Archive for the ‘Trading’ Category

Dow and Jones history

Wednesday, February 29th, 2012
CHD

Charles Henry Dow

The history of the index began in the XIX century. It was implemented in 1896. At that time there were only few instruments for analysis and description of the processes that took place at the stock market. Therefore, a question concerning the elaboration of these instruments became more and more urgent. The evaluation method of market trends proposed by Dow and Jones became the real innovation and significantly simplified the life of most businessmen. Firstly, index took into account 11 large US companies (9 of them were railroad companies). It was calculated as simple average of their stocks value. Despite the fact that more than 100 years have passed and accounting method has undergone significant changes, the Dow Jones index remains an important benchmark for global investors even now. Today it includes over 30 leading American companies.

Edward Jones

Edward Jones

Charles Dow (1851 –1902) and Edward Jones (1856–1920) were friends and companions. Both of them were gifted as journalists and businessmen. Together they worked in the sphere of financial news. In 1882 Dow and Jones started their own business in New York. Their office was located in the basement of the confectioner’s shop where they began publishing the small financial news bulletin under the title Customer’s Afternoon Letter. This bulletin became popular very soon; the number of printed copies was increasing; investors appreciated the benefits of the given information, though at that time this information could be defined as insider.

In 1889 the partners published the comprehensive edition of The Wall Street Journal created for financial and commercial circles. It was focused on providing the breaking and reliable news. The Wall Street Journal is that very edition which has been publishing the Dow Jones index since 1896. The edition is still considered as confident and today the number of printed copies exceeds 2 million. For a long time the newspaper did not have a real counterpart. The contemporary counterpart of the WSJ is famous Financial Times of London.

the_wall_street_journalIn fact, there are some other Dow Jones indices (transportation index, utility index, composite index, etc.) that characterize the different economic fields. But only the industrial index is considered as the most popular serving as a barometer of the stock market. This index is fundamental for institutional and private investors. And this is quite reasonable, as the 100-year practice confirmed that this function is accomplished properly. The index comprises the mature and reliable companies with 1/5 of the market value of all American stocks.

Dow Jones index was appreciated not only as an impartial indicator of the US stock exchange market, but also as one of the country’s economy in general.

Added by Kristina Leshkevich,
InstaForex Clients’ relationship manager

Elliott wave analysis

Wednesday, February 22nd, 2012

To continue the topic of previous article, we will consider some aspects of wave analysis.

If we look at the chart of currency price changes we will see that there are several types of movement. The chart depicts the phases of descending and ascending movement as well as those of sideways movement. According to the Elliott wave theory, each market stage is a wave, which in turn is a model of crowd’s behavior. As it was mentioned before, a wave can perform the function of action or reaction. The first one moves the market within the general trend, while the second one makes it reverse.

According to the style, waves are subdivided into motive and corrective. Each market cycle is composed of motive and corrective waves. All waves of reverse movement develop in corrective style. Elliott discovered that the motive waves have 5-wave structure, while the corrective waves have 3-wave structure. Therefore, the whole cycle consists of 8 waves. Each wave can be divided into several smaller waves.

wave

The waves can be indentified for every timeframe with the help of more than 10 wave levels. Each of them has its own name and marking. The symbols below were implemented to simplify this procedure:

Triad of symbols for higher wave levels

[1][2][3][4][5][A][B][C][D][E][W][X][Y][Z]

(1)(2)(3)(4)(5)(A)(B)(C)(D)(E)(W)(X)(Y)(Z)

1, 2, 3, 4, 5, A, B, C, D, E, W, X, Y, Z

Triad of symbols for lower wave levels

[i][ii][iii][iv][v][a][b][c][d][e][w][x][y][z]

(i)(ii)(iii)(iv)(v)(a)(b)(c)(d)(e)(w)(x)(y)(z)

i, ii, iii, iv, v, a, b, c, d, e, w, x, y, z

The following rules are used for interpretation of waves:

  1. The turn of the second wave is never equal to 100% upward move of the first wave. For example, at bullish market the second wave low will never be below the beginning of the first wave.

  2. The third wave in impulse sequence is never the shortest. As a rule it is the longest.

  3. The fourth wave never ends in the price range of the first wave, except it forms the chart in a special way: the market movement is the same as it was before, irrespective of its size and movement period.

Analysts often use Elliott wave principles in combination with Fibonacci numbers to calculate the period and size of market movement.

Added by Tatyana Makhina,
InstaForex Clients’ relationship manager

Ralf Nelson Elliott and his wave analysis

Tuesday, February 14th, 2012

elliottRalf Nelson Elliott is an American accountant. He was born in 1871. From the age of 20 he worked in executive positions for railroad companies in Mexico. Later he entered the accounting field and was known as a qualified economist. Elliott took part in international government projects, was appreciated as auditor and consultant. He published several books on business organization, economic and social issues. In 1927 Elliott started successful consulting business.

Unfortunately, by 1929 malignant anemia had left him bedridden. Nevertheless, Elliot remained a man of action and creativity and therefore continued his work despite the serious illness. His studies were focused on stock market. Elliot was influenced by works of Charles Dow and Robert Rhea. Having investigated the equity market, he discovered new unknown patterns of price movement. After the thorough analysis which took him several years, Elliott presented his conclusions to the financial world. When Elliot’s discoveries proved to be practically useful, his articles were published in popular magazines and newsletters. Elliot himself became an analyst whose opinion was considered by biggest investors.

In 1938 appeared the book “The Wave Principle” where he detailed the results of his studies and described his method. His next book entitled “Nature`s Law – The Secret of the Universe” was published in 1946.

We can say that Elliot continued the Dow’s theory of cycles, waves and ripples on ascending and descending market trends. He emphasized the fact that the activity of great mass of people results in price changes regulated by specific laws that can be traced in different fields. Elliot compares them to nature’s laws and gives the examples of the similar patterns in flora and fauna. He stated that crowd behavior has several psychological stages, whether this is a slave rebellion or stock exchange trading. The development of both can be traced on different timeframes (from minutes to centuries). The author describes the peculiarities and signs of changeability for different phases and in what way it is possible to take an advantage of it.

According to the wave principle each market event can be considered as an effect and cause of important information. This interconnection can be explained by social nature of humans. Therefore, this process generates the repeating figures.

volnaAccording to Elliot, waves are the models of directed motion. Each wave has one of two possible functions: action or reaction. Particularly, each wave can stimulate the development of the upper wave or interrupt it. The relative direction of a wave defines its function. As a rule, waves are interchanged according to their length: long-short etc. Each wave can be divided into several short waves. Therefore waves are fractal, i.e. on the same part of the chart we can observe waves of different scale, depending on the timeframe.

We can come to a conclusion that Ralf Nelson Elliot was some sort of romantic scientist, partly philosopher, partly naturalist. His theories are still used by traders, though some of them accuse Elliott in cheating.

Classical wave analysis is quite complicated but the examination of its underlying concepts can be useful to forecast price movements and levels.

Added by Tatyana Makhina,
InstaForex Clients’ relationship manager

Choose your way of investment

Friday, February 10th, 2012

Once we have got some spare money, we start considering profitable investment methods. There are several alternatives to choose from: bank account, trust management, real estate, financial markets.

Depositing to a bank account is frequently preferred by investors as it is risk-free. Investing in a bank account does not require any special skills of capital management, it is very simple: you just go to a bank, leave your money on an account and watch your deposit accumulating interest. But yet there are a series of restrictions to remember about. Firstly, interest rates hardly run over inflation, which means that you gain almost no return as such. Secondly, as a rule, high interest is accrued on large deposits. But unfortunately, you might not have a sum with many zeroes at the end. Thirdly, such deposits are typically uwithdrawable either totally or partially; apparently, it is not convenient.

investAnother variant of investment is open-end funds based on the trust management principle. This way of investing funds carries more risks than the abovementioned one: no profitability is guaranteed, moreover, you could not receive the investment back. In addition, in case with open-end funds, an investor cannot influence the process of money management: after the shares are purchased, your money is managed by someone else, not you. The liquidity of shares is low too. In case with trust management, you have a strategy developed exclusively for you and you are still able to influence the process. Mind that the minimum capital of a customer is to be over 1000 USD. Both open-end funds and trust managers charge a certain commission for their work.

Forex offers trust management service as well within the framework of the PAMM system. The minimum deposit required is 1 USD and the return can be withdrawn at any moment.

Real estate is also a rather favourable sector to invest in. However not everyone can afford such an expensive purchase. Real estate items can be leased or sold at much of a profit. Profitable dealing with real estate takes profound knowledge of the housing market, thorough search for tenants or buyers, negotiating, consulting with specialists and months of waiting for an increase in housing prices.

Entering Forex requires less money than purchasing a real estate item. As for the working process, it is plain. Trades of any volume are carried out promptly anytime. There are sellers and buyers in various parts of the world every minute.

And the last way of investment we are going to dwell on is the stock market where securities are traded. “Securities” is a term used to loosely describe stocks, bonds and derivatives etc, i.e. documents that represent evidence of ownership of a certain asset. On the stock market profit is only gained when the rate is on increase. Margin trading is not held here which means that you cannot use a leverage to make trades more effective. Trading hours on the stock market are determined by those of a corresponding stock exchange.

Liquidity of currency operations is higher than liquidity of those with securities. Unlike stock exchanges, Forex has no specific location and is open 24 hours a day.

There are other investment alternatives of course. Your choice depends on your financial resources and analytical skills. Investment in Forex appears to have many advantages, including high liquidity, continuous trading process, enticing minimum deposit required, leverage, profits on both a bearish market and a bullish one.

It is worth noting however that the rest of investment ways, except for bank account, imply some risks. That is why, it is so important to develop your skills of market analysis and capital management.

Added by Denis Minenkov,
InstaForex Clients’ relationship manager

Setting smart goals for success in trading

Thursday, February 2nd, 2012

smartA goal is a result you want to achieve. There is no point in doing something if it is not aimed at reaching a certain goal. Any objective should be well-determined; otherwise you may fail to achieve it. Today traders have good knowledge of management, which is very helpful in their daily work. Management implies some standards for goals to meet; the researchers have found out that objectives that meet these standards are more effective.

So, formulating objectives properly is crucial and easy with the help of a simple SMART methodology based on the following criteria:
  • S for Specific;
  • M for Measurable;
  • A for Achievable;
  • R for Realistic;
  • T for Time-based;
The criteria considered above are versatile; they can be applied to various aspects of our life as business, personal development etc.
Let us have a closer look at them:
S for Specific
Objective Setting should result in a clear answer to the question:”What will I do?” So, abstract or ambiguous formulations are no good. With a vague goal in mind, your results will be much different from what you planned. Forget objectives like “to earn much money” or “ensure decent income” as they lack any sense.
M for Measurable
Any goal should be characterized by certain parameters possible to be measured. These parameters help assess to what extent your objective has been achieved. This is a rather complicated criterion, particularly on Forex where forecasting profit is next to impossible. Nevertheless, planning some benchmarks is crucial to control the progress. You can set any parameters such as profit size, percentages or ratios, frequency of making trades, limits to their volume etc.
A for Achievable
An objective is in fact your impetus to solve small sub-goals lying on the way to the ultimate goal. That is why, to make it achievable, make sure that it conforms to your skills and abilities and is consistent with other objectives you have.
R for Realistic
Objectives should be feasible to reach, while sub-goals – common-sensible yet challenging. However you should be sure of your ability to achieve them. Rational ambition will further inspire you unless you overlook plotting a precise plan and defining a period for achievement of an objective.
T for Time-based
You need to outline a certain time period within which you will reach an objective. Otherwise, there is a risk you will never make it to the ultimate goal.
The stage of objective definition is followed by elaborating a detailed plan on the objective realization.
Set smart goals and you will succeed in achieving them!

Added by Dmitry Antipov,
InstaForex Clients’ relationship manager