Stock market investment: Alpha, Beta and stuff
Alpha is a risk-adjusted measure of the so-called active return on an investment. It is the return in excess of the compensation for the risk borne, and thus commonly used to assess active managers’ performances. Often, the return of a benchmark is subtracted in order to consider relative performance, which yields Jensen’s alpha.
The alpha coefficient (αi) is a parameter in the capital asset pricing model (CAPM). It is the intercept of the Security Characteristic Line (SCL). Alternatively, it is also the coefficient of the constant in a market model regression.
It can be shown that in an efficient market, the expected value of the alpha coefficient is zero. Therefore the alpha coefficient indicates how an investment has performed after accounting for the risk it involved:
- αi < 0: the investment has earned too little for its risk (or, was too risky for the return)
- αi = 0: the investment has earned a return adequate for the risk taken
- αi > 0: the investment has a return in excess of the reward for the assumed risk
For instance, although a return of 20% may appear good, the investment can still have a negative alpha if it’s involved in an excessively risky position.
Besides an investment manager simply making more money than a passive strategy, there is another issue: Although the strategy of investing in every stock appeared to perform better than 75 percent of investment managers, the price of the stock market as a whole fluctuates up and down, and could be on a downward decline for many years before returning to its previous price.
The passive strategy appeared to generate the market-beating return over periods of 10 years or more. This strategy may be risky for those who feel they might need to withdraw their money before a 10-year holding period, for example. Thus investment managers who employ a strategy which is less likely to lose money in a particular year are often chosen by those investors who feel that they might need to withdraw their money sooner.
The measure of the correlated volatility of an investment (or an investment manager’s track record) relative to the entire market is called beta. Note the “correlated” modifier: an investment can be twice as volatile as the total market, but if its correlation with the market is only 0.5, its beta to the market will be 1.
Investors can use both alpha and beta to judge a manager’s performance. If the manager has had a high alpha, but also a high beta, investors might not find that acceptable, because of the chance they might have to withdraw their money when the investment is doing poorly.
These concepts not only apply to investment managers, but to any kind of investment.
A coefficient measuring a stock’s relative volatility to a market index, such as the S&P 500 Index. A manager with a Beta greater than 1.0 is more volatile than the market, while a manager with a Beta less than 1.0 is less volatile than the market.
“An important measure of a stock’s (or a portfolio’s) volatility in relation to the Standard & Poor’s 500, which by definition has a beta of 1.0. A beta higher than this implies greater volatility than the overall market. Thus, a stock with a beta of 1.5 will move up 15 percent when the market rises 10 percent. In good times, high betas imply high returns, since a beta above 1.0 amplifies the market’s movements. In bad times, of course, a beta below 1.0 is desirable, since you wouldn’t want your portfolio to magnify downward movements. Ideally, you want a low beta and high returns, which is hard to get. You can lower the overall beta of your portfolio by adding lower beta stocks to the mix, in effect diversifying away some of the volatility.”
Investment managment education with AIMS London Hertfordshire Bedfordshire
Forex education: order types
Order Types
Basic Order Types
There are some basic order types that all brokers provide and some others that sound weird. The basic ones are:
- Market order
A market order is an order to buy or sell at the current market price. For example, EUR/USD is currently trading at 1.2140. If you wanted to buy at this exact price, you would click buy and your trading platform would instantly execute a buy order at that exact price. If you ever shop on Amazon.com, it’s (kinda) like using their 1-Click ordering. You like the current price, you click once and it’s yours! The only difference is you are buying or selling one currency against another currency instead of buying Britney Spears CDs. - Limit order
A limit order is an order placed to buy or sell at a certain price. The order essentially contains two variables, price and duration. For example, EUR/USD is currently trading at 1.2050. You want to go long if the price reaches 1.2070. You can either sit in front of your monitor and wait for it to hit 1.2070 (at which point you would click a buy market order), or you can set a buy limit order at 1.2070 (then you could walk away from your computer to attend your ballroom dancing class). If the price goes up to 1.2070, your trading platform will automatically execute a buy order at that exact price. You specify the price at which you wish to buy/sell a certain currency pair and also specify how long you want the order to remain active (GTC or GFD). - Stop-loss order
A stop-loss order is a limit order linked to an open trade for the purpose of preventing additional losses if price goes against you. A stop-loss order remains in effect until the position is liquidated or you cancel the stop-loss order. For example, you went long (buy) EUR/USD at 1.2230. To limit your maximum loss, you set a stop-loss order at 1.2200. This means if you were dead wrong and EUR/USD drops to 1.2200 instead of moving up, your trading platform would automatically execute a sell order at 1.2200 and close out your position for a 30 pip loss (eww!). Stop-losses are extremely useful if you don’t want to sit in front of your monitor all day worried that you will lose all your money. You can simply set a stop-loss order on any open positions so you won’t miss your basket weaving class.
- GTC (Good ‘til canceled)
A GTC order remains active in the market until you decide to cancel it. Your broker will not cancel the order at any time. Therefore it’s your responsibility to remember that you have the order scheduled. - GFD (Good for the day)
A GFD order remains active in the market until the end of the trading day. Because foreign exchange is a 24-hour market, this usually means 5pm EST since that that’s U.S. markets close, but I’d recommend you double check with your broker. - OCO (Order cancels other)
An OCO order is a mixture of two limit and/or stop-loss orders. Two orders with price and duration variables are placed above and below the current price. When one of the orders is executed the other order is canceled. Example: The price of EUR/USD is 1.2040. You want to either buy at 1.2095 over the resistance level in anticipation of a breakout or initiate a selling position if the price falls below 1.1985. The understanding is that if 1.2095 is reached, you will buy order will be triggered and the 1.1985 sell order will be automatically canceled.
Always check with your broker for specific order information and to see if any rollover fees will be applied if a position is held longer than one day. Keeping your ordering rules simple is the best strategy.
Forex trading training from AiMS London
Rob Lee Senior Analyst of the AiMS Forex Trading Training club from London describes technical analysis, its rationale, theory and mind-set.
To study technical analysis we need to define what it is and separate it from other methods used, such as fundamental analysis, to determine market movements and direction.
Technical analysis is the study of market action using primary charts to forecast the future price of a given market or security. Market action is a term that includes the three principal sources of information used by a technician:
- Price
- Volume
- Open interest
Price action is a term that is not to be confused with market action, price action refers solely to the open, high, low and close (OHLC) prices of a given period of time for a given market or security.
As technicians our philosophy states that:
- Market action discounts everything
- Price moves in trends
- History is repetitive
Market action discounts everything
Market Action, the foundation of our study of the markets, which is primary to understanding our analysis, is that everything that can affect price fundamentally, political, psychological, geographical, acts of god or otherwise is built into the price of that market.
A technical analyst is stating that by studying the market action of a security they are actually studying the shift in supply and demand, if demand exceeds supply the price will raise and conversely if supply exceeds demand the price will fall, the basis for all economic and fundamental analytical work.
A technician reverses the conclusion by stating that if market action is rising then the fundamentals must be that demand is exceeding supply and that if the market action is falling then that fundamentally the supply is out striping demand and must be bearish.
A technical analyst then can state that all that needs to be studied is Market action, to forecast the future direction of a market. A technician is not overly concerned with the “why” a price rises or falls, but more “when” a price turns at a critical point often when no one really knows why in the early stages of a price trend.
The logic is that the market discounts everything, everything that affects price is already reflected in the market from grass roots up. By studying the market action the wealth of knowledge in the Market is telling the technician which way is the likely future direction. There are reasons why the market moves up or down, but as technicians do not feel that knowing the reasons are necessary to forecast direction, not why but when.
Price moves in trends
The concept a technician understands is that price moves in trends. A technical analyst has to believe price moves in trends to make his predictions. This theory is key to identifying the crucial stages of a price trend change, the optimal point at which to trade in the direction of a trend. An out come of this is bastardised from Newton’s first law of motion, a trend is more likely to continue then reverse.
Simplified, a trend will continue until it reverses, therefore a technician will ride a trend until it shows signs of reversal, the basis of our work as technical analysts / traders.
History is repetitive
Technical analysis is the study of market action, which is effectively the study of human psychology. Patterns emerge in a chart for that very reason as human psychology, which tends not to change, repeats its self. The study of the past will give us insights of the future.
Technical vs. fundamental
Fundamentalists concentrate on the laws of supply and demand, which moves price up or down. All the relevent factors are dialled into their analysis to produce an intrinsic value, what it is worth. If the value is under priced then it must be bought, likewise if intrinsic value is over price, or overbought, then a selling order would be correct.
Both technical and fundamental analysis is attempting to answer the same question, the direction of price albeit with different tools. Fundamental analysis looks at the cause while the technician looks at the effect. A technician believes the effect is all that is required to reach a conclusion, whilst the fundamentalist always has to know why.
In real terms there is a lot of overlap, fundamentalists for example use basic technical analysis and the technician will have at least a rudimentary awareness of the fundamentals, economic news for example. A problem arises, often at the beginning of a critical move in the markets the fundamentals do not correlate with the actual market conditions. This presents a conflict as technical analysts contradict fundamental analysis.
The only conclusion we can reach is that the market trend tends to lead the fundamentals, in other words market action is a lead indicator for the known fundamentals. Unknown fundamentals are working of which the market has yet to discount from price, often major moves in the market begin with little or no change in the known fundamentals and the move is well underway before the fundamentals come into the conscious knowledge of the market masses.
As a technician we become at ease in positions where conventional wisdom disagrees, we just don’t need or are unwilling to wait for fundamental confirmation.
Timing
Leverage demands excellent timing, futures markets for example with high leverage requires accurate timing of execution as we take on positions with low margin requirements. A small move in price can realise profits or more importantly force a trader out of the market and produce a loss. Unlike stocks where we can buy and hold, we can be, as a futures trader, the correct side of the market and still lose as timing becomes important.
Technical analysis is the only discipline we can employ to accurately deploy entry and exit points. Although we can use fundamental or technical to forecast in the primary stage, technical is the only choice we have to execute efficiently in the futures markets.
Finally, a technician can adapt to almost any market they wish, very quickly allowing the bigger picture to been seen with inter-market analysis across various key factors, from Stocks buy and hold to fast moving futures. This a key strength of technical analytical practices, which is not matched by a fundamentalist who requires large amounts of data in their specialist field to forecast, a technician simply pulls up a chart and begins work without specialist knowledge in the given sector.
AiM School Forex Training and Trading Club London
225 Marshall Wall, Canary Wharf, London
Forex Basic Training
Forex Training: An Introduction to the markets
Currency / Forex
The purpose of the foreign exchange market is to help international trade and investment. A foreign exchange market helps businesses convert one currency to another, although today 70% to 90% of forex exchange transactions are speculative.
The foreign exchange market is the largest and most liquid financial market in the world. Traders include large banks, central banks, currency speculators, corporations, governments, and other financial institutions. The average daily volume in the global foreign exchange and related markets is continuously growing. Daily turnover was reported to be over US$3.2 trillion in April 2007 by the Bank for International Settlements. [2] Since then, the market has continued to grow. According to Euromoney’s annual FX Poll, volumes grew a further 41% between 2007 and 2008.
Foreign exchange market is unique and useful to operations because:
- High trading volumes
- High liquidity of the market
- Geographical dispersion
- Extensive trading sessions: 24 hours a day except on weekends
- The variety of factors that affect exchange rates.
- Low margins of profit compared with other markets of fixed income (but profits can be high due to very large trading volumes)
- The use of leverage
The Forex Over The Counter (OTC) market is by far the biggest and most popular financial market in the world, traded globally by a large number of individuals and organizations. The dollar is the most traded currency, being on one side of 86% of all transactions. The euros share is second at 37%, while that of the yen is third at 16.5% (various wikipedia sources).
Currency symbol Construction
Foreign exchange currency symbols are always three letters, the first and second letter describe the country and the third letter identifies the name of that countries currency.
Example of some popular currency symbol’s
| Symbol | Country | Currency | Other names |
| USD | United States | Dollar | Buck, Greenback |
| EUR | European union | Euro Dollar | Fiber |
| JPY | Japan | Yen | |
| GBP | Great Britain | Pound | |
| CHF | Switzerland | Franc | Swissy |
| CAD | Canada | Dollar | Loonie |
| AUD | Australia | Dollar | Oz, Aussie |
| NZD | New Zealand | Dollar | Kiwi |
Figure f1.1 Example of popular currency symbols.
Symbols can be paired, know as pairs, and traded against each other in a buy/sell format. The first symbol is the base symbol followed by the quoted symbol.
Example: EUR/USD: The European dollar is the base currency followed by the United States Dollar, which is the quoted currency.
The base currency in a buy situation has a value of one; in this case Є1.00 (one euro dollar) and the quoted price in USD would be how many United States Dollars that Є1.00 can buy, expressed in this format: EURUSD 1.4719 (example), the single Euro Dollar can purchase 1.4719 United States Dollars on this market.
In a sell situation the roles are reversed, the quoted currency becomes the base currency and the base currency becomes the quoted currency. To simplify this the pair does not change expression. We can express this in simple terms:
For every buy side there is a sell side: If I buy EURUSD (go long) I am buying USD with EUR at the market price. If I Sell EURUSD (go short) I am buying EUR with USD. This is not as confusing as it first appears.
Although useful to understand the reversal it is not a requirement in speculation trading, we merely need to understand that buying a pair requires the quoted price to climb to make profit and that selling a pair requires the quoted price to fall to make a profit.
For those that like more detail a brief explanation:
Buying EURUSD: I am buying the quoted price of USD with EUR, example EURUSD 1.4100. The quote then climbs to 1.4200, I have made 0.0100 profit (100 pips).
Selling EURUSD: I am Selling EUR at 1.4100 and buying it back at 1.4200, I have lost 0.0100 profits, or you could state: I am Buying EUR with USD calculated dividing the base by the quote, in this case 1/1.4100 = 0.7092, in other words 1 USD buys 0.7092 EUR.
Times of operations
The spot FX market is unique within the world markets, the market is open 24-hours a day Sunday – Friday (GMT). At any time, somewhere around the world a financial centre is open for business, and banks and other institutions exchange currencies every hour of the day and night with generally only minor gaps on the weekend.
The foreign exchange markets follow the sun around the world, so you can trade late at Asian sessions at one end of the clock or to North American sessions at the other end, some the most important markets and their session times follow.
| Financial market | EST | GMT |
| Tokyo open | 19:00 | 00:00 |
| Tokyo close | 04:00 | 09:00 (a) |
| London open | 03:00 | 08:00 (a) |
| London close | 00:00 | (b) 17:00 |
| New York open | 08:00 | (b) 13:00 |
| New York close | 17:00 | 22:00 |
Figure f1.2 (a) Tokyo close and London open overlap by 1 hour. (b) London close and New York open overlap by 4 hours. Overlaps are important as two or more markets are open and trading during the same period of time, this list is by no means exhaustive.
Forex Pips and lots
The most common increment of currencies is the pip; the pip is located at 0.0001
Odd pairs, an example of non-standard symbol is the JPY, the pip is located at the position 00.01.
Calculating the value of a pip: pip/quote = value.
Example: USD/JPY .01/89.90=0.0001112
Forex spot markets are traded in lots. The standard lot size is 100,000 units; this can be broken down into mini lots at 10,000 units (and even micro lots at 1,000 units). As currency is measured in pips we can take advantage of this small increments of change in price by trading large amounts of a currency to realise significant profit or loss.
We can now calculate the pip value of a trade in to USD and onto another currency:
Example: USDJPY 89.90
Calculate the value of a pip: .01 /89.90 = 0.0001112
Dial in our lot size, in this case 100,000 units: x 100,000 = 11.12USD
(.01 p / 89.90 q) x 100,000 u = 11.12USD r
To change that into another currency value, GBP for example: GBP/USD 1.6400
(1 /1.6400 q) x 11.12 r = £6.78 v
The full equation: (.01 p /89.90 q) x 100,000 u = 11.12 r x (1 b/1.6400 q) = £6.78 v
The formulas:
r= (p/q)u
v = r(1/q)
v=(p/q)u(1/q)
Forex Leverage
A broker will typically require a trade deposit, also known as an account margin or initial margin. The broker will specify the amount required per position traded.
Leverage can be set by the trader or the broker, a leverage of 100:1 requires 1% of position, a leverage of 50:1 would require a 2% of position of margin.
Example: $100,000 at 100:1 requires $1,000 for margin.
Margin call
The account capital must remain above the required margin for the position(s) to remain open. The broker will close the position if usable margins fall below required.
Example: Account capital $2,000, 1 standard lot opened, margin requirement $1,000. Usable margin is the money available to open new positions or sustain trading loses. Initial capital $2,000 – $1,000 used margin, usable margin $1,000.
If your losses exceed your usable margin you will get a margin call.
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