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Statistical analysis refers to a collection of methods used to process large amounts of data and report overall trends. Statistical analysis is particularly useful when dealing with noisy data. Statistical analysis provides ways to objectively report on how unusual an event is based on historical data. Our server uses statistical analysis to examine the tremendous amount of data produced every day by the stock market. We usually prefer statistical analysis to more traditional forms of technical analysis because statistical analysis makes use of every print. Candlesticks, by comparison, throw away an arbitrary number of prints before the analysis starts. Candlesticks, point and figure charts, and other traditional forms of technical analysis were designed long ago. They were specifically created for people who were analyzing the data by hand. Statistical analysis looks at more data, and typically requires a computer.
Measurement of return
The rate of return is the total return the investor receives during the holding period ( the period when the security is owned or held bu the investor) stated as percentage of the purchase price of the investment at the beginning of the holding period. In other word, it is the income from security in the form of cash flow and the difference in price of the security between the beginning and end of the holding period expressed as a percentage of the purchase price of security the beginning of the holding period. The general equation for calculating the total rate of return is show below: K = D + End of the holding period beginning of the holding period beginning of the holding period
Probability
Probability (or likelihood]) is a measure or estimation of how likely it is that something will happen or that a statement is true. Probabilities are given a value between 0 (0% chance or will not happen) and 1 (100% chance or will happen).[2] The higher the degree of probability, the more likely the event is to happen, or, in a longer series of samples, the greater the number of times such event is expected to happen. These concepts have been given an axiomatic mathematical derivation in probability theory, which is used widely in such areas of study as mathematics, statistics, finance, gambling, science, artificial intelligence/machine learning and philosophy to, for example, draw inferences about the expected frequency of events.
Probability theory is also used to describe the underlying mechanics and regularities of complex systems. A Probability is number that decribes the chances of event taking place. Probabilities are governed buy five rules and range from 0 to 1 A probability can never be larger than 1 (In other words maxims probability of an event taking place is 100%) The sum total of probabilities must be equal to 1. A probability can never be a negative number. If outcome is certain occure, it is assigned a probability of 1 , and impossible outcome are assigned a probability of 0 The possible outcomes must be mutually exclusive and collectively exhaustive The future return are characterized by uncertain, whenever the probability associated with various possible return are known, then the excepted return can be computed as the weighted average of the various returns, the weights being the probabilities associated with the return
Standard deviation
Standard deviation is a statistical term that measures the amount of variability or dispersion around an average. Standard deviation is also a measure of volatility. Generally speaking, dispersion is the difference between the actual value and the average value. The larger this dispersion or variability is, the higher the standard deviation. The smaller this dispersion or variability is, the lower the standard deviation. Chartists can use the Standard Deviation to measure expected risk and determine the significance of certain price movements. In statistics and probability theory, standard deviation (represented by the symbol sigma, ) shows how much variation or "dispersion" exists from the average (mean, or expected value). A low standard deviation indicates that the data points tend to be very close to the mean; high standard deviation indicates that the data points are spread out over a large range of values.
FUNDAMENTAL ANALYSIS
Fundamental analysis refers to the study of basic fundamental economic indicators which affect the countrys economy. Is a method of study which aims to predict the trend of the market by analyzing economic indicators, the government police and the social factors within a business cycle. The basic principles are all the elements that affect an economy of a country. From interest rates and central bank policy to natural disasters, since the basic principles are a dynamic combination of pattern, behaviors and unpredictable events. Thus, it is better for you to firstly identify and recognize the most effective indicators which affect each country separately. Download and read here. This is a method of analyzing the value of a companys stock price by studying the financial data of the company. It considers the companys earnings and expenses, profit, assets and liabilities, management experience and industry dynamics. In other words it focuses on the business and tries to work out what the stock price should be. An investor using Fundamental Analysis to make investment decisions will rely heavily on the following sources of information: Company Balance Sheet Income (Profit and Loss) Statement Annual report Newspapers Company announcements Industry news.
Study of industry life cycle The industry life cycle is made up of the following stages: 1. Pioneering Phase 2. Growth Phase 3. Mature Growth Phase 4. Stabilization/Maturity Phase 5. Deceleration/Decline Phase
1)Pioneering Phase
This phase is characterized by low demand for the industry's product and large upstart costs. Industries in this phase are typically start-up firms, with large upfront costs and few sales.
2) Growth Phase
After the pioneering phase, an industry can transfer into the growth phase. The growth phase is characterized by little competition and accelerated sales. Industries in this phase have typically survived the pioneering phase and are beginning to recognize sales growth.
4)Stabilization/Maturity Phase
After the growth phases, an industry will enter in the stabilization/maturity phase. The stabilization/maturity phase is characterized by growth that is now average. Industries in this phase have significant competition and the return on equity is now more normalized. This is typically the longest phase an industry will go through.
5)Deceleration/Decline Phase
The deceleration follows the growth and maturity phases. The deceleration/decline phase is characterized by declining growth as demand shifts to other substitute (new) products.
Distribution if you cant get product to every location at the same time, the retailers wont buy from you because all of their products need to be standardized in all branches Financing If you dont have enough money to finance a large job, you cant take on large jobs In most industries, either you enter on a large scale or you accept cost disadvantages.
2) Product Differentiation
If a brand is strongly recognized and well liked, new companies need to spend a lot of money to overcome customer loyalty. In order to get someone to try it, you might need to sell it at a discount, have a big and expensive public relations program or publicity event, or even give it away to create some awareness of the product. Product differentiation can also be in the actual product as opposed to the perception of it. It could be a different type of product that has a feature or set of features that are hard to get right, or a proprietary difference due patent protection.
3) Capital Requirements
All companies in every industry need some money to start up. This could be for a physical location or facilities, equipment, inventory, advertising, R&D expenses, customer credit, operating cash, and all start-up costs in general including utility bills. In the era of increased specialization amongst larger conglomerate companies, getting started is more expensive than ever.
4) Cost Structure
Companies that have been in the business for an extended period of time may have cost advantages that cannot be duplicated by new entrants. This could be because assets (such as land) were purchased at levels far below todays prices, locations that cannot duplicated, government subsidies, proprietary technology, access to raw materials, or simply being further along the learning or experience curve.
6) Government Regulation
Certain industries have large regulatory hurdles in order to get started in that industry. Regulations are usually a big factor in industries where public or consumer health and safety are an issue, such as prescription drugs or air travel. If the worst case scenario for the companys product or service can result in death, illness or injury, there are going to be regulations preventing just anybody from opening up shop.
P/E Ratio
The P/E ratio (i.e., Price/Earnings ratio) is a price ratio calculated by dividing the security's current stock price by the previous four quarter's earnings per share (EPS). The P/E Ratio shows how much an investor must pay to "buy" $1 of the company's earnings. For example, if a stock's current price is $20 and the EPS for the last four quarters was $2, the P/E ratio is 10 (i.e., $20 / $2 = 10). This means that you must pay $10 to "buy" $1 of the company's earnings. Of course, investor expectations of company's future performance play a heavy role in determining a company's current P/E ratio. A common approach is to compare the P/E ratio of companies within the same industry. All else being equal, the company with the lower P/E ratio is the better value.
Current Ratio
A company's current ratio is a liquidity ratio calculated by dividing current assets by current liabilities. This measures the company's ability to meet current debt obligations. The higher the ratio the more liquid the company. For example, a current ratio of 3.0 means that the company's current assets, if liquidated, would be sufficient to pay for three times the company's current liabilities.
Debt Ratio
A company's debt ratio is a leverage ratio calculated by dividing total liabilities by total assets. This ratio measures the extent to which total assets have been financed with debt. For example, a debt ratio of 40% indicates that 40% of the company's assets have been financed with borrowed funds. Debt is a two-edged sword. During times of economic stress or rising interest rates, companies with a high debt ratio can experience financial problems. However, during good times, debt can enhance profitability by financing growth at a lower cost.
Inventory Turnover
A company's inventory turnover is an efficiency ratio calculated by dividing cost of goods sold by inventories. It reflects how effectively the company manages its inventories by showing the number of times per year inventories are turned over (replaced). Of course, this type of ratio is highly dependent on the industry. A grocery store chain will have a much higher turnover than a commercial airplane manufacturer. As stated previously, it is important to compare ratios with other companies in the same industry.
Technical Analysis
Meaning
Technical analysis is a method of evaluating securities by analyzing the statistics generated by market activity, such as past prices and volume. Technical analysts do not attempt to measure a security's intrinsic value, but instead use charts and other tools to identify patterns that can suggest future activity.
Definition
The official definition of technical analysis is the analysis of past price data to determine future price movements. It is the study of prices in order to make better trades. The basis of modernday technical analysis can be traced back to the Dow Theory, developed around 1900 by Charles Dow. It includes principles such as the trending nature of prices, confirmation and divergence, and support and resistance. The field of technical analysis is based on three assumptions: 1.The market discounts everything. 2. Price moves in trends. 3. History tends to repeat itself.
Types of charts
There are different types of charts 1) Bar Charts 2) Line Charts 3) Candle Stick Charts
Bar Charts:
This is one of the most popular types of charts used in technical analysis. As illustrated below, the top of the vertical line indicates the highest price at which a security traded during the day, and the bottom represents the lowest price. The closing price is displayed on the right side of the bar and the opening price is shown on the left side of the bar. A single bar like the one to the left represents one day of trading.
Candlestick Chart
They have been around for hundreds of years. They are often referred to as Japanese candles because the Japanese would use them to analyze the price of rice contracts. There are two part in candle 1) Wick 2) Body. Wick shows High price and Low price of day. Similar to a bar chart, candlestick charts also display the open, close, daily high and daily low. The difference is the use of color to show if the stock went up or down over the day. There two kinds of candle 1) White Candle: It appears when Opening price of stock is lower than Closing price of stock on a particular day. 2) Black Candle: It appears when Closing price of stock is lower than Opening price of stock on a particular day.
Line Charts:
This is common type of chart. Line charts only shows movement of closing price of stocks. Line chart is formulated just by joining the daily closing price of stock. It dose not depict the high and low price of day. A line charts strength comes from its simplicity. It provides an uncluttered, easy to understand view of a securitys price.
Bibliography
www.investopedia.com www.trade-ideas.com www.ikofx.com Risk management book