Showing posts with label fundamental. Show all posts
Showing posts with label fundamental. Show all posts
Friday, January 31, 2014
How Fundamental And Technical Analysis Lets You Profit From Forex Trading
Of all the moving parts involved in trading forex, interpreting the signals the market gives you is the most important. They are what allows you to make decisions about entering and exiting trades, position size and everything else that makes trading profitable. Heres the important stuff you need to know about analyzing the market to find those signals.
As a trader, these signals are the critical information you always need to be looking for. Thats because they can happen at any time of the day or night, and can often require immediate action if you want to take advantage of them. So what do you feel is the the best way to learn how to spot the signals the market is giving you?
Truthfully, this is a skill that only comes to you through continued study and actual trading experience. Having said that, the first thing you need to master is distinguishing between the various clues the market is trying to give you. In other words, before you can recognize and interpret market activity, you need to understand the different kinds of analysis.
There are broadly two kinds of analysts who study the market trying to work out which way it might be headed. Some use technical analysis and others use fundamental analysis. Lets cover each each type so youll understand what were talking about.
Technical analysis (TA) depends entirely on understanding and interpreting data and price charts. You dont need any special knowledge about political or economic events to use Technical Analysis. Thats why its best to start with this one first, and only after youve mastered TA should you move on to fundamental analysis.
Once you understand technical analysis and can read a chart, youll be able to spot trend changes and continuations very easily. This will help you enter and exit the market at the right price and time, giving you an opportunity to maximize your profits.
On the other hand, Fundamental analysis focuses on political and economic factors, while ignoring price like charts and technical indicators. It considers things such as economic policy, news and current events, and government announcements that affect the economy.
Traders who favor fundamental analysts say technical analysis can only tell you whats happened in the past, and theres no way it can predict what is going to happen the future. According to fundamental analysts, currency prices relate directly to profits, GDP and economic activity, and thats why they spend more time looking at these factors than anything else.
Being able to recognize what the market is saying and being able to act on that information is the key for forex trading success. Thats why its important that you learn about the both forms of analysis. Having an understanding of each one will enable you to identify market signals and trade them profitably, which is ultimately what you want to do.
As a trader, these signals are the critical information you always need to be looking for. Thats because they can happen at any time of the day or night, and can often require immediate action if you want to take advantage of them. So what do you feel is the the best way to learn how to spot the signals the market is giving you?
Truthfully, this is a skill that only comes to you through continued study and actual trading experience. Having said that, the first thing you need to master is distinguishing between the various clues the market is trying to give you. In other words, before you can recognize and interpret market activity, you need to understand the different kinds of analysis.
There are broadly two kinds of analysts who study the market trying to work out which way it might be headed. Some use technical analysis and others use fundamental analysis. Lets cover each each type so youll understand what were talking about.
Technical analysis (TA) depends entirely on understanding and interpreting data and price charts. You dont need any special knowledge about political or economic events to use Technical Analysis. Thats why its best to start with this one first, and only after youve mastered TA should you move on to fundamental analysis.
Once you understand technical analysis and can read a chart, youll be able to spot trend changes and continuations very easily. This will help you enter and exit the market at the right price and time, giving you an opportunity to maximize your profits.
On the other hand, Fundamental analysis focuses on political and economic factors, while ignoring price like charts and technical indicators. It considers things such as economic policy, news and current events, and government announcements that affect the economy.
Traders who favor fundamental analysts say technical analysis can only tell you whats happened in the past, and theres no way it can predict what is going to happen the future. According to fundamental analysts, currency prices relate directly to profits, GDP and economic activity, and thats why they spend more time looking at these factors than anything else.
Being able to recognize what the market is saying and being able to act on that information is the key for forex trading success. Thats why its important that you learn about the both forms of analysis. Having an understanding of each one will enable you to identify market signals and trade them profitably, which is ultimately what you want to do.
About the Author:
To learn more about becoming a profitable trader, read this complete currency trader review. Then read through the other posts to find the best advice on forex trading as a business.
Wednesday, July 31, 2013
Fundamental Analysis And The Five Main Ratios
Fundamental Analysis and the five main ratios
Fundamental analysis also known as quantitative analysis involves the detailed analysis of financial statements to assess how a company may perform in the future. Fundamental analysis is not qualitative analysis, i.e., it does take account of the intangible and hence hard-to-measure aspects of a companys operations such as the value of its goodwill, the value of any brands it may own and other intangibles. Neither does fundamental analysis encompass technical analysis where decisions to trade are based solely on a shares price and volume movements. Fundamental analysis uses real, hard data to ascertain a shares real (intrinsic) worth by examining revenues, earnings, future growth, return on equity, profit margins and other data. When positive anomalies are found i.e. a companys share appears undervalued, then the investor may consider buying in.
Investors who depend solely on fundamental analysis (Value Investors) will normally use at least five key ratios to decide whether a share represents good value or not. For these ratios to be meaningful, the comparisons should be between i) similar entities in similar sectors or industries and ii) well established businesses as distinct to start ups, or businesses in other special circumstances.
Price-to-Earnings Ratio (P/E)
One of the best-known and most valuable of the five key ratios. P/E compares a companys current share price with its past (trailing P/E) or potential earnings (forward P/E) per share. If, for example, a companys share price is currently 10 a share and the earnings over the last 12 months (a trailing P/E) were 0.50p a share, then the P/E ratio would be a value of 20 (10 divided by 0.50p). Assuming the financial performance of two companies is almost identical, then the company with the lowest P/E ratio costs less per share for the same financial outcome than the one with the higher P/E.
Price-to-Book Ratio (P/B)
The P/B indicates the amount investors are willing to pay for a share of the companys tangible assets, which by definition excludes intangible assets such as goodwill. The investor must first know the book value of all the companys fixed and current assets minus its current and long-term liabilities values which can be obtained from the balance sheet. The ratio is calculated by dividing the total value of the assets by the total number of issued shares. If the resultant ratio is less than 1, it would mean that shares can be bought in that company for less than the book value of its assets.
Debt-to-Equity Ratio (D/E)
The D/E ratio also known as Gearing indicates what proportion of shareholders funds (and some other types of debt such as loans or bonds) are being used to finance the assets of the business. It can also indicate how much money a company can safely afford to borrow over the long term. To determine the D/E ratio, the companys total long term debt is divided by shareholders equity. If a company has total debts of 1,000,000 and shareholders equity of 4,000,000 then the debt/equity ratio would be 0.25 (1,000,000 divided by 4,000,000). Where the ratio is higher than 100 the majority of the companys assets are financed through debt: if the ratio is less than 100, then the assets are financed mainly through equity.
Free Cash Flow (FCF)
Free cash flow measures how much money a company has left over after paying its overheads and taxes, making any capital investments and covering its working capital requirements. Knowing the FCF is particularly important to shareholders as it shows the amount of money thats available for dividend payments. FCF also enables the business to buy back shares, reduce or eliminate debt and invest in plant and equipment. The ratio is calculated by subtracting non-discretionary costs such as capital expenditure from the companys operating cash flow and then dividing that figure by the companys market capitalisation and total debt. Strong companies usually show positive free cash flow and the higher the FCF ratio, the better.
The price to earnings growth ratio (PEG)
This is an extended version of the P/E ratio as it takes earnings growth into account. PEG compares a companys P/E ratio to its earnings growth rate to determine whether the shares are undervalued or overvalued. The ratio is calculated by dividing a shares P/E ratio by its projected year-over-year earnings growth rate. So if for example the companys earnings per share the previous year were 15p and projected earnings per share this year are 18p that represents an earnings growth rate of 20%. On that basis if the companys P/E ratio were 30 then the PEG would be 1.5 i.e. 30/20 suggesting that the shares may be overvalued by as much as 50%. Conversely, and as a rule of thumb only, a PEG of less than 1.might suggest the shares are cheap. Generally speaking, the lower the PEG, the better the value, because each module of earnings growth costs the investor less.
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Fundamental analysis also known as quantitative analysis involves the detailed analysis of financial statements to assess how a company may perform in the future. Fundamental analysis is not qualitative analysis, i.e., it does take account of the intangible and hence hard-to-measure aspects of a companys operations such as the value of its goodwill, the value of any brands it may own and other intangibles. Neither does fundamental analysis encompass technical analysis where decisions to trade are based solely on a shares price and volume movements. Fundamental analysis uses real, hard data to ascertain a shares real (intrinsic) worth by examining revenues, earnings, future growth, return on equity, profit margins and other data. When positive anomalies are found i.e. a companys share appears undervalued, then the investor may consider buying in.
Investors who depend solely on fundamental analysis (Value Investors) will normally use at least five key ratios to decide whether a share represents good value or not. For these ratios to be meaningful, the comparisons should be between i) similar entities in similar sectors or industries and ii) well established businesses as distinct to start ups, or businesses in other special circumstances.
Price-to-Earnings Ratio (P/E)
One of the best-known and most valuable of the five key ratios. P/E compares a companys current share price with its past (trailing P/E) or potential earnings (forward P/E) per share. If, for example, a companys share price is currently 10 a share and the earnings over the last 12 months (a trailing P/E) were 0.50p a share, then the P/E ratio would be a value of 20 (10 divided by 0.50p). Assuming the financial performance of two companies is almost identical, then the company with the lowest P/E ratio costs less per share for the same financial outcome than the one with the higher P/E.
Price-to-Book Ratio (P/B)
The P/B indicates the amount investors are willing to pay for a share of the companys tangible assets, which by definition excludes intangible assets such as goodwill. The investor must first know the book value of all the companys fixed and current assets minus its current and long-term liabilities values which can be obtained from the balance sheet. The ratio is calculated by dividing the total value of the assets by the total number of issued shares. If the resultant ratio is less than 1, it would mean that shares can be bought in that company for less than the book value of its assets.
Debt-to-Equity Ratio (D/E)
The D/E ratio also known as Gearing indicates what proportion of shareholders funds (and some other types of debt such as loans or bonds) are being used to finance the assets of the business. It can also indicate how much money a company can safely afford to borrow over the long term. To determine the D/E ratio, the companys total long term debt is divided by shareholders equity. If a company has total debts of 1,000,000 and shareholders equity of 4,000,000 then the debt/equity ratio would be 0.25 (1,000,000 divided by 4,000,000). Where the ratio is higher than 100 the majority of the companys assets are financed through debt: if the ratio is less than 100, then the assets are financed mainly through equity.
Free Cash Flow (FCF)
Free cash flow measures how much money a company has left over after paying its overheads and taxes, making any capital investments and covering its working capital requirements. Knowing the FCF is particularly important to shareholders as it shows the amount of money thats available for dividend payments. FCF also enables the business to buy back shares, reduce or eliminate debt and invest in plant and equipment. The ratio is calculated by subtracting non-discretionary costs such as capital expenditure from the companys operating cash flow and then dividing that figure by the companys market capitalisation and total debt. Strong companies usually show positive free cash flow and the higher the FCF ratio, the better.
The price to earnings growth ratio (PEG)
This is an extended version of the P/E ratio as it takes earnings growth into account. PEG compares a companys P/E ratio to its earnings growth rate to determine whether the shares are undervalued or overvalued. The ratio is calculated by dividing a shares P/E ratio by its projected year-over-year earnings growth rate. So if for example the companys earnings per share the previous year were 15p and projected earnings per share this year are 18p that represents an earnings growth rate of 20%. On that basis if the companys P/E ratio were 30 then the PEG would be 1.5 i.e. 30/20 suggesting that the shares may be overvalued by as much as 50%. Conversely, and as a rule of thumb only, a PEG of less than 1.might suggest the shares are cheap. Generally speaking, the lower the PEG, the better the value, because each module of earnings growth costs the investor less.
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