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Why are we so terrible at selling?

Fusion

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That’s a question that has dogged professional investors for years.

Picking investments or trades to buy is one thing but when it comes to selling and in particular timing a sale its a whole different ball game.


In retail trading circles, this can cause us to snatch at profits and to run losing positions beyond the point where our money management rules tell us we should have closed the trade, with predictable results. It's a clear form of loss aversion (a cognitive bias that we should all be aware of) that stops us from making the rational call to close the trade.

 

Success in trading comes from running profits and cutting losses to grow our capital base and the ability to do this repeatedly, over as long a period as we can manage.

 

Having trouble selling isn’t confined to private investors, however. It’s a real issue among professional traders and money managers, unlike the science of buying or investing, which has been scrutinised to death by academics, analysts, traders and other financial markets participants. The science (or should that be the art of selling or divesting) has had precious little coverage in comparison.

 

The widely respected Barons magazine recently highlighted the asymmetry in professional money managers' selling ability and why professional can vastly underperform the market benchmark.

 

A research paper written by a mixture of US academics and specialists who measure investment performance or “skill “ as they like to call it, looked at 4 million trades made by money managers between 2000 and 2016 across 800 portfolios that on average contained more than USD 570 million of assets (aka "smart money").

 

The researchers found clear evidence of skill when entering trades or positions on the money managers' part, but it was a completely different story when it came to exiting trades.

 

In fact, the research found that the money managers were frankly shockingly poor when it came to timing sales, selecting what to sell and when to sell it. The researchers estimated that this lack of selling ability cost the managers returns of 2% per annum. Whilst that might not sound like much in insolation, if we consider the effects of compounding over decades that underperformance becomes hugely significant.]


That point is further reinforced by research by asset managers at JP Morgan Chase in 2014.


The fund managers looked at the lifecycle of 3000 US stocks dating back to 1980 what they found was striking as the quotes below show.

 

Risk of permanent impairment

 

“Using a universe of Russell 3000 companies since 1980, roughly 40% of all stocks have suffered a permanent 70%+ decline from their peak value.”

 

Negative lifetime returns vs the broad market.

 

“The return on the median stock since its inception vs an investment in the Russell 3000 Index was -54%. Two-thirds of all stocks underperformed the Russell 3000 Index, and for 40% of all stocks, their absolute returns were negative.”

 

Trades have a finite life cycle, and for the vast majority of stocks (or choose your asset class), they will often have their moment in the sun, get too close to it, and then fall away, never to return to those levels again. Identifying trades at their peak or going past their “sell-by dates" couldn’t be more important to an investment portfolio's performance.

 

In light of this knowledge, what can we do?


As with all the biases and psychological blackspots in trading that we discuss in our articles knowing and acknowledging that they exist half of the battle because we can modify behaviour accordingly once we have done that.

 

As traders in cash-settled margin products, we have an advantage over the money managers and asset owners described above. Simply because we are used to going both directions, e.g. shorting, on asset classes such as currencies and metals.

 

We take a 360 degree or holistic approach to the markets and the skills we use to decide to short USDJPY or the US 500 index can also be used to determine when a long position has run its course. Conversely, the skill set we use to identify a trading opportunity on the long side should also tell us when a short position is running out of steam.


Most traders we know of at Fusion do not hold their trades for more than a couple of days. Due to the power of leverage, they often don't need to since the gains can be enormous (but so can the losses we leave to run far longer than any positive P&L).


At the same time, why not make use of take profits or trailing stops to make sure you can squeeze that little bit extra out of the profit on the trade or set your levels and stick to them, without checking your phone or platform every minute of the day as we all do.

 

By adapting our mindset and the trading skills that we developed around opening trades, we can become better sellers or closers of positions and that will help us get the most out of the trades we make and the positions we take.


You don't have to suffer the same fate as the rest of the market - don't be a bad seller!   

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Why You've Got a Bigger Advantage than Professionals
Fusion Markets

You’ll often hear in the media or from professional market participants that retail clients “shouldn’t try to compete with the professionals”.


Ignoring the condescension here for a moment (“the adults will take it from here”) it is my firm belief after ten years of trading that this isn’t always true.


Sure, any beginner will find it challenging at the beginning to trade successfully, but you can’t expect to play like Roger Federer after one match of tennis, can you?


Charlie Ellis, the man who oversaw the $24 billion Yale endowment fund in the US once, said “watch a pro football game and it's obvious the guys on the field are faster, stronger and more willing to bear and inflict more pain than you are. Surely you would say ‘I don’t want to play against those guys.”


But Charlie is wrong in a few ways.


Yes, professional traders and institutions have many advantages at their fingertips. They get news faster than you do. Their trades go more quickly than yours. They pay far less than you do. You get the picture.


But it’s not all doom and gloom. Here are a few reasons why:


Time


No, not in the sense that you have more actual time to trade than them.


You probably don’t.


You’ve probably got a full-time job.


You might have kids or ailing parents to look after.


Trading is like a side hustle for you.


BUT your time horizon is different from theirs.


You can hold a trade for days or weeks without a Manager yelling at you “Why the hell are you selling euros, you dummy… the market is going up”. You might enter a trade on gold and plan to hold it for months.


A professional fund manager or trader might not have that luxury due to quarterly reviews, investor pressure or whatever else.


Professional Risk


Professional or Career risk is one I picked up from famed value investor, Howard Marks. In his book “The Most Important Thing” (one of my favourite investing/trading books of all time – buy it!) he talks about how in the GFC there was so much pressure on investors to not look silly by calling the bottom of the market or “catching a falling knife”. No one wanted to be the guy in the office who was buying Citibank at $1 per share!


Similar to my time point above, you don’t have that problem.


You don’t have your colleagues questioning you why you’ve bought or sold some instrument. Or a boss that is screaming at you and putting you into an emotionally defensive position trying to justify your actions.


Will you lose your job for selling USDJPY? No.


Does a professional trader get fired for always missing targets or taking on too much risk? Yes.


You need to work out what you’re happy with in your trading goals and go for them.


It’s entirely up to you what you define as success. The Pros don’t have that luxury.


Benchmarks


Which brings me to my next point.


Most professional traders and investors have a benchmark. If you’re a fund manager you’ll send out your monthly report to your investors saying “here is how much we made/lost.. and here is what the benchmark did”.


If you miss that benchmark, get ready for investor withdrawals. As a professional, you’re judged on your performance. Simple as that. The more investors leave. The more you have to sell. The more you sell, the worse your performance!


What’s your benchmark? You get to set your own. Happy with 1% a month? Awesome.


What about $100 a month so you can buy your wife dinner? Happy days.


Or $5,000 a month so you can pay off your mortgage? Even better.


It comes back to autonomy and your desires. No one else decides that but you.


Fees and Expenses


Believe it or not, you do have a HUGE advantage here, especially if you’re trading with a low-cost broker (hello, Fusion!)


If you’re a professional investor/manager, you’ll often have a significant research team, a very fancy office with lovely views, staff bonuses, visits to various investment conferences etc.


Not to mention all that travel to see your clients and investors!


Putting that aside for a moment, if you choose a good broker, you’ll pay zero spread and a small commission that is not far off what the pros trade. They’ve got $100,000,000 though, you’ve got one thousand!


So, ignore the haters telling you to stay out of the market because its only for the big boys.


However, let me be clear.


I’m not saying trading is easy and (unlike some) and that you can soon retire on the beach. It’s not. Trading FX, in particular, is a highly challenging exercise.


But don’t just assume because there are so many professionals in this that you can’t succeed or you’ll never be good enough. You have to play your own game, and for me, that’s the best part. I set my own rules as to what I consider success. That’s something the pros will never get.  


If you’d like to start trading and use your advantages to outperform the pros, Sign Up to Fusion Markets and get your feet wet with our demo account. When you're ready start a live account to start making real-time trades.

Trading Strategies
Financial Markets
Retail vs Professional
Market Trends
24.02.2022
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Ethereum Trading: All You Need to Know
Fusion Markets

What is Ethereum?  


You may have heard of Ethereum being compared to Bitcoin, but Ethereum isn’t actually the digital currency itself. Instead, Ethereum is the technology that can run various financial services like payment systems, identity software, security programs, and of course, cryptocurrency trading.  

But how does this technology work?  

Like Bitcoin, Ethereum also uses blockchain technology, but there are quite a few differences on the deeper, more technical side. Blockchain technology is the foundation that supports all of Ethereum’s services.  

The biggest feature of Ethereum is that it is a programmable blockchain. This means that you’re free to use the technology according to your own needs. Whether you need it for payments, software, or even Bitcoin, you’re free to do that!  


Some of the world’s biggest companies are using blockchain in various ways, which shows how flexible the technology is. BMW, the renowned automaker, is using the Ethereum blockchain to track materials across its supply chain.  

De Beers, the biggest diamond mining company globally, is using the Ethereum blockchain to track diamonds from mining to selling. HSBC is also using the blockchain to conduct foreign exchange trades on its FX Everywhere platform.  

The blockchain can be used on just about any technology that requires information to be logged and verified.   

But if you’re here reading this article, you’re probably more interested in investing in cryptocurrency or buying cryptocurrencies. That would be ETH or Ether.  

  

What is the difference between Ether and Ethereum?  


If Ethereum is the technology, then Ether is the cryptocurrency that runs on that technology. However, for most people, “Ethereum” and “Ether” are used interchangeably to refer to the digital currency instead of the technology.  

The shorthand for Ether is ETH, and just like Bitcoin, ETH is a form of decentralised finance or “defi.”  

This means that the digital currency is not centrally regulated by one authority. Instead, all the computers on the blockchain do the work of validating each and every transaction on the network.  

Ether is up there with Bitcoin as one of the most highly traded cryptocurrencies globally, along with Ripple XRP and Litecoin and others available on Fusion Markets’ platforms.   

  

The benefits of trading Ethereum  


As with any digital currency, the biggest benefit of trading Ethereum is the lack of centralised regulation because of blockchain technology. This means that making fraudulent transactions on the network is extremely difficult and almost impossible.  

However, one thing that makes Ether different from Bitcoin is that the supply of Eth is limitless.  

Let’s break it down a little bit.  

The way Bitcoin works is people are constantly “mining” for Bitcoin. However, there is a predefined limit for the amount of Bitcoin that can ever be in circulation. Once all the available Bitcoin has been mined, that’s all the Bitcoin that will ever circulate.  

The Bitcoin mining rate slows down over time, so the prediction is that the last Bitcoin will be mined at around 2140. That’s over a hundred years from now, but it’s still a definite time that will arrive.  

For most people, the problem with the limited supply of Bitcoin is that it can create issues like high inflation levels in the future.  

The supply of Ether does not have the same limitations that Bitcoin has. Thus, it can be more stable in its fluctuations, and this effectively works as a hedge against extreme inflation.  

Ether is also less volatile, at least when compared to Bitcoin. So if you’re looking to invest or trade in cryptocurrencies, but you want to minimise the volatility, Ether may be right up your alley.  

  

Risk Management when it comes to Ethereum  


Despite the lower volatility levels of Ethereum, it is still a cryptocurrency. This means that unlike more traditional investments like stocks and forex, its price is still quite volatile in comparison.  

So, when trading or investing in Ethereum, it’s essential to employ risk management practices.  

First, only use as much money as you’re willing to lose. This is a basic precept for investing or trading in general, and it applies to Ethereum as well. The price of ETH in 2021 may be high, and it may look like it will continue to rise, but no one can really predict the next price movement.  

Second, diversify. Don’t put all your eggs in one basket. If you want to trade cryptocurrency, make sure to allocate your funds across multiple digital currencies. That way, if the price of one plummets, you still have your holdings in other cryptocurrencies to rely on.  

Third, do your own research. Don’t rely on social media gurus or finance forum posts that tell you when to buy or sell. Cryptocurrency is a fairly new concept, and it’s pretty much still in its infancy stages.   

If you’re investing in ETH, make sure that you understand it, how it works, and what the technology behind it is.  

A good investment is one where you believe in the product you’re investing in.   

While it’s true that no one can really predict how the price of the cryptocurrency will move, it’s much safer to put your money in investments that you’ve done research in instead of just blindly following what you see on social media.  

Finally, make sure to monitor your own physical and mental health while trading cryptocurrency. The markets run 24/7, and you don’t want to be looking at charts all day while ignoring your own well-being.   

Taking care of your mind and body allows you to make better, more rational trading decisions, dramatically reducing the risk.  

Risk management is a fundamental skill that any reasonable investor or trader should have. There are plenty of risks when it comes to ETH and cryptocurrency in general. Risk is unavoidable, so the best thing we can do is to manage and minimize it.  

  

The Future of Ethereum  


Despite cryptocurrency being a new concept and Ethereum being fairly more recent than Bitcoin, its rise in the charts shows that it’s here to stay.  

The main selling point of Ethereum is how its blockchain technology compares to Bitcoin, and with the number of people investing in or trading ETH, it’s clear that there is widespread acceptance and trust for ETH.  

Will ETH keep its place as one of the top cryptocurrencies in the future? The truth is, nobody knows. Governments are still only beginning to recognise and regulate cryptocurrencies, so the future of ETH is, as a whole, uncertain.  

But for some people, that uncertainty is what makes ETH such a good investment. Hopefully, this article has helped get you started on the basics of trading ETH. 

 


Ethereum Trading Cryptocurrency
Education
22.10.2021
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