subject: Forecasting Financial Markets the first [print this page] Few discuss about hedging, hedging teories actually first appeared at the stock markets, maybe you ever heard term like
"DO NOT PUT YOUR ALL EGGS IN ONE BASKET"
It means Do not put all of your investments at the only one type of investment, or a cool language like "diversification techniques" even though this technique comes from stock market analysis techniques,
but these techniques can apply to all investment activities including investment in real sector activities. well first we discuss it a little, okey,
later if there's a chance we can discuss it deeply and published in the subsequent articles, so you have to help Professor Data to promote this website so Profesor Data Website ratings could be rise and Professor Data can continue to publish articles that are useful to you, definitly, that all of articles on this website directly all written by Professor Data and not taken from another website.
Actually diversification theory itself is not too complicated, principally it same as other hedging techniques such as options techniques that we discussed above, and how about to proof it and the implementation.
Mmm.. like that.. on this theory was assumed that all of the investors were have been become risk avoidance (if your investment with a little capital, of course you can be more daring, but let's try to imagine if you have Millions $$$, you certainly will immediately turn become risk avoidance type and prefer to play safe).
Suppose you want to invest at the stock markets, there are two statistical formula you should remember, first, Correlation formula or causal relationship formula.
This formula will only generate numbers from 1 to -1 where 1 = positive relationship and perfect / strong, meaning, for example, if stock A and stock B have a correlation of 1 (POSITIVE) means, when the A shares rose, then B shares will also be increased.
And if stock A and stock B have a NEGATIVE correlation of -1 = perfect relationship / strong, which means, if stock A rose, then B shares will decrease, understand...? Just from there we can already feel the benefits.
Eits ... whoa .. just wait , what about the effect of the economic and markets sentimen impact? (not the individual share makes a market movement, but market movement makes the directly impact to the individual share movement, that's the assumption).
Example, if you have a bad economic in your country, and international economic too, event if you have a good financial report, your stock will definitly going down (but the risk (betha/slope) were different.. we will discuss it later) got it.
For those of you who often involve at the Financial Markets, certainly understand that sometimes there are companies or other Financial Market products which have a good fundamentals but the price could be kept make the reversal direction agains the "micro" fundamental (we often called it technical movement, but sometimes technical movement could be become primary movement you should read more about "Crowd Behaviour" at the Financial Markets that it's the truth analysis behind the technical analysis)..
One of the consequences that caused this to happen were the impact of the economic, or market sentiment, You could use market index at your countries as the standard markets sentimen like (Dow, Dac, sp 500.. etc), How about forex markets or futures, you still can use that especially if you use US product like EUR/USD,CORN,OIL,etc Dow index was better at the experienced (and your countries markets index off course){especially CBOT corn was very influential at that time when began to harvest crops watch forex market and market index carefully use your imagination and be creative okey ^^}.
You can see here that there are a connection between all financial markets, you should watch it carefully.
So how about the implementation, well .. First we measure the correlation between the stocks first, then we also measure the correlation between stocks with the market index, understand .. dizzy? should use simple language?
Well .. The first time we have to understand was you souldn't pick stocks which the relationship was too strong, because it will enlarge the risk, if stock A go up and stock B rise with the same scale too, it's useless, how about if they all going down?(we talk about risk here right?).
then if the first one up and the second down at the same scale that's only waste of time and waste of money, why? cause when you buy shares you must pay broker fees, as well as at the time you sell your shares.
What we have to note here is the market sentiment, or "Composite Index " you must be diligent in reading news at the newspaper or on the Internet, especially international and domestic economic news,
The first time we are doing is reading especially international economy on U.S. , Europe and oil (we could discuss it again later in deep detail about that), continues we can see how the measure of direct effects (correlation) on the domestic economic, significant or not (You still have to care even though the impact is not too significant, because if the symptoms lasted long, certainly the impact will be felt directly in the domestic economy)
For example, when world tin prices fell, you shouldn't buy the shares of which are involved in tin mining.
And if world economy was at the good performance, looking at the what sector which should move it, well then measuring the correlation with the Market index, if correlation approaches one, at least you already have "BUY" timing .
