Financial Markets & TradingAn IntroductionOmkar Godbole | Aditya Dasgupta

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

2. Improves economic efficiencyFunction of Financial Markets

Debt and Equity MarketsPrimary and Secondary MarketsInvestment Banks underwrite securities in primary marketsBrokers and dealers work in secondary marketsExchanges and Over-the-Counter (OTC) MarketsMoney and Capital MarketsMoney markets deal in short-term debt instrumentsCapital markets deal in longer-term debt and equity instrumentsStructure of Financial Markets

Trading Markets

Macroeconomics AnalysisIndustry AnalysisEquity Valuation Model (Dividend Discount Model- DDM)Financial Statement AnalysisFundamental Analysis

Global Economy Analysisaffects export, price competition and profitsexchange rate: purchasing power and earningsDomestic EconomyThe ability to forecast the macroeconomy can translate into great investment performanceoutperform other analysts to earn extra profits Many variables can affect economy Macroeconomics Analysis

Select a good industry to invest. It is difficult for a firm to do well in a troubled industryStandard Industry Classification (SIC) codeValue line Investment Survey - reports 1700 firms in 90 industriesTwo factors that determine the sensitivity of a firms earnings to business conditions: business risk & financial riskIndustry Analysis

Dividend Discount Model (DDM) V0= (D1+P1)/(1+k) = D1/(1+k) + D2/(1+k)2 ...+ Dn/(1+k)nconstant growth assumption V0 = D1/(1+k) + D1(1+g)/(1+k)2 +D1(1+g)2/(1+k)3 + ... = D1/(k-g) or k = expected return = D1/P0 + gEquity Valuation Model

Preparation of Source/Use Fund StatementRatio AnalysisPerformance AnalysisDu Pont AnalysisFinancial Statement Analysis

Macro Trading - 24th March 2014

Dow TheoryTrend linesIndicators

Elliot Wave Analysis

Technical Analysis

A standard Candlestick chart contains a series of multiple individual candlestick data points, that displays the high, low, opening and closing prices for a security for a single day

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

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

Candlestick Chart

Technical IndicatorsIndicatorsTechnical Indicator is a result of mathematical calculations based on indications of price and/or volume. The values obtained are used to forecast probable price changes

Volumes

Accumulation/DistributionMoney Flow IndexOn Balance VolumePrice and Volume TrendVolume Rate of Change Trends Indicators

Average Directional Movement IndexAccumulation Swing IndexBollinger BandsCommodity Channel IndexMass IndexMoving AveragePivot Points Support and Resistance LinesParabolic SARStandard DeviationZigZagWilliams` Accumulation/Distribution

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

Elliot Wave Theory

The Elliott Wave Theory is interpreted as follows:Every action is followed by a reaction. Five waves move in the direction of the main trend followed by three corrective waves (a 5-3 move).A 5-3 move completes a cycle.This 5-3 move then becomes two subdivisions of the next higher 5-3 wave.The underlying 5-3 pattern remains constant, though the time span of each may vary.

Elliot Wave Interpretation

The Elliott Wave Theory assigns a series of categories to the waves from largest to smallest. They are:

Grand Super cycleSuper cycleCyclePrimaryIntermediateMinorMinuteMinuetteSub-Minuette

Wave Categories

Elliot Wave Chart

RISK is the possibility of loss

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

Risk Management Money and Trade Management

Diversify your portfolioEquityDebtCommodities Foreign ExchangeSome examplesBuy Gold, Yen, Pharmacy stocks as a hedge against Inflation, stock market crashBuy Banking, Infrastructure and IT stocks in boomOnly way to beat inflation Buy Agriculture commodities

Minimize Risk by Diversification

Legendary Trader Paul Tudor Jones trading style and beliefs

Contrarian attempt to buy and sell turning points. Keeps trying the single trade idea until he changes his mind, fundamentally. Otherwise, he keeps cutting his position size down. Then he trades the smallest amount when his trading is at its worst.Considers himself as a premier market opportunist. When he develops an idea, he pursues it from a very-low-risk standpoint until he has been proven wrong repeatedly, or until he changes his viewpoint.Swing trader, the best money is made at the market turns. Has missed a lot of meat in the middle, but catches a lot of tops and bottoms.Spends his day making himself happy and relaxed. Gets out if a losing position is making him uncomfortable. Nothings better than a fresh start. Key is to play great defense, not great offense.Never average losers. Decreases his trading size when he is doing poorly, increase when he is trading well.He has mental stops. If it hits that number, he is out no matter what. He uses not only price stops, but time stops.Monitors the whole portfolio equity (risk) in real time.He believes prices move first and fundamentals come second.He doesnt care about mistakes made 3 seconds ago, but what he is going to do from the next moment on.Don't be a hero. Don't have an ego. Always question yourself and your ability. Don't ever feel that you are very good. The second you do, you are dead.

Trade Management and Psychology of Trader

Trading Plan from Goldenwire.com

A trading system is simply a group of specific rules, or parameters, that determine entry and exit points for a given equity. These points, known as signals, are often marked on a chart in real time and prompt the immediate execution of a trade

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

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

Trading System

Trading on trend lines and moving averages 7th Jan 2014

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

Technical Trade Outcome

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

De-MeritsTrading systems are complexYou must be able to make realistic assumptions and effectively employ the system Development can be a time-consuming task Trading PlanMerits and Demerits

We all at And Were Done !!Thank You for Your Valuable Time !!

*Make the distinction between primary and secondary markets.*Firms raise funds only at Primary offer stage, but the secondary markets give the primary markets liquidity and therefore increases the value.

1.Debt MarketsShort-term (maturity < 1 year) Money MarketLong-term (maturity > 1 year) Capital Market2.Equity MarketsCommon stocks1.Primary MarketNew security issues sold to initial buyers2.Secondary MarketSecurities previously issued are bought and sold1.ExchangesTrades conducted in central locations (e.g., New York Stock Exchange)2.Over-the-Counter MarketsDealers at different locations buy and sell