FOREX Strategies | FOREX Trading Strategies

ANALYSIS OF SHARES. Continuation. The technical analysis

The technical analysis is the kind of the analysis that entirely bases on the examination graphs of prices and volume of the tenders of the given share. In this sense it is not, strictly speaking, consistent with fundamental analysis. Experienced traders and investors know how to use both types of analysis correctly.

Historically technical analysis proceeds from the “Dow Theory”: The main characteristic of market of shares is trend of set of shares (stock indexes come from here and the oldest of them – Dow Jones). Naturally the definition of points of trend’s “breakthrough” (i.e. turn) have special importance.

Dow has suggested to define trend by index of leading shares (industrial Dow) and a turn to determine the validity of a turn use the confirmation signal from the “transport Dow” (index of the transport companies).

Today, the major indexes for the American market are not only the Dow, but also S&P 500, NASDAQ 100, but the Dow technique can be applied now also.

Also the major indicator, especially in dramatic moments of turn of trends is the volume of trading. At the end of rapid growth almost always the last movement upward happens (in the day time scale) on sharp falling volume, and strong first falling – at great volume. Such picture took  place in a deep correction on the Russian stock market on May 10, 2006, for example.

So, the technical analysis. Major POSTULATES:

• Price takes into account EVERYTHING;
• Prices are moving directed;
• History repeats itself.

It is classical, “educational variant”. I’d like to offer some of my own amendments – clarifications:

• Price takes into account everything. However this happens not immediately but gradually! And the more global acting factor is, the longer is the “response time” of price.

The theory of efficient market implies INSTANT action of the new information to the price:

• Prices are moving directed. SOMETIMES! But not all the time.
• History repeats itself. This fact is the most nebulae, I will not comment it. Usually in training “figures” of technical analysis are demonstrated – double peaks, “head-shoulders”, etc. But you can always find cases where the figure “does not work”.

Nevertheless the technical analysis is the major tool of the analysis as it helps to understand the state of the market (in what condition is our share?).

Let’s try to supplement postulates of technical analysis:

• The prices graph contains simultaneously casual and non casual component;
• The ratio of “casual-non casual” components defines efficiency of the market: the higher is the share of casual components, the more effectively market is, and the more difficult is earning on it.
• Task of trader (and investor) is to allocate non casual component and use it for profit.
• We can identify two states of an active (or the market): trend movement and consolidation. Two of these are moving from one state to another, cyclically, but through different time-intervals.

It is fundamentally important for the trader (investor) to learn to identify are we in trend motion or in zone of consolidation. There is the best trade tactic for each of these states, but when applying the tactic at the wrong market, we risk to get losses instead of profits.

Basic strategies on the market of shares:

- A strategy of long-term retention of positions ( “buy and hold”) is a simple but effective strategy. It assumes acquisition of first-class shares (necessarily without using credit leverage!). Ideally requires opportunities of regular buying extra securities over a long period. Result (yield) increases substantially if producing “additions” in case of considerable (20 and over%%) declining market. Disadvantages are obvious – extra-long “jam” in positions is possible in case of an unsuccessful point of initial entrance;

- Strategy of investment “in index” – is a kind of previous strategy, with the shares acquired in accordance with their share of the common indexes (USA – Dow Jones, S&P500);

- Portfolio growth strategy – shares are purchased to the portfolio, having (from the point of view of manager) high growth potential. Advantage of this strategy is high profitability in a growing market;

- Strategy of aggressive portfolio management – strategy designed to yield additional profitableness, received because of manager’s professionalism. It is critical enough to behaviour of the market.

The organization and placement of bonded loans allows financial markets to involve larger sums under lower rates than loans on bill loans. However, this type of financing may not be available immediately to all enterprises. It is essential that the company-emitter had already positive public credit history, that is attracted funds from the previously open markets, for example, by borrowing bill loans. It is necessary to note also that the production and placement of bonds is more difficult and lengthy procedure than the placement of bills and much more expensive for the organization of the release.

However, all this is justified, because the fact of placement of bonds considerably raises the image of company, and if there were several successful releases of bonds and there were no problems with their repayment, investors start to treat with greater trust to the emitter. Besides the positive public credit history of the company is very valuable non-material active allowing to place bonded loans under lower interest rates in further. It makes bonds of one of the cheapest forms of financing.

Thus, the emitter becomes recognizable in business community of investors, portfolio managers, managers, speculators and financiers. Demand for papers of the emitter raises, that opens prospect to the company to be on the share market, after IPO. The public companies have a number of advantages over private companies, they have a good tool of financing of the business that makes real realization of many expensive projects.

Process of issue of bonds consists of eight basic stages:

• Carrying out of the analysis, whether company can place in general the enterprise bonds;
• Careful study of parameters of the future bond loan;
• Decision-making on release of bonds
• Realization of activities to raise interest of investors to release of bonds of the Emitter;
• Preparation and registration of the prospectus of issue;
• Placement of bonds among investors;
• Registration of the report on release;
• Organization of the secondary market.

The organization of the secondary market is the important stage in placing of the bond loan, allowing investors to buy and sell bonds freely, diversifying their forex investments and increasing demand for papers of the Emitter.

This article describes ordinary shares and investments basics to Forex players.

Ordinary shares attract Forex investors for different reasons: it is an opportunity to earn much, if the rate will “fly up”, for owners of large packages of dividends can provide a permanent source of income. Considering variety of shares traded on the stock market (more than securities 20000 in U.S.) – it could be argued that whatever is investor’s objective, he could always pick up the paper, suitable for his investment strategy.

The basis of attractiveness of shares is that their owner is entitled to participate in profits of the company. Naturally, in case of rapid growth of company income rate of its shares also grows – the history of the stock market knows many examples when the stock price increases in the tens and hundreds of times by year or two. Bad aspect is that the investor is not only not guaranteed any level of profitability, but simply keeping enclosed means in safety. Stock market knows a lot of stories when strongest market falls and bankruptcies of largest companies such as the crisis of 1987 and 1999-2000 in USA, the Russian stock market collapse in May of 2006; Enron collapse and bankruptcy of YUKOS.

Stock indices – Dow Jones (S&P500,NASDAQ) have stable growing momentum in the long scale.

Difficulty, therefore, lies in correct selection of shares for inclusion in a portfolio of the investor.

Mutual fund is a combined investment funds transferred to trust management company. Mutual fund itself is not a legal entity, it is so-called “property complex”, and indeed, is investment portfolio.

Investing money in mutual funds, investor actually enters into a contract with the management company and trust management becomes the owner of investment shares. Management Company extradites shares, making this trust management of mutual funds.

The assets transferred into mutual funds by shareholders, remains the property of shareholders and management company is implementing trust management of mutual funds, making transactions with that property.

The Management Company is entitled to transfer their rights and responsibilities for managing mutual funds to another management company.