Definisi dan Cara Kerja Statin-Statin
"Statin-Statin" adalah suatu kelompok obat-obat yang menurunkan tingkat kolesterol dalam darah dengan mengurangi produksi kolesterol oleh hati. Statin-statin menghalangi enzim dalam hati yang bertanggung jawab untuk membuat kolesterol. Enzim ini disebut hydroxy-methylglutaryl-coenzyme A reductase (HMG-CoA reductase). Secara ilmiah, statin-statin dirujuk sebagai HMG-CoA reductase inhibitors.
Kolesterol adalah kritis terhadap fungsi normal dari setiap sel dalam tubuh. Bagaimanapun, ia juga berkontribusi pada perkembangan dari atherosclerosis, suatu kondisi dimana plak-plak yang mengandung kolesterol terbentuk didalam arteri-arteri. Plak-plak ini menghalangi arteri-arteri dan mengurangi aliran darah ke jaringan-jaringan yang disuplai oleh arteri-arteri. Ketika plak-plak pecah, suatu penggumpalan darah terbentuk diatas plak, dengan demkian menghalangi lebih jauh arteri dan mengurangi aliran darah. Ketika aliran darah dikurangi secara cukup dalam arteri-arteri yang menyuplai darah ke jantung, akibatnya adalah angina (nyeri dada) atau suatu serangan jantung. Jika penggumpalan terjadi pada plak-plak didalam otak, akibatnya adalah sebuah stroke. Jika penggumpalan-penggumpalan terjadi pada plak-plak didalam kaki, mereka menyebabkan intermittent claudication (nyeri pada kaki-kaki ketika sedang berjalan). Dengan mengurangi produksi kolesterol, statin-statin mampu untuk memperlambat pembentukan plak-plak baru dan adakalanya dapat mengurangi ukuran dari plak-plak yang telah ada. Sebagai tambahan, melalui mekanisme-mekanisme yang tidak dimengerti dengan baik, statin-statin mungkin juga menstabilkan plak-plak dan membuat mereka kurang cenderung untuk pecah dan mempromosikan perkembangan dari penggumpalan-penggumpalan.
Peran yang penting dari kolesterol dalam atherosclerosis telah diterima secara luas oleh ilmuwan-ilmuwan. Penelitian dari beberapa tahun-tahun terakhir menunjukan bahwa pengurangan kolesterol secara agresif adalah lebih bermanfaat daripada pengurangan-pengurangan yang sedang.
Atherosclerosis adalah suatu proses yang kompleks yang melibatkan lebih banyak daripada hanya kolesterol. Contohnya, ilmuwan-ilmuwan telah menemukan bahwa peradangan pada dinding-dinding dari arteri-arteri mungkin adalah suatu faktor yang penting dalam atherosclerosis. Sebagai tambahan untuk menurunkan tingkat-tingkat kolesterol, statin-statin juga mengurangi peradangan, yang mungkin adalah mekanisme lain yang dengannya statin-statin secara menguntungkan mempengaruhi atherosclerosis. Pengurangan peradangan ini tidak tergantung pada kemampuan statin untuk mengurangi kolesterol. Lebih jauh, efek-efek anti-peradangan ini dapat dilihat secepat dua minggu setelah memulai statin-statin.
Kondisi-Kondisi Penggunaan Statin-Statin
Statin-statin digunakan untuk mencegah dan merawat atherosclerosis yang menyebabkan nyeri dada, serangan-serangan jantung, stroke-stroke, dan intermittent claudication pada individu-individu yang mempunyai risiko atau berisiko untuk atherosclerosis.
Faktor-faktor risiko untuk atherosclerosis termasuk:
* tingkat-tingkat kenaikan kolesterol yang abnormal,
* suatu sejarah keluarga dari serangan-serangan jantung (terutama pada usia muda),
* umur yang bertambah, dan
* diabetes
Kebanyakan individu-individu ditempatkan pada statin-statin karena tingkat-tingkat kolesterol yang tinggi. Walaupun pengurangan kolesterol adalah penting, penyakit jantung adalah kompleks dan, seperti didiskusikan sebelumnya, faktor-faktor lain seperti peradangan mungkin memainkan suatu peran. Tiga puluh lima persen dari individu-individu yang mengembangkan serangan-serangan jantung tidak mempunyai tingkat-tingkat kolesterol darah yang tinggi, namun kebanyakan dari mereka mempunyai atherosclerosis. Ini berarti bahwa tingkat-tingkat kolesterol yang tinggi tidak harus selalu perlu untuk terbentuknya plak-plak atherosclerosis.
Karena tidak jelas efek-efek mana dari statin-statin yang bertanggung jawab untuk manfaat-manfaat mereka, tujuan perawatan dengan statin-statin harus tidak hanya pengurangan kolesterol ke tingkat-tingkat normal, namun lebih ke pencegahan dari komplikasi-komplikasi atherosclerosis (angina, serangan-serangan jantung, stroke, intermittent claudication, dan kematian). Konsep ini adalah penting karena ia mengizinkan untuk individu-individu yang mempunyai risiko atau berisiko untuk atherosclerosis, namun tidak mempunyai tingkat-tingkat kolesterol yang tinggi, untuk dipertimbangkan untuk perawatan dengan statin-statin. Statin-statin, seperti angiotensin converting enzyme inhibitors (ACE inhibitors), adalah suatu kelompok obat-obat yang penting karena mereka telah ditunjukan mengurangi kejadian dari serangan-serangan jantung, stroke-stroke, dan kematian.
Perbedaan-Perbedaan diantara Statin-Statin
Statin-statin berbeda dalam beberapa cara-cara. Perbedaan yang paling menyolok adalah dalam kemampuan mereka mengurangi kolesterol. Sekarang ini, atorvastatin (Lipitor) dan rosuvastatin (Crestor) adalah yang paling berpotensi, dan fluvastatin (Lescol) adalah yang berpotensi paling sedikit.
Statin-statin juga berbeda dalam seberapa kuatnya mereka berinteraksi dengan obat-obat lain. Secara spesifik, tingkat-tingkat pravastatin (Pravachol) dan rosuvastatin (Crestor) dalam tubuh adalah lebih tidak mungkin ditingkatkan oleh obat-bat lain yang mungkin dikonsumsi pada saat yang bersamaan dengan statin-statin. Ini adalah begini karena enzim-enzim dalam hati yang mengeliminasi pravastatin dan rosuvastatin tidak dihalangi/diblokir oleh banyak dari obat-obat yang memblokir enzim-enzim yang mengeliminasi statin-statin lai. Ini mencegah tingkat-tingkat dari pravastatin dan rosuvastatin dari kenaikkan dan menjurus pada keracunan yang meningkat seperti myopathy (peradangan otot-otot). Contohnya, pada studi-studi ilmiah, pasien-pasien yang mengkonsumsi kedua-duanya verapamil (Calan, Verelan, Verelan PM, Isoptin, Isoptin SR, Covera-HS) dan simvastatin (Zocor) mengalami myopathy 10 kali lebih sering daripada pasien-pasien yang menerima simvastatin sendirian karena verapamil meningkatkan tingkatan-tingkatan darah simvastatin.
Statin-statin berbeda dalam frekwensi yang dengannya mereka menyebabkan suatu tipe yang berat dari myopathy yang disebut rhabdomyolysis, dimana otot-otot dirusak secara berat/parah. Cerivastatin (Baycol) telah ditarik dari apotek-apotek diseluruh dunia karena ia telah menyebabkan rhabdomyolysis 10 sampai 100 kali lebih sering daripada statin-statin lain. Rhabdomyolysis mungkin terjadi lebih sering pada pasien-pasien yang mengkonsumsi statin-statin dengan obat-obat yang juga menyebabkan rhabdomyolysis atau obat-obat yang meningkatkan konsentrasi-konsentrasi darah statin.
Efek-Efek Sampingan Obat-Obat Statin
Efek-efek sampingan yang paling umum adalah:
* sakit kepala
* mual
* muntah
* sembelit
* diare
* rash
* kelemahan, dan
* nyeri otot
Efek-efek sampingan yang paling serius (namun untungnya jarang) adalah kegagalan hati dan rhabdomyolysis. Rhabdomyolysis adalah suatu efek sampingan dimana ada kerusakkan pada otot-otot. Rhabdomyolysis seringkali mulai sebagai nyeri otot dan dapat berlanjut pada kehilangan sel-sel otot, kegagalan ginjal, dan kematian. Itu terjadi lebih sering ketika statin-statin digunakan dalam kombinasi dengan obat-obat lain yang mereka sendiri menyebabkan rhabdomyolysis atau dengan obat-obat yang mencegah eliminasi dari statin-statin dan meningkatkan tingkat-tingkat statin-statin dalam darah. Karena rhabdomyolysis mungkin fatal, nyeri persendian atau otot yang tidak dapat dijelaskan yang terjadi ketika mengkonsumsi statin-statin harus diberitahukan pada serang dokter untuk evaluasi. Statin-statin harus tidak digunakan selama kehamilan karena risiko dari efek-efek kurang baik yang serius pada janin yang sedang berkembang.
Interaksi Obat-Obat Statin dengn Obat-Obat lain
Statin-statin mempunyai beberapa interaksi-interaksi obat yang penting. Tipe pertama dari interaksi melibatkan enzim-enzim yang bertanggung jawab untuk eliminasi statin-statin oleh hati. Enzim-enzim hati (terutama, enzim-enzim hati cytochrome P-450) adalah bertanggung jawab pada eliminasi semua statin-statin dari tubuh dengan pengecualian dari pravastatin dan rosuvastatin. Oleh karenanya, obat-obat yang menghalangi/memblokir aksi dari enzim-enzim hati ini meningkatkan tingkat-tingkat simvastatin, lovastatin, fluvastatin, dan atorvastatin (namun tidak pravastatin atau rosuvastatin) didalam darah dan dapat menjurus pada perkembangan dari rhabdomyolysis. Obat-obat atau agen-agen yang menghalangi/memblokir enzim-enzim ini termasuk:
* protease inhibitors (digunakan dalam merawat AIDS),
* erythromycin,
* itraconazole, (Sporanox)
* clarithromycin, (Biaxin)
* diltiazem, (Cardizem, Dilacor, Tiazac)
* verapamli (Calan, Verelan, Verelan PM, Isoptin, Isoptin SR, Covera-HS), dan
* grapefruit juice (sari buah dari semacam jeruk besar).
Interaksi obat penting lainnya terjadi antara statin-statin dan niacin atau fibric acids, contohnya, gemfibrozil (Lopid), clofibrate (Atromid-S), dan fenofibrate (Tricor). Obat-obat niacin dan fibric acid dapat menyebabkan rhabdomyolysis atau gagal hati ketika digunakan sendiri-sendiri, dan menggabungkan mereka dengan statin-statin meningkatkan kemungkinan dari rhabdomyolysis atau gagal hati. Meskipun demikian, fibric acids dan niacin seringkali digunakan dengan hati-hati dalam kombinasi dengan kebanyakan statin-statin. Cholestyramine (Questran) begitu juga colestipol (Colestid) mengikat statin-statin dalam usus kecil dan mengurangi penyerapan mereka kedalam tubuh. Untuk mencegah pengikatan ini didalam usus kecil, statin-statin harus diminum satu jam sebelum atau empat jam setelah cholestyramine atau colestipol.
Contoh-Contoh dari Obat-Obat Statin
Statin-statin yang disetujui untuk penggunaan di Amerika termasuk:
* atorvastatin (Lipitor),
* fluvastatin (Lescol),
* lovastatin (Mevacor),
* pravastatin (Pravachol),
* rosuvastatin (Crestor), dan
* simvastatin (Zocor).
source: (http://www.totalkesehatananda.com)
Rabu, 05 November 2008
Selasa, 04 November 2008
Trading Strategies using Technical Tools
Executive Summary
Making trading decisions and developing a sound and effective trading strategy is an important foundation of trading. Before developing a trading strategy, a trader should have a working knowledge of technical analysis as well as knowledge of some of the more popular technical studies.
In making decisions about where and when to take a position, investors, traders and analysts use two different approaches: fundamental analysis and technical analysis. Fundamental analysis is the appreciation of the economics underlying a particular trade. If you want to know where to invest and why, you use the techniques of fundamental analysis. Technical analysis is concerned with the when and the how of placing money. It determines the optimal timing for a position and its conclusions about how long to stay in a particular trade have significant importance for the kind of derivatives structure one may use to take a position.
Technical analysis is an art in which quasi-statistical techniques and formal statistics are used to determine the existence and strength of trends in financial time series and to identify turning points in these trends. If you can do this with a reasonable degree of accuracy, then you can improve your chances of making a profitable trade. Technical analysis is important in the structuring of derivative products because of the leverage involved and because of the inclusion of such features as barriers and compound strikes. Timing is everything.
Strategy 1 - Simple Moving Average.
Successful trading is often described as optimizing your risk with respect to your reward, or upside. Trading strategy should have a disciplined method of limiting risk while making the most out of favorable market moves. For this strategy I will illustrate one decision making model which uses a Simple Moving Average ("SMA") technical study, based on a 12-period SMA, where each period is 15 minutes.
I will use a simple algorithm: when the price of the currency crosses above the 12-period SMA, it will be taken as a signal to buy at the market. When the currency price crosses below the 12-period SMA, it will be a signal to "Stop and Reverse" ("SAR"). In other words, a long position will be liquidated and a short position will be established, both with market orders. Thus this system will keep you in the market - you will always have either a long or short position after the first signal. In the chart below, the white line represents the price of USDJPY, the purple line represents the 12-period SMA of USDJPY, and the red line indicates where USDJPY crosses above the SMA, generating a buy signal at approximately 129.90:
The moving average method has an element of risk control built in: a long position will be stopped out fairly quickly in a falling market because the price will drop below the SMA, generating a stop-and-reverse signal. The same holds true for a sell signal in a rising market.
Strategy 2 - Support and Resistance Levels
Think of security prices as the result of a head-to-head battle between a bull (the buyer) and a bear (the seller). The bulls push prices higher and the bears push prices lower. The direction prices actually move reveals who is winning the battle
One use of technical analysis, apart from technical studies, is in deriving "support" and "resistance" levels. The concept here is that the market will tend to trade above its support levels and trade below its resistance levels. If a support or resistance level is broken, the market is then expected to follow through in that direction. These levels are determined by analyzing the chart and assessing where the market has encountered unbroken support or resistance in the past.
For example, in the chart below EURUSD has established a resistance level at approximately .9015. In other words, EURUSD has risen up to .9015 repeatedly, but has been unable to move beyond that point:
The trading strategy would then be to sell EURUSD the next time it gets close to .9015, with a stop placed just above .9015, say at .9025. This would have indeed been a good trade as EURUSD proceeded to fall sharply, without breaking the .9015 resistance. Hence a substantial upside can be achieved while only risking 10 or 15 pips (.0010 or .0015 in EURUSD).
I am thoroughly convinced that most investors could significantly improve their performance if they would pay more attention to the underlying causes affecting security prices: investor expectations and supply/demand.[1]\
Support/Resistance concepts
The following is a very brief summary of the support/resistance concepts
1. A security's price represents the fair market value as agreed between buyers (bulls) and
sellers (bears).
2. Changes in price are the result of changes in investor expectations of the security's future
price.
3. Support levels occur when the consensus is that the price will not move lower. It is the point
where buyers outnumber sellers.
4. Resistance levels occur when the consensus is that the price will not move higher. It is the
point where sellers outnumber buyers.
5. The penetration of a support or resistance level indicates a change in investor expectations
and a shift in the supply/demand lines.
6. Volume is useful in determining how strong the change of expectations really is.
7. Traders' remorse often follows the penetration of a support or resistance level as prices
retreat to the penetrated level.
Strategy 2 - ASOLUTE BREADTH INDEX
1 Overview
The Absolute Breadth Index ("ABI") is a market momentum indicator that was developed by Norman G. Fosback.[1]
The ABI shows how much activity, volatility, and change is taking place on the New York Stock Exchange while ignoring the direction prices are headed.
2 Interpretation
You can think of the ABI as an "activity index." High readings indicate market activity and change, while low readings indicate lack of change.
In Fosback's book, Stock Market Logic, he indicates that historically, high values typically lead to higher prices three to twelve months later. Fosback found that a highly reliable variation of the ABI is to divide the weekly ABI by the total issues traded. A ten-week moving average of this value is then calculated. Readings above 40% are very bullish and readings below 15% are bearish.
3 Example
The following chart shows the S&P 500 and a 5-week moving average of the ABI.
Strong rallies occurred every time the ABI's moving average rose above 310.
4 Calculation
The Absolute Breadth Index is calculated by taking the absolute value of the difference between NYSE Advancing Issues and NYSE Declining Issues.
Absolute value (i.e., ABS) means "regardless of sign." Thus, the absolute value of -100 is 100 and the absolute value of +100 is also 100.
Strategy 4 - ACCUMULATION/DISTRIBUTION
1 Overview
The Accumulation/Distribution is a momentum indicator that associates changes in price and volume. The indicator is based on the premise that the more volume that accompanies a price move, the more significant the price move.
2 Interpretation
The Accumulation/Distribution is really a variation of the more popular On Balance Volume indicator. Both of these indicators attempt to confirm changes in prices by comparing the volume associated with prices.
When the Accumulation/Distribution moves up, it shows that the security is being accumulated, as most of the volume is associated with upward price movement. When the indicator moves down, it shows that the security is being distributed, as most of the volume is associated with downward price movement.
Divergences between the Accumulation/Distribution and the security's price imply a change is imminent. When a divergence does occur, prices usually change to confirm the Accumulation/Distribution. For example, if the indicator is moving up and the security's price is going down, prices will probably reverse.
3 Example
The following chart shows Battle Mountain Gold and its Accumulation/Distribution.
Battle Mountain's price diverged as it reached new highs in late July while the indicator was falling. Prices then corrected to confirm the indicator's trend.
4 Calculation
A portion of each day's volume is added or subtracted from a cumulative total. The nearer the closing price is to the high for the day, the more volume added to the cumulative total. The nearer the closing price is to the low for the day, the more volume subtracted from the cumulative total. If the close is exactly between the high and low prices, nothing is added to the cumulative total.
Strategy 5 - ACCUMULATION SWING INDEX
1 Overview
The Accumulation Swing Index is a cumulative total of the Swing Index. The Accumulation Swing Index was developed by Welles Wilder.
2 Interpretation
Mr. Wilder said, "Somewhere amidst the maze of Open, High, Low and Close prices is a phantom line that is the real market." The Accumulation Swing Index attempts to show this phantom line. Since the Accumulation Swing Index attempts to show the "real market," it closely resembles prices themselves. This allows you to use classic support/resistance analysis on the Index itself. Typical analysis involves looking for breakouts, new highs and lows, and divergences.[2]
Wilder notes the following characteristics of the Accumulation Swing Index:
• It provides a numerical value that quantifies price swings.
• It defines short-term swing points.
• It cuts through the maze of high, low, and close prices and indicates the real strength and
direction of the market.
3 Example
The following chart shows Corn and its Accumulation Swing Index.
You can see that the breakouts of the price trendlines labeled "A" and "B" were confirmed by breakouts of the Accumulation Swing Index trendlines labeled "A'" and "B'."
Strategy 6 - ADVANCE/DECLINE LINE
1 Overview
The Advance/Decline Line ("A/D Line") is undoubtedly the most widely used measure of market breadth. It is a cumulative total of the Advancing-Declining Issues indicator. When compared to the movement of a market index (e.g., Dow Jones Industrials, S&P 500, etc) the A/D Line has proven to be an effective gauge of the stock market's strength.
2 Interpretation
The A/D Line is helpful when measuring overall market strength. When more stocks are advancing than declining, the A/D Line moves up (and vice versa).
Many investors feel that the A/D Line shows market strength better than more commonly used indices such as the Dow Jones Industrial Average ("DJIA") or the S&P 500 Index. By studying the trend of the A/D Line you can see if the market is in a rising or falling trend, if the trend is still intact, and how long the current trend has prevailed.
Another way to use the A/D Line is to look for a divergence between the DJIA (or a similar index) and the A/D Line. Often, an end to a bull market can be forecast when the A/D Line begins to round over while the DJIA is still trying to make new highs. Historically, when a divergence develops between the DJIA and the A/D Line, the DJIA has corrected and gone in the direction of the A/D Line.
A military analogy is often used when discussing the relationship between the A/D Line and the DJIA. The analogy is that trouble looms when the generals lead (e.g., the DJIA is making new highs) and the troops refuse to follow (e.g., the A/D Line fails to make new highs).
3 Example
The following chart shows the DJIA and the A/D Line.
The DJIA was making new highs during the 12 months leading up to the 1987 crash. During this same period, the A/D Line was failing to reach new highs. This type of divergence, where the generals lead and the troops refuse to follow, usually results in the generals retreating in defeat as happened in 1987.[1]
4 Calculation
Because the A/D Line always starts at zero, the numeric value of the A/D Line is of little importance. What is important is the slope and pattern of the A/D Line.
Strategy 7 ADVANCE/DECLINE RATIO
1 Overview
The Advance/Decline Ratio ("A/D Ratio") shows the ratio of advancing issues to declining issues. It is calculated by dividing the number of advancing issues by the number of declining issues.
2 Interpretation
The A/D Ratio is similar to the Advancing-Declining Issues in that it displays market breadth. But, where the Advancing-Declining Issues subtracts the advancing/declining values, the A/D Ratio divides the values. The advantage of the Ratio is that it remains constant regardless of the number of issues that are traded on the New York Stock Exchange (which has steadily increased).
A moving average of the A/D Ratio is often used as an overbought/oversold indicator. The higher the value, the more "excessive" the rally and the more likely a correction. Likewise, low readings imply an oversold market and suggest a technical rally.
Keep in mind, however, that markets that appear to be extremely overbought or oversold may stay that way for some time. When investing using overbought and oversold indicators, it is wise to wait for the prices to confirm your belief that a change is due before placing your trades.
Day-to-day fluctuations of the Advance/Decline Ratio are often eliminated by smoothing the ratio with a moving average.
3 Example
The following chart shows the S&P 500 and a 15-day moving average of the A/D Ratio.
You can see that prices usually declined after entering the overbought level above 1.25 ("sell" arrows) and that they usually rallied after entering the oversold level below 0.90 ("buy" arrows).[1]
4 Calculation
The A/D Ratio is calculated by dividing the number of stocks that advanced in price for the day by the number of stocks that declined.
Table 3 shows the calculation of the A/D Ratio.
Strategy 8 ADVANCING-DECLINING ISSUES
1 Overview
The Advancing-Declining Issues is a market momentum indicator which shows the difference between stocks listed on the New York Stock Exchange that advanced in price minus those that declined. As of this writing, about 2,500 issues trade each day on the NYSE.
The difference between the number of advancing and declining issues is the foundation of many market breadth indicators. These indicators include the Advance/Decline Line, Advance/Decline Ratio, Absolute Breadth Index, Breadth Thrust, McClellan Oscillator and Summation Index. Indicators that use advancing and declining issues in their calculations are called market breadth indicators.
2 Interpretation
The Advancing-Declining Issues indicator shows the difference between the number of advancing issues and the number of declining issues. Plotted by itself, this indicator is helpful to determine daily market strength. Strong up days generally show readings of more than +1,000. Very weak days have readings of less than -1,000.
I prefer to plot a 5-to-40 day exponential moving average of the Advancing-Declining Issues rather than the daily values themselves. The moving average creates an excellent short-term overbought/oversold indicator. Both the Over-bought/-Oversold indicator and the McClellan Oscillator are created using moving averages of advancing minus declining issues.
3 Example
The following chart shows the DJIA and a 40-day moving average of the Advancing-Declining Issues indicator.
I drew "buy" arrows when the moving average rose above -50 and "sell" arrows when it fell below 125. Normally, I would use 100, but the strong up-trend during this period caused the indicator to have an upward bias.
4 Calculation
The Advancing-Declining Issues is calculated simply by subtracting the number of declining issues from the number of advancing issues.
The following table shows the calculation of the Advancing-Declining Issues.
Strategy 9 - ADVANCING, DECLINING, UNCHANGED VOLUME
1 Overview
Advancing, declining, and unchanged volume are all market momentum indicators. They reflect movement on the New York Stock exchange in millions of shares.
Advancing volume is the total volume for all securities that advanced in price. Declining volume is the total volume for all securities that declined in price. And similarly, unchanged volume is the total volume for all securities that were unchanged in price.
2 Interpretation
Numerous indicators have been developed using up and down volume indicators. These indicators include the Cumulative Volume Index, Negative Volume Index, Positive Volume Index, and the Upside-Downside Ratio. Charts of the advancing or declining volume can be used to look for volume divergences (where advancing volume increases but the market falls) to see if selling pressure is waning, to view daily trends, etc.
Due to the erratic fluctuations in advancing and declining volume, I suggest you smooth the indicators with a 3- to 10-day moving average.
3 Example
The following chart shows the S&P 500 and a 10-day moving average of advancing volume.
A bearish divergence developed as prices tried to rally (trendline "A") while the advancing volume was declining (trendline "B"). If you only looked at the S&P 500 you might think the market was gaining strength. The Advancing Volume showed the true picture and prices were forced to correct.[1]
Strategy 9 - ANDREWS' PITCHFORK
1 Overview
Andrews' Pitchfork is a line study consisting of three parallel trendlines based on three points you select. This tool was developed by Dr. Alan Andrews.
2 Interpretation
The interpretation of a pitchfork is based on normal trendline support and resistance principles.
3 Example
The following chart of Xerox shows an Andrews' Pitchfork.
The pitchfork was displayed by selecting the three points shown. You can see how prices tended to "walk along" the trendlines.
4 Calculation
The first trendline begins at the left-most point selected (either a major peak or trough) and is drawn so it passes directly between the two right-most points. This line is the "handle" of the pitchfork. The second and third trendlines are then drawn beginning at the two right-most points (a major peak and a major trough) and are drawn parallel to the first line. These lines are the "tines" of the pitchfork.
Strategy 11 ARMS INDEX
1 Overview
The Arms Index is a market indicator that shows the relationship between the number of stocks that increase or decrease in price (advancing/declining issues) and the volume associated with stocks that increase or decrease in price (advancing/declining volume). It is calculated by dividing the Advance/Decline Ratio by the Upside/Downside Ratio.
The Arms Index was developed by Richard Arms in 1967. Over the years, the index has been referred to by a number of different names. When Barron's published the first article on the indicator in 1967, they called it the Short-term Trading Index. It has also been known as TRIN (an acronym for TRading INdex), MKDS, and STKS.
2 Interpretation
The Arms Index is primarily a short-term trading tool. The Index shows whether volume is flowing into advancing or declining stocks. If more volume is associated with advancing stocks than declining stocks, the Arms Index will be less than 1.0; if more volume is associated with declining stocks, the Index will be greater than 1.0.
The Index is usually smoothed with a moving average. I suggest using a 4-day moving average for short-term analysis, a 21-day moving average for intermediate-term, and a 55-day moving average for longer-term analysis.
Normally, the Arms Index is considered bullish when it is below 1.0 and bearish when it is above 1.0. However, the Index seems to work most effectively as an overbought/oversold indicator. When the indicator drops to extremely overbought levels, it is foretelling a selling opportunity. When it rises to extremely oversold levels, a buying opportunity is approaching.
What constitutes an "extremely" overbought or oversold level depends on the length of the moving average used to smooth the indicator and on market conditions. Table 5 shows typical overbought and oversold levels.
3 Example
The following chart contains a 21-day moving average of the Arms Index and the New York Stock Exchange Index.
Horizontal lines are drawn at the oversold level of 1.08 and at the overbought level of 0.85. I drew "buy" arrows when the Arms Index peaked above 1.08 and "sell" arrows when the Index bottomed below 0.85. In most of the cases the arrows occur at, or one day before, significant changes in price.
4 Calculation
The Arms Index is calculated by first dividing the number of stocks that advanced in price by the number of stocks that declined in price to determine the Advance/Decline Ratio. Next, the volume of advancing stocks is divided by the volume of declining stocks to determine the Upside/Downside Ratio. Finally, the Advance/Decline Ratio is divided by the Upside/Downside Ratio.
1. Determine the overall market condition.
If you are trading equity-based securities (e.g., stocks), determine the trend in interest rates, the trend of the New York Stock Exchange, and of investor sentiment (e.g., read the newspaper). The object is to determine the overall trend of the market.
2. Pick the securities.
I suggest that you pick the securities using either a company or industry you are familiar with, or the recommendation of a trusted analyst (either fundamental or technical).
3. Determine the overall trend of the security.
Plot a 200-day (or 39-week) moving average of the security's closing price. The best buying opportunities occur when the security has just risen above this long-term moving average.
4. Pick your entry points.
Buy and sell using your favorite indicator. However, only take positions that agree with overall market conditions.
Much of your success in technical analysis will come from experience. The goal isn't to find the holy grail of technical analysis, it is to reduce your risks (e.g., by trading with the overall trend) while capitalizing on opportunities (e.g., using your favorite indicator to time your trades). As you gain experience, you will make better, more informed, and more profitable investments.
Source: Unknown
Making trading decisions and developing a sound and effective trading strategy is an important foundation of trading. Before developing a trading strategy, a trader should have a working knowledge of technical analysis as well as knowledge of some of the more popular technical studies.
In making decisions about where and when to take a position, investors, traders and analysts use two different approaches: fundamental analysis and technical analysis. Fundamental analysis is the appreciation of the economics underlying a particular trade. If you want to know where to invest and why, you use the techniques of fundamental analysis. Technical analysis is concerned with the when and the how of placing money. It determines the optimal timing for a position and its conclusions about how long to stay in a particular trade have significant importance for the kind of derivatives structure one may use to take a position.
Technical analysis is an art in which quasi-statistical techniques and formal statistics are used to determine the existence and strength of trends in financial time series and to identify turning points in these trends. If you can do this with a reasonable degree of accuracy, then you can improve your chances of making a profitable trade. Technical analysis is important in the structuring of derivative products because of the leverage involved and because of the inclusion of such features as barriers and compound strikes. Timing is everything.
Strategy 1 - Simple Moving Average.
Successful trading is often described as optimizing your risk with respect to your reward, or upside. Trading strategy should have a disciplined method of limiting risk while making the most out of favorable market moves. For this strategy I will illustrate one decision making model which uses a Simple Moving Average ("SMA") technical study, based on a 12-period SMA, where each period is 15 minutes.
I will use a simple algorithm: when the price of the currency crosses above the 12-period SMA, it will be taken as a signal to buy at the market. When the currency price crosses below the 12-period SMA, it will be a signal to "Stop and Reverse" ("SAR"). In other words, a long position will be liquidated and a short position will be established, both with market orders. Thus this system will keep you in the market - you will always have either a long or short position after the first signal. In the chart below, the white line represents the price of USDJPY, the purple line represents the 12-period SMA of USDJPY, and the red line indicates where USDJPY crosses above the SMA, generating a buy signal at approximately 129.90:
The moving average method has an element of risk control built in: a long position will be stopped out fairly quickly in a falling market because the price will drop below the SMA, generating a stop-and-reverse signal. The same holds true for a sell signal in a rising market.
Strategy 2 - Support and Resistance Levels
Think of security prices as the result of a head-to-head battle between a bull (the buyer) and a bear (the seller). The bulls push prices higher and the bears push prices lower. The direction prices actually move reveals who is winning the battle
One use of technical analysis, apart from technical studies, is in deriving "support" and "resistance" levels. The concept here is that the market will tend to trade above its support levels and trade below its resistance levels. If a support or resistance level is broken, the market is then expected to follow through in that direction. These levels are determined by analyzing the chart and assessing where the market has encountered unbroken support or resistance in the past.
For example, in the chart below EURUSD has established a resistance level at approximately .9015. In other words, EURUSD has risen up to .9015 repeatedly, but has been unable to move beyond that point:
The trading strategy would then be to sell EURUSD the next time it gets close to .9015, with a stop placed just above .9015, say at .9025. This would have indeed been a good trade as EURUSD proceeded to fall sharply, without breaking the .9015 resistance. Hence a substantial upside can be achieved while only risking 10 or 15 pips (.0010 or .0015 in EURUSD).
I am thoroughly convinced that most investors could significantly improve their performance if they would pay more attention to the underlying causes affecting security prices: investor expectations and supply/demand.[1]\
Support/Resistance concepts
The following is a very brief summary of the support/resistance concepts
1. A security's price represents the fair market value as agreed between buyers (bulls) and
sellers (bears).
2. Changes in price are the result of changes in investor expectations of the security's future
price.
3. Support levels occur when the consensus is that the price will not move lower. It is the point
where buyers outnumber sellers.
4. Resistance levels occur when the consensus is that the price will not move higher. It is the
point where sellers outnumber buyers.
5. The penetration of a support or resistance level indicates a change in investor expectations
and a shift in the supply/demand lines.
6. Volume is useful in determining how strong the change of expectations really is.
7. Traders' remorse often follows the penetration of a support or resistance level as prices
retreat to the penetrated level.
Strategy 2 - ASOLUTE BREADTH INDEX
1 Overview
The Absolute Breadth Index ("ABI") is a market momentum indicator that was developed by Norman G. Fosback.[1]
The ABI shows how much activity, volatility, and change is taking place on the New York Stock Exchange while ignoring the direction prices are headed.
2 Interpretation
You can think of the ABI as an "activity index." High readings indicate market activity and change, while low readings indicate lack of change.
In Fosback's book, Stock Market Logic, he indicates that historically, high values typically lead to higher prices three to twelve months later. Fosback found that a highly reliable variation of the ABI is to divide the weekly ABI by the total issues traded. A ten-week moving average of this value is then calculated. Readings above 40% are very bullish and readings below 15% are bearish.
3 Example
The following chart shows the S&P 500 and a 5-week moving average of the ABI.
Strong rallies occurred every time the ABI's moving average rose above 310.
4 Calculation
The Absolute Breadth Index is calculated by taking the absolute value of the difference between NYSE Advancing Issues and NYSE Declining Issues.
Absolute value (i.e., ABS) means "regardless of sign." Thus, the absolute value of -100 is 100 and the absolute value of +100 is also 100.
Strategy 4 - ACCUMULATION/DISTRIBUTION
1 Overview
The Accumulation/Distribution is a momentum indicator that associates changes in price and volume. The indicator is based on the premise that the more volume that accompanies a price move, the more significant the price move.
2 Interpretation
The Accumulation/Distribution is really a variation of the more popular On Balance Volume indicator. Both of these indicators attempt to confirm changes in prices by comparing the volume associated with prices.
When the Accumulation/Distribution moves up, it shows that the security is being accumulated, as most of the volume is associated with upward price movement. When the indicator moves down, it shows that the security is being distributed, as most of the volume is associated with downward price movement.
Divergences between the Accumulation/Distribution and the security's price imply a change is imminent. When a divergence does occur, prices usually change to confirm the Accumulation/Distribution. For example, if the indicator is moving up and the security's price is going down, prices will probably reverse.
3 Example
The following chart shows Battle Mountain Gold and its Accumulation/Distribution.
Battle Mountain's price diverged as it reached new highs in late July while the indicator was falling. Prices then corrected to confirm the indicator's trend.
4 Calculation
A portion of each day's volume is added or subtracted from a cumulative total. The nearer the closing price is to the high for the day, the more volume added to the cumulative total. The nearer the closing price is to the low for the day, the more volume subtracted from the cumulative total. If the close is exactly between the high and low prices, nothing is added to the cumulative total.
Strategy 5 - ACCUMULATION SWING INDEX
1 Overview
The Accumulation Swing Index is a cumulative total of the Swing Index. The Accumulation Swing Index was developed by Welles Wilder.
2 Interpretation
Mr. Wilder said, "Somewhere amidst the maze of Open, High, Low and Close prices is a phantom line that is the real market." The Accumulation Swing Index attempts to show this phantom line. Since the Accumulation Swing Index attempts to show the "real market," it closely resembles prices themselves. This allows you to use classic support/resistance analysis on the Index itself. Typical analysis involves looking for breakouts, new highs and lows, and divergences.[2]
Wilder notes the following characteristics of the Accumulation Swing Index:
• It provides a numerical value that quantifies price swings.
• It defines short-term swing points.
• It cuts through the maze of high, low, and close prices and indicates the real strength and
direction of the market.
3 Example
The following chart shows Corn and its Accumulation Swing Index.
You can see that the breakouts of the price trendlines labeled "A" and "B" were confirmed by breakouts of the Accumulation Swing Index trendlines labeled "A'" and "B'."
Strategy 6 - ADVANCE/DECLINE LINE
1 Overview
The Advance/Decline Line ("A/D Line") is undoubtedly the most widely used measure of market breadth. It is a cumulative total of the Advancing-Declining Issues indicator. When compared to the movement of a market index (e.g., Dow Jones Industrials, S&P 500, etc) the A/D Line has proven to be an effective gauge of the stock market's strength.
2 Interpretation
The A/D Line is helpful when measuring overall market strength. When more stocks are advancing than declining, the A/D Line moves up (and vice versa).
Many investors feel that the A/D Line shows market strength better than more commonly used indices such as the Dow Jones Industrial Average ("DJIA") or the S&P 500 Index. By studying the trend of the A/D Line you can see if the market is in a rising or falling trend, if the trend is still intact, and how long the current trend has prevailed.
Another way to use the A/D Line is to look for a divergence between the DJIA (or a similar index) and the A/D Line. Often, an end to a bull market can be forecast when the A/D Line begins to round over while the DJIA is still trying to make new highs. Historically, when a divergence develops between the DJIA and the A/D Line, the DJIA has corrected and gone in the direction of the A/D Line.
A military analogy is often used when discussing the relationship between the A/D Line and the DJIA. The analogy is that trouble looms when the generals lead (e.g., the DJIA is making new highs) and the troops refuse to follow (e.g., the A/D Line fails to make new highs).
3 Example
The following chart shows the DJIA and the A/D Line.
The DJIA was making new highs during the 12 months leading up to the 1987 crash. During this same period, the A/D Line was failing to reach new highs. This type of divergence, where the generals lead and the troops refuse to follow, usually results in the generals retreating in defeat as happened in 1987.[1]
4 Calculation
| Table 2 | ||||
| Date | Advancing | Declining | A-D | A/D Line |
| 02/15/94 | 1198 | 882 | 316 | 316 |
| 02/16/94 | 1183 | 965 | 218 | 534 |
| 02/17/94 | 882 | 1251 | -369 | 165 |
| 02/18/94 | 706 | 1411 | -705 | -540 |
| 02/22/94 | 1139 | 1003 | 136 | -404 |
Because the A/D Line always starts at zero, the numeric value of the A/D Line is of little importance. What is important is the slope and pattern of the A/D Line.
Strategy 7 ADVANCE/DECLINE RATIO
1 Overview
The Advance/Decline Ratio ("A/D Ratio") shows the ratio of advancing issues to declining issues. It is calculated by dividing the number of advancing issues by the number of declining issues.
2 Interpretation
The A/D Ratio is similar to the Advancing-Declining Issues in that it displays market breadth. But, where the Advancing-Declining Issues subtracts the advancing/declining values, the A/D Ratio divides the values. The advantage of the Ratio is that it remains constant regardless of the number of issues that are traded on the New York Stock Exchange (which has steadily increased).
A moving average of the A/D Ratio is often used as an overbought/oversold indicator. The higher the value, the more "excessive" the rally and the more likely a correction. Likewise, low readings imply an oversold market and suggest a technical rally.
Keep in mind, however, that markets that appear to be extremely overbought or oversold may stay that way for some time. When investing using overbought and oversold indicators, it is wise to wait for the prices to confirm your belief that a change is due before placing your trades.
Day-to-day fluctuations of the Advance/Decline Ratio are often eliminated by smoothing the ratio with a moving average.
3 Example
The following chart shows the S&P 500 and a 15-day moving average of the A/D Ratio.
You can see that prices usually declined after entering the overbought level above 1.25 ("sell" arrows) and that they usually rallied after entering the oversold level below 0.90 ("buy" arrows).[1]
4 Calculation
The A/D Ratio is calculated by dividing the number of stocks that advanced in price for the day by the number of stocks that declined.
Table 3 shows the calculation of the A/D Ratio.
| Table 3 | |||
| Date | Advancing | Declining | A/D Ratio |
| 02/15/94 | 1198 | 882 | 1.3583 |
| 02/16/94 | 1183 | 965 | 1.2259 |
| 02/17/94 | 882 | 1251 | 0.7050 |
| 02/18/94 | 706 | 1411 | 0.5004 |
| 02/22/94 | 1139 | 1003 | 1.1356 |
Strategy 8 ADVANCING-DECLINING ISSUES
1 Overview
The Advancing-Declining Issues is a market momentum indicator which shows the difference between stocks listed on the New York Stock Exchange that advanced in price minus those that declined. As of this writing, about 2,500 issues trade each day on the NYSE.
The difference between the number of advancing and declining issues is the foundation of many market breadth indicators. These indicators include the Advance/Decline Line, Advance/Decline Ratio, Absolute Breadth Index, Breadth Thrust, McClellan Oscillator and Summation Index. Indicators that use advancing and declining issues in their calculations are called market breadth indicators.
2 Interpretation
The Advancing-Declining Issues indicator shows the difference between the number of advancing issues and the number of declining issues. Plotted by itself, this indicator is helpful to determine daily market strength. Strong up days generally show readings of more than +1,000. Very weak days have readings of less than -1,000.
I prefer to plot a 5-to-40 day exponential moving average of the Advancing-Declining Issues rather than the daily values themselves. The moving average creates an excellent short-term overbought/oversold indicator. Both the Over-bought/-Oversold indicator and the McClellan Oscillator are created using moving averages of advancing minus declining issues.
3 Example
The following chart shows the DJIA and a 40-day moving average of the Advancing-Declining Issues indicator.
I drew "buy" arrows when the moving average rose above -50 and "sell" arrows when it fell below 125. Normally, I would use 100, but the strong up-trend during this period caused the indicator to have an upward bias.
4 Calculation
The Advancing-Declining Issues is calculated simply by subtracting the number of declining issues from the number of advancing issues.
The following table shows the calculation of the Advancing-Declining Issues.
| Table 4 | |||
| Date | Advancing | Declining | A/D |
| 02/15/94 | 1198 | 882 | 316 |
| 02/16/94 | 1183 | 965 | 218 |
| 02/17/94 | 882 | 1251 | -369 |
| 02/18/94 | 706 | 1411 | -705 |
| 02/22/94 | 1139 | 1003 | 136 |
Strategy 9 - ADVANCING, DECLINING, UNCHANGED VOLUME
1 Overview
Advancing, declining, and unchanged volume are all market momentum indicators. They reflect movement on the New York Stock exchange in millions of shares.
Advancing volume is the total volume for all securities that advanced in price. Declining volume is the total volume for all securities that declined in price. And similarly, unchanged volume is the total volume for all securities that were unchanged in price.
2 Interpretation
Numerous indicators have been developed using up and down volume indicators. These indicators include the Cumulative Volume Index, Negative Volume Index, Positive Volume Index, and the Upside-Downside Ratio. Charts of the advancing or declining volume can be used to look for volume divergences (where advancing volume increases but the market falls) to see if selling pressure is waning, to view daily trends, etc.
Due to the erratic fluctuations in advancing and declining volume, I suggest you smooth the indicators with a 3- to 10-day moving average.
3 Example
The following chart shows the S&P 500 and a 10-day moving average of advancing volume.
A bearish divergence developed as prices tried to rally (trendline "A") while the advancing volume was declining (trendline "B"). If you only looked at the S&P 500 you might think the market was gaining strength. The Advancing Volume showed the true picture and prices were forced to correct.[1]
Strategy 9 - ANDREWS' PITCHFORK
1 Overview
Andrews' Pitchfork is a line study consisting of three parallel trendlines based on three points you select. This tool was developed by Dr. Alan Andrews.
2 Interpretation
The interpretation of a pitchfork is based on normal trendline support and resistance principles.
3 Example
The following chart of Xerox shows an Andrews' Pitchfork.
The pitchfork was displayed by selecting the three points shown. You can see how prices tended to "walk along" the trendlines.
4 Calculation
The first trendline begins at the left-most point selected (either a major peak or trough) and is drawn so it passes directly between the two right-most points. This line is the "handle" of the pitchfork. The second and third trendlines are then drawn beginning at the two right-most points (a major peak and a major trough) and are drawn parallel to the first line. These lines are the "tines" of the pitchfork.
Strategy 11 ARMS INDEX
1 Overview
The Arms Index is a market indicator that shows the relationship between the number of stocks that increase or decrease in price (advancing/declining issues) and the volume associated with stocks that increase or decrease in price (advancing/declining volume). It is calculated by dividing the Advance/Decline Ratio by the Upside/Downside Ratio.
The Arms Index was developed by Richard Arms in 1967. Over the years, the index has been referred to by a number of different names. When Barron's published the first article on the indicator in 1967, they called it the Short-term Trading Index. It has also been known as TRIN (an acronym for TRading INdex), MKDS, and STKS.
2 Interpretation
The Arms Index is primarily a short-term trading tool. The Index shows whether volume is flowing into advancing or declining stocks. If more volume is associated with advancing stocks than declining stocks, the Arms Index will be less than 1.0; if more volume is associated with declining stocks, the Index will be greater than 1.0.
The Index is usually smoothed with a moving average. I suggest using a 4-day moving average for short-term analysis, a 21-day moving average for intermediate-term, and a 55-day moving average for longer-term analysis.
Normally, the Arms Index is considered bullish when it is below 1.0 and bearish when it is above 1.0. However, the Index seems to work most effectively as an overbought/oversold indicator. When the indicator drops to extremely overbought levels, it is foretelling a selling opportunity. When it rises to extremely oversold levels, a buying opportunity is approaching.
What constitutes an "extremely" overbought or oversold level depends on the length of the moving average used to smooth the indicator and on market conditions. Table 5 shows typical overbought and oversold levels.
| Table 5 | ||
| Moving Average | Overbought | Oversold |
| 4-day | 0.70 | 1.25 |
| 21-day | 0.85 | 1.10 |
| 55-day | 0.90 | 1.05 |
3 Example
The following chart contains a 21-day moving average of the Arms Index and the New York Stock Exchange Index.
Horizontal lines are drawn at the oversold level of 1.08 and at the overbought level of 0.85. I drew "buy" arrows when the Arms Index peaked above 1.08 and "sell" arrows when the Index bottomed below 0.85. In most of the cases the arrows occur at, or one day before, significant changes in price.
4 Calculation
The Arms Index is calculated by first dividing the number of stocks that advanced in price by the number of stocks that declined in price to determine the Advance/Decline Ratio. Next, the volume of advancing stocks is divided by the volume of declining stocks to determine the Upside/Downside Ratio. Finally, the Advance/Decline Ratio is divided by the Upside/Downside Ratio.
My Approach
There are many technical analysis tools in this paper. The most difficult part of technical analysis may be deciding which tools to use! Here is an approach you might try.
1. Determine the overall market condition.
If you are trading equity-based securities (e.g., stocks), determine the trend in interest rates, the trend of the New York Stock Exchange, and of investor sentiment (e.g., read the newspaper). The object is to determine the overall trend of the market.
2. Pick the securities.
I suggest that you pick the securities using either a company or industry you are familiar with, or the recommendation of a trusted analyst (either fundamental or technical).
3. Determine the overall trend of the security.
Plot a 200-day (or 39-week) moving average of the security's closing price. The best buying opportunities occur when the security has just risen above this long-term moving average.
4. Pick your entry points.
Buy and sell using your favorite indicator. However, only take positions that agree with overall market conditions.
Much of your success in technical analysis will come from experience. The goal isn't to find the holy grail of technical analysis, it is to reduce your risks (e.g., by trading with the overall trend) while capitalizing on opportunities (e.g., using your favorite indicator to time your trades). As you gain experience, you will make better, more informed, and more profitable investments.
Source: Unknown
How to Calculate Intrinsic Value for Stock Investing
Why You should Calculate Intrinsic Value
Simply because, you don't buy any stock at any price, do you? Do you know why? Because you want as much return as possible!
The price you are paying is the ultimate determinant for the rate of return that you'll be earning. The higher the price you pay for it, you'll be getting lower rate of return. This is why, you need to know how much a stock worth. Once you know its value, you can identify which stocks are traded at discounted price.
However, buying a stock simply because it is cheap is not the right approach either. This is another reason to calculate intrinsic value. To buy quality stocks at discounted price, value for money right?
How to Calculate Intrinsic Value
The way to go is, search for stocks whose prospects you believe in and then use a valuation technique to ensure the purchase price is acceptable. Here, I use net present value (NPV) formula.
How to do it? Let say you are valuing stock ABC,
From 13 years historical data, you get the information as above. To proceed, you also need to firm up your expectation based on your risk profile. In this example:
- I set my investment horizon as long as ten years from 2007. So that in 2018 I can use the fund to finance my children's study
- I am confident stock ABC will continue growing 13 per cent per year for the next ten years (13 years records prove this stock able to grow 13 per cent EPS per year)
- I assume stock ABC will be having the same PER and dividend payout by end of 2017 (or early in 2018)
- I am expecting 12 per cent return on investment (ROI)
so that my initial investment able to cover my children's tuition costs in ten years time.
Let's start calculating intrinsic value of stock ABC.
Step One: Forecast Share Price
First of all, you need to forecast its share price ten years down the road. In this case, I project the price for the next ten years using 13 per cent per year growth.
Step Two: Forecast Total Future Value
Secondly, you need to calculate the total future value. This must include the potential dividend as well.
Look, some investors doesn't care much about dividend. To them, dividend is just too small to be considered. But as it has effect to the total future value, it should be taken into consideration.
By the end of the day, you can compare the stock's profitability to others; which may not pay any dividend at all.
Step Three: Calculate Intrinsic Value
After having all these data, then only you can calculate the intrinsic value for stock ABC.
Step Four: Compare with Current Stock Price
The intrinsic value above is because my goal is to get 12 per cent per annum from this stock. If so, current stock's price, which is $33.50, is acceptable indeed (stock price is below the intrinsic value).But if your goal is about getting 25 per cent per annum return on investment, the intrinsic value will be $22. In this case, the current stock price will no longer acceptable for you.
For this same reason, you can say that current stock price is suit to those who are aiming for 15 per cent return per annum (in economics, this called as Internal Rate of Return or IRR)
What's Next?
As you can see, intrinsic value can be relatively different from one investor to another depending on the expected return. Expecting very high return will limit your investment options. On the other hand, having very low expected return may as well better keep the cash in fixed deposit.
As an investor, it is crucial to set a realistic target on the expected profits. It is better if before you calculate intrinsic value of your selected stock, assess your own risk profile first. This will help you to determine your realistic preferred return based on your need, ability and investing habits.
Eager to buy stock? Hang on first! You need to have the fair value as another comparison.
This is what mention by Warren Buffet's guru, the margin of safety.
(source: http://www.stock-investment-made-easy.com)
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