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Smart Investing: How to Make Probabilities Work in Your Favour

Investment is an equally exciting and daunting process for many Australians. For many wanting to invest their hard-earned money, the stock market is a chance to land huge returns for various types of investment.

According to Deloitte Access Economics, about 6.9 million Australians invest on a securities exchange, with more and more younger people joining the stage. In fact, from just 24% in 2012, the number if those participating in ASX grew to around 39% millennials aged 25-34 years old in 2017.

Being Smart About Investing

If you’re planning to invest, being well prepared boosts your chances of success. But what does it take to make smart investments?

When asked about this, Dr Steven Enticott, head of CIA Tax, mentions that he has a favourite word that trumps most get-rich-quick formulas, dubious strategies and quick courses. What he relies on is: probabilities.

He explains that most investors who turn to obscure share trading formulas tend to neglect the power of probabilities. Or, they are most likely looking at probabilities the wrong way.

For instance, a foreign exchange investment might seem as a 50-50 chance of gain or loss, right? Endicott says otherwise.

“Actually, it’s not 50-50, because you’ve got a spread. The moneymaker in the game is gonna make money out of it so he’s gonna sell it to you at a higher price and buy it from you at a lower price, so he’ll make money every time. If you look at share brokerage cost as well, that’s gonna worsen the situation…you might be down to 55% chance of loss and 45% chance of winning”.

Indeed, with about 98% of investors in the securities exchange sustaining losses, Endicott believes that this is largely due to ignoring probabilities.

How to Make Probabilities Work in Your Favour

Endicott gives three essential ingredients that can give your investment a higher chance: fundamentals, technical info and good old-fashioned logic.

Fundamentals refer to well-known trends and movements in the market. For instance, if you know that the Australian dollar is too high based on historical rates, the value would most likely trickle down instead of continuing to rise up.

“So you have a fundamental view, then you start looking at the technical side. Let’s look at the charts – 1-hour chart, 1-day chart, 1-week chart, 1-month chart – what direction are they telling?”

Basing your investment decision on both fundamental knowledge of the market and the technical updates and metrics will give you a more reliable direction as to the trend of that specific investment product.

And for Endicott, the last one is logic. “Does this actually make sense?” One case for logic is on volatility, where investors set a stop loss to allow a likely drop of the stock.

Fundamentals, technical info and logic – once you are able to move these to your favour, then expect great returns.

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