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
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Community ideas
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!
Proximal and Distal Line Plotting For Supply and Demand ZonesProximal and Distal lines are important components of any Supply and Demand zone. One needs to plot two horizontal lines to mark Supply and Demand Zones. To know How to draw these lines, you need to understand Supply and Demand Zone formations.
Proximity means nearest to the current price, while distal means farthest from the current price.
What is the need to draw Proximal and Distal lines on a zone?
As a Supply and Demand trader, one needs to know which price point to enter and where to exit.
The proximal line is used to define the entry point into a trade, and the Distal line defines the Stopping Point. We place our stop losses slightly beyond the distal lines of the zones.
Have a look at the above image
Supply zones are located above the current market price and Demand zones are located below the current market price.
In the illustration above, CMP is Rs.1668.3
The green-shaded zone below CMP is the Demand zone. It has two horizontal lines one at Rs.1607.65 which is nearer to the current price, and it forms the proximal line, whereas the other horizontal line is at Rs.1588.75 which is far away as compared to Rs.1607.65, so it constitutes the distal line of the demand zone
The pink-shaded zone above CMP is the Supply zone. It has two horizontal lines one at Rs.1688 which is nearer to the current price, and it forms the proximal line, whereas the other horizontal line is at Rs.1702.4 which is far away as compared to Rs.1688, so it constitutes the distal line of Supply zone.
How to Draw Proximal and Distal Lines for a Demand Zone
A Demand zone is a designated area on a chart where Demand exceeds Supply, and there is a high likelihood of having pending Institutional Buy Orders. We look to enter long trades when the price retraces back to the demand zone, in doing so we also participate along with the Institutions which increases the probability of the trade working in our favour. So it's important to correctly identify the Proximal line and Distal line of a Demand Zone. Let u see how to mark the Proximal and Distal line of a Demand Zone
Proximal Line Marking For A Demand Zone
Irrespective of whether it’s a DBR or RBR Demand zone, the proximal line marking method remains the same. There are multiple ways to mark proximal lines, I will discuss the one that I follow and is widely used. While marking the proximal line we look at only the Base Candles, Proximal line is plotted at the Highest Wick of the base candles.
Distal Line Marking For A Demand Zone
There is a slight variation while marking distal lines, depending upon whether it’s a DBR or RBR Demand Zone
Distal Line For DBR Demand Zone
We need to consider all three components, Leg In, Base Candles & Leg Out. The distal line is plotted at the lowest point of the entire formation.
Distal Line For RBR Demand Zone
We need to ignore the Leg In and focus only on the Base candles and the Leg Out. The distal line is plotted at the lowest point of either the Base candles or the Leg Out, whichever is lower.
How to Draw Proximal and Distal Lines for a Supply Zone
A Supply zone is a designated area on a chart where Supply exceeds Demand, and there is a high likelihood of having pending Institutional Sell Orders. We look to enter Short trades when the price retraces back to the supply zone, in doing so we also participate along with the Institutions which increases the probability of the trade working on our favour. So it's important to correctly identify the Proximal line and Distal line of a Supply Zone. Let u see how to mark the Proximal and Distal lines of a Supply Zone
Proximal Line Marking For A Supply Zone
Irrespective of whether it’s an RBD or DBD Supply zone, the proximal line marking method remains the same. There are multiple ways to mark proximal lines, I will discuss the one that I follow and is widely used. While marking the proximal line we look at only the Base Candles, Proximal line is plotted at the Lowest Wick of the base candles.
Distal Line Marking For A Supply Zone
There is a slight variation while marking distal lines, depending upon whether it’s an RBD or DBD Supply Zone
Distal Line For RBD Supply Zone
We need to consider all three components, Leg In, Base Candles & Leg Out. Distal line is plotted at the highest point of the entire formation.
Distal Line For DBD Supply Zone
We need to ignore the Leg In, focus only on the Base candles and the Leg Out. Distal line is plotted at the Highest point of either the Base candles or the Leg Out, whichever is Higher.
Conclusion
In conclusion, the Proximal and Distal lines are critical components of the Supply and Demand Trading Strategy. Knowing how to properly place them is essential for the correct identification of zones. Supply and Demand Zone formations when combined with other factors like Trend, Location, and Quality attributes of the zone form a very sound rule-based Price Action Trading Strategy.
Curve Pattern , an examplePublishing herewith an example of curve pattern using bitcoin day chart will give some more example using other type of investments also
Price and patterns, 14.02.2023Publishing herewith my idea about relation of price with patterns using nifty 50 15 minute chart
this is the basic of technical analysis where many tools are used to gauge the market along with indicators
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.
Circular patterns Publishing herewith my idea about circular patterns for education purpose
i use these patterns in my everyday analysis and getting excellent results
circular pattern helps me in finding the resistance and support levels in advance
curve pattern is my friend i use it to find high growth trade and also a very quick trade up/down
i mostly use it in 1 minute time frame to find a very fast trade, actually always in look for this pattern in every time frame
OM VATS
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
bollinger band educational postBollinger Bands are a type of technical analysis indicator that are used to measure the volatility of a financial instrument. They are plotted two standard deviations away from a moving average, which serves as a measure of the instrument's midpoint. The bands are plotted on a chart, usually alongside the price action of the financial instrument being analyzed.
The upper Bollinger Band is plotted at the level of the moving average plus two standard deviations, while the lower Bollinger Band is plotted at the level of the moving average minus two standard deviations. If the price action of the financial instrument moves away from the moving average, it is considered a signal of increased volatility.
Bollinger Bands are used by traders and investors to identify potential buy and sell signals. For example, if the price of a stock moves to the upper Bollinger Band, it is often considered overbought and a potential sell signal, while if the price moves to the lower Bollinger Band, it is considered oversold and a potential buy signal.
It is important to note that Bollinger Bands are just one of many technical analysis tools, and they should be used in conjunction with other indicators and fundamental analysis to make informed trading decisions.
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! 💘
Adani's Dead Cat Bounce: Navigating Volatility of the MarketsThe recent resurgence in Adani's stock price has been a source of fascination for many investors, as the company's shares have experienced a "V-shaped recovery" after a huge sell-off. This sudden increase in stock prices is commonly referred to as a "dead cat bounce," and it's a phenomenon that has been observed many times in the stock market. But what exactly is a dead cat bounce, and why does it occur?
A dead cat bounce is a term used to describe a sudden and temporary increase in the price of a stock that has been declining for a long period of time. This phenomenon is often seen after a large sell-off, as investors who were previously bearish on the stock suddenly become optimistic and start buying shares again. This can cause a brief rebound in the stock's price, but it's important to note that this is typically a short-lived event, and the stock will soon resume its downward trajectory.
So why does a dead cat bounce occur? There are a number of factors that can contribute to this phenomenon, including short-term market optimism, rumors of a takeover or merger, or a change in investor sentiment. In the case of Adani, the company's recent resurgence can be attributed to the Hindenburg Research fiasco, which saw the company's shares decline significantly in the face of negative rumors and allegations.
However, after the dust settled, investors began to see the value in Adani's operations and started buying shares again. This sudden increase in demand for Adani's stock led to a rapid rebound in the company's stock price, and the company's shares have doubled in just one week.
It's important to remember that a dead cat bounce is not a sign of a company's long-term health or prospects. Rather, it's a temporary phenomenon that occurs when investors become optimistic about a stock's future for a short period of time. In the case of Adani, the company's recent rebound in stock prices is a reminder that the stock market can be a fickle beast, and that it's important for investors to do their research and assess the long-term prospects of a company before investing.
In conclusion, the recent resurgence in Adani's stock price is a classic example of a dead cat bounce. While it's tempting to get caught up in the excitement of a sudden increase in stock prices, it's important to remember that this is typically a short-lived event, and that a company's long-term prospects should be the focus of any investment decision.
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
Basics of Elliot Waves.Hello Traders!
1. Today, we will discuss the basic market movement structure, elliotically . A recent comment on one of my ideas published pointed (indirectly) towards the need for a basic understanding of Elliot Waves for the general trading public.
2. The market moves in consistent impulsive and corrective structures . Waves 1, 2, 3, 4, and 5 together form the 1st Impulsive structure of the market. Waves A, B, and C together form the next Corrective structure of the market.
What is an Impulsive Structure ? These are patterns that occur in the direction of the trend. A movement consisting of 5 smaller cycle waves and following certain set rules/guidelines set by Elliot; Wave 2 never retraces more than 100%, Wave 3 is never the shortest, & Wave 4 does not enter the price territory of Wave 1. The 3rd rule is at times compromised and that should be up for discussion some other day. More rules exist but are not required for the basic understanding of the markets.
What is a Corrective Structure ? We will put this very vaguely. Whatever is not impulsive, is corrective, in laymen's terms.
3. Let's address the Impulsive structure .
Waves 1, 3, and 5 are impulsive waves within the impulsive structure. Waves 2 and 4 of this impulsive structure stand to be corrective. Waves 1, 3, and 5 consist of 5 waves each. Waves 2 and 4 consist of 3 waves each.
4. Now we'll address the next Corrective structure . Wave A and C of this structure are impulsive whereas Wave B is of corrective nature.
Waves in the corrective structure are very interesting. Wave A can at times consist of 5 waves as well as 3, even though impulsive, and can also be a diagonal. Wave B can sometimes contain 5 waves, when in a form of a triangle, even though corrective. Wave C always has only 5 waves and can be a diagonal as well. The corrective waves are a whole lot more complicated and require a vigorous understanding of the structures.
5. Every wave structure is part of a larger wave structure on a larger timeframe. 5 impulsive, 3 corrective waves of the smallest cycle; which will form Waves 1 and 2 of a larger cycle. Then these two waves along with 3, 4, 5, and the next correction set, will form the 1st and 2nd waves of an even larger cycle. This is how our final wave structure (basic) would look like.
The world moves in harmony with progression and recession. And so do the markets. All they need is an observer. Be one.
Happy observing!
Profits,
Market's Mechanic.
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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!
Unlocking Secrets of Booming Hotel Industry: Essential Research!Discovering the Potential of the Booming Hotel Industry: Vital Perspectives for Hotel Industry Research!
Overview of the Tourism and Hotel Sector
~ Tourism has become very important in India. It brings in a lot of money from other countries and helps create jobs. The increase in tourists also means more business for hotels.
~ India is becoming a popular tourist destination and is ranked 6th in tourism and hospitality by the World Economic Forum. This is according to a report by the World Travel and Tourism Council (WTTC).
~ The tourism and hospitality industry in India is one of the top 10 industries that receives the most foreign investment. According to government data, the hotel and tourism sector received around $16.6 billion of foreign investment from April 2000 to September 2022.
~The Indian government is trying to make India a big tourism destination. They have a plan called " Project Mausam " to connect with other countries in the Indian Ocean and bring back old cultural and economic ties. Also, they have made it easier for tourists from 161 countries to visit India by offering electronic visas.
~A significant surge in India, thereby propelling the hospitality sector to thrive. This is primarily due to a marked increase in the volume of foreign and domestic travelers, leading to a corresponding increase in the demand for lodgings. Budget hotels have emerged as prevalent trend in India. Furthermore, international hotel companies have increasingly commenced considering the establishment of such hotels in India, given the latent source of growth that arises from the extant disparity between the burgeoning influx of tourists and the insufficient number of rooms to accommodate them.
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"Supply"
⁎ It has been predicted that the hospitality sector will be unable to keep pace with the sustained growth of the economy, projected to grow at an annual rate of 7%. In the coming five years, it is anticipated that around 40 multinational corporations within the hotel industry will establish a presence in India, yet the industry still remains unable to fulfill the long term demand.
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"Demand"
⁎ The burgeoning nature of tourism industry in India can be attributed to the burgeoning influx of both business and leisure travelers, along with the noticeable proliferation of medical tourism. During the apogee of the tourism season, from November to March, there is a discernible increase in demand. This can only be comprehended by those with an erudite background in the field.
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"Entrance Hindrances"
⁎ High Capital Intensity, Brand Recognition, Zoning and Regulatory Restrictions, Strong Competition, Economies of Scale, Customer Relationships
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"New cycle begun"
⁎ Travel within India is starting to recover and travel businesses have seen a big increase in earnings. Right now, the industry is almost back to its normal levels with occupancy at 63-65%. This new trend is just starting, India to host G20 Summit in Sept 2023, hold over 200 meetings. international travelers geopolitical events and global economy, which should support the hotel RevPAR growth. which will help hotels earn more money.
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⁎ The IMF predicts that India's economy will grow rapidly in the next few years. They expect India to have the highest growth rate, with a projected 7.4% in FY22-23 and 6.1% in FY23-24.
⁎ After removal of international travel restrictions, domestic travel remains the preferred choice for Indian nationals. Travel is not limited to pilgrimages only anymore and to places of one’s relatives as travellers are now more inclined to visit leisure and holiday destinations. Corporate travel has taken a new leap in the country, factoring in the growing economic activities. In fact, the pandemic has evolved a new work cum travel option in the form of workations, staycations and bleisure travel, which has further aided the domestic travel and hotel industry. Young people are starting to save money for travel and taking their trips more seriously.
⁎ Social media is also making people more aware of new places to visit. India has many places that could become great tourist destinations if developed. The demand for hotel rooms in India has increased dramatically, going up from 25,000 rooms per day to 90,000 rooms per day. This suggests that more and more people are traveling and choosing to stay in hotels, which is a positive trend for the tourism industry in the country.
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We will learn how to differentiate between a fundamentally strong hotel from a weaker one.
⁎ Examination of the Comprehensive Structure of India's Hotel Industry at a Macro Level. The Indian hotel sector is characterized by a highly fragmented landscape, with each city accommodating a mixture of both domestic and international chains and a considerable number of unbranded, predominantly family run establishments. The Ministry of Tourism classifies these establishments via the allocation of stars, such as standard, star, and heritage. In the branded segment, while the majority of the supply was once concentrated in high end properties, the shift towards a greater number of domestic travelers over the last decade has resulted in the proliferation of mid range branded hotels, which has accordingly expanded the room supply. This increase in supply has been derived from the conversion of non branded establishments and new construction projects. the Indian hotel industry operates in a crowded environment. This further constrains the pricing power of the industry.
⁎ The demand for hotels changes depending on the economy and the time of year. When the economy is doing well, people have more money to spend on vacations or business trips, which means more business for hotels. But when the economy is not doing well, people spend less money on these services, which can make it difficult for hotel companies to make money. This can be a big risk for the hotel business.
⁎ In the hotel industry, the demand for rooms can vary greatly throughout the year. Despite this, expenses such as power, lighting, and salaries are constant and can make up to 70% of a hotel's costs. Investors should be aware of this volatility and the fact that a hotel's quarter on quarter performance may fluctuate.
⁎ Starting a hotel requires a substantial amount of capital, including the cost of acquiring land and constructing the building. The process also involves obtaining local government approvals, negotiating contracts, and can take anywhere from four to six years. The long gestation period and two to three years it takes for a hotel to reach optimal operations makes the industry challenging.
⁎ There are ways to reduce the capital requirements, such as through a management contract model where the management of the hotel is separated from its ownership. This allows for the risk of operating a hotel to be shared among different entities, though the macro business risks of competition, funding cycles, and seasonality still remain. Despite these challenges, the hotel industry remains attractive.
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Some point to help us understand the comparison between different hotel companies.
First Revenue Per Available Room (RevPAR) . The Revenue Per Available Room (RevPAR) depicts the revenue generated from a single room, regardless of its occupancy status. It encompasses unsold or unoccupied rooms, thereby providing a precise representation. The four major hotel companies in the study,
NSE:INDHOTEL , NSE:CHALET , NSE:EIHOTEL & NSE:LEMONTREE , All strive to maximize their RevPAR, as it reflects not only the pricing of the rooms but also their occupancy rate. The company Charlotte has already surpassed its pre-COVID-19 RevPAR levels.
Let's look at example
The average sales price is approx. Rs. 4600 and unit costs are Rs. 1800 per room while occupancy rate is 80%. We can calculate RevPAR as follows: 200*(RevPAR/Unit Costs)+(1800/Unit Costs) = 1000+3400=3472
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Second the Occupancy Rate . The Occupancy Rate is the number of Occupied rooms divided by the number of available rooms. when the COVID-19 pandemic hit, the Occupancy Rate for both branded and unbranded hotels went way down in FY22. We will see some major hotel companies.
NSE:INDHOTEL "IHCL" includes (Taj Hotels, Vivanta Hotels, Ginger Hotels & Seleqtions Hotels)
NSE:EIHOTEL include (Oberoi Hotels, Trident Hotels & Maidens Hotels)
NSE:CHALET include (The Westin, Novotel Hotel and Resort, Marriott Hotels & Four Points)
Lemon Tree Hotels Include (Aurika Hotels, keys Select & Redfox)
There has been a substantial improvement in occupancy rates, Some companies already. reached pre COVID-19 levels high.
Let's look at example
Hotel has total 100 rooms and the average room rate (ARR) is 2,500 INR per room. The hotel's total room revenue for a given day is 100 rooms * 2,500 INR = 2,50,000 INR.
Hotel has an occupancy rate of 80%, this means that 80 rooms are occupied and the hotel earns 80 rooms * 2,500 INR = 2,00,000 INR in revenue from occupied rooms (Revenue from occupied rooms / Total room revenue) * 100
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Third Average Room Rate (ARR). The ARR calculates the average rental revenue per occupied room dividing the total revenue by the number of rooms occupied. COVID-19 pandemic had an impact on the ARR. Indian Hotels falls under the luxury and upscale category, Lemon Tree is a mid scale or economic brand, And Oberoi, Trident Hotels, are undergoing a process of reestablishment, with Indian Hotels having already reached its desired state.
Let's look at example
The Average Room Rate (ARR) is the average rate of a hotel room per night. Calculated by dividing the total revenue generated from the sale of rooms by the number of rooms sold.
If hotel generates revenue of ₹500,000 from the sale of 100 rooms in a month, the ARR would be ₹5,000 per room per night (500,000/100).
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Sector overview or Business overview
The hotel industry experiences marked fluctuations in profitability margins due to its cyclical nature. As a quadrant business, the evaluation of performance should be based on two key metrics: EBITDA margin and Return on Capital Employed (ROCE). The EBITDA margin, which represents the proportion of profits within a company's sales, holds significant significance across various industries. The four major hotel chains, including Lemon Tree, have experienced an improvement in margins through cost reduction measures. The objective for these companies is to attain a 33% EBITDA margin by 2025. The efficiency with which hotels allocate capital is equally important, as demonstrated by the ROCE metric. With the recent normalization, increase in consumer demand, and heightened operating margins, it is anticipated that the ROCE will settle within a range of 12-15%, after considering debt reduction. We have leveraged expectations. This is an important aspect because hotels are capital intensive. A company's balance sheet determines the level of stress its cash flows can sustain, especially during downturns. High leverage reduces a hotel company's financial flexibility, which also dilutes its efforts to raise funds for future projects.
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Key Ratios Analysis
1. Leverage Ratios
The Debt to Equity ratio is a financial metric that compares a company's total debt to its total equity. It is used to measure a company's financial leverage and its ability to pay off its debt obligations.
⁎ Debt/EBITDA ratio is a financial metric that measures a company's ability to pay off its debt obligations with its earnings before interest, taxes, depreciation, and amortization (EBITDA). This ratio is used to evaluate the financial health of a company, particularly its debt burden and ability to service its debt obligations.
2. Liquidity Ratios
The current ratio used to determine a company's ability to pay its short term obligations. It is calculated by dividing the company's current assets by its current liabilities
⁎ The Cash ratio is financial ratio that measures a company's ability to pay off its current liabilities using only its most liquid assets, such as cash and cash equivalents. This ratio provides an indication of a company's liquidity and short term financial health.
When evaluating a hotel investment, it's important to consider whether there is a well-established and financially strong promoter group backing the company. promoter can help the hotel deal with difficulties in a more timely manner and even negotiate better rates from suppliers. This can be the difference between survival and bankruptcy, as we saw in the past when as many as 40% of hotels and restaurants in India shut down permanently. Indian Hotels Limited and Lemon Tree Hotels, among other prominent hospitality companies in India, enjoy the advantage of having formidable backing from influential promoters and substantial institutional support, respectively. As of December 2022, the percentage of promoter stake in Lemon Tree Hotels that was pledged had declined from 29.39% (December 2021) to a current value of 11.9%.
Thank you for reading my analysis of the hotel industry.
I hope it provided valuable insights into the performance and trends of the sector. If you have any questions or comments, feel free to leave them below.
Jai hind 🇮🇳
Trading Reverse Head & Shoulder PatternWhat is Reverse head & shoulder ?
Ans:- The Reverse Head and Shoulders is a bullish reversal pattern that is formed in the stock market when an asset experiences a decline, followed by a moderate recovery, then another decline to a lower level, another recovery to near the original decline, and finally another decline to a level that is lower than the previous decline. The pattern is considered complete when the price rises above the neckline, which is the line connecting the highs of the two recoveries.
The pattern is named after its visual appearance, which resembles the human head and shoulders, but in reverse. The three troughs form the shoulders and the head, while the neckline serves as the confirmation point for a reversal. The height of the pattern can be used to estimate the potential upside for the asset once the reversal is confirmed.
The Reverse Head and Shoulders pattern is often seen as a positive sign for the market, indicating a potential end to the downtrend and a shift towards upward momentum. However, it is important to consider other factors such as market sentiment before making a trade based on this pattern.
Now how to trade Reverse Head & shoulder pattern?
Ans:- To trade this pattern we should follow:-
Identifying the pattern: To trade the Reverse Head and Shoulders pattern, you first need to identify it on a stock chart. Look for three troughs followed by a neckline that connects the highs of the two recoveries.
Confirming the pattern: Once the pattern is identified, you need to confirm it by waiting for the price to rise above the neckline. This is considered the confirmation point and signals the start of a potential upward trend.
Setting a target price: The height of the pattern can be used to estimate the potential upside for the asset. Measure the distance between the neckline and the lowest trough and add it to the neckline to determine a target price.
Placing a trade: Once the pattern is confirmed and the target price is set, you can place a long (buy) trade. It is recommended to use a stop loss order to protect your trade in case the pattern does not play out as expected.
Monitoring the trade: After placing the trade, it is important to monitor the stock price and adjust your stop loss if necessary. Close the trade once the target price is reached or if the stock price drops below the neckline, indicating a potential reversal.
It is important to keep in mind that no single pattern or indicator can guarantee success in the stock market. It is also recommended to consider other factors such as market sentiment and technical indicators before making a trade based on the Reverse Head and Shoulders pattern.
Pros:
Sign of a potential trend reversal: The Reverse Head and Shoulders pattern is often seen as a positive sign for the market, indicating a potential end to the downtrend and a shift towards upward momentum.
Estimation of potential upside: The height of the pattern can be used to estimate the potential upside for the asset, allowing traders to set realistic targets and determine their risk-reward ratio.
Relatively easy to identify: The Reverse Head and Shoulders pattern is relatively easy to identify and does not require complex analysis, making it accessible to traders of all levels.
Con:
No guarantee of success: No single pattern or indicator can guarantee success in the stock market, and the Reverse Head and Shoulders pattern is no exception. The pattern can be disrupted by external factors such as market sentiment, economic data releases, and geopolitical events.
False signals: The pattern is not always reliable, and false signals can occur if the price does not rise above the neckline or if the trend does not continue as expected.
Need for confirmation: The pattern is not considered complete until the price rises above the neckline, and traders must wait for this confirmation point before entering a trade. This can lead to missed opportunities or increased risk if the pattern does not play out as expected.
In conclusion, The Reverse Head and Shoulders pattern is a bullish reversal pattern in the stock market that is formed by a series of declines and recoveries and, but it should not be relied upon exclusively. It is important to consider other factors and to always manage risk when trading based on this pattern.
Learn to earnHOW TO PERFORM TOP-DOWN ANALYSIS
HTF Analysis. Buid the Long-Term Picture.
LTF Analysis. Build a case for an Entry.
EVERY TIMEFRAME HAS A TASK TO HELP YOU BUILD A STORY.
Trend Identification: Utilizing Higher Highs and Higher LowsTechnical Indicator - William Fractal
Setting - 20 period
About the Indicator : William Fractal is a technical analysis tool used by traders in financial markets to identify potential turning points and trends. It is based on the concept of fractals, which are self-similar patterns that repeat themselves on different scales. The William Fractal is formed when there is a series of five bars, with the middle bar having the highest high and the lowest low in comparison to the surrounding bars. Traders use this pattern to determine potential buy and sell signals, as a fractal forming at the bottom of a downtrend could signal a potential reversal, while a fractal forming at the top of an uptrend could signal a potential trend continuation. The William Fractal can be used in combination with other technical indicators to improve trading decisions.
Benefits of using William fractal indicator
Easy to Identify : The William Fractal is a simple and straightforward pattern to spot, making it accessible for traders of all skill levels.
High Accuracy : The pattern is based on the concept of fractals, which have a high degree of accuracy in identifying trend reversals.
Confirms Trend Strength : By highlighting areas of potential trend reversal or continuation, the William Fractal can help traders confirm the strength of a trend.
Improves Timing : By using the William Fractal in conjunction with other technical indicators, traders can improve the timing of their trades and increase the chances of success.
Identifies Key Turning Points : The William Fractal can help traders identify key turning points in the market, allowing them to make informed trades and take advantage of market movements.
Works in All Markets : The William Fractal is applicable across different financial markets, including stocks, forex, and commodities, making it a versatile tool for traders
Try this out and let me know your thoughts in the comment section.
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!
Educational post Rising WedgeA Rising Wedge is a chart pattern in technical analysis that is formed when price moves in a diagonal upwards trend, with both trendlines converging.
This pattern is considered bearish because it signals a potential reversal of the current uptrend. As the pattern progresses, the price movement becomes more and more confined, which often results in a downward breakout.
This downward move signals a potential trend reversal, and traders often view it as a selling opportunity.
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
