What Is the Margin of Safety in Investing/Trading?

2022年12月14日

Hello traders,

The gap between the true worth of an investment and its current price on the market is referred to as an investment's margin of safety.
The margin of safety is a concept that is utilized in trading and investing.
It is a buffer that protects investors against the possibility of incurring losses as a result of the volatility in the market or the occurrence of unanticipated occurrences.

It is possible to incur a loss while investing in stocks, bonds, and other securities since the value of these assets is subject to significant shifts during the course of their ownership.
Investors may mitigate this risk with the assistance of a margin of safety, which ensures that they are not paying more for an asset than what the item is really worth.
This indicates that the investor may still make a profit when selling the asset, even if the price at which it is traded on the market drops.

The difference between the market price of an item and its intrinsic value may be subtracted to arrive at one method for calculating the margin of safety.
If a company's intrinsic value is $100 and it is now trading at $120, for instance, the margin of safety for that stock is $20.
This indicates that the investor will still be able to sell the shares at a profit even if the current market price of the stock drops by $20.

You may also determine the margin of safety by dividing the asset's intrinsic value by its current market price.
This is still another method.
The investor will get a percentage as a result of this calculation, which will indicate the level of protection they have against prospective losses.
If a share of stock has an intrinsic value of $100 and is now trading at $120, for instance, the margin of safety is 16.67% (100 divided by 120 equals 8333).
This indicates that the investor will still be able to sell the shares at a profit even if the price of the stock on the market drops by 16.67%.

The margin of safety is a tool that investors may use to decide whether or not it is worthwhile to make an investment.
It is possible that purchasing the item would be a wise decision if there is a large margin of safety.
On the other hand, if the margin of safety is minimal, it is probably best to steer clear of the investment and hunt for something else that has a bigger margin of safety.

When it comes to trading and investing, one of the most crucial concepts to understand is the margin of safety.
Investors are able to better protect themselves against the possibility of loss and make choices on their investments that are more informed as a result.

What about crypto assets?

I'm not a big believer but most blockchain indicators are right now in the mega buy zone for Bitcoin - telling us the margin of safety to buy now is big

The reason I don't like them much is that they could stay in that zone for years, and I'd invest blocking my money for years before the real pump happens - which represents a missed cost-opportunity if I'd invested that money elsewhere

My preferred way is to get a swing H4 or H8 buy signal based on my trading strategy as it's more reliable because most of the actions justifying a price move happens on the exchanges regardless of the hashrate, difficulty, number of addresses holding Bitcoins, etc.

Thank you for reading
Dave