Basis Point - BPS

What Does Basis Point - BPS Mean?

A unit that is equal to 1/100th of 1%, and is used to denote the change in a financial instrument. The basis point is commonly used for calculating changes in interest rates, equity indexes and the yield of a fixed-income security.

The relationship between percentage changes and basis points can be summarized as follows: 1% change = 100 basis points, and 0.01% = 1 basis point.

So, a bond whose yield increases from 5% to 5.5% is said to increase by 50 basis points; or interest rates that have risen 1% are said to have increased by 100 basis points.

Accumulation/Distribution Line

Looking at the flow of money in and out of a security is one of the best ways to determine the likely directions of a security. At the most basic level, the price of a security is determined by the supply and demand for that security, which can both be illustrated by the money flow of the security.

One of the most commonly used indicators to determine the money flow of a security is the accumulation/distribution line (A/D line). It is similar to on-balance volume indicator but instead of only considering the closing price of the security for the period it also takes into account the trading range for the period. This is thought to give a more accurate picture of money flow than of balance volume.

Calculation

The first thing that is calculated is the close location value (CLV), which is a reflection of the closing price of the period relative to the range of the trading. The CLV ranges between +1 and -1, where a value of +1 means the close is equal to the high and the value of -1 means the close was the low. When the CLV is equal to zero, it means that price closed exactly halfway between the high and the low for the day.

The CLV value is then multiplied by the volume and similar to on-balance volume is added to a running total. By multiplying volume by the CLV, the calculation effectively weighs the money flowing in and out of the security.

The CLV is calculated as:

For example, if the high for the day was $59, the low $50, and the close was $55 the CLV would be calculated as follows:

If the volume for the trading day was 10 million shares, the amount added to the accumulation/distribution line would be +1,110,000. As can be seen this value is much different from the +10 million that would be added in the on-balance value measure.

Uses of the accumulation/distribution line

The A/D line measures the trend in the amount of buying or selling pressure in a security. When the line is trending up is a signal of increasing buying pressure as the stock is closing above the halfway point of the range. If the line is trending downward it is a signal of increasing selling pressure in the security.

This line can be used to determine the strength of a trend along with identifying divergence to signal a trend change. The strength of a price trend can be identified by looking at the direction of the trend in the A/D line. It is important that the price trend and the A/D line be trending in the same direction for the price trend to be considered strong.

The A/D line can also be used to identify situations of divergence, which can signal a shift in the price trend. This occurs when the price trend and the A/D line are moving in opposite directions.A bullish signal is formed when there is positive divergence, which means that the A/D line is trending upward while the price is trending downward. A rising A/D line signals that buying pressure is increasing, which should eventually lead to price increases. It is difficult to imagine that a price can continue to fall while buying pressure is clearly increasing.

A bearish signal is formed when there is negative divergence, which occurs when the A/D line is trending downward while the price is trending upward. A falling A/D line is a sign of selling pressure, which as it increases makes it difficult for the upward price trend to continue.

The A/D line expands on the on-balance volume measure to help technical trader's measure price and volume together and compare it against the pricing trend in the market.

The Relative Strength Index

The relative strength index (RSI) is another one of the most frequently used and well known momentum indicators in technical analysis. It is used to signal overbought and oversold conditions in a security.

The indicator is plotted between a range of zero to 100 where 100 is the highest overbought condition and zero is the highest oversold condition. The RSI helps to measure the strength of a security's recent up moves compared to the strength of its recent down moves. This helps to indicate whether a security has seen more buying or selling pressure over the trading period.

The standard calculation uses 14 trading periods as the basis for the calculation which can be adjusted to meet the needs of the user. If the trading periods used is lowered then the RSI will be more volatile and is used for shorter term trades.

Calculation

How the RSI is used

Like most indicators there are two general ways in which the indicator is used to generate signals - crossovers and divergence. In the case of the RSI, the indicator uses crossovers of its overbought, oversold and centerline.

The first technique is to use overbought and sold lines to generate buy-and-sell signals. In the RSI, the overbought line is typically set at 70 and when the RSI is above this level the security is considered to be overbought. The security is seen as oversold when the RSI is below 30. These values can be adjusted to either increase or decrease the amount of signals that are formed by the RSI.

How the RSI is used

Like most indicators there are two general ways in which the indicator is used to generate signals - crossovers and divergence. In the case of the RSI, the indicator uses crossovers of its overbought, oversold and centerline.

The first technique is to use overbought and sold lines to generate buy-and-sell signals. In the RSI, the overbought line is typically set at 70 and when the RSI is above this level the security is considered to be overbought. The security is seen as oversold when the RSI is below 30. These values can be adjusted to either increase or decrease the amount of signals that are formed by the RSI.

A buy signal is generated when the RSI breaks the oversold line in an upward direction, which means that it goes from below the oversold line to moving above it. A sell signal is formed when the RSI breaks the overbought line in a downward direction crossing from above the line to below the line. A more conservative approach can be used by setting the overbought and oversold levels at 80 and 20, respectively.

Another crossover technique used in formulating signals is using the centerline (50). This technique is exactly the same as using the overbought and oversold lines to formulate signals. This technique will often form signals after a movement in the direction they are predicting but are used more as a confirmation then a signal compared to the other techniques. A downward trend is confirmed when the RSI crosses from above 50 to below 50. An upward trend is confirmed when the RSI crosses above 50.

Divergence can be used to form signals as well. If the RSI is moving in an upward direction and the security is moving in a downward direction it signals to technical traders that buying pressure is increasing and the downtrend may be coming to an end. Divergence can also be used to signal a reversal in an upward trend where the RSI is decreasing signaling increasing selling pressure in an upward trend.

The RSI is a standard component on any basic technical chart. The relative strength indicator focuses on the momentum underlying the security and is a great secondary measure to be used by traders. It is important to note that the RSI is often not used as the sole generation of buy-and-sell signals but used in conjunction with other indicators and chart patterns.

Stochastic Oscillator

Stochastic Oscillator

What Does Stochastic Oscillator Mean?

A technical momentum indicator that compares a security's closing price to its price range over a given time period. The oscillator's sensitivity to market movements can be reduced by adjusting the time period or by taking a moving average of the result. This indicator is calculated with the following formula:

%K = 100[(C - L14)/(H14 - L14)]

C = the most recent closing price

L14 = the low of the 14 previous trading sessions

H14 = the highest price traded during the same 14-day period.

%D = 3-period moving average of %K

The theory behind this indicator is that in an upward-trending market, prices tend to close near their high, and during a downward-trending market, prices tend to close near their low. Transaction signals occur when the %K crosses through a three-period moving average called the "%D".

The stochastic oscillator is another well-known momentum indicator used in technical analysis. The idea behind this indicator is that the closing prices should predominantly close in the same direction as the prevailing trend.

In an upward trend the price should be closing near the highs of the trading range and in a downward trend the price should be closing near the lows of the trading range. When this occurs it signals continued momentum and strength in the direction of the prevailing trend.

The stochastic oscillator is plotted within a range of zero and 100 and signals overbought conditions above 80 and oversold conditions below 20. The stochastic oscillator contains two lines. The first line is the %K which is essentially the raw measure used to formulate the idea of momentum behind the oscillator. The second line is the %D which is simply a moving average of the %K. The %D line is considered to be the more important of the two lines as it seen to produce better signals.

The stochastic oscillator generally uses the past 14 trading periods in the calculation but can be adjusted to meet the needs of the user.

Calculation

There are three versions of the stochastic oscillator fast, slow and full. The purpose of each version of the stochastic is to smooth the oscillator and help remove some of the randomness. The fast stochastic oscillator is the basic version of the indicator and is the one represented by the above equations. The slow and full stochastics smooth the data that is provided by the raw data given in the fast stochastic. Both of these oscillators reflect the same period and plot two lines.

Slow Stochastic:

The number of periods used in calculating the slow %D can be adjusted to meet the user’s needs.

Full Stochastic:

Stochastic Signal Generation

The main signal that is formed by this oscillator is when the %K line crosses the %D line. A bullish signal is formed when the %K breaks through the %D in an upward direction. A bearish signal is formed when the %K falls through the %D in a downward direction.

Divergence can also be used to formulate buy–and-sell signals. When looking for divergence the %D line is the one most used as it gives clearer signals due to its smoothed nature. A divergence signal is formed when the %D and the security move away from one another, signaling a weakening of the trend.

If the security is moving in an upward direction and the %D is moving in a downward direction this is a bearish sign. A bullish sign is formed when the %D is moving upward when the security is moving downward. If this divergence is happening when the %D is in an overbought (above 80) or an oversold (below 20) position on the oscillator the signal formed is much stronger. However, the signal is not considered complete until the %K line crosses the %D line in the opposite direction of the price trend.

The stochastic oscillator is a little more difficult to calculate compared to other technical indictors but none the less it is one of the more commonly used indicators. The indicator can be adjusted to any time frame but is normally set to equal 14 periods.

Two of The World’s Greatest Investor

Warren Buffett, the "Oracle of Omaha," is considered by many to be the greatest investor ever. He is also known for giving much of his $40 billion fortune to the Bill & Melinda Gates Foundation, which is dedicated to bringing innovations in health and learning. Buffett is primarily a value investor that closely follows Benjamin Graham's investing philosophy after having worked at Graham's firm, Graham-Newman.

Buffett has several excellent investing rules. You can read about many of them in his company's (Berkshire Hathaway) annual reports, which are an excellent source of investing knowledge.

Here are three of Buffett's rules:

Rule No.1: Never lose money.

Rule No.2: Never forget rule No.1.

If you lose money on an investment, it will take a much greater return to just break even, let alone make additional money. Minimize your losses by finding quality companies that are temporarily selling at discounted prices. Then follow good capital management principles and maintain your trailing stops. Also, sitting on a losing trade uses up time, money and mental capital. If you find yourself in this situation, it is time to move on.

The stock market is designed to transfer money from the active to the patient.

The best returns come from those who wait for the best opportunity to show itself before making a commitment. Those who chase the current hot stock usually end up losing more than they gain. Remain active in your analysis, look for quality companies at discounted prices and be patient waiting for them to reach their discounted price before buying.

The most important quality for an investor is temperament, not intellect.

You need a temperament that neither derives great pleasure from being with the crowd or against it. Independent thinking and having confidence in what you believe is much more important than being the smartest person in the market. Most of the time, the best opportunities are found when everyone else has given up on the stock market. Over-confidence and emotion are the enemies of a high quality portfolio.

The Great Trader Gartman

In the October 1989 issue of Futures magazine, Dennis Gartman published 15 simple rules for trading. He is a successful trader who has experienced the gamut of trading from winning big to almost losing everything. Currently, he publishes The Gartman Letter, a daily publication for experienced investors and institutions.

Here are three of Gartman's best rules:

There is never one cockroach.

When you encounter a problem due to management malfeasance, expect many more to follow. Bad news often begets bad news. Should you encounter any hint of this kind of problem, avoid the stock and sell any shares you currently own.

In a bull market only be long. In a bear market only be short.

Approximately 60% of a stock's move is based on the overall move of the market, so go with the trend when investing or trading. As the saying goes, "The trend is your friend."

Don't make a trade until the fundamentals and technicals agree.

Fundamentals help to find quality companies that are selling at discounted prices. Technical analysis helps to determine when to buy, the exit target and where to set the trailing stop. A variation of this is to think like a fundamentalist and trade like a technician. When you understand the fundamental reasons that are driving the stock and the technicals confirm the fundamentals, then you can make the trade.

Patience Is A Trader's Virtue

Although the best investors and traders understand the importance of patience, it is one of the most difficult skills to learn as an investor and trader.

Dennis Gartman, a successful trader and publisher of The Gartman Letter has this to say about the value of patience: "Proper patience is needed throughout the lifecycle of the trade, at entry, while holding and exit."

Waiting for Your Entry Point

You have done your homework and have identified the entry point for a promising stock. Now you are waiting in anticipation for the price to reach your entry point. Instead of pulling back, the price lunges upward. You panic, entering an order above your planned entry point in a rush to make sure you don't miss the trade. By doing this, you give up some of your potential profit, but, more importantly, you actually violate the rules that caused you to enter the trade in the first place.

If you've ever let your emotions rule the day, you know that it can often lead to disappointing returns. In fact, impatient investors who violate their discipline may be headed down the path to ruin. Following a predetermined set of rules keeps the emotional side of trading and investing at bay.

Fishing for a Winner

Patient investing is similar to fishing. There are many fish in the lake and it isn't necessary to catch every fish that swims by in order to be successful. In fact, it's only necessary to catch those few that bite and fill up your net (or that meet your trading criteria).

It is important to remember that there are always many trading opportunities in the market, even in a tough stock market, so the difficulty is not so much in finding trading opportunities, but making sure the opportunities fit your trading rules. It is vital that you concern yourself with getting good entry points and making sure you have defined exit points along with stop losses without having to get in on every trade. If the stock doesn't want to bite, or it fails meet your criteria, then don't worry about it. Be patient. There will likely be another fish, or opportunity, right around the corner.

If you find that you have lost control and entered a stock before its time, it is usually best to exit the trade and wait for it to develop based on your predefined rules and not on your emotions. Take the costs associated with the trade as a lesson, learn from it and move on.

Waiting for the right entry point is an essential characteristic of every successful trader. If you find yourself tempted to enter an order before its time, step away and go over the reasons you selected the entry point once more. Then remind yourself that following your discipline will contribute to your success.

Give the Position Time to Develop

One of the stocks you have been following hits your entry point and you pull the trigger. After entering the trade, you enter a good-till-canceled bracketed order with your target and trailing stop, which define where you will take profit and where you will take a loss. Now you wait for the expected move to happen. As you watch the trade develop, it starts to move into a profitable position.

According to the original plan, this stock still has more room to run until it hits your defined target. But before you take the quick gain, the trade retreats and falls below your original entry point, but fails to hit your trailing stop. You panic and sell, generating a small loss. Just after you exit the trade, the price moves up again and reaches your target, only now you are out of the trade. Sound familiar? It turns out that in some cases, your well-thought-out plan will be right, and you'll let a fear of a loss get in the way of the trade proceeding as expected.

Rest assured, this is a common trait among many traders. Exhibiting patience with a good trade setup is a difficult task. It requires confidence in your research and in your system. While no one is infallible, the best traders trust their discipline to make them successful. They do not waver from their trailing stop methodology by letting the trade play out. If it incurs a loss, they capture all the relevant information to assess what went right and what went wrong. If their discipline needs to change, then so be it. But whatever you do, do not let your emotion take control - it will inevitably leads to losses.

That said, keep in mind that losses are part of trading. It is your discipline along with good entry points, trailing stops and exit targets that lead to consistent profits and keep you from incurring unwarranted losses. Stay patient and let your process go to work. If you are tempted to exit a trade prematurely, step away and go over the reasons why you originally set your stops and targets. Then remind yourself that it is discipline that makes a great trader.

Knowing When to Sell a Position

There are times when you follow your discipline faithfully, but despite your patience, the price of your stock barely moves. You have been patient and followed the rules - now what do you do?

In most cases, it is best to go back and re-examine your analysis of the trade. Take a fresh look and try to find what has changed. If something is different, does your new analysis change the original reason for entering the trade? If the rationale for the trade has changed, does your analysis call for you to avoid the stock at this price? If you should not be in the stock, then sell it immediately. On the other hand, if your analysis indicates that this stock meets all of your criteria to own and the entry point is very close then it makes sense to continue to hold your position.

In many cases, the price of your stock will approach your target, and being patient will work out well for you. Now comes the time when you need to close out your position. You can continue to be patient, waiting until the price hits your target or your trailing stop,or you can tighten up your stop to ensure that you capture a profit on the trade. In either case, it is time to reward your patience with a profitable trade.

While there is a little more discretion provided to selling, make sure that you make changes to targets and stops based on some pre-determined criteria. For example, you may decide that when a trade gets half-way between the entry and the target, you'll adjust the stop to the entry price.

Summary

In summary, so much of trading is psychological, making patience a great virtue for investors. Exhibiting patience when entering a trade and having patience while a trade develops are integral parts to successful trading and investing. However, allowing patience to turn into stubbornness is something you must always guard against; consistently exiting a trade according to predefined criteria is one of the best methods of improving your success as a trader. .

5 Investors Who Move The Market

There are people in every industry that have so much of an effect on it, it seems unfair. Golf has Tiger Woods, politics have the President of the United States, and the investing world has these players.

1. Warren Buffett

Warren Buffett has the distinction of the having celebrity status both in and out of the investing world. Of all of the leading voices in the market, Buffett is the largest, although his voice is rarely heard. Buffett is the CEO of Berkshire Hathaway, a $184 billion company that owns controlling interests in companies like Geico, Netjets and many others. He is the third wealthiest person in the world and has made his empire as possibly the most successful value investor as well as a proponent of the buy and hold investing model.

During the peak of the Great Recession of 2009, Buffet wrote an op ed piece in the New York Times. It was hailed as a vote of confidence in an economy that was faltering. When Buffett speaks, the market listens, and it is easy to see simply by watching Wall Street's as well as the news media's reaction to all of his words.

2. Carl Icahn

Corporate raiders find companies that they perceived to be undervalued and purchase a controlling interest in the company, often allowing them to gain control of a certain number of board seats. With those board seats the corporate raider is able to make changes to the company which increases their value.

Carl Icahn may be one of the best known modern day corporate raiders. Some of his most famous attempts at taking control of companies include his battles with Trans World Airlines, Yahoo! and Time Warner. Recently, Haines Celestial Group, maker of organic foods and one of Mr. Icahn's holdings, announced a better-than-expected quarter, allowing Icahn to profit $124 million - a 100% gain in just one year.

3. Bill Gross

Known as the bond king, Bill Gross is the founder and chief investing officer of PIMCO, a global investing firm focused primarily on bond investing. He manages the $235 billion PIMCO Total Return Fund, a fund mostly invested in bonds. He was referred to by the New York Times as the nation's most prominent bond investor.

Mr. Gross is vocal about his views of world monetary policy and the investing community listens. Over the years he has made some legendary calls including a recent 2011 warning to investors to steer clear of treasuries because of their negative return when accounting for inflation. If history is a guide, even the largest institutional investors will listen very closely to this warning.

4. Dennis Gartman

Dennis Gartman is best known for his daily newsletter, The Gartman Letter. Each day at 2:30AM he wakes up to write his four page publication for delivery to all subscribers no later than 6:00AM. This newsletter is read by institutional investors all over the world because it contains commentary on the world markets. Of particular interest is his commentary on currency and commodities trading. If you're looking for one of the best informed predictions on the gold market, Dennis Gartman may be your trader of choice.

Not only is he a commentator, he is also a trader himself. His 22 rules of trading are a must-read for all traders. One of his rules is to understand mass psychology more than economics because markets are more based on human emotion more than economic factors.

5. The Computer

It may seem odd that the computer is a market mover but the effect of the computer on the modern day trading market is staggering. Computers now account for more than 70% of all daily trading volume. To put that in to perspective, for every three trades made by a human, seven trades are done by computer - and those seven trades could have taken place in under one second.

Because of this, a new question must be asked by the modern trader: What would the computer do? Many argue that looking at the characteristics of a company are no longer as important as studying the company's chart. Understanding moving averages and support levels may now be more important than knowing what a company does and what new products are in the pipeline.

One thing is certain: The computer is now just as - if not more - important than the large volume hedge fund and mutual fund traders.

The Bottom Line

Whether the market is rigged or not will remain a question asked by traders for many more generations but it is certain that these influential traders have a profound effect on movement of the global markets. You may be wise to keep an eye on their movements and market predictions.