ADX - Simple tool to make money!

The average directional movement index (ADX) was developed in 1978 by J. Welles Wilder as an indicator of trend strength in a series of prices of a financial instrument.
 ADX has become a widely used indicator for technical analysts, and is provided as a standard in collections of indicators offered by various trading platforms.

The ADX is a combination of two other indicators developed by Wilder, the positive directional indicator (abbreviated +DI) and negative directional indicator (-DI).
The ADX combines them and smooths the result with an exponential moving average.

ADX is a lagging indicator that measures the trend strength without regard to trend direction.

ADX is formed by combining two other indicators which are positive directional indicator (abbreviated +DI) and negative directional indicator (abbreviated -DI).

Positive Directional Indicator is calculated based on differences between current high and previous high over recent trading periods. Similarly Negative Directional 

Indicator is calculated based on differences between current low and previous low over certain recent trading periods.

ADX will range between 0 and 100 and is usually calculated based on 14 time-periods. Usually 20 is used as the key level for analysing ADX.

Since ADX enables one to quantify trend strength, it helps to identify the strongest trends as well as range conditions. So, appropriate trading strategy can be used. In trending conditions, one can enter on pullbacks and trade in direction of the trend where as in range conditions, one can trade on reversal either at support (bullish) or at resistance (bearish). In range conditions, another strategy can be to combine ADX with RSI (overbought and oversold) signal.

Different researchers have come out with various ways to interpret ADX. Some of the popular ones are as below:

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ADX below 20 indicates absence of trend and similarly ADX above 25 indicated strong trend. So, avoid trending strategies when ADX is below 20 as the market will be range bound and price action happens sideways.

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 Increasing ADX values above 20, indicates increasing trend strength, thereby uptrending ADX confirms either bullish or bearish trends supporting decision to either buy or sell.

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ADX crossing over 25 from below especially after being below for 30 bars or so, indicates that price has broken out of range with sufficient strength and that now trend trading strategies can be profitably deployed.

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ADX above 50 indicates extremely strong trend.

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ADX value pulling back below 40 indicates trend getting exhausted and likely to reverse.

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ADX crossing below 20 from above especially after being above for 30 bars or so, indicates that market is likely to be rangebound and accordingly risk management strategies can be put in place to handle change in trend momentum.

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Trend is deemed to be uptrend when (+DI) line is above (-DI) line and ADX is above 20.

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Trend is deemed to be downtrend when (+DI) line is below (-DI) line and ADX is above 20.

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When ADX is above 20 and +DI line crosses over -DI line, buy signal is indicated.

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When ADX is above 20 and -DI line crosses over +DI line, sell signal is indicated.

ADX indicator scale

If ADX is between 0 and 25 then the stock is in a trading range. It is likely just chopping around sideways. Avoid these weak, pathetic stocks!

Once ADX gets above 25 then you will begin to see the beginning of a trend. Big moves (up or down) tend to happen when ADX is right around this number.

When the ADX indicator gets above 30 then you are staring at a stock that is in a strong trend! These are the stocks that you want to be trading!

You won't see very many stocks with the ADX above 50. Once it gets that high, you start to see trends coming to an end and trading ranges developing again.

​Applied ADX on live charts with 100% Success Rate :- 

1) Nifty :- ​

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​2) Infy :-​

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3) Reliance :-

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​4) Maruti :-​

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5) ITC :- 

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Whether to follow it or not, it is completely your choice. To me this looks simple and easy to interpret and make money. Happy Trading :) 

Intrinsic Value & Book Value - Concept Checker

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Intrinsic or fundamental value is the perceived value of an investment's future cash flows, expected growth, and risk. The goal of the value investor is to purchase assets at prices lower than the intrinsic or fundamental value.

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Intrinsic value is an all-important concept that offers the only logical approach to evaluating the relative attractiveness of investments and businesses. Intrinsic value can be defined simply: It is the discounted value of the cash that can be taken out of a business during its remaining life.

The calculation of intrinsic value, though, is not so simple.  Intrinsic value is an estimate rather than a precise figure, and it is additionally an estimate that must be changed if interest rates move or forecasts of future cash flows are revised. Book value, an easily calculable number, though one of limited use.

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The book value of an entity is an accountant's view of the value of the company. The book value could be the intrinsic or fundamental value if you believe the accountants' estimate of assets and liabilities are the true value and there are not intangible values to be considered. But accounting methodology makes it rare that the book value would be a good indication of the real or fundamental value.

You can gain some insight into the differences between book value and intrinsic value by looking at one form of investment, a college education. Think of the education's cost as its "book value." If this cost is to be accurate, it should include the earnings that were foregone by the student because he chose college rather than a job.

For this exercise, we will ignore the important non-economic benefits of an education and focus strictly on its economic value. First, we must estimate the earnings that the graduate will receive over his lifetime and subtract from that figure an estimate of what he would have earned had he lacked his education. That gives us an excess earnings figure, which must then be discounted, at an appropriate interest rate, back to graduation day. The

rupee​

 result equals the intrinsic economic value of the education.

Some graduates will find that the book value of their education exceeds its intrinsic value, which means that whoever paid for the education didn't get his money's worth. In other cases, the intrinsic value of an education will far exceed its book value, a result that proves capital was wisely deployed. In all cases, what is clear is that book value is meaningless as an indicator of intrinsic value.

Compounding is the 8th Wonder of the World, Power of Equity Compounding is the 9th wonder of the world - Unlock the real truth behind stock market!!!

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This is what 10,000 in Stock Market can do for you & still people say money is not made in stock market. Wipro Stock has multiplied by 7,04,265 times or an annualised return of 48.22% over 34 years.

Film actor Rajesh Khanna bought a bungalow in iconic Carter Road in Mumbai for Rs.3.5 lakhs in 1970. His heirs sold it recently for Rs.85 crores. The property has multiplied by 2428 times or an annualized return of 19.38% over 44 years.

Samudhra Mahal in Mumbai is another expensive property. A flat purchased in 1970 at Rs.700 per sq.ft was sold at Rs.1,18,000 per sq.ft in 2013. Money multiplied by 168 times in 43 years. This works out to an annualized return of 12.66%

In 1963, Godrej paid Rs.1 lakh to buy his first house, a 2916 sq.feet apartment at Usha Kiran, Carmicheal road, in tony South Mumbai. In 2011 he sold it for Rs.25 crore. Money multiplied by 2500 times over 48 years or an annualized return of 17.70%

The first three properties can be bought and owned by cream or elite of the society who are worth at least tens of crores, mostly hundreds of crores.

Power of equity is least understood in this country.

If you can withstand notional loss (if you don't book) in portfolio during bear markets, not worry about daily price movements, it is possible to make much better money than what can be made out of best of real estate.

Give at least the same importance to equity as you give to real estate.

You don't mind holding real estate for 20 or 30 years. Please do the same for equity ignoring bull and bear markets, notional profits and losses.

Many of you have been investing for last couple of years. Stay the course for at least another 15 to 20 years completely ignoring market fluctuations. You would be amazed at the fortune created for your retirement or to pass on to your children.

Their are many examples of wealth creation in stock market, it is important that you realise the Power of Equity. Another such example is CIPLA, see what it did. Cipla Stock has multiplied by 2,32,886 times or an annualised return of 43.83% over 34 years.

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Remember : Compounding is the 8th Wonder of the World, Power of Equity Compounding is the 9th wonder of the world - Unlock the real truth behind stock market :) 

Diagonal Put Time Spread Strategy: Live Call

Buy Nifty 8500 Dec 2015 Strike Put @491.50

Sell Nifty 8100 Oct 2014 Strike Put @116

Net Debit = 491.50-116 = 375.50

After Oct expiry, keep selling next month or far months calls. Cost would reduce significantly & profits would maximise tremendously. 

Live Execution done today:

Relative Strength Index

Relative Strength Index

The relative strength index (RSI) is a technical indicator used in the analysis of financial markets. A technical momentum indicator that compares the magnitude of recent gains to recent losses in an attempt to determine overbought and oversold conditions of an asset.

It is intended to chart the current and historical strength or weakness of a stock or market based on the closing prices of a recent trading period. The indicator should not be confused with relative strength.

The RSI is classified as a momentum oscillator, measuring the velocity and magnitude of directional price movements. Momentum is the rate of the rise or fall in price. The RSI computes momentum as the ratio of higher closes to lower closes: stocks which have had more or stronger positive changes have a higher RSI than stocks which have had more or stronger negative changes.

The RSI is most typically used on a 14 day timeframe, measured on a scale from 0 to 100, with high and low levels marked at 70 and 30, respectively. Shorter or longer timeframes are used for alternately shorter or longer outlooks. More extreme high and low levels—80 and 20, or 90 and 10—occur less frequently but indicate stronger momentum.

When price moves up very rapidly, at some point it is considered overbought. Likewise, when price falls very rapidly, at some point it is considered oversold. In either case, Wilder deemed a reaction or reversal imminent.

RSI Formula:-

Interpreting Failure Swings: -

Wilder thought that "failure swings" above 70 and below 30 on the RSI are strong indications of market reversals. For example, assume the RSI hits 80, pulls back to 71, then rises to 81. If it falls below 71, Wilder would consider this a "failure swing" above 70.

Andrew Cardwell has developed several new interpretations of RSI to help determine and confirm trend. First, Cardwell noticed that uptrends generally traded between RSI 40 and 80, while downtrends usually traded between RSI 60 and 20. Cardwell observed when securities change from uptrend to downtrend and vice versa, the RSI will undergo a "range shift."

Next, Cardwell noted that bearish divergence: 1) only occurs in uptrends, and 2) mostly only leads to a brief correction instead of a reversal in trend. Therefore bearish divergence is a sign confirming an uptrend. Similarly, bullish divergence is a sign confirming a downtrend.

Reversals

Cardwell discovered the existence of positive and negative reversals in the RSI. Reversals are the opposite of divergence.

For example, a positive reversal occurs when an uptrend price correction results in a higher low compared to the last price correction, while RSI results in a lower low compared to the prior correction.

A negative reversal happens when a downtrend rally results in a lower high compared to the last downtrend rally, but RSI makes a higher high compared to the prior rally.

In other words, despite stronger momentum as seen by the higher high or lower low in the RSI, price could not make a higher high or lower low. This is evidence the main trend is about to resume. Cardwell noted that positive reversals only happen in uptrends while negative reversals only occur in downtrends, and therefore their existence confirms the trend.

Practical understanding through trading over the years & effective trading ranges: -

1) It is always better to work on RSI of 27 days rather than 14 days for 73:28

2) Positive ranges results in buy on dips near 40 RSI but not sell at 80. When I say buy on dips, it would be more fruitful to sell a far OTM Put or bullish derivative strategy near RSI of 40 rather than buying future.

3) Negative ranges results in Sell on Rise near 60-65 but not buy at 20. When I say sell on rise, it is far better to sell far OTM call or bearish derivative strategy than selling future.

4) It is always safe to work on 14 days RSI of 85:15 on stocks with good liquidity

5) Conventional ​14 days RSI of 80:20 works well on indexes

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Thank you​. ​Comments and feedback would be appreciated. 

Rules For Traders - Simple Reminder

1. Buying a weak stock is like betting on a slow horse. It is retarded.

2. Stocks are only cheap if they are going higher after you buy them.

3. Never trust a person more than the market. People lie, the market does not.

4. Controlling losers is a must; let your winners run out of control.

5. Simplicity in trading demonstrates wisdom. Complexity is the sign of inexperience.

6. Have loyalty to your family, your dog, your team. Have no loyalty to your stocks.

7. Emotional traders want to give the disciplined their money.

8. Trends have counter trends to shake the weak hands out of the market.

9. The market is usually efficient and can not be beat. Exploit inefficiencies.

10. To beat the market, you must have an edge.

11. Being wrong is a necessary part of trading profitably. Admit when you are wrong.

12. If you do what everyone is doing you will be average, so goes the definition.

13. Information is only valuable if no one knows about it.

14. Lower your risk till you sleep like a baby.

15. There is always a reason why stocks go up or down, we usually only learn the reason when it is too late.

16. Trades that make a lot of intellectual sense are likely to be losers.

17. You do not have to be right more than you are wrong to make money in the market.

18. Don't worry about the trades that you miss, there will always be another.

19. Fear is more powerful than greed and so down trends are sharper than up trends.

20. Analyse the people, not the stock.

21. Trading is a dictators game; you can not trade by committee.

22. The best traders are the ones who do not care about the money.

23. Do not think you are smarter than the market, you are not.

24. For most traders, profits are short term loans from the market.

25. The stock market can not be predicted, we can only play the probabilities.

26. The farther price is from a linear trend, the more likely it is to correct.

27. Learn from your losses, you paid for them.

28. The market is cruel, it gives the test first and the lesson afterward.

29. Trading is simple but it is not easy.

30. The easiest time to make money is when there is a trend.

Daily circuit limit on Sensex, Nifty from October 1

Market regulator Sebi asked stock exchanges to calculate circuit limits -- the maximum permissible movement allowed to Sensex or Nifty in a trading session -- on a daily basis as against the current practice of doing the same on a quarterly basis.

Currently the stock exchanges calculate the circuit filters on the basis of the level attained by Sensex and Nifty at the end of every quarter and the same limits are applicable for every day of trade for the next three months.

The new calculation would apply for 10 per cent, 15 per cent and 20 per cent circuit limits in Sensex and Nifty, the two benchmark indices of Indian stock market, with effect from October 1, 2013. While 10 per cent and 15 per cent limits result into temporary trading halts, a 20 per cent movement triggers into trading getting halted for the entire day.

The move assumes significance in the wake of rising volatility in stock markets. For example, the 10 per cent circuit limit for Sensex in the current quarter is fixed at 1,950 points, while 15 per cent limit is at 2,900 points and 20 per cent limit is 3,875 points.

These limits were fixed as per the closing value of Sensex at the end of previous quarter, April-June 2013.

However, the circuit limits would be much lower if they are calculated on the basis of previous day closing levels.

For example, the Sensex today closed at 18,235 points and therefore the 10 per cent circuit filter would stand at 1,823 points for tomorrow's trade.

Announcing the new guidelines, Sebi said: "The stock exchange on a daily basis shall translate the 10 per cent, 15 per cent and 20 per cent circuit breaker limits of market-wide index variation based on the previous day's closing level of the index".

Sebi further said that the stock exchange should resume trading in stocks with a 15-minute pre-open call auction session, after any trading halt.

In order to accommodate such pre-open call auction session, the extant duration of the market halt would be suitably reduced by 15 minutes, Sebi said.

Under the circuit breaker system, a rise or fall of 10 per cent in Sensex triggers into the trading being halted across the market for one hour, if such a movement takes place before 1 pm, while halt is of 30 minutes is a 10 per cent movement happens between 1 pm and 2.30 pm. pm. In case the movement takes place at or after 2.30 pm, there is no trading halt at the 10 per cent level.

In case of a 15 per cent movement of either index, there is a two-hour market halt if the movement takes place before 1 pm. If the 15 per cent trigger is reached between 1-2 pm, there is a one hour halt, while trading is halted for rest of the day if a 15 per cent trigger is reached on or after 2 pm.

In case of a 20 per cent movement of the index, the trading is halted for the remainder of the day.

Source: ET

DIVERSIFICATION: Don't put ALL your EGGS in one BASKET

For starters, allow me to provide a quick definition:

Diversification - (1) the process of making diverse; giving variety to (2): to divide funds with the expectation that the positive performance of some will offset negative performance of others (as in investing).

Diversification can be compared to a kitchen sink casserole; it takes time, requires a handful of ingredients and if not executed well, it can result in an experience that is hard to stomach.   Just as I believe in making use of food that may spoil, I also believe in diversification.  However, there are a few issues that investors should consider when developing a diversification strategy.

Most investors have been told to diversify their portfolio. They think if they buy companies that are in different industries that they will be covered if there is some adversity in the markets. The problem is that they do not fully understand the risks in the markets and how to offset those risks. To trade properly, you need to understand the degree of risk you are taking on by involving yourself in the markets.

There are several risks that any trader or investor will face.  Depending on the type of investment or trading vehicle you select, you will be exposed to one or many of these types of risk.  The levels of risk are listed in order along with the securities that are involved at those levels.

Systemic Risk – These are shocks to the entire financial system where there are few to no safe havens left. Everyone experienced this during the 2008 collapse in the global markets.

Asset Class Risk – Stocks, bonds, commodities, and currency markets all go through cycles where they are bullish or bearish.  You face the risk of entering at the wrong part of the cycle for any of these asset classes.

Country Specific Risk – Countries grow at different paces and can offer distinct opportunities and risks based on economic projections, political stability, and other factors.

Sector Risk – Companies fall into sectors: consumer discretionary, technology, basic materials, industrials, energy, consumer staples, services, utilities, and financials. The sectors also undergo bullish and bearish cycles, falling in and out of favor with investors.

Industry Risk – Within these sectors, there are many industry labels that inform investors about the nature of a company's products or services.  Companies also fall into cycles.  

Company Risk – Individual stocks have risks tied to the company's operations. Lackluster earnings, accounting irregularities, and corporate member changes are all issues you face.

If you trade or invest in individual stocks, you are exposed to the highest levels of risk.  Even if you try to reduce risk by buying many stocks in different industries or sectors, you still have the asset class and company risk. When it comes to minimising your risk, you want to balance risk and reward.  When you increase your risk, you also increase your potential for profit.  You will usually see larger price movements with stocks than you will see with exchange traded funds, or ETFs, but most ETFs hold up much better than individual stocks if a company encounters an issue. 

To really be diversified, you should invest or trade in multiple asset classes, such as futures or forex, to spread your exposure out over different asset classes.  Even if you own a tech stock and a financial company, you will lose when the stock market collapses.  Know your risks and manage them when trading. Success comes from protecting your capital as much as it comes from making winning trades.

Finance Myths

The most important factor that prevents to be financially secure is the trust in the age old beliefs and deceptive thoughts about money. The advice and guidance financial experts give may work well for many people, but at the same time may not fit in your personal situation. Tips about money sometimes can be life saving and sometimes life destroying. Before deciding on any plan about money spending or saving, you must keep in mind few very common myths about money.

1. You can save money by budgeting

A budget can no doubt help you save money, but it should be given a space as an item in your budget. It's important to set apart some money as savings.

While budgeting you are likely to set apart a fixed amount for an item. For eg., you might set apart 8000 for a refrigerator, chances are you're going to buy the product just by checking the money and not the item. You might get what you need at a much lesser price.

2. You are becoming wealthy as you are earning more

Generally, as you start earning more, you tend to shop a lot. You tend to buy things that you've always dreamt of. You actually ignore to think about savings imagining you've a lot of money. This is one of the reasons lottery winners declare bankruptcy soon. It's important to ensure that higher earnings equals to higher savings too.

3. Money can't buy happiness

The relationship between people, money and joy is not clearly captured in the phrase "Money doesn't buy happiness". The reality is money can buy happiness, specially for lower and middle class people. You can buy things that you actually need, this will of course give you contentment and happiness. If you want to spend quality time with your family, you need to go on vacation. A vacation is only possible if you have money to earn it. Quality time with family gives you happiness, which is the result of vacation that you buy from money.

4. The neediest is the first one to get the financial aid

There are many government aided programs that provide financial aid to people who are actually needy. However, most student based programs are merit based rather than need based. Even high income families can qualify for financial aid programs. This kind of programs makes rich people richer and needy people more needy.

5. Owning a home is better than renting

Keeping in mind today's financial scenario, it's better to keep your lifestyle flexible. Change in job or city isn't a rare thing. In a condition like this, buying a home can give extra mental pressure. You need to sell the house before flipping jobs or city. In a rented house, you have no hassle of managing anything. Also, you never know the estate prices might just go down when you need to sell the house. You might suffer loss also.

6. Red cars are expensive to insure

The truth is the insurance companies are color blind. It doesn't bother them if your car is blue, black, striped or red. The insurance rate for a particular model, make and age of the vehicle will be the same irrespective of the color.

7. Closing old unused credit cards is good for your credit

Your credit rating largely depends on your credit history wherein your borrowing history and balances on your credit card are shown. It's a good idea to keep unused credit cards also open. Credit card companies keep a track of old accounts, especially those with good credit history.

8. Saving for an emergency is more important than paying off your credit card bills

The ideal decision should be saving money while paying off your debts. Instead, when you keep saving money without paying debt, you are actually stocking up more debt. The high interest rates are racking up in your account. Your credit ratings are also getting affected.

9. Expenses will cut down after you retire

Nothing like this is actually going to happen. Retirement, generally, means old age and aging people cost more than babies. People theses days don't have their house completely paid off and prices of all products are getting higher not lower. Hence, retirement doesn't by any chance means lower spendings.

10. You don't have enough money to save

There is no guarantee that your income is going to increase or the time when it's going to happen. It's important to save some percentage of money with whatever you earn. You must start saving with small amounts.

A thought may be age old but it's not necessary that it'll work for you. So, whenever you hear something about finances, analyze your situation then take any action.

Rules Of Investing, Market Truisms and Axioms

If you are going to insist on investing your money into the financial markets then it is imperative that before you take on the additional risk you take some safety precautions. If you don't follow the basic rules – you will lose and lose big. 

P. Arthur Huprich published a terrific list of rules that you should consider as a starting guide.

Commandment #1: "Thou Shall Not Trade Against the Trend." If the market is going up then it is okay to have money exposed to the market – if it isn't, don't.

 

• Portfolios heavy with underperforming stocks rarely outperform the stock market!

 

• There is nothing new on Street. There can't be because speculation is as old as the hills. Whatever happens in the stock market today has happened before and will happen again, mostly due to human nature.

 

• Sell when you can, not when you have to.

 

• Bulls make money, bears make money, and "pigs" get slaughtered.

 

• We can't control the stock market. The very best we can do is to try to understand what the stock market is trying to tell us.

 

• Understanding mass psychology is just as important as understanding fundamentals and economics.

 

• Learn to take losses quickly, don't expect to be right all the time, and learn from your mistakes.

 

• Don't think you can consistently buy at the bottom or sell at the top. This can rarely be consistently done.

 

• When trading, remain objective. Don't have a preconceived idea or prejudice. Said another way, "the great names in Trading all have the same trait: An ability to shift on a dime when the shifting time comes."

 

• Any dead fish can go with the flow. Yet, it takes a strong fish to swim against the flow. In other words, what seems "hard" at the time is usually, over time, right.

 

• Even the best looking chart can fall apart for no apparent reason. Thus, never fall in love with a position but instead remain vigilant in managing risk and expectations. Use volume as a confirming guidepost.

 

• When trading, if a stock doesn't perform as expected within a short time period, either close it out or tighten your stop-loss point.

 

• As long as a stock is acting right and the market is "in-gear," don't be in a hurry to take a profit on the whole positions. Scale out instead.

 

• Never let a profitable trade turn into a loss, and never let an initial trading position turn into a long-term one because it is at a loss.

 

• Don't buy a stock simply because it has had a big decline from its high and is now a "better value;" wait for the market to recognize "value" first.

 

• Don't average trading losses, meaning don't put "good" money after "bad." Adding to a losing position will lead to ruin. Ask the Nobel Laureates of Long-Term Capital Management.

 

• Human emotion is a big enemy of the average investor and trader. Be patient and unemotional. There are periods where traders don't need to trade.

 

• Wishful thinking can be detrimental to your financial wealth.

 

• Don't make investment or trading decisions based on tips. Tips are something you leave for good service.

 

• Where there is smoke, there is fire, or there is never just one cockroach: In other words, bad news is usually not a one-time event, more usually follows.

 

• Realize that a loss in the stock market is part of the investment process. The key is not letting it turn into a big one as this could devastate a portfolio.

 

• Said another way, "It's not the ones that you sell that keep going up that matter. It's the one that you don't sell that keeps going down that does."

 

The table below depicts the percentage gain necessary to get back even, after a certain percentage loss.

• Your odds of success improve when you buy stocks when the technical pattern confirms the fundamental opinion.

 

• You can lose money even in the "best companies" if your timing is wrong. Yet, if the technical pattern dictates, you can make money on a short-term basis even in stocks that have a "mixed" fundamental opinion.

 

• To the best of your ability, try to keep your priorities in line. Don't let the "greed factor" that Street can generate outweigh other just as important areas of your life. Balance the physical, mental, spiritual, relational, and financial needs of life.

 

• Technical analysis is a windsock, not a crystal ball. It is a skill that improves with experience and study.

 

Always be a student, there is always someone smarter than you!

 

I hope this helps clarify the some of the issues that you wrestle with when it comes to managing your money.

Thinking about Saving - Think Again?

The things we need to consider, as investors, when thinking about saving for retirement and managing portfolio risks.  Here is a list of things to consider. 

• "Buy and Hold" investing will not work. Active management to participate in cyclical upswings, and avoid the majority of downswings, will be key.

• "Save More & Spend Less."  Savings will make a large chunk of your total retirement nest egg. This has always been the case.

• "Lump Sum Invest Vs. Rupee Cost Averaging."  Accumulate cash and invest in lump sums when things have become undervalued during the cyclical bear markets.  This will provide better returns over time especially when combined with an active management strategy.

• "Income Over Growth."  The income theme will continue to dominate investor psychology particularly in the baby boomer generation.

• "The Inflation Benchmark."  The real benchmark for investors to focus on is inflation - not an index.  Inflation, except in rare instances, actually compounds annually - stock markets don't.  Managing portfolios to limit losses and pace inflation will be key to ensure future purchasing power parity. 

• "Diversification."  Real diversification between non-corollary assets will be key in the future to hedge off market volatility and reduce emotional mistakes.

• "Real Assets."  Investing in physical real assets such as income producing properties, oil and gas wells, precious metals, private equity, etc. will perform better in a rising inflationary environment.  The key here is having a "real asset" behind the investment that will retain value even in deflating market environments.

• "Fixed Income"  Even in a rising interest rate environment actual fixed income, not bond funds, will provide income, low volatility and principal protection to portfolios.  Short duration ladders that can ratchet up as interest rates rise will provide portfolios with an edge over long only equity portfolios.

Of course, there are many other investments that will do well and these are just a few ideas to start the thinking process.  Furthermore, there will be fantastic and tradable bull market rallies like we have seen twice so far this century.  Being able to capitalize on those rallies will be critical in offsetting the rate of inflation and creating portfolio returns.  Unfortunately, the ensuing declines will also destroy all the gains and then some so being vigilant and disciplined in your risk management process will be critical.

However, the most important asset destroyed by reversion processes is "time".  It is the one commodity that you have a very limited supply of and no ability to replace.  Reversion doesn't mean that the markets "crash", although they certainly can, but the slow grind through the process will be like "Chinese water torture" for investors slowly destroying valuable assets over time.  Understanding the environment that we are in today, and will continue to face going forward, can help us make better decisions in both our planning and investment process.  Ignore the reversion process at your own risk.

Fibonacci Retracements

Leonardo Pisano Bogollo (1170-1250), an Italian mathematician from Pisa, is credited with introducing the Fibonacci sequence to the West. Leonardo of Pisa, nicknamed, Fibonacci was one of the best known mathematicians of his time. His greatest find was Fibonacci series.

0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377, 610, 987, 1597, ...

This sequence is constructed by choosing the first two numbers (the "seeds" of the sequence) then assigning the rest by the rule that each number be the sum of the two preceding numbers. This simple rule generates a sequence of numbers having many surprising properties, of which we list but a few.

• Take any three adjacent numbers in the sequence, square the middle number, multiply the first and third numbers. The difference between these two results is always 1.
• Take any four adjacent numbers in the sequence. Multiply the outside ones. Multiply the inside ones. The first product will be either one more or one less than the second.
• The sum of any ten adjacent numbers equals 11 times the seventh one of the ten. Mesoamericans thought the numbers 7 and 11 were special.What can we get out of these numbers. Try picking any number and divide it by the next number in the series and see what you get.

For example: 21/34 = 0.6176 or 34/55 = 0.6182 or 144/233 = 0.6180

Or the 62% retracement level. Similarly, if you take the previous number and divide it by the next number you get another important retracement level 38%.

For example: 21/55 = 0.382 or 34/89 = 0.382

And you can go on like this. But the most important retracement levels are 38% and 62%.The sequence extends to infinity and contains many unique mathematical properties.

• After 0 and 1, each number is the sum of the two prior numbers (1+2=3, 2+3=5, 5+8=13 8+13=21 etc…).
• A number divided by the previous number approximates 1.618 (21/13=1.6153, 34/21=1.6190, 55/34=1.6176, 89/55=1.6181). The approximation nears 1.6180 as the numbers increase.
• A number divided by the next highest number approximates .6180 (13/21=.6190, 21/34=.6176, 34/55=.6181, 55/89=.6179 etc….). The approximation nears .6180 as the numbers increase. This is the basis for the 61.8% retracement.
• A number divided by another two places higher approximates .3820 (13/34=.382, 21/55=.3818, 34/89=.3820, 55/=144=3819 etc….). The approximation nears .3820 as the numbers increase. This is the basis for the 38.2% retracement. Also, note that 1 - .618 = .382
• A number divided by another three places higher approximates .2360 (13/55=.2363, 21/89=.2359, 34/144=.2361, 55/233=.2361 etc….). The approximation nears .2360 as the numbers increase. This is the basis for the 23.6% retracement.
• The 50% retracement is not based on a Fibonacci number. Instead, this number stems from Dow Theory's assertion that the Averages often retrace half their prior move.

1.618 refers to the Golden Ratio or Golden Mean, also called Phi. The inverse of 1.618 is .618.

Practical Significance of Fibonacci levels on charts. Focus will be on moderate retracements (38.2-50%) and golden retracements (61.8%) :

38.2% Retracement on Nifty. After taking the support at 38.2% retracement, nifty continues it's uptrend. 

50% Retracement on Nifty - Corrective Pullback only to fall after that. 

61.8% Retracement on Nifty - After decline from 6111.80 to 5663, Nifty bounces back to 61.8% (corrective Pullback) to face a stiff resistance around those level, only to fall after that. 

50% Corrective Advance in Bear Market on Gold

Conclusion

Fibonacci retracements are often used to identify the end of a correction or a counter-trend bounce. Corrections and counter-trend bounces often retrace a portion of the prior move. While short 23.6% retracements do occur, the 38.2-61.8% covers the more possibilities (with 50% in the middle). This zone may seem big, but it is just a reversal alert zone. Other technical signals are needed to confirm a reversal. Reversals can be confirmed with candlesticks, momentum indicators, volume or chart patterns. In fact, the more confirming factors the more robust the signal.

VIX - Volatility Index

VIX

Volatility Index is a measure of market's expectation of volatility over the near term. Volatility is often described as the "rate and magnitude of changes in prices" and in finance often referred to as risk. Volatility Index is a measure, of the amount by which an underlying Index is expected to fluctuate, in the near term, (calculated as annualised volatility, denoted in percentage e.g. 20%) based on the order book of the underlying index options.

India VIX is a volatility index based on the NIFTY Index Option prices. From the best bid-ask prices of NIFTY Options contracts, a volatility figure (%) is calculated which indicates the expected market volatility over the next 30 calendar days. India VIX uses the computation methodology of CBOE, with suitable amendments to adapt to the NIFTY options order book using cubic splines, etc.

The VIX Measures FEAR
High VIX readings mean that fear is also high, whereas low VIX readings mean that fear is low.  Backtesting various VIX reversal signals has proven that the VIX can be used to predict market direction about 60 to 70% of the time, the more VIX signals the better.  What this means is that when the VIX is at an extreme (meaning everyone thinks the market will continue in that direction), a top or bottom is usually in place and what usually happens is the market reverses in the opposite direction.

Volatility (VIX) Tends to Trend
This means that if the VIX rises today, it has a higher than average chance of rising tomorrow. This is even more significant at market extremes and right before market reversals.

The VIX is Dynamic
What this means is that you can not predict market direction simply by the level of the VIX.  In the past, many traders simply bought the market when the VIX goes above 30 and sold the market when it traded down to 20. Because the VIX and volatility is constantly changing this strategy simply doesn't work.  Now, more than ever, it is the relative level of the VIX that is important, not the absolute value.

Volatility is Mean Reverting
This means that periods of high volatility will be followed by periods of low volatility.  This was academically proven over 50 years ago and is one of many market truths.  This is important because when the VIX has a low reading and begins to revert to its mean, it is also accompanied by a market that begins to sell off.  It is the same for when the VIX has a high reading and changes direction, this typically is accompanied by a market that begins to rally.

VIX Reversal Signals
There have been many books written about the VIX and signals have been developed that help traders pinpoint when the market is most likely to reverse.  What all of these signals have in common is that they use various means to determine when the VIX is at an extreme and either reversing or about to reverse.  While historically these individual VIX Signals have worked 60 to 70% of the time, that is no longer the case in today's market. Why is this? Because EVERYBODY knows about them and is watching them.  Whenever a system or strategy becomes known to too many people, it often fails to live up to the results it once had.  However, that being said, when multiple VIX Signal are generated, there is still a very high probability of the market reversing.

Practical Importance of VIX for tracking the market:-

https://www.facebook.com/photo.php?fbid=10151182070943583&set=o.277991142250706&type=1&theater

Beta

In finance, the Beta (β) of a stock or portfolio is a number describing the correlated volatility of an asset in relation to the volatility of the benchmark that said asset is being compared to. This benchmark is generally the overall financial market and is often estimated via the use of representative indices, such as the S&P 500, Nifty, Sensex, etc. 

Beta is also referred to as financial elasticity or correlated relative volatility, and can be referred to as a measure of the sensitivity of the asset's returns to market returns, its non-diversifiable risk, its systematic risk, or market risk. On an individual asset level, measuring beta can give clues to volatility and liquidity in the marketplace. In fund management, measuring beta is thought to separate a manager's skill from his or her willingness to take risk.

The beta coefficient was born out of linear regression analysis. It is linked to a regression analysis of the returns of a portfolio (such as a stock index) (x-axis) in a specific period versus the returns of an individual asset (y-axis) in a specific year. The regression line is then called the Security characteristic Line (SCL).

• Beta < 0: Negative Beta - not likely.
• Beta = 0: Cash in the bank.
• Beta Between 0 and 1: Low-volatility
• Beta = 1: Matching the market.
• Beta > 1: More volatile than the market

Example of use: A fund with a beta of 1 is deemed to have the same volatility as the Nifty; therefore a fund with a beta of 4 is four times more volatile than the Nifty, and a fund with a beta of .25 is 25% as volatile as the Nifty.

This means that a fund with a beta of 4 would rise 40% if the Nifty rose 10% (the same is true of a drop).

The three basic interpretations of Beta are as follows: 

• Econometric Beta: The primary risk factor for the CAPM. Relevant to pricing and not valuation.

• Graphical Beta: The slope coefficient of the characteristic line.

• Statistical Beta: The measure of systematic risk in the CAPM.  

Beta depends on two factors, multiplied together:

1. the relative volatility of a security's returns compared to the market's returns, and
2. the correlation of the security's returns to the market's returns.

There are several misconceptions about beta. Amongst the most common are:

• Beta measures the relative volatility of a security's price compared to the price of the market. Beta is a measure that compares returns, not prices; a security with a positive beta can have a price that decreases while the market's price increases. The key is whether the security's returns are above or below its mean return when the market's returns are above or below its mean return; whether the security's mean return is positive or negative is not relevant to its beta.
• Beta measures the relative volatility of a security's returns compared to the volatility of the market's returns. Beta has two components: relative volatility of returns, and correlation of returns. Unless the correlation of returns is +1.0 or -1.0, beta does not measure the relative volatilities of returns.
• A positive beta means that a security's returns and the market's returns tend to be positive and negative together; a negative beta means that when the market's return is positive the security's return tends to be negative, and vice versa. The calculation of beta involves deviations of the market's returns and the security's returns about their respective mean returns. A security with a negative mean return can have a positive beta, and a security with a positive mean return can have a negative beta.
• A beta of 1.0 means that the security's returns have the same volatility as the market's returns. This could be true, or the security's returns could be twice as volatile as the market's returns, but their correlation of returns is +0.5. Beta, by itself, does not describe the relative volatility of returns.

Because beta is the product of the relative volatility of returns and the correlation of returns, it does allow for some useful conclusions:

• A beta of 1.0 could mean that the security's returns have the same volatility as the market's returns and their correlation is +1.0, or it could mean that the relative volatility is 2.0 and the correlation is +0.5, or it could mean that the relative volatility is 5.0 and the correlation is +0.2. It is certain that the volatility of the security's returns is at least as great as the volatility of the market's returns, and that the correlation of returns between the security and the market is positive.
• A beta higher than 1.0 means that the security's returns have been more volatile than the market's returns, and that the correlation of returns is positive. For example, a beta of 2.0 means that the security's returns have at least twice the volatility of the market's returns, probably more. The value of beta gives a lower limit to the relative volatility of the security's returns compared to the market's returns.
• A beta lower than 1.0 can mean that the security's returns are less volatile than the market's returns, or it could simply mean that the security's returns and the market's returns have a low correlation.
• A beta of 0 means that the correlation of returns of the security and the market is 0.0; i.e., they tend to move independently.
• A negative beta means that the security's returns tend to move opposite the market's returns; i.e., their correlation of returns is negative. The absolute value of beta gives a lower limit to the relative volatility of the security's returns compared to the market's returns.

Applications of Beta

Beta is a commonly used tool for evaluating the performance of a fund manager. Beta is used in contrast with Alpha to denote which portion of the fund's returns are a result of simply riding swings in the overall market, and which portion of the funds returns are a result of truly outperforming the market in the long term. For example, it is relatively easy for a fund manager to create a fund that would go up twice as much as the Nifty when the Nifty rose in value, but go down twice as much as the Nifty when the Nifty's price fell - but such a fund would be considered to have pure Beta, and no alpha. A fund manager who is producing Alpha would have a fund that outperformed the Nifty in both good times and bad.

Beta can also be used to give investors an estimate on a stock's expected returns relative to the market return. Consider some examples:

• Company ABC, a tech stock, has a beta of 1.8. Over a given year, the Nifty increases in value 17%. Assuming the beta value is accurate, ABC's value should have increased 30.1% or (1.8 x 17%) over the same time period.
• Company XYZ, a mid-sized oil company, has a beta of 1.0. Over a given year, the Nifty falls 10%. Assuming the beta value is accurate, XYZ's value would also have fallen 10% over the same period.
• Company LMN, a gold mining company, has a beta of -1.4. Over a given year, the Nifty increases in value 11%. Assuming the beta value is accurate, LMN's value would have declined 15.4% or (-1.4 x 11%) over the same period.

How to estimate Beta

For individual companies, beta can be estimated using regression analysis (line of best fit) against a stock market index. It is one of the required inputs to the Capital Asset Pricing Model (CAPM), which is used to calculate the expected return of an asset based on its beta and expected market returns. Essentially, to calculate beta for an individual security you take total stock returns for a given period, and simply plot it against the benchmark returns, and then fit a least squares regression line (line of best fit) through the data points. The slope of the line would then be your beta.

The beta for a portfolio of securities is simply the weighted average of each of the individual securities. The weight of each security is the value invested in that security divided by the value of the entire portfolio. A quick example would illustrate the concept. Assume you have Rs. 100 invested into two companies for a total investment of Rs. 200. The betas for the companies are 1.0 and 2.0 respectively. Therefore, the calculation would be (Rs.100/Rs.200)*1.0 + (Rs. 100/200)*2.0 = 1.5. Therefore, the beta of the portfolio is 1.5.

The two most widely used methods of estimating beta are:

1. Pure-Play Method
When using the pure-play method, a company seeks out companies with a product line that is similar to the line for which the company is trying to estimate the beta. Once these companies are found, the company would then take an average of those betas to determine its project beta.

2. Accounting-Beta Method
When using the accounting-beta method, a company would run a regression using the company's return on assets (ROA) against the ROA for market benchmark, such as the S&P 500. The accounting beta is the slope coefficient of the regression.

Variances in Beta

Values of Beta can vary depending on how they are calculated. Specifically, the main varying components are:

• Different time frame: Depending on how far back into history the beta calculation goes, the values will differ. For example, if one calculation includes the stock prices for the trailing 12 months versus the trailing 60 months; the two values will be different.
• Different time intervals: Depending on the interval between the stock prices used, beta calculations can differ. For example, one calculation which uses the monthly stock prices will differ from another calculation which uses weekly or daily stock prices.
• Different index: Beta calculations can vary depending on which index is used to measure the overall value in the market. For example, using the Nifty and the SENSEX will result in different values.
• Inclusion or exclusion of dividends: Depending on whether dividends are included in the calculation of the returns of the stock, the beta calculations can differ.

The result of each of these different choices can cause beta values to differ widely depending on how the calculation is made. This means that a beta value is not an exact value of how a stock varies with the market, but a representation.

Different types of Beta - Explained by various financial scholars

1. Classic beta – This is related to the 'beta' as referred to in past decades, though now corrupted to mean precisely matching the market. In the new parlance the word beta is equivalent to a beta of 1 under the older definition. It effectively means just matching the market, whether the market is the US stock market, the UK FTSE 100, Indian Market Nifty or SENSEX or the global MSCI-EAFA. Standard index funds come under this category. 

2. Bespoke beta – This refers to the same as 1 above except that the index no longer represents the broad market but particular sectors or other asset classes. For instance, the banking sector or a basket of commodities.

3. Alternative beta – The rationale is that there are systematic risk exposures which were previously not available to investors but which can be now accessed through ETFs. As an example, currency ETF linked to the price of the euro in terms of the dollar.

4. Fundamental beta – There is now a raging debate as to whether indices constructed by weighting the constituent stocks by market capitalisation are the best proxies for the market. A strongly supported school has sprung up which claims that fundamental indices, in which the constituents are weighted by fundamental factors such as revenue or dividends, are much better. It is better to match these fundamental indices as fundamental beta.

5. Cheap beta – This refers to a situation where beta cannot be produced by investing in an index or ETF, but where beta is embedded in a complex basket of risks within one security. An example is a convertible bond. This has the following elements of risk embedded in it: interest rate risk, stock market risk, credit risk, and volatility risk. Players in convertible bonds are effectively getting indirect exposure to all these different betas. Interestingly, here we take beta as numbers rather than as the concept of matching the market.

6. Active beta – it refers to long-short funds such as 130/30, where the overall exposure of the portfolio matches the market but additionally there is 30% additional long exposure in favour of stocks, counterbalanced by short exposures in unattractive stocks.

7. Bulk beta – This refers to traditional equity portfolio management of the standard type, where portfolios consist of a large element of beta, i.e. market exposure, as well as the ability to generate alpha through stock selection.

8. Levered beta = Risk of Equity. The beta of a company, including debt. The levered beta describes the capital structure of the company and volatility relative to the market.

9. Unlevered Beta = Risk of Entire Firm (Assets)

Unlevered Beta is basically a weighted average of the levered Beta and the debt Beta. Typically, the debt beta is thought to be 0, although it isn't always. The beta of a company after subtracting out the impact of its debt obligations. Unlevered beta removes the effects of the use of leverage on the capital structure of a firm, since the use of debt can result in tax rate adjustments that benefit a company. Removing the debt component allows an investor to compare the base level of risk between various companies.

Ub = [(1-L)Eb + (L)DB ]/ (1 - TL)

That's the general formula for conversion, with Ub being the unlevered (or Asset) beta, Eb being the levered (or equity) beta, and Db being the debt beta. L is the leverage ratio. From this equation, you can see the "weighted average" quality of asset beta.

Basically, there is a ton of information about the relation between levered and unlevered betas. For valuation purposes, I think it is important to know that when using the betas of comparable companies to find a beta for your private company, you would want to unlever them to make them "free" of the comparable companies' capital structure. After doing this, you would then take the average (or whatever) and relever it using your company's leverage ratio to find the appropriate equity beta, and thus amount of return that you need to get on your equity (usingCAPM).

Practical Application of Levered and Unlevered Beta can be better understood by this research article:

http://www.iese.edu/research/pdfs/di-0488-e.pdf

Practical Application on Excel:

http://www2.cob.ilstu.edu/kjbaue2/fil341/SV.pdf