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Forex Trading: If you Trade Forex Again, I’ll Slap You

forex-homemade-finance

Yes, quite rightly read:

If you’re really thinking about dealing with Forex and Forex trading again, I squeeze through your screen and it gets uncomfortable.

I mean it’s just fine!

content

  • Why does the subject of forex bring me to the white heat?
  • Forex trading is a zero-sum game
  • Forex has transaction costs and therefore a negative expected value
  • The amount of trades makes it
  • The leverage effect not only affects profit and loss but also transaction costs!
  • Do not believe me, believe research on the profitability of Forex and Daytradern
  • Bookmakers and the forex business
  • Comparison of forex with a game of chance
  • Conclusion: Currency trading is bullshit.
  • You think this post is good? Then support Homemade Finance!

Why does the subject of forex bring me to the white heat?

Very easily:

At regular intervals in my mailbox land emails in which readers point out that with Forex you could have made a fortune on this and that occasion, if only you had seized the opportunity. The currency trading quasi as our all financial Elysium. Sure, of course.

The most recent example is the collapse of the Mexican peso after the 2016 US election.

What you could have done ashes!

So maybe you should reserve a part (“play money”) of your depot to speculate in the currency markets?

I’m always a bit clueless about such news, trying to explain why I do not think that’s a good idea and also refer to my article on the difference between speculating and investing .

I have also in my transparency promise my opinion on the numerous Forexbuden and consorts out there already look.

Here I would like to go into depth once and for all. Ok, by now I’ve calmed down a bit, of course I will not break through the screen to you.

I’ll stay on my side (for today), so you can put the fork or the pepper spray away and we’ll take a close look at why you’d better concentrate on your investment portfolio rather than on wild currency speculation.

Forex trading is a zero-sum game

What is a zero-sum game, please?

Very easily:

A zero-sum game is a game in which one win is exactly the other loss.

Short classic example:

You and I throw a coin. If you win the number, you win by the head. The winner wins € 10 from the other.

If we throw our coin many times, how much profit / loss will you or I have statistically?

Zero.

That’s right, neither you nor I have made a permanent profit or loss on this game. You win half of the games and you lose the other half of the games, at least in the long run.

Expected value: 0.5 * 10 € – 0.5 * 10 € = 0

Sounds neutral or not? You can not win anything, but you can not lose anything. The same applies to the foreign exchange trade. Here also no value is generated but also not destroyed, but only pushed from A to B.

That’s an important difference to ETF and stocks!

For equities, we hold shares in companies that generate (added) value for people through their economic activities. One is speculation, the other investing.

One of the most important fine differences in the capital markets!

Forex has transaction costs and therefore a negative expected value

Ok, foreign exchange trading is a zero-sum game, unlike stocks.

What sounds so harmless at first has far-reaching consequences for Forextrader. After all, trading foreign exchange costs fees. Since the currency markets are damn liquid these are not particularly high but nevertheless existent.

On much traded currency pairs, the transaction costs are admittedly extremely low, but nevertheless, their expected value shifts into negative territory. If you still have some problems with the concept of the expected value, then please read the contribution to the expected value . It is extremely valuable for your understanding of the capital markets and also here in connection with foreign exchange trading. I guarantee you that the reading will definitely be worthwhile for you.

But back to the topic:

For example, transaction costs from 10 € to 100,000 € volume (also called a lot in the language of foreign exchange trading) per roundturn equal 0.01% . For a much traded currency pair such as EUR / USD, this magnitude is quite realistic. That does not sound like much, but there are two powerful reasons why the bottom line is going to be a hell of a lot more expensive for you.

The amount of trades makes it

Forex trading is a short-term matter. It’s not like opening a position and holding it for 20 years. Rather, it is closed again after a short time. Holding periods from a few hours to days are typical.

The effects of transaction costs (in the forex context, this is usually only referred to as spreads, ie the difference between the broker’s buying and selling price.) Other transaction costs are usually not borne by retail brokers).

    • Let’s assume a sporadic trader making a trade a week . So once buying and selling per week.

 

    • If he starts with a fixed starting amount of € 100,000 and converts it completely every time, then transaction costs cost him 0.01% each time. In other words, each time he receives an average of 99.99% of his money back.

 

  • Since Forex is designed as a zero-sum game, after 52 trades profit and loss, on average, the balance will probably be about the same.

After 52 trades the result is:

100,000 € * 0,9999 ^ 52 = 99,481.32 €

Of our start-up capital, € 100,000 – € 99,481.32 = € 518.68 has been cut in costs.

 

Based on our original € 100,000 seed capital, this equates to 0.51868% of costs incurred for one year of Forexgetrade. That may sound harmless considering the traded volume, but now comes the real trick.

The leverage effect not only affects profit and loss but also transaction costs!

So far, we have assumed that we are trading in equity of € 100,000 , but this is practically never the case with retail traders (fancy term for us small Otto normal traders).

Since the price fluctuations in currencies are usually very low, a decent leverage lever is used, so that a bit more movement in the matter comes.

Let’s assume that our equity is € 5,000 per € 100,000 trading volume.

This is similar to a lever of 1:20 , which is already more conservative in the Forex area. For comparison, some brokers sometimes allow leverage of 1: 400 , which is a similar wise idea as scratching a tiger on the corpse, but only incidentally.

Since the transaction costs always refer to the volume traded and of course not to the equity, after one year and 52 trades also 518.68 € costs incurred. Based on your 5,000 € at the beginning, the cost ratio is therefore 518.68 € / 5,000 € = 10.3736% !

Conclusion: Forex is an incredibly expensive proposition for traders and a very good deal for the broker. That’s also the simple reason why there are 2000 Forexbrokers out there feeling it’s getting bigger every day.

Do not believe me, believe research on the profitability of Forex and Daytradern

Of course you can tell me:

Nice bills Alex, but you can also substantiate your statements scientifically a bit further?

Fortunately, this is not all that difficult, because there are some studies and evidence on this topic, some even by brokers themselves.

An interesting scientific paper on this topic is ” Do Day Traders Rationally Learn About Their Ability? By Barber, Lee and Odean (2010).

Your results:

  • Of all Daytreads, 40% cease after the first month, 80% after one year, 87% after two years and 93% after five years. And no, they do not stop, because they have all become rich.
  • Only 1% of all traders really make a profit on cost.
  • Traders “learn” nothing from their actions, they remain more or less the same rational / irrational about their (usually short) trader career away. The alleged learning by loss is popular in many forex communities, but can not be proven in this investigation.

Another extremely interesting publication, this time on Forex market efficiency, comes from Shmilovici, Kahiri, Ben-Gal and Hauser (2008), entitled Measuring the Efficiency of the Intraday Forex Market with a Universal Data Compression Algorithm . The efficiency of various currency markets was checked by means of huge amounts of data. As a result, no inefficiencies could be demonstrated, which would have allowed a systematic profit after deducting transaction costs.

The statistics published by Broker are also very informative:

One of the largest brokers ever, Interactive Brokers, regularly publishes figures on the profitability of its Forexkunden . In regularity, the number of lossy accounts predominates.

Other zombies like FXCM or Interbank also (forcedly) publish numbers to their customers. Only 25% -30% of all accounts have been profitable there in recent years. The higher the volume of the account, the more the winner / loser ratio approaches 50:50 . Makes sense, too, because the currency trading is yes, as already more extensively quit, a zero-sum game and from a larger volume to reach at least just a neutral expectation.

One man’s meat is another man’s suffering.

Bookmakers and the forex business

Since I’m a big fan of irony, here are two fun facts:

1. There is a gigantic big market for sports betting, yes, quite right. This is called Betfair and is one of the big players in the betting business. That would not be worth mentioning in and of itself. But a few years ago, this company has expanded its product portfolio in an interesting direction. You now know for sure what’s coming: The company has actually targeted the currency trading. To do this, Betfair has launched a forex broker and consequently named Tradefair.

  1. Maybe you already know eToro, a relatively well known Forex- / Social-Tradingboutique from Israel. You probably will not know 888.com. This is simply a gambling site, ie an online casino. Interestingly, one co-founder of eToro is a former director of 888.com. Of course this is not forbidden and in my opinion not morally reprehensible. It would not necessarily generate confidence for me as a trader, if the guy who otherwise offers me gambling wants to make it possible to trade forex with joy.

Do not get me wrong, I have nothing per se against gambling, yes everyone should squander his money as he wants, but the fact that gambling companies also have forex on offer or there are connections between the two areas would me without knowing all the others be aware of the above-mentioned facts.

That simply dictates the reasonably healthy and hopefully critical common sense.

Comparison of forex with a game of chance

Since I am really nasty on it today, I would like to take the comparison with slot machines and foreign exchange trading to the extreme.

forex-comparative

In summary, the problem with Forex is that it can be broadly attributed to the Stock Market chapter, but it has NOTHING to do with equities or with the creation of added value! Unfortunately, some people do not seem to be directly aware of the difference.

Purpose of Shares: The procurement of capital for a company in order to make something meaningful and thus create economic added value. Purpose of Forex: Change currency from currency A to B. Economic value added does not matter here.

Conclusion: Currency trading is bullshit.

This is the most differentiated and most scientific statement that I can overcome on this topic. However you turn it, the whole thing is just a waste of time.

Of course, the internet is full of semi-scientific trading systems as well as detailed contributions and there are whole forums dealing with nothing else.

But please, leave me: It will not make you happy in the long run and cost you at least as much time as money if you get involved. Save yourself this. Better to use your energy and money to build a solid ETF portfolio over the long term rather than speculating in currencies, hoping for the quick buck.

The road to success is never as fast as we would sometimes wish and it is not easy at all. That’s the way the world is.

And do not forget: If you are ever thinking of trying your luck with Forex I might end up breaking through the screen.

It’s your turn: have you been concerned with currency trading? Did I miss one of two worth knowing points? And what do you think about the whole topic?

PS: Forex is poison for you and your financial independence, that’s my belief and my knowledge, based on scientific findings that I’ve collected and want to share with you here.

That’s why you will not find any affiliate links to any brokers in this post and on Homemade Finance, even if these clicks are worth over € 600 .

Yes, quite right.

Why do you think Forexbroker bloggers and website owners can pay so absurdly high commissions? Are you thinking or not? It is really important to me that both of us can trust in Homemade Finance here.

That’s why it goes without saying for me to forego this money and to advertise for nothing that I know that it will not help you with your goals. Promised.

 

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Stock Market Psychology: How to Think on the Stock Market

Does the saying seem familiar to you?

All head thing.

He is as unremarkable as he is on the stock market. Stock market psychology is perhaps the most underrated discipline in finance, and yet, in my opinion, it is the most important. Because only with the right mindset and knowledge about you and your innate weaknesses, you can have long-term success with stocks.

content

  • What is the Prospect Theory in Exchange Psychology?
  • Why you should not care, whether you make profit or loss
  • What I do
  • Why it’s good to be average on the stock market
  • Immediate Tip: Avoid News!
  • Summary
  • You think this post is good? Then support Homemade Finance!

What is the Prospect Theory in Exchange Psychology?

Let’s do a little experiment:

  1. You have 50,000 € and invest the money in a portfolio. You were incredibly lucky and after three months you made a big profit of € 40,000. Therefore, you stand at a total of 90,000 €. However, you are unsure what you should do best now, because many analysts believe the market will remain very volatile. Should you sell now or stay invested? How do you decide?
  2. Just like before, you have 50,000 € and invest in exactly the same portfolio. Only this time you have really unbelievable bad luck and lost 40.000 € in only 3 months. This leaves only $ 10,000 left over from your original assets and experts say the market will continue to be very volatile. Should you sell now or go all out and stay invested because the market is sure to recover? How do you decide?

How did you decide in each situation? If, in the first scenario, you choose to take your profits and go all-out and invest in the second scenario, you’re in the majority of investors.

The problem here is this is not rational.

It only makes sense to behave the same way in both situations, because logically, there is no difference between the two cases. However, humans tend to rate gains mentally differently than losses.

That’s in our nature. If we gain something, then we are immediately afraid it could be taken away from us (call evil tongues something like that also become adults) whereas we have the hope to make up for our losses somehow, if we lose something.

In other words, we are risk-averse when we are in the plus and are willing to take risks if there is a loss. However, as I said, this is not logically consistent, because you should actually stick to your risk attitude regardless of book profits / losses.

It is also empirically proven that investors realize profits rather than losses. Simple and simple, because humans evaluate them emotionally differently. To act rationally should not make any difference to you if you have just made a profit or a loss, your decision must always be consistent.

In stock market psychology, this phenomenon is explained by Prospect Theory , so to speak about expectation theory. They discovered the psychologists Kahneman and Tversky, for which there was also the Nobel Prize. I would like to mention here that above is a reduced example without probabilities of this theory.

Conclusion 1: Only investors who act rationally will succeed in the long run.

Why you should not care, whether you make profit or loss

hamock photo

So now we know that we should not let emotion guide us and make our decisions consistently. So what should we do? The answer is simple:

Nothing!

That’s right, nothing. If you have a broad and well diversified portfolio then it does not matter if you made a profit or a loss, the best you can do is nothing. Terribly comfortable right?

Let me explain this: Basically, all this profit-taking and loss-limiting is nothing but market-timing. And you should not time the market (11th bid), because that will bring you nothing in the long run. Incidentally, the commandment is not mine, but comes from scientific investigations. And since you can not see any advantage by timing tests.

Conclusion 2: Markettiming is useless and most likely results in an underperfomance. No marketing.

That means we know thanks to stock market psychology and science that we must behave consistently and not time the market. So what should we do?

What I do

With what I know about the stock market and the economy, I’ve hammered out a simple plan:

Over a period of 20-30 years, I invest a fixed monthly amount in a portfolio that reflects the state of the art. So the usual: Diversification, low cost, market wide, and so on. In this portfolio is stubbornly paid whether it storms on the stock market or the sun is shining. This is done ice cold, year after year. And in the past that was the plan that always worked. This is from the stock exchange psychological point of view already an advantage, because it calms one despite questionable explanatory power. That’s the way man is built.

For longer investment periods, the average cost effect (cost average) continues to be used with a constant, regular investment amount. This means nothing else than buying stubborn regular buying when prices are high and when prices are down.

On average, you have then achieved a price somewhere in between. The nice thing about this is that you automatically buy fewer shares at a constant amount at high prices and more automatically at low prices. For cost averaging I will again write a detailed extra article. If you sign up for the newsletter, you will automatically receive an e-mail.

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Why Binary Options Are Scams And You Are Broke After 50 Trades

binaere options-was-homemade-finance

Binary options are scams and if you do not keep your hands off, you will not reach your financial goals.

As simple as that.

But since you certainly want to know more about why binary options are scams and definitely not good for you, I break up the topic in a good home-style-finance-style and pick it up for you.

In addition, I’ll show you why your trading capital is almost completely lost after only 50 trades. With bill, graphics and everything that goes with it.

content

  • Are binary options good or bad?
  • Binary options and psychology
  • The expected value of binary options
  • A bet with a company in Cyprus
  • How bloggers favor binary options fraud
  • Binary options and martingales
  • Are binary options gambling?
  • Conclusion: Why binary options are fraud
  • You think this post is good? Then support Homemade Finance!

Are binary options good or bad?

Short answer: Bad.

Long answer: First of all, a binary option is neither good nor bad, but only a binary option.

No more and no less.

Nobody forces you to act or deal with it. It’s just a financial product on the market. Quasi an offer. You can use it or not.

However, binary options are very different from other constructs because they are a derivative with very high leverage.

This amplifies the smallest price movements that you would otherwise perhaps not perceive.

A binary option is neither good nor bad, but just an idea. Because of its construction, it can lead to rapid gains (or losses), which appeals to greed in people who may not be in the finance theme.

Of course that’s bad but not the fault of the option. These greed, however, shamelessly exploit some brokers to offer this unsuitable and leveraged product to the end user.

Mostly under the boldest lure of quick profit. And so the greedy together with the shameless and moving money with horrendous transaction costs (more on that later) from A to B.

Added value for society? None.

At this point, in my opinion, a neutral idea becomes something bad.

If you want a return, you have to add value to someone else. Then and only then can you expect to make a profit yourself in the long run.

Summary of the Long Answer: Binary options are bad.

Binary options and psychology

As already indicated above, human emotions play a major role here. As always, when something should be sold.

In that case, it’s greed. The potential trader of binary options (= gamblers) hopes for quick money and financial independence. Of course with just sitting around in front of the laptop and stupid clicks.

And that’s what advertising for binary options is all about. In no time at all, Max M. achieved everything with nothing and no prior knowledge of binary options.

1 million euros with one euro bet in just one week (= gambling).

If you really believe that, do not be surprised if the money is gone faster after the deposit than you can count to three.

Of course, wealth accumulation and financial independence are possible, but in no case without a lot of work before.

Anyone who promises you anything else does not like you and will most likely try to pull you off in one way or another.

Greed has lost nothing in your life. She is a really bad adviser at the investment.

The expected value of binary options

Ok, enough palavert. Time to dive a bit into the numbers and figure out the value or benefit of a binary option for us.

I have selected a common offer:

A 60-second option on WTI grade petroleum.

If the price of oil rises in the next minute, we win back 85% of our stake plus our stake.

If the price of oil falls, the stake is completely lost.

I have picked out the three most important scientific papers from the HUGE mountain of existing literature on the behavior of prices on stock exchanges, which show that in the short term the prices have a 50-50 chance to rise or fall.

That’s what science says

Random Walks in Stock Market Prices – Eugene Fama (1995) in the Financial Analyst Journal

Forecasts of future prices, unbiased markets, and martingale models – Benoit Mandelbrot (1966) in the Journal of Business

Efficient capital markets: A review of theory and empirical work – Malkiel and Fama (1969) in the Journal of Finance

The prices on the stock exchanges are therefore proven to move up or down by accident for very short periods of time.

With this information, we can determine the expected value of an option, that is, the actual mathematical value for us:

0.50 * 0.85 – 0.50 * 1 = -0.075

In other words, for every euro you bet, you’ll get back on average € 0.925. Or – put differently again – you lose 7.5% of your bet per trade in the long run.

That’s what I call a shitty deal!

To illustrate this, I have graphically illustrated you how a theoretical starting balance of € 1,000 with each additional bet develops. We do not shoot any fresh money here and always have our entire balance in play.

expected value-binaere options

After just 50 bets, we only have $ 20 left over from our original $ 1,000.

For heaven’s sake!

If each of these bets was a 60-second bet, then in just 50 minutes we racked up 980 euros in binary options .

What a scam!

So binary options have a negative expectation and no one who seriously invests to achieve something would even touch that with a pair of pliers.

Of course, the development of your deposit / betting deposit from the above example does not perfectly follow the expected value in reality. Of course, due to simple coincidence, you can sometimes make a profit in between.

To illustrate, I have developed a simple but accurate simulation for the example above and run it ten times. We assume that our trading capital is divided into ten equal and simultaneously played single bets, and each time we receive a game with the expected value calculated above.

In the following chart you can see well that the individual developments on average in any case the same idealized expected value from the graph above, but individual scenarios in between at the beginning, in absolute terms, sometimes even in profit.

simulation-trading capital

Nonetheless, your mathematical expectation is still negative here as well. This leads to the first funny-looking situation that we are in the gambling with binary options, despite a possible profit mathematically always in the minus.

And believe me

Sooner or later we all get exactly what mathematics promises us.

Once we understand the paradoxical situation of having suffered a mathematical loss in between, despite a possible absolute gain, and that this is the only thing that matters in the long run, then we are on the right track.

With this principle, casinos, lottery, bookmakers, (retail) forex brokers and providers of binary options earn their money. After all, virtually no one can tell apart his real and mathematical profit.

That makes it possible to fool people into believing that they could be one of the few lucky people who, despite mathematically gigantic losses, have become rich.

The likelihood that you or I belong to it is virtually nonexistent, and I certainly do not trust my future to such a detrimental game for me.

Do you?

A bet with a company in Cyprus

Another aspect is that the ordinary binary option is not a real security, but a simple promise of payment by the broker.

That means there are no real stocks, commodities or foreign exchange behind your trade, but a bare promise that you will be paid money under certain conditions.

Then nothing.

That means, in the end, you’re betting on some windy (letterbox) company with mostly thin capital, which is usually based in Cyprus or Malta. Solid investment looks different if you ask me.

And just to make it clear once and for all:

This bullshit has as much to do with stock market as petrol with good scotch.

Binary options are just bets with an outrageous house edge.

Not more.

How bloggers favor binary options fraud

There is a conspiracy between bloggers and binary options providers. Well, maybe not directly a conspiracy, but a kind of out of control rudder for bloggers to fraudulently present binary options in a good light.

It works like this:

We have calculated above that a binary options broker earns 7.5 cents gross profit for each euro converted per option. In combination with the extremely fast turnaround times of the poor fortune knight’s credit, there are fantastic “returns” for the option provider.

He could only make quick money if the greedy would simply give him the money. But when I think about it, that’s exactly what they do.

No matter. In any case, the binary options business is highly profitable for the broker. This in turn results in a, in relation to, lush marketing budget.

This is also necessary to attract fresh, greedy money, for example, with the well-known advertising promises in Internet ads.

Therefore, a (ON!) Click on Google Adsense for the search term “binary options” currently costs a whopping $ 13.60, whereas for “stocks” only $ 3.71 is due. This huge difference shows that binary options providers are more likely to be more profitable than real brokers if they can afford those prices.

binaere options-adwords-jun-17

The cause of the more profitable business is overpriced trading or binary options fraud on would-be traders.

If a blog is financed by advertising revenue, then the temptation can be great sometimes even a few positive words about binary options to lose.

The result is hypocritical contributions with statements such as:

… have advantages and disadvantages.

… you can try it.

… only for experts but do it.

This is a betrayal of your readers and anyone who earns even a penny promoting binary options is in my eyes a disloyal rag.

Hence my call to you:

If you find a link or a deliberately placed binary options banner on a blog, then avoid that blog for the rest of your life. Suspicious are also “neutral” broker comparisons for binary options. Here is also strong on every mediated customer earned.

This blogger / blogger had only their own advantage at your expense in view and you can not assume that in the future elsewhere will not happen.

Binary options and martingales

As with any quick-rich-without-a-finger-to-stir system, there are a few “gurus” who try to guarantee surefire profits at short notice through progressive bets. Packed as an online course, e-book or similar.

Progressive bet only means that the bet is increased after each loss. Classic for a martingale would be the doubling of the bet. This then results in a classic sawtooth-like development of trading capital. With a gigantic loss at the end (yes the blue line goes down to zero).

With this “strategy” losses can be delayed for a while, but never avoided. I will go into more detail on Martingale in a separate post and can only recommend that you look at it as well. Because this mesh will meet you even more often in life.

There’s simply no secret binary options strategy that lets you make surefire profits and achieve everything overnight.

There is no such thing, certainly not in any ebook for € 29.90.

Investing instead of speculating should be your motto.

Are binary options gambling?

In my opinion, yes. You have all the crucial features of a bet:

  • Basically zero-sum game
  • Negative expectation due to house advantage
  • Payment promise of a semi-insured company in Cyprus or Malta
  • Expires in a very short timeframe
  • Deposit bonus on the first deposit as an incentive
  • Promises fast money without work

With the best of intentions, I can not tell the difference to a bet.

Conclusion: Why binary options are fraud

Since binary options scams open the door, I can only advise against the things violently.

Basically, it is similar to the currency trading : First there is a financial product, which is neither good nor bad per se, but only a neutral financial product. No more and no less.

Due to its construction, it has an enormous lever, which theoretically allows fast profits, which in turn appeals to some people.

Who does not want quick profits, right?

Fast profits with only a few euros use, a little clicking and the staring of a screen? Sounds good, exactly what I was looking for!

This financial product is then marketed by some resourceful sloth ears to inexperienced and usually somewhat greedy people as THE way to financial freedom.

With unspeakably high costs for the user and thus unspeakably high profits for the provider.

Because the extremely high leverage affects not only profits and losses, but also on the transaction costs.

Many stockbrokers say they know the leverage effect and know what it means, but they do not understand that it also drives up the cost of trading.

That’s why a binary options broker wants to get you to trade as well, preferably as much and every minute.

This will bring you a negative expectation in the boat. A mortal sin at the investment, because then the math works against you.

Do not mess with math, baby.

Numbers do not lie and therefore my conclusion for you: Binary options = fraud.

Anyone who promises me with little use and risk in the shortest possible time to achieve fantastic results, is a dubious rip-off and is immediately whipped mercilessly out the door.

And so you should handle it too. Because you’ve probably heard before:

Nothing worth having falls into your lap.

Speaking of flogging: Because it is foreseen that some providers of binary options will try to separate their links and advertising in the comments, I can also announce right away that it flies out immediately. So save us all the trouble right now.

Could I convince you that binary options are scams? Or do you think that’s too stuffy in your opinion? Discuss with me in the comments!

PS: Binary options have very little to do with classic options. If you want to know more, have a look at my full and straightforward explanation of options . It is worth it!

 

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16 Pareto Principle Examples for Immediate Application

Pareto principle-examples-homemade-finance

You’ve probably heard of it before:

The Pareto principle, also known as the 80-20 Rule (rarely 20-80 Rule). It roughly states that you can get 80% of the success with 20% of the effort. This principle is a very valuable tool to use your time better and more efficiently. However, it may be a bit difficult at the beginning to get a feel for this principle

So here are a few examples that you can apply right away to do more. Over time you will develop a feel for it and automatically scan your everyday life afterwards.

If you already know about the Pareto principle, then you are welcome to skip the first section of this article and scroll directly to the examples below.

content

  • Short and sweet about the Pareto principle
  • What does that mean for you now?
  • Pareto principle examples
  • A few admonishing words at the end
  • You think this post is good? Then support Homemade Finance!

Short and sweet about the Pareto principle

The Pareto Principle simply says that in many cases you can get the most out of your success with a fraction of the effort. I’ve shown you that graphically, unfortunately, has not become as nice as I had hoped, mea culpa.

As you can see, in the beginning the gain in success is steeper than when you would swap a unit bet for a unit of success linearly. Although this rule is not a natural law, it can be observed in many areas empirically in a similar way.

A classic example that everyone knows: Your apartment has once again urgently needed a spring cleaning. In the beginning, you see success relatively quickly, you pick up the clothes from the floor, put the furniture back in the right place, clean the dishwasher and everything does not look so bad anymore. But if you go into detail and wipe off the lampshade, then the gain in cleanliness is lower than at the beginning.

And when clothes pick up, etc., went fast, so eat the small work as just dusting a lot of time, but do not contribute much to a first better first impression.

Incidentally, this principle was discovered by this very same gentleman named Pareto (Italian), who has found that 80% of land ownership is spread over 20% of the population. Gradually, he has also been able to determine this distribution more or less in other areas.

What does that mean for you now?

The 80-20 rule can also apply to your finances. So 20% of your investments will make up 80% of your success. If you have reached 20% of the millionaire’s fortune, you will have achieved 80% of his satisfaction. The same applies to your financial freedom. We have already discussed, the way to financial independence worth it today. The Pareto principle is the reason for that.

If you have achieved 20% of the necessary wealth for your financial freedom, you will feel 80% of the satisfaction as if you have fully achieved the amount.

Pareto principle examples

Private

1. Clean up the apartment

You expect an hour visit and your place looks like S **, it would take 5 hours to clean up tippi toppi. Concentrate on the most obvious things in this remaining hour. Everyone sees clothes on the floor, not dust on the kitchen cabinets.

2. Divide your free time

Unfortunately everyone knows: too much but too little time and you can not decide? List the 5 most satisfying alternatives for you and strike the last four.

3. Learn for an exam

You are short of time and want to get the best out of the next exam? Put your focus on important things. Let’s say there are 5 different types of tasks, each with 5 examples that were calculated in the course. But time would only be enough to practice all five examples of a single type. Then you now count on a task of each type instead.

4. Learn a new language

With only 20% of existing vocabulary, you can master 80% of all situations (reading, writing, listening, speaking) in a foreign language.

5. Mop out the wardrobe

4/5 of your clothes you wear little or not at all. If you remove them from your closet, you will have a clearer wardrobe with just the parts you really like.

6. Slimming

Eat 80% of your calories with 20% of your food. So if you want to lose weight reduce it specifically.

7. Do not consume so much news

Only 20% (if any) of the headlines you read have any informational value. Spend less time on news portals or Twitter and do something different instead.

8. Reduce stress

80% of your stress is generated by 20% of the activities and people. Try to reduce these activities as much as possible

 

finances

9. Build up a depot

Many people invest a lot of time in the clever construction of a sophisticated depot, only to find that each widely diversified depot has a very similar performance over the long run. So why mess around with the umpteenth Japan Small Tech Cap ETF when a simple world portfolio does it? In the saved time, you could put in a few overtime hours and earn some startup capital for your account.

10. Pick a broker

It is very similar when choosing a broker. You spend hours trying to find the one that might be a few euros cheaper per month. In doing so, after a short search, one finds that standard brokers in Germany all have very similar terms. Choose one of these and do not make any science out of it.

11. Find the best daily interest rates

The biggest absurdity in my opinion and at the same time the German saver’s favorite hobby. Hunt on the Internet for the latest top interest rates. For a decimal place better return are invested hours of time, if one calculates the hourly wage one would have to start with most of the amounts to make it laugh.

Do not make it too complicated, look for a provider of overnight money, which in the past has consistently delivered ordinary interest (not necessarily the best but not the worst) and the arbor is finished. You prefer spending free time with friends, working or learning something.

Professional

12. Prioritize your tasks

If your task sheet is hopelessly overcrowded, write down all to do points and prioritize. The supreme tasks first and the rest you do later. For example, if there are 10 things on your list, then you’re going to be down the last eight and do the two important ones first. You do that every day anew and you will see, your task melt melts faster and more thoroughly.

13. Focus on the important customers

The prime examples when it comes to the Pareto principle. 20% of customers generate 80% of sales. So it makes sense to focus on exactly this clientele in the work.

14. Focus on the important products

The same applies to products in a company. 20% of the products account for 80% of sales. So concentrate on these

15. Work in a new software

Studies have shown that 80% of people only use 20% of the full functionality of a software. That means you should dare to deal with new software. Often it does not take so much time to be halfway inside. Furthermore, it is, depending on the software, another qualification.

16. Focus on the biggest troublemakers

80% of complaints come from 20% of customers. So if you want to do it as efficiently as possible, then focus first on these and then on the others.

A few admonishing words at the end

The Pareto principle is a very powerful tool to do more, but as so often it is more a Pi times thumb story. In the past, the 80-20 principle has been more or less stubbornly applied to almost any situation. Empiricism does not always confirm the 80-20 ratio, sometimes it can be shifted in one direction or another, for example 90-10, 70-30 or even 20-90.

Incidentally, the numbers do not always have to add up to 100. This has probably just been a good fit and people like “round” numbers and that’s why you seem to have stayed there.

Furthermore, it is not always possible after 80% success simply to stop, sometimes you just have to go for the 100%, with the corresponding higher effort.

Also, the 20-80 rule should not be an invitation to sloppiness. Just because 80% can be reached quickly does not mean that you should not do your job properly. On the contrary, I claim that the ability to work conscientiously makes the Pareto Principle applicable in the first place. Because 20% bullshit is still bullshit.

Finally, one can say that the Pareto principle is a useful tool to make more of your life. No matter in which area, be it professional, (passive) or private.

Time is a limited good for all of us, so it is even more important to spend it only with the really important things.

 

Uncategorized

Stocks For Beginners: 23 Things I Do Differently Today

Stocks are the most honest investment ever. Point.

They make you an entrepreneur and let you participate in the real economy.

Risk aware and calculated wear, instead of being fed by banks with lousy interest and wegschuckucken behind the deposit insurance.

If only it were not such a complex topic.

Sometimes you feel really slain and do not know what to look for or how to get started.

That’s why I’ve put together everything that I know about stocks for beginners.

All the insights here are the quintessence of full time study and my own experiences.

I would like to share all this with you now.

content

  • What is a stock anyway?
  • What does a broker do?
  • What happens if my broker goes bankrupt?
  • How do I buy stocks or ETF?
  • Chart analysis is bullshit!
  • Have patience. At least 20 years
  • 5 minutes of time a month are enough
  • Diversify, diversify, diversify!
  • No single shares!
  • Keep the costs low!
  • All head thing: You yourself are your biggest enemy!
  • Ignore stock market news!
  • Just go to your depot once a month: then when you buy
  • Do not think about your portfolio
  • Do not buy shares through your house bank!
  • Do not buy active funds!
  • Should I start day trading?
  • No forex / CFD / binary options!
  • No raw materials!
  • There are no hot tips
  • Stocks are not everything: you also need enough on the daily allowance
  • Always use limit orders!
  • Stocks for Beginners: Be Stubborn!
  • You think this post is good? Then support Homemade Finance!

What is a stock anyway?

A stock is a little pinch of a company.

It makes you a small co-entrepreneur, with all the opportunities and risks.

A company with a great business model can create a lot of value and bring you a lot of money, but it can also burn a lot of money.

This is the business risk that you have to take to get more return than on the daily allowance

With stocks, many beginners immediately think about how dangerous it can be, but look at it like this:

You now own a part of the economy. Part of a big and hopefully successful cooperation.

I think that’s a nice thought.

But nothing is straightforward in life, you have to be ready to accept that.

What does a broker do?

A broker has in the end two tasks:

  1. He goes public for you and gets you stocks or ETF
  2. He watches your stock and keeps it in a safekeeping account for you

Retention is usually free these days. For him to go shopping for you you have to pay him a fee.

What happens if my broker goes bankrupt?

Nothing in theory. I also asked myself this question at the beginning and then informed myself a bit. Your deposit with your broker is legally and on balance separated from the broker itself.

That is, if it goes bankrupt your securities are still there, you just have to move to another broker. In practice, then, you may not be able to sell for a few days.

From a legal point of view, so everything is regulated. I also believe that the likelihood of a Brokerpleite is not so high. I am also aware of no Brokerpleite recently in Germany.

How do I buy stocks or ETF?

It is easy peasy to enter the stock market today. Find a proper broker in Germany and open an account. Most hardly differ in price or performance.

After you have started to put together a personal share or ETF savings plan, look for next for each security the so-called ISIN (comparable to the ISBN in books) out. In virtually every known broker interface, there is a search function somewhere where you can enter them.

Then set quantity and price and you’re done. You really can not go wrong.

Chart analysis is bullshit!

Many beginners believe that you can use a kind of voodoo on stocks that can predict things.

Especially the drawing of lines and any patterns seems to have done to the people.

That’s nonsense!

Man is a pattern recognizer and believes he can recognize something in everything and everyone. That’s part of our problem-solving behavior.

This works on the stock market but not. Courses in the past say virtually nothing about the future.

As always, believe me not blind, but what scientists have found out:

Fama (1970): Efficient Capital Markets: A Review of Theory and Empirical Work

It’s just a waste of time. If you spend overtime instead of reading charts like in a coffee grounds, you’re probably more likely to spend more money afterwards.

Have patience. At least 20 years

Many new entrants are often frustrated because the portfolio has been down for months. There is nothing to gloss over, it will even happen for years that you are in the dark.

That is normal.

On the stock market you have to bring a long breath as a beginner. For example, the duration of the longest loss period in the S & P 500 was around 16 years, during the Great Depression.

If you buy regularly with equal amounts, then the duration of the loss period has significantly reduced due to the cost-averaging effect.

Nevertheless, we are talking about a period of more than 10 years.

Therefore, you should bring the time accordingly. It should be 20, better 30 years old. If you do not have that much time then you should invest less in equities and more in solid bonds.

5 minutes of time a month are enough

Especially at the beginning of the stock market, you are very enthusiastic, have just bought his first share or his first ETF and would like to deal with it all day long.

That’s ok and it’s nice, but at some point you can imagine that the enthusiasm is going to abate.

That too is ok, because you do not need more than 5 minutes of time a month to run a decent portfolio.

These 5 minutes I use for logging into your online broker and the purchase of your depot. There is nothing more to do.

Do not feel guilty about it, there is no scientific proof that more time in front of the screen leads to better results.

Diversify, diversify, diversify!

Even though you’ve heard that countless times, it’s actually the royal rule on the stock market and should become your mantra.

Diversification is everything.

Really everything.

Diversify to:

  1. Geographical regions (eg Europe, North America, etc.)
  2. sectors
  3. Industrialized and emerging countries
  4. Big and small businesses

This list does not claim to be exhaustive, but at least give you an idea of ​​what you have to think about.

If you’ve been on Homemade Finance for a while, then you’ve probably noticed that I celebrate ETF very much. This is simply because, as a private investor, it was not possible to set up a portfolio so cheaply and so diversified before.

ETFs have made the financial markets a little fairer. In one fell swoop, you can get 800 companies into the custody account at low cost, automatically covering most of the above criteria. Therefore, I also advise newcomers to start early to deal with the topic of ETF

The Bible on Diversification is by Markowitz: Portfolio Selection

No single shares!

I’m sorry but I’m not Warren Buffett and you probably never will. That is also OK.

Many beginners in the field of equities believe that you can beat the market with a little stock reading on the weekend and can generate excessive returns.

I’m not saying it’s impossible, I’m just saying it’s hard to reach for ordinary people, because the effort is gigantic.

According to legend, Warren Buffett studies nothing but company balance sheets almost all day long simply because he enjoys it. I can not and do not want to keep up with that. Do you?

The lesson is that unless you are Warren Buffett, do not bet on individual stocks, but diversify as widely as possible. By diversified I mean not 5 or 50, but 500+ companies from all over the world in the portfolio. If your purse does not like that, like mine, then it can be done cheaply through ETF .

Keep the costs low!

An important insight that I would like to recommend to any newcomer to shares is that there is nothing certain in the stock market. Man is a control freak and he wants to have everything under control.

Bad news: nobody controls the market. He wavers and sometimes wild. This is the price you have to pay to earn more than negative interest on the account.

But there is one exception: the costs

Keep your order fees low and make sure you have no active funds or ETF with a very high TER / TD.

Usually this is done after an hour and so you have done everything you can control on the stock market to the best of my conscience.

All head thing: You yourself are your biggest enemy!

In my opinion, the real challenge is to be as passive and calm as possible. Why?

Well, science tells us private investors:

  1. diversify
  2. Keep costs low
  3. Bespare regularly
  4. Stop fooling around

The first three points are done quickly with a neat ETF portfolio.

Then it may be that someday, when there is nothing left to do, a quiet voice in your head announces and tells you things like:

Maybe I should wait with the purchase, it could be even cheaper

Maybe I should get out to avoid the crisis

Maybe I should …

Do not listen to yourself. Make a proper plan and keep it stubborn and consistent for a few decades with regular amounts. Then chances are good that a decent return comes around.

The art is not to build a smart portfolio or to find the perfect composition. Rather, the art of consistently pursuing a plan that has even begun is without dissuading itself from it.

This is also the biggest challenge for me personally, I suffer from planneritis.

I give my best