It’s not uncommon to see people labelling themselves as Forex traders, gold traders, or crypto investors, but by pigeon-holding yourself to one particular asset is a bad idea as it encourages limitation. Diversification, on the other hand, is desirable and an important part of investing, which comes from understanding high probability assets.
In this article, we are going to look at the unique features of the stock market, the Forex market, the commodities market, and the crypto market, and how we can put together a well-thought-out portfolio that performs consistently over many years to come.
What Is A high Probability Asset?
A high probability asset is one that has more chance of returning a profit than a loss. In investing, there are no guarantees or certainties. This is a concept that investors should be familiar with, although it is often not well practiced.
People regularly form an unhealthy attachment to an asset as they are 100% sure it will return a profit. Unfortunately, there is not such guarantee in investing, and this leads to some disastrous results (e.g., Tesla, gold, oil).
The correct approach is to have a portfolio with different asset type. That means the name of the asset should have no bearing on your decision to invest. And instead, put an analysis method in place to help you determine if this makes the high probability asset or not. A portfolio like this one will have a higher chance of returning a profit than loss.
This article is originated from the podcast “What You Need To Know To Profit From Each Market”, hosted by Kola Gbadmasi and Zaheer Anwari. Join us on iTunes or Spotify.
The Different Analytical Methods
Now, when it comes to analysis, there are three main ways to do this: you can use the fundamental analysis (Warren Buffet approach), the technical analysis (Richard Dennis approach), or combine them both together.
As you might know, we are huge fans of the Richard Dennis approach. Technical analysis, which is a flashy term for saying “using charts to make our decisions”, is remarkably simple to learn and execute. It also has a proven history of performance that goes back decades.
If you are not familiar with Richard Dennis, I highly recommend Way of the Turtle by Curtis Faith. This book is an excellent breakdown of how technical analysis can be used for amazing results.
If you are new to technical analysis, click here to complete the scorecard and we have a couple of free gifts for you. One of them is a PDF that breaks down our complete methodology for you. Like learning anything new, it’s just a case of familiarity and we are certain that you will master it at no time.
A Word On Trends
Regardless of which market you were looking at, markets move in only three ways: bull (moving up), bear (moving down), or consolidation (moving sideways).
When markets are consolidating, we stand aside as these are low probability environments and this is when there’s more chance for loss than profit. The two most profitable environments are bullish and bearish markets, and they are known as trending markets.
We are trend followers, in other words, we look for trending assets. This means that we look for assets that are either moving up or down over a sustained period of time (12 to 24 months).
Using fashion as an example, fashion trends last months to years. Styles that come and go quickly are called fads and are often quickly forgotten about. You want to bring the same logic to investing. This is why we should invest long term and stay away from those get-rich-quick scheme and day trading. (Read: How to Create Long-Term Wealth)
Remember, if you are desperate enough to buy into a get-rich-quick scheme, there will be someone out there who is ready to sell it to you. And if it does not work out, you need to be accountable for your own choices. It’s always easier to blame someone else rather than look at yourself.
Unfortunately, the internet has cluttered the space with a lot of misleading information and we hope these podcasts are held open to bring some clarity and truth. In today’s world, you are responsible for becoming financially literate and we are on hand to help point you in the right direction.
We can’t stress this enough: STAY AWAY from day trading and low probability sideways markets. Always play the long game and focus on high probability trending markets. Those that are moving up or down over months and years are the high probability assets we want to invest in.
Things To Know About The Markets For Building Your Portfolio
There are four types of markets: the stock market, the Forex market, the commodities market, and the cryptocurrency market. We are going to explain how we can apply trends to these markets, and why you ought to embrace all markets if you want a portfolio that performs for you for years to come.
Ultimately, these markets are similar in the way they move, but do they differ? Knowing the differences is essential if your portfolio is to perform consistently well.
The stock, commodities market and Forex markets are mature markets. They’ve been around for a very long time and they should really make the foundation of your portfolio, particularly the stock market.
Commodities are more volatile than stocks, and the currency market typically trends from 9 to 12 months.
However, the crypto market is the newest of them all and is hence still maturing. You may even argue that it’s an immature market given the number of scams that are going on. But having said that, a lot of innovation is taking place. So, this is a market that is here to stay and it cannot be ignored.
I think the best place to start with is the stock market, because this is a very mature market. It has been around for hundreds of years. The New York Stock Exchange, for example, was founded in 1792, and the London Stock Exchange was founded in 1801.
Stock markets make up a bulk of our portfolio. There’s always a high probability opportunity to select from these thousands of stocks. Even when the overall market is bearish, you will still find some hidden gems rising and moving up in the market.
For example, from January 2022, the S&P declined 14%, but there are stocks in this period that have been moving up: McKesson has moved up 21% and AbbVie is up 16%.
You may or may not have heard of these stocks before, but that’s the beautiful thing about investing in stocks. You don’t need to hear about the stocks before, you just need to have a strong, robust scanner system that will help you find these hidden gems, which our proprietary scanning tools allow us to do.
Stock market can move down very quickly. So, although it may take years for the market to move up, it may only take a few weeks or months for it to drop 15%. And that’s the case with the bear market in 2008 – we had a very deep decline and the market moved down fairly quick.
That being said, the market moves to the upside for the majority of the time. It moves up very slowly over sustained period of time. You will see profits by holding onto positions for a longer term, which is the power and effect of compounding.
Now, when the market is bearish, we can still use investment accounts that allow us to short the market. So, when a market is declining, it’s not actually something that we need to be too concerned about because we can just reverse our approach. In the UK, we can use CFD accounts or a spread betting account, which is tax free.
When the market is going up, we go long (we buy into stocks), and when the market is declining, we go short (we reverse our stocks). The direction of the market is actually secondary, what is primary is making sure that you are on the right side of the market.
And since, as we mentioned earlier, the market moves down quicker than it moves up, we will in fact accumulate profits a lot faster when we short the market.
And another important question to ask yourselves is this: when the stock market goes sideways or bearish, where does the money go? As investors, we need to look across all markets because when the money leaves one market, it often flows into another one.
The commodity market is another mature market that has been around for decades. There is a decent array of assets available. One of the challenges, however, of investing in commodities is that, price movement can be fundamentally or geopolitically driven.
This can bring an element of volatility. Certainly, over the long term, there could be a direction, but we cannot ignore the unpredictability we face in dealing with commodities. Using this very sad situation in Ukraine as an example, the price of oil has increased rapidly in just a number of days.
Commodities can also trend or move sideways for a long period of time. Gold is a good example of that. From 2001 to 2011, gold increased by around 650%. However, since 2011, gold has been trending sideways. As we mentioned earlier, you don’t want to be trading sideways markets because they’re low probability environments.
Sure, commodities can trend for decades, but they can also consolidate for an equally long periods of time without breaking. And that’s a big difference compared to stocks.
Nonetheless, we should always keep an eye on it because a breakout can happen at any moment and do not want to miss out a long-term position at the start of a trend.
As an investor, you want to consistently and continually scan and analyse the markets. Okay, you don’t need to be checking your computer every hour, but certainly on a weekly basis. You want to have some analysis process that looks across the commodities market in order to make sure that you aren’t missing a breakout.
The Forex market, also known as the foreign exchange market or the currency market, is a mature market as well. It has however unfairly gained a bad reputation over the years because of the internet selling it as a way to gain quick riches.
The Forex market is a powerful market that offers excellent opportunities. Although in recent years, the market has been shy of trend, it is not a market that you want to ignore.
When it trends, it moves quick and offers excellent high probability opportunities. A typical holding period can be somewhere from 9 to 12 months. Its natural movement is cyclic.
Also, currencies are paired. For example, the Euro is against the US dollar, and the Australian dollar is against Japanese Yen. This means that price movement – be it up and down – can often be the same in terms of speed and of trends.
Sometimes the pound is gaining strength against other currencies, sometimes it is weakening. As investors (not day traders!), we just want to be on the right side of the movement when a long-term trend is in progress.
Right now, the majority of traders in the Forex market are most likely going to be day traders who are trying to gain quick profits in that market. But please don’t fall for those traps. There’s no longevity in it. You may make a bit of money on the short term, but over the long term, it’ll just be a waste of time, a waste of money, and it can totally spiral out of control.
Stay away from day trading. Instead, look for long-term trends and embrace the power of compounding, whether that be in the foreign exchange market, the commodities market or the stock market.
Okay, so, I’m sure you are all very much aware of or are probably involved in the crypto market. The cryptocurrency space is the newest of all the markets and it is still maturing.
Indeed, given the number of scams you hear about, you may want to brush it aside and swear to never touch it. However, this technology is the future, and so this market is here to stay. It cannot be ignored. There are a lot of interesting progress and innovation that are taking place.
If you know how to do your due diligence, there are some real low cap gems with excellent upside potential to invest in. Look for projects that are very new, as it’s a really good way to go about creating a crypto portfolio.
At the start of 2021, we at Sublime Trading has got involved in Launchpads and IDOs. IDOs are Initial DEXS Offerings, which are an upgrade on ICOs, Initial Coin Offerings. Back in 2017 and 2018, there were a lot of ICOs coming out but sadly, many of them ended up being scams. IDOs are effectively an upgrade and are betted projects that are meeting a need on the blockchain.
Now, if you get a membership to a credible Launchpad, then you can get in and see some mind-boggling returns. I mean a 100X or a 1000X is unbelievable. However, would we put all our capital into this? Absolutely not.
This goes back to what we said at the very beginning, which is, a well-thought-out portfolio requires being familiar with the unique features of each market, and then knowing when is the right time to invest. The movement in the cryptocurrency space is much quicker compared to the stock markets, and so you need to execute your investor skills in a much shorter cycle.
If you are a good stock investor, you can actually become a good crypto investor. The reason why a lot of people don’t have a good performing crypto portfolio is because they’re gambling. They have no clue and no plan.
However, if you are a good stock investor, you’ve already learnt about high probability stocks, entry points, risk management, exit management, compounding, etc., you can adapt those skills to the crypto space.
Move straight to the crypto space and deal with the speed and volatility of it as an amateur, that is how a lot of people end up getting burnt. You still need to have solid and sound investor skills for all markets.
Stay True To The Principles Of Good Investing
1) Have an analysis process in place
2) Select the high probability assets across all markets
3) Learn, understand and be aware of the unique features of each market
4) Do not label yourself or pigeon-hold yourself as a Forex Trader or a Crypto Trader, etc.
5) STAY AWAY FROM DAY TRADING AND GET-RICH-QUICK SCHEMES
6) Stay neutral and do not build unhealthy attachments to brand names
7) Look for long-term trends, bull or bear
8) Keep an eye on breakouts
9) Look across all assets when one market stops trending
Building a portfolio is really just a two-step process: first, you select high probability assets and second, you extract profit. This is an art that is very simple to learn, but the element of sophistication is often overlooked.
When you look for long-term trends and embrace compounding, the returns will be life changing and you will be able to maintain a lifestyle whilst growing wealth. The beauty of good investing is that you can adapt it around your lifestyle without compromising on time and profit.
You can still go to work, maintain your businesses, spend time with your loved ones, or keep hitting the gym whilst your money is growing handsomely in the background. It’s just a case of adapting the right processes and spending a few minutes each week managing your portfolio.
Stay neutral and do not develop attachments on your stocks or any brand names. The investor in you must be separate to the consumer in you. Just because you like Nike or gold does not mean that those assets offer better opportunities compared to Lululemon or wheat.
The aim of the game is to make consistent profit, and the best way to do that is to invest in the best-looking high probability stocks regardless of the brand or asset name.
Stocks will always offer the most opportunities each year, given the size and maturity on the market, but the performance of your portfolio can be boosted when any opportunities present themselves in commodities, Forex and cryptos.
When one market stops trending, money will flow into another market, and this is why you should look across all assets and markets.
And last but not least, do not give up and fall prey to get-rich-quick schemes, the rewards of learning to do this correctly are life changing, not just for you, but for your loved one. Let’s head towards a brighter future by embracing long-term investing and becoming financially literate.