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STATISTICAL ANALYSIS

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

Excepted rate of return


The return on an investment as estimated by an asset pricing model. It is calculated by taking the average of the probability distribution of all possible returns. The rate of return expected on an asset or a portfolio. The expected rate of return on a single asset is equal to the sum of each possible rate of return multiplied by the respective probability of earning on each return. Formula :E(r) = probability * rate of return For example, if a security has a 20% probability of providing a 10% rate of return, a 50% probability of providing a 12% rate of return, and a 25% probability of providing a 14% rate of return, the expected rate of return is (.20)(10%) + (.50)(12%) + (.25)(14%), or 12%.

Average rate of return (ARR) Definition


Method of investment appraisal which determines return on investment by totaling the cash flows (over the years for which the money was invested) and dividing that amount by the number of years. The ratio of the average cash inflow to the amount invested. The rate of return on an investment that is calculated by taking the total cash inflow over the life of the investment and dividing it by the number of years in the life of the investment. The average rate of return does not guarantee that the cash inflows are the same in a given year; it simply guarantees that the return averages out to the average rate of return. Example: Rainer spent $800,000 to buy an apartment building. After deducting all operating expenses, real estate taxes, and insurance, she receives $65,000 in the first year, $71,000 in the second year, $69,000 in the third year, and $70,000 in the fourth year. The total net earnings are $275,000. Divide that number by the 4 years being analyzed, to reach $68,750 as an average annual return. Divide $68,750 by the initial $800,000 investment to calculate the average rate of return of 8.59 percent. Drawback: The procedure does not take into account the time value of money. The $65,000 received in the first year was more valuable than the $70,000 received in the fourth year, because the $65,000 could have been invested to earn still more money.

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.

Definition of 'Standard Deviation'


In finance, standard deviation is applied to the annual rate of return of an investment to measure the investment's volatility. Standard deviation is also known as historical volatility and is used by investors as a gauge for the amount of expected volatility.

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.

Analysis of Economy wide factor


Economic fundamental provide the most significant information to traders. The impact of economic data tends to be long term oriented. Economic indicators are reports published at a fixed time intervals by government and private organizations. Economic indicators illustrate the detail of a country's economic performance whether it has improved or declined. This economic statistics are analyzed to predict the movement of the Forex trading market. An economic indicator that shows a strong country's economy condition will enhance the currency exchange rate to rise. Every economic indicator does not have the similar impact on the market every time. The date and time of release of economic data is very important to adjust a foreign exchange position. Information on upcoming economic indicators can be found in newspapers and business magazines. Besides, critical announcement or events can also be found at economic calendar as shown in table 1. Economic calendar mainly contains information of the date, time, type of events and the forecast impacts on the market. Here are some lists of economic report that have most significant impacts on the market: Gross Domestic Product (GDP) Gross National Product (GNP) Industrial Production Inflation reports Merchandise Trade Balance Employment Rate Retail Sales

Analysis of industry wide factor


Every industry has key differences that lead you to analyze them differently. Some industries have only a few major players while others have dozens or even hundreds of individual companies competing for market share. Industries have different growth prospects, regulations they need to abide by, and customer bases. Some industries tend to perform well when the business cycle is up (cyclicals), and others tend to perform well when the business cycle is down (counter-cyclicals), such as dollar stores, discount retailers and producers of inexpensive generic alternatives. Regardless of which industry you are looking at, the following factors are worth considering:

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.

3)Mature Growth Phase


After the growth phase, an industry will reach the mature growth phase. The mature growth phase is characterized above average growth, but no longer accelerating growth. Industries in this phase now face increasing competition and, as a result, profit margins begin to erode.

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.

Study of qualitative 1) Economies of scale.


Predominant economies of scale in a particular industry determine how big a new company coming into the industry has to start out at in order to avoid having a cost disadvantage in relation to its competitors. Think of a bottling line at a company that bottles soft drinks. The dominant company in the industry will have an automated, high tech bottling line that is capable of filling hundreds of bottles at a time and sending them straight into their packaging. How could someone compete on price if they had to do all of this manually? Economies of scale can be a barrier to entry in a wide variety of areas such as: Production if youre not big enough, you cant mass produce them cheap enough (Coca Cola) Research if you cant afford the research, youll fall behind the competition (Apple) Marketing if you cant afford the marketing, nobody will know you exist (Any fast food) Service if you cant provide the same level of service as the competition (such as 24 hour technical support) you will be viewed as more risky and less reliable

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.

5) Access to Distribution Channels


Securing distribution of a new product can be difficult if the competition has the distribution options tightly sewn up. Getting a new product into a supermarket chain may require a discounted selling price, promotions, and prolonged marketing efforts. The fewer options there are for distribution, the greater this factor becomes.

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.

Analysis of company wide factor


After determining the economic and industry conditions, the company itself is analyzed to determine its financial health. This is usually done by studying the company's financial statements. From these statements a number of useful ratios can be calculated. The ratios fall under five main categories: profitability, price, liquidity, leverage, and efficiency. When performing ratio analysis on a company, the ratios should be compared to other companies within the same or similar industry to get a feel for what is considered "normal." At least one popular ratio from each category is shown below.

Net Profit Margin


A company's net profit margin is a profitability ratio calculated by dividing net income by total sales. This ratio indicates how much profit the company is able to squeeze out of each dollar of sales. For example, a net profit margin of 30%, indicates that $0.30 of every $1.00 in sales is realized in profits.

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.

Book Value Per Share


A company's book value is a price ratio calculated by dividing total net assets (assets minus liabilities) by total shares outstanding. Depending on the accounting methods used and the age of the assets, book value can be helpful in determining if a security is overpriced or under-priced. If a security is selling at a price far below book value, it may be an indication that the security is under-priced.

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.

Stock Price Valuation


After determining the condition and outlook of the economy, the industry, and the company, the fundamental analyst is prepared to determine if the company's stock is overvalued, undervalued, or correctly valued. Several valuation models have been developed to help determine the value of a stock. These include dividend models which focus on the present value of expected dividends, earnings models which focuses on the present value of expected earnings, and asset models which focus on the value of the company's assets.

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.

1. The Market Discounts Everything


A major criticism of technical analysis is that it only considers price movement, ignoring the fundamental factors of the company. However, technical analysis assumes that, at any given time, a stock's price reflects everything that has or could affect the company including fundamental factors. Technical analysts believe that the company's fundamentals, along with broader economic factors and market psychology, are all priced into the stock, removing the need to actually consider these factors separately. This only leaves the analysis of price movement, which technical theory views as a product of the supply and demand for a particular stock in the market.

2. Price Moves in Trends


In technical analysis, price movements are believed to follow trends. This means that after a trend has been established, the future price movement is more likely to be in the same direction as the trend than to be against it. Most technical trading strategies are based on this assumption.

3. History Tends To Repeat Itself


Another important idea in technical analysis is that history tends to repeat itself, mainly in terms of price movement. The repetitive nature of price movements is attributed to market psychology; in other words, market participants tend to provide a consistent reaction to similar market stimuli over time. Technical analysis uses chart patterns to analyze market movements and understand trends. Although many of these charts have been used for more than 100 years, they are still believed to be relevant because they illustrate patterns in price movements that often repeat themselves.

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

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