But this is just too crazy ....
Thursday 22 July 2010
Winning risk:reward Ratio
Risk/reward ratio is one the most influential parameters of any Forex system.
A good risk/reward ratio is able to make an unprofitable system profitable, while poor risk/reward ratio can turn a winning setup into a losing strategy.
Risk - simply referred to the amount of assets being put at risk. In Forex it is the distance of our Stop loss level (in pips) multiplied by the number of lots traded. E.g. a stop loss at 50 pips with 2 lots traded would give us a total risk of 100 pips.
Reward - the amount of pips we look to gain in any particular trade - in other words the distance to a Take Profit level.
Example of risk/reward ratio:
100 pips stop vs 200 pips profit goal gives us 1:2 risk/reward.
25 pips stop vs 75 pips profit gives 1:3 risk/reward ratio.
Why consider risk/reward ratio at all?
An average trading system which is able to produce at least 50% of winning signals automatically becomes profitable if its stop and profit targets are set at 1:2 risk/reward ratio or higher.
On the other hand, a trading system which is capable of delivering over 70% of winning signals can still be unprofitable in the long run if it shows poor money management with, for example, 3:1 risk/reward ratio.
Small risk - large reward: a winning formula used by professional traders
How do they do it? Let's review some practical examples:
With low risk : high reward entries at the re-test of trend line, experienced trades can allow to be wrong multiple times before pulling out a winner, and still end up in profit.
Channeling, range bound markets also offer low risk : high reward trading opportunities. Besides, it is not only about getting in/out of a trade, but also about reviewing previous trends and positioning yourself in the direction of the most likely breakout, and in this way seeking additional profits plus once again eliminating the risk of stops being hit.
Wave traders like to ride market trends by entering on price retracement levels. These levels can be found using various studies and indicators: Fibonacci levels, support/resistance levels, trend lines, moving averages, which are treated as flexible trend lines, etc. All these studies help to see the points of retracement reversals.
When doing complex analysis of a retracement, special attention is paid to those price levels where two or more studies coincide in place and time with each other.
No matter what trading system you use, if you make sure your risk:reward ratio is set properly, you'll be trading on a profitable side, even when the number of your losing trades is greater than the number of winning trades.
http://forex-strategies-revealed.com/money-management-systems/risk-reward-ratio
A good risk/reward ratio is able to make an unprofitable system profitable, while poor risk/reward ratio can turn a winning setup into a losing strategy.
Money management system #5 (Winning risk : reward ratio)
What is risk/reward ratio?
Risk - simply referred to the amount of assets being put at risk. In Forex it is the distance of our Stop loss level (in pips) multiplied by the number of lots traded. E.g. a stop loss at 50 pips with 2 lots traded would give us a total risk of 100 pips.
Reward - the amount of pips we look to gain in any particular trade - in other words the distance to a Take Profit level.
Example of risk/reward ratio:
100 pips stop vs 200 pips profit goal gives us 1:2 risk/reward.
25 pips stop vs 75 pips profit gives 1:3 risk/reward ratio.
Why consider risk/reward ratio at all?
An average trading system which is able to produce at least 50% of winning signals automatically becomes profitable if its stop and profit targets are set at 1:2 risk/reward ratio or higher.
On the other hand, a trading system which is capable of delivering over 70% of winning signals can still be unprofitable in the long run if it shows poor money management with, for example, 3:1 risk/reward ratio.
Small risk - large reward: a winning formula used by professional traders
How do they do it? Let's review some practical examples:
With low risk : high reward entries at the re-test of trend line, experienced trades can allow to be wrong multiple times before pulling out a winner, and still end up in profit.
Channeling, range bound markets also offer low risk : high reward trading opportunities. Besides, it is not only about getting in/out of a trade, but also about reviewing previous trends and positioning yourself in the direction of the most likely breakout, and in this way seeking additional profits plus once again eliminating the risk of stops being hit.
Wave traders like to ride market trends by entering on price retracement levels. These levels can be found using various studies and indicators: Fibonacci levels, support/resistance levels, trend lines, moving averages, which are treated as flexible trend lines, etc. All these studies help to see the points of retracement reversals.
When doing complex analysis of a retracement, special attention is paid to those price levels where two or more studies coincide in place and time with each other.
No matter what trading system you use, if you make sure your risk:reward ratio is set properly, you'll be trading on a profitable side, even when the number of your losing trades is greater than the number of winning trades.
http://forex-strategies-revealed.com/money-management-systems/risk-reward-ratio
Real Returns from Equities, Bonds and Bills (1900 to 2008)
Investing in shares? Plan for the very long-term
Read more: http://www.dailymail.co.uk/money/article-1145151/INVESTMENT-EXTRA-Investing-shares-Plan-long-term.html#ixzz0uKmYK8FD
The Importance of Sound Execution of Sound Strategy
Is Timing Really Everything ?
Timing is indeed very important but it doesn't have to be "Everything".
Timing can be further categorized into (1) timing the exact moment and (2) timing a general period. For example, is current market just over its peak now vs generally the market is still rather high now. While it seems impossible to predict the exact future but its always simpler to get a sense of what may happen next.
I predict that The sun will rise tomorrow morning
vs
The sun will be seen at 7:23am after the clouds are cleared off in 13 minutes
If an investor is Correct All The Time, focusing solely on timing would be a smart thing to do. Otherwise, timing become a variable that can help you as much as killing you. As a matter of fact, it will always help you sometimes and it will always kill you some other time. Hence,knowing what to do when your timing is right or wrong becomes even more important especially when you can't be Correct All The Time. Namely the profit take and cut lost strategies.
It takes 2 timings to get one complete transaction. Buying at the lowest today does not guarantee anything yet if it goes lower tomorrow. Selling (short) at the highest today may still have a higher tomorrows. Hence a perfect transaction that is built by 2 perfect timings can only be justified as an after event. In probability study, even if you can guarantee getting the timing Correct, but there is only half the chance you can get it Correct again twice in a row. In other words, even if you know 100% correct timing when to buy low, but there is only 50% chance that you can also sell high at the perfect timing.
So no matter which ways you look at it, "Timing is Everything" is Not a Guaranteed method. It can make you one in a million, but most people will not get anything positive out of this strategy especially long term wise.
Hence you may need to form an investment strategy that can cater for any timings and events. That would be a rock solid personal finance. If there are certain timings or events that your current profile cannot handle yet, then just temporary exclude investing during those timings and events. Until one day you learn enough to build a more solid personal finance to cater for those timings and events. Thats how malpf's wealth pyramid was introduced earlier, you start with something you don't really need to know like Fix Deposit and slowly learn more before handling mutual funds and stock investment.
However one of the positive human nature is to pursue greatness. Everyone want to hit jackpot no matter how slim the chances are. Timing may not be Everything but it is the Ultimate investment skill. Until today, there is no one formula for Guarantee Exact Timing (GET) in investment yet. And the person who come up with one will sit in the same hall with Newton and Einstein, most probably above all of them.
Hence, totally abandon timing an investment is as ignorant as adhere solely to it, if not worse. What should we do then ?
Build a rock solid personal finance first, then leave a 5% room in it as play money for you to practice timing in real life. This way, overall you will still have a good life ahead of you while not giving up any chances that you can be great! When you find out you are really good at timing, slowly increase your 5%. Otherwise lower the 5% or totally eliminate it especially when your 95% are not even earning more than 5%.
How about you ? How much are you relying on Timing in your life ?
Wednesday 21 July 2010
A Different Way of Looking at Stock Prices
Here is the historic stock price to earnings ratio measure as an average of 10 year corporate profits. This is the classic measurement that says how much value for money you get from your stock investment. This snapshot was taken last year, and current P/E as measured by this chart is around 18, whereas during historical bear markets, P/E fell below 10. So, we are not even down the half way point.
Image from Newyork Times
SHILLER’S PE RATIO
The noted Yale economist, Robert Shiller, calculates a very interesting cyclically-adjusted price-to-earnings ratio. Instead of using 12-month earnings (which can be very volatile, especially recently), he uses a 10-year average of earnings. He has compiled an incredible data set, with the data going back to 1881, so you get a true sense of history.
For October, the Shiller P/E is just over 20x (the 125-year plus historical average is about 16x). It’s true that this metric is not as overvalued as in past peaks (in the dotcom era, it went over 40x), but it’s interesting to know that when we usually see 20x, it’s not at the end of a recession but five years into an economic expansion. Shiller is skeptical on the recent boom in the stock market (and housing as well for that matter). On stocks, he said recently “you have to go back to the Great Depression to see such a turnaround in the stock market” and that the current booms (both stocks and housing) “…can’t be trusted to continue.”
http://pragcap.com/shillers-pe-ratio-signals-stocks-are-overvalued
The 2008 Stock Market Crash
Since the S&P 500 peaked in 2007, the stock market has plummeted a whopping 42% from the peak. The dot-com bubble deflated over several years, whereas the United States housing bubble has collapsed over a much shorter time period and has brought down with it the American banking system. Fear has run amuck, and the question is, has rational thought regarding value given way to irrational fears regarding market risks?
If one believes that the market is a somewhat random geometric series of cash flows that resembles exponential growth, then one should be able to identify peaks and troughs in the market by defining an “upper peak” and “lower trough” line.
The recent bear stock market has easily broken through the previous “lower trough” line and therefore savvy investors may now find substantial value in good stocks that have solid balance sheets and dividends that pay above safe investments like bonds. The following graph shows the S&P 500 and the upper and lower trading bands:
http://calgaryrealestatemarketblog.wordpress.com/2008/
If one believes that the market is a somewhat random geometric series of cash flows that resembles exponential growth, then one should be able to identify peaks and troughs in the market by defining an “upper peak” and “lower trough” line.
The recent bear stock market has easily broken through the previous “lower trough” line and therefore savvy investors may now find substantial value in good stocks that have solid balance sheets and dividends that pay above safe investments like bonds. The following graph shows the S&P 500 and the upper and lower trading bands:
http://calgaryrealestatemarketblog.wordpress.com/2008/
Making Sense of the U.S. Housing Slowdown
Economic Letter—Insights from the Federal Reserve Bank of Dallas
Vol. 1, No. 11
November 2006
Federal Reserve Bank of Dallas
Making Sense of the U.S. Housing Slowdown
by John V. Duca
A robust housing market buoyed the U.S. economy during the 2001 recession and fueled growth once recovery began. The record-setting building of single-family homes created construction jobs and spurred demand for building materials, appliances and home furnishings. Business was brisk for mortgage lenders and real estate brokers alike.
Perhaps even more significant, rapidly rising housing prices had allowed consumers to tap into their mounting home equity, providing them the financial wherewithal for a buying spree. By mid-2004, however, home prices had risen to the point where many analysts worried that markets were overheated, making homes less affordable, particularly for first-time buyers already facing the drag of rising energy prices.
Today, signs of a housing market slowdown are unmistakable. New and existing home sales have been declining since mid-2005, although they remain high by historical standards (Chart 1A). Building activity has begun to cool a bit, while single-family housing permits have fallen 34 percent from their peak, settling back to pre-2002 levels (Chart 1B). The building permits data suggest further declines in single-family construction are likely, given the usual six to eight months it takes to complete a home.
http://www.dallasfed.org/research/eclett/2006/el0611.html
Dividend Growth Graph
Here's a graphical representation of the Dividend Growth:
http://www.financescholar.com/stocks-valuation-timeline2.html
http://www.financescholar.com/stocks-valuation-timeline2.html
Different investments offer different levels of potential return and market risk.
Large-cap stocks are represented by the total returns of the S&P 500 index. Midcap stocks are represented by a composite of the CRSP 3rd-5th deciles and the S&P 400 index. Small-cap stocks are represented by a composite of the CRSP 6th-10th deciles and the S&P 600 index. Foreign stocks are represented by the total returns of the MSCI EAFE index. Bonds are represented by the total returns of the Barclays U.S. Aggregate Bond index. Cash is represented by a composite of yields on 3-month Treasury bills and the Barclays 3-Month Treasury Bills index.
Based on average 12-month returns from 1980-2009. (CS000168)
Different investments offer different levels of potential return and market risk. International investors are subject to higher taxation and currency risk, as well as less liquidity, compared with domestic investors. Small-cap and midcap stocks are generally subject to greater price fluctuations than large-cap stocks. Unlike stocks and corporate bonds, government T-bills are guaranteed as to principal and interest, although funds that invest in them are not. Past performance is not a guarantee of future results.
http://fc.standardandpoors.com/srl/srl_v35/library_article.jsp?tid=0099
Be cyclically aware and responsive.
This means
- a) monitoring the progress of the economic cycle, using the 3-phase, 7-waypoint cyclical model I developed and have been using in my Cyclical Investingnewsletters for the past 24 years, and
- b) allocating assets profitably in relation to the current state of the economic cycle, owning those assets supported by economic forces at the time, and avoiding those likely to be depressed by them.
http://www.cyclical-investing.com/
World Stock Market Capitalization
The chart below, borrowed from Dr. Marc Faber's Market Commentary December 1, 2008, is devastating. The chart shows a stunning loss of $30 trillion stock market wealth around the world. By some estimates, combined losses in commodities, stocks, bonds, real estate are greater than $60 trillion. This is beyond rescue.
http://www.greenfaucet.com/economy/not-your-garden-variety-depression/78457
Relating PE to Stock Price
The concept of High PE, Low PE and average PE of a stock.
http://seekingalpha.com/article/192426-potential-new-long-and-short-ideas
http://seekingalpha.com/article/192426-potential-new-long-and-short-ideas
Bull Market Gains (1940 - Current)
The bull market that began on March 9, 2009 has gotten off to the strongest start of any bull market in U.S. stocks since 1940.
http://seekingalpha.com/article/160154-strong-start-for-bull-market-but-investors-are-nervously-eyeing-the-exits
Growing the worth of your Portfolio over the Long Term
This is what you should aim for as an investor over the long run.
Keep this vision in sight, always.
Watch Out: The Cyclical Stocks Are Trading At An Extreme, And This Could Portend Trouble
Watch Out: The Cyclical Stocks Are Trading At An Extreme, And This Could Portend Trouble
Eddy Elfenbein | Apr. 21, 2010, 5:31 PM
One of the quick-and-dirty metrics I like to look at is the Morgan Stanley Cyclical Index (^CYC) divided by the S&P 500 (^SPX). The Cyclical Index is composed on stocks that are closely tied to the economic cyclical. This means industries like autos, chemicals and mining.
When we divided these two indexes, we can tell if cyclicals are outperforming or underperforming. The thing about cyclicals is that they, well, move in cycles. Check out the chart below:
As you can see, there’s historically been a consistent up-and-down wave that averages a few years. This usually, but not always, corresponds with how well the economy is doing. Investors favor cyclicals during the good times, and flee them during the rough patches.
I urge you not to place too much faith in this metric, but I want to show you that the market does, in fact, move in cycles. These are powerful and once the market is locked it, the cycle can last for some time. Therefore it’s important for us to understand where we are in a cycle.
On top of that, the cycle has a double-whammy effect since the market generally does much better when cyclicals are outperforming, meaning they’re outperforming a market that’s already doing well (note the bottoms in 1982, 1990 and March 2009).
You can really see how the last 18 months have dramatically impacted cyclicals. The ratio held up fairly well until September 17, 2009. Within six months, that ratio dropped from 0.7 to 0.42. The Cyclical Index dropped from 871 on September 19 to 283 by March 9. Youch, that’s a staggering loss so you can see that the non-cyclicals provided some shelter from the storm (though not as good as cash).
But once the ratio hit bottom, cyclicals put on an explosive rally. Although the Cyclical Index is still well-below its high from 2007, the ratio has surpassed its high and has gone on to make several all-time highs. That’s about the shortest cycle I’ve ever seen. In fact, it was more like a panic mini-cycle. Last Thursday (pre-Fab), the ratio made its most recent all-time high of 0.786.
Picking cycle peaks is a tricky business and I won’t attempt to do so now, but I’m on the lookout for a harsh drop off in the Cyclical Ratio. Once it gets going, it could down, down, down for a few years.
Read more: http://www.businessinsider.com/morgan-stanleys-cyclical-index-is-much-higher-than-normal-2010-4#ixzz0uHxXiKpl
The Value of Stock
The Value of Stock
A stock's value can change at any moment, depending on market conditions, investor perceptions, or a host of other issues.
A stock's value can change at any moment, depending on market conditions, investor perceptions, or a host of other issues.
A stock doesn't have a fixed price, or value. When investors are buying the stock, the price tends to go up. But if they think the company's outlook is poor, or if the overall market is weak, they either don't invest or sell shares they already own. Then the price of the stock tends to fall.
But price isn't only one way to measure a stock's value. Return on investment — the amount you earn by owning the stock — is another. To assess return, you add any increase or decrease in price from the time of purchase and any dividends the stock has paid over that time. Then you divide by the amount you invested to find percent return. As a final step, you can find the annualized return by dividing the return by the number of years you owned the stock.
But price isn't only one way to measure a stock's value. Return on investment — the amount you earn by owning the stock — is another. To assess return, you add any increase or decrease in price from the time of purchase and any dividends the stock has paid over that time. Then you divide by the amount you invested to find percent return. As a final step, you can find the annualized return by dividing the return by the number of years you owned the stock.
THE BLUES AT BIGCO.
The peaks and valleys in the price of a stock dramatically illustrate how value changes.
CYCLICAL STOCKS
All stocks don't act alike. One difference is how closely a company's business is tied to the condition of the economy. Cyclical stocks are shares of companies that respond predictably to the economy's ups and downs. When things slow down, their earnings typically fall, and so does their stock price. But when the economy recovers, earnings rise and the stock price goes up. Airline and hotel stocks are typically cyclical: People tend to cut back on travel when the economy is slow. In contrast, stock prices for companies that provide necessary services and staples, such as food and utilities, tend to stay fairly stable.
INCOME STOCKS, GROWTH STOCKS |
The trick to making money, of course, is to buy a stock before others want it and sell before they decide to unload. Getting the timing right means you have to pay attention to:
- The rate at which the company's earnings are growing
- Competitiveness of its products or services
- The availability of new markets
- Management strengths and weaknesses
- The overall economic environment in which the company operates
Investing may be a bit of a gamble, but it's not like betting on horses. A long shot can always win the race even if everyone bets the favorite. In the stock market, the betting itself influences the outcome. If lots of investors bet on Atlas stock, Atlas's price will go up. The stock becomes more valuable because investors want it. The reverse is also true: If investors sell Zenon stock, it will fall in value. The more it falls, the more investors will sell.
MAKING MONEY WITH STOCKS You may make money with stocks by selling your shares for more than you paid for them or by collecting dividends on the stocks — or both.
The profit you make on the sale of stock is known as a capital gain. Of course, it doesn't all go into your pocket. You owe taxes on the gain as well as a commission on the sale, but if you've owned the stock for more than a year, it's a long-term gain. That means you pay the tax at a lower rate — sometimes substantially lower — than you pay on your earned income or on interest income.
Dividends are the portion of the company's profit paid out to its shareholders. A company's board of directors decides how large a dividend the company will pay, or whether it will pay one at all. Typically, large, mature companies pay dividends, while smaller ones tend to reinvest their profits to fund growth. From your perspective, one of the advantages of dividend income is that through 2010 qualified dividends are taxed at your long-term capital gains rate — 15% if your marginal tax rate is 25% or higher and 0% if it's 10% or 15%.
The profit you make on the sale of stock is known as a capital gain. Of course, it doesn't all go into your pocket. You owe taxes on the gain as well as a commission on the sale, but if you've owned the stock for more than a year, it's a long-term gain. That means you pay the tax at a lower rate — sometimes substantially lower — than you pay on your earned income or on interest income.
Dividends are the portion of the company's profit paid out to its shareholders. A company's board of directors decides how large a dividend the company will pay, or whether it will pay one at all. Typically, large, mature companies pay dividends, while smaller ones tend to reinvest their profits to fund growth. From your perspective, one of the advantages of dividend income is that through 2010 qualified dividends are taxed at your long-term capital gains rate — 15% if your marginal tax rate is 25% or higher and 0% if it's 10% or 15%.
Most dividends paid by US corporations are qualified, as are dividends paid by a number of international firms. So is most dividend income that mutual funds pass along to you. But dividends from real estate investment trusts (REITs) and mutual savings banks are not qualified. You should check the year-end 1099 statements you receive from financial institutions and discuss which income qualifies for the lower rate with your tax adviser.
A comeback for value investing
Though growth stocks have made the most of the bull market momentum, value stocks did much better in containing falls during the inevitable reversal. The result: a better long-term record.
http://www.thehindubusinessline.com/iw/2009/04/26/stories/2009042650500700.htm
Sales Growth. We seek to grow sales organically by building market share
Sales Growth. We seek to grow sales organically by building market share
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