Spot market strategies. 2 Investment myths There are strategies giving advantage automatically Experts are right any time Everything is to forecast Firmly.

Spot market strategies

2

Investment myths

• There are strategies giving advantage automatically

• Experts are right any time• Everything is to forecast• Firmly companies are always

recommended• Information about economic

results coverts investor needs

3

Real sources of investor advantage

• Better access to information

• Higher portfolio diversification

• Bigger financial recourses

• Better knowledge and experience

4

• Week h. – all information from the past are not useful, because every body can get these

• Semi-strong h. – information form the past and current public information are not useful, because every body know or can know these

• Strong h. (random walk h.) – all information, even not published, are known by investors

Financial market hypothesis

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Main item of investment decision

• Expected rate of return

• Estimated risk of loss

• Time of market entry

• Time of market exit

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Rules of portfolio building

• Security market in the long time is always efficient

• To get average return of security market one should diversificate investment in time and securities spectrum

• Diversification in time is to achieve by long time, regular investment

• By diversification of securities spectrum one should take into account relation of substitution and dependency

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Simplest methods of efficient investment

• Constant dollar plan – determine portfolio value, if you have surplus – sell it, if deficit- go to accomplish. Because security market is efficient, in the long time you will be often in position of seller then buyer

• Fixed relation method – determine relation between passive side (bonds) and active (stock) side. I you portfolio deviate from this relation, sell and buy to return it. On this way you use the chance offered by opposite price movement of bonds and stock

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Professional approach

• Fundamentalist – stock price depends on economic potential of the company

• Econometrics – portfolio could be created using criteria: expected return ratio, minimum risk

• Technicians – information about future stock price are contained in the price from the past

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Fundamentalists

• Stock price depends on the company development potential

• Success of the company depends on– company itself (finance, management,

innovatory, human capital etc.)– close environment (clients, suppliers,

competitors, natural opportunities etc.)– distant environment (market

opportunities, system stability etc.)

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Fundamentalists cont• Possible results in future are more

important then success right now• Company success is created long

time, investment in stock should wait log time to be profitable

• The non-quantitative information is also necessary

• To get information only is to less. The company should be known directly

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One coefficient model

• Algorithm of expected return ratio

R=α + βI + γwhere R – return on stock

investment, I – stock market index

α, β, γ – regression function parameters, and also symbols some groups of companies

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One coefficient model cont.

• Company types

α – companies with long term, stable growth

β – companies strong depend on stock market situation

γ – companies with no recognised factors of growth

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r1 σ11 σ12 ….. σ1n

r2 σ21 σ22 ….. σ2n

r3 σ31 σ32 …. σ3n

…. …. …. …. ….

rm σm1 σm2 …. σmn

Standard deviation of company „i”

σi= βσM+ σe

where σM – standard deviation of the index, σe – standard deviation of the rest

Companies one can put in order according rate of return (rows) and standard deviation value (columns)

One coefficient model cont.

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One coefficient model cont.

• Target: chose stock and its share in portfolio to reach determined portfolio rate of return (rp) by minimal portfolio risk (σp), therefore

rp = r1u1+r2u2+ …rkuk and σp=min

where u1,u2...uk – shares of stock in portfolio and

algorithm of portfolio standard deviation is as follow

σp2= σM

2 (Σui2 βi+ Σ Σ uiujβiβjrij)+ Σui

2 σei2

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…………..

……………………….

……………………..

M

D

σ

……………………………….………………

……………………………..

………….D

r

B

rp

One coefficient model cont.

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Technical strategies

• Dow Theory

• Majority trend – lasts over one year

• Secondary trend – from few weeks to one year, oscillating around the majority trend

• Minority trend – from few minutes to few days, without any significant meaning

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Basic directions of technical analyse

• Finding Elliot waves

• Formation

• Trend analyse

• Coefficients analyse

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R.N.Elliot theory

• Stock price changes in 8 phases (waves) cycle: 5 waves of impulse, 3 – of correction. In case ascending trend impulse is directed up, if descending - down

1

2

3

4

ab

5

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Elliot waves identification

• First step – phase identification (impulse, correction)• Key operation – finding third wave of impulse (it is

significant longer then previous waves)• Next step – measuring range of waves (difference

between lower ad upper price on the wave)• Minimal 3-th wave range is 1,618 x range of the first,

measured form the bottom of the second. The range of the 5-h is: bottom of the first + 3,26 (2x1,618) length of first, top of the first + 3,26 x length of first

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Formation

• There are special shapes of the price curve

• Range of formation is analysed by use of support and resistance lines

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Basic formation types

Canal

Price is oscillating between parallel lines. It doesn’t inform about exit direction (up, down). After puncture of some line, as next comes correction about 50% puncture impulse

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Basic formation types cont.

• Triangles and wedges

Exit from formation is opposite to its slope

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Basic formation types cont.

• Flag and banner

Exit from formation is opposite to its slope

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Basic formation types cont.

• Fan

Support line became a resistance line

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Basic formation types cont.

• Head and arms Double pick

All of these mean trend reverse

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Basic formation types cont.

• Saucer, reverse saucer

Trend is changing form horizontal to ascending (saucer) or descending (reverse saucer)

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Moving average. General Concept

Session number1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16Stock price 32 31,5 32 32,1 30,3 29,9 29 31 30 30,8 32 31,4 30 29,6 29,4 295-session m.av 31,6 31,2 30,7 30,5 30 30,1 30,6 31 30,8 30,8 30,5 29,9

27

27,5

28

28,5

29

29,5

30

30,5

31

31,5

32

32,5

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16

Stock price

5-session m.av

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Linear moving average

• By k-session moving average, the stock price x, from i session (from now back) using expression (k-i+1)/k, value of this average is

k

ik ikxk

S1

)1(1

'

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Exponential moving average

1

1

)1

21(

1''

ik

ik kx

kS

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Bollinger band• Construction: above and below trend line (moving

average, here invisible) put two lines, each in 1,75 standard deviation distance from the trend

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MACD• Construction. Figure contains two lines:

- value of MACD coefficient, which is the difference between long time moving average (28 session) and short time moving average (12 session)- signal line (very short time moving average (9 session)

Stock price

signalMACD coef.

oscillator

Oscillator – difference between signal and MACD coef. value

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Coefficients analyse. General rules

• Make decision, if at least two coefficients point the same price movement

• Take always into consideration the turnover value (merits by small turnover are not valuable)

• Always look at the main stock exchange index

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Basic coefficients

• Blue chips index• Breadth of the market – current value of cumulate

difference between number ascending and descending stock

• Market volume – ratio of number ascending and descending stock

• New high and new lows – relation of number of stock, which reach highest price in the year to the stock number, which reach lowest price in the year. Usually dates about such „picks” and „bottoms” is taken from at least 10 sessions

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Basic coefficients cont.

• Price earning ratio (P/E r.) – relation of current price to the company profit on one stock unit

• Relation of small to big lots trading on the stock exchange

• Share of short trade – relation of the monthly average short turnover to current short turnover