Multipliers for Stock Analysis: Reviewing Ebitda
Author: Maks Artemov
In our previous articles, we’ve already discussed several market multipliers such as P/S, P/E, ROI, ROE and the ways they are calculated. This time, we’ll get acquainted with another one called Ebitda. Just like other multipliers, Ebitda provides insight into the company’s finances based on its performance.
The Ebitda multiplier – what is it?
Ebitda means “Earnings before interest, taxes, depreciation, and amortization”. Basically, it’s the money earned by a company before all expenses. This multiplier was created way back in the eighties last century and has been used since then because it still appears relevant and can be applied for assessing the financial capabilities of business entities.
Big companies and corporations with massive expenses and assets, which they have been depreciating for a long time, find it very favourable to focus interested parties on the Ebitda coefficient. By doing this, they make their companies more attractive to investors. And vice versa, small companies with minor expenses and assets prefer not to showed their Ebitda multiplier, as it can ruin their investment appeal.
Quite often, Ebitda is coupled with a similar multiplier called Ebit, although they are calculated in different ways. Ebit implies “Earnings before interest and taxes”.
What does Ebitda show?
1. Efficiency of the company’s performance in comparison with its competitors in the industry. Just like many other multipliers, it won’t do any good comparing companies from different sectors.
2. Profitability. Whether there is any use in investing money in this particular company and what profit expectations it offers.
3. Profit expectations for paying expenses, amortization, and taxes. Can the company afford to pay all the above-mentioned and what profit will it have in the end?
Advantages and disadvantages of the Ebitda coefficient (multiplier)
Advantages:
1. It’s more accurate than other multipliers in determining the volume of money due to consideration of amortization.
2. It allows to compare companies with different tax deduction levels, capital structures, and amortization indicators.
3. It offers the opportunity to compare profits before tax and amortization. Based on them, one can draw a conclusion which company is better at optimizing their expenses.
Disadvantages:
1. There is no single calculation method. Calculations for different companies may vary a lot, hence the comparison is made with unsuspected errors.
2. It doesn’t take into account changes in the company’s working capital, thus leading to an incorrect volume of money, which is usually overestimated.
3. In the case of neglected capital expenses, it misinterprets the company’s actual capabilities to repay its debts.
4. The company’s accounting policy has a direct influence on the Ebitda coefficient.
How Ebitda is calculated
There are two of the most popular methods to calculate Ebitda:
Ebitda top-down = Revenues – Costs of goods (not including amortization) + Operating expenses
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Best Medium-term Strategies: Larry Williams's Moving-Average Based Strategy
Author: Timofey Zuev
Larry Williams described this strategy in his book "Long-term Secrets to Short-term Trading". It suits both Forex and other financial markets. With timeframes, things are more complicated: technically, the strategy suits TFs from M1 to MN but as long as from opening to closing the position more than one candlestick can pass, trading on small TFs can be unprofitable due to fixed spreads, like in Forex.
The desktop of Larry Williams strategy
https://blog.roboforex.com/wp-content/uploads/2021/07/1-1008x630.png
Explications:- A Simple Moving Average drawn through High.
- A Simple Moving Average drawn through Low.
- Local highs of the SMA (High).
- Local lows of the SMA (Low).
Signals to buy by the strategy
Larry Williams suggests the following conditions for buying: in an uptrend, open a position when the price touches the SMA (Low) and close it when the price touches the SMA (High). As soon as one trade is closed, open another one and keep going until the trend changes to descendin. If a signal to buy coincides with a trend reversal, skip the signal and start trading when the trend becomes ascending again.
An example of signals to buy:
https://blog.roboforex.com/wp-content/uploads/2021/07/2-en-1008x630.png
Note that in the picture, there are several buying opportunities, but keep in kind that only one position must be opened and closed before you open the next one.
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How to Trade VIX?
Author: Andrey Goilov
Traders have always been trying to analyze and forecast future price movements. There are plenty of ways of making such forecasts and analyses. Some use chart patterns, some construct complicated trading systems based on indicators. However, there is always an alternative to all these approaches, which is VIX analysis.
This instrument is the index of future volatility of the US stock market. It is also known as "the fear index" because it can demonstrate the market sentiment. When the index values grow, this might mean that the market is expecting serious movements, such as corrections or even global crises. This information, in turn, can be used for making trading decisions.
This article is devoted to VIX and the ways of trading it and its derivatives.
What is VIX?
VIX, or the Volatility Index, was created in 1993 in Chicago Board Options Exchange. Speaking rather particularly, it represents the opinion of traders on the stock market behavior over the next 30 days.
VIX is calculated by the Black-Scholes formula based on 8 stocks from the S&P 500. VIX values can give an idea of how volatile next market movements will be, and this information, in turn, might help investors make a good trading decision.
Some say that market volatility will grow alone guide the growth of the index values. And if the index values are low, the market will remain stable, while any expectations of volatility surges or some malfunctions in the global economy will be useless.
For example, in March 2020, the index values rose extremely high, reaching the level of 2008 when the world got immersed in a tremendous economic crisis. Indeed, the beginning of 2020 was rather unstable, and investors were pretty scared, which resulted in a serious slump of stocks.
Now it is clear that while the market is falling deeper and deeper, panic and uncertainty among investors only grows, and VIX values rise. With VIX, you can try catching the beginning of panic as well as its potential end and start buying cheaper shares without any hurry.
How to trade VIX?
Most often, the fear index is invested in via ETFs or ETNs. Let us focus on some of the instruments.
ProShares VIX Short-Term Futures ETF (VIXY)
This is a rather popular instrument among other ETFs. It represents the volatility dynamics of VIX based on the S&P 500 VIX Short-Term Futures Index, which, in turn, consists of a set of short-term VIX futures.
However, I would recommend VIXY to experienced investors only. As a rule, when the investor understands well what they need, they either try to make a profit on the growth of the S&P 500 volatility or hedges from a significant market slump.
iPath B S&P 500 VIX Short-Term Futures ETN (VXX)
This one is a popular instrument among ETNs. It offers an access to a daily moving long position in VIX futures of the first and second month. VXX represents expectations of investors about the future direction of VIX at the moment when its futures expire.
The asset is volatile, and its movements can reach 10% a day, but high risks mean high potential profit that might be interesting for aggressive traders. Note that VIX movements may have no correlation with VXX, there is a certain lag.
Traders also note that VXX does not suit long positions but it still has negative correlation with the S&P 500. Hence, in large corrections, traders can make money on the growth of volatility with iPath B S&P 500 VIX Short-Term Futures ETN (VXX).
Closing thoughts
In essence, VIX represents the volatility of the US stock market. If its values rise high, investors are afraid of an approaching market correction. And if VIX values are low, this means investors are confident about future market growth.
Note that investments in VIX are thought to be risky, recommended to short-term and aggressive investors only. The "buy and hold" principle is useless here, you will have to keep tracking trades and market behavior on the whole to avoid serious losses.
The best time to invest in volatility is a financial crisis because market players will freak out and sell their assets, which will provoke the growth of volatility and a surge in VIX.
Do not forget about derivatives, such as ETFs and ETNs: they are available and east to sell and buy as any stocks in the marke.
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RoboForex: important information regarding GE reverse stock split on July 30th, 2021
On July 30th, 2021, General Electric (GE, GE.ny) will have its stock go through a reverse split with a ratio of 1:8.
A reverse stock split is a corporate action as a result of which the company reduces the number of issued shares by a specific multiplier and simultaneously increases the value of each share by that multiplier. GE's split for example will mean that a shareholder who had 8 shares that are worth 13 USD each or 104 USD in total will have 1 share worth 104 USD.
How will it influence positions and orders?
If you have open positions in GE or plan to open such positions, please pay attention to the following changes, which will happen between 31st of July and 2nd of August.
MetaTrader 4 / MetaTrader 5 accounts- All pending orders (Buy Limit, Buy Stop, Sell Limit, Sell Stop, Buy Stop Limit, Sell Stop Limit, Stop Loss and Take Profit) orders on GE will be cancelled before the session opens at 16:31 on the 2nd of August.
- The opening price of all positions that are open as of 15:00 (server time) on the 2nd of August on GE will be multiplied by 8.
- The volume of all open positions on GE will be divided by 8.
- In case the total exposition in GE is not a multiple of 8, the account will retain an open position with a volume that is a multiple of 8. The remaining volume will be closed at the last price of the 30th of July (Bid price will be used for Buy positions and Ask price for Sell positions).
Example:
In case you had one position with a total volume of 42 shares purchased at a price of 12, as of the 2nd of August, your account will have one open position with a volume of 5 and an opening price of 96 (12*8) and cash transaction with an amount equal to the result of closing the remaining 2 shares at the last price of the 30th of July.
In case you had several positions, they will all be combined into one position. The new position will have the opening price based on an average weighted price of all positions held before the split. If you had 3 following positions, 10 shares purchased at a price of 12; 20 shares purchased at a price of 12.5; 12 shares purchased at a price of 13, as of 2nd of August, your account will have:- an average weighted price of all positions is (10*12+20*12.5+12*13)/42= 12.52.
- one open position with a volume of 5 and an opening price of 100.16 (12.52*8).
- 2 positions closed with 0 result.
- cash transaction with an amount equal to the result of closing the remaining 2 shares at the last price of the 30th of July.
In case the total exposition in GE is less than 8, the position will be closed at the last price of 30th of July (Bid price will be used for Buy positions and Ask price for Sell positions).
R Trader accounts
The Split procedure will run on the server at 15:00 server time.- During the procedure, all active pending orders (Buy Limit, Sell Limit, Take Profit, and Stop Loss) for GE and GE.ny will be cancelled.
- The opening price of all positions that are open as of 15:00 (server time) on the 2nd of August will be multiplied by 8.
- The volume of all open positions will be divided by 8.
- If you hold more than one position in any of those instruments in one direction, they will all be combined into one position. The new position will have the opening price and a volume based on an average weighted price of all positions held before the split.
- In case a deal receives fractional shares, such shares will be liquidated for cash transaction - "Split cash correction". The volume of other deals for the related instrument will be reset to 0 and moved to History Tab.
Pay attention to Expert Advisors (EA)
If you are using an Expert Advisor (EA), we suggest that you double-check with its developers whether its code needs any modifications to ensure that the EA operates correctly after the stock split.
The historical charts in your trading terminal will be updated to reflect the new prices of the instruments. Please, take into account this information when planning your trading activity.
All other aspects of trading conditions shall remain the same unless otherwise stated.
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How to Trade the Engulfing Pattern?
Author: Dmitriy Gurkovskiy
This overview is devoted to the Engulfing pattern; to how it forms and works. This candlestick pattern is easy to note on the chart. It forecasts a reversal of the actual trend.
How does the Engulfing pattern form?
The Engulfing pattern is a reversal candlestick pattern that forms on the local highs and lows of the price chart in an uptrend or downtrend. It consists of two candlesticks: the first one has a relatively small body, while the second one is of the opposite color and has a larger body that fully covers (engulfs) the first candlestick.
In terms of the market behavior, an Engulfing pattern means that the actual trend is losing its power and tempo — the first candlestick demonstrates this. The previous movement loses strength, and the market balance is feeble.
The appearance of the next mighty candlestick of the pattern that engulfs the previous one and closes in the opposite direction, signifies the beginning of a correction that might even turn into a reversal of the current trend.
Types of the Engulfing pattern
Depending on the color of the second engulfing candlestick, two types of the pattern are sungled out: the Bullish engulfing and the Bearish engulfing.
Bullish engulfing
The pattern forms in a downtrend at the local lows of the price chart. The first small black candlestick of the pattern shows that bears are losing power; then a large white candlestick appears, fully engulfing the body of the first one. This means that bulls are advancing, feeling the bears' weakness.
Next thing, the price goes upwards, and an ascending correction starts. This is confirmed by the quotations rising higher than the high of the large bullish candlestick, the second one.
Bearish engulfing
The pattern forms in an ascending impulse at the local highs of the price chart. The first small white candlestick means that bulls are tired and need a pause. The large black candlestick that follows shows that bears are using their chance, counterattacking.
Then the quotations go down, and a descending correction starts. This is confirmed by falling under the low of the second candlestick, the large and white one.
https://blog.roboforex.com/wp-content/uploads/2021/07/Engulfing-en.jpg
Closing thoughts
Reversal candlestick patterns called Bullish engulfing and Bearish engulfing form at the local extremes of the price chart in an uptrend or downtrend. They predict a possible correction or even a reversal.
The efficacy of the patterns increase in presence of certain enforcing factors and alongside tech analysis patterns, support/resistance levels, and signals of trading indicators. Before trading for real, practise the patterns on a demo account.
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RoboForex gives away $1,100,000 among its clients and partners
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Dear Clients and Partners,
Join the promotion for $1,100,000 to celebrate RoboForex’s 11th birthday! Each month from July 2021 to April 2022, there will be a giveaway of money prizes among traders with Prime account, Partners, and CopyFX Traders with Prime accounts.
Over 500 for the total of $1,100,000
will be given away over 10 months- 54 winners each month
The prize pool of each giveaway is $110,000.
- Up to 3 chances to win
You can receive one coupon in all three categories each month.
- Prizes up to $20,000
Your prize can be immediately withdrawn from the account or used in further trading.
How to join?
Receive Coupons for fulfilling the conditions below. You can participate in monthly giveaways and receive Coupons in all 3 categories.
1. Traders with Prime accounts
Trade with the best conditions: spreads from 0, commission for the trading volume of 1 million USD decreased to 10 USD. leverage up to 1:300.
Conditions for receiving a Coupon:- Deposit at least 300 USD to your account.
- Perform at least 3* lots of trading operations per month.
Open Prime account
2. Partners
Attract clients to trade and receive up to 60% of the Company’s revenue.
Conditions for receiving a Coupon:- Partner commission at month-end is at least 300 USD
3. CopyFX Traders
Earn on your strategies at CopyFX and increase your chances to win a prize.
Conditions for receiving a Coupon:- Make the Top-30 of the best CopyFX Traders on Prime accounts in the current month.
Open CopyFX Prime account
Join the offer right now, take part in as many giveaways as possible, and increase your chance to win. Good luck!
Join
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- 54 winners each month
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RoboForex adds 30 CFDs on Brazilian stocks to R Trader
https://roboforex.com/uploads/news/2021/brazil-stocks-rtrader/header-bg.png
Dear Clients and Partners,
RoboForex has expanded the list of trading instruments in its innovative R Trader web terminal by making 30 CFDs on Brazilian stocks available for trading with tight spreads and low commissions! The list of new instruments includes such companies as AmBev (ABEV3), Banco Bradesco (BBDC4), Itau Unibanco (ITUB4), Petrobras (PETR4), and Vale (VALE3).
Conditions for trading CFDs on Brazilian stocks- Commission – from 0.1% (but not less than 10 BRL).
- Spreads – from 0 pips.
- Leverage – up to 1:5.
- Trading time – from 4:10 to 10:55 PM (server time).
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RoboForex: important information regarding NVIDIA stock split on July 20th, 2021
On July 19th, 2021, NVIDIA Corporation (NASDAQ: NVDA) will have its stock go through a 4 to 1 split.
A stock split is a corporate action, as a result of which the company increases the number of issued shares by a specific multiplier. The value of the portfolio consisting of these shares remains the same.
How it will influence positions and orders?
If you have open positions in NVDA or plan to open such positions, please pay attention to the following changes, which will be effective as of July 20th, 2021:
MetaTrader 4 / MetaTrader 5 real accounts:- All pending orders (Buy Limit, Buy Stop, Sell Limit, Sell Stop, Buy Stop Limit, Sell Stop Limit, Stop Loss, and Take Profit) in NVDA will be canceled before the trading session starts on July 20th, at 4:31 PM server time.
- The opening price for all positions in NVDA on the account active on July 20th, at 3:00 PM server time will be divided by 4.
- The volume of all open positions in NVDA on July 20th, at 3:00 PM server time will be multiplied by 4.
- All pending orders (Buy Limit, Buy Stop, Sell Limit, Sell Stop, Buy Stop Limit, and Sell Stop Limit) in NVDA will be canceled before the trading session starts on July 20th, 4:31 PM server time.
- All open positions in NVDA will be closed before the trading session starts on July 20th.
The split procedure will take place on July 20th, at 3:00 PM server time- During the split procedure, all active pending orders (Buy Limit, Sell Limit, Stop Loss, and Take Profit) in NVDA and NVDA.nq will be canceled.
- The opening price for active positions in NVDA and NVDA.nq opened before July 20th, 3:00 PM server time will be divided by 4.
- The volume of all positions in NVDA opened before July 20th, at 3:00 PM server time will be multiplied by 4.
- If you have at least two open positions NVDA or NVDA.nq in the same direction and on the same account, they will be combined into one new position. This new position will have the opening price and a volume based on an average weighted price of all open positions held before the split.
Pay attention to Expert Advisors (EA)
If you use Exerts Advisors, (EA), we recommend you contact the developers to make sure they will work correctly after the split.
The historical charts of the above-mentioned instruments in your trading terminal will be updated to reflect the new prices. Please, take into account this information when planning your trading activity.
All other aspects of trading conditions shall remain intact.
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RoboForex: changes in trading schedule (Independence Day in the USA)
We’re informing you that on July 5th, 2021 due to the celebration of Independence Day in the USA, there will be some changes in the trading schedule*.
MetaTrader 4 / MetaTrader 5 platforms
Trading schedule on Metals (XAUUSD and XAGUSD), US indices (US30Cash, US500Cash, and USTECHCash), the Japanese index J225Cash, and CFDs on oil (Brent and WTI)- July 5th, 2021 – trading stops at 7:40 PM server time.
- July 6th, 2021 – trading starts as usual.
- July 5th, 2021 – no trading.
- July 6th, 2021 - trading starts as usual.
R Trader platform
Trading schedule on Metals (XAUUSD and XAGUSD) and CFDs on oil (BRENT.oil and WTI.oil)- July 5th, 2021 – trading stops at 7:40 PM server time.
- July 6th, 2021 – trading starts as usual.
- July 5th, 2021 – trading stops at 7:40 PM server time.
July 6th, 2021 – trading starts as usual.
- July 5th, 2021 – no trading.
- July 6th, 2021 – trading starts as usual.
- July 5th, 2021 – no trading.
- July 6th, 2021 – trading starts as usual.
cTrader platform
Trading schedule on Metals (XAUUSD and XAGUSD)- July 5th, 2021 – trading stops at 7:40 PM server time.
- July 6th, 2021 – trading starts as usual.
* – This schedule is for informational purposes only and may be changed by the provider.
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How to Trade in Forex during Crises?
Author: Maks Artemov
In times of crises in the gloval or local economy, traders have only questions: how to trade and make money? Should one pay attention to currency pairs — or invest in protective assets, such as gold, right away? Which trading strategies to use?
Before answering these questions, let me remind you that Forex, unlike, other markets, always feature liquidity and volatility. If the stock market might be experiencing certain lull, currency pairs keep trading all the time, and in crises, they are almost always in trends (ascending or descending). However, even this rule has exceptions.
The next idea should neither be news to you: trading in crises, especially in a highly volatile market, implies increased risks. They will also be touched upon in this article.
And now let us look at some examples of how crises can influence currency prices and how we can use it in trading.
Types of crises and examples of trading
A crisis can emerge at the global level (the COVID-19 pandemic is a good example) as well as at the local one. One example of the latter type is natural disasters.
Such events cause damage to the infrastructure and people's homes, goods supply, transport, and manufacturing. As a rule, the country becomes unable to produce and export goods because it spend all of its resources on recovery.
In most cases, the country's national currency starts falling. This gives a chance to sell pairs containing this currency. However, the beginning of such falling, not to mention its end, is rather hard to predict. The currency might even not react to the natural disaster.
Let us look at the example of AUD/USD and GBP/USD during floods in Australia and Great Britain in March and June 2012. While the Australian dollar demonstrated a serious slump, the pound remained in a flat.
https://blog.roboforex.com/wp-content/uploads/2021/06/audusd-1200x553.jpg
AUD/USD chart during the flood in Australian in March, 2012
https://blog.roboforex.com/wp-content/uploads/2021/06/gbpusd-1200x553.jpg
GBP/USD chart during the flood in England in June 2012
The movements of national currencies depend on the scale of the disaster and the country's readiness to cope with the consequences. As seen on the charts below, we cannot always evaluate these factors fully. It seems that in such circumstances, the only reliable strategy is scalping or intraday trading. However, sometimes in crises, the market allows to trade medium and long run. In the end, everything depends on the trader’s ability to assess the macroeconomic situation correctly.
As one example, take the debt crisis of Europe in 2009-2010. The trigger was the economic crisis in Greece, and market panic ragged the common European currency down. At that tie, the euro lost up to 20% of its price.
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How to Trade Hanging Man and Inverted Hammer?
Author: Victor Gryazin
This overview is devoted to two reversal patterns from candlestick analysis — the Hanging Man and Inverted Hammer. Appearing on the chart, the patterns might precede a correction or reversal.
How do the patterns form?
The Hanging Man and Inverted Hammer are candlestick analysis patterns. Candlestick analysis began in Japan, and Steve Nison, famous trader and analyst, became its active apologet. Being informative and very visual, candlestick analysis is fairly popular among traders.
How the Hanging Man forms
The Hanging Man reversal pattern forms at the price's highs after an ascending movent. The pattern looks like a candlestick with a small body (the color does not matter) with a small upper shadow or none at all — and an extremely long lower shadow, at least double the size of the body. The Japanese must, indeed, have seen the figure of a hanged person in this pattern and thus gave it such a grave name.
The idea of the Hanging Man is as follows. At some point, a massive sale of the asset happens; then buyers try to get the quotations back to the highs, which is indicated by the long lower shadow. A dubious moment comes: bears are active and ready to counter-attack but bulls still have the vigor and hope to win the battle.
The clue to who will win is the manner in which the candlestick following the Hanging Man closes. If this is a bearish candlestick with the close price below the Hanging Man's body, this means the reversal pattern has formed fully, so we may count on further falling. Otherwise, if bulls manage to close the day in their own favor, the pattern is not considered confirmed: the reversal signal is canceled, and the uptrend is likely to continue.
https://blog.roboforex.com/wp-content/uploads/2021/06/HangingMan-581x630.png
How the Inverted Hammer forms
The Inverted Hammer reversal pattern is a mirror reflection of the Hanging Man. It appears at the lows of the price chart in a downtrend. The pattern is a candlestick with a modest body (the color does not matter), with a small lower shadow or no shadow at all — and a very long upper shadow, at least twice as long as the body. It resembles a hammer with its handle looking up, which, naturally, gave the pattern its name.
The pattern works the following way. In a downtrend, active buying bursts out at some point, which is confirmed by the long upper shadow of the candlestick. The market becomes uncertain: bulls try to capture the in
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MACD – Trading the Trend Strategy
Author: Andrey Goilov
This trading method using Moving Averages works well with strong market movements. You must have already heard that trading the trend usually yields brilliant results; and if you add an oscillator, you get a full-scale trading strategy.
An indicator-based strategy is attractive because it has strict entry and exit rules. And if the trader uses graphic analysis, they usually have to analyze charts looking for price patterns, as well as subjectively evaluate the market situation.
Today, I will be telling you about a strategy used on M30 and H1. It allows placing close Stop Losses and trading intraday.
About the strategy MACD – Trading the Trend
The strategy is based on three Moving Averages, and MAs are the best indicator showing the market trend. Knowing the trend, you will know the direction of your work. As an additional signal source, the MACD is used. The strategy suits GBP/USD, AUD/USD, EUR/USD.
Parameters of the trading strategy
The strategy demonstrates the best results on H1 and M30. To get started, prepare the chart and add some indicators with certain parameters.- MA (85) is a Linear Weighted MA with period 85, apply to: Low, color: blue.
- MA (75) is a Linear Weighted MA with period 75, apply to: Low, color: dark-blue.
- MA (5) is a Linear Weighted MA with period 5, apply to: Low, color: yellow.
- MACD (15, 26, 1) is the MACD with fast EMA (15), slow EMA (26), MACD SMA – 1.
https://blog.roboforex.com/wp-content/uploads/2021/06/Pic-1-NZDUSD.png
A signal to buy by the strategy
The main signal to open a trade is a breakaway of the two slow MAs by the fast one, while the MACD will be used as an extra filter. The crossing of two MAs is a simple signal for a change of the trend. In this case, we expect a downtrend to come to an end and an uptrend to start, which means it is time to buy.
The parameters for entering a buying trend are as follows:- The MA (5) crosses the MA (85) and (75) from below, signifying a change of the trend.
- The MACD values are above zero, indicating the presence of an uptrend.
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How to Trade with Bulls Power and Bears Power Indicators?
Author: Victor Gryazin
This article is devoted to using two indicators: Bulls Power and Bears Power – in financial markets. These indicators are meant for measuring the strength of trends.
How do Bulls Power and Bears Power work?
These indicators were created by a famous trader and the author of the book “Elder Triple Screen” Alexander Elder. They help estimate the current power balance of buyers and sellers and catch the moment when bears/bulls are getting weaker. The combination of these indicators is also known as the Elder Ray.
Bulls Power demonstrates the strength of bulls in the market. It compares the highs with the Exponential Moving Average. If the Bulls Power histogram is above zero and growing, this means buyers are holding the price above the EMA, and bulls are now stronger than bears. And vice versa, if the histogram is declining, dropping below zero, this indicates the predominance of bears.
Bears Power, in its turn, demonstrates the strength of bears in the market. It compares the lows with the EMA. If the Bears Power histogram is below zero and declining, this means sellers are holding the price below the EMA, and bears are now stronger than bulls. However, if the histogram starts growing and rises above zero, this means bulls are in control of the market.
In essence, Bulls Power and Bears Power are irregular oscillators. They appear in separate windows under the price chart. They look like bar histograms with the central line at zero. To determine the direction of the active trend, Elder recommends adding to the chart an EMA (13), drawn by close prices.
https://blog.roboforex.com/wp-content/uploads/2021/06/BullBearPower-1009x630.png
Installing and setting up the indicators
Bulls Power and Bears Power are included in many popular trading terminals. To install the indicator to the chart of your financial instrument in MetaTrader 4 or MetaTrader 5, go to the Main Menu: Insert/Indicators/Oscillators/Bulls Power and Bears Power.
The formulae of the indicators look as follows:
• Bulls Power = HIGH - EMA (13)
• Bears Power = LOW - EMA (13)
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How to Diversify Your Trading Portfolio? Basic Approach
Author: Maks Artemov
Trading in financial markets can bring profit and losses in turns. There are plenty of reasons for losing money, starting with unpredictable behavior of assets and through an unwisely collected portfolio. This article is devoted to the latter reason, discussing basic approaches to diversifying your portfolio for decreasing risks and getting the maximum from the market.
We all know the saying: “Never put all the eggs in one basket”, and it perfectly describes the danger of undiversified portfolios. Putting all the eggs in one basket here means investing everything in one instrument and waiting for a profit. Practice shows that this strategy does not always work.
What is diversification?
In investment, diversification means distributing your investment capital among various financial instruments to decrease risks and increase profit. This approach helps to compensate for possible losses that emerge from a decline of one of your instruments by making a profit on your other instruments.
Until the 1950s, diversification principles in the stock market were limited by fundamental analysis (Graham and Dodd’s theory): people chose investment options by studying the business of issuers, almost neglecting risks.
In 1952, in the Journal of Finance there was published an article on collecting an investment portfolio by a young postgraduate Harry Markowitz. His ideas from the article and his PhD thesis became the base for the modern portfolio theory.
Markowitz described a fully mathematical approach to forming an investment portfolio that allows choosing assets based on the profit/risk ratio. In 1990, he won the Nobel prize for his research.
In this article, I will not describe Markowitz’s ideas or the statistical aspect of forming a portfolio because these are the topic for a different, much more detailed talk. Before starting such a talk, you will need to understand the basic principles of diversification to avoid putting all the eggs in one basket already at this stage.
Basic diversification principles for an investment portfolio
In the modern world, all the branches of the economy cannot be growing at once. Hence, investors need to distribute their capital in such a way that in the case of a slump of an asset or group of assets in one sector of the economy the portfolio still generated a profit.
The basic diversification principle presumes distributing your investment capital among the shares of companies from different branches of the economy, as well as among various financial instruments.
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What Is Pairs Trading and How to Use It?
Author: Victor Gryazin
Pairs trading is a market-neutral trading strategy that implies buying and selling similar (correlating) trading assets simultaneously.
This method is equally valid for the currency, stock, and commodity markets. The hardest part of this method is choosing the type of assets.
In this article, I will tell you about the main principles of pairs trading, describe basic ways of choosing your instruments, and give examples of using the strategy in the real market.
What is the gist of pairs trading?
Pairs trading is a method based on trading two correlating financial instruments simultaneously in opposite directions.
Correlation is a statistical link between two or more values (assets). It can be direct and inverse. In the first case, one asset basically repeats all the movements of the other one. If the correlation is inverse, the charts of two instruments are mirror-like.
As an example of direct correlation, take the behavior of oil prices and stock prices of oil companies. When oil prices grow, stocks also grow. And vice versa: when oil prices are falling, correlation will stay in place, only in the opposite direction.
However, each oil company will grow or fall in its own way, faster or slower. This temporary divergence of prices can be used for pairs trading.
The strategy of pairs trading uses the principle of balance: it presumes that divergences of correlating instruments tend to return to their average values. Such divergences happen after some important fundamental events: changes in interest rates by Central banks, corporate events, etc.
To trade by the strategy, find a highly correlating pair of financial instruments, one of which has grown/fallen compared to the other. We expect the correlation to restore with time, after which you will close the position.
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How to choose instruments for pairs trading?
Choosing assets for this strategy implies using fundamental and technical analysis, as well as statistical calculations. On the whole, you can start to look for instruments for pairs trading among:- The stocks of companies of one market sector;
- Contracts for similar instruments: Brent and WTI oil, gold and silver, etc.
- Interconnected currencies.
In this article, I will try not to overwhelm you with mathematical calculations, opting for choosing the assets by graphic analysis. However, mind that this is just one way of choosing instruments for graphic trading, and not the most precise one.
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