Asian Stocks Climb, Led by Commodity Producers; BHP Advances

By Chua Kong Ho

July 31 (Bloomberg) -- Asian stocks rose for a second day, led by commodity producers after oil climbed more than $4 a barrel and prices of metals advanced.BHP Billiton Ltd., the world's largest mining company, and Woodside Petroleum Ltd., Australia's second-biggest oil producer, led gains. NTT DoCoMo Inc., Japan's No. 1 mobile-phone operator, advanced after saying first-quarter profit rose 41 percent.

NEC Electronics Corp., Japan's third-biggest chipmaker, climbed to a six-week high after swinging to a first-quarter operating profit.The MSCI Asia Pacific Index gained 0.6 percent to 132.88 as of 9:09 a.m. in Tokyo. About six stocks rose for each that declined. All 10 of the index's industry groups advanced, with raw-materials producers posting the biggest gain.Japan's Nikkei 225 Stock Average added 0.6 percent to 13,448.51.

Australia's S&P/ASX 200 Index rose 1.5 percent, and South Korea's Kospi Index gained 1.1 percent.In the U.S., the Standard & Poor's 500 Index rose 1.7 percent, led by the biggest gain in energy shares in six years as oil prices increased and a private report showed an unexpected rise in jobs.Crude oil rose $4.58, or 3.8 percent, to $126.77 a barrel yesterday, the highest close since July 22, after a U.S. Energy Department report showed gasoline inventories declined for the first time in five weeks.A measure of six metals traded on the London Metal Exchange advanced 0.8 percent. Copper rose 1.3 percent and nickel 3.9 percent.To contact the reporter for this story: Chua Kong Ho in Shanghai at kchua6@bloomberg. net

Understanding Risk

Risk and Reward are Part of Investing
By Ken Little

“No pain, no gain.” How many times have you heard that cliché to describe something you really didn’t want to do? Unfortunately, investing carries a certain amount of risk and with that risk can come some pain, but also some gain.
You must weigh the potential reward against the risk of an investment to decide if the “pain is worth the potential gain.” Understanding the relationship between risk and reward is a key piece in building your personal investment philosophy.

Carry Risk

All investments carry some degree of risk. The rule of thumb is “the higher the risk, the higher the potential return,” but you need to consider an addition to the rule so that it states the relationship more clearly: “the higher the risk, the higher the potential return, and the less likely it will achieve the higher return.”
To understand this relationship completely, you must know where your comfort level is and be able to correctly gauge the relative risk of a particular stock or other investment.

Will I Lose Money?

Most people think of investment risk in one way: “How likely am I to lose money?” This statement describes only part of the picture, however. You should consider that risk and others when evaluating an investment:
Are my investments going to lose money? (Is safety of principal more important than growth?)
Will I achieve my investment goal? (Under-funding retirement, for example.)
Am I will to accept more risk to achieve higher returns? (Are my investments going to keep me awake at night with worry?)
Let’s look at these concerns about risk.

Am I Going to Lose Money?
The most common type of risk is the danger your investment will lose money. You can make investments that guarantee you won’t lose money, but you will give up most of the opportunity to earn a return in exchange.
For example, U.S. Treasury bonds and bills carry the full faith and credit of the United States behind them, which makes these issues the safest in the world. Bank certificates of deposit (CDs) with a federally insured bank are also very secure.
However, the price for this safety is a very low return on your investment. When you calculate the effects of inflation on your investment and the taxes you pay on the earnings, your investment may return very little in real growth.

Will I Achieve My Financial Goals?
The elements that determine whether you achieve your investment goals are:

• Amount invested
• Length of time invested
• Rate of return or growth
• Less fees, taxes, inflation, etc.
  

If you can’t accept much risk in your investments, then you will earn a lower return as noted in the previous section. To compensate for the lower anticipated return, you must increase the amount invested and the length of time invested.
Many investors find that a modest amount of risk in their portfolio is an acceptable way to increase the potential of achieving their financial goals. By diversifying their portfolio with investments of various degrees of risk, they hope to take advantage of a rising market and protect themselves from dramatic losses in a down market.

Am I Willing to Accept Higher Risk?
Every investor needs to find his or her comfort level with risk and construct an investment strategy around that level. A portfolio that carries a significant degree of risk may have the potential for outstanding returns, but it also may fail dramatically.
Your comfort level with risk should pass the “good night’s sleep” test, which means you should not worry about the amount of risk in your portfolio so much as to lose sleep over it.
There is no “right or wrong” amount of risk – it is a very personal decision for each investor. However, young investors can afford higher risk than older investors can because young investors have more time to recover if disaster strikes. If you are five years away from retirement, you probably don’t want to be taking extraordinary risks with your nest egg, because you will have little time left to recover from a significant loss.
Of course, a too conservative approach may mean you don’t achieve your financial goals.

Conclusion
Investors can control some of the risk in their portfolio through the proper mix of stocks and bonds. Most experts consider a portfolio more heavily weighted toward stocks riskier than a portfolio that favors bonds.
Risk is a natural part of investing. Investors need to find their comfort level and build their portfolios and expectations accordingly.

What is Investing?

How Does Investing Differ from Saving?
By Ken Little

Investing is the proactive use of your money to make more money or, to say it another way, it is your money working for you.

Investing is different from saving. Saving is a passive activity, even though it uses the same principle of compounding. Saving is more focused on safety of principal (the amount you start out with) and less concerned with return.

Your focus in investing is on return and can run the spectrum from conservative to very aggressive in terms of risk. One way you measure results is by the expected return weighed against the anticipated risks. It is easy to slip into an unnecessarily complex discussion about whether a particular financial transaction was an investment or a savings deposit. However, it is important to understand that investing has some distinctive characteristics, which separate it from pure savings. Since we are discussing stocks, I’ll limit the characteristics to that type of investment:

• Ownership
• Upside Potential
• Risk

Each of these characteristics sets investing in stocks apart from savings in several different ways.

Ownership

When you buy stock, you are buying a piece of a company – you become a part owner. This ownership gives you certain rights, including voting on important matters before the company and participating in the profits if the company distributes dividends.
Virtually no savings instruments give you ownership. You may own a bank CD, but you don’t own part of the bank. You may own a U.S. Treasury bond, but you don’t own the government.

Upside Potential

When you own stock, you participate in the growth of the company. As the value of the company increases, so does you investment. If profits increase, you may receive bigger dividend checks. The stock price may continue to rise for a long period. Many of the early employees of Microsoft are millionaires because their stock has gone up dramatically.
If you have a bank CD that pays 3%, it is unlikely the bank’s president is going to call you one day and say, ‘we’ve had a great year, so I’m raising your interest rate to 6%.’

Risk

Along with the potential for extraordinary gain is the potential for loss. These two go hand in hand. You can lose money investing in stocks.
If the thought of losing money makes your stomach knot up, stick to savings instruments. However, you should know that even the safest savings instrument carries unseen risks. Most savings instruments trade security for return, meaning they pay very little. When you factor in inflation and taxes, many so-called safe savings instruments return almost nothing and some can actually lose ground.

The Stock Market For Beginners: 7 Starter Tips

Other pages in this 'Stock Market For Beginners' section of the site look at the kinds of things that a new investor should do to help themselves. However, these were written in essay format and so for some time it has been on the 'to do list' to make a list and simplify the stock market for beginners tips.

Here we go...

1. Investing is not a hobby. To big merchant banks, it is a very competitive business. Therefore, you should also treat it as a business. That means understanding your own profit and loss as well as the companies in which investments are made.

Once this thought pattern is established, it makes the whole process so much easier. Simply ask, "Will this investment / trade / software / subscription make or lose me money?" Once an answer has been established, a clear course of action will present itself.

2. Get some great investment management software. These days, a speedy internet connection and good money management and investment software costs virtually nothing. Why spend the time and effort trying to figure out the best ways to do things when solutions already exist.

Ideally, look to purchase two types of software. One will be for personal money management. This can be used for profit and loss and keeping track of the costs of subscriptions, stockbrokers and the like. The other will be used for tracking stock and fund prices, storing company news, technical and fundamental analysis and more.

3. Get an education. Warren Buffett has suggested in the past that every investor should be able to understand basic accountancy principles, an annual report and stock market history. You probably do not need to become an accountant, but being able to understand the scoring system of the game can only help.

4. Learn about money management. Every investor will have the occassional (at best) loser and it is vital that no individual holding can wipe out a portfolio. Understanding asset allocation is vital.

Years of talking to people about investments has taught me that there are fundamental differences between the way investors behave. New investors ask for 'a tip' and want to know, "What should I buy?".

In contrast, professionals do not want tips. They have dozens of good ideas of their own. They won't be sharing those ideas with you and they will not be expecting you to share yours. Instead, they ask about how you allocate money. "Which sectors and markets do you like and why?" The difference between these approaches is like night and day.

5. Read widely. Getting a wide ranging education in personal finance, corporate finance, taxation, economics and investment theories will help. However, finding areas of the world or business in which you can become relatively expert can help in the process of finding investments.

The reality is that in the modern world - especially with the power of the internet - there is very little information that is not in the public domain somewhere. However, the world now has information overload. Whilst the information might be available, few people now have the time to find or understand it. The people who know these things and can 'join the dots' have regular opportunities for stock market investment.

Once the basics have been covered and understood, it may be that just one or two hours of reading each week will be enough to keep knowledge up to date. But keeping up to date is vital.

6. Find a good investment service to subscribe to. Many of the suggestions above can now be covered by joining just one stock market service. These services now aim to pick stocks, offer trading and portfolio management software and educational services too. If things go well, then by investing in the stock market picks, the service can be paid for with profits.

Though these services are often not 'cheap' they are generally very valuable and can help to make an investor or trader profitable whilst learning the ropes. This is a great way to learn or experience the stock market for beginners.

7. Practice makes perfect. In the investment business, paper trading is how we all start. Pick a couple of companies, make a note of their price, the date, the reason why you want to buy them and then start following the stock.

As time passes, the hunch or assessment which made the stock such a great prospect will play out. Was it a good or bad decision? Would buying the stock 'for real' have made a profit or a loss?

This is an excellent learning experience and one that is vital to the long-term profitability of anyone in the stock market. To get the real experience, purchase some graph paper and chart the stock price movements each day by hand. Learn to compare this with the overall movements of the market and a whole new world of investment and money will begin to open up to you!

Trading Basics

Basic Steps in How Stock Trading Works
By Ken Little

Trading stocks. You hear that phrase all the time, although it really is wrong – you don’t trade stocks like baseball cards (I’ll trade you 100 IBMs for 100 Intels).
Trade = Buy or Sell
To “trade” means to buy and sell in the jargon of the financial markets. How a system that can accommodate one billion shares trading in a single day works is a mystery to most people. No doubt, our financial markets are marvels of technological efficiency.
Yet, they still must handle your order for 100 shares of Acme Kumquats with the same care and documentation as my order of 100,000 shares of MegaCorp.

You don’t need to know all of the technical details of how you buy and sell stocks, however it is important to have a basic understanding of how the markets work. If you want to dig deeper, there are links to articles explaining the technical side of the markets.

Two Basic Methods
There are two basic ways exchanges execute a trade:

On the exchange floor
Electronically
There is a strong push to move more trading to the networks and off the trading floors, however this push is meeting with some resistance. Most markets, most notably the NASDAQ, trade stocks electronically. The futures’ markets trade in person on the floor of several exchanges, but that’s a different topic.

Exchange floor
Trading on the floor of the New York Stock Exchange (the NYSE) is the image most people have thanks to television and the movies of how the market works. When the market is open, you see hundreds of people rushing about shouting and gesturing to one another, talking on phones, watching monitors, and entering data into terminals. It could not look any more chaotic.

Yet, at the end of the day, the markets workout all the trades and get ready for the next day. Here is a step-by-step walk through the execution of a simple trade on the NYSE.


You tell your broker to buy 100 shares of Acme Kumquats at market.
Your broker’s order department sends the order to their floor clerk on the exchange.
The floor clerk alerts one of the firm’s floor traders who finds another floor trader willing to sell 100 shares of Acme Kumquats. This is easier than is sounds, because the floor trader knows which floor traders make markets in particular stocks.
The two agree on a price and complete the deal. The notification process goes back up the line and your broker calls you back with the final price. The process may take a few minutes or longer depending on the stock and the market. A few days later, you will receive the confirmation notice in the mail.
Of course, this example was a simple trade, complex trades and large blocks of stocks involve considerable more detail.

Electronically
In this fast moving world, some are wondering how long a human-based system like the NYSE can continue to provide the level of service necessary. The NYSE handles a small percentage of its volume electronically, while the rival NASDAQ is completely electronic.
The electronic markets use vast computer networks to match buyers and sellers, rather than human brokers. While this system lacks the romantic and exciting images of the NYSE floor, it is efficient and fast. Many large institutional traders, such as pension funds, mutual funds, and so forth, prefer this method of trading.

For the individual investor, you frequently can get almost instant confirmations on your trades, if that is important to you. It also facilitates further control of online investing by putting you one step closer to the market.

You still need a broker to handle your trades – individuals don’t have access to the electronic markets. Your broker accesses the exchange network and the system finds a buyer or seller depending on your order.


ConclusionWhat does this all mean to you? If the system works, and it does most of the time, all of this will be hidden from you, however if something goes wrong it’s important to have an idea of what’s going on behind the scenes.

Nickel Gains in London as Stockpiles Decline to Eight-Month Low

By Chanyaporn Chanjaroen

July 21 (Bloomberg) -- Nickel rebounded from a two-year low in London as stockpiles of the metal used in stainless steel declined to the smallest in eight months, indicating supply is slowing.
Inventories tracked by the London Metal Exchange dropped 6 percent this month to 43,728 metric tons, the lowest since Nov. 23. BHP Billiton Ltd. this month shut its Kalgoorlie refinery in Western Australia through June 2009, cutting sales of the metal by 25,000 tons, or about 57 percent of existing LME stockpiles.
``You probably started to see the impact from supply disruption in Western Australia,'' Max Layton, an analyst at Macquarie Ltd. in London, said today by phone. ``It may be short- lived and overall we see a small surplus this year.''
Nickel for delivery in three months increased $150, or 0.7 percent, to $20,550 a ton as of 4:55 p.m. London time. The contract closed July 18 at $20,400 a ton, the lowest since June 28, 2006.
The metal is headed for a second consecutive annual drop, after last year's 21 percent decline as stainless-steel mills resorted to products containing less nickel. Prices may have to fall to about $15,000 a ton to lure back consumers, Charles Cooper, an analyst at Evolution Securities Ltd., said today.
Boliden AB, the second-largest producer of zinc in Europe, said production at the Tara zinc and lead mine in Ireland will decline ``slightly'' in the next six to nine months, extending a drop from the first half.
The mine produced an equivalent of 104,019 tons of zinc metal during January to June, down 7 percent from a year ago, the Stockholm-based company said today in an earnings statement. Lead output fell 11 percent to 13,765 tons.
Mine Closures
Zinc prices have slumped 22 percent this year and lead 20 percent, making mines unprofitable. Tech Cominco Ltd., owner of the world's largest zinc mine, said July 15 it would close its Lennard Shelf Pillara mine in Western Australia next month, earlier than planned.
Lead jumped $65, or 3.3 percent, to $2,035 a ton and zinc added $20, or 1.1 percent, to $1,840.
Stockpiles of copper monitored by the exchange have increased 5 percent this month to 128,725 tons, the highest since March 12. As inventories have been held by ``only a few market participants, '' availability is limited, Norddeutsche Affinerie AG, Europe's largest copper refiner, said today in an e-mailed newsletter.
Copper for immediate delivery traded at a premium of $241 a ton above the benchmark price on July 17, the highest since August 2005 and indicating a shortage of nearby futures contracts. The spread was $234 a ton today. Borrowing fees for futures for tomorrow delivery were $35 a ton a day.
Lost Output
Aluminum Corp. of China Ltd., the nation's biggest producer of the lightweight metal, said it may lose 30,000 tons of output after it trimmed some capacity at two ventures in Shanxi province because of a power shortage.
Shanxi Huaze Aluminum & Power Co. suspended 25 percent of its 280,000-ton annual capacity as of July 18, and Shanxi Huasheng Aluminum Co. stopped 22 percent of its 220,000-ton capacity, Chalco, as the company is known, said in a statement late that day.
Aluminum stockpiles on the LME added 4,975 tons, or 0.4 percent, to 1.12 million tons, the highest since May 12, 2004. The contract rose $7 to $3,040 a ton.
Tin increased $75 to $23,500.
To contact the reporter on this story: Chanyaporn Chanjaroen in London at cchanjaroen@ bloomberg. net Last Updated: July 21, 2008 12:01 EDT

Elliott Wave Theory

Who Was Ralph Elliott?

Ralph Elliott had the type of career that would be astounding even today...
He is remembered as the father of The Wave Principle, now known as the Elliott Wave Principle which is a number analysis system which can be used to predict many things in life, including market movements.
Elliott was born in Kansas in 1871. In his early career he worked for around 25 years as an accountant, often in executive positions. Many of these positions were held in Central America and Mexico. He learned skills of financial management and corporate reorganisation. In 1924 he became Chief Accountant for Nicaragua.
Later in life he was struck by illness and turned his attentions to analysis of the stock market. He was completing a goal that he had expressed in a book he had written about Latin America: "There is a reason for everything, and it is [one's] duty to try to discover it."
Investigating the possibility of form in the marketplace, Elliott examined yearly, monthly, weekly, daily, hourly and half-hourly charts of the various indexes covering 75 years of stock market behavior. In 1934 his observations began to form a set of principles about wave movement and the application to stock prices.
In 1946, his finest work was published, Nature's Law - The Secret Of The Universe. The first 1000 copies sold out quickly to financial analysts and the position in history of Ralph Elliott was set. His research is now used by thousands of fund and money managers around the world to assist their decision making.
In the modern financial world, the leading interpreter of wave priciples is Robert Prechter.

Education Relative Strength Index (RSI)

Introduction
Developed by J. Welles Wilder and introduced in his 1978 book, New Concepts in Technical Trading Systems, the Relative Strength Index (RSI) is an extremely useful and popular momentum oscillator. The RSI compares the magnitude of a stock's recent gains to the magnitude of its recent losses and turns that information into a number that ranges from 0 to 100. It takes a single parameter, the number of time periods to use in the calculation. In his book, Wilder recommends using 14 periods.
The RSI's full name is actually rather unfortunate as it is easily confused with other forms of Relative Strength analysis such as John Murphy's "Relative Strength" charts and IBD's "Relative Strength" rankings. Most other kinds of "Relative Strength" stuff involve using more than one stock in the calculation. Like most true indicators, the RSI only needs one stock to be computed. In order to avoid confusion, many people avoid using the RSI's full name and just call it "the RSI."
Calculation
100
RSI = 100 - --------
1 + RS

RS = Average Gain / Average Loss

Average Gain = [(previous Average Gain) x 13 + current Gain] / 14
First Average Gain = Total of Gains during past 14 periods / 14

Average Loss = [(previous Average Loss) x 13 + current Loss] / 14
First Average Loss = Total of Losses during past 14 periods / 14

Note: "Losses" are reported as positive values.

To simplify our explanation of the formula, the RSI has been broken down into its basic components which are the RS, the Average Gain, and the Average Loss.
To calculate RSI values for a given dataset, first find the magnitude of all gains and losses for the 14 periods prior to the time where you wish to start the calculation. (Note: 14 is the standard number of periods used when calculating the RSI. If a different number is specified, just substitute that number in for "14" throughout this discussion.)
It is important to understand that the RSI is a "running" calculation and the accuracy of the calculation depends on how long ago the calculations started. The first RSI value is an estimate - subsequent values improve on that estimate. You should calculate at least 14 values prior to the start of any values that you will rely on - going back 28+ periods is even better.
To start the running calculation, the First Average Gain is calculated as the total of all gains during the past 14 periods divided by 14. Similarly, the First Average Loss is calculated as the total magnitude of all losses during the past 14 periods divided by 14. The next values for the "averages" are calculated by taking the previous value, multiplying it by 13, adding in the next Gain (or Loss), and then dividing by 14. This is Wilder's modified "smoothing" technique in action.
The RS value is simply the Average Gain divided by the Average Loss for each period.
Finally, the RSI is simply the RS converted into an oscillator that goes between zero and 100 using this formula: 100 - (100 / RS + 1).
Here's an Excel Spreadsheet that shows the start of an RSI calculation in action.
When the Average Gain is greater than the Average Loss, the RSI rises because RS will be greater than 1. Conversely, when the Average Loss is greater than the Average Gain, the RSI declines because RS will be less than 1. The last part of the formula ensures that the indicator oscillates between 0 and 100. Note: If the Average Loss ever becomes zero, RSI becomes 100 by definition.

Important Note: The more data points that are used to calculate the RSI, the more accurate the results. The smoothing factor is a continuous calculation that - in theory - takes into account all of the closing values in the data set. If you start an RSI calculation in the middle of an existing data set, your values will only approximate the true RSI value. SharpCharts uses at least 250 data points prior to the starting date of any chart (assuming that much data exists) when calculating its RSI values. To duplicate our RSI numbers, you'll need to use at least that much data also.
Use
Overbought/Oversold
Wilder recommended using 70 and 30 and overbought and oversold levels respectively. Generally, if the RSI rises above 30 it is considered bullish for the underlying stock. Conversely, if the RSI falls below 70, it is a bearish signal. Some traders identify the long-term trend and then use extreme readings for entry points. If the long-term trend is bullish, then oversold readings could mark potential entry points.
Divergences
Buy and sell signals can also be generated by looking for positive and negative divergences between the RSI and the underlying stock. For example, consider a falling stock whose RSI rises from a low point of (for example) 15 back up to say, 55. Because of how the RSI is constructed, the underlying stock will often reverse its direction soon after such a divergence. As in that example, divergences that occur after an overbought or oversold reading usually provide more reliable signals.
Centerline Crossover
The centerline for RSI is 50. Readings above and below can give the indicator a bullish or bearish tilt. On the whole, a reading above 50 indicates that average gains are higher than average losses and a reading below 50 indicates that losses are winning the battle. Some traders look for a move above 50 to confirm bullish signals or a move below 50 to confirm bearish signals.
Example

The DELL example shows a number of extreme readings as well as a negative divergence. In Oct-99, RSI reached oversold for a brief moment to mark the low around 38. The next extreme reading (overbought) occurred after a large advance that peaked in Dec-99. RSI reached overbought levels in late Dec-99 and moved below 50 by the second week of Jan-00. The next oversold reading occurred in Feb. for another brief moment and marked the low around 35. By the end of Feb-00, RSI moved back above 50 and into overbought territory in March. A negative divergence formed in March and marked the high in the upper fifties.
RSI and SharpCharts

RSI is available on our SharpCharts charting tool. In the example, RSI has been assigned 14, 20 and 30 periods. A swing trader might prefer 14-periods, while an investor may prefer 30-periods. Users are encouraged to test different RSI settings and judge for themselves which ones work best and suit their particular trading/investing style.
Click here to see a live example of RSI.
For more on oscillators, please read our ChartSchool article on how to use and interpret oscillators.

Education Moving Averages

Moving Averages
Introduction
Moving averages are one of the most popular and easy to use tools available to the technical analyst. They smooth a data series and make it easier to spot trends, something that is especially helpful in volatile markets. They also form the building blocks for many other technical indicators and overlays.
The two most popular types of moving averages are the Simple Moving Average (SMA) and the Exponential Moving Average (EMA)। They are described in more detail below.

Simple Moving Average (SMA)

A simple moving average is formed by computing the average (mean) price of a security over a specified number of periods. While it is possible to create moving averages from the Open, the High, and the Low data points, most moving averages are created using the closing price. For example: a 5-day simple moving average is calculated by adding the closing prices for the last 5 days and dividing the total by 5.
10+ 11 + 12 + 13 + 14 = 60
(60 / 5) = 12
The calculation is repeated for each price bar on the chart. The averages are then joined to form a smooth curving line - the moving average line. Continuing our example, if the next closing price in the average is 15, then this new period would be added and the oldest day, which is 10, would be dropped. The new 5-day simple moving average would be calculated as follows:
11 + 12 + 13 + 14 +15 = 65
(65 / 5) = १३
Over the last 2 days, the SMA moved from 12 to 13. As new days are added, the old days will be subtracted and the moving average will continue to move over time.
In the example above, using closing prices from Eastman Kodak (EK), day 10 is the first day possible to calculate a 10-day simple moving average. As the calculation continues, the newest day is added and the oldest day is subtracted. The 10-day SMA for day 11 is calculated by adding the prices of day 2 through day 11 and dividing by 10. The averaging process then moves on to the next day where the 10-day SMA for day 12 is calculated by adding the prices of day 3 through day 12 and dividing by 10.
The chart above is a plot that contains the data sequence in the table. The simple moving average begins on day 10 and continues.
This simple illustration highlights the fact that all moving averages are lagging indicators and will always be "behind" the price। The price of EK is trending down, but the simple moving average, which is based on the previous 10 days of data, remains above the price. If the price were rising, the SMA would most likely be below. Because moving averages are lagging indicators, they fit in the category of trend following indicators. When prices are trending, moving averages work well. However, when prices are not trending, moving averages can give misleading signals.

Exponential Moving Average (EMA)

In order to reduce the lag in simple moving averages, technicians often use exponential moving averages (also called exponentially weighted moving averages). EMA's reduce the lag by applying more weight to recent prices relative to older prices. The weighting applied to the most recent price depends on the specified period of the moving average. The shorter the EMA's period, the more weight that will be applied to the most recent price. For example: a 10-period exponential moving average weighs the most recent price 18.18% while a 20-period EMA weighs the most recent price 9.52%. As we'll see, the calculating and EMA is much harder than calculating an SMA. The important thing to remember is that the exponential moving average puts more weight on recent prices. As such, it will react quicker to recent price changes than a simple moving average. Here's the calculation formula.
Exponential Moving Average Calculation
Exponential Moving Averages can be specified in two ways - as a percent-based EMA or as a period-based EMA. A percent-based EMA has a percentage as it's single parameter while a period-based EMA has a parameter that represents the duration of the EMA.
The formula for an exponential moving average is:
EMA(current) = ( (Price(current) - EMA(prev) ) x Multiplier) + EMA(prev)
For a percentage-based EMA, "Multiplier" is equal to the EMA's specified percentage. For a period-based EMA, "Multiplier" is equal to 2 / (1 + N) where N is the specified number of periods.
For example, a 10-period EMA's Multiplier is calculated like this:
(2 / (Time periods + 1) ) = (2 / (10 + 1) ) = 0.1818 (18.18%)
This means that a 10-period EMA is equivalent to an 18.18% EMA.
Note: StockCharts. com only support period-based EMA's.
Below is a table with the results of an exponential moving average calculation for Eastman Kodak. For the first period's exponential moving average, the simple moving average was used as the previous period's exponential moving average (yellow highlight for the 10th period). From period 11 onward, the previous period's EMA was used. The calculation in period 11 breaks down as follows:
(C - P) = (57.15 - 59.439) = -2.289
(C - P) x K = -2.289 x .181818 = -0.4162
( (C - P) x K) + P = -0.4162 + 59.439 = 59.023
*The 10-period simple moving average is used for the first calculation only। After that the previous period's EMA is used.

Note that, in theory, every previous closing price in the data set is used in the calculation of each EMA that makes up the EMA line. While the impact of older data points diminishes over time, it never fully disappears. This is true regardless of the EMA's specified period. The effects of older data diminish rapidly for shorter EMA's. than for longer ones but, again, they never completely disappear.
Simple Versus Exponential
From afar, it would appear that the difference between an exponential moving average and a simple moving average is minimal. For this example, which uses only 20 trading days, the difference is minimal, but a difference nonetheless. The exponential moving average is consistently closer to the actual price. On average, the EMA is 3/8 of a point closer to the actual price than the SMA.
From day 10 to day 20, the EMA was closer to the price than the SMA 8 out of 11 times. The average absolute difference between the exponential moving average and the current price was 1.52 and the simple moving average had an average absolute difference of 1.69. This means that on average, the exponential moving average was 1.52 point above or below the current price and the simple moving average was 1.69 points above or below the current price.
When Kodak stopped falling and started to trade flat, the SMA kept on declining. During this period, the SMA was closer to the actual price than the EMA. The EMA began to level out with the actual price, and remain further away. This was because the actual price started to level out. Because of its lag, the SMA continued to decline and nearly touched the actual price on 13-Dec.
A comparison of a 50-day EMA and a 50-day SMA for IBM also shows that the EMA picks up on the trend quicker than the SMA. The blue arrows mark points when the stock started a strong trend. By giving more weight to recent prices, the EMA reacted quicker than the SMA and remained closer to the actual price. The gray circle shows when the trend began to slow and a trading range developed. When the change from trend to trading began, the SMA was closer to the price. As the trading range continued into 2001, both moving averages converged. In early 2001, CPQ started to trend up and the EMA was quicker to pick up on the recent price change and remain closer to the price.
Which is better?
Which moving average you use will depend on your trading and investing style and preferences. The simple moving average obviously has a lag, but the exponential moving average may be prone to quicker breaks. Some traders prefer to use exponential moving averages for shorter time periods to capture changes quicker. Some investors prefer simple moving averages over long time periods to identify long-term trend changes. In addition, much will depend on the individual security in question. A 50-day SMA might work great for identifying support levels in the NASDAQ, but a 100-day EMA may work better for the Dow Transports. Moving average type and length of time will depend greatly on the individual security and how it has reacted in the past.
The initial thought for some is that greater sensitivity and quicker signals are bound to be beneficial. This is not always true and brings up a great dilemma for the technical analyst: the trade off between sensitivity and reliability. The more sensitive an indicator is, the more signals that will be given. These signals may prove timely, but with increased sensitivity comes an increase in false signals. The less sensitive an indicator is, the fewer signals that will be given. However, less sensitivity leads to fewer and more reliable signals. Sometimes these signals can be late as well.
For moving averages, the same dilemma applies। Shorter moving averages will be more sensitive and generate more signals. The EMA, which is generally more sensitive than the SMA, will also be likely to generate more signals. However, there will also be an increase in the number of false signals and whipsaws. Longer moving averages will move slower and generate fewer signals. These signals will likely prove more reliable, but they also may come late. Each investor or trader should experiment with different moving average lengths and types to examine the trade-off between sensitivity and signal reliability.

Trend-Following इन्दिकाटर Advertisement
Moving averages smooth out a data series and make it easier to identify the direction of the trend. Because past price data is used to form moving averages, they are considered lagging, or trend following, indicators. Moving averages will not predict a change in trend, but rather follow behind the current trend. Therefore, they are best suited for trend identification and trend following purposes, not for prediction.
When to Use
Because moving averages follow the trend, they work best when a security is trending and are ineffective when a security moves in a trading range. With this in mind, investors and traders should first identify securities that display some trending characteristics before attempting to analyze with moving averages. This process does not have to be a scientific examination. Usually, a simple visual assessment of the price chart can determine if a security exhibits characteristics of trend.
In its simplest form, a security's price can be doing only one of three things: trending up, trending down or trading in a range. An uptrend is established when a security forms a series of higher highs and higher lows. A downtrend is established when a security forms a series of lower lows and lower highs. A trading range is established if a security cannot establish an uptrend or downtrend. If a security is in a trading range, an uptrend is started when the upper boundary of the range is broken and a downtrend begins when the lower boundary is broken.
In the Ford (F) example, it is evident that a stock can go through both trending and trading phases. The red circles indicate trading range phases that are interspersed among trending periods. It is sometimes difficult to determine when a trend will stop and a trading range will begin or when a trading range will stop and a trend will begin. The basic rules for trends and trading ranges laid out above can be applied to Ford. Notice the trading range periods, the breakouts (both up and down) and the trending periods. The moving average worked well in times of trend, but faired poorly in times of trading. Also note how the moving average lags behind the trend: it is always under the price during an uptrend and above the price during a downtrend. A 50-day simple moving average was used for this example. However, the number of periods is optional and much will depend on the characteristics of the security as well as an individual's trading and इन्वेस्टिंग style।

If price movements are choppy and erratic over an extended period of time, then a moving average is probably not the best choice for analysis. The chart for Coca-Cola (KO) shows a security that moved from 60 to 40 in a couple months in 2001. Prior to this decline, the price gyrated above and below its moving average. After the decline, the stock continued its erratic behavior without developing much of a trend. Trying to analyze this security based on a moving average is likely to be a lesson in futility.
A quick look at the chart for Time Warner (TWX) shows a different picture. Over the same time period, Time Warner has shown the ability to trend. There are 3 distinct trends or price movements that extend for a number of months. Once the stock moves above or below the 70-day SMA, it usually continues in that direction for a little while longer. Coca-Cola, on the other hand, broke above and below its 70-day SMA numerous times and would have been prone to numerous whipsaws. A longer moving average might work better, but it is clear that the Time Warner chart had better trending characteristics.
Moving Average Settings
Once a security has been deemed to have enough characteristics of trend, the next task will be to select the number of moving average periods and type of moving average. The number of periods used in a moving average will vary according to the security's volatility, trendiness and personal preferences. The more volatility there is, the more smoothing that will be required and hence the longer the moving average. Stocks that do not exhibit strong characteristics of trend may also require longer moving averages. There is no one set length, but some of the more popular lengths include 21, 50, 89, 150 and 200 days as well as 10, 30 and 40 weeks. Short-term traders may look for evidence of 2-3 week trends with a 21-day moving average, while longer-term investors may look for evidence of 3-4 month trends with a 40-week moving average. Trial and error is usually the best means for finding the best length. Examine how the moving average fits with the price data.
If there are too many breaks, lengthen the moving average to decrease its sensitivity. If the moving average is slow to react, shorten the moving average to increase its sensitivity. In addition, you may want to try using both simple and exponential moving averages. Exponential moving averages are usually best for short-term situations that require a responsive moving average. Simple moving averages work well for longer-term situations that do not require a lot of sensitivity.
Uses for Moving Averages
There are many uses for moving averages, but three basic uses stand out:
* Trend identification/ confirmation
* Support and Resistance level identification/ confirmation
* Trading Systems
Trend Identification/ Confirmation
There are three ways to identify the direction of the trend with moving averages: direction, location and crossovers.
The first trend identification technique uses the direction of the moving average to determine the trend. If the moving average is rising, the trend is considered up. If the moving average is declining, the trend is considered down. The direction of a moving average can be determined simply by looking at a plot of the moving average or by applying an indicator to the moving average. In either case, we would not want to act on every subtle change, but rather look at general directional movement and changes.
In the case of Disney (DIS), a 100-day exponential moving average (EMA) has been used to determine the trend. We do not want to act on every little change in the moving average, but rather significant upturns and downturns. This is not a scientific study, but a number of significant turning points can be spotted just based on visual observation (red circles). A few good signals were rendered, but also a few whipsaws and late signals. Much of the performance would depend on your entry and exit points. The length of the moving average influences the number of signals and their timeliness. Moving averages are lagging indicators. Therefore, the longer the moving average is, the further behind the price movement it will be. For quicker signals, a 50-day EMA could have been used.
The second technique for trend identification is price location. The location of the price relative to the moving average can be used to determine the basic trend. If the price is above the moving average, the trend is considered up. If the price is below the moving average, the trend is considered down.
This example is pretty straightforward. The long-term for Cisco (CSCO) is determined by the location of the stock relative to its 100-day SMA. When CSCO is above its 100-day SMA, the trend is considered bullish. When the stock is below the 100-day SMA, the trend is considered bearish. Buy and sell signals are generated by crosses above and below the moving average. There was a brief sell signal generated in Aug-99 and a false buy signal in July-00. Both of these signals occurred when Cisco's trend began to weaken. For the most part though, this simple method would have kept an investor in throughout most of the bull move.
The third technique for trend identification is based on the location of the shorter moving average relative to the longer moving average. If the shorter moving average is above the longer moving average, the trend is considered up. If the shorter moving average is below the longer moving average, the trend is considered down.
For Inter-Tel (INTL), a 30/100 moving average crossover was used to determine the trend. When the 30-day moving average moves above the 100-day moving average, the trend is considered bullish. When the 30-day moving average declines below the 100-day moving average, the trend is considered bearish. A plot of the 30/100 differential is plotted below the price chart by using the Percentage Price Oscillator (PPO) set to (30,100,1). When the differential is positive the trend is considered up – when it is negative the trend is considered down. As with all trend-following systems, the signals work well when the stock develops a strong trend, but are ineffective when the stock is in a trading range. Also notice that the signals tend to be late and after the move has begun. Again, trend following indicators are best for identification and following, not predicting.
Support and Resistance Levels
Another use of moving averages is to identify support and resistance levels. This is usually accomplished with one moving average and is based on historical precedent. As with trend identification, support and resistance level identification through moving averages works best in trending markets.
After breaking out of a trading range, Sun Microsystems (SUNW) successfully tested moving average support in late July and early August. Also notice that the June resistance breakout near 18 turned into support. Therefore, the moving average acted as a confirmation of resistance-turned- support. After this first test, the 50-day moving average went on to 4 more successful support tests over the next several months. A break of support from the 50-day moving average would serve as a warning that the stock may move into a trading range or may be about to change the direction of the trend. Such a break occurred in Apr-00 and the 50-day SMA turned into resistance later that month. When the stock broke above the 50-day SMA in early Jun-00, it returned to a support level until the Oct-00 break. In Oct-00, the 50-day SMA became a resistance level and that held for many months.

The Stock Exchange For Beginners - Part 2

In my previous message about the stock exchange for beginners, I tried to convey some of the realisations that a new investor needs to make to help him or her become successful.

This time, I am going to offer a few thoughts on what I believe helps me to be successful and a few examples of what can and may go wrong. As ever, I hope that this isn't below your level of either confidence or competence as I don't wish to insult. However, I have found that there seem to be far more people that want to understand finance 'a little better' than there are people who can lecture on the subject.

Firstly to an example. Back in the mid 90's I joined an Investment club in the UK. I knew a couple of the members from a local health club I was a member at. Knowing that I was (a) keenly interested in investment and (b) more knowledgeable than most of them, I was invited along.

Suffice to say that on the first evening, I realised that I had been invited along to do all the work! I enjoyed the work so that didn't actually bother me. I also could purchase some additional investment tools 'for the club' which I couldn't justify for myself.
The main work of analysis was carried out by myself and another member who is a long-time friend and no mug in the world of shares and investment himself. We were using as our template a theory offered by Jim Slater which centred around price / earnings growth ratios. In short, it was highly successful.

At the end of the first year, we were 'up' by around 80%. Admittedly, this was during the tech-boom bull and any idiot could get 30% pa without trouble or effort, but still we were very impressed. The second year started well too and within 6 months of year two, our small company growth share portfolio (the only portfolio) was up comfortably over 100%. Nice work if you can get it.

For those of you that haven't been a member of an investment club and don't know, they are a democracy. Every opinion counts equal in a vote to buy or sell, whether they understand investment - or not. Here was our trouble. If you can believe it, making an enormous profit was 'boring' and they needed 'excitement'. To me, making money as quickly as we did was not merely exciting - it was thrilling!! But, when we wanted to sell they wouldn't and when we offered rock solid buy predictions they disliked something and again, we wouldn't.

I think our lowest point was not buying shares in a UK pizza delivery firm (that was growing very quickly and would have turned into a great investment) because (and I kid you not) one of the founding members didn't like 'Italian food'. Who cares?
The club ended rather badly with arguments and falling outs. Several years later it still has a couple of holdings in shares that might 'one day turn around'. Fat chance!!!!
So here is the tip: why do you want to invest? This needs analysis.
My friend and I invested because we were willing to put in the effort, wanted to increase our holdings, make money and frankly, we like winning in a global market against the nation's smartest minds!!

Our other members however, were there to gamble. It was just fun. Who cares about the result? We all meet in a pub, have a meal, chat about shares and throw some money at the market. We wanted profits, they wanted a social group.
After being up by over 100% after 18 months, we closed the club at a loss of both money and friendship. Ridiculous.

What about you? Why do you want to invest? If you want to gamble, take up sports betting. You get to watch a game as well as be financially involved - that sounds much better.
Do you plan to follow the market? If you don't, best to keep away.

I'm not the world's greatest at tracking a market - I can admit it. Each day, I look at the shares in my portfolio, funds I advise clients about, prospective investments I am mulling over, general financial news and read a few posts by other advisers / analysts online. And yet, if I'm honest, I worry that don't pay enough time each day to the markets.

If you want to make serious decisions, with serious amounts of money and (hopefully) make serious amounts of profit, you need to be - SERIOUS!!!

Personally, I don't like the idea of gambling much. I consider myself to be either a speculator or an investor, not a gambler. When I first started investing, I didn't know the difference (though I started at 18 and had no-one to guide me). That meant that all my investments were gambles. Mostly, they weren't so hot.

These days, I assess and analyse much more. I avoid 'turnarounds', since I don't think they turn around too often. Greater life experience has taught me to recognise that most companies that need to turn, or might turn, are already dead - they just don't know it yet.
I also have learned my lesson with 'development' companies. You know the thing, one great idea that 'if' they get to market will make 'tens of millions'. I own shares in a couple that I bought years ago. Broadly, I was right to buy. Of all the development stocks I could have bought, these actually did develop and do make products. They just don't make profits yet - years after I bought.

One of my development picks actually dominates the bluetooth market. That's right, I invested in the company that developed much of the bluetooth technology we use today! How could it not make a bundle of money? Am I a genius or what? Years later, I am still down 65%.
Another has an amazing fuel saving device for gear boxes in cars, lorries and off-road vehicles. In this age, you'd think that fuel saving technology would be all the rage. Over the years, I have bought more shares in the lows and sold them in the highs to make some 'trading' profits. But still my initial investment (I think 8 years ago) is down.

Though I may not have realised it at the time, these were not investments, they were gambles. So is the stock exchange really a place for beginners?
An investment is in a company that has products, a defined market and notable market share, profits, a track record and much more. Remember that. Think about Warren Buffett - he makes investments, good ones at that.

I'm also quite traditional about investing. I have never spread bet, used an option or future or sold short. I don't use leverage. If I can't figure out what might go wrong, FOR CERTAIN, I'd rather not do it. I buy, I hold and I sell. That's it.
I have no doubt that these admissions mean that I miss out on all sorts of possible investment opportunities. There are all sorts of weird and wonderful investments out there, but I invest and I don't like to gamble.

If you think about it though, what I just said doesn't really hold me back. I own some coins, stamps, comics, unit funds, shares, books and art - I did mention that I speculate didn't I? And if the world suddenly has a crisis, it means that I own actual, physical assets as well as just share certificates.

So that brings me to another point ... can you focus?

Ideally, you need to know quite a lot about certain areas and use that knowledge for your investment benefit. The art and books I own are mostly related to cricket. I love cricket and know a lot about the game and it's history - which means that I know when I see something of value. If it has value now, it probably will have for some time to come. Whether I buy at a good price or not, value and scarcity count.

Who'd imagine ME telling you that the stock market isn't everything?
Investment risk is lowered by knowledge. Every time. If you are buying shares on the stock exchange, what does the seller know that you don't? What do you know that the seller does not? You can bet your life that the buyer or seller opposite you in any transaction has done some serious research. If you don't do yours, who do you think will win? You or the market?
So of all the things that I might have said about investing, I haven't really made it sound 'sexy' yet. Have I? The truth is, investing isn't really very sexy. Lap dances are sexy. Pop stars are sexy. Carmen Electra is sexy. Investing is graphs, moving averages, annual reports, company statements, calculators and work. Not so sexy. It's kind of like being an accountant but with marginally more life and a few graphs.

But the great thing about investment is that in the long run, you decide whether you'll be successful or not. The harder you work at it, the luckier you will be. If you are just starting out, think about YOU first, not the market or companies. Decide on what you want to specialise on, whether the stock market for beginners is a place to invest and how you will approach it.

It might help to find areas in which you have useful knowledge already. Either that or decide on an area and slowly become an expert. What do I mean? Well, if you worked in a bank for 10 years, you must know something about banking. When you read an annual report from a bank, do you laugh and see through the waffle or does it make real sense? If you can see through the waffle of some far off CEO and CFO, you can start to compare the relative prospects in the same market of competing firms. Hey - that could be an opportunity!

If you really know about banking, you can compare the product offerings and service as well as the annual reports. You might still know some bank staff that are happy to tell you honestly that they are being 'creamed' in the market or whatever. Before you know it, you have a picture building of a competitive market. Before long, you will REALLY understand the investment potential of several companies. That will put you far ahead of many other investors.
As I said earlier, investment risk is lowered by knowledge - EVERY TIME.
Would your profits improve with help from a great market advice service?

The Stock Exchange For Beginners Guide - Part 1

As I start my guide, about the Stock Exchange For Beginners, where should a newbie really start?

Firstly, I believe, with a realisation.

The stock exchange is rarely a place where anyone 'gets rich quick'. Offhand, I don't know where anyone does that, but certainly not in investments. Sure, some occassional stocks and shares will rise quickly making their owners money, but rarely will you become rich. Bear in mind that if an investment doubles in one year (which is pretty rare) you needed to be already wealthy to make a lot of money. If you invested a thousand, you will have just 'made' a thousand. You aren't wealthy or rich yet.

There are ways for an investor to make enormous profits, but as ever, they involve enormous risks. Things like options and futures really are NOT for the beginner with limited resources. They are highly technical, involve the potential to lose all of your investment quickly and need constant monitoring. I know that I am quite traditional in this sense, but many options appear to me as if they are little more than a gamble. That is not how a prudent investor operates! Instead look for reliable and predictable companies, quoted on the stock exchange and suitable for beginners.

Second realisation is this ... It isn't easy for beginners to make money on the stock exchange . If everyone could become a billionaire by investing, Warren Buffett would not be famous. It takes time, study and effort and most importantly - independent thought. Not everyone has the will or stamina to carry that through. I know that mine wavers from time to time. Who doesn't suffer setbacks and confidence knocks?

Thirdly, though it may be a 'hobby', the stock exchange isn't 'fun'. The world of investment is dominated by investment banks and their bankers. They do all the big deals, float companies, issue bonds, trade stocks, bonds, currencies and commodities and make lots of money. They employ some of the world's brightest young MBA's to figure out new and improved profit making ventures. They do all this because it is a business, with real money and real profits.

Nobody is playing around.

If you want to be successful, you too need to view it as a business. Here is tip number one: if you are interested, go and do some reading about Benjamin Graham. Buy his books and digest. It will take a while, but it is the proper place to start. It was Ben Graham that first coined the idea successful investment is businesslike.

All that said, the little guy can still make money investing. I know, I do. Why can't you? Funds find it hard to invest in small companies, maybe that offers you an edge. Often, money managers are so busy working their 15 hour days that they miss wider discoveries in society. Just by going to the mall or supermarket, you might spot lines selling well and get a head start on the analysts. If that approach sounds good, you might like to grab a book by Peter Lynch - he offers guidance on how he finds winners, or as he puts it 'tenbaggers'.

If you really want to do well in investment on the stock exchange, then you need to approach it as if it were your own business. A part-time business perhaps, but still a business.
The stock exchange for beginners can be a daunting way to make a second income. Fear not, with time, you can learn the skills. But, I warn you again that it takes effort, independent thought and study to really do well.

Would you like to learn more about trading? You would?