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

5 Main item of investment decision Expected rate of return Estimated risk of loss Time of market entry Time of market exit

6 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

7 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

8 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

9 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.)

10 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

11 One coefficient model Algorithm of expected return ratio R=α + βI + γ where R – return on stock investment, I – stock market index α, β, γ – regression function parameters, and also symbols some groups of companies

12 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

13 r1r1 σ 11 σ 12 ….. σ 1n r2r2 σ 21 σ 22 ….. σ 2n r3r3 σ 31 σ 32 ….σ 3n …. rmrm σ m1 σ m2 ….σ mn Standard deviation of company „i” σ i = βσ M + σ e where σ M – standard deviation of the index, σ e – 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.

14 One coefficient model cont. Target: chose stock and its share in portfolio to reach determined portfolio rate of return (r p ) by minimal portfolio risk (σ p ), therefore r p = r 1 u 1 +r 2 u 2 + …r k u k and σ p =min where u 1,u 2...u k – shares of stock in portfolio and algorithm of portfolio standard deviation is as follow σ p 2 = σ M 2 (Σu i 2 β i + Σ Σ u i u j β i β j r ij )+ Σu i 2 σ ei 2

15 ………….. ………………………. …………………….. M D σ ………………………………. ……………… …………………………….. …… ……. D r B rprp One coefficient model cont.

16 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

17 Basic directions of technical analyse Finding Elliot waves Formation Trend analyse Coefficients analyse

18 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 a b 5

19 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 (2 x 1,618) length of first, top of the first + 3,26 x length of first

20 Formation There are special shapes of the price curve Range of formation is analysed by use of support and resistance lines

21 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

22 Basic formation types cont. Triangles and wedges Exit from formation is opposite to its slope

23 Basic formation types cont. Flag and banner Exit from formation is opposite to its slope

24 Basic formation types cont. Fan Support line became a resistance line

25 Basic formation types cont. Head and armsDouble pick All of these mean trend reverse

26 Basic formation types cont. Saucer, reverse saucer Trend is changing form horizontal to ascending (saucer) or descending (reverse saucer)

27 Moving average. General Concept

28 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

29 Exponential moving average

30 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

31 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 signal MACD coef. oscillator Oscillator – difference between signal and MACD coef. value

32 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

33 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

34 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