How To Trade

Silver vs. Platinum: Which is the Better Investment?

This video takes a look at the supply (i.e. amount mined) and demand of silver relative to platinum. Which one has the greater supply/demand imbalance, and thus might be a better value opportunity? Watch the video to find out.

Although there has been much press recently about the US Dollar loosing its status, there is no doubt that as of this lesson and most likely for the foreseeable future, the US Dollar still reigns supreme over all other currencies of the world. The price for the majority of traded commodities such as oil is quoted in US Dollars and the US Dollar represents over 60% of the worlds currency reserves (the currency held by central banks to back their liabilities). These facts combined with the fact that the US Economy is by far the largest economy in the world has resulted in a market where over 80% of all currency transactions involve the US Dollar. As you can probably imagine after hearing this, currency traders pay heavy attention to what is happening with the US Economy, as this has a very direct affect not only on the US Dollar but on every other currency in the world as well.

The rising power of the currency world is the Euro which was introduced in 1999 as part of an overall plan to unify Europe into something known as the European Union. In short the differing laws and currencies of the different European countries were making them less competitive in the global market place. To try and fix this problem and create one entity with a common set of laws and a common currency, 15 countries joined what is now referred to as the European Union and 12 of those countries adopted the Euro as their common currency. While the economies of the individual countries that make up the Euro Zone don’t come anywhere close to the size of the US Economy, when combined into one Euro Zone economy they do, and therefore some say the Euro will eventually rival or even replace the Dollar as the main currency of the world.

Japan, which is the second largest individual economy in the world, has the third most actively traded currency, the Japanese Yen. After experiencing impressive growth in the 60’s, 70’s and early 80’s Japan’s economy began to stagnate in the late 1980’s and has yet to fully recover. To try and stimulate economic growth, the central bank of Japan has kept interest rates close to zero making the Japanese Yen the funding currency for many carry trades, something which we will learn more about in later lessons. It is also important to understand at this stage that Japan is a country with few natural energy resources and an export oriented economy, so it relies heavily on energy imports and international trade. This makes the economy and currency especially susceptible to moves in the price of oil, and rising or slowing growth in the major economies in which it trades with.

While the United Kingdom is a member of the European Union it was one of the three countries that opted out of joining the European Monetary Union which is made up of the 12 countries that did adopt the Euro. The UK’s currency is known as the Pound Sterling and is a well respected currency of the world because of the Central Bank’s reputation for sound monetary policy.

Next in line is Switzerland’s currency the Swiss franc. While Switzerland is not one of the major economies of the world, the country is known for its sound banking system and Swiss bank accounts, which are basically famous for banking confidentiality. This, combined with the country’s history of remaining neutral in times of war, makes the Swiss Franc a safe haven currency, or one which attracts capital flows during times of uncertainty.

Also known as “The Aussie” the Australian Dollar is heavily dependant upon the price of gold as the Australian economy is the world’s 3rd largest producer of gold. As of this lesson interest rates in Australia are also among the highest in the Industrialized world creating significant demand for Australian Dollars from speculators looking to profit from the high yield the currency and other Australian Dollar denominated assets offer.

Like the Australian Dollar the New Zealand Dollar which is also known as “The Kiwi” is heavily dependant on commodity prices, with commodities representing over 40% of the countries total exports. The economy is also heavily dependant on Australia who is its largest trading partner. Like Australia, as of this lesson New Zealand also has one of the highest interest rates in the industrialized world, creating significant demand from speculators in this case as well.

Last but not least is the Canadian Dollar or otherwise affectionately known as “The Loony”. Like its commodity currency brothers, the Canadian Economy, and therefore the currency, is also heavily linked to what happens with commodity prices. Canada is the 5th largest producer of gold and while only the 14th largest producer of oil, unbeknownst to most; it is also the largest foreign supplier of oil to the United States. Its relationship with the US does not end here either as the country exports over 80% of its goods to the United States, making the economy and currency very susceptible to what happens not only with commodity prices, but to the overall health of the US Economy as well.

Key Points:

1. Deflation is largely about a decline in economic growth
2. Current talks of global deflation tend to focus on a rise in emerging market debt and a rejection on the part of investors to inexpensively finance more emerging market debt
3. This makes it hard for emerging market economies to grow
4. In turn, commodities have less demand and commodity prices fall
5. Moreover, capital flees emerging markets and seeks the US dollar and US government debt as safety
6. The US dollar and US Treasury bonds rally in deflation

1. Cash Flow is a measure of how much cash the company is gaining or losing. Some see it as a more honest, or pure, measure of profitability than earnings.

2. There are two types of cash flow measures that are commonly used: operating cash flow and free cash flow. Operating cash flow measures cash from operations; free cash flow measures cash from operations minus cash spent for new equipment. Free cash flow a more strict measure; basically, it attempts to calculate how much money is leftover for shareholders after all business-related cash expenditures are accounted for.

Mathematically, the calculations are as follows:

Operating Cash Flow = Revenue - Operating Expenses - Cost of Goods Sold + Depreciation - Taxes

Free Cash Flow = Revenue - Operating Expenses - Cost of Goods Sold + Depreciation - Taxes - Change in Working Capital - Capital Expenditures

As an example, imagine a lemonade stand with the following attributes for the past month:

• It earned $40 in sales
• The cost of cups, lemons, and sugar are the cost of goods sold; for the month, they equaled $8
• Suppose they need to pay for lights and chairs. These are operating expenses, as they are not related to the cost of goods sold, but they are related to running the business. Suppose they spend $12 on such expenses.
• In total, they have $20 worth of sales in which they have not yet recieved payment (they have extended credit to customers). They do not owe anyone any money. Last month, they owed $4 and had $10 worth of payments that were due from customers.
• They are growing and are investing in a new lemonade stand across the street. To get the sign, they spent $10.

The FCF calculation for this business for its past month is as follows: 40 - 8 - 12 - (20 - 6) - 10 = -4

The (20-6) is the change in working capital, which is basically (in our simplified model) the change short-term receivables - short-term payables.Since they paid debt this month, they sent cash out, and since they had more sales on credit, those sales need to be subtracted from the revenue (since they have not received cash for them yet; when cash is sent for them, that will be recorded as a favorable change in working capital and cash flow measurements). This example illustrates how a business with growing sales and reasonably low operating costs may still have negative cash flow. Such instances may not be a problem if the business can collect payments for sales easily and has cash on hand, but for value investors, understanding the details can help greatly in formulating an opinion on the company.

3. To calculate the the price/cash flow ratio, we can simply divided the market capitalization by the operating cash flow or the free cash flow -- whichever we are attempting to calculate.

4. As is the case with the price/earnings ratio, inverting price/cash flow ratios -- so viewing them that as cash flow/price ratios -- allows us to measure how much we as investors are paying for future cash flows relative to how much we would be paying for other yields -- namely bonds. This lets us create a framework by which we can evaluate how much we are getting compensated for the risk we are taking by investing in the company.

5. Generally speaking, a lower price/cash flow ratio is indicative of a stock that is “on sale.” However, companies with dim prospects for growth may also be given low price/cash flow ratios.

6. Price to free cash flow ratio could have some predictive value. From 1995 to 2014 in US markets, stocks in the top 20% of price/free cash flow ratio significantly outperformed the S&P 500 (some other conditions were added to shift the focus to larger stocks).

Value Investing operates from the principle that the prices of financial assets are mean reverting. In other words, when price is too low, it is time to buy; and when it is too high, it is time to sell.

Specifically, the metrics that are expected to mean revert are valuation ratios. These ratios typically look to compare the price of a company's shares relative to its earnings potential or the value of its assets. If an investor can purchase a company that is generating profits, and can do so at a price that is relatively low compared to what investors typically pay for future earnings, this might be a company worth buying. Conversely, the time to sell is when the the price for future earnings is too high. In this way, the cycle of mean-reverting valuation ratios mirrors the cycle of investor sentiment: just as the time to buy from a sentiment or psychology perspective is when the market as a whole has crashed and investors have engaged in panic selling, the time to buy for value investors is when the market has crashed and is discounting the price of future earnings too much.

Value investors typically (but not always) hold stocks for 3-5 years, if not longer. This is often how long it takes for big shifts in valuation ratios to occur. Moreover, statistically speaking, the biggest moves in the market occur on just a few days -- and so it is vital to be in the market when those days occur. Committing to holding positions can help ensure value investors are in the market when the moves they are anticipating occur.

• Turning Trading into a Performance Activity
• Characteristics of Successful Traders
• Undercontrolled vs. Overcontrolled Trading
• Patterns of Poor Trading
• Common Behavioral Triggers
• Diffusing and Managing Problems
• Maximizing Strengths

Brett N. Steenbarger, Ph.D. has been actively involved in the financial markets since the late 1970s. He has served as Director of Trader Development for Kingstree Trading, LLC in Chicago and currently consults with traders in a number of professional trading organizations. He is also Clinical Associate Professor of Psychiatry and Behavioral Sciences at SUNY Upstate Medical University in Syracuse, NY.

A clinical psychologist and active trader, writer, and researcher for the past 20 years, Brett is the author of The Daily Trading Coach (Wiley, 2009); Enhancing Trader Performance (Wiley, 2006); and The Psychology of Trading (Wiley; 2003).

1) "One of the hardest things for most investors is to sit by and watch other people make money," says Howard Marks, co-chairman of Los Angeles-based Oaktree Capital Management, who has known Mr. Buffett for many years. "But that doesn't bother Warren at all when the opportunities are outside his sphere."

FOMO, the fear of missing out, is a pitfall that isn't discussed often enough. In the information age and with global electronic trading, there are opportunities everywhere. In hindsight, a million dollars a week is a cinch; let it go or risk chasing trades better left alone.

2) "Warren has the ability to figure out which things are important in a whole narrative and to ignore everything else," Mr. Marks says.

This is an art, but it comes with practice. There are no rules because sometimes a certain theme or inter-related market will matter and other times it won't. Greece is a perfect example at the moment because sometimes it matters, sometimes it doesn't. The irrevocable themes in forex are growth and inflation. Let those be your compass.

3) "[Buffett is] extraordinarily good at knowing what he's good at and what he's not, and staying away from the latter."

Don't fall in love with the flavour of the week. Even if there isn't anything you're particularly good at, decide what you want to be and stick with it. The underlying message here is simple - stay disciplined.


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Hi guys , I have heard about the ATR and also the ADR. Some people use ATR to calculate stop loss values. Can anyone please tell me how do I use ATR and what's the difference between ATR and ADR ?

Originally Posted by Nuri Fabianski

Hi guys , I have heard about the ATR and also the ADR. Some people use ATR to calculate stop loss values. Can anyone please tell me how do I use ATR and what's the difference between ATR and ADR ?

About ATR:

- Average True Range (ATR) for Intraday Trading
- How to Use the Average True Range (ATR) To Set Stops
- Breakouts with the ATR

ADR is Average Daily Range?
If yes so there are many ADR indicators (for example - this one, this indicatior, and so on)