Relative Strength Index RSI

Relative Strength Index (RSI)
Welles Wilder created the Relative Strength Index (RSI), in order to identify when the market is bearing extreme situation. Knowing whether market is overselling or overbuying, an investor can make better investments.
RSI shows the important data in numbers from 0 to 100. The closer to the zero <30 means that the territory is oversold, and 70> means it’s overbought.

RSI example – RSI trend line can show nice breakout entry point for trader:

RSI in trading means identifying extreme situations. If the index is under 30 that means the territory is oversold. That further means that pressure of selling is high and it is likely to see technical correction. Since everybody eventually sold their assets, it means there are not many sellers, so they can raise prices up again. If the indicator turns up as well, this means a good chance to buy.
Even though the RSI identifies extremes, it doesn’t mean that a trader has to be one, and as soon as the index shows value below 30 that buying should be engaged. No extreme actions, please.
It is uncertain for how long the index can stay below 30, so other factors have to be taken into consideration. But, the indication for buying-button to be turned on is when the RSI gets above the oversold territory.
Chart shows explained situations.
Overbought territory is alerted by RSI showing value above 70. This situation means that pressure for buying is high and therefore the prices will reach their upper limits. Market is left with fewer buyers and sellers start growing their number. Just as opposite to oversold territory, when the RSI starts going down, that signals the beginning of good time to sell.
Of course, when the index reaches values above 70, it doesn’t mean that you should start selling. When it starts going down, presuming other information about the market were taken care of, selling is good to go. (Chart)

Another usage of the RSI is for confirmation of the market’s trend. A way to confirm the trend is to draw lines on the indicator that represent trend – a trend line. If the line remains steady, that means the trend holds well. These lines are very considerable to observe on larger time frames. (Chart)
RSI trend line enables earlier acknowledgment of trend changes, as the line often warns a possible breakout a bit sooner than chart trend lines.
Usage of “level 50” for additional confirming chart data about the trend means watching the RSI line moving across RSI value of 50. If it goes over 50, uptrend is in question. If it goes below 50, that marks the downtrend. This is for confirmation of chart data.
(Referring to the chart below, we insert a 50 line in the RSI indicator section (see the red line).)

Another useful usage of RSI indicator is for identifying divergence signals.
Divergence represents the situation when the RSI indicator doesn’t move according to the market’s direction. This informs us of reversing of the trend which gives us a chance of entering a trade. It is possible to identify divergence as two occurrences; bullish and bearish.
Bullish divergence will occur when a downtrend market’s prices go low further, but the indicator doesn’t go lower, but begins to go up again. This signals the change of the trend, and means a good time to buy.
Bearish divergence is the moment we see the market has uptrend, and prices are breaking high values, but the RSI stops going higher and starts going back. This signals a change of a trend, and a good time to sell.
After the RSI rise to 30, it is good to wait a bullish divergence, which is to wait for the RSI to start rising slowly while the prices had already been in a declining phase – then buy. And vice versa, when the RSI reaches 70 from higher value, bearish divergence might occur when the RSI starts to fall at the time of prices in their way up. Bearish – sell.
In short, divergence stands for change in a trend. It represents a good moment to start trading in opposite direction.

Unsystematic risk or residual risk

Residual risk, or unsystematic risk, also known as nonsystematic risk represents the risk that investor has to bear regardless of investment. In example, this sort of risk is best avoided by having diverse portfolio of investment, and to spread percentage of investment onto different assets. So if one fails, only a small percentage is lost, whereas if the investor has only two assets, one fails – half is lost.
This sort of risk is steady and present in every investment, and it can appear due to competition getting stronger, a change in regulations, recall of a product and a managerial change.
I.e. the risk that a sports club will become a minor and its stock prices will suffer. This risk has influence in the sport business, the team and its sponsors, but it doesn’t affect the whole league, so that can be used as an example for a nonsystematic risk.
An investor that had only stocks in ownership of the club faces nonsystematic risk of a high level, but if he invested in a factory that produces clothes, retail stock, and shares of other clubs, he would face less risk.
But, all risk can’t be fully avoided. This risk affects entire market. And even if the investor wouldn’t invest in anything – he or she risks money losing its value due to inflation.
It is impossible to always know where the risk might occur.
The RSI can be used to identify extremes, to confirm a trend and also to identify divergence. We will look at each of these principles in detail.

Market Failure

Market Failure
Market failure is the situation in which for any given market there is lack of supplies that have high demand by consumers.
When a market “fails” the economy suffers, because there is no balance with money spending, because other products that are good with quantity don’t sell, and that brings those products to be wasted, (For example, if there are no CD’s in the market, CD players won’t sell and that situation is “CD players’ market failure).

Merger Arbitrage

Merger Arbitrage is a hedge fund strategy that implies simultaneous buying and selling the stocks of two companies that are in the process of merging.
This strategy is used when the merger deal process is unsure to be finished. This uncertainty produces the price of the company that is being bought to be lower than the price of a merged company’s stock will have. The difference in the price is the profit for the one who conducts the sale with Merger Arbitrage strategy – the arbitrageur.
Merger arbitrageurs don’t care whether the deal will be conducted to the end; they just follow the process and buy during that process.

Venture-Capital-Backed IPO

DEFINITION of ‘Venture-Capital-Backed IPO’

When a company wants to sell its shares, the shares are called Initial Public Offering. As it is very risky to buy such IPO’s by a private investor, they back it up for some security. Venture capital is funding raised by companies that are starting their business.

Asset valuation review

Asset valuation review is the process where a regulatory body estimates the value of assets of a failed bank. This process is used so that a positional buyer would get the price for which to buy the assets of failed bank.
When a bank or other financial institution fails, it is being turned to a governmental body. Somebody can buy it from government, and the body that determines the value of those remained assets determines the price through the asset valuation review.
The duty of the governmental body is to examine all leftover values and to present it to the public.
The process of asset valuation can be difficult as the reviewer has to examine the bank’s portfolio of assets and determine its value. Since banks have a large portfolio of assets, the reviewers use sampling method to estimate their value. This saves lots of time, which is necessary in order to finish the job as soon as possible.

Value investing

Value investing is a simple form of investing, as to do that it doesn’t require having deep insight in finance, it doesn’t require having access to professional analyses or good handling with different types of charts. There are five basics concepts to cover in order to start value investing.
First thing to know is that companies have intrinsic value. That means that you actually know that companies have a certain value. But regardless, not everything is for sale all the time, and when something isn’t listed, it costs more to convince the owners to sell it.

For example, an item on sale sells cheaper than its standard value is, but it is still the same item regardless of it not being sold for its full price. The same thing is with stocks, they have a certain value regardless of their price. The price can be higher or lower, but it is the same stock. Not only has the real value of the stock dictated its price. Buying stocks in order to sell them for higher price makes sense only if you buy them for lower price. So knowing something’s real value is helpful when you want to buy it or sell it.

Second thing to know is that you should have a margin of safety. A nice way of having a margin of safety is to limit your purchase price. Don’t go buying stocks on high prices, because you can’t be sure if their price would later grow, or decline. But when you buy something for a low price, even if it doesn’t repay back – you didn’t lose much money, and there is a chance that you can at least sell it for the same money.
As an example, let’s take a used car that you hope to repair and sell for more. It can happen that there is a huge breakdown that can’t be repaired. In that case you can sell it as scrap, and still save some of loss, rather than if you bought the same car for greater price, hoping that you won’t have to invest a lot in its repair.
In short words, make sure that if you lose, don’t lose much.
If a stock’s intrinsic value is $50, buy it only when the price for it is lower than that, for example when it is $40. Then wait for the price reach its value and you get $10 per stock. There is a chance that the value will grow.
Benjamin Graham, the founder of value investing only bought stocks when they were at 60% of their original value. That’s what margin safety is.
Third important thing to know about value investing is that prices are not everything you need to know about the stock of a company. Value investing implies that stock can be underpriced or overpriced. For example, recession, investors start selling because they start panicking, so the prices go low. On the other hand, something might not be tested yet, but have a great price due to high expectation of its performance that turns wrong. That’s called not believing in efficient-market hypothesis.
Another thing to know is that value investors don’t follow majority. When you see everybody buying – start selling or wait. The reason for that is that when everybody’s buying, the stocks are usually overpriced.
Value investors buy only stocks for what they are – a parts of ownership of a company. Therefore, value investors always aim to buy stocks of companies that have firm foundations and secured future, regardless of what others are doing. That’s called – not following the herd.

Most important thing that is shared with most of investors that work with most types of investing is patience. Every market and trading strategy favors patience. But when value investing is in question, this patience means real patience, diligence and taking your time. Value investing is a true long-term strategy. But anyway, you can’t buy a stock for $40 on Monday and sell it for $50 on Wednesday anyway. Value investing requires months of waiting, or years preferably. A good thing with this is that usually countries charge long term capital profits less than short-term profits (an example would be gambling and lottery in most of the world’s countries).

Anyway, there isn’t a formula for choosing the perfect stock to buy – if there was such a thing, it wouldn’t exist. So patience is, as earlier here said, a value that is required to possess in order to be a successful investor regardless of your strategy. But if you manage to comprehend the first four important things to know about value investing, or if your nature tells you to do things that (you discover) value investors do – you will surely be the one who has lots of patience when investing and waiting your return.
Sometimes, your money prepared for buying a stock just wants to pop out. So you go to the market and look around, find a beautiful company that matches your preferences, but it turns out to be overpriced. Well, don’t buy; wait for it to go cheaper, and in the meantime you buy something else that has a good price. Value investing is about that; rather don’t buy anything than jumping into a purchase that you will regret because you don’t have a strategy prepared for it.

Stock Market Capitalization to GDP Ratio


This is the ratio used to determine if the market is undervalued or overvalued. This ratio can be used to determine evaluation of any particular market, as well as the market overall.
Stock market capitalization to GDP ratio is being calculated by inputting the data of stock market capitalization over (the particular) market GDP. The SMC to GTP ratio itself is this number times a hundred:

Stock Market Capitalization to GDP Ratio Formula:
Stock Market Capitalization to GDP Ratio Formula

This means that MC to GDP is a percentage of stock market value’s GDP. If the result is greater than 100%, it is an overvalued market, and if the result is around 50%, that is an undervalued market. Just for illustration, according to the World Bank, the US market capitalization to GDP ratio was 150% in 2000, which was an overvalued market.