a solid confirmation for a short position. Let’s look at that same monthly BTC chart with the DMI overlaid and see if we can spot the signal:



Naturally, this isn’t a fool-proof method, but in day-trading – not much is.

As the ATR doesn’t tell us which direction the breakout will occur, we need a trend confirmation (i.e. whether the given stock is overbought or oversold) in order to pick a direction for the trade. Let’s look at that same Google chart now with both the ATR and RSI overlaid:

Look closely at the point at which the two lines intersect (circled in yellow). After this, the -DI (orange) clearly pulls away from the +DI, leading to the initiation of a powerful downtrend that has lasted until the end of the current month (May). While on this occasion, the signal was both correct and leading, there are many false signals generated by the DMI, and it’s wise to seek confirmation through the use of another trend indicator, such as the RSI.

With that in mind, let’s add the RSI to this same chart and see if we get a confirmation:



Notice the spike in the RSI just at the exact same point that the DMI crosses over? This indicates a sharp increase in buying just at the moment that the downtrend begins to form. Taken together, you could feel relatively confident opening a short position on the basis of these indicators. Of course, it’s always wise to seek further confirmation as nothing is certain in trading, and the more data you have on your side, the better.

With the crypto market under pressure at the moment, Bitcoin would actually be quite an example to track to see whether a dominant downtrend is taking hold or a correction to the upside is at hand. And thanks to Libertex, you can now trade Bitcoin CFDs as well as dozens of other cryptocurrency CFDs.

Practice makes perfect with Libertex

As with all TA tools analysed in this series, we must stress that this indicator shouldn’t be considered perfect. However, it is definitely a good weapon in your arsenal and can certainly assist you in selecting suitable buying and selling points. Every indicator we’ve studied thus far can be used in combination with each other for optimal accuracy, and we highly recommend you practice doing exactly that on your free Libertex Demo Account (https://libertex.com/).

[Libertex]

How to Research Stocks: Everything a Beginner Should Know

When you're thinking about investing your money in the stock market, it's important to do your research first. This means looking into the company, the sector it operates in and the market as a whole.

Research helps you evaluate an asset's strengths, weaknesses and growth potential. No matter whether you're buying stock, an ETF, trading CFDs or a relatively predictable savings bond, you need to examine the pros and cons.

With thorough research, you can minimise your chances of loss. There are several ways that you can go about researching stocksand other tradable assets. The most important thing is to make sure that you're using multiple sources of information and interpreting that information correctly. In today's article, we'll explain where to find information on stocks and which factors you should pay close attention to.

Please note: there's no such thing as a guaranteed investment. Even if you do all of your research, there's still a risk that you could lose your money. So, before investing in the stock market, make sure that you're comfortable with the level of risk — only invest money that you can afford to lose.

Where to Find Stock Research Materials

Investors can use various sources when looking for reliable and credible stock research materials. Here are a few to get you started:

Stock Research Sites

A variety of subscription-based and free websites focus on providing investors with analyst recommendations, forecasts, newsletters, calendars, charting tools, etc. For instance, credible websites include The Wall Street Journal's Markets section and Bloomberg's Investing section. If you just want objective information, such as historical price data, market cap, earnings calendars, etc., Google Finance is an excellent resource.

"State of the Market" Reports

Remember how we mentioned that it's important to assess the overall industry's health before selecting stocks? These reports can help you make an informed decision. Keep in mind, though, that many organisations charge hefty fees for access to these reports. To easily find publicly available ones, just Google "State of the [Market] Industry Reports filetype:pdf". Then you can access numerous reports in PDF format immediately.

Broker Website

Your broker of choice may provide educational materials, so you can research shares. For instance, at Libertex, investors and traders can view webinars, read informative articles, etc.

Company's Financial Reports:

You can gather financial reports from companies you're interested in investing in, such as their Form 10-K and 10-Q. The former includes independently-audited financial statements, including the balance sheet, revenue, expenses and sources of income. The latter is the company's quarterly update on financial results and operations.

The Two Main Ways To Research Stocks

There are two main ways how to research a stock — fundamental and technical.

Fundamental Analysis

This measures a stock's intrinsic value and determines whether a share is currently overpriced or underpriced. To do so, you can gather information on each of these factors:



Technical Analysis

Technical analysis is all about identifying short-term trading opportunities by observing charts. You'll keep an eye out for price trends and patterns rather than paying attention to how the market will perform months or years from now.

Some indicators to consider during technical analysis include:

- Simple moving average
- Exponential moving average
- Stochastic oscillator
- Bollinger Bonds
- MACD
- Relative Strength Index

If you aren't sure what these indicators mean, your broker website of choice should have educational materials that guide you through each one. And, with a demo account, you can practice reading charts and pinpointing potentially advantageous entry/exit points.

What to Look for When Researching Stocks

At this point, you know where to gather research and which points are relevant to fundamental and technical analysis. So, you've likely compiled materials — perhaps you sit in front of a quarterly earnings report or a State of the Industry breakdown. But what do you do with the information therein? It's easy to get overwhelmed by the sheer amount of data that these documents contain. We'll show you how to do stock researchand which areas to focus on.

Common Analysis of the Industry

We've mentioned it before, but we'll highlight it again since it's so crucial: before you dive too deep into stocks, you need to make sure that the market sector is viable. You don't want to invest in a company in a dying industry, as it is likely that their stock will drop in value. And if you're planning to trade on short timeframes, you need to identify stocks that are priced low but are expected to enter a bull market.

First, familiarise yourself with market sectors — there are 11 outlined by the GICS.



After you've learned about the stock market sectors, you can follow our earlier tip about finding "State of the Market" reports. These are often quite lengthy, but you can head to the sections about innovations and trends, revenue reports, CAGR, geographical breakdown and market outlooks.

Look at the Company's Business Model

When you research a company for investment, it's important to look at more than just its products and services. You also need to take a look at the business model — in other words, how the company turns a profit.



Key Competitive Advantages

This area of astocks' research refers to whether a company can gain an edge over its competitors, usually in one of two ways: by offering cheaper goods or of higher quality. You may have heard this concept referred to as a "unique selling proposition".

There are many kinds of business models, but here's a glance at several popular ones:



You want to find companies with strong competitive advantages. Unfortunately, there's no simple "advantage" metric you can track on a chart. You'll have to read the company's USP, innovations and plans for the future, using that information to determine whether they offer a better service than their competitors. Thankfully, to make this decision a little easier, there are numerous investment analysts that provide thought pieces on the strength of publicly traded companies. Seeking Alpha is a great place to look!

Financial Strength

To determine a company's financial strength, you should analyse these areas.

- Income Statement. It states the company's operational results for a certain quarter or year. It records the funds flowing in and out of business during that specified time frame. You can view the income statement to find information like sales, gross profit, the cost of goods sold, taxes on income, net income, depreciation expenses, dividends per common share, earnings per share, etc.
- Balance Sheet. This sheet gives you a snapshot of the company's financial position, including its assets, liabilities and owners' equity.
- Cash Flow Statement. A cash flow statement shows how the company has managed its cash inflows and outflows, which gives you a good idea of the business's liquidity. You'll be able to see their cash at the beginning and end of the year, the cost of equipment purchased, bonds issued and the increase/decrease in accounts payable and receivable.

Management Research

Who's at the helm of a company can make a big difference in the stock price and future success. For instance, when Satya Nadella became the new CEO of Microsoft, he transformed the company into a cloud-first company. This transition established Microsoft as a major cloud computing vendor, and the share price has increased seven-fold since then.

Of course, not every new CEO will bring such great results to a company; you have to look at their business history and the general market sentiment towards the management shift. Keep in mind that when new management is brought on, the stock price will be highly volatile for a while.

Growth Analysis and Target Price

Stock prices generally rise as a company's earnings increase. So, it's important to pay attention to a company's projected earnings and, perhaps more importantly, whether it could achieve its previous projections. You can also view growth forecasts accompanied by target prices by Wall Street analysts.

Valuations

Valuation is the process of assigning value to a stock, which helps you determine whether the current price is high or low compared to the business' growth projections and current performance. The most common valuation method is by determining the price-to-earnings ratio, which we'll examine in a bit. Some other valuation methods include calculating the return on investment, pay-back period, internal rate of return and net present value.

How to Research a Stock Before You Buy: Ratios and Metrics to Examine

Here, we talk about the financial parameters of the stocks you're going to buy.

Earnings per Share (EPS)

To find Earnings per Share, you'll divide the company's net profit by the number of shares outstanding. The results indicate how much the company makes per share, and it's commonly used to indicate its corporate value.

It's worth knowing that EPS can be distorted by "extraordinary items", such as one-off transactions that bring in a huge profit or a huge loss caused by a natural disaster. Some analysts factor these items into their calculations.

Price-to-Earnings (P/E) Ratio

A price to earnings ratio is a stock valuation method for a company's current share price compared to its prior earnings per share— usually over a time frame of 12 months. In such a case, it would be called a 12-month trailing P/E ratio. You can also calculate the forward P/E by dividing the stock price by Wall street analysts' projected prices.

A high P/E (25+) indicates the company is quickly growing, but risks are higher. Slow-growing companies have a lower P/E, but it's often safer, even though earnings may be lower.

Price-to-Earnings-Growth (PEG) Ratio

To find this ratio, you'll divide the stock's price-to-earnings ratio by its earnings growth rate over a certain time period. A PEG of 1-2% a year is considered "normal".

Price-to-Book (P/B) Ratio

This calculation compares a company's market capitalisation to its book value. You can find it by dividing the share price by the book value per share (also referred to as the shareholder's equity per share). If the value is below 1.0, this indicates the stock is undervalued and may be a good buy.

Debt-to-EBITDA Ratio

First, understand that EBITDA stands for earnings before interest, taxes, depreciation and amortisation. So, to find the debt-to-EBITDA ratio, you'll divide the former by the latter. The results indicate the company's ability to pay off its debts: if the ratio is high, the debt load is too high. A ratio of 4.0 or above is typically considered a red flag.

Market Capitalisation

This refers to the company's total market value of all outstanding shares. This figure helps classify companies based on their cap level: large-cap companies have a market cap of $10B or more, mid-cap companies fall between $2B-$10B, and small-cap companies are $2B or less. Market capitalisation doesn't affect the share price — it's the other way around. However, it's useful for portfolio diversification; many investors prefer to split their shares across small-, mid- and large-cap companies.

Return on Equity (ROE)

To find ROE, you'll divide the company's net income by shareholder's equity. It's a profitability ratio and shows you how much a shareholder will receive back on their invested capital. An ROE of 15-20% is considered "good."

Net Profit Margin

The net profit margin is found by dividing a company's net profit by its revenue. This figure tells you which percentage of a company's income is actually profit. An appropriate net profit will vary from sector to sector, so make sure to research those! But, on average, a 20% net profit margin is considered "good".

Free Cash Flow

Free cash flow indicates how much cash a business generates after operating expenses and capital expenditures. This is a pretty complicated figure to calculate, as you'll need to gather data from multiple financial statements. You can follow the steps in this image, or, to save some time, you can find the metric on sites like Yahoo Finance.

Return on Assets

This is a financial ratio that measures how profitable a business is compared to its total assets. In other words, you can use the figure to determine how efficiently the company is using its assets to turn a profit. To find this ratio, you'll divide the net profit by total assets and multiply the results by 100. A ROA of over 5% is considered "good", while one over 20% is considered "excellent".

Conclusion

After reading this article, you'll be well on your way to making data-driven investment and trading decisions. Just make sure to gather information from multiple sources and, if possible, verify calculations yourself by manually reviewing income statements and cash flow sheets. It's time-consuming, but minimising losses is worth it.

[Libertex]

What Are Bollinger Bands, and How Are They Used in Trading?​

Bollinger Bands are commonly used as a tool in technical analysis in a range of financial markets, including forex. It helps understand the market conditions and identify the right moment for entry/exit, which is an essential skill for any trader.

Bollinger Bands demonstrate the prices and volatility over time of a given asset and are used in various trading strategies. The formula was first introduced in the 1980s by the American financial analyst John Bollinger. Since then, these statistical charts have been utilised to analyse market data, inform trading decisions and manage algorithmic trading.

What Are Bollinger Bands?

Bollinger Bands demonstrate on-chart market volatility. They are two intervals drawn to predict an asset's potential volatility range in relation to its moving average (MA). Normally, these price channels move across the chart symmetrically, but the distance between the bands varies significantly in certain market conditions.

Despite trends, market moves can be quite erratic. Technical analysis applies this method for anticipating a price action. Bollinger Bands appear as three bands, the middle being a simple moving average usually plotted in a 20-minute period.

The other two bands (upper and lower) are reactive to volatility shifts and indicate the two extremes. They are calculated around the simple moving average shown below. They are drawn first and then projected into a channel that will contain the expected price changes. For trading decisions, the important pieces of information derived from the bands include the entry and exit points for trades. And unless the price moves way beyond the price channel, traders can be fairly certain about what to expect.



Some prefer to connect the top or bottom of the price to determine the upper or lower extremes. And then, they extend parallel lines to illustrate the interval of price changes.

Bollinger Bands Calculation

Bollinger Bands can be used in five-minute charts, daily, hourly or monthly timeframes. Traders can adjust the following two parameters: period and standard deviations (StdDev).

The most used period is 20, but it can be modified to suit a specific need. As for the standard deviation, it's often positioned at 2.0. Consequently, Bollinger Bands denoted (20,2) indicate that the period and the standard deviation are set at 20 and 2, respectively. A high StdDev means that the price is less likely to reach either band. With a low StdDev, the price will possibly break out of the channel.

To calculate Bollinger Bands, you need to determine the Middle, Lower and Upper Bands separately. The formulas are as follows:

Middle Band = 20-day SMA (simple moving average)

Lower Band = 20-day SMA – (20-day standard deviation of price x 2)

Upper Band = 20-day SMA + (20-day standard deviation of price x 2)

How to Use Bollinger Bands

The simplest way to interpret and use Bollinger bands in trading strategies is to view the channel as a measure of the highness or lowness of the price relative to previous trades.

Let's quickly go over the kind of information traders can gauge from this indicator:

- The upper band demonstrates statistically higher prices.
- The lower band demonstrates the opposite.
- The bandwidth, i.e. difference between the upper and the lower Bollinger Bands, corresponds to market volatility.

As a volatility indicator, Bollinger Bands tighten or broaden around the price plot on the chart. As seen in the formula above, the price range widens as the standard deviation goes up and vice versa. For example, when the volatility of a given currency pair is low, the channel narrows down.

Bollinger Bands can also be used to confirm a trend and describe its direction and strength:

- During an upward trend, the price will continuously reach the upper band, meaning buying activity is strong.
- The trend is likely to head up when it is higher than the 20-period MA and when it goes beyond the upper band.
- In case the price is pulling back during an upward trend, it can mean two things. If it doesn't drop lower than the SMA and goes back up, it confirms the trend's strength. Alternatively, if it breaks the lower band, the uptrend is reversing.

By confirming the price action, Bollinger Bands provide traders with information on whether they should make buying or selling orders. For instance, a sell trade should be carried out at the upper band limit; entering a buy trade is advisable at the lower band limit. If a currency normally follows a range pattern, this method will be useful. However, mistakes can cause huge losses, such as when a breakout occurs.

As a technical analysis tool, Bollinger Bands offer reassurance when traders make certain decisions. When trading near the outer boundaries, they can be confident there's resistance (upper band) or support (bottom band). But Bollinger Bands alone are an insufficient signal as they simply offer a perspective on the price relative to historical volatility.

5 Bollinger Bands Trading Strategies You Show Know

Having determined what Bollinger Bands are, how to calculate them and what kind of information they provide, it's time to look at the strategies. We have five trading strategies to showcase this trading indicator in action.

Bollinger Band Squeeze

When the distance between Bollinger Bands reaches a six-month minimum, it's identified as a Squeeze. When the volatility is that low, traders should prepare for the eventual breakout. The biggest challenge is to figure out the direction of the breakout:

Assume other indicators, such as relative strength index (RSI) and a volume-based indicator, are heading up. At the same time, the price is going down or sideways. These are indications of a bullish market.

Alternatively, look for a bearish breakout when the price goes up and the indicators are flat or making a lower top.



When the price takes off in either direction after this period of consolidation, the price move is often large. If it breaks through the upper band, traders need to make buy orders and vice versa. A stop loss is preferably set on the opposite side of the breakout.

Double Bollinger Bands

First, you apply Bollinger Bands using the default parameters:

- Period: 20
- Deviations: 2

Next, the second set of Bollinger Bands should be set at slightly different settings:

- Period: 20
- Deviations: 1



These two BB indicators outline the following areas of the chart:

- A1-B1: Buy Zone
- B1-X: Neutral Zone
- X-B2: Neutral Zone
- B2-A2: Sell Zone

If the upward trend is strong, it's very likely the price will move up. Provided the candles will be closed at the topmost zone, traders should hold long trades or even enter new ones. If the downward trend is strong and the candles close in the lowest zone, traders are advised to keep short trades or open new ones.

Bollinger Bands Scalping

This strategy takes advantage of short-term volatility in the currency. It's well-suited for range-bound conditions accompanied by close to flat horizontal Bollinger Bands.

Here are the settings:

- Bollinger Bands are set at default parameters – 20,2
- The best timeframes for Bollinger Bands Scalping are 1-minute, 5-minute and 15-minute charts.
- The recommended trading sessions are London, New York and Tokyo.
- Lastly, traders could potentially yield maximum profits by trading currency pairs with low spreads, such as GBP/USD, EUR/USD, etc.



It may be advisable to enter a long trade if:

- The price stays above the middle band and is drawn to the upper band
- The bandwidth widens
- The price seems to be pushed higher.

The sell entry rules are the following:

- The price stays below the middle band and is drawn to the upper band
- The bandwidth widens
- The market sentiment points to the bearish movement, and the price is pressured further down.

Bollinger Bands & MACD Indicator

The strategy is set up to use the MACD indicator to define the trend and the Bollinger Bands to trigger the trade.

The settings for the MACD indicator are:

- Slow-moving average at 26
- Fast-moving average at 12
- 9-day EMA as the 'signal' line

The Bollinger Bands settings are:

- MA at 12
- StdDev at 2

The conditions for entering a long position are: MACD should be higher than the signal, zero lines and a buy stop order should be placed at the upper Bollinger Band.

The short trade is entered when MACD is lower than the signal, zero lines and the sell stop order is set at the lower Bollinger Band.



With this strategy, you receive accurate signals, avoid substantial streaks of losses, and have the opportunity to profit from consolidating and trending conditions. However, it requires you to constantly observe the charts.

Gimmee Bar

This trading strategy aims to trade on reversals downward from the top of a trading range or upward from its bottom.

When to enter a long trade:

- Prices are going down inside the trading range
- Prices are tagging the lower Bollinger Band
- The bar should close higher than open, which is the Gimmee bar
- A buy order should be placed one tick above the bar

When to enter a short trade:

- Prices are rising inside the trading range
- Prices are tagging the upper band
- The bar should close lower than it opened
- A sell order should be placed one tick below the bar



The strategy creator warns traders about certain scenarios with Gimmee bars. For example, you shouldn't trade when the bar overlaps or moves closer to the MA.

Trading with Bollinger Bands

All traders need to determine how the markets are moving. Bollinger Bands are applied to analyse trend strength, monitor when a reversal may be occurring and inform them if they should enter or exit the market to generate profit.

Even with certain limitations of Bollinger Bands strategies, the indicator has become one of the most useful and commonly used tools. Since the bandwidth contracts and widens with volatility, it helps traders take advantage of oversold and overbought conditions.

With this information in mind, you can find a strategy that suits your skills and preferences with Libertex. Please keep in mind that CFD trading is risky, even when you're using the best tools available. The platform is built by professionals, which ensures features and insights for every skill level. Start a free Demo account (https://libertex.com/blog/bollinger-bands#modal-demo) to learn more about selecting and placing trades and step up to more complex strategies.

[Libertex]

Libertex named “Best Crypto CFDs Broker” for 2022 by Ultimate Fintech

After much anticipation, the 2022 Ultimate Fintech awards winners have finally been announced. The prestigious publication that provides traders and businesses an industry benchmark of the best companies to trade and do business with, honoured the industry’s shining stars for their contribution to the sector over the last twelve months. And in yet another consecutive year, the online broker Libertex has once again taken gold, beating off the best in the business to be crowned as the “Best Crypto CFDs Broker” for 2022.

Commenting on the company’s latest success, Libertex CMO Marios Chailis had this to say: “Naturally we are absolutely thrilled to receive a second honour in as many years from this well-respected authority. In 2021, Ultimate Fintech named us the “Most Trusted Broker” and having spent so much time and effort positioning ourselves as one of the most reputable platforms on the market, that certainly meant a lot. Now, to be able to extend that reputation of trust to crypto CFDs, an asset class that has previously been plagued by numerous fees and commissions, is a culmination of our efforts for which we feel extremely proud! As the “Best Crypto CFDs Broker” of 2022, we pledge to continue making  crypto CFD trading even more exciting for all Libertex clients!”.

Libertex has not only increased its crypto CFDs range to include all the major currency pairs, it now boasts a sizable altcoin offering, too. If that wasn’t enough, the long-serving CFD broker has even made all crypto CFD purchases and sales completely commission free for its clients. The only thing that applies are the broker’s spreads. This means that Libertex users only pay the spread (difference between Bid and Ask prices) on all their digital asset CFDs transactions on the platform. Apart from massively increasing any potential gains they might make, these lucrative terms mean Libertex clients have more live funds available to trade. Undoubtedly such a fresh approach to the trading conditions of crypto CFDs distinguishes the broker by far from others in the field.

Best of all though, trading crypto via CFDs saves traders the hassle of actually owning physical coins, while simultaneously allowing leveraged trading and even making it easier to close out positions irrespective of market liquidity conditions. When trading crypto CFDs, Libertex clients are able to store their entire CFDs portfolio – from futures, Forex and commodities, right through to indices ETFs and corporate stocks – all in one easily accessible and simple to use app.


Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 70.8% of retail investor accounts lose money when trading CFDs with this provider. Tight spreads apply. Please check our spreads in the platform. Available for retail clients on the Libertex Trading Platform. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money. Cryptocurrency instruments are not available to retail clients in the UK.

[Libertex]

What Is a Carry Trade?

The term carry trade originates from the financial concept based on profiting from holding (i.e., carrying) an asset. More technically, it's considered a type of interest arbitrage.

The strategy first caught traders' attention in the 1990s. At the time, it was especially popular with hedge funds. Investors noticed big potential interest rate differences between countries like the US, Japan and Australia, where they could reach an impressive 5%. Even now, carry trades remain a widely used strategy, so it makes sense to learn how to utilise it to your advantage.

What Is a Carry Trade?

A carry trade is a straightforward strategy. It's a method of gaining profits through a high-interest currency against a low-interest one. For example, US dollars are considered high interest because the US pays a high interest rate on its bonds, whereas the Bank of Japan keeps the interest rates low.

When an investor holds a trade for an extended period, the interest accumulates for every day the asset is held. Of course, this is profitable when done in the interest-positive direction. Using the examples of high- and low-interest currencies above, a trader can benefit from borrowing JPY to buy USD.

The difference between the rates can often be substantial, especially if you invest a large amount or apply a multiplier. Thus, the potential for big profits makes it one of the most popular trading strategies.

Understanding How Positive Carry Trades Work

A positive carry trade on a high-yielding currency can result in a win if the exchange rate doesn't move or changes to your advantage. However, the opposite scenario can cause large losses. For example, carrying trade in large volumes can produce a dramatic depreciation. The interest gained every single day can offset the losses from the change. But it's debatable whether it'll cover the loss entirely. Therefore, carry trading can be treated as an additional form of income.

The Australian dollar has a 4.5% interest rate, and the New Zealand dollar's is 2.75%. If you buy or go long on the AUD/NZD, you're entering a carry trade. The 1.75% difference will be paid daily, as long as you have that trade open on the market. This seemingly small amount adds up over time.

Apply proper risk management in forex. The best and most popular currencies are often associated with high volatility. So, instead of being tempted to gain as much interest as possible, you should assess supportive fundamentals and market sentiment.

Advantages and Disadvantages of Carry Trade in Forex



A currency carry trade, like most trading strategies, comes with appealing aspects as well as certain drawbacks. Here are the main pros and cons to consider before adopting this trading tactic.



These reasons make carry trading suitable for those who can accept the high-risk, high-reward strategies. Bear in mind that the appetite for big profits should never be the driving force for your actions. Treat carry trading as an additional method of taking advantage of the market.

Yen Carry Trade Examples

Let's say a trader wants to benefit from the interest rate of 0.5% in Japan, whereas it is 4% in the US. They expect to gain profits from the difference between them, which is 3.5%. At the time of the trade, the exchange rate is 107 yen per dollar, and the trade volume is 0.5 million yen:

0.5 million yen / 107 = $4,673

The 4% rate on the dollar will result in an annual balance of:

$4,673* 1.04% = $4,856

At the same time, the amount of yen owed will be:

0.5 million yen * 1.005 = 0.503 million yen, which is $4,701

The profit will amount to the difference between the amounts earned and owed:

$4,856 - $4,701= $155

If the exchange rate changes against the yen, the profits may grow bigger. If it moves in the opposite direction, the profits may decrease or even turn into losses.

The calculated profits seem insignificant. However, the prospects seem much better if you use leverage. Now, let's assume a trader wants to invest the same amount for the same currency pair. Libertex offers leverage of up to 1:30, which considerably increases potential profits as well as potential risks.

- If the trader leaves that purchase for a year, here is what can happen:
- A trader misjudges an opportunity, and the position loses value. If the drop brings the account down, the trader closes the position with only the 0.5 million/$4,673 remaining on the account, i.e., the funds allocated for the margin.
- The exchange rate of the currencies doesn't change. There is no loss or gain on the value position, but the trader profits from the 3.5% interest (4% for the US dollar – 0.5% of the Japanese yen). This equals $4,907, which is more than the amount in the beginning! - This could not be possible without the leverage from the platform.
- The position gains value. On top of getting the $4,907 in interest, the trader may earn additional gains, which often exceed the interest earnings.

How to Use the Carry Trade Strategy for Trading CFDs

The nature and risks of trading CFDs are quite different. Some say that CFDs are suitable for people who are used to trading in volatile market conditions. However, when you use carry trade strategies on CFDs, it puts a different spin on this otherwise tough instrument.

What are CFDs?



A CFD (Contract for Difference) is a leveraged derivative financial product. The value of CFDs is derived from the value of another asset, which is considered an underlying asset (for example, currencies, stocks or commodities).

When you buy CFDs, you don't own the asset. Nevertheless, the potential success of your trade depends on how the underlying asset is valued. As a trader, you put trust into the contractor and its sound financial position over time.

How to Trade CFDs Using the Carry Trade Strategy

Regardless of how you trade CFDs, you expect to receive profits from the positive difference between the closing value and the opening value. When you carry trade CFDs, your income partially depends on the increased value of the underlying asset, but you don't rely on the price changes to receive profit. CFDs are complex instruments, and, unfortunately, many investors lose money when trading CFDs. Therefore, you should always consider the risk when deciding if it's worth it.

CFDs can be traded on a variety of underlying assets, limited to what your CFD broker can access. Moreover, the possibilities continue to expand to a wider range of markets. If you buy CFDs on assets that pay out dividends, then you can combine the profits. Even if the interest rate doesn't yield profits, your chances for a long-term gain rise to a large extent.

Conclusion

Carry trading is a strategy that exhibits the potential for profits over time if you manage it accurately. The solid stream of income acts as a safety net. If everything works out as you expected, carry trading can be an additional income.

Libertex contains a hub of articles and guides that will help you navigate different trading strategies available for the money markets, including carry trades. You can find various ways of mitigating and managing certain risks, for example, exchange rate risk.

If you register a free Demo account on Libertex (https://libertex.com/blog/what-is-carry-trade#modal-demo), you can practice carry trading before fully committing to it. This is the best way to introduce yourself to a new strategy or trading in general. Whether you're just starting your trading journey or you want to further improve your skills, you can learn the essentials and apply them in practice on Libertex.