Knowable Risk Management

Hello traders! This week’s newsletter comes to you from sunny southern California, where the weather is 75 degrees and I’m teaching a futures class. My sympathies to all of my east coast friends who are suffering through a terrible cold and snow snap! Wish you were here! On that note, this week we’ll discuss some things to avoid in your trading, much like avoiding disastrous weather is part of my plan…

Now, when we talk about avoiding risks in the market place, it really comes down to the knowable things that we can avoid. Tweet: When we talk about avoiding risks in the market place, it really comes down to the knowable things that we can avoid. We can’t really avoid the unknowables, right? At least, we can’t avoid them on purpose-otherwise these would be knowables! So, what in the world are we really talking about?

Free Trading WorkshopSpecifically, I’m talking about things on the economic calendar. Much like looking at a long-term weather forecast can help you plan your travel and trips, your economic calendar can help you plan your trades. Do you like snow and cold? Then Buffalo, New York in February and March are good annual travel plans. Do you prefer warmth and humidity? Then Miami, Florida in August would be great!  In the world of trading, I prefer to avoid extremely volatile times, especially when they are accompanied by thin/illiquid trading levels. The question is, when and where do these times happen?

Economic Forecast

Much like looking at the forecast before planning a last-minute trip, I’ll check an economic calendar or two as I prepare for the upcoming trading week. There are numerous economic calendars that exist, some are provided by your broker, others on forex specific sites and many others on news/trading sites. My personal favorite is found on, though the reasons I like this one are too numerous and in-depth to cover here. For a quick recap of the more significant economic announcements coming out each week, check out Power Trading Radio host, Merlin Rothfeld’s Chart of the Week.

At the time of this writing (4:30 pm on Tuesday, March 6), the major news events coming out over the next couple of days include an interest rate decision by the Canadian central bank, an interest rate decision by the European central bank, an interest rate decision by the Japanese central bank, non-farm payrolls and the unemployment rate for the United States. That is a lot of potentially significant storms – uh, economic events – that could move and shake the currency markets over the next few days! So how are we going to protect ourselves from these knowables?

Ways to minimize your trading risk

Whenever there is an interest rate decision for a currency by its central bank, my trading plan’s risk management rules state that I must be OUT of ANY currency pair that includes that currency. So, an hour or two BEFORE the Canadian central bank releases its rate decision, no Canadian dollar trades for me. The main reasons are as follows:

  1. Usually there is little directional movement right before the decision is released
  2. The liquidity dries up, the spread gets a bit wide right before the release
  3. If I’m in a trade when the release happens my stop loss might not be filled exactly where I want, there may be some slippage

Since I can’t quantify my risk to the pip, I’m not interested in trading.

Weekend Market Movement

Another potential storm in our trading can happen over the weekend. Most weekends there isn’t a lot of movement from Friday’s close to Sunday’s open, a few pips of a gap here and there but nothing earth shattering. I said, MOST weekends. Personally, I want to be out of all forex trades before the weekend, that way I never worry about a potential storm or large gap going against me. Some traders prefer to stay in their trades over the weekend, that’s fine for them. However, if you do choose to hold trades over the weekends, there are some storms that you should consider avoiding.

On these economic calendars, there are certain groups of bankers and economists who get together and make big decisions and recommendations on economic stuff. Some of these groups include the IMF (International Monetary Fund), World Bank and the Group of 7, 8, etc. When they get together, oftentimes their announcements and recommendations that come out over the weekend can cause significant gaps. Another instance where I’m not interested in holding onto trades where I can’t quantify my risk accurately.

So how, specifically, can we add some of these knowable events to our trading plans?

First of all, don’t be in trades of an individual currency when it has very important news coming out! That being said, because economic events happen almost constantly so it will be difficult to be out of every position for every economic event. I pay the most attention to the large events like the previously stated interest rate decisions, unemployment rates, and GDP announcements.

You could also have a rule that states that you will exit all trades before the weekend close, therefore eliminating all gap risk every single weekend. Or, you could choose to hold over the weekends, accepting the gap risk but not holding when the mentioned groups have their meetings. Alternatively, you could hold over every weekend, hoping for the best. Let me know how that works out…

Until next time, hope you avoid the knowable storms!

Rick Wright –

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Have You Considered Preferred Stocks?

We’ve written a few times before about U.S. preferred stocks. These are different from the stocks that make up what we usually think of as the ‘stock market’. The stock market is made up of ‘common stocks’. Each of the two kinds of stocks has its place, and you might very well want to invest some money in both. With common stocks near all-time highs, it is important to consider investment alternatives, as you may not want to commit more money to the stock market at these nosebleed levels.

The ‘preferred’ in ‘preferred stock’ refers to the fact that preferred shareholders have certain rights to the company’s assets, and these obligations must be satisfied before the common shareholders can receive any money.

Free Trading WorkshopPreferred shares (or ‘preferreds’) are a sort of hybrid between common stocks and bonds. Like common stocks, they are an equity stake in the company. Preferred shareholders are part owners of the company – they are not creditors, as bondholders are. But preferreds are like bonds in other ways. They do have a set face amount, which is called the issue price, call price or liquidation preference. They also have a fixed payment rate, like a bond’s interest rate. In the case of preferreds, this fixed payment is not called interest, it is called a dividend.  The rate that a preferred stock pays in dividends is usually part of the name of the preferred stock. For example: DDR Corp 6.375% Class A.

This is a preferred stock issued by DDR Corp. The company pays dividends on this stock at the rate of 6.375% of the face value per year. ‘Class A’ refers to the fact that a company may have issued several different series of preferred stocks over the years, with different dividend rates. There might be a Class B, Class C, etc. This is not a recommendation, just an example.

The pros and cons of investing in preferred stocks.

There are a few things about preferred stocks that might make them attractive to you: Tweet: There are a few things about preferred stocks that might make them attractive to you.

  • They always pay substantial dividends, that are higher than the interest the same company would pay on its bonds, and usually higher than the dividend yield on its common stock.
  • They are higher in the capital structure than common stocks, so in case of trouble they are safer than common stock (although they could still become worthless if the company were to go bankrupt, if there was no money left after paying creditors and bondholders).
  • Their prices are not nearly as volatile as common stocks.
  • The dividend income may be a ‘qualified’ dividend for tax purposes. If so, in the U.S. the preferred dividends are taxed at long-term capital gains rates of 15% or 20%, rather than at full ordinary income tax rates of up to 37% as bond interest or bank interest would be.
  • Because their face amount is small (almost always $25 per share), it is easy to create a diversified portfolio of preferred stocks from several different issuers, even with a small portfolio.

The high cash flow returns from preferred stocks do come with some downsides – there is a reason their yields are always higher than that of the same company’s bonds or common stocks:

  • A preferred share is a right to a fixed number of dollars of the company’s equity, not a percentage of its equity like common stock. The price of the company’s common stock can go up over time as the company’s net worth grows. Preferred stock prices do not go up in this way, no matter how successful the company is. You own them purely for the cash flow, not for any hope of appreciation.
  • Preferred stock dividends can be suspended if the company’s cash flow doesn’t support them. Bond interest payments cannot. It is easy to check whether a company has ever missed any preferred dividend payments. Many companies have never missed a payment in decades, but we do need to do our homework.

If you would like to have some money in an investment that is more secure than common stock and pays better dividends. and has a higher return than the interest on cash or bonds, consider preferred stocks.

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How Mark-to-Market Accounting Election Affects You

What is Mark to Market (MTM)? A simple explanation would be that MTM is an accounting method that describes how a trader calculates their trading gains and losses, and how these gains and losses are reported on a trader’s annual income tax return. MTM refers to a year-end process where you mark all your open positions to market prices. Essentially, you are calculating the sale of all open positions at year-end using the closing price of the last day of trading in that year.

By default, securities and Section 1256 investors (Futures & Commodities) are stuck with capital-loss treatment, meaning they’re limited to a $3,000 net capital loss against ordinary income. The losses first offset capital gains in full without restriction. After the $3,000 loss limitation against other income is applied, the rest is carried over to the following tax years. This hurts traders’ ability to trade as their capital account is dwindled.  It can take years or even a lifetime to use up their capital loss carryovers. Tweet: It can take years or even a lifetime to use up capital loss carryovers.

Only those who qualify as a trader in securities status could elect MTM to report their trading gains and losses. Those who qualify as investors are disqualified from electing MTM.

The IRC section 475 MTM basically allows traders to convert gains and losses from the capital gain treatment to ordinary income loss treatment. The MTM essentially cancels the need to report wash sale adjustments and allows a trader to claim any amount of loss in the year it occurred. Individual traders must make the election by April 15 for the current year. Failure to file the election by the deadline will cause the trader the ability to claim losses as ordinary and they will be stuck with capital loss carryovers.

When to use mark-to-market election and when not to

Nuances & Misconceptions. There are many nuances and misconceptions about Section 475 MTM. For example, you’re entitled to have segregate investment positions that aren’t subject to Section 475 MTM treatment, meaning at year-end, you can defer unrealized gains on properly segregated investments. You can have both ordinary tax losses on business trading and deferral with lower long-term capital gains tax rates on segregated investment positions.

Another example would be that you can elect MTM for Equities only and not to include section 1256 contracts.  This way you get to keep the preferential 60/40 tax treatment that applies to section 1256 contracts while enjoying MTM on equities.

Making the MTM election should not be done automatically, you should consider your status of capital carry forward losses (CFL) and, current year gain/loss as well as your projected gain/loss moving forward. Making the wrong decision could become very costly to traders.

Let’s explore a few examples:

You have a current CFL of $70,000, your capital gains as of March are $80,000. Making the MTM election for the current year will allow you to only claim $3,000 of the CFL while paying ordinary income tax on $80,000. Clearly, this will be unfavorable to you. If you are interested in MTM then a better choice would be to form a passthrough entity in April and continue to trade via that entity. A newly formed entity has 75 days from its inception to elect MTM. The result would be that the 80K YTD gains will be offset by the 70K CFL, leaving you with only 10K of taxable capital gains. All gains/losses from April moving forward will be considered ordinary.

Here’s another scenario.

Free Trading WorkshopYou have a current CFL of $50,000, your capital losses as of March are $40,000. In this case you probably should make the MTM election, so you are not continuing to pile up more capital loss carryforwards. Electing MTM allows you to claim the full 40K in loss generated as of March. You could still choose to form a passthrough entity and since you have more flexibility with the timing of the MTM. This way, if you generate profits in the April-Dec time frame you can stick with the default cash accounting method allowing you to offset any gains generated via the entity with 50K CFL. If you continue to have losses, you can then use the MTM election.

Using up capital-loss carryovers is a challenge for many traders. Proper Section 475 MTM election planning and entities are the answer. It pays to think out the nuances carefully and not make a blanket decision to skip Section 475 as that can cost you big time!

In general, securities traders should usually elect Section 475 MTM unless they already have significant capital-loss carryovers. On the other hand, if a trader generates large new trading losses before April 17, he or she might prefer to elect Section 475 MTM for the year in question by that sole proprietor election date to have business ordinary-loss treatment retroactive to Jan. 1. The trader can form a new entity afterward to use capital gains treatment and get back on track with using up capital loss carryovers. Alternatively, the trader can revoke the Section 475 election in the subsequent tax year.

For more information,

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Trading & Investing: Whose a Mental Fit?

The day someone decides they are going to pursue trading, they are typically making that decision because of the potential financial prize. In other words, they are making that decision because of the perceived benefit, not thinking of the risk and work it takes to achieve the benefit, etc. After all, no one gets excited about risk and potential failure. What most people don’t understand, let alone consider is that they are about to step into a mine field of very simple yet sophisticated and strategic traps that have the potential to drain their bank account and their self confidence all in one.

Free Trading WorkshopWhen I look at the traders and investors who do well and those who don’t, there is a clear observation. The group of traders who focus on the prize alone tend to lose money and never achieve their goal. This, in turn, keeps them further and further away from living the life they choose to live. The group of new traders who focus on the traps and risk tend to succeed and reach their goal. As always, it’s one group providing income for the other, that’s trading.

In this article, we will go over a few key mental traits that will help determine whether you are likely to succeed at trading, or not. Tweet: Key mental traits that will help determine whether you are likely to succeed at trading, or not.

Discipline: This is a must. If you don’t have discipline in other parts of your life, don’t think you will magically have discipline when you start trading. In fact, trading will challenge your discipline more than you can imagine. From birth, we gravitate toward things that make us feel good and run from things that we are afraid of. In trading, you have to think the opposite if you want to succeed. What I mean is, we want to buy low and sell high. To buy low, when prices are cheap and at a demand level where they are likely to turn higher, you need to buy when everyone else has sold, after red candles and with down sloping indicators accompanied by bad news, and so on. The act of buying low and selling high is NOT comfortable for the human mind in the financial markets. Therefore, you must have the discipline to follow simple rules.

Profits and Losses: People love profits and don’t like losses. This often leads to people taking profits quickly when they have them and refusing to take losses because they don’t want to lose. This action is VERY common and leads to a short trading career. Successful traders take losses when their plan tells them to and they hold on for gains until they reach their target. In other words, they plan their trade and trade their plan. Losing is always part of your winning strategy.

Determination/Longevity/Position Size: You have likely heard of the person who spent lots of time digging for gold. They dug a deep whole and found nothing. Dug deeper and found nothing. Dug a little deeper and found nothing and then gave up. What they didn’t realize is that they were only 5 more feet away from the gold. Someone else came in and only had to dig five feet and the gold was sitting right there. Trading can be the same. You will be challenged. Trading is like a mirror. It reflects every emotional flaw you have, and Murphy’s Law exposes all your flaws very quickly in trading.

Personality traits that benefit a trader.

The journey to financial freedom with trading is a marathon, not a race so make sure you use small position size while you are learning. Don’t take on risk until your simulated trading proves that you have an edge that your competition doesn’t have. Then, begin your trading with as little position size as you can. Let your results dictate when you should increase that size. The problem you need to be aware of is typically, determination goes hand in hand with aggressive action. Don’t let the burning desire (determination) to reach the prize lead you to take on too much risk, too soon. Longevity is the key, and properly handling risk with position sizing and small losses is the key to longevity. Instead, channel your strong determination into energy (discipline) that allows you to follow your rules.

Some see trading as a safe beautiful garden with all its pretty flowers. Few astute market speculators realize that the pretty garden is really a mine field with deceptive traps designed to do one thing, transfer their account into a more seasoned trader’s account. There are other traps in the mine field that separate the successful from the unsuccessful and I will cover those in time.

Live the life you choose.

Sam Seiden –

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Bitcoin analysis for March 12, 2018


Bitcoin (BTC) has been trading upwards. The price tested the level of $9.834. This week, People’s Bank of China (PBOC) Governor Zhou Xiaochuan spoke about both public and privately issued cryptocurrencies. Zhou details that the central bank dislikes “speculative cryptocurrency products” and the bank does not officially recognize digital currencies like bitcoin. Further Zhou explains the bank is monitoring projects like bitcoin and initial coin offerings (ICO), and aims to ramp up regulatory actions.

Trading recommendations:

According to the 30M time – frame, I found that price is testing median line (resistance) of the upward channel, which is a sign taht buying might be exhausted. I also found a Fibonacci expansion 161.8% (resistance) at the price of $9.886, which is another strong resistance. My advice is to watch for potential selling opportunities. The dodnward targets are set at the price of $9.504 and at the price of $9.110.


$9.886 – Intraday resistance

$9.500– Intraday support

$9.500 – Objective target 1

$9.110 – Objective target 2

With InstaForex you can earn on cryptocurrency’s movements right now. Just open a deal in your MetaTrader4.

The material has been provided by InstaForex Company –