investment portfolio management notes

7/29/2019 Investment Portfolio Management Notes.

1/16

Foreign Exchange trading commonly referred to as Forex or FX is the exchangeof one currency for another currency at an agreed price. The Forex market is thelargest financial market in the world with over $4.4 trillion traded daily1,compare this with the approximate $34.52 billion daily average volume of theNYSE Listed Shares of the NYSE Group2.

Over 85% of Forex trading is concentrated in the major currency pairs, which arecombinations of the EUR, USD, JPY, GBP, CHF, AUD, CAD. The markets areat their most liquid during the London Trading Hours as over 38% of the globaldaily FX volume is transacted through the London Forex market3.

Why Trade Forex?

1. LiquidityThe FX market is the most liquid market in the world, making the cost of

trading lower than other asset classes. Additionally, slippage is far lesslikely to occur than in other markets due to the depth of the market. Innormal market conditions and size in the most liquid currency pairs youshould see no slippage on your trades or orders.

2. 24 Hour Global MarketThe Forex market is not traded on a central exchange or in a physicallocation, it is an Over the Counter (OTC) market where trading occursthrough electronic systems and the telephone, 24 hours a day from Sundayevening till the close on Friday night (UK Time). This 24 hour marketmeans that gapping is less likely and allows traders to react to political,economic, technical and fundamental factors as they happen rather thanwaiting for the market to open.

3. AccessThe growth of the internet enabled Forex to be offered to retail customers,allowing them to trade Forex in milliseconds through an online broker.This coupled with leverage has bought about huge growth in retailcustomers now trading Forex. It is estimated that Retail FX daily tradingvolumes have grown from $10 Billion in 2000 to over $200 Billion in 20124.

4. LeverageForex is a margined (or leveraged) product. This means that you can tradeForex with an initial deposit that is a small percentage of the totaltransaction value. This means that the rate of return, the profit or loss fromthe initial capital outlay, is significantly higher than in traditional cashtrading.

5. Low Transaction CostMost Forex brokers do not charge commission on Forex trades but make


2/16

their money from the dealing spread, the difference between where acustomer can buy (the offer) or sell (the bid). Due to the high liquidity and24 hour market the spread in currency pairs is small meaning the cost oftrading is low. Other trading costs are also low, the initial margin requiredto trade FX is small and the financing rates, the cost to borrow the notionaltransaction value overnight are also lower than other financial markets.

6. Trade Long or ShortIt is easy to take a positive or negative view of how a currency will performagainst another, there are no selling (shorting) restrictions on free floatingcurrencies.

7. VolatilityThe exchange rate is affected by a huge variety of political, economic,technical and fundamental factors meaning that it is constantly moving andadjusting price wise. This variety makes forex trading interesting andexciting as it causes volatility, as prices can change rapidly in response tomany factors creating trading opportunities.

CFD

A CFD (Contract for Difference) is an agreement to exchange the difference invalue of the underlying instrument between the time at which the contract isopened and the time at which it is closed.

Geared products like CFDs can help you make the most effective use of your

investment capital,but it is important to appreciate that the amount you could gain or lose relative toyour initial investment is greater for geared products than for non-gearedproducts.

CFDs are margin traded products. You only need to deposit a fraction of thenotional trade value of the contract allowing you to make a much largerinvestment than in traditional cash markets. Your profit or loss is determined bythe difference between the price you buy at and the price you sell at. Margin

levels required will vary between different CFD products.A CFD is all of the following;


3/16

An agreement to exchange the difference between the opening price and the

closingIndices

S&P 500

Quote 1550.5 / 1551

Contract Size $100 per One Index Point

Trading Unit 1 Index Point

You believe the S&P 500 Index will go

lower, you sell 1 contract at 1550.5

You believe the S&P 500 Index will go

higher, you buy 1 contract at 1551

Opening SELL Opening BUY

The quote means you can sell at:

1550.5

The quote means you can buy at:

1551.0

You need to have the required margin of

$4,000 per contract available on your

account.

You need to have the required margin of

$4,000 per contract available on your

account.

The Contract Size of 1 contract is $100

per One Index Point meaning yourprofit or loss per contract will be $100

per one Index Point price increment

The Contract Size of 1 contract is $100

per One Index Point meaning yourprofit or loss per contract will be $100

per one Index Point price increment

The value of 1 contract is Price x

Contract Size

(1550.5 x $100) = $155,050

The value of 1 contract is Price x

Contract Size

(1551.0 x $100) = $155,100

Two days later the market rises on better than expected Non-Farm Payroll

Figures and the S&P price quote moves to 1554.5 / 1555. You decide to closeyour open trading position.

Closing BUY Closing SELL

You decide to close the position by

placing an equal and opposite trade to

You decide to close the position by

placing an equal and opposite trade to


4/16

the opening trade, in this case buying 1

contract at 1555.0

the opening trade, in this case by selling

1 contract at 1554.5

Your profit is calculated as follows:

Closing Price - Opening Price /Trading Unit x Contract Size x Number

of Contracts

Your profit is calculated as follows:

Closing Price - Opening Price /Trading Unit x Contract Size x Number

of Contracts

1555.0 - 1550.5 / 1 x $100 x -1 = -$450

(Loss)

1554.5 - 1551.0 / 1 x $100 x 1 = $350

(Profit)

As this is a Futures (expiring) CFD there is no commission or overnight

financing charges, all costs are in the competitive dealing spread

price of a contract. A derivative that allows you to trade the price movement of the underlying

instrument without actually owning that instrument. A total return swap where cash is borrowed from the counterparty to

purchase a contract for the return of an underlying asset from thatcounterparty. The borrowing cost can either be paid separately as anovernight financing charge or be included in the spread.

A leveraged product meaning that only a small amount of collateral(margin) is required as an initial deposit.

A trading contract that gives the client the ability to open a long or shortposition.

An OTC (Over the Counter) product meaning you can only close thatcontract with the counterparty you opened it with.

Types of orders

To assist our customers in managing their trading risk we offer a wide range ofdifferent order types. These strategy orders can help customers manage the risk

on their open positions or enable them to open new positions if the marketreaches certain levels.

What is a Market order?

A Market order is an instruction to buy or sell at the current market price. Forexample, EURUSD is currently trading at 1.3040 / 1.3043, if you want to buy


5/16

EURUSD at the current price of 1.3043 you can simply click the Buy/Ask Pricebutton and your order will be executed instantly at this price.

What are Limit and Stop orders?

A Limit or Stop order is an instruction to buy or sell if the market price reaches apre-defined level. The order essentially contains two variables, the price and theduration. The duration is the time period that the customer wishes the order toremain active, after which it will expire.

Limit order: This order is an instruction to either BUY BELOW or SELLABOVE the current market price, if the pre-defined price is reached during theorder duration.

Stop order: This order is an instruction to either BUY ABOVE or SELL

BELOW the current market price, if the pre-defined price is reached during theorder duration.

Pre-defined order levels must be placed a certain minimum distance away fromthe current market price. These minimum levels will vary by instrument.

What are Limit Settle orders?

There are two types of Limit Settle orders: Linked Limit and Stop Loss. Limitorders (take profit) or stop loss orders (limit loss) are pending orders that are

linked to open positions whose primary purpose is to close an existing openposition at a profit or for a loss. These orders can be attached to a market order atthe point of placing the market order or after the position has been opened. Fromthe MarketsTrader platform, it is possible to set both a limit and a stop loss orderat the same time. These orders can be viewed, amended or cancelled at any time.If the open position is closed then any Limit Settle orders that are linked to theposition will automatically be cancelled.

What are Limit Open orders?

There are two types of Limit Open orders: Limit Open and Stop Open. These arelimit or stop orders that are designed to open a new position when the pricereaches a pre-defined level. If you want to SELLbelow or BUYabove the currentprice you would place a Stop order and if you wanted to BUYbelow or SELLabove the current price you would place a limit order. These orders can beviewed, amended or cancelled at any time.


6/16

Hedging facility

Clients have access to a hedging facility within the MarketsTrader platform. Ahedge trade is a way of insuring an investment against future risk. So if you havean open Forex position which you feel has encouraging future prospects but you

anticipate the currency pair may reverse against you in the short term, you maywant to neutralize this short term risk by hedging your position by making anopposite trade to the existing open position. This hedging function enables CCCtraders hold a long and short position in the same instrument at the same time.

Order Duration

It is possible to choose different lengths of time that an order remains active inthe market.

Daily:A Daily order remains active in the market until the end of the trading day.

GTF (Good til Friday):A GTF order remains active in the market until the endof trading each week.

GTC (Good til Cancelled):A GTC order remains active in the market indefinitelyuntil either the price is reached and the trade executed or the client manuallycancels the order.

Advanced Strategy Orders

OCO (One Cancels the Other)An OCO is an order that comprises of both a limit and stop order. If one of theorders is executed the other order will be cancelled. OCO orders can be eitherLimit Open or Limit Settle.

IF-Done Limit OrderAn if-done limit order allows you to preset the Take Profit and the Stop Lossprice for your limit entry order. This is an easy way to place stops and limits on atrade that you anticipate may be opened in the future if a certain price target is

reached. If your market entry order is triggered, the If-Done order automaticallyattaches your pre-defined Take Profit and Stop Loss orders to the live openposition.

Trading Order Examples


7/16

Limit Settle

OCO Limit Price and Stop PriceYou open a long position in EURUSD at 1.3043 and decide that you want to take

profits if the price reaches 1.3098 but also want to limit your losses if the pricetrades at 1.3022. You can place an OCO Limit Settle order, above the market,with a Limit Price at 1.3098 and a Stop Price at 1.3022, below the market. If theprice reaches 1.3098 first then the open position will be closed at 1.3098 and theStop order cancelled. If the price was to reach the 1.3022 level first then the openposition will be closed at 1.3022 and the limit order cancelled. If the open positionis closed either manually or as a result of the order expiring, then both Limit andStop orders will automatically be cancelled.

Limit Open

Limit PriceEURUSD is currently trading at 1.3040 / 1.3043, and you want to buy if theprice reaches 1.3020. You can place a limit order at 1.3020 and if the price reachesthat level the trading system will automatically execute the buy order at the exactprice of the order.

Stop PriceEURUSD is currently trading at 1.3040 / 1.3043, and you want to sell if the price

reaches 1.3017. You can place a stop order at 1.3017 and if the price reaches thatlevel the trading system will automatically execute the sell order at the exactprice of the order.

Trends

Trends

The first trend theory holds that an uptrend remains intact as long as eachsuccessive intermediate high is higher than those preceding it and each reactionstops at a higher point than earlier reactions. Conversely, a downtrend prevailswhen each intermediate decline is lower than the preceding lows and at a lowerpoint than earlier rallies.


8/16

Uptrend - series of successively higher peaks and troughs

Downtrend - series of declining peaks and troughs

Sideways - horizontal peaks and troughs


9/16

Basic: Support & Resistance

Support and resistance levels are unquestionably among the most important of alltechnical considerations. They are areas, at which prices are expected to havedifficulty moving beyond, and they therefore deserve careful considerations inbuying and selling decisions. Support and resistance levels on bar chart can bedivided into three basic categories: 1. congestion areas; 2. areas at which previousadvances and declines failed; and 3. transformed support and resistance levels. i.e.,former highs that have been penetrated and thereby turned into support levels.The basic idea behind resistance and support theory is simply that price levelsthat were significant in the past will have significant impact on price action in thefuture.

Major Support (troughs)

Price levels or areas on a chart where buyer interest is sufficiently strong enoughto overcome any selling pressures and the price decline is halted.

Major Resistance (peak)

Price levels or areas on a chart where selling interest is sufficiently strongenough to overcome any buying pressure and the price rise is halted.

Significance of a Trendline

1. The longer the trendline has been intact, the more significant the trendline.2. The more the number of times the trendline has been tested, the stronger

the trendline.

Validity of Trendline Violation

1. The price filter used is a 1% or 3% penetration criteria to eliminate falsebreaks. A closing price penetration beyond the trendline is more significantthan just an intra-day penetration.

2. The time filter requires that prices close beyond the trendline for 2successive days.


10/16

Chart Configuration

Flag and Pennant

The parallelogram and triangle formations that sometimes form after a rapid

vertical move indicate that another similar move is likely to follow. Technicalanalysts often feel that flags mark the halfway point of a price move, measuringthe level of decisive break away from the previous formation.

Many chartists believe that flags and pennants are among the most dependablesignals, particularly in reference to the direction of an impending move.

Triangles

Triangles can be continuation or reversal patterns, but seem to fall in the formercategory more often than the later. They appear when simultaneous short-termuptrend and downtrend lines intersect. The conventional chart interpretationholds that triangles signal an impending large move with the direction of themove likely to be in the direction of the steeper trendline. An Ascending Triangleis likely to breakout in either direction. Subjectively, triangles appear to be fairly


11/16

reliable indicators, especially when no more than three of four oscillations occurbefore the breakout.

Gaps

Gaps are simply areas within the boundary of activities where no actual tradinghas occurred. Technical analysts generally place gaps into one of four categories:Common Gaps are blank areas between two consecutive days trading ranges,within which activity has taken place within the recent past. The area from where

the gap occurred normally becomes a support or resistance area. Break AwayGaps occur when prices suddenly burst out of a lengthy, range bound market.Run Away Gaps appear following an already substantial price movement, whileExhaustion Gaps are supposed to signal the final stages of a major move.


12/16

Reversal Formations

Reversal

The reversal on either a daily or weekly chart is the simplest of trend changeformations. A downside reversal occurs when the price registers a new highduring the course of a day (or week) and then closes the day (or week) sharplylower. Price action immediately following a daily or weekly reversal variesconsiderably. In some cases key reversals make the beginning of dramatic

retracements of the preceding move, while in others the reversals simply markthe beginning of a more gradual trend change.

Island Reversal

These are small top or bottom formations set apart by gaps on either side. Theisland consists of a single day or several days, and the entire formation is closelyrelated to the daily or weekly reversal phenomena. The key difference is simplythat following the gap on the island area, prices hold on for several days beforethe buying (or selling) momentum disappear between trading sessions.

Double Top or Bottom

These patterns form when successive intermediate term highs or lows stopapproximately at the same level. A double top is considered complete only if thedecline from the second peak carries prices below the first stopping point. Doubletops are frequently associated with support and resistance and a reluctance to buyor sell above or below levels that have proved to be previous barriers. Forpsychological reasons, round numbers are often likely areas for longer-rangedouble tops.


13/16

Head and Shoulder Formation

The head and shoulder top (as well as the inverted head and shoulder bottom) is

historically one of the most popular and widely followed chart formations. Theleft shoulder results from an advance followed by a relatively similar decline, andthe head is formed by a large rally falling short of the top of the head andsubsequent decline that carries prices below the line connecting the body joints ofthe head called the neckline. Several ideas concerning head and shoulderformation have gained widespread acceptance by technical analysts. First, thepattern is not complete until the neckline is decisively penetrated. Unless anduntil this occurs no reversal is considered given. Second, after this confirmingpenetration, prices frequently rally back to the vicinity of the neckline before thefinal movement begins. Third, the vertical distance from the top of the head to the

neckline provides a measure of the extent of the decline likely to occur from theneckline before the final begins. The existence of this concrete measuring ruleperhaps accounts for part of this studys popularity among chartists. Fourth, amarket is considered extremely vulnerable to a steep decline if the rally formingthe right shoulder is unable to carry as far as the top of the left shoulder.


14/16

Technical Studies

Relative Strength Index

The Relative Strength Index (RSI) indicator calculates a value based on thecumulative strength and weakness of price, specified in the input Price, over theperiod specified in the input Length. For that number of bars, RSI accumulatesthe points gained on bars with higher closes and the points lost on bars withlower closes. These two sums are indexed, with the index plotted on the chart.The RSI plots as an oscillator with a value from 0 to 100. The direction of RSIwill confirm price movement. For example, a rising RSI confirms rising prices.

RSI can also help identify turning points when there are non-confirmations or

divergences. For example, a new high in price without a new high in RSI mayindicate a false breakout. RSI is also used to identify overbought and oversoldconditions when the RSI value reaches extreme highs or lows.

Stochastic

The Stochastic Slow indicator calculates the location of a current price in relationto its range over a period of bars. The default settings are to use the most recent

14 bars (input StochLength), the high and low of that period to establish a range(input PriceH and PriceL) and the close as the current price (input PriceC).

This calculation is then indexed, smoothed and plotted as SlowK. A smoothedaverage of SlowK, known as SlowD, is also plotted. SlowK and SlowD plot asoscillators with values from 0 to 100. The direction of the Stochastics willconfirm price movement. For example, rising Stochastics confirm rising prices.


15/16

Stochastics can also help identify turning points when there are non-confirmations or divergences. For example, a new high in price without a newhigh in Stochastics may indicate a false breakout. Stochastics are also used toidentify overbought and oversold conditions when the Stochastics reach extremehighs or lows. Additionally, SlowK crossing above the smoother SlowD can be abuy signal and vice versa.

Moving Average

The moving average may be the most widely used indicator. The MovingAverage 2 line indicator calculates and plots two simple arithmetic averages ofthe same prices, specified by the Price input, from each of the most recent numberof bars specified by the Length inputs. For example, the default setting is to

calculate and plot a simple average of the closing prices of the last 9 bars and asimple average of the closing prices of the last 18 bars. The average of shorterlength (also known as the fast average) will be more sensitive to current pricechanges than the average of greater length (also known as the slow average).

Moving averages are generally used for trend identification. Attention is given tothe direction in which the averages are moving and to the relative position ofprices and the averages. Rising moving average values (direction) and pricesabove the short moving average and the short moving average above the longmoving average (position) will indicate an uptrend. Declining moving average

values and prices below the short moving average and the short moving averagebelow the long moving average would indicate a downtrend. Displaced movingaverages plot the moving average values of a previous bar or later bar on thecurrent bar.


16/16

Momentum

The Momentum indicator calculates and plots the net change of the prices

between bars. The Input Length parameter specifies the number of the bars, orthe time interval used for the net change plot. In the default setting, the indicatoris set to plot the net change of ten bars. Measuring current prices versus earlierprices sheds light on the pace of a trend and possible trend reversals. It may alsobe useful in identifying overbought and oversold conditions when the Momentumbecomes extremely strong or weak.

investment portfolio management notes

Documents