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Trading 101

Trading 101: 10 Essential Investment Rules For Rookies



As you saw in our Trading vs. Investing article, in several ways, value investing is the polar opposite of trading. That said, in other regards, the two different approaches are very close to each other. Following your investment rules with discipline, for example, is as important in investing as it is in trading. In short, objectivity, patience, dealing with emotions, and other “soft” skills are very important for both methods. The actual rules and best practices to follow, on the other hand, are usually unique for trading and investing.

Also read: 10 Essential Trading Rules for Rookies

As with trading, there are rules that are more important for beginners than they are later on in an investor’s career. In several ways, staying in the game is more important than your initial results, as with experience you will naturally evolve, find your comfort zone, and be able to focus on your edge. The following rules are addressing the most basic mistakes that rookies commit, while also focusing on the cornerstones of investing that will jump-start your career and boost your returns.

Let’s jump straight into it.

Good investing is simple, don’t complicate your analysis

This is probably the most important rule that should be taught on financial courses before anything else. Keep it simple! Buy great assets for a fair price. That sentence is the key to investing. Sophisticated models are often just tools for justifying a “gut” decision, or worse, convincing yourself that your initial decision was wrong. Don’t fall into that trap!

Think about it, what makes a great company for example? It has an edge over its competitors, has a solid and growing market where it sells its products, and has a history if innovation and flexibility. These simple rules are almost always enough to find investment candidates, and if the valuation is also favorable, you will have the margin of safety to act upon your analysis without taking on unnecessary risks.

Valuation matters in the long-run but it’s not a timing tool

One of the common mistakes of newbie investors, including your humble author himself, is that you will be looking for “the Holy Grail” measure that will help you decide whether or not a company or stock or a market is overvalued, undervalued, or fairly valued. The truth is that there are several measures that come close enough, but investing is far from being a valuation-only game.

This is especially true if you try to base your timing decisions on valuations. As Keynes once said, markets can stay irrational longer than you can stay solvent. The emphasis on timing is crucial, as valuation should be incorporated into your analysis, but don’t expect the market to turn higher just because the asset got undervalued, or crash because it’s overvalued. As an investor, you have to accept that even long-term price trends might be products of mass psychology, economic trends, government intervention, and so on. On the long run valuation drives returns, but short-term it says nothing about the direction of the market.

Start investing in businesses that you know

The competitive edge, the stable and growing market, and the history of good decisions seem like very easy filters for companies, but they are only easy if you know the business that you are dealing with. Otherwise, you might be basing your decisions on false assumptions.  Of course, this goes for all other forms of investments, from farming to antiques.

If the most successful investors stick to a few industries that they are familiar with, why would a beginner venture into unknown territories? Using your knowledge and interests can give you the edge in the beginning of your career.

Markets show the value of the last trade, not the “real” value of assets

Maybe the biggest fallacy, which is common even among financial professionals, is that they treat the price of an asset as the one and only truth out there, without thinking about the mechanics of markets.  That puts the “valuation” of assets into totally unrealistic heights near the top of bull markets and to insanely cheap levels at the bottom of bear markets.

For an individual investor these are great opportunities, but remember, on average investors will never be able to realize those prices. Why? Because if every owner of the given stock appeared on the market to buy or sell, the realized price would be way lower or higher than the quote that you see on your screen.

The tide of a bull market lifts all “ships” but a bear market hurts even the best companies

One of the most important lessons for an investor comes from the fundamental change in risk appetite between rising and falling markets. Bull markets tend to be long and a lot of times boring affairs for an investor, as valuations get richer and richer across the board, quietly reaching levels where it will be very hard to pick bargains. On the flipside, your holdings will deliver great returns, with relatively low volatility, a lot of times much more than you’d ever expected. Value these times and be patient until you notice the signs of change.

On the other hand, you have to know that when markets tank, even the best companies can suffer great losses. Sentiment turns bleak, and panicked investors run for the exits, often pushing valuations way below any reasonable level. If you are confident in your decisions you will hold on to your investments and even add to your holdings rather than dumping them on the market.

Be greedy when others are in panic and cautious in times of euphoria

Another rule that is attributed to Warren Buffett, but if you understand the previous rules it’s just a small logical step. That said, this small step is often the hardest, on market bottoms, everything looks gloomy, everyone thinks the world will end, and even as your analysis shows bargains all over the place, you will most likely hesitate to “pull the trigger”.

Conversely, near tops you will have plenty of excuses to ignore the warnings signs that pop up, as the economy will be great, investors will be piling into risk assets, and prices will seemingly keep on rising forever. Still, these times should be used to gradually lower your exposure to prepare for the inevitable sobering.

This time it’s not different

Panics and bubbles almost always give way to extreme opinions and baseless speculation, with a “new era of investments” or a “plateau of high valuations” on one side and “the collapse of the financial system” or the “end of the economy as we know it” on the other side. These theories help in justifying the irrational nature of markets, while also feeding the excess sentiment, but don’t be fooled, 99% of the times they will have nothing to do with the reality. Base your decisions on your analysis and common sense, rather than wild predictions and unfounded projections.

Successful investing is about patience, excitement shouldn’t be your goal

[ecko_annotated header=”Patience is Success” annotation=””]


If you are having lots of fun while investing you might be doing something wrong; too much exposure, leverage, too concentrated bets could all give you thrills, but usually at the cost of way too high risk. Most of the times, a good purchase is in segments that are totally forgotten, and considered “boring”. Think about it, what are the chances that you will find deeply undervalued assets in a hyped market?

Also, exciting market moves are characteristics of a bubble, and although bubbles are great to ride all the way up, a disciplined investor will likely exit them a bit early. But that’s not a bad thing, bubbles are only easy to trade in hindsight, and although you won’t sell at the exact top, that last 10% won’t make a huge difference if you have been participating in the trend since the start.

Patiently waiting for great opportunities and sitting out boring advances are crucial and underrated skills—work on them.

Sometimes doing nothing is the optimal strategy

This rule is closely related to the previous one, but it’s crucial to understand, especially in today’s environment, that most of the times investors don’t have to be active. The media, sell-side analysts, and your broker are all there to tell you otherwise and encourage you to trade. This often leads to investors mixing trading with value investing and losing perspective.

While it’s common to think that the next big turning point is close, and someone out there is just nailing it, the reality is that trends will usually go on much longer than anyone expects. If you are waiting for a boom or crash every month, then you should revise your expectations, even if once you will inevitably be right.

Buy assets that you would be happy to hold if the market was closed for years

A good purchase should be one for the long run, a good business or a good productive asset at a fair price shouldn’t be the function of market prices. Sure, if the price of your holding triples overnight (thanks to a takeover bid for example) it might be the good decision to cash out immediately, but in general, your investments should “work” without a constant market.

That, of course, means that apart from a liquid safety sum, you shouldn’t rely on your investments as a continuous source of income, rather a long-term source of wealth. This mindset will help you immensely both in your investment and portfolio decisions.

What’s next?

After these basic rules, we will take a look at the most reliable valuation measures that can help you decide what the fair price of an asset should be. That’s a crucial step towards successful investing, but don’t forget, the Holy Grail is not an algorithm, it’s common sense.

Previous article: Chart Patterns, Part 1

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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4.6 stars on average, based on 277 rated postsTrader and financial analyst, with 10 years of experience in the field. An expert in technical analysis and risk management, but also an avid practitioner of value investment and passive strategies, with a passion towards anything that is connected to the market.

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  1. Gabriel

    May 14, 2017 at 4:56 am

    Great guidance. When you favor value investing, it can be tempting to dip into trading as the markets go crazy on a daily basis. It is good to be reminded that patience is a great skill in itself.

  2. sjoenne

    May 21, 2017 at 10:07 pm

    Good guidance !
    What are your thoughts on Aragon (ANT) and SiaCoin(SC)??

    Would be great if there was a chatroom available inside

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Trading 101

Trading 101 and Beyond: The Head and Shoulders Pattern and Why You Should Never Ignore it



The “Head and Shoulders” pattern (H&S henceforth) is perhaps one of the most widely used and misused technical patterns out there. Figure 1 depicts an example of a H&S pattern (tops – white ellipses; neckline – bright blue trendline).

Figure 1. REGN Daily Chart

It is without a doubt the pattern’s name that makes people smirk when they hear market commentators referring to it. After all, why would anyone invest/trade their hard-earned money using a pattern that has the same name as the most popular anti-dandruff shampoo? I am personally never thrilled to discuss the pattern. Imagine advising a portfolio manager, who relies entirely on fundamental analysis, that they should immediately sell one of their favourite names because the stock has broken its “neckline”… Patterns such as the double/triple top seem to be never questioned, whereas the H&S pattern gets ridiculed left, right and center, even though their implications are not that much different.

The former takes into consideration that the same level has served as resistance on more than one occasion (i.e. market participants realize that a security is too “expensive” at a certain price and a horizontal resistance is formed). Double/triple tops have an implied target of the distance between the “resistance” level (marked by the double or triple top) and the interim low (the lowest level within the pattern) projected down from the interim low (see Figure 2; double top – violet horizontal trendline; interim low – bright blue horizontal trendline; target – yellow vertical line).

Figure 2. MRK Daily Chart.

Hypothetically, if the stock had bounced up one more time before moving lower, a H&S would have been observed (tops – white ellipses; neckline – bright blue trendline; target – yellow vertical line in Figure 3). The only difference between the two is the slight change in the implied target, which is simply dictated by the slope of the neckline. That is, had the neckline been flat, the target from the H&S would have been identical to the one obtained from the double top.

Figure 3. MRK Hypothetical Daily Chart

While double/triple tops seem to be understood by most market participants, the H&S pattern is often disregarded. In the next section, I discuss why, on the contrary, the pattern should never be ignored.

The H&S Pattern

A textbook H&S pattern occurs in an uptrend and has three peaks, with the middle one being the highest. The neckline connects the two interim lows (i.e. the lows on each side of the “head”) and is used as the trigger to sell. Similarly, an inverse H&S transpires in a downtrend and has three troughs, with the middle one being the lowest. The neckline connects the interim highs and is used as the trigger to initiate long positions. So what makes this pattern so important? Two things.

Note, at a first glance the two don’t have much to do with the pattern so just bear with me.

  1. Prices tend to trend, and the trend should be considered active until there have been definite signals that a reversal has occurred. Yes, this is one of the six tenets of Dow Theory. A quick glance at S&P 500’s monthly chart reveals that the tenet could very well hold true (Figure 4). With the exception of 2016, the index always appeared to trend for extended periods. That is, the index was either posting higher highs and higher lows (uptrend) or lower highs and lower lows (downtrend) until eventually reversing. So how is this related to the H&S pattern? Let’s recall that a H&S pattern occurs in an uptrend and, by definition, includes one lower high – the right “shoulder”. So unless the neckline has a very steep slope, a break below it, in most cases, would lead to a lower low. A lower high (the right “shoulder”) and a lower low (the subsequent move below the neckline) implies a downtrend. But as the chart depicts, there were a total of only three periods where the index posted lower highs and lower lows (i.e. the dot-com bust, the “Great Recession”, and the sideways move in 2016). Therefore, the H&S pattern should not occur frequently on charts of “trending” securities, similar to that of S&P 500. Of course, unless prices are indeed reversing. We will return to this chart shortly to examine the pattern’s track record.

Figure 4. S&P 500 Monthly Chart

  1. Stock prices are significantly more volatile than their underlying drivers. This proposition has been a topic of discussion for many years, with Robert Schiller pointing out to this phenomenon in his papers “Do Stock Prices Move Too Much to be Justified by Subsequent Changes in Dividends” in 1980 and “The Volatility of Stock Market Prices” 7 years later. He concludes that stock prices deviate significantly more than the expected changes in real dividends. For more details on the subject, you can refer to Shiller’s texts. Market volatility, particularly since the “Great Recession”, is indicative of markets exhibiting bouts of extreme volatility, which cannot be explained by fundamental drivers. The “Flash Crashes” of 2010 and 2015, and the several late-day selloffs during the February and mid-March corrections in 2018 are only some of the examples of such volatility. In the context of H&S patterns, as market volatility exacerbates each move during a trend, a change in trend (i.e. a completed H&S pattern) should be followed by a swift move in the direction of the new trend.

All in all, the combined implication from the above two points is that market participants can profit tremendously by initiating positions at the onset of a new trend (i.e. when a trend reversal occurs) because 1) markets will move in the direction of the new trend for a prolonged period (as markets tend to trend), and 2) each move during the new trend will be of large magnitude (as markets are significantly more volatile than their underlying drivers).

Going back to the monthly S&P 500’s chart, it is evident that nearly all major trends had terminated with a H&S pattern (tops and bottoms – white ellipses; necklines – bright blue trendlines in Figure 5).

Figure 5. S&P 500 Monthly Chart

Of course, the pattern has also given false signals. Zooming in (Figure 6 –S&P 500 weekly chart), two such occasions catch the eye – the 2016 consolidation (already visible on the monthly chart, Figure 5) and earlier in 2010. On both occasions, the index broke below the neckline of a H&S pattern (neckline – yellow trendlines, break below necklines – yellow arrows) but did not subsequently trend in the opposite direction (i.e. a trend reversal did not lead to a prolonged movement in the opposite direction).

Figure 6. S&P 500 Weekly Chart

However, had one gone short upon both signals, they would have had an opportunity to reverse and go back long shortly after. Not surprisingly, it was inverse H&S patterns that gave clues that the topping patterns in Figure 6 are giving false signals (lows – bright blue ellipses; necklines – bright blue trendlines in Figure 7).

Figure 7. S&P 500 Weekly Chart (same period as in Figure 6 – 2009 to May 22, 2018)

Overall, using the pattern would have led to catching practically all major tops and bottoms over the last 20 years, and being whipsawed on two occasions. Not a bad track record given how quickly one could have been able to close and reverse in both 2010 and 2016.

Formation of the Pattern

So how exactly does a H&S pattern form? Imagine a prolonged uptrend where each subsequent rally takes prices to a new high and each subsequent pullback terminates at a higher level. As prices tend to trend (point #1 above), prices are expected to move way past fundamental values before they reverse. Market volatility (point #2) only exacerbates the extent of each move. It is only after prices have reached extreme levels, in relation to their true drivers, that they are unable to make a new high (yellow trendline in Figure 8).

Figure 8. Hypothetical Uptrend with One Lower High 

This is not a reversal as of yet. A reversal of a trend requires not only a lower high but also a lower low. For example, if the subsequent low terminates at a higher level, followed by a new high, the uptrend will be considered intact (Figure 9).

Figure 9. Hypothetical Uptrend Continuation

However, had the subsequent down-move terminated at a lower level, the security would be considered in a downtrend (Figure 10).

Figure 10. Hypothetical Uptrend Reversal

As seen in Figure 5, in most cases, once markets eventually reverse, they start trending in the opposite direction. That is, markets trend higher to reach extreme “expensive” readings before they reverse and trend downwards until they become extremely “cheap”.

Unfortunately, most of the technical analysis literature on the subject describes the pattern with a very stringent set of rules. Those rules, while aiming to make interpretation of the pattern objective, may lead to untimely entry & exit, and ultimately to unprofitable trading.

Traditional & Alternative Interpretations of the H&S Pattern

Traditional Interpretation #1: The H&S pattern is a reversal pattern (i.e. H&S can only point to falling prices and inverse H&S – to rising prices). This is perhaps one of the two greatest myths about the pattern. Most traditional texts discuss the action of prices breaking through the “head” of the pattern as simply one of the three ways to negate the pattern’s original reversal signal (the other two being -1) breaking back above the neckline, and 2) breaking above the right shoulder). This completely ignores the fact that a “failed” H&S pattern may often give a continuation signal that is more potent than a reversal signal generated by a “completed” H&S pattern. Given that markets trend for extended periods, there are various examples of “failed” H&S patterns pointing to a continuation of the ongoing trend before the eventual reversal takes place. Let’s look at a few examples. First, Figure 11 depicts Aphria’s (APH.TO) price action since mid- 2016. The stock formed a “tentative” H&S pattern from November 2016 to August 2017 (tops – white ellipses, neckline – green trendline). APH never broke below the neckline, and instead broke through the head in late 2017, giving one of its most potent buy signals, with the stock tripling over the next few months.

Figure 11. APH.TO Daily Chart

More recently, a client of mine requested a technical overview of New Flyer Industries (NFI.TO). Over the last 3 years, the stock had formed several tentative H&S patterns (tops – white ellipses; necklines – green trendlines in Figure 12). Similar to Aphria, the necklines were never broken, and the subsequent breaks above the “heads” of the pattern resulted in major buy signals.

Figure 12. NFI.TO 2-Day Chart

Going back to the S&P 500’s weekly chart, the index formed a tentative H&S pattern in 2012 (tops – white ellipses, neckline – green trendline in Figure 13), but instead of breaking the neckline, it broke the head and continued its advance.

Figure 13. S&P 500 Weekly Chart

Credit for this alternative interpretation goes to Fregal Walsh, who had published a paper on the subject in the 2015 IFTA Annual Journal.

Traditional Interpretation #2:  The first counter move after the pattern is completed should terminate at the neckline. In other words, after the break of the neckline and the initial move in the opposite direction of the prior trend, prices are expected to reverse and halt at the neckline before reversing again in the direction of the breakout (first counter move after pattern completion terminates at the neckline – yellow trendline in Figure 14).

Figure 14. Traditional Theory for First Counter-move after a H&S Completion

While this certainly is the case for most broken trendlines (i.e. support turns into resistance and vice versa), this is yet another stringent guideline in the context of the H&S pattern , which can certainly lead to missed opportunities. On one hand, prices may never retrace back to the neckline, meaning one may never enter in the direction of the breakout if they were to wait for a retest. On the other hand, prices would often not only retrace back to the neckline, but would also move back above/below it before eventually reversing in the direction of the breakout. Using the same monthly chart of S&P 500, it is evident that out of the 5 major H&S patterns, on 4 occasions (patterns 1, 2, 3 & 4 in Figure 15), the index never retested the neckline after breaking it. Notice that this was the case irrespective of the direction or the slope of the neckline.

Figure 15. S&P 500 Monthly Chart

In the last inverse H&S pattern (#5), the index reached the neckline but before bouncing higher it broke below it (Figure 16).

Figure 16. S&P 500 2-day Chart

I am certainly not implying that subsequent retests of the neckline are insignificant. Often enough, if the specific technical backdrop of a security warrants it, I use the neckline as either a potential entry or a negation level. Rather, I am suggesting that if one is certain of a trend reversal, they should not religiously wait for a retest of the neckline. Also, sometimes, the neckline could be broken back (i.e. the security moves back within the pattern) but this not necessarily mean that one should close all positions. Figure 17 shows one of many such examples, where a stock (ATD.B.TO) moved back above the neckline of the H&S pattern (green trendline) for a week before plummeting over the next few months.

Figure 17. ATD.B.TO Daily Chart


Traditional technical analysis theory suggests that one should wait for the neckline to be broken before initiating a trade. To a large degree, entering upon a close below/above the neckline is a reasonable entry strategy. After all, as we saw in Figures 11, 12 & 13, the pattern could very well be consolidating before breaking the “head” of the pattern and continuing its prior trend. In that case, a premature entry in the expectation that the neckline will be broken will result in an unprofitable trade. Thus, on a systematic basis (and without considering any other technical developments), waiting for a close beyond the neckline is advised (H&S tops – white ellipses;  neckline – blue trendline; target – vertical blue line; entry – blue arrow in Figure 18).

Figure 18. WMT Daily Chart

Unfortunately, this entry often leads to trades with a very unfavourable risk-reward profile, as by the time the neckline is broken on a closing basis the stock may have already moved significantly away from the top of the pattern (i.e. from the negation level which determines the risk of the trade). One way to tackle this is to wait for a corrective move in the opposite direction of the breakout before initiating a trade. This scenario was already covered in the previous section, where it was shown that the first corrective move after the break of the neckline may terminate 1) prior to retesting the neckline, 2) at the neckline, or 3) beyond the neckline (yellow lines in Figure 19 indicating possible scenarios for the first counter-move after the neckline is broken; eventual move in the direction of the breakdown – red line).

Figure 19. Possible Scenarios for First Counter-move after a H&S Completion

Having done extensive work on “price gaps”, I had found that if a gap transpires during the formation of the head or the right shoulder, or upon breaking out of the pattern (i.e. breaking the neckline), a probable scenario is that price will pull back to pre-gap levels, giving a K-Divergence signal. See my primer on gaps for more details on how to trade the gap phenomenon and my “K-Divergence” paper in the 2018 IFTA Annual Journal for details on the specific H&S trading application.


Naturally, one exit strategy is to close positions once the pattern reaches its implied target (i.e. the distance from the head to the neckline projected from the neckline break – see Figures 3 & 18 for examples). It is noteworthy that the suggested target is considered to be a “minimum” projection from the point of pattern completion. Simply looking at S&P 500’s monthly chart, it is evident that the minimum target was exceeded on every occasion (target – purple vertical lines in Figure 20).

Figure 20. S&P 500 Monthly Chart

Not surprisingly, as index’s constituents are more volatile than the index itself, they form the pattern much more frequently. When it comes to individual stocks, the minimum target can be used to close at least half of the position. WMT’s chart (Figure 18 above) shows just that – an S&P 500 constituent completing a H&S pattern (and meeting its minimum downside target in May) without the index completing a topping pattern during the same period.


Hopefully, the above discussion has at the very least made you just a little bit less skeptical about the infamous Head and Shoulders pattern. If you have any questions or if you would like to see a more thorough description/explanation for any of the sections in this article, feel free to do so in the comment section below.

Featured image courtesy of Shutterstock.

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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4.5 stars on average, based on 14 rated postsPublished author of technical research. In his work on price “gaps”, published in the 2018 International Federation of Technical Analysts’ Annual Journal, he developed a new technical tool for analyzing and trading the “gap” phenomenon – the “K-Divergence” ( Besides obtaining a Master in Financial Technical Analysis, he has completed a BBA and an MBA from the Schulich School of Business in Toronto and has completed all exams for the CFA, CMT and CFTe designations. Currently, providing research to investment management and financial advisory firms.

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Trading 101

Managing the Safety of Your Cryptocurrency



The fact that Coinbase and other companies have made it possible for nearly anyone to invest in cryptocurrencies is almost unilaterally a good thing, but it has led to many people buying cryptocurrencies without understanding the ecosystem. Bitcoin and other cryptocurrencies are only seen as risky investments because of their future worth, when there is also the risk of theft in the present.

Many investors focus their time on the idea of maximizing the returns on their investments, but protection against downside is equally important. We’ve all heard the oft-cited thought experiment where when you lose 50% of your investment, you now need 100% returns to get back to even. Avoiding negative returns is an equal priority to achieving high ones.

There are some steps a newbie cryptocurrency investor can take to make sure they are as protected as they can be. From wallets to basic security and diversification, the points below are a few quick changes you can make that will maximize your security.

The Basics

The two most basic steps are not keeping your money in an exchange wallet, and using a 2-factor authentication application. Many people new to the ecosystem will go with the path of least resistance, and that results in only having a password protecting their assets.

Exchanges are considered to be secure, but there have been many breaches in the past, so it is not impossible your funds could be compromised in the future. In the case of a hack, hopefully your exchange would cover you, but the best thing you can do is move your funds into an offline wallet (e.g. desktop, mobile, or hardware). By splitting your money off from the giant “honeypot” that exchanges serve as, the incentive for hackers is greatly reduced.

Additionally, by enabling 2-factor authentication and using an application, you mitigate for the risk that your password or phone number are compromised. This may sound crazy, but it is possible for a SIM card to get hijacked and a hacker to use your phone number to gain access to your funds. Authly and Google Authenticator make it possible to prevent that from happening.

Wallet Management

Once you have made sure your money is on a wallet, there are still risks you need to understand. At this point, the biggest risk is that you might forget the passcode or PIN to your wallet. Or you could lose the device with the private keys on it. Both of these situations can be handled easily by taking careful note of your memetic passcode and backing up your wallets onto a second device.

It might help to back up a bit for a second. Your private key is what verifies your ownership of a public key, which can be thought of as being similar to a bank account. When you moved your coins into an offline wallet, you “took ownership” of your private keys. This is an essential part of forming a decentralized network, because if you hadn’t done that, all the keys would still be managed by a centralized source. Another way to look at it as if you are making sure no one else knows your ATM code.

Something fewer people in the ecosystem realize is they are not assigned a single set of keys, but actually many pairs. These pairs of keys are generated from a “seed root”, which is a 16 word sequence of seemingly random words (see this list for more about this). By having this seed root, you are can prove you are the rightful owner of the cryptocurrency in question. It is considered to be the password of passwords, and should be guarded as such.

Knowing all of this, the best way for you to carry on with your security is to write down your 16-word seed root, file it away in a separate area from your wallet, and then back up the data onto an offline hard drive that can be recovered in the case of emergency. All of this may sound like a paranoid hassle now, but the small time investment will make the difference.

Protect Your Crypto

By learning to manage your money well, you will be able to increase the protection of your cryptocurrency. The final thing you should consider is spreading out your funds between several different wallets. There is always the risk that a company gets compromised, and by diversifying where you hold your securities, you can reduce the effect this may have.

Featured image courtesy of Shutterstock.

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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Trading 101

Trading 101: Managing Trading Emotions And The Fear of Missing Out (FOMO)



Fear of missing out

At any given moment of the day, there are thousands of markets waiting for you. All those charts are moving 24 hours a day, 5 days a week, and every tick means that you could make money.

Dealing with missed trades can be a major challenge for traders. Thinking of all of the money that never made its way to your trading account is tough, and it often leads traders to make some of the worst mistakes in the market.

Things FOMO traders say…

“I knew it!” – This usually comes from a trader who were following his planned set-up but ended up not taking the trade

“I could have made so much money today.” – Everyone would be a millionaire in hindsight.

“I waited so long for this trade.” – A trader with a trigger-happy finger who is stalking a market as it is setting up for a good trade.

“It still has room to go…” – A trader who gets in late after first being too scared to enter.

“I have a feeling…” – A trader who is not following a plan with strict rules and criteria for entry.

“I’ll just enter with a small position.” – A trader who is justifying breaking his rules.

Reasons for FOMO trading

The problem with trading is that it can often be perceived as an activity with no clear beginning or end. Basically, a trader is always in the middle of his game – a game that never stops. And when there is no beginning or end to it, you could – in theory – always enter a new trade that has the potential to make you money.

We could for example compare this to gambling at a casino. When people sit down to play blackjack, everyone understands when the game begins and when it ends. After the game is over, you can’t change anything anymore. You have either lost or you have won.

In trading, however, the game never really ends. Even after you have closed a trade, you can always get back in. Every tick in the market is a potential opportunity for you to make more profit. When we are thinking like this, missing a trade feels like leaving money on the table!

Entering early in fear of missing out

This is one of the most common situations among FOMO traders. They see a set-up falling into place in front of them, and then decide to enter their order early since the price is already moving with such strong momentum. They get worried that the price will continue to surge without them.

The problem with this is that you enter your order before the set-up satisfies all your trading rules, meaning your risk management and your planned risk:reward ratio will be completely off. What often happens later is that the price turns before it reaches your planned entry point, and you end up sitting in a losing trade that never even met your entry criteria in the first place.

Price moved too fast and you missed your entry

It happens that you have a near-perfect set-up with only one minor criteria on your trading plan not being satisfied. You then see price move strongly in the direction that you expected, while you are still sitting on the sidelines.

This is obviously painful, and it is exactly in situations like this that traders tend to commit FOMO trading like chasing the price or enter their next trade too early as in the previous example.

Instead, be patient and move when the time is right

This is the correct way to approach trading and the only way to fight FOMO. In order to do this successfully, you must have a trading plan and a checklist with all your entry criteria written down. Many active traders like to have this physically printed out on a piece of paper so that they always see it before entering a new trade.

When you have your trading rules written down, experience shows that violating them becomes much more difficult, and you will end up as a much happier and more successful trader!

Featured image from Pixabay.

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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4.3 stars on average, based on 34 rated postsFredrik Vold is an entrepreneur, financial writer, and technical analysis enthusiast. He has been working and traveling in Asia for several years, and is currently based out of Beijing, China. He closely follows stocks, forex and cryptocurrencies, and is always looking for the next great alternative investment opportunity.

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A part of CCN is Neutral and Unbiased and its team members have pledged to reject any form of advertisement or sponsorships from 3rd parties. We will always be neutral and we strive towards a fully unbiased view on all topics. Whenever an author has a conflicting interest, that should be clearly stated in the post itself with a disclaimer. If you suspect that one of our team members are biased, please notify me immediately at jonas.borchgrevink(at)