Profitability ratios tell us about the profitability of the company. The greater the ratio, the more profits the company generates! These ratios include:
1. Operating Margin (operating profit/net sales)
2. Gross Margin (gross profit/net sales)
3. Net Profit Margin (net profit/net sales)
4. Return On Equity (net profit/net worth of the company)
5. Return On Investment (operating profit/total assets)
6. Return On Asset (net income/total asset)
Most of you would agree with me that just by looking at the price alone, it's very hard to tell when the market will reverse or move sideways.
There are many tools available that can generate early warning signals. Moving Average Convergence Divergence(MACD) created by Gerald Appel, is one such tool. It is one of the simplest and most reliable indicators around. Traders love MACD.
The image below shows the MACD indicator. The thick red line is the MACD while the thin yellow line is the 9-day EMA, also known as the trigger line. The histogram represents the difference between MACD and its 9-day EMA. The histogram is positive when MACD is above its 9-day EMA and negative when MACD is below its 9-day EMA.
The trading rules are:
1) MACD crossover and above the yellow line
2) MACD crosses above zero line
1) MACD crossover and below the yellow line
2) MACD crosses below zero line
Now, let's take a look how this indicator facilitates our analysis.
As you can see, with the help of MACD, I am able to know when a reversal will probably take place.
The first thing I'll always do when doing technical analysis on a stock is to determine the trend, whether it is in an uptrend or a downtrend. This will facilitate my decision making as well as formulate strategies.
The image on the left is the daily price chart for Yanlord Land Group, a real estate developer based in China.
As you can see, a beautiful descending channel pattern is formed when we draw the resistance and support that touches the lower highs and lower lows respectively. The price has failed to break the two trend lines, hence, they are strong resistance and support.
I'll probably make an entry near the support level and exit when it touches resistance. So easy? Of course not!
Relative strength is one of the factors I'll always look at when searching for a good stock. What is Relative Strength?
Expressed in percentage, it shows what portion of the market/industry/sector a particular stock has outperformed. Hence, by looking at this figure, we're able to know the strength of the stock we hold relative to other stocks.
For example, stock A has a relative strength of 90%. Therefore, it has outperformed 90% of the stocks in the market/industry/sector for a specific period.
Also, it is desirable that the relative strength is of a high number(more than 50%). A high relative strength shows that the stock has a high performance and if it can sustain this high number over a longer period of time, then this can be interpreted as the company is growing.