Technical analysis is the study of share prices. By researching the past performance of a share, we can gain an insight into how it will likely perform in the future.
To fully appreciate the power of technical analysis it is important to understand the basics. There are three key principles upon which technical analysis is based:
● Everything is discounted and reflected in market prices.
● Prices move in trends and trends persist.
● Market action is repetitive.
Let’s examine each principle in detail.
The first and most important principle is that everything is discounted and reflected in market prices. All knowledge, regardless of type (fundamental, political, economical, psychological or other) is already reflected in market prices.
It can be time consuming studying fundamental information such as company financial statements, earnings and P/E ratios in an attempt to determine the potential for a share to rise in value. The real value of a share at any point in time is determined solely by supply and demand, as reflected in trades made at the stock exchange.
Technical analysts do not care what the underlying forces of a shift in supply and demand are; instead he or she is interested in what occurs to the price.
If demand is greater than supply, prices will increase. On the other hand, if supply is greater than demand, prices will decline.
The study of market prices is all that is necessary to make money from the stock market.
The second principle on which technical analysis is based is that prices move in trends and trends persist.
The supply and demand balance sets a trend in motion. Once in motion, a trend remains intact until it ends. For example, if a stock’s price is moving up, it will continue its rise until there is a clear change in direction.
It is far easier to follow the trends, rather than fight them. The old Wall Street adage, “the trend is your friend” is true because, once begun, a trend is likely to continue once it is in place. A trend will usually give us warning that it is about to change direction. The warning can sometimes last a day or longer, so it is important to become familiar with recognising the signs.
The final key principle on which technical analysis is based is that market action is repetitive. Certain patterns appear time after time on charts. These patterns have meanings that can be interpreted in terms of probable future price movement.
Although not infallible, the odds are in the analysts’ favour. Common reversal patterns include Double Tops, Shooting Stars, Doji’s and Head and Shoulders.
These patterns, when seen during an uptrend (bull run) consistently identify a likely trend reversal, i.e. a fall in share prices.
Human nature is such that it tends to react to similar situations in consistent ways. As a rule, people will act the same in the future as they have in the past.
Since the stock market is a reflection of the actions of people, technical analysts study it to determine how people will react under certain conditions and thus, how share prices will move. Technical analysts analyse the recurrence of similar characteristics in an attempt to identify the likely future price direction.
As you can see, technical analysis can be defined as the study of individual share prices and the overall market based on supply and demand. Technical analysts record, usually in chart form on a computer, historical and up-to-date price and volume activity and deduce from that pictured history the probable future trend of prices.
© Platinum Pursuits 2006. All rights reserved.
Disclaimer
The decision to invest or trade and the method selected is a personal decisions and involves an inherent level of risk, and you must undertake your own investigations and obtain your own advice regarding the suitability of our services for your circumstances. Platinum Pursuits Pty Ltd is an Authorised Representative (Rep. No. 286343) of Option Partners Pty Ltd, AFSL 298347.
Information contained in all Platinum Pursuits products and websites is intended to be general advice only and should not be relied upon as financial product advice. You are warned that:
1. The advice has been prepared without taking into account your objectives, financial situation or particular needs; and
2. Because of that, you should, before acting on the advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs; and
3. If the advice relates to the acquisition, or possible acquisition, of a particular financial product - you should obtain a Product Disclosure Statement relating to the product and consider the Statement before making any decision about whether to acquire the product.
Equities and derivatives trading involves risk, Investors need a broker to trade equities and derivatives, and must meet suitability requirements. Past results are not necessarily indicative of future performance. Investors are required and advised to request for and read the product disclaimer statements as provided by the particular profile they trade with.
None of the information and data contained in this presentation or the Platinum Pursuits websites (www.platinumpursuits.com or www.ppmember.com) nor any opinion expressed constitutes a recommendation to purchase or sell a security, or to provide investment or financial product advice.
The information contained on all Platinum Pursuits products is provided for general informational purposes, as a convenience to the customers of Platinum Pursuits Pty Ltd. The materials are not a substitute for obtaining professional advice from a qualified person, firm or corporation. Consult the appropriate professional advisor for more complete and current information. Platinum Pursuits Pty Ltd is not engaged in rendering any legal or professional services by presenting this general information or by placing these or any general informational materials on their websites.
Platinum Pursuits Pty Ltd and its associates do not receive any remuneration (including commission) or other benefit from third parties by virtue of the advice provided.
Platinum Pursuits Pty Ltd is an Authorised Representative (286343) of The International Securities and Derivatives Group Pty Ltd ABN 22 103 552 683, AFSL 227544.
Showing posts with label Technical Analysis. Show all posts
Showing posts with label Technical Analysis. Show all posts
Wednesday, October 15, 2008
Let’s Talk Fundamentals – Some More (written by Daniel Kertcher)
Last week we discussed the power of fundamental analysis and how it is used. This week we’ll continue exploring more of the most popular and useful fundamental indicators available.
P/E Ratio
The P/E Ratio is one of the most widely recognised fundamental indicators, and, one of the easiest to calculate. The P/E ratio stands for the price of the share compared to the earnings per share (EPS). Last week we discussed the EPS.
Basically, the EPS is the amount of profit the company makes divided by the number of shares issued. By comparing the price of the share to the earnings per share, we can gauge whether or not the share price is undervalued, fairly valued or overvalued. If the price of the share is very high, compared to the earnings, then the P/E ratio will be very high too. High P/E ratios identify shares that may be overvalued and hence, it may be sound to sell the share.
A company with a low share price, but high earnings, will have a very low P/E ratio. This low ratio identifies to the investor that the share price is undervalued, and could represent a buying opportunity.
For example, let’s say that the share price for our imaginary company, XYZ ltd, is $1.00. The EPS for the company is $0.10. Our calculation would be as follows:
P/E Ratio = Price of the share
Earnings per share
10 = $1.00
$0.10
Therefore, the P/E ratio for XYZ ltd is 10. Now what exactly does this mean?
Well, we can do a variety of things with the P/E ratio. We can compare the P/E ratio of XYZ with previous P/E ratios for XYZ. If we notice a trend of increasing P/E ratios, then the share price may be reaching an overvalued situation. If the trend has been of decreasing P/E ratios, then perhaps the company is currently unpopular with investors, but may be a good buy.
Alternatively, we can compare the P/E ratios of other companies in the same industry and sector. For example, if we notice that XYZ’s competitors have much higher P/E ratios, then perhaps XYZ represents a good buy. If XYZ’s P/E ratio is substantially higher than it’s competitors, then perhaps it is approaching it’s peak in price. As you can see, the P/E ratio can be rather vague. The most sensible use of the P/E ratio, in my opinion, is to use it when calculating the PEG ratio.
PEG Ratio
The PEG ratio is one of the most powerful indicators. Every famous successful investor, such as Warren Buffett, and Peter Lynch use the PEG ratio as one of their principle leading indicators when assessing a potential investment.
The PEG ratio compares the P/E of a share with it’s earnings growth rate. Hence, the PEG ratio stands for Price of the share, compared to the Earnings of the share, compared to the earnings Growth rate of the share.
Let’s consider XYZ again. It has a P/E ratio of 10, and an earnings growth rate of 15. This means that the earnings (profits) are growing at 15% per annum.
PEG ratio = (Price of the share/Earnings per share)
Earnings Growth rate
0.66 = 10
15
A PEG ratio less than 1 indicates that the share price is undervalued. The price of the share is low compared to its earnings and to its growth rate. If the growth continues, then the share will continue to produce excellent returns. Other investors will eventually recognise this and will invest in the company. The increased demand will increase the share price.
A PEG ratio greater than 1 indicates that the share price is overvalued. Be sure to incorporate the PEG ratio in you analysis techniques. This simple, yet effective indicator will help you evaluate your investments regardless of which international market you choose to trade.
© Platinum Pursuits 2006. All rights reserved.
Disclaimer
The decision to invest or trade and the method selected is a personal decisions and involves an inherent level of risk, and you must undertake your own investigations and obtain your own advice regarding the suitability of our services for your circumstances. Platinum Pursuits Pty Ltd is an Authorised Representative (Rep. No. 286343) of Option Partners Pty Ltd, AFSL 298347.
Information contained in all Platinum Pursuits products and websites is intended to be general advice only and should not be relied upon as financial product advice. You are warned that:
1. The advice has been prepared without taking into account your objectives, financial situation or particular needs; and
2. Because of that, you should, before acting on the advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs; and
3. If the advice relates to the acquisition, or possible acquisition, of a particular financial product - you should obtain a Product Disclosure Statement relating to the product and consider the Statement before making any decision about whether to acquire the product.
Equities and derivatives trading involves risk, Investors need a broker to trade equities and derivatives, and must meet suitability requirements. Past results are not necessarily indicative of future performance. Investors are required and advised to request for and read the product disclaimer statements as provided by the particular profile they trade with.
None of the information and data contained in this presentation or the Platinum Pursuits websites (www.platinumpursuits.com or www.ppmember.com) nor any opinion expressed constitutes a recommendation to purchase or sell a security, or to provide investment or financial product advice.
The information contained on all Platinum Pursuits products is provided for general informational purposes, as a convenience to the customers of Platinum Pursuits Pty Ltd. The materials are not a substitute for obtaining professional advice from a qualified person, firm or corporation. Consult the appropriate professional advisor for more complete and current information. Platinum Pursuits Pty Ltd is not engaged in rendering any legal or professional services by presenting this general information or by placing these or any general informational materials on their websites.
Platinum Pursuits Pty Ltd and its associates do not receive any remuneration (including commission) or other benefit from third parties by virtue of the advice provided.
Platinum Pursuits Pty Ltd is an Authorised Representative (286343) of The International Securities and Derivatives Group Pty Ltd ABN 22 103 552 683, AFSL 227544.
P/E Ratio
The P/E Ratio is one of the most widely recognised fundamental indicators, and, one of the easiest to calculate. The P/E ratio stands for the price of the share compared to the earnings per share (EPS). Last week we discussed the EPS.
Basically, the EPS is the amount of profit the company makes divided by the number of shares issued. By comparing the price of the share to the earnings per share, we can gauge whether or not the share price is undervalued, fairly valued or overvalued. If the price of the share is very high, compared to the earnings, then the P/E ratio will be very high too. High P/E ratios identify shares that may be overvalued and hence, it may be sound to sell the share.
A company with a low share price, but high earnings, will have a very low P/E ratio. This low ratio identifies to the investor that the share price is undervalued, and could represent a buying opportunity.
For example, let’s say that the share price for our imaginary company, XYZ ltd, is $1.00. The EPS for the company is $0.10. Our calculation would be as follows:
P/E Ratio = Price of the share
Earnings per share
10 = $1.00
$0.10
Therefore, the P/E ratio for XYZ ltd is 10. Now what exactly does this mean?
Well, we can do a variety of things with the P/E ratio. We can compare the P/E ratio of XYZ with previous P/E ratios for XYZ. If we notice a trend of increasing P/E ratios, then the share price may be reaching an overvalued situation. If the trend has been of decreasing P/E ratios, then perhaps the company is currently unpopular with investors, but may be a good buy.
Alternatively, we can compare the P/E ratios of other companies in the same industry and sector. For example, if we notice that XYZ’s competitors have much higher P/E ratios, then perhaps XYZ represents a good buy. If XYZ’s P/E ratio is substantially higher than it’s competitors, then perhaps it is approaching it’s peak in price. As you can see, the P/E ratio can be rather vague. The most sensible use of the P/E ratio, in my opinion, is to use it when calculating the PEG ratio.
PEG Ratio
The PEG ratio is one of the most powerful indicators. Every famous successful investor, such as Warren Buffett, and Peter Lynch use the PEG ratio as one of their principle leading indicators when assessing a potential investment.
The PEG ratio compares the P/E of a share with it’s earnings growth rate. Hence, the PEG ratio stands for Price of the share, compared to the Earnings of the share, compared to the earnings Growth rate of the share.
Let’s consider XYZ again. It has a P/E ratio of 10, and an earnings growth rate of 15. This means that the earnings (profits) are growing at 15% per annum.
PEG ratio = (Price of the share/Earnings per share)
Earnings Growth rate
0.66 = 10
15
A PEG ratio less than 1 indicates that the share price is undervalued. The price of the share is low compared to its earnings and to its growth rate. If the growth continues, then the share will continue to produce excellent returns. Other investors will eventually recognise this and will invest in the company. The increased demand will increase the share price.
A PEG ratio greater than 1 indicates that the share price is overvalued. Be sure to incorporate the PEG ratio in you analysis techniques. This simple, yet effective indicator will help you evaluate your investments regardless of which international market you choose to trade.
© Platinum Pursuits 2006. All rights reserved.
Disclaimer
The decision to invest or trade and the method selected is a personal decisions and involves an inherent level of risk, and you must undertake your own investigations and obtain your own advice regarding the suitability of our services for your circumstances. Platinum Pursuits Pty Ltd is an Authorised Representative (Rep. No. 286343) of Option Partners Pty Ltd, AFSL 298347.
Information contained in all Platinum Pursuits products and websites is intended to be general advice only and should not be relied upon as financial product advice. You are warned that:
1. The advice has been prepared without taking into account your objectives, financial situation or particular needs; and
2. Because of that, you should, before acting on the advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs; and
3. If the advice relates to the acquisition, or possible acquisition, of a particular financial product - you should obtain a Product Disclosure Statement relating to the product and consider the Statement before making any decision about whether to acquire the product.
Equities and derivatives trading involves risk, Investors need a broker to trade equities and derivatives, and must meet suitability requirements. Past results are not necessarily indicative of future performance. Investors are required and advised to request for and read the product disclaimer statements as provided by the particular profile they trade with.
None of the information and data contained in this presentation or the Platinum Pursuits websites (www.platinumpursuits.com or www.ppmember.com) nor any opinion expressed constitutes a recommendation to purchase or sell a security, or to provide investment or financial product advice.
The information contained on all Platinum Pursuits products is provided for general informational purposes, as a convenience to the customers of Platinum Pursuits Pty Ltd. The materials are not a substitute for obtaining professional advice from a qualified person, firm or corporation. Consult the appropriate professional advisor for more complete and current information. Platinum Pursuits Pty Ltd is not engaged in rendering any legal or professional services by presenting this general information or by placing these or any general informational materials on their websites.
Platinum Pursuits Pty Ltd and its associates do not receive any remuneration (including commission) or other benefit from third parties by virtue of the advice provided.
Platinum Pursuits Pty Ltd is an Authorised Representative (286343) of The International Securities and Derivatives Group Pty Ltd ABN 22 103 552 683, AFSL 227544.
Let’s Talk Fundamentals (written by Daniel Kertcher)
Technical Analysis has become extremely popular over the past decade. Modern day computers and the Internet have allowed everyone from professional traders to arm-chair investors study the markets live and make their trading decisions instantly.
Despite the technological advancements and the “New found power of Technical Analysis” we must not forget the traditional approach to investing, that is Fundamental Analysis.
Before computers made charting child’s play, professional investors and brokers would study the fundamentals of a company. They would study the balance sheets, the forecasts, and the past performance. They would investigate the board of directors, attend the general meetings and really try to get a “feel” for the company. Because back then, just like today, the market always rewarded Earnings, or Profits. A company’s whole mission in life is to make profits. If the company can continue to make and grow its profits, the share price will rise. A company like that may well get stung in times of high market volatility, but those with strong earnings will always fall the least and recover the quickest.
Fundamental analysis is essentially the study of a company’s earnings. Up until recently, however, fundamental analysis was extremely time consuming, and hence, not as popular by private investors.
For most investors these days, time is a precious commodity, and they simply don’t have enough of it to spend investigating the thousands of companies that are out there. Fortunately, there are now a variety of web sites that cater to fundamental information. The best sites are those that provide search engines.
These search engines allow you to program the desired fundamental information and parameters you are looking for and then will conduct the search for you, usually within seconds!
The key is to know what to look for!
You may well have heard of a variety of fundamental terms and ratios. They usually get thrown around at dinner parties by those who are trying to sound impressive, or at least semi-intelligent.
Terms such as P/E ratio, PEG ratio, EPS (earnings per share) and Current ratio are usually foreign to most people, yet they tend to nod knowingly when discussing the topic with their friends.
Well, as it is, these particular calculations are extremely useful, especially when used to find shares in the market that represent great value. Now, there are many more calculations to consider, and we will investigate them in future issues of this report. But to begin, let’s look at a few now.
As mentioned, earnings, or profits, are extremely important for a public company (or any company for that matter). Revenue, or income, is sometimes confused with earnings. Many companies have enormous revenues, but fail to make any profit. Even a school child would know that that is an unsustainable situation.
Earnings per share (EPS)
One way to identify potential share investment opportunities is to study the earnings track record of a company. We want to see how profitable have they been over the course of the past two years. Now the past does not always equal the future, but it gives us a good idea as to how well management has performed over the past couple of years, how well have their products or services sold over the past couple of years. So, we want to look 2 years in the past and see how earnings have grown if they’ve grown at all.
We only want to be investing in companies whose earnings are increasing and have grown in excess of 15% per year.
In other words, if their earnings were $1 a share 2 years ago, we want to see last year’s earnings up to $1.15 and this year’s earnings up another 15%.
When you find companies whose earnings are going up at least 15%, you are finding the cream of the crop, because most companies are not able to sustain that level of growth or profit growth over a period of time. In future issues we’ll continue to outline exactly what to look for when searching for the best share investment opportunities.
© Platinum Pursuits 2006. All rights reserved.
Disclaimer
The decision to invest or trade and the method selected is a personal decisions and involves an inherent level of risk, and you must undertake your own investigations and obtain your own advice regarding the suitability of our services for your circumstances. Platinum Pursuits Pty Ltd is an Authorised Representative (Rep. No. 286343) of Option Partners Pty Ltd, AFSL 298347.
Disclaimer
Information contained in all Platinum Pursuits products and websites is intended to be general advice only and should not be relied upon as financial product advice. You are warned that:
1. The advice has been prepared without taking into account your objectives, financial situation or particular needs; and
2. Because of that, you should, before acting on the advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs; and
3. If the advice relates to the acquisition, or possible acquisition, of a particular financial product - you should obtain a Product Disclosure Statement relating to the product and consider the Statement before making any decision about whether to acquire the product.
Equities and derivatives trading involves risk, Investors need a broker to trade equities and derivatives, and must meet suitability requirements. Past results are not necessarily indicative of future performance. Investors are required and advised to request for and read the product disclaimer statements as provided by the particular profile they trade with.
None of the information and data contained in this presentation or the Platinum Pursuits websites (www.platinumpursuits.com or www.ppmember.com) nor any opinion expressed constitutes a recommendation to purchase or sell a security, or to provide investment or financial product advice.
The information contained on all Platinum Pursuits products is provided for general informational purposes, as a convenience to the customers of Platinum Pursuits Pty Ltd. The materials are not a substitute for obtaining professional advice from a qualified person, firm or corporation. Consult the appropriate professional advisor for more complete and current information. Platinum Pursuits Pty Ltd is not engaged in rendering any legal or professional services by presenting this general information or by placing these or any general informational materials on their websites.
Platinum Pursuits Pty Ltd and its associates do not receive any remuneration (including commission) or other benefit from third parties by virtue of the advice provided.
Platinum Pursuits Pty Ltd is an Authorised Representative (286343) of The International Securities and Derivatives Group Pty Ltd ABN 22 103 552 683, AFSL 227544.
Despite the technological advancements and the “New found power of Technical Analysis” we must not forget the traditional approach to investing, that is Fundamental Analysis.
Before computers made charting child’s play, professional investors and brokers would study the fundamentals of a company. They would study the balance sheets, the forecasts, and the past performance. They would investigate the board of directors, attend the general meetings and really try to get a “feel” for the company. Because back then, just like today, the market always rewarded Earnings, or Profits. A company’s whole mission in life is to make profits. If the company can continue to make and grow its profits, the share price will rise. A company like that may well get stung in times of high market volatility, but those with strong earnings will always fall the least and recover the quickest.
Fundamental analysis is essentially the study of a company’s earnings. Up until recently, however, fundamental analysis was extremely time consuming, and hence, not as popular by private investors.
For most investors these days, time is a precious commodity, and they simply don’t have enough of it to spend investigating the thousands of companies that are out there. Fortunately, there are now a variety of web sites that cater to fundamental information. The best sites are those that provide search engines.
These search engines allow you to program the desired fundamental information and parameters you are looking for and then will conduct the search for you, usually within seconds!
The key is to know what to look for!
You may well have heard of a variety of fundamental terms and ratios. They usually get thrown around at dinner parties by those who are trying to sound impressive, or at least semi-intelligent.
Terms such as P/E ratio, PEG ratio, EPS (earnings per share) and Current ratio are usually foreign to most people, yet they tend to nod knowingly when discussing the topic with their friends.
Well, as it is, these particular calculations are extremely useful, especially when used to find shares in the market that represent great value. Now, there are many more calculations to consider, and we will investigate them in future issues of this report. But to begin, let’s look at a few now.
As mentioned, earnings, or profits, are extremely important for a public company (or any company for that matter). Revenue, or income, is sometimes confused with earnings. Many companies have enormous revenues, but fail to make any profit. Even a school child would know that that is an unsustainable situation.
Earnings per share (EPS)
One way to identify potential share investment opportunities is to study the earnings track record of a company. We want to see how profitable have they been over the course of the past two years. Now the past does not always equal the future, but it gives us a good idea as to how well management has performed over the past couple of years, how well have their products or services sold over the past couple of years. So, we want to look 2 years in the past and see how earnings have grown if they’ve grown at all.
We only want to be investing in companies whose earnings are increasing and have grown in excess of 15% per year.
In other words, if their earnings were $1 a share 2 years ago, we want to see last year’s earnings up to $1.15 and this year’s earnings up another 15%.
When you find companies whose earnings are going up at least 15%, you are finding the cream of the crop, because most companies are not able to sustain that level of growth or profit growth over a period of time. In future issues we’ll continue to outline exactly what to look for when searching for the best share investment opportunities.
© Platinum Pursuits 2006. All rights reserved.
Disclaimer
The decision to invest or trade and the method selected is a personal decisions and involves an inherent level of risk, and you must undertake your own investigations and obtain your own advice regarding the suitability of our services for your circumstances. Platinum Pursuits Pty Ltd is an Authorised Representative (Rep. No. 286343) of Option Partners Pty Ltd, AFSL 298347.
Disclaimer
Information contained in all Platinum Pursuits products and websites is intended to be general advice only and should not be relied upon as financial product advice. You are warned that:
1. The advice has been prepared without taking into account your objectives, financial situation or particular needs; and
2. Because of that, you should, before acting on the advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs; and
3. If the advice relates to the acquisition, or possible acquisition, of a particular financial product - you should obtain a Product Disclosure Statement relating to the product and consider the Statement before making any decision about whether to acquire the product.
Equities and derivatives trading involves risk, Investors need a broker to trade equities and derivatives, and must meet suitability requirements. Past results are not necessarily indicative of future performance. Investors are required and advised to request for and read the product disclaimer statements as provided by the particular profile they trade with.
None of the information and data contained in this presentation or the Platinum Pursuits websites (www.platinumpursuits.com or www.ppmember.com) nor any opinion expressed constitutes a recommendation to purchase or sell a security, or to provide investment or financial product advice.
The information contained on all Platinum Pursuits products is provided for general informational purposes, as a convenience to the customers of Platinum Pursuits Pty Ltd. The materials are not a substitute for obtaining professional advice from a qualified person, firm or corporation. Consult the appropriate professional advisor for more complete and current information. Platinum Pursuits Pty Ltd is not engaged in rendering any legal or professional services by presenting this general information or by placing these or any general informational materials on their websites.
Platinum Pursuits Pty Ltd and its associates do not receive any remuneration (including commission) or other benefit from third parties by virtue of the advice provided.
Platinum Pursuits Pty Ltd is an Authorised Representative (286343) of The International Securities and Derivatives Group Pty Ltd ABN 22 103 552 683, AFSL 227544.
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