Beyond Technical Analysis
Cash flow statement or Three great riversToday we're going to start taking apart the third and final report that the company publishes each quarter and year - it's Cash flow statement.
Remember, when we studied the balance sheet , we learned that one of the company's assets is cash in accounts. This is a very important asset because if the company doesn't have money in the account, it can't buy raw materials, pay employees' salaries, etc.
What, in general, is a "company" in the eyes of an accountant? These are assets that have been purchased on credit or with equity, for the purpose of earning a net income for its shareholders or investing that income in further growth.
That is, the source of cash in a company's account may be profits . But why do I say "may be"? The point is that it's possible to have a situation where profits are positive on the income statement, but there is no money physically in the account. To make sense of this, let's remember the workshop I use in all the examples. Suppose our master sold all of his boots on credit. That is, he was promised payment, but later. He ended up with a receivable in assets and, most interestingly, generated revenue. The accountant will calculate the revenue for these sales, despite the fact that the shop hasn't actually received the money yet. Then the accountant will deduct the expenses from the revenue, and the result will be a profit. But there is zero money in the account. So what should our master do? The orders are coming in, but there is nothing to pay for the raw materials. In such circumstances, while the master is waiting for the repayment of debts from customers, he himself borrows from the bank to top up his current account with money.
Now let us make his situation more complicated. Let us assume that the money borrowed he still does not have enough, and the bank does not give more. The only thing left is to sell some of his property, that is, some of his assets. Remember, when we took apart the assets of the workshop , the master had shares in an oil company. This is something he could sell without hurting the production process. Then there is enough money in the checking account to produce boots uninterrupted.
Of course, this is a wildly exaggerated example, since more often than not, profits are money, after all, and not the virtual records of an accountant. Nevertheless, I gave this example to make it clear that cash in the account and profit are related, but still different concepts.
So what does the cash flow statement show? Let's engage our imagination again. Imagine a lake with three rivers flowing into it on the left and three rivers flowing out on the right. That is, on one side the lake feeds on water, and on the other side it gives it away. So the asset called "cash" on the balance sheet is the lake. And the amount of cash is the amount of water in that lake. Let's now name the three rivers that feed our lake.
Let's call the first river the operating cash flow . When we receive the money from product sales, the lake is filled with water from the first river.
The second river on the left is called the financial cash flow . This is when we receive financing from outside, or, to put it simply, we borrow. Since this is money received into the company's account, it also fills our lake.
The third river let's call investment cash flow . This is the flow of money we get from the sale of the company's non-current assets. In the example with the master, these were assets in the form of oil company stock. Their sale led to the replenishment of our notional money lake.
So we have a lake of money, which is filled thanks to three flows: operational, financial, and investment. That sounds great, but our lake is not only getting bigger, but it's also getting smaller through the three outgoing flows. I'll tell you about that in my next post. See you soon!
How to add tweets to your TradingView charts?Hello everyone!
Did you know that you can integrate tweets into your TradingView charts? If not, you're in for a treat! In this visual guide, we will show you how you can enhance your charts by seamlessly incorporating tweets. 🙂
But first, let us show you an example of how incorporating tweets in your charts can make them more interactive and informative.
Adani Enterprises after the release of Hindenburg’s report:
Pretty cool, right? Now without further ado, let’s get started.
1. On your chart window, go to the toolbar on the left side of the screen and select the "Text" option, which is 5th from the top.
2. You will see a few options once you click on it. Select the “Tweet” option.
3. It will ask you to insert the link of the tweet that you want to add to your chart. All you have to do is just "paste" the link and click "ok" .
4. Upon adding the link, the tweet will show up on the chart along with the timestamp that denotes the precise time of its posting.
5. To adjust the tweet's placement, simply click and drag the tweet window to the desired location.
Thanks for reading! Hope this was helpful.
See you all next week. 🙂
– Team TradingView
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As 'Above' so 'Below' - the harmony of natureIn this real world, there is various philosophy that tries to explain the "As above, so below" harmony is the great law of nature but none can prove this law hence it's still a hypothesis.
The law of nature works on everything and the stock market is not untouched by nature.
I am not here to give a lecture on this law of nature but to prove how this harmony of nature is preserved in the stock market and to share my research work on 'Stock-et' science which is equally difficult as 'Rocket' science.
Many of you have heard of these famous patterns:-
'Head and Shoulder'
'Cup and Handle'
'Rounding Top/Bottom'
'Flag/Pennant'
'Double Top/Bottom'
Do you all observe some correlation among them?
They all are candlestick patterns that either decide reversal or continuation, if this was your observation then probably you are correct but I wasn't indicating this.
Let me explain to you what kind of relationship I was talking about.
How do we estimate the target of these patterns? To the target level, we first measure the depth of the pattern i.e. how deep it's below the breakout level.
As its depth is below so will the height above.
Now, I think you all can draw how this law of nature is respected here in the candlestick pattern or more precisely in the stock market.
Let’s have an example to be more sound:-
The above chart describes how the CUP pattern works following this law of nature.
The stock after the breakout rallied non-stop to attain the e height of +94% which was the depth of the cup pattern.
After attaining the target or say 'equilibrium' stock witnessed a jerk, not before that.
This proves how the market preserves "As above, so below" harmony, the great law of nature.
Still not convinced then look to another example,
This is the vice-versa of the previously explained example, here stock attains the depth of -17% i.e. ' equilibrium' after forming a Head and Shoulder pattern with a height of shoulder +17%.
This proves how the market preserves "As below, so above" harmony, the great law of nature.
Now let's look at this concept with different dimensions i.e. dimensions of mathematics, physics, and chemistry.
Don’t be afraid I'm not going to talk about 'rocket' science but 'stock-et' science.
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In math, we all have read negative and positive cancels out i.e. (-3+3=0) same in candlestick patterns if the stock has a pattern depth of then the pattern target would be +30% to attain '0' or say 'equilibrium'.
In physics, we all have read that negative charges neutralize the positive charge to attain 'equilibrium' same in the stock market.
In chemistry, we all have read that all chemical changes occur in nature to attain 'equilibrium' i.e. two elements share their electrons to attain 'stability' (H2O, here two hydrogen molecules share their 1 electron with 6 electrons of oxygen to attain equilibrium) this same happens in markets all market movements occur to attain 'stability'.
Generally, people have fantasies about 'Rocket' science but we traders have fantasies about 'Stock-et' science.
Please drop comments on whether you have a fantasy for any of the above science.
Also, let me know how many of you believe that the stock market doesn't work on speculation but has its science
let's call it 'Stock-et' science.
Stock Market Risks: A Brief Guide to Get ThroughThe stock market can be an exciting and potentially lucrative place to invest, but it also carries significant risks, particularly in the futures and options segment. While the potential for high returns is a major draw, it is essential to understand the risks and take appropriate measures to manage them effectively.
Risks in Futures and Options Segment
Futures and options are derivative products that allow investors to buy or sell a particular asset at a specific price on a future date. This segment can be risky due to the potential for high leverage, meaning that a small investment can lead to significant losses or gains. Moreover, futures and options are often complex instruments that require a solid understanding of the underlying asset.
Risk Aspects in Investment
Investment in the stock market also carries inherent risks, such as market volatility, company-specific risk, and currency risk, among others. These risks can impact the overall performance of your portfolio in the long run.
Risk Aspects in Day Trading
In day trading, an instrument is bought and sold on the same day so as to make a quick profit. While day trading can be profitable, it also carries significant risks due to the high volatility and leverage involved. Day traders need to have a deep understanding of the market and should use technical analysis to make informed decisions.
Step-by-Step Guide for Surviving the Stock Market
1. Educate Yourself: The first step to surviving the stock market is to educate yourself about the risks involved, market trends, and investment strategies. You can attend seminars, read books, and consult with experienced investors or brokers.
2. Set Realistic Goals: Setting realistic financial goals based on your investment horizon, risk appetite, and financial situation is crucial. This not only helps in avoiding impulsive trading but also in staying focussed.
3. Diversify Your Investments: Diversifying your portfolio across different sectors, geographies, and asset classes can help mitigate risks and balance your returns.
4. Have a Disciplined Approach: Avoid chasing quick returns or taking unnecessary risks. Have a disciplined approach to investing, and stick to your investment plan.
5. Manage Your Risks: Use risk management tools such as stop-loss orders and limit orders to minimize losses. Moreover, one should always try to invest only that much money which one can afford to lose. Other than that there is always need to maintain a cash buffer for emergencies.
In conclusion, the stock market carries significant risks, especially in the futures and options segment. However, with a disciplined approach, a sound investment strategy, and effective risk management, new and struggling traders and investors can survive and thrive in the stock market.
Thanks for reading.
What should I look at in the Income statement?The famous value investor, Mohnish Pabrai , said in one of his lectures that when he visited Warren Buffett, he noticed a huge handbook with the financial statements of thousands of public companies. It's a very dull reading, isn't it? Indeed, if you focus on every statement item - you'll waste a lot of time and sooner or later fall asleep. However, if you look at the large volumes of information from the perspective of an intelligent investor, you can find great interest in the process. It is wise to identify for yourself the most important statement items and monitor them in retrospect (from quarter to quarter).
In previous posts, we've broken down the major items on the Income statement and the EPS metric:
Part 1: The Income statement: the place where profit lives
Part 2: My precious-s-s-s EPS
Let's now highlight the items that interest me first. These are:
- Total revenue
The growth of revenue shows that the company is doing a good job of marketing the product, it is in high demand, and the business is increasing its scale.
- Gross profit
This profit is identical to the concept of margin. Therefore, an increase in gross profit indicates an increase in the margin of the business, i.e. its profitability.
- Operating expenses
This item is a good demonstration of how the management team is dealing with cost reductions. If operating expenses are relatively low and decreasing while revenue is increasing, that's terrific work by management, and you can give it top marks.
- Interest expense
Interest on debts should not consume a company's profits, otherwise, it will not work for the shareholders, but for the banks. Therefore, this item should also be closely monitored.
- Net income
It's simple here. If a company does not make a profit for its shareholders, they will dump its shares*.
*Now, of course, you can dispute with me and give the example of, let's say, Tesla shares. There was a time when they were rising, even when the company was making losses. Indeed, Elon Musk's charisma and grand plans did the trick - investors bought the company's stock at any price. You could say that our partner Mr. Market was truly crazy at the time. I'm sure you can find quite a few such examples. All such cases exist because investors believe in future profits and don't see current ones. However, it is important to remember that sooner or later Mr. Market sobers up, the hype around the company goes away, and its losses stay with you.
- EPS Diluted
You could say it's the money the company earns per common share.
So, I'm finishing up a series of posts related to the Income statement. This statement shows how much the company earns and how much it spends over a period (quarter or year). We've also identified the items that you should definitely watch out for in this report.
That's all for today. In the next post, we will break down the last of the three financial statements of a public company - the Cash flow statement.
Goodbye and see you later!
What is a crypto card?Crypto cards enable you to pay with cryptocurrency in stores and withdraw cash from almost any ATM worldwide. Additionally, each business that issues these cards offers a set of benefits for cardholders.
What is a crypto card?
If you own cryptocurrency, you've probably considered how to use it in everyday life. Currently, in order to convert Bitcoin into dollars, you must transfer BTC to a centralized exchange, convert it to USD, and then withdraw the funds to a bank card. You can also use an exchanger, but you run the risk of falling victim to scammers. The lengthy withdrawal process makes it difficult and less desirable for regular users to use cryptocurrency as a payment method.
A crypto card could be the solution. It functions exactly like a traditional debit card. In fact, you can use a crypto debit card to pay for the same products: Bitcoin is deducted from your wallet in the amount equal to the purchase price (an automatic conversion to a specific currency occurs).
Several centralized exchanges and payment processors have already produced their own crypto debit cards. The use of such cards greatly simplifies the interaction between the traditional and cryptocurrency financial systems. When you get paid in bitcoin, you can use that money right away to make purchases for things you need on a daily basis, like food, gas, clothing, and other essentials. And since it's a debit card, you won't be able to spend more than you have.
Another significant benefit is a cashback. Cashback percentages range from 1% to 8% and are applied to purchases.
The procedure for obtaining a crypto debit card varies according to the provider, but it is very simple and quick. Some providers only offer a virtual card that you can link to your Apple Pay or Google Pay wallet or use to make purchases online. A physical card can also be issued through certain services, like BitPay.
The best crypto debit card for you will be determined by your needs and where you live. Some businesses provide cards with restrictions and daily limits. At the same time, the number of supported cryptocurrencies and the lack of regional restrictions are important factors.
Due to the fact that Visa and MasterCard support the majority of crypto cards, they are accepted at shops and ATMs throughout the world.
In the following section, we'll examine and contrast the three most widely used crypto debit cards.
Crypto.com Visa
The Crypto.com card operates on the Visa network, accepts more than 100 cryptocurrencies, and is available in more than 100 countries worldwide.
Customers are offered cards of five different levels, each with its own set of terms and remuneration structure. Obsidian's most premium card, for example, provides 5% cashback and unlimited access to airport lounges through the Lounge Key programs. This card also provides refunds on Airbnb and Expedia bookings, as well as 100% cashback on Spotify, Netflix, and Amazon Prime subscriptions, among other benefits. However, the person must stake CRO tokens worth $400,000 in order to obtain this specific card.
Binance Visa Card
This card operates on the Visa network as well, but it is only available to European customers. The user can receive up to 8% BNB cashback on each purchase and withdraw funds from ATMs without paying any fees. Both virtual and physical cards are available for free.
Coinbase Visa
The Coinbase card is available to all residents of the United States (except Hawaii) and offers up to 4% cashback on purchases. At the same time, users are not charged for servicing the card or withdrawing funds from an ATM.
In the picture you can see a comparison of these three cards according to the main characteristics:
Crypto cards significantly simplify the use of cryptocurrencies for the average user, and they do not have the same limitations as traditional bank cards. Using cryptocurrency as legal tender is a long-held desire of crypto enthusiasts, made possible by the functionality and accessibility of crypto cards.
10 Reasons why Most traders lose moneyHey everyone!👋
Trading & investing is not easy. If it were, everyone would be rich.
Here are a couple of time-honored tips to help you get back to basics.
Lack of knowledge 📘
Many traders jump into the market without a thorough understanding of how it works and what it takes to be successful. As a result, they make costly mistakes and quickly lose money.
Poor risk management 🚨
Risk is an inherent part of trading, and it's important to manage it effectively in order to protect your capital and maximize your chances of success. However, many traders don't have a clear risk management strategy in place, and as a result, they are more vulnerable to outsized losses.
Emotional decision-making 😞
It's easy to feel strong emotions while trading. However, making decisions based on emotions rather than rational analysis can be a recipe for disaster. Many traders make poor decisions when they are feeling overwhelmed, greedy, or fearful and this can lead to significant losses.
Lack of discipline 🧘♂️
Successful trading requires discipline, but many traders struggle to stick to their plan. This can be especially challenging when the market is volatile or when a trader is going through a drawdown. Create a system for yourself that's easy to stay compliant with!
Over-trading 📊
Many traders make the mistake of over-trading, which means they take on too many trades and don't allow their trades to play out properly. This leads to increased risk, higher brokerage costs, and a greater likelihood of making losses. Clearly articulating setups you like can help separate good opportunities from the chaff.
Lack of a trading plan 📝
A trading plan provides a clear set of rules and guidelines to follow when taking trades. Without a plan, traders may make impulsive decisions, which can be dangerous and often lead to losses.
Not keeping up with important data and information ⏰
The market and its common narratives are constantly evolving, and it's important for traders to stay up-to-date with the latest developments in order to make informed decisions.
Not cutting losses quickly ✂️
No trader can avoid making losses completely, but the key is to minimize their impact on your account. One of the best ways to do this is to cut your losses quickly when a trade goes against you. However, many traders hold onto losing trades for too long, hoping that they will recover, and this can lead to larger-than-expected losses.
Not maximizing winners 💸
Just as it's important to cut your losses quickly, it's also important to maximize your winners. Many traders fail to do this, either because they don’t have a plan in place, telling them when and how to exit a trade. As a result, they may leave money on the table and miss out on potential profits.
Not Adapting 📚
Adapting to changing market conditions is paramount to success in the financial markets. Regimes change, trading edge disappears and reappears, and the systems underpinning everything are constantly in flux. One day a trading strategy is producing consistent profits, the next, it isn't. Traders need to adapt in order to make money over the long term, or they risk getting phased out of the market.
The majority of traders can improve their chances of success by educating themselves, developing a solid trading plan, planning out decisions beforehand, and avoiding common pitfalls.
I hope you enjoyed this post. Please feel free to write any additional tips or pieces of advice in the comments section below!
Happy learning. Cheers!
Rajat Kumar Singh (@johntradingwick)
Community Manager (India), TradingView
Risk-Reward ratioHey everyone!👋
Risk management is an essential part of successful trading as it helps in identifying, assessing, and mitigating potential risks that may arise from various factors such as volatility.
Whether you are a day trader, swing trader, or scalper, effective risk management can help you in protecting your capital, and minimising losses while maximizing potential profits.
Before we move ahead, please remember this is an educational post to help all of our members better understand concepts used in trading or investing. This in no way promotes a particular style of trading!
One of the key pillars of risk management is Risk-Reward (RR) ratio. Traders can use this concept for optimising their entries and exits.
📚 What is Risk-Reward ratio?
→ The RR ratio measures your potential risk to the potential loss for a given trade.
→ A Risk:Reward of 1:3 means that you are risking 1 point in order to gain 3 points.
→ Conversely, some traders like to visualise it as Reward:Risk, in which case, the same proportion is written as 3:1.
🔍 What's an ideal Risk-Reward ratio?
→ In general, some traders consider 1:2 or higher as a good RR ratio.
→ However, this is not written in stone and should not necessarily be taken at face value.
→ There is no “One-size-fits-all” approach. Different traders have different systems and winning rates.
→ The risk-reward ratio combined with the win rate determines a trader's profitability.
🚨 Risk-Reward versus Win rate %
For a trader to stay breakeven,
→ A low RR requires a higher winning rate
→ A high RR requires a lower winning rate
As evident from the above data, a trader using a higher RR with a low win rate can still be profitable.
Hence, traders must combine their winning rate with an optimal RR to reach their desired profitability target.
Need for a balanced approach
→ A high risk-reward ratio seems attractive because it allows traders to make more profit than they stand to lose.
→ Similarly, a low risk-reward seems less attractive because it gives less reward as compared to the risk.
Example: Buying the horizontal breakout (Higher risk, higher RR)
Example: Buying the horizontal breakout (Lower risk, lower RR)
Risk is subjective and no two traders have the same risk tolerance. Therefore, it is advisable to use a RR as per your own trading system and the winning rate so as to ensure that the potential reward justifies the potential risk.
Thanks for reading! As we mentioned before, this isn't trading advice, but rather information about a tool that many traders use. Hope this was helpful!
See you all next week. 🙂
– Team TradingView
Feel free to check us out on Instagram , and YouTube for more awesome content! 💘
My precious-s-s-s EPSIn the previous post , we began looking at the Income statement that the company publishes for each quarter and year. The report contains important information about different types of profits : gross profit, operating income, pretax income, and net income. Net income can serve both as a source of further investment in the business and as a source of dividend payments to shareholders (of course, if a majority of shareholders vote to pay dividends).
Now let's break down the types of stock on which dividends can be paid. There are only two: preferred stock and common stock . We know from my earlier post that a stock gives you the right to vote at a general meeting of shareholders, the right to receive dividends if the majority voted for them, and the right to part of the bankrupt company's assets if something is left after paying all debts to creditors.
So, this is all about common stock. But sometimes a company, along with its common stock, also issues so-called preferred stock.
What advantages do they have over common stock?
- They give priority rights to receive dividends. That is, if shareholders have decided to pay dividends, the owners of preferred shares must receive dividends, but the owners of common shares may be deprived because of the same decision of the shareholders.
- The company may provide for a fixed amount of dividend on preferred shares. That is, if the decision was made to pay a dividend, preferred stockholders will receive the fixed dividend that the company established when it issued the shares.
- If the company goes bankrupt, the assets that remain after the debts are paid are distributed to the preferred shareholders first, and then to the common shareholders.
In exchange for these privileges, the owners of such shares do not have the right to vote at the general meeting of shareholders. It should be said that preferred shares are not often issued, but they do exist in some companies. The specific rights of shareholders of preferred shares are prescribed in the founding documents of the company.
Now back to the income statement. Earlier we looked at the concept of net income. Since most investments are made in common stock, it would be useful to know what net income would remain if dividends were paid on preferred stock (I remind you: this depends on the decision of the majority of common stockholders). To do this, the income statement has the following line item:
- Net income available to common stockholders (Net income available to common stockholders = Net income - Dividends on preferred stock)
When it is calculated, the amount of dividends on preferred stock is subtracted from net income. This is the profit that can be used to pay dividends on common stock. However, shareholders may decide not to pay dividends and use the profits to further develop and grow the company. If they do so, they are acting as true investors.
I recall the investing formula from my earlier post : give something now to get more in the future . And so it is here. Instead of deciding to spend profits on dividends now, shareholders may decide to invest profits in the business and get more dividends in the future.
Earnings per share or EPS is used to understand how much net income there is per share. EPS is calculated very simply. As you can guess, all you have to do is divide the net income for the common stock by its number:
- EPS ( Earnings per share = Net income for common stock / Number of common shares issued).
There is an even more accurate measure that I use in my analysis, which is EPS Diluted or Diluted earnings per share :
- EPS Diluted ( Diluted earnings per share = Net income for common stock / (Number of common shares issued + Issuer stock options, etc.)).
What does "diluted" earnings mean, and when does it occur?
For example, to incentivize management to work efficiently, company executives may be offered bonuses not in monetary terms, but in shares that the company will issue in the future. In such a case, the staff would be interested in the stock price increase and would put more effort into achieving profit growth. These additional issues are called Employee stock options (or ESO ). Because the amount of these stock bonuses is known in advance, we can calculate diluted earnings per share. To do so, we divide the profit not by the current number of common shares already issued, but by the current number plus possible additional issues. Thus, this indicator shows a more accurate earnings-per-share figure, taking into account all dilutive factors.
The value of EPS or EPS Diluted is so significant for investors that if it does not meet their expectations or, on the contrary, exceeds them, the market may experience significant fluctuations in the share price. Therefore, it is always important to keep an eye on the EPS value.
In TradingView the EPS indicator as well as its forecasted value can be seen by clicking on the E button next to the timeline.
We will continue to discuss this topic in the next publication. See you soon!
Importance of Stoploss in TradingStop-loss is a risk management tool used by traders to limit their potential losses. It is an order placed with a broker to automatically sell or buy a security if it reaches a certain price level, known as the stop-loss level.
Here are some general guidelines on where to place stop-loss orders 👇
⚡ Support and Resistance Levels
A common approach is to place stop-loss orders at key levels of support or resistance. For example, if you are long in a stock, you may place your stop-loss order just below a support level. If the price falls below this level, it is an indication that the trend has changed and it's time to exit the trade.
⚡ Volatility
Another approach is to place stop-loss orders based on the volatility of the security. If a stock has high volatility, you may want to place your stop-loss order further away from the entry price to give it more room to move. Conversely, if a stock has low volatility, you may place your stop-loss order closer to the entry price. But you still need to give the stock enough room to breath in case of the latter.
⚡ Technical Indicators
Some traders use technical indicators to place stop-loss orders. For example, you may use the average true range (ATR) to set your stop-loss order. The ATR measures the average range of price movements, and you can set your stop-loss order at a multiple of the ATR.
Ultimately, where you place your stop-loss order will depend on your trading strategy, risk tolerance, and the specific security you are trading. It's important to have a clear plan for where to place your stop-loss order before entering a trade, as it can help you manage risk and avoid potentially large losses.
What are your thoughts on using stoploss and which method do you use? Do write in the comment section.
Trade safe and stay healthy.
Education About Bearish Rising WedgeHey there!
Lets Learn About bearish rising wedge
A bearish rising wedge is a chart pattern that often appears in the stock market and is seen as a bearish signal. It occurs when the price of a stock moves up and down, forming a wedge-like shape that is inclined upwards.
The pattern is considered bearish because it signals that the stock's upward momentum is losing steam, and that there may be a price decline in the near future. The pattern is formed when the stock's high and low prices move closer together over time, creating the wedge shape.
Investors and traders watch for this pattern as a sign that it may be time to sell their stock, or to short sell the stock, meaning to bet on a price decline. However, it's important to remember that a bearish rising wedge is not a guarantee of a price decline, and it's always wise to consider multiple indicators and factors before making any investment decisions.
Here in my example as we can see s and p 500 is forming bearish market structure and forming lower highs and lower lows.
In conclusion, a bearish rising wedge is a useful tool for investors and traders to keep an eye on, but it's only one of many factors that should be taken into consideration when making investment decisions like I used another indicator to confirm my analysis. So, keep an eye out for this pattern and stay informed, but always remember to do your own research and make informed decisions.
Bye Have a nice day
How to fail as a traderHey Everyone! 👋
Over the last few months, we've looked at a couple of the best ways to improve your trading, including learning to adjust to market conditions, building a proper trading mindset, and more. Today, we thought it would be fun to do the opposite. Instead of trying to help the community build up solid, professional trading practices, let's design a losing trader from the ground up! What attributes/decisions will we have to encourage to get a losing result?
Theoretically, the market is just a game of probabilities. How can we guarantee that our trader will lose? As it turns out, there are a couple of easy behaviours we can combine to ensure that a losing outcome is a foregone conclusion.
Number 1: They never define risk 🤷🏼♂️
In trading, people often say things about "Risk management" , "Defining your risk" or "Defining your out", but it can sometimes be difficult to determine, as a new trader, what the heck people are talking about. Define my risk? How? What are you talking about? What does this actually mean?
Put simply, defining your risk is figuring out *where* you are wrong on a trade/investment.
👉 For active traders, it can be as simple as picking a recent low or high and saying "If this price is hit, then I'm exiting the trade. The short-term read I had on this asset is no longer valid. I don't think I know what's going to happen next."
👉 For someone who is more of a position trader, it can be as simple as saying "I don't want to lose more than 10% (or some percent) of my capital at any point when I am in this position. I think that I have selected my entry well enough that a 10% drop (or x%) would mean that, for some reason or another, my thesis is no longer valid."
👉 From a cash management/portfolio management perspective, defining your risk has another dimension: How much of your total capital do you want to potentially lose in a worst-case scenario? Should each trade risk 50% of your capital? 20%? 5%? 1%? How much of your total bankroll will you lose before you stop?
In order to ensure that we have a losing trader, it's important that they don't have a plan for position sizing, setting stop losses, or setting account stop losses. This way, they won't have any consistency and will inevitably take a few big losses that knock the out of the game forever.
Number 2: They use lots of leverage 🍋
👉 When combined with Number 1, using lots of leverage is a great way to accelerate the process of losing money. Given that a strategy that wins 50% of the time will statistically face a 7-trade losing streak in the next 100 trades, sizing up and using leverage is a great way to ensure that when a rough patch strikes, you lose all your capital.
👉 Letting trades go past how much you expected to lose is a great way to speed this process because, with the addition of leverage, things only need to go against you 50%, 20%, 10%, etc, before you're wiped out. You can't risk to zero.
Considering that the most aggressive hedge funds in the world typically don't use an excess of 5-8x leverage, even in FX trading, we will need our losing trader to use at least 10-20x leverage in order to speed up their demise.
Number 3: They hop from strategy to strategy 🐰
Bruce lee once said, “I fear not the man who has practised 10,000 kicks once, but I fear the man who has practised one kick 10,000 times.”
👉 In this example, sticking to one strategy, even if suboptimal, is the man who has practised one kick many many times. The trader who strategy hops is the one who has tried almost every kick out there but mastered none. In order to ensure that our trader is a losing trader, we need to ensure that they never develop any mastery and keep switching from strategy to strategy.
👉 We need to constantly dangle a new strategy, indicator, or trading style constantly in front of our traders. Thus, no matter what strategy the trader picks, they will lack the hours necessary to have anything but suboptimal trade execution, poor overall market sense, and a general lack of nuance & understanding.
Combined with number 1 and number 2, it's going to be nearly impossible for this trader to be profitable.
--
So there you have it; 3 ways to ensure that the trader will fail. Recognize any of them?
Our hope in writing this is not to discourage anyone from getting involved in the markets, but rather to continually shine a light on some of the bad habits we can get into when starting out. Avoiding rookie mistakes and bad practices that can stunt a career as a trader & create bad habits!
Let us know if you enjoyed it, and we will continue to make more of these posts that go through some trading "best practices" .
Have a great week!
-Team TradingView ❤️
Do check us out on Instagram , and YouTube for more awesome content! 💘
How to select the Right Time Frame for Day Trading (Intraday) ?The selection of right time frame for day trading (Intraday) is a very subjective question and is frequently asked by the novice traders. The selection of the time frame depends on many parameters. But according to my experience it depends on mainly two parameters.
1. Stoploss
2. Signal strength of your trading strategy.
The time frame from 1 minute to 1 hour is best for day trading. Let us discuss these parameters in detail.
1. Stoploss: Each time frame has a different stoploss level. The higher time frame has a deep stoploss level as compared to the lower time frame. So, we have to select the time frame according to the stoploss or we can say that the right time frame depends on the amount of money you afford to lose in one trade . Before entering into the trade, check the stoploss for different time frames and then choose the time frame according to the bearable amount of money to lose in one trade.
2. Signal strength of your trading strategy: Whatever strategy you choose to trade, the entry and exit signals are always strong on the higher time frame as compared to the lower time frame because the lower time frames has high volatility as compared to the higher time frames. It means the success rate is high on the higher time frames as compared to the lower time frames.
Both of these parameters are directly proportional to each other. So, the selection of the time frame for day trading must depend on both of these parameters. We have to select the time frame on which our signal strength is good and also the comfortable amount of money which we afford to lose in one trade.
Thanks
Different Set-ups - Same OutcomeHi folks!
Often Traders like to think that their set-up or strategy is 'superior' that helps in identifying opportunities and put them on good trades better than other strategies employed by other traders. They vehemently defend their approach, their indicators and strategies. While some may put total faith in Fibonacci Sequences, others on RSI + MACD with Moving Average Cross overs while some others may vouch on Trend Lines and pure Price Action and nothing else, ... and it goes on.
In the chat rooms here on TradingView and elsewhere, I have seen raging discussions and disagreements over indicators and it has always amused me.
This simple example that I have shared should be an eye-opener to such traders. The fact is no strategy or set-up is superior or gives a definitive edge that another strategy does not. In the example, I only took a small number of 50 set-ups - but astute traders know that there are as many set-ups as there are traders!
With so many numerous technical indicators available today, we could show any number of examples of how one or a combination of the technical indicators would have found the opportunity in this example.
The bottom line is that it is indeed possible to spot opportunities using a variety of indicators in different ways. It's futile to debate "which indicator is the best".
As long as the method (with or without indicators) adopted by you is delivering results, that's all that matters to help you stay profitable and keep you happy.
Hope this might be of interest to some of you.
All the best to all.
PriceCatch
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The income statement: the place where profit livesToday we are going to look at the second of the three main reports that a company publishes during the earnings season, the income statement. Just like the balance sheet, it is published every quarter and year. This is how we can find out how much a company earns and how much it spends. The difference between revenues and expenses is called profit . I would like to highlight this term "profit" again, because there is a very strong correlation between the dynamics of the stock price and the profitability of the company.
Let's take a look at the stock price charts of companies that are profitable and those that are unprofitable.
3 charts of unprofitable :
3 charts of profitable :
As we can see, stocks of unprofitable companies have a hard enough time growing, while profitable companies, on the contrary, are getting fundamental support to grow their stocks. We know from the previous post that a company's Equity grows due to Retained Earnings. And if Equity grows, so do Assets. Recall: Assets are equal to the sum of a company's Equity and Liabilities. Thus, growing Assets, like a winch attached to a strong tree, pull our machine (= stock price) higher and higher. This is, of course, a simplified example, but it still helps to realize that a company's financial performance directly affects its value.
Now let's look at how earnings are calculated in the income statement. The general principle is this: if we subtract all expenses from revenue, we get profit . Revenue is calculated quite simply - it is the sum of all goods and services sold over a period (a quarter or a year). But expenses are different, so in the income statement we will see one item called "Total revenue" and many items of expenses. These expenses are deducted from revenue gradually (top-down). That is, we don't add up all the expenses and then subtract the total expenses from the revenue - no. We deduct each expense item individually. So at each step of this subtraction, we get different kinds of profit : gross profit, operating income, pretax income, net income. So let's look at the report itself.
- Total revenue
This is, as we've already determined, the sum of all goods and services sold for the period. Or you could put it another way: this is all the money the company received from sales over a period of time. Let me say right off the bat that all of the numbers in this report are counted for a specific period. In the quarterly report, the period, respectively, is 1 quarter, and in the annual report, it is 1 year.
Remember my comparison of the balance sheet with the photo ? When we analyze the balance sheet, we see a photo (data snapshot) on the last day of the reporting period, but not so in the income statement. There we see the accumulated amounts for a specific period (i.e. from the beginning of the reporting quarter to the end of that quarter or from the beginning of the reporting year to the end of that year).
- Cost of goods sold
Since materials and other components are used to make products, accountants calculate the amount of costs directly related to the production of products and place them in this item. For example, the cost of raw materials for making shoes would fall into this item, but the cost of salaries for the accountant who works for that company would not. You could say that these costs are costs that are directly related to the quantity of goods produced.
- Gross profit (Gross profit = Total revenue - Cost of goods sold)
If we subtract the cost of goods sold from the total revenue, we get gross profit.
- Operating expenses (Operating expenses are costs that are not part of the cost of production)
Operating expenses include fixed costs that have little or no relation to the amount of output. These may include rental payments, staff salaries, office support costs, advertising costs, and so on.
- Operating income (Operating income = Gross profit - Operating expenses)
If we subtract operating expenses from gross profit, we get operating income. Or you can calculate it this way: Operating income = Total revenue - Cost of goods sold - Operating expenses.
- Non-operating income (this item includes all income and expenses that are not related to regular business operations)
It is interesting, that despite its name, non-operating income and operating income can have negative values. For this to happen, it is sufficient that the corresponding expenses exceed the income. This is a clear demonstration of how businessmen revere profit and income, but avoid the word "loss" in every possible way. Apparently, a negative operating income sounds better. Below is a look at two popular components of non-operating income.
- Interest expense
This is the interest the company pays on loans.
- Unusual income/expense
This item includes unusual income minus unusual expenses. "Unusual" means not repeated in the course of regular activities. Let's say you put up a statue of the company's founder - that's an unusual expense. And if it was already there, and it was sold, that's unusual income.
- Pretax income (Pretax income = Operating income + Non-operating income)
If we add or subtract (depending on whether it is negative or positive) non-operating income to operating income, we get pretax income.
- Income tax
Income tax reduces our profit by the tax rate.
- Net income (Net income = Pretax income - Income tax)
Here we get to the income from which expenses are no longer deducted. That is why it is called "net". It is the bottom line of any company's performance over a period. Net income can be positive or negative. If it's positive, it's good news for investors, because it can go either to pay dividends or to further develop the company and increase profits.
This concludes part one of my series of posts on the Income statement. In the next parts, we'll break down how net income is distributed to holders of different types of stock: preferred and common. See you soon!
At the beginning was the EquityWith this post, I am concluding the analysis of the company's balance sheet. You can read the previous parts here:
Part 1 - Balance sheet: taking the first steps
Part 2 - Assets I prioritize
Part 3 - A sense of debt
Now we know that every company has assets on one side of the balance sheet and liabilities and equity on the other side. If you add liabilities and equity together you get the sum of assets. And vice versa, if you subtract all of the company's liabilities from the assets, you get what? That's right, you get Equity . Let's discuss this important component of the balance sheet.
When a company is first established, it must have initial equity. This is the money with which any business starts. It is used for the first expenses of the new company. In the case of our workshop , the equity was the master's savings, with which he bought the garage, equipment, raw materials and other assets to start his business. As sales progressed, the workshop received the revenue and reimbursed expenses. Whatever was left over was used to boost the company's profit. So, our master invested his capital in the business to increase it through profits.
Making a profit is the main purpose for which the company's assets work, loans are raised, and equity is invested.
Let's see which balance sheet items are in the Equity group:
- Common stock (The sum of nominal values of common stock issued). Remember, when our master decided to turn his company into a stock company , he issued 1 million shares at a price of $1,000 per share. So $1,000 per share is the par value of the stock. And the sum of the nominal values of the stocks issued would be $1 billion.
- Retained earnings . It is clear from the name of this item that it contains profits that have not been distributed. We will find out where it can be allocated in the next post, when we start analyzing the income statement.
- Accumulated other comprehensive income (Profit or loss on open investments). The profit or loss of a company can be not only from its core business, but also, for example, from the rise or fall in the value of other companies' shares that it bought. In our example, the workshop has oil company shares. The financial result from the revaluation of these shares is recorded in this item.
So, the equity is necessary for the company to invest it in the business and make a profit. Then the retained earnings themselves become equity, which is reinvested to make even more profits. It's a continuous cycle of the company's life that bets on equity growth.
Which balance sheet items are of interest to me in the Equity group? Of course, I am interested in the profit-related items: retained earnings and profit or loss on open investments. The sum of nominal share values is a static indicator, so it can hardly tell us anything.
However, it is better to use information from the income statement rather than the balance sheet to analyze earnings, because only this report allows us to see the entire structure of a company's income and expenses.
So we conclude the general analysis of a company's balance sheet. To fully understand why it is needed, let's engage our imagination once again. Do you remember the example with the hotel ? We imagined that a joint stock company is a hotel with identical rooms, where you, as an investor, can buy a certain number of rooms (one room = one share). Think about what you would want to look at first before buying? Personally, I'd rather see photos of the rooms.
So, the balance sheet can be compared to such photos that we get from the hotel at quarterly and annual intervals. Of course, in such a case, the hotel will try to use special effects as much as possible in order to improve investors' impression of the photos released. However, if we track and compare photos over multiple periods, we can still understand: is our hotel evolving, or have we been watching the same couch in a standard room for 10 years in a row.
We can say that the balance sheet is a "photo" of the company's assets, debts and equity at the balance sheet date. And the balance sheet items I've chosen are what I look at first in this photo.
In the next series of posts, we will break down an equally important report, the income statement, and explore the essence of earnings. See you soon!
I rarely use stoploss, I'm a day traderso, what I do to cover my risk
if I am buying/selling stocks- I used to do this in delivery not in "MIS" so while buying a stock, I use to put a sell order a few paise/rupees below the ordered price depending on stock price in MIS
as I follow my charts, after a good analysis decides direction and entry point, but it may happen that the price takes some time while moving up or there may be stoploss hunting
so, if price moves down, my sell order activates in "MIS" , means my both orders running simultaneously, my loss is only the price difference in both order
there are 3 possibilities now
1. price start moving up- than I exist from my sell order and continues with buy order even add some more quantity as price is again breaking my level now there is better possibility that price will start upward journey after a retesting
2. price is moving in a range - I have option to wait for the price movement when price breaks out, close my sell position
3. my direction was wrong- so I can close my buy order and go with my sell order, and even add some more quantity in sell order
in trading I have many lines on my charts which works as resistance and support so there is possibility that after reaching my resistance level there may be a pull back or retracement in 5m/15m time frame
here, I use my sell order as a "profit saver", I apply sell order at that level and when price again starts moving up after reaching support, I closes my sell order, that's way I earn something in retracement also
and if possible, add fresh order at lower price
i use to trail my sell/or buy order as per the condition
this is the best way of averaging, and I am never in any tension about price movement whatever happens, I am not losing my investment, well difference of my buy order price and sell order price is my insurance cost
even with completely wrong decision I always have an opportunity to make some profit from losing trade
Not good in English but trying to put my way of hedging because to become a successful trader we must save our capital, in stock market it is not capital which earn you profit, it is your profit which help you earn handsomely. If we are on losing side
it effects our psychology most and we are not able to hold our winning trade or sticks to our losing trade or we are not able to book our profit at the right time hoping for bigger gain to cover loss as soon as possible. in low score games even strong teams
can't defend the target.
This method is applicable in F&O, Currency, Commodity also but in F&O selling requires a big margin might not be possible for all. so we can put a sell order one strike down, it works nicely from Friday to Tuesday as there not
much decay in premium, your day loss would be around 500 Rs if u put sell order 10 rs back in below strike for a lot and not find a support in whole day from where price is moving 10 points in reverse direction
conversely, buy order could be placed as a hedge in downward movement
Hope this will help u in your trading, and you will become a successful trader.
OM Vats
@vatsom003
Introduction to market structureHey everyone!👋
In this article, we'll dive into market structure, providing insightful examples to enhance your understanding of this concept.
Please remember this is an educational post to help all of our members better understand concepts used in trading or investing. This in no way promotes a particular style of trading!
Market structure is a basic form of understanding how markets move. It can be seen as the flow of the price between a series of swing highs and swing lows.
The market moves in trends. These trends are nothing but a combination of different structures.
The market structure allows you to be in sync with the market and avoid counter-trend trading, which enhances the probability of your setups.
There are broadly 3 types of structures:
1. Bullish (Uptrend)
2. Bearish (Downtrend)
3. Ranging (Sideways)
Illustration: Bullish market structure
Illustration: Bearish market structure
Illustration: Range market structure
📈 What is an uptrend?
✅ Characterised by a bullish market structure.
✅ Formation of higher highs followed by higher lows.
✅ For an uptrend to stay intact, it must preserve its ascending structure - higher highs must follow higher lows.
✅ Lower highs are allowed if the price goes into compression or re-accumulation.
📉 What is a downtrend?
✅ Characterised by a bearish market structure.
✅ Formation of lower highs followed by lower lows.
✅ For a downtrend to stay intact, it must preserve its descending structure - lower highs must follow lower lows.
✅ Lower highs are allowed if the price goes into compression or re-distribution.
⚡ What is a range?
✅ A range is a zone where the price finds itself bouncing between two levels.
✅ These levels are - range high and range low.
✅ The size of the range is dependent on different factors such as asset class, demand-supply, volatility, etc.
A lot of times, the structure won’t be as clear as you want it to be. Conversely, sometimes the structure will replicate the textbook. Hence, you need to be flexible in your approach.
Sometimes, trading in range-bound markets can be challenging due to the choppiness in price movements. However, when the price action is more defined, some traders may prefer to trade the range by executing breakout trades or mean reversion trades from the range high to the range low or vice versa.
It is better to combine market structure with other concepts/indicators for better results.
Thanks for reading! As we mentioned before, this isn't trading advice, but rather information about a tool that many traders use. Hope this was helpful!
See you all next week. 🙂
– Team TradingView
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What a professional trader think. ?For every trade we have a reason, when the trade works, we naturally think our reason was right but here is a catch, there is no way to determine the intentions of all traders. Yet the typical trader executes his methodology as if he is being told what those intentions are the professionals does not. Disconnect any reason from the results of a trade because it is impossible to get an exact reason why the trade worked or failed. Many will disagree with me on this but believe me there are traders (Mota Bhais) even a single order from them can drag a shooting price down back to floor or even hell, and they to do it occasionally. Just see the past charts you will get what I am trying to say.
Prices are random guys, yes believe me or not it applies to every trade you take.
Let me ask you a question.
What trading skills required to experience a winning trade.?
- Do you need an edge.?
- Do you need a plan.?
- Do you need the discipline to execute the plan.?
- Do you need a good reason to enter a trade.?
Answer: Nothing just a click of your mouse, yes that's it.
but what if you want it to make your consistent source of income.?
Now here comes the difference only few traders get those correct belief system which keep them above others.
Pro trader belief
1) On a random outcome, I do not have to know what is going to happen next.
2) There is a random distribution between wins and losses.
3) There is no point to find a reason why price movement happened, it is the task of media let them take care of that.
4) There is no connection of my last trade to the current one, so it is very foolish to trade for loss recovery. There is nothing like loss recovery, every trade is unique.
5) On a particular trade I can fail or win but I have to think with a large number of trades, on overall profitability, over a long term.
6) My work is to execute the plan with full efficiency rest is not in my hand.
7) I do not predict price move it is not my task I focus on process.
Nobody wants to Chang the way they think. I am also not telling you to make a v curve you just need to adjust something within, and everything get sorted by itself.
Thanks for reading this out.
We are just 35% up from 2008 high To understand the Dollex, let us take a hypothetical situation. Assume that the Sensex was at 40,000 in January and has now grown to 50,000 in December. That is a phenomenal 25% appreciation in the Sensex and if you are an Indian investor you would be extremely happy. However, if you are a foreign portfolio investor or FPI, you also worry about the rupee/dollar exchange rate. That is because, for the foreign investor to realize the 25% gains on the Nifty, the rupee must have remained stable. However, if during this period the rupee had depreciated by 15% from Rs.70/$ to Rs.80.50/$, then the returns of the foreign investor would have been substantially lower. This currency impact is captured by the Dollex.
Now let us use this example to understand what is Dollex? The Dollex captures these dollar-adjusted returns. Let us break up the above illustration. In the above case, Sensex returns would be 25% {(50,000-40,000) / 40,000}. That is quite straight forward and that is the returns that your Sensex would show. Here is how Dollex would be calculated. Dollar infusion in January = 40,000/70 = $571.43. At the time of redemption, it is 50,000/80.50 =$621.12. In this case, the Dollex Returns would be 621.12/571.43 = 8.7%. That is a tad shocking. How did 25% returns become just 8.7%? That is because during this interim period, the rupee had depreciated by 15% resulting in the dollar returns reducing substantially. This dollar impact is captured by the Dollex. We shall look at the S&P BSE Dollex 30 in greater detail.
What are ratios to analyse any banking stocksHAPPY REPUBLIC DAY 🇮🇳
Today we will study ratios for analysing any banking/ non- banking stock.
Key Ratios are -
1. Net Interest Margin (NIM)
2. Provision Non Performing Assets (PNPA)
3. Loan to Assets Ratio
4. Return on Assets Ratio (ROA)
5. Capital Adequacy Ratio
6. Gross NPA
7. Net NPA
8. CASA Ratio
9. Cost to Income ratio
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1. Net Interest Margin (NIM)
1. Net Interest Margin = ( Investment Income –
Interest Expenses ) / Average Earning Assets.
2. Positive Net Interest Margin shows that bank is earning more money in the form of interest than its cost of funding investments.
3. There are several factors that affect bank NIM. One of the most significant is interest rates. When interest rates are high, banks are able to earn more from loans and investments, which increases their NIM. When interest rates low, banks earning will loans and investments decrease, which lead lower NIM.
4. In summary, Net Interest Margin is important measure of bank's profitability and its ability to generate income from its existing assets. NIM is affected by interest rates and competition. Banks with a high NIM are generally considered strong financial position and better to grow and invest in new opportunities.
Let's look at example
Bank in India has total assets of ₹1,00,000 crore consist of loans and investments. The bank has total deposits of ₹80,000 crore and it pays interest rate of 4% on savings accounts and 6% on Fix Deposit The bank total interest income for the period is ₹2,400 crore which is earned by loans and investments. The bank total interest expense for period is ₹1,600 crore, which is paid to depositors.
To check the NIM we take the bank net interest income (NII) of ₹800 crore (₹2,400 crore in interest income - ₹1,600 crore interest expense) and divide by the bank average earning assets of ₹90,000 crore (average of total assets and total deposits).
NIM = NII / Average Earning Assets
NIM = ₹800 crore / ₹90,000 crore
NIM = 0.89%
Bank NIM is 0.89% every ₹100 of assets the bank is earning ₹0.89 of net interest income. This NIM is a measure of the bank efficiency in generating income from assets and can be used to compare it with other banks and over time.
NIM in India will be lower than developed countries due to lower lending rates and high competition among bank.
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2. Provision Non Performing Assets (PNPA)
1. An asset, including a leased asset, becomes non performing when it ceases to generate income for the bank.
2. Provision for Non Performing Assets (NPA). The amount keep aside by bank, to cover it's potential losses from loans and other credit related assets that have been non performing.These provisions are made when a bank expects that some of its borrowers will default on their loans, and the bank needs to set aside funds to cover the potential loss.
3. In summary, Provision for Non Performing Assets (NPA) Banks are required to make provisions for NPA on a regular basis, quarterly basis, amount of provisions is disclosed in the financial statements. Provision for NPA is an important measure of a bank's financial health, Help bank to absorb the impact of loan defaults and manage credit risk.
Provisions for NPA is closely watched by investors, analysts, and regulators, it helps them to assess the bank's credit risk.
Let's look at example
Bank total loans of ₹50,000 crore. ₹2,000 crore classified Non performing Assets (NPA) borrowers defaulted their payments more than 90 days. Bank required to set aside certain percentage of the NPA loans as PNPA as per the Reserve Bank of India's guidelines. The current PNPA provisioning ratio is 15%.
To get PNPA we multiply the NPA loans of ₹2,000 crore with the PNPA provisioning ratio of 15%.
PNPA = NPA loans x PNPA provisioning ratio
PNPA = INR 2,000 crore x 15%
PNPA = INR 300 crore
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3. Loan to Assets Ratio
1. Loan to Assets ratio can help investors obtain complete analysis of bank's operations. Banks that have relatively higher Loan to Assets ratio banks with lower levels of Loan to Assets ratios derive a relatively larger portion of their total incomes from more diversified, noninterest earning sources, such as asset management or trading. Banks with lower Loan to Assets ratios may fare better when interest rates are low or credit is tight.
2. In summary, Loan to Asset ratio is financial metric compares bank total loans to total assets. It's used to measure bank leverage assess the level of risk associated with lending activities. Higher Loan to Assets ratio indicates that a bank is more heavily reliant on lending and is more leveraged and risky, while a lower ratio indicates that the bank is less risky.
Let's look at example
Bank has total assets ₹1,00,000 crore, total loans ₹70,000 crore. to get Loan to Assets Ratio we divide the total loans by the total assets.
Loan to Asset Ratio = Total Loans / Total Assets
Loan to Asset Ratio = ₹70,000 crore / ₹1,00,000 crore. Loan to Asset Ratio = 0.7.
Bank's Loan to Assets Ratio is 0.7 / 70% (0.7*100) bank assets in form of loans. A higher Ratio indicates that bank is heavily invested in lending activities, which can be sign of more aggressive lending strategy. it's also increases the risk of default. Than higher risk of NPA. Banks required to maintain minimum level of Capital Adequacy Ratio as per the Reserve Bank of India's (RBI) guidelines.
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4. Return on Assets Ratio (ROA)
1. Return on Assets = Net Income / Total Assets
2. The higher ratio means assets are well managed and low ratio means resources didn't used effectively compared to the industry and competitors.
3. In summary, ROA is financial ratio measures profitability of company in relation to total assets. It is calculated by dividing the company's
net income by its total assets. This ratio is useful to compare the performance of company with its peers in the same industry. It is an important metric used to evaluate a company's overall efficiency and performance but it's important to keep in mind that high ROA not necessarily mean that company have strong financial position.
Let's look at example
Bank has total assets of ₹100 billion and net income of ₹5 billion. To get ROA we divide the net income by total assets.
ROA = Net Income / Total Assets
ROA = ₹5 billion / ₹100 billion
ROA = 0.05 or 5%.
Bank ROA is 5% For every ₹100 billion of assets, the bank generates ₹5 billion of net income. Higher ROA show that bank is profitable and efficient in utilizing assets. It's important to note this ratio is sensitive to the size of the bank It's better to compare the ROA of a bank with other banks of similar size.
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5. Capital Adequacy Ratio
1. The Capital Adequacy Ratio helps make sure banks have enough capital to protect depositors money.
2. Banks are required to maintain a certain level of Capital Adequacy Ratio as per the regulations set by central bank to ensure that they have sufficient capital to meet the potential losses and continue their operations even in adverse situations.
3. It helps maintain the stability of the financial system by ensuring that banks can withstand in unexpected situation.
Let's look at example
In India, the Reserve Bank of India (RBI) sets the minimum Capital Adequacy Ratio for banks at 9%. which means that they must hold capital worth at least 9% of their total risk-weighted assets.
Bank in India with total assets of ₹100 billion and risk-weighted assets of ₹80 billion must maintain minimum capital of ₹7.2 billion (9% of ₹80 billion) to meet the Capital Adequacy Ratio requirement set by the RBI.
It's important to note that, the Banks with a higher Capital Adequacy Ratio are considered to have a better ability to absorb unexpected losses.
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6. Gross NPA
1. Gross Non Performing Assets (GNPA) is refer to the total value of loans or advances that have been classified as Non Performing Assets. These are loans or advances the borrower has defaulted on repayment or interest for certain time. loan is classified as an NPA if the borrower has not made any payment for period of 90 days or more.
2. A high ratio of GNPA to total loans indicates a higher level of credit risk and potentially weaker financial condition for the bank.
Let's look at example
Bank has total loans of ₹100 billion and ₹20 billion are classified Non Performing Assets (NPA). The bank Gross Non Performing Assets (GNPA) would be INR 20 billion.
we see the ratio of GNPA to total loans we get 0.2 (₹20 billion / ₹100 billion). This ratio of 20% indicates that 20% of the bank loans are classified as NPA. This high ratio may indicate the bank is facing high level of credit risk it could be cause for concern.
It's important to note that Gross NPA ratio is used in conjunction with other financial indicators to understand overall financial health of bank and single indicator may not enough to make a conclusion.
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7. Net NPA
1. Any financial security owned by a bank is considered an asset. The interest we pay on loans is the primary source of income for banks these loans are classified as assets for bank's.
when borrowers can't repay the amount these assets are classified as Non Performing Assets (NPA) because they are not generating any income for the bank's.
2.If loan provided by bank is overdue more than 90 days from the borrower end comes under NPA. If loan amount is unpaid more than 1 year from due date then it's a doubtful debt and if it’s unpaid more than 3 years then loss of an asset or default account.
Net Non-Performing Asset = Gross NPA – Provisions.
Gross NPA = Total Gross NPA/Total Loans given.
Impact of NPA
Due to higher NPA rates, banks will suffer significant revenue losses that will potentially affect their brand image. insufficient funds, banks will have to increase the interest rates on loans to maintain their profit margin.
Let's look at example
Bank has total loans of ₹100 billion and ₹20 billion are classified as Non Performing Assets (NPA). The bank is required to make provisions for ₹10 billion against these NPA. The bank Gross Non-Performing Assets (GNPA) would be ₹20 billion and Net Non Performing Assets (Net NPA) would be ₹10 billion (₹20 billion - ₹10 billion).
If we see the ratio of Net NPA to total loans we get 0.1 (INR 10 billion / INR 100 billion). This ratio of 10% indicates that 10% of the bank's loans classified as NPA after making necessary provisioning. This ratio gives a clearer picture of bank's financial health than just Gross NPA ratio as it takes into account the provisions made against NPA.
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8. CASA Ratio
1. CASA (Current Account and Saving Account) it is measure the proportion of bank deposits that are in the form of current and savings accounts.
2. The ratio is calculated by dividing the total value of current and savings account deposits by the total deposits. It is typically expressed as percentage. Higher CASA ratio indicates that bank have larger proportion of stable deposits. This is because banks can use these deposits to fund their lending activities at a lower cost which improves bank's net interest margin.
Let's look at example
Bank has total deposits of ₹200 billion and ₹150 billion in form of current and savings accounts. The bank CASA ratio would be 75%.
This ratio indicates that three fourth of the bank deposits are in the form of current and savings accounts which are considered the stable form of deposits. This high ratio is considered positive sign. Stable deposits can used to fund lending activities lower cost.
High CASA ratio the bank will have access to cheaper funding which will improve it's net interest margin. This means that the bank will be able to offer loans at a lower rate of interest. which will make it more competitive in the market and attract more customers. And bank will also have more stable funding which will make it less vulnerable to market fluctuations and interest rate changes.
Asset quality, capital adequacy play important roles in assessing a bank's overall financial condition.
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9. Cost to Income ratio
1. Cost to Income Ratio (CIR) measure company efficiency by comparing it's operating expenses to it's revenue. calculated by dividing the total operating expenses by the total revenue and expressed in percentage.
2. Lower (CIR) indicates that company more efficient in managing expenses and able to generate more income for every unit of expenses. while higher (CIR) indicates that company less efficient in managing it's expenses and is generating less income for every unit of expenses.
Let's look at example
Bank A with a high CIR.
Bank has total operating expenses of ₹10 billion and total revenue of ₹15 billion. The bank's CIR is 67% (₹10 billion / ₹15 billion). High CIR indicates that the bank is not very efficient in managing its expenses and is generating less income for every unit of expenses. The bank may need to review its cost structure and implement measures to reduce expenses in order to increase its efficiency and profitability.
Bank B with a low CIR:
A bank has total operating expenses of ₹5 billion and total revenue of ₹15 billion. The bank CIR is 33% (₹5 billion / ₹15 billion). This low CIR indicates that the bank is efficient in managing its expenses and is able to generate more income for every unit of expenses. The bank able to invest in growth opportunities and increase profitability.
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