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How to use Stochastics in trading
Stochastic oscillators are a popular momentum indicator used in technical analysis and prized for their accuracy and clarity. They can provide overbought or oversold signals to traders and even be combined with other indicators, like moving averages or the Relative Strength Index (RSI), to unearth insights that support profit-maximizing trades. Stochastics gauge an asset’s closing price in comparison to a range (measured 0-100) of closing prices over a mutable (though most often 14-day) time period, creating overbought (readings of 80-plus) and oversold (readings of 20 or under) trading signals. Continue reading...
What is market momentum?
Market momentum is the tendency of a trend to continue in one direction or another. Various analysis methods and indicators seek to identify the strength of trends and to find points of possible reversals and retracements. A market has strong momentum when trading volume is up and confirms the direction of price movement in the market. Bullish or bearish market sentiment will influence the degree of momentum that is present. Continue reading...
How to use the Relative Strength Index (RSI) in trading
The Relative Strength Index (RSI) was developed by J. Welles Wilder Jr. to measure asset momentum using price changes and the speed of those changes. Like stochastics, the RSI is an oscillator that reads between 0 and 100; in this case, the RSI calculation determines the ratio of upward and downward movement using 14 periods of data, then smooths it out so only strong trends approach 0 or 100. Traders traditionally interpret RSI values of 70 or greater as an indicator of an overbought asset, while values 30 or below indicate an asset has been oversold; higher or lower values (like 80 and 20) can be used to minimize the number of bought or sold readings. Continue reading...
What is Cash-Flow Financing?
Cash flow financing is an alternative method of securing a loan, in which cash flows are the collateral, not assets. In cash flow financing, also known as cash flow loans, a lending institution will base their decisions regarding the size of the loan and the loan repayment schedule on future expected cash flows of the company. The cash flows serve as collateral instead of assets, as in an asset-backed loan. Continue reading...
What is Cash Flow?
Cash flow is the liquid flow of cash and cash equivalents into and out of a business. Cash flow is an accounting metric that keeps track of the liquid assets going into and out of a business, project, or fund. Cash flow does not include accounts receivable, necessarily, because those funds may not be in-hand at the present time. The cash conversion cycle (CCC) and some valuation calculations will use cash flow numbers. Accounts may demonstrate positive or negative cash flow, which is either adding to or decreasing total assets. Continue reading...
What is a Cash Flow Statement?
A statement of cash flows is an accounting report which describes the changes in cash flows, which is distinct from net income. Cash Flow Statements are an important part of corporate accounting. While net income reports include non-cash items such as depreciation, as well as accounts receivable and accounts payable, cash flow statements will isolate the cash transactions in and out of the company. This helps get an idea of whether the company can pay its bills in a timely manner and so forth. Continue reading...
What is Discounted Cash Flow?
Discounted Cash Flow (DCF) uses an estimated future cash flow amount and a Discount Rate to determine the Present Value (PV). An investor or business executive might project an estimated future cash flow for a business based on recent growth rates, industry information, futurism, estimated inflation, etc. The most common future cash flow to use is free cash flow, which takes out capital expenditures. Continue reading...
What is Operating Cash Flow (OCF)?
Operating cash flow is the amount of cash a company is able to generate from its operations - i.e., how much real cash flow is being generated after accounting for expenses. It is calculated by adjusting net income for items like depreciation and changes in inventory. A company’s OCF is an important metric in determining whether it can generate cash flow without requiring external financing. The timeliness and frequency of cash flows is important as well, in that a company ideally produces consistent and favorable OCF. Continue reading...
What is the Operating Cash Flow Ratio?
The operating cash flow ratio, or OCF ratio, is used to measure whether a company’s cash flows are sufficient to cover current liabilities. It essentially measures how many times a company can use cash flow from operations to cover debt expenses. It can be measured by dividing a company’s cash flow from operations by its current liabilities. Companies with high (relative to their peers or other companies in the sector OCF ratios are generally in good financial health, meaning they can adequately cover ongoing liabilities with cash flow from operations. Continue reading...
What is Cash Flow to Debt Ratio?
The cash flow to debt ratio measures a company’s operating cash flow versus its total debt. It is a useful tool for measuring a company’s ‘coverage,’ which looks at how well equipped a company is to meet its ongoing debt obligations (interest payments, for example) based on the amount of cash it generates through sales/service. There are different methodologies for calculating the ratio, but the most conservative are using free cash flow as the numerator and all redeemable debt (short-term, long-term, preferred stock) as the denominator. Continue reading...
What is Cash Flow After Taxes?
Cash flow after taxes (CFAT) is nearly the same thing as EBITDA, but with taxes left in. One way to arrive at Cash Flow After Taxes is to take the net income of the business and add in interest, amortization, depreciation and other non-cash expenses. This is one item away from the formula for EBITDA, which also adds tax back in to arrive at the Earnings Before Interest, Taxes, Depreciation and Amortization. Continue reading...
What is Cash Flow from Investing Activities?
In the Cash Flow Statement, the cash flow in and out of investments, whether in shares of other companies or in capital assets, is recorded. The gains or losses from investment activities, including but not limited to shares of other companies (non-controlling interest) and the gains or losses experienced with subsidiaries, as well as negative cash flow or positive cash flow into or out of capital investment projects such as production infrastructure, are recorded in a portion of the Cash Flow Statement called Investing Activities. Continue reading...
What is the Price to Cash Flow Ratio (PCFR)?
The Price to Cash Flow Ratio (PCFR) is a valuation measure that looks at a company’s stock price relative to its cash flow per share. Generally speaking, the lower the ratio, the better chance the company is undervalued - it basically means the company produces a lot of cash flow relative to how much it costs to acquire a share on the open market. A very high PCFR indicates that a company is trading at a high price relative to the amount of cash flow it produces. Start-up technology companies, for instance, would generally have high PCFRs because they may not produce high levels of cash flow in early stages, but investors may bid up the price in anticipation of future growth. Continue reading...
What are Subprime Loans?
Subprime loans are loans made by institutions to individuals who do not meet the industry standards for a desirable loan client. Lenders such as banks and mortgage companies are able to shift much of the risk of loans they make by selling the debt off to investors and investment banks in the form of collateralized mortgage obligations and other forms of securitized debt. This paves the way for lenders to adopt more liberal guidelines around who can receive a loan for their home purchase and so forth. A thorough banker who is preserving the financial stability of his employing institution will perform due diligence to prove that a client can meet the repayment schedule for the loan by showing adequate cash flow and credit history. Continue reading...
What is the Debt-to-Equity Ratio?
Also known as ‘leverage,’ the debt-to-equity ratio indicates the relative proportion of a company’s debt to total shareholder equity. Given that debt is looked at relative to shareholder equity, the debt-to-equity ratio is often given greater consideration than the debt ratio for determining leverage and risk. Similar to debt ratio, a lower debt-to-equity means that a company has less leverage and a stronger equity position. Continue reading...
What is Operating Leverage?
Operating leverage is a measure of how critical each sale of a company is to overall cash flow. If a company has high operating leverage, it means that it relies on fewer sales with very high gross margins, versus a company with low operating leverage that experiences higher levels of sales with lower gross margins. As an example, a convenient store has less operating leverage than a business that sells yachts. Continue reading...
What is the High-Low Index?
Often referred to in the media as “New Highs and New Lows,” the High-Low Index is an observation of the number of stocks which hit 52-week highs or lows in the current day. The High-Low Index is usually expressed as a simple moving average (10-day or longer) of the Record High Percent. A Simple Moving Average (SMA) is a technical indicator that can help traders determine whether a bull or bear trend will continue or reverse course. It typically adds up closing prices for a given time period, then divides that figure by the number of time periods used for the average. Simple moving averages are effective in their simplicity, but their efficacy is most closely tied to how they are used. By giving equal weight to each data point, SMAs can limit bias towards any specific point in a specific time period. Continue reading...
What is asset management?
Asset management is a term often reserved for the overseeing of assets on behalf of a business or for wealthy clients with significant and various assets. A financial planner, CPA, or estate attorney who is capable of assisting a client with various types of assets and their optimal arrangement for that client’s goals can be said to be in a business of asset management. Tax considerations and cash flows may be a larger consideration with asset management than with investment advising. Continue reading...
What is the Gearing Ratio?
In mechanics, gears are used to increase torque and to translate the force to other areas. In finance, a gearing ratio is a term referring the amount leverage being used, compared to the amount of equity. A high gearing ratio is almost the same as a high debt-to-equity ratio. The gearing ratio is computed in a slightly different manner. Gearing is another word for leverage. High amounts of debt can spell trouble for a company down the road, and investors are wise to consider that. Continue reading...
What is a Moving Average Ribbon?
A moving average ribbon is created by plotting many incremental moving average lines on top of the same price chart. The visual relationship of the moving averages can help reveal crossover points, which traders can use as trade signals. As with other crossover indicators, the shorter-term moving average lines will tend to move more than the longer-term ones, and the degree of momentum that the crossovers imply increases for moving average lines of lengthier look-back periods. Continue reading...