Ten Things You Need To Know About Moving Averages

Moving averages as tools for finding support and resistance levels in prices on charts. Moving averages work as indicators because they are used by many other market participants to make buy and sell decisions. Unlike chart patterns and trend lines that are subjective based on opinions on charts moving averages are a way to quantify signals to use for possible trend identification.

It is very interesting to lay a 50-day and 200-day simple moving averages (SMA) on to a chart for the past year. You will begin to see patterns develop. Bounce off the 50-day, a last chance for support at the 200-day etc. Each stock and ETF has different key moving averages and different reactions to them on the chart. It can really help your trading to know the key moving averages for what you are trading and clues to support and resistance, they give clues as to where the buyers and sellers are waiting.

BEST TRADES

Some of my best trades have been simply making an entry after the breakout above a key long term moving average like the 200-day and then capturing the trend using the 10-day SMA as a trailing stop. Moving averages are not magic indicators but they are fantastic technical tools for quantifying and capturing trends.

TEN THINGS TRADERS NEED TO KNOW ABOUT MOVING AVERAGES.

1. Here are three of the most meaningful moving averages in the stock market. The 20-day moving average commonly acts as a reversion to the mean in a range-bound market. The 50-day moving average can act as the line of support for an intermediate uptrend or resistance in an intermediate downtrend. The 200-day moving average is the ultimate dividing line for the long-term trend of the market. The SPY is generally the best tracking ETF for the market as a whole.

2. In sharply trending markets the 5-day exponential and the 10-day simple moving averages have meanings as support and resistance to help manage your position when the longer term moving averages are too far away to use.

3.  Exponential Moving Averages apply more weight to recent price change, while Simple Moving Averages view each data point equally.

4. Moving averages let you see where other traders both big and small are buying and selling. The meaning of moving averages as support and resistance points on charts rely on how other traders are reacting with buying and selling when the prices approach those key levels.

5. Where the price on the chart is in relation to the 200-day moving average is determined by long-term investor and trader psychology. Bulls like to stay above the 200-day moving average, while bears sell short below it. Bears usually win and sell into rallies as prices approach this line when the 200-day becomes resistance, and bulls buy into pullbacks to the 200-day when the price is above it. This line is one of the biggest signals in the market telling you which side to be on. Bull above, Bear below.

6. When the 50-day moving average pierces the 200-day moving average in either direction, it supposedly predicts a substantial shift in buying and selling behavior. The 50-day moving average rising from below and crossing through the 200-day moving average is called a Golden Cross, while the bearish piercing of the 50-day from above the 20-day moving average is called a Death Cross.

7. A great second chance entry on a momentum stock is with a bounce off a 50-day moving average as support for the price action. Many institutional buyers are waiting at the 50-day sma to add to their long term positions in major growth stocks that they are accumulating.

8. Getting a monster stock at the 200-day during a bull market is like a gift from the trading Gods. However if the 200-day is lost it is very dangerous and could begin a fall with no net, this is a time to short the old leaders when the 200-day is breached and the stock begins what could be a death plunge.

9. Some traders use systems that give buy and sell signals when a shorter term moving average crosses over a longer one or vice versa. Legendary trend trading pioneer Richard Donchian used a five and twenty day moving average cross over system for buy and sell signals to capture trends.

10. Some traders watch for when a moving average begins to slope upwards or downwards and consider it as a signal of a trend beginning, continuing, or changing.

Each trader must decide how to incorporate moving averages into their own system and time frame. But these are the major tools of some of the world’s best traders.

See two charts below.

Source: Trader Planet

The Universal Principles of Successful Trading

Universal rule for trading

Here are the six universal principles of successful traders:

1). Preparation

Author Brent Penfold is in the minority believing risk management is the #1 priority in trading. Brent believes that once you get your trading system and position size in place you must use the amount you will risk on each trade to determine your risk of ruin. The book shows exactly how to figure this out using Excel. His point is that if your risk of ruin is not zero then you will eventually blow out your account. Risking 1% to 2% of your capital in any one trade usually gives you a zero percent risk of ruin but it also depends on your systems win/loss ratio. But the point is to test any system with a minimum of 30 trades first then determine your risk of ruin. I would advise a larger sample size in multiple market environments a trend following system that looks brilliant in a trending market may result in a 50% draw down in a choppy or range bound market.

2). Enlightenment

Your most important goal is to lower your risk ruin to zero. In trading, the trader with the best ability to cut losses short wins. Simple trading strategies work the best based on traditional support and resistance levels while trading with the trend on either reversals or break outs. The 10% of winning traders in the market win by treading where others fear, buying on break outs when they first occur and going short when a new low is made, or buying into key reversals when a security finds support or resistance and reverses at the end of a monster trend.

3). Developing a trading style

You must choose your own personal style of trading, swing trading, trend trading, etc. You must also trade based on your chosen time frame: intraday, short term, medium term, or long term.

4). Selecting Markets

Ideal markets to trade have high volume, price transparency, liquidity, 24 hour coverage, zero counter party risk, low transaction costs, and are honest and efficient. They also must  have the necessary trading attributes of volatility, research, simplicity, ease of short selling, specialization, opportunities, growth, and leverage. These are the markets that afford you the greatest chances of making money trading.

5). The Three pillars of trading.

Money Management: You must make your trades as fixed as possible. Trade with the same risk, capital, units, percentage, and in the same type markets to manage risk most effectively.

Methodology: Choose a method that works for you and your personality from the ones available. (Dow Theory, technical indicators, patterns, price and volume, etc) Once you have a methodology to your trading, test it in the real world in real time either with micro trades or paper trade, you need a sample size to judge its efficacy.

Trader Psychology: Manage your hope, greed, fear, and pain to stay in the game.

6). Putting it all together

Monitor your performance consistently. You need positive reinforcement that your trading is working by the results you are getting in winning and losing trades. Your equity momentum will show you if you are trading too big or if you are on the wrong track, your P&L does not lie.

I have been actively and successfully trading the market for a decade and agree 100% with the authors principles.  The author finishes up his book by asking many professional traders and some that are successful private traders what one advice they would give to aspiring traders. This advice alone is worth the price of the book. Here is a summary:

Money Management:

Focus on risk
Trade small

Methodology:
Pick a method that suits your personality
Develop a simple methodology
Avoid the majority, learn to anticipate reversals
Look for alignment in set ups
Good defense wins games
Identify low risk set ups
Know your methodology using software

Psychology:
Deep practice before trading
Expect to lose. Trade to win
Be disciplined. Be patient
Be humble
Be in control


The author keeps it real.
Source: “The Universal Principles of Successful Trading: Essential Knowledge for All Traders in All Markets”
-- by Brent Penfold

Presentation about Finance Statement Analysis

Islamic Invesment Oppertunity

Opportunity of Islamic Investment in India
Allah says: Allah made trade lawful and prohibited interest (2:275). At on other place Allah says O who believer in me fear god and quit what remains of riba if you are indeed believers; but if you do not, take notice of war from Allah and his messenger.(2:278-9)

There is two ways of getting profit,
(1) which Islam permits
(2) which Islam prohibits.

Islam has forbidden earning from interests. And has counted as big sin and among the big sins there is no which forbidden in this manner; that notice a war from Allah and his messenger. Can human being defeat Allah and his messenger? In India Muslims are second largest populations after Indonesia, Indian Muslims population estimated to be around 150, millions. In spite of this India is routinely ignored in the vast majority of the books articles on the subject of Islamic banking and or investments. Dow Jones has Islamic index, FTSE of Britain has not only Islamic Index but also a full fledge Islamic bank, but unfortunately there is not a single Islamic Product or an Islamic benchmark in Indian investment environment.

Even more bizarre India is not covered and not included for any of their research work by any Islamic institution or bank. although India is the big market for Islamic investments, and according to me no research work of any research institution could be complete without including India. Although India has a good Islamic structure which provides opportunity of “riba” free investment and finance which gives us lots of benefit.

Since the 1991 liberalization reforms, India's GDP has consistently grown at over 5% and has now crossed the 8% mark. In fact, India is expected to be one of the world's two largest economies by 2050. The huge capital inflows into the country mirror the confidence of foreign investors in the Indian economy's ability to match this expectation.

India's institutional framework is well suited for the world economy. Corporate India has been performing well and this factor, coupled with strong macroeconomic fundamentals, growing industrial and service sectors, provides great potential for investment in the Indian economy.

Stock Market:
Common people in our community believe that investment in stocks is prohibited. No it is not true. Indeed there are some kind of stocks, which might be prohibited but not all. So prominent Islamic scholars, and ulemas have defined all market instruments and after that they have permitted with some conditions to have investments in stock market and invest in it.

Restrictions:
- The company’s activities should include liquor, pork, hotel, casino, gambling, cinema, music, interest bearing financial institutions, conventional insurance companies, etc.
- The total interest bearing debt of the company at any point in time should remain below one third of its average market capitalization during the last twelve months.

- Its aggregate of account receivables should remain below 45% of total assets.

- If company has any interest bearing income it should not be more than 10% in any condition.

While Shariah compliant investment avenues are now becoming available in most countries, India has not seen large-scale development. To gauge the scope of Islamic investment opportunities in the Indian stock market, it is imperative to examine stocks that conform to Islamic Shariah principles "Out of 6,000 BSE listed companies, approximately4,200 are Shariah compliant. The market capitalization of these stocks accounts for approximately 61% of the total market capitalization of companies listed on BSE. This figure is higher even when compared with a number of predominantly Islamic countries such as Malaysia, Pakistan and Bahrain. In fact, the growth in the market capitalization of these stocks was more impressive than that of the non-Shariah compliant stocks.

The software, drugs and pharmaceuticals and automobile ancillaries sector were the largest sectors among the Shariah compliant stocks. They constitute about 36% of the total Shariah compliant stocks on NSE. Further on examining the BSE 500 the market capitalization of the 321 Shariah compliant companies hovered between 48% and 50% of the total BSE 500 market capitalization.(Source: www.islamicequity.co.in)

Mutual Funds:
Another opportunity is mutual fund which is based on 100% equity. These funds are invested in different sectors like IT, automobile telecommunication, cement and a few present in interest based financial institutes, almost 10 to 15 %. So investor has to purify that amount from the profits. And also there are many sectorial funds which invests only in a particular sector like automobile, Oil & Gas, etc
Here are some of the most common types of the sharia compliant funds and their basic investment profile, which an investor must know before leaving his/her hard earned money at their disposal:

Equity Funds:

As the name suggests, equity funds invest the money pooled in from the investors into stocks. Equity MFs are further classified into sub-categories depending upon the asset classes such as large-cap, mid-cap and small-cap, sectors or themes. Equity funds carry a bigger risk profile than the bond funds.

Sector Funds:

Sector funds invest in the stocks of one particular sector and these funds are generally conceptualized after some sector catches fancy of the market or when there is any significant buzz for some major growth in a particular sector. For example, the infrastructure sector is the current favorite in the MF circle, while a few other sectors with exposure to the country’s infrastructure growth are also finding favor.
However, sector funds do not offer the much-desired diversification to the MF investors and often these funds enter the market after most of the growth has already materialized in that particular sector. However, there are certain defensive sectors like FMCG and pharmaceuticals, which consistently witness some modest growth with limited volatility.

Index Funds:

The index funds primarily invest in the constituent stocks of a particular market index, such as Sensex and Nifty, and most often track the movements of those indices. While during a bull run, index funds can give impressive returns, the losses are also sharp during the bearish phases of the market. However, the index funds are known to given good returns in the long term, as their portfolio generally consist of stocks with proven track record. Here however you have to consider purification as quite a few banking stocks are there in the current index.

Growth Funds:

These funds invest in growth stocks, or the stocks of those Companies are likely to see a sharp rise in their sales and profits. These funds Seek to cash in upon the rise in the share prices of these companies, driven by their Bulging sales and profit books.

Dealing in equity shares can be acceptable in Shariah?

Dealing in equity shares can be acceptable in Shariah subject to the following conditions:

The main business of the company is not in violation of Shariah. Therefore, it is not permissible to acquire the shares of the companies providing financial services on interest, like conventional banks, insurance companies, or the companies involved in some other business not approved by the Shariah, such as the companies manufacturing, selling or offering liquors, pork, haram meat, or involved in gambling, night club activities, pornography etc.

If the main business of the companies is halal, like automobiles, textile, etc. but they deposit there surplus amounts in a interest-bearing account or borrow money on interest, the share holder must express his disapproval against such dealings, preferably by raising his voice against such activities in the annual general meeting of the company.

If some income from interest-bearing accounts is included in the income of the company, the proportion of such income in the dividend paid to the share-holder must be given charity, and must not be retained by him. For example, if 5% of the whole income of a company has come out of interest-bearing deposits, 5% of the dividend must be given in charity.

The shares of a company are negotiable only if the company owns some non-liquid assets. If all the assets of a company are in liquid form, i.e. in the form of money that cannot be purchased or sold, except on par value, because in this case the share represents money only and the money cannot be traded in except at par.

What should be the exact proportion of non-liquid assets of a company for the negotiability of its shares? The contemporary scholars have different views about this question. Some scholars are of the view that the ratio of non-liquid assets must be 51% at the least. They argue that if such assets are less than 50%, the most of the assets are in liquid form, therefore, all its assets should be treated as liquid on the basis of the juristic principle: The majority deserves to be treated as the whole of a thing. Some other scholars have opined that even if the non-liquid asset of a company or 33%, its shares can be treated as negotiable.

The third view is based on the Hanafi jurisprudence. The principle of the Hanafi School is that whenever an asset is a mixture of liquid and non-liquid assets, it can be negotiable irrespective of the proportion of its liquid part. However, this principle is subject to two conditions:

First, the non-liquid part of the mixture must not be in a negligible quantity. It means that it should be in a considerable proportion. Second, the price of the mixture should be more than the price of the liquid amount contained therein. For example, if a share of 100 dollars represents 75 dollars, plus some fixed assets the price of the share must be more than 75 dollars. In this case, if the price of the share is fixed as 105, it will mean that 75 dollars are in exchange of 75 dollars owned by the share and the rest of 30 dollars are in exchange of the fixed asset. Conversely, if the price of that share fixed as 70 dollars, it will not be allowed, because the 75 dollars owned by the share are in this case against an amount which is less than 75. This kind of exchange falls within the definition of “riba” and is not allowed. Similarly, if the price of the share, in the above example, is fixed as 75 dollars, it will not be permissible, because if we presume that 75 dollars owned by the share, no part of the price can be attributed to the fixed assets owned by the share. Therefore, some part of the price (75 dollars) must be presumed to be in exchange of the fixed assets of the share. In this case, the remaining amount will not be adequate for the price of 75 dollars. For this reason the transaction will not be valid.

However, in practical terms, this is merely a theoretical possibility, because it is difficult to imagine a situation where a price of the share goes lower than its liquid assets.

Subject to these conditions, the purchase and sale of shares is permissible in Shariah. An Islamic Equity Fund can be established on this basis. The subscribers to the Fund will be treated in Shariah as partners “inter se.” All the subscription amounts will form a joint pool and will be invested in purchasing the shares of different companies. The profits can accrue either through dividends distributed by the relevant companies or through the appreciation in the prices of the shares. In the first case i.e. where the profits earned through dividends, a certain proportion of the dividend, which corresponds to the proportion of interest earned by the company, must be given in charity. The contemporary Islamic Funds have termed this process as “purification.”

The Shariah scholars have different views about whether the “purification” is necessary where the profits are made through capital gains (i.e. by purchasing the shares at a lower price and selling them at a higher price). Some scholars are of the view that even in the case of capital gains the process of “purification” is necessary, because the market price of the share may reflect an element of interest included in the assets of the company. The other view is that no purification is required if the share is sold, even if it results in a capital gain. The reason is that no specific amount of price can be allocated for the interest received by the company. It is obvious if all the above requirements of the halal shares are observed, the most of the assets of the company are halal, and a very small proportion of its assets may have been created by the income of interest. This small proportion is not only unknown, but also a negligible as compared to the bulk of the assets of the company. Therefore, the price of the share, in fact, is against the bulk of the assets, and not against such a small proportion. The whole price of the share therefore, may be taken as the price of the halal assets only.

Although, the second view is not without force, yet the first view is more cautious and far from doubts. Particularly, it is more equitable in an open-ended equity fund because if the purification is not carried out on the appreciation and a person redeems his unit of the Fund at a time when no dividend is received by it, no amount of purification will be deducted from its price, even though the price of the unit may have increased due to the appreciation in the prices of the shares held by the fund. Conversely, when a person redeems his unit of the Fund at a time when no dividend is received by it, no amount of purification will be deducted from its price, even though the price of the unit may have increased due to the appreciation in the prices of the shares held by the fund. Conversely, when a person redeems his unit after some dividends have been received in the fund and the amount of purification has been deducted therefrom, reducing the net asset value per unit, he will get a lesser price compared to the first person.

On the contrary, if purification is carried out both on dividend and capital gains, all the unit-holders will be treated at par with the regard to the deduction of the amounts of purification. Therefore, it is not only free from doubts but also more equitable for all the unit-holders to carry out purification in the capital gains. This purification may be carried out on the basis of an average percentage of the interest earned by the companies included in the portfolio.

The management of the fund may be carried out in two alternative ways. The managers of the Fund may act as mudaribs for the subscriber. In this case a certain percentage of the annual profit accrued to the Fund may be determined as the reward of the management, meaning thereby that the management will get its share only if the fund has earned some profit. If there is no profit in the fund, the management will deserve nothing, but the share of the management will increase with the increase of profits.

The second option of the management is to act as an agent for the subscribers. In this case, the management may be given a pre agreed fee for its services. This fee may be fixed in lump sum or as a monthly or annual remuneration. According to the contemporary Shariah scholars, the fee can also be based on a percentage of the net asset value of the fund. For example, it may be agreed that the management will get 2% or 3% of the net asset value of the fund at the end of every financial year.

However, it is necessary in Shariah to determine any of the aforesaid methods before the launch of the fund. The practical way for this would be to disclose in the prospectus of the fund on what basis the fees of the management will be paid. It is generally presumed that whoever subscribes to the fund agrees with the terms mentioned in the prospectus. Therefore, the manner of paying the management will be taken as agreed upon on all the subscribers.