financial theory

Investing based on emotions rarely leads to success in the markets. In this article, we will explore 5 emotional investment biases that can lead to poor decision making when investing.

1. Loss-aversion bias

Loss-aversion arises when investors feel more pain from a loss than pleasure from an equal gain. If Alice lost 10 percent on a bad trade, it would crush her emotionally. But if she made 10 percent on a good trade, she would only be mildly happy.

Investors like Alice will try to avoid losses at all costs. This can lead to the following poor investment decisions:

• Holding bad investments for too long to avoid realizing a loss.
• Not letting ‘winners run’ but instead banking small profits to avoid small losses.
• ‘Doubling down’ on poor investments that are already losing money.
• Taking excessive risk with money they already made from trading, but taking much less risk with the rest of their money.

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Bitcoin is well known for catching investors off-guard with its volatility. It can do nothing for months on end, then move fifteen percent in a day in the opposite direction you thought it would. While this can be a deterrent for some, it does imply that bitcoin behaves differently to other investments. In this article, we will examine bitcoin correlation with other assets over the last 5 years.

What is Correlation?

Two investments are correlated if they move in a similar way. They are uncorrelated if they do not.

Diversification works better when assets are uncorrelated or negatively correlated. If you own stocks and bonds, for example, bonds might go up when stocks go down.

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Are we in a stock market bubble? With the S&P 500 and the Nasdaq both hitting new all time highs recently, and the world economy slowing down as a result of governments forcing people and businesses into lockdown, this question will no doubt be on the minds of most investors right now.

What is a bubble?

A bubble is a time when asset prices rise way above their intrinsic values because investors are in a general state of euphoria. Bubbles usually ‘pop’ at the peak of this euphoria and then start to ‘deflate’.

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Markets are in a strange place right now. Are we about to have another crash like we had in March? Or will central banks keep pumping liquidity into the markets to keep the party going? Whatever happens, investors need a plan to manage drawdown risk in these uncertain times.

What is drawdown?

Drawdown is the maximum decline of an investment from its highest point (peak) to the next lowest point (trough). Using the Corona dump of 2020 as an example, we can see this for the S&P 500 below:

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Bitcoin and gold are volatile investments in the short term. But in the long term, they may provide a hedge against unlimited money printing. Both of these assets are scarce and finite commodities. Relative to fiat currency this gives them value.

In this article, we will compare the relative scarcity of bitcoin and gold using the Stock to Flow model.

What is the Stock to flow model?

The stock to flow (S2F) model can be used to measure the relative scarcity or abundance of finite commodities like gold or bitcoin.

• The “stock” is the total supply that has already been mined.
• The “flow” is how much new supply is mined each year.

The stock to flow ratio is given by the formula below:

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In these times of major market volatility it is more important than ever for traders to manage risk. In this article we will look at the ‘risk per trade’ method of trade position sizing.

What is trade position sizing?

Let’s say Bob wants to short Tesla but he doesn’t want to take too much risk. The first thing Bob needs to keep his risk management in check is a stop loss. This way if Tesla’s price keeps climbing, Bob would automatically close his short position to limit his loss.

If Bob has a tight stop loss on his Tesla short position, his loss would be smaller than if he has a wide stop loss (assuming the price reached both stop losses). But the loss on Bob’s trading account would also depend on the dollar value of his Tesla trade—this would be his trade position size.

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Fibonacci Retracement levels are a useful tool for many technical analysts. In this post, we will find out why.

The usual disclaimer: none of this is investment advice. Any examples or references used are just for information and illustration. 

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Portfolio Rebalancing can improve returns and lower the risks of investing over time. In this post, we will explore 3 things to keep in mind when rebalancing your portfolio.

The usual disclaimer: none of this is investment advice. Any examples or references used are just for information and illustration. 

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Diversification between assets classes can improve the risk-adjusted returns of your investment portfolio. In this article, we’ll see how portfolio diversification applies to bitcoin.

The usual disclaimer: none of this is investment advice. It’s just for information and illustration.

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In this series of Technical Analysis 101, we will explore one of the most commonly used technical trading indicators: the Relative Strength Index (RSI). 

The RSI is a momentum indicator that traders use to show whether an investment is approaching overbought (sell signal) or oversold (buy signal) territory.

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