Financial Markets & TradingAn Introduction

Omkar Godbole | Aditya Dasgupta

1. Allows transfers of funds from person or business without investment opportunities to one who has them

2. Improves economic efficiency

Function of Financial Markets

Debt and Equity Markets

Primary and Secondary Markets Investment Banks underwrite securities in primary

markets Brokers and dealers work in secondary markets

Exchanges and Over-the-Counter (OTC) Markets

Money and Capital Markets Money markets deal in short-term debt instruments Capital markets deal in longer-term debt and

equity instruments

Structure of Financial Markets

Trading Markets

Macroeconomics Analysis Industry Analysis Equity Valuation Model

(Dividend Discount Model- DDM) Financial Statement Analysis

Fundamental Analysis

Global Economy Analysis– affects export, price competition and profits– exchange rate: purchasing power and earnings

Domestic Economy– The ability to forecast the macroeconomy can

translate into great investment performance– outperform other analysts to earn extra profits

Many variables can affect economy

Macroeconomics Analysis

Select a good industry to invest. It is

difficult for a firm to do well in a troubled industry

Standard Industry Classification (SIC) code Value line Investment Survey - reports 1700

firms in 90 industries

Two factors that determine the sensitivity of a firm’s earnings to business conditions:business risk & financial risk

Industry Analysis

Dividend Discount Model (DDM)

V0= (D1+P1)/(1+k)

= D1/(1+k) + D2/(1+k)2

...+ Dn/(1+k)n

constant growth assumptionV0 = D1/(1+k) + D1(1+g)/(1+k)2

+D1(1+g)2/(1+k)3 + ... = D1/(k-g)

or k = expected return = D1/P0 + g

Equity Valuation Model

Preparation of Source/Use Fund Statement Ratio Analysis– Performance Analysis– Du Pont Analysis

Financial Statement Analysis

Macro Trading - 24th March 2014

Dow Theory

Trend lines Indicators

Elliot Wave Analysis

Technical Analysis

A standard Candlestick chart contains a series of

multiple individual candlestick data points, that displays the high, low, opening and closing prices for a security for a single day

The wide part of the candlestick is called the "real body" and tells investors whether the closing price was higher or lower than the opening price

The candlestick's shadows show the day's high and lows and how they compare to the open and close

Japanese Candlestick

Candlestick Chart

Technical Indicators

Indicators Technical Indicator is a result of mathematical

calculations based on indications of price and/or volume. The values obtained are used to forecast probable price changes

Volumes

Accumulation/Distribution  Money Flow Index  On Balance Volume  Price and Volume Trend  Volume Rate of Change

Trends Indicators

Average Directional Movement Index  Accumulation Swing Index  Bollinger Bands  Commodity Channel Index  Mass Index  Moving Average  Pivot Points Support and Resistance Lines  Parabolic SAR  Standard Deviation  ZigZag  Williams` Accumulation/Distribution

Cont..

Cont..

Ralph Nelson Elliott developed the Elliott Wave

Theory in the late 1920s by discovering that stock markets, thought to behave in a somewhat chaotic manner, in fact traded in repetitive cycles.

Elliot Wave Theory

The Elliott Wave Theory is interpreted as

follows: Every action is followed by a reaction. Five waves move in the direction of the main

trend followed by three corrective waves (a 5-3 move).

A 5-3 move completes a cycle. This 5-3 move then becomes two subdivisions

of the next higher 5-3 wave. The underlying 5-3 pattern remains constant,

though the time span of each may vary.

Elliot Wave Interpretation

The Elliott Wave Theory assigns a series of

categories to the waves from largest to smallest. They are:

Grand Super cycle Super cycle Cycle Primary Intermediate Minor Minute Minuette Sub-Minuette

Wave Categories

Elliot Wave Chart

RISK is the possibility of loss

Risk management is to direct and control the possibility of loss. The activities of a risk manager are to measure risk and to increase and decrease risk by buying and selling stock.

Risk Management – Money and Trade Management

Diversify your portfolio

Equity Debt Commodities Foreign Exchange

Some examples Buy Gold, Yen, Pharmacy stocks as a hedge against

Inflation, stock market crash Buy Banking, Infrastructure and IT stocks in boom

Only way to beat inflation – Buy Agriculture commodities

Minimize Risk by Diversification

Legendary Trader Paul Tudor Jones trading style and beliefs

Contrarian attempt to buy and sell turning points. Keeps trying the single trade idea until he changes his mind, fundamentally. Otherwise, he keeps cutting his position size down. Then he trades the smallest amount when his trading is at its worst.

Considers himself as a premier market opportunist. When he develops an idea, he pursues it from a very-low-risk standpoint until he has been proven wrong repeatedly, or until he changes his viewpoint.

Swing trader, the best money is made at the market turns. Has missed a lot of meat in the middle, but catches a lot of tops and bottoms.

Spends his day making himself happy and relaxed. Gets out if a losing position is making him uncomfortable. Nothing’s better than a fresh start. Key is to play great defense, not great offense.

Never average losers. Decreases his trading size when he is doing poorly, increase when he is trading well.

He has mental stops. If it hits that number, he is out no matter what. He uses not only price stops, but time stops.

Monitors the whole portfolio equity (risk) in real time. He believes prices move first and fundamentals come second. He doesn’t care about mistakes made 3 seconds ago, but what he is

going to do from the next moment on. Don't be a hero. Don't have an ego. Always question yourself and your

ability. Don't ever feel that you are very good. The second you do, you are dead.

Trade Management and Psychology of Trader

Trading Plan from Goldenwire.com

A trading system is simply a group of specific rules, or

parameters, that determine entry and exit points for a given equity. These points, known as signals, are often marked on a chart in real time and prompt the immediate execution of a trade

Often, two or more of these forms of indicators will be combined in the creation of a rule. For example, the MA crossover system uses two moving average parameters, the long-term and the short-term, to create a rule

“Buy when the short-term crosses above the long term, and sell when the opposite is true.“

Trading System

Trading on trend lines and moving averages – 7th Jan 2014

A sample technical trade Buy GBP/USD– 22nd Jan 2014

Technical Trade Outcome

Merits It takes all emotion out of trading It can save a lot of time It's easy if you let others do it for you

De-Merits Trading systems are complex You must be able to make realistic

assumptions and effectively employ the system

Development can be a time-consuming task

Trading PlanMerits and Demerits

We all at

And We’re Done !!

Thank You for Your Valuable Time !!