Investment is the act of allocating funds to various assets to achieve appreciation. It differs from daily consumption or saving by emphasizing the exchange of potential returns for risk. By time horizon, it is divided into short-term investments (less than 1 year, such as money market funds and short-term treasuries) and long-term investments (over 5 years, such as stocks, real estate, or pension funds). By risk, it includes low-risk investments (government bonds, bank fixed deposits, annualized volatility <5%) and high-risk investments (venture equity, cryptocurrencies, annualized volatility >30%). The core of investing is balancing return and risk, achieving sustainable growth through professional evaluation (such as DCF models or CAPM pricing). The United Nations World Investment Report shows that global direct investment flows reached $1.5 trillion in 2024, with 70% directed to developed economies.
1. Time-based
2. Risk-based
3. Asset form
Saving is a risk-free capital preservation behavior, mainly achieved through bank deposits or treasuries, with annualized returns typically at 1-3%, suitable for emergency reserves. Investing involves risk but seeks higher returns, such as stocks averaging 7-10% annually (S&P 500 1957-2024 data). Speculation relies on short-term price fluctuations, such as day trading or leveraged futures, with extremely high risk and average success rates below 50%, often leading to permanent capital loss. Buffett's famous saying, "Investing is transferring purchasing power to the future," while speculation is more like gambling. Beginners should start with investing and avoid speculative behavior that leads to capital loss.
Comparative analysis:
Risk and return are positively correlated, with higher returns accompanied by higher uncertainty. Modern Portfolio Theory (MPT), proposed by Harry Markowitz in 1952, proves that diversification can reduce unsystematic risk. The efficient frontier represents the highest return combination for a given risk. Formula: Expected return E(R_p) = Σ(w_i * r_i), risk σ_p = √(Σ w_i^2 * σ_i^2 + 2 Σ w_i w_j * cov_ij). In practice, a 60/40 stock-bond portfolio has a historical Sharpe ratio of approximately 0.8.
CAPM model: E(R_i) = R_f + β_i [E(R_m) - R_f]. Risk-free rate from 10-year treasuries (current 4.2%). Beta>1 for high-risk assets.
Behavioral finance: Loss aversion, anchoring bias. Countermeasures: Rule-based trading, regular review.
Time value means $1 today is worth more than $1 tomorrow due to earning potential. Compounding formula A = P (1 + r/n)^(nt). Example: $100,000 at 8% monthly compounding for 30 years reaches approximately $1.01 million. Rule of 72: Doubling years ≈ 72 ÷ annualized rate.
Annuity: PV = C * [1 - (1+r)^-n]/r. Perpetuity PV = C / r, used for stable cash flow valuation.
Equity assets: Common stocks with dividends and voting rights, preferred stocks with fixed dividends. Fixed income: Zero-coupon bonds bought at discount, floating-rate bonds against rising rates. Alternative assets: REITs 8-12% returns, private equity IRR 15%+.
Passive: Index funds with 0.03% expense ratio. Active: DCF + sensitivity analysis. Sustainable: ESG outperformance 1.2%.
401(k) pre-tax deductions, Roth IRA post-tax tax-free withdrawal. Tools: Robinhood zero-commission, TradingView advanced charting.
5% stop-loss, annual rebalancing. Education: CFA curriculum, Khan Academy videos.
Chart analysis, also known as technical analysis, is a method of predicting future price movements by studying historical price, volume, and other market data. Its core assumptions include three aspects: first, market behavior discounts everything, and all known information (fundamentals, economic data, geopolitics) is already reflected in prices; second, prices move in trends unless there is clear evidence of change; third, history tends to repeat itself, as human psychology produces similar reactions under the same market conditions. The origins of technical analysis can be traced to Charles Dow in the late 19th century, who founded Dow Theory by observing stock price fluctuations, laying the foundation for modern chart analysis. The candlestick chart invented by Japanese rice merchant Munehisa Homma in the 18th century is widely used in global markets and has become the most popular form of price representation.
Each candlestick in a candlestick chart represents a fixed time period (such as 1 minute, 1 hour, 1 day) and includes four key prices: open, high, low, close. A bullish candle indicates the close is higher than the open, usually filled with red or white, representing buyer dominance; a bearish candle indicates the close is lower than the open, filled with green or black, representing seller dominance. A long body indicates a significant imbalance between buyers and sellers, while a short body indicates equilibrium. A long upper shadow suggests resistance at highs, and a long lower shadow suggests support at lows. A doji (open ≈ close) signals potential trend reversal.
Bar charts are similar to candlesticks but use a vertical line for high-low, left tick for open, right tick for close, more suitable for programmatic scanning and historical backtesting. Line charts only connect closing prices, the simplest, suitable for observing long-term trends, such as 10-year index cycles. Point and Figure charts completely ignore time, only recording preset price changes (such as 1%), filtering noise, specifically for identifying support and resistance. Renko charts are built with fixed price bricks (such as 10 points per brick), also removing the time dimension, highlighting trend strength. Heikin-Ashi charts are an improved version of candlesticks, using average prices: open = (previous open + previous close)/2, close = (open + high + low + close)/4, making trends smoother and reducing false signals.
Trends are the core of chart analysis. Dow Theory divides them into primary trends (lasting 1-3 years), secondary trends (3 weeks-3 months), and minor trends (less than 3 weeks). Identifying trends requires three conditions: price sequence, volume cooperation, and time span confirmation. An uptrend is defined as a series of higher lows (Higher Lows) and higher highs (Higher Highs), downtrend the opposite. Sideways consolidation (Sideways) shows prices oscillating in a horizontal channel with no clear direction.
Trend line drawing principles: Uptrend line connects two or more lows, confirmed by the third touch; downtrend line connects highs. Valid trend lines should not be pierced by candle bodies, only allowing wick touches. A trend line break (close piercing) with volume is a signal of trend end or acceleration. Channel analysis draws parallel lines on trend lines to form a price running range. Upper channel is dynamic resistance, lower channel dynamic support. Prices typically run within the channel for more than 70% of the time; breaking the upper channel signals accelerated rise, breaking the lower channel accelerated fall.
Trend strength judgment: Use Average Directional Index (ADX), value >25 indicates strong trend, >40 extremely strong, <20 consolidation. Trend persistence is assessed by pullback amplitude; in an uptrend, pullback should not exceed 61.8% of the previous advance (Fibonacci ratio), otherwise it may turn to consolidation or reversal.
Support is the area where buyers intervene when prices fall, resistance is the area where sellers emerge when prices rise. Their formation reasons include psychological levels (round hundreds/thousands), historical highs/lows, volume concentration areas, and institutional order accumulation. Support and resistance have role reversal characteristics: broken resistance becomes future support, broken support becomes future resistance. This phenomenon stems from market memory effect and stop-loss order triggers.
Volume-weighted support and resistance: Use Volume Profile to identify high-volume nodes (HVN) and low-volume nodes (LVN). HVN areas form strong support/resistance due to institutional accumulation or distribution, with prices staying longer in these areas. LVN areas are quickly traversed by prices, often becoming acceleration zones after breakouts.
Dynamic support and resistance: Moving averages (such as 50-day EMA) serve as dynamic support in trends, with multiple pullbacks not breaking forming "multi-point resonance." Fibonacci ratios are widely used in pullbacks: 38.2% shallow pullback, 50% medium, 61.8% deep. If price stabilizes at 61.8% with volume, it usually signals trend continuation.
Price patterns are visual representations of market participant psychological games. According to Thomas Bulkowski's "Encyclopedia of Chart Patterns" backtest data, reversal patterns have average success rates of 65-80%, continuation patterns 75-85%.
Head and shoulders top: Composed of left shoulder, head, right shoulder, neckline connecting two valleys. Left shoulder has the largest volume, head second, right shoulder smallest. Neckline break with close falling more than 3%, target price = head height - neckline distance moved down equally. Success rate 78%, false breakout rate 15%. Head and shoulders bottom is the mirror, reversal bullish.
Double top/bottom: M or W shape, second high/low not exceeding the first, neckline break target = valley/peak to neckline distance. Success rate 72%, often at trend ends.
Triangle patterns: Symmetrical triangle (converging, no direction bias), ascending triangle (flat upper, rising lower, bullish), descending triangle (flat lower, falling upper, bearish). Breakout direction consistent with pre-triangle trend, target = triangle base width projected equally.
Flags and pennants: Sharp rise/fall followed by small counter-trend consolidation, shaped like flags or small triangles. Flags are parallel channels, pennants small triangles. Breakout target = flagpole length. Success rate 85%, brief pauses in strong trends.
Gaps are price jumps with no overlap between adjacent candles, reflecting extreme supply-demand imbalance. Common gaps appear in consolidation, usually filled within 3-5 trading days, suitable for short-term operations. Breakout gaps with large volume confirm new trend start, almost never filled. Continuation gaps appear in trend mid-section, used to measure target: distance from breakout to continuation gap midpoint, projected to trend end. Exhaustion gaps appear at trend end, with abnormal volume surge followed by rapid pullback, signaling reversal.
Island reversal is the strongest reversal signal: upward gap followed by consolidation, then downward gap forming "island," all positions trapped, forced liquidation triggers avalanche.
Volume is the "fuel" of price, no-volume rises are unsustainable. Volume-price in same direction is healthy trend, divergence is warning. Price new high but volume shrinking indicates insufficient buyer follow-through, easily forming "bear trap." Conversely, price new low but volume expanding indicates weakening seller pressure, possibly forming "bull trap."
On-Balance Volume (OBV) is the earliest volume-price indicator, invented by Joseph Granville. Calculation: If today's close > yesterday, OBV = yesterday's OBV + today's volume; if <, subtract volume; if =, remain unchanged. OBV leading price new high confirms uptrend continuation; leading break confirms downtrend.
Volume Weighted Average Price (VWAP) is institutional execution benchmark. Daily VWAP = Σ(price × volume)/total volume. Price consistently above VWAP indicates institutional net buying; below indicates net selling.
Renko charts are built with fixed price bricks (such as 10 points per brick), completely filtering time noise, only showing meaningful price changes. Up bricks green, down bricks red. Brick reversal requires price moving 2 bricks in opposite direction, suitable for trend following strategies. Point and Figure charts are similar, only recording changes above X points, X is box size, O is reversal boxes (such as 3-box reversal).
Multi-Time Frame Analysis (MTFA) is essential for professional traders. Top-down: Weekly determines primary trend, daily finds entry points, 1-hour refines stop-loss, 5-minute executes. Example: Weekly uptrend + daily pullback to 50-day MA + 1-hour RSI oversold = high-probability buy.
Case 1: 2020 COVID crash: S&P 500 flash crashed from 3400 to 2200, forming V-bottom. March 23 hammer + volume bullish candle, daily RSI rebound from 15, confirming bottom. Subsequent ascending channel target calculated to 4200 (actual 2021 reached).
Case 2: Tesla 2020-2021 bull market: Started from $400, rising along 20-day EMA, multiple pullbacks not breaking forming dynamic support. November 2021 double top + OBV divergence, neckline $850 break, target calculated to $450 (2022 actual touched).
Risk warnings: Chart analysis is not absolute prediction, must combine fundamentals and risk management. Over-reliance on single pattern easily misled by false signals. Pattern failure rates rise in extreme sentiment markets (such as 2022 inflation panic).
Technical indicators are mathematical calculations based on price, volume, or open interest to identify trends, momentum, volatility, or overbought/oversold conditions. Their theoretical foundation stems from the efficient market hypothesis and behavioral finance: although prices random walk, predictable psychological patterns exist in the short term. Indicators are divided into leading (early signals, such as RSI) and lagging (confirmation signals, such as moving averages). Overlay indicators are plotted directly on price charts (such as MA, Bollinger Bands), oscillator indicators are plotted in separate sub-charts (such as MACD, Stochastic).
Leading vs lagging trade-off: Leading indicators react fast but have many false signals, suitable for short-term; lagging indicators are reliable but miss initial moves, suitable for trend following. Professional traders use "multi-indicator resonance" principle: at least 2 types of indicators (trend + momentum) confirm simultaneously before entry.
Moving averages (MA) are the most basic overlay indicators, smoothing price noise to reveal underlying trends.
Simple Moving Average (SMA): Arithmetic average of all period closing prices. Formula: SMA_n = (P_1 + P_2 + ... + P_n)/n. Advantages: Simple calculation; disadvantages: Equal weighting causes lag. 50-day SMA crossing above 200-day SMA forms "golden cross," historical S&P 500 success rate 72%.
Exponential Moving Average (EMA): Gives higher weight to recent prices. Formula: EMA_t = α * P_t + (1-α) * EMA_(t-1), α = 2/(n+1). 12-day and 26-day EMA combination used for MACD calculation. EMA reacts faster to sudden events, such as March 2020 pandemic crash, 12-day EMA leading SMA by 3-5 days in sell signals.
Weighted Moving Average (WMA): Linear weighting, most recent data weight = n, next = n-1. Suitable for high-frequency data, but complex calculation.
Kaufman Adaptive Moving Average (KAMA): Invented by Perry Kaufman, automatically adjusts smoothing coefficient based on market noise. Strong smoothing in high noise, fast response in trends.
Practical parameter optimization: Stocks use 50/200-day MA, forex 20/100-hour MA, cryptocurrencies 9/21-hour EMA. Parameters need adjustment based on asset volatility to avoid overfitting.
Relative Strength Index (RSI): Invented by J. Welles Wilder, 14-period standard. Formula: RSI = 100 - 100/(1+RS), RS = average gain/average loss. Above 70 overbought (consider selling), below 30 oversold (consider buying). RSI divergence is the strongest reversal signal: price new high but RSI not new high, signaling bear trap. Failure swing: RSI falls from overbought to below 70 then rebounds without breaking 80, forming M-top.
Stochastic Oscillator: Developed by George Lane, compares close to period price range. %K = 100*(C-L14)/(H14-L14), %D = 3-period SMA of %K. Above 80 overbought, below 20 oversold. Full Stochastic allows custom smoothing periods, such as 14,3,3.
Commodity Channel Index (CCI): Designed by Donald Lambert, measures price deviation from typical price. CCI = (typical price - 20-period typical price SMA)/(0.015 * mean deviation). +100 overbought, -100 oversold. CCI>200 indicates extremely strong rise, usable for breakout strategies.
Bollinger Bands: Invented by John Bollinger, middle band 20-period SMA, upper band +2 standard deviations, lower band -2 standard deviations. Bandwidth = (upper-lower)/middle, bandwidth contraction signals big move start (squeeze effect). Price touching upper band + RSI>70 = double overbought sell signal.
Average True Range (ATR): Developed by Wilder, measures average of daily true ranges (high-low, |high-previous close|, |low-previous close| max). ATR(14) used for stop-loss setting: stop-loss after buy = entry price - 2ATR. Dynamic channels like Keltner Channel = EMA ± ATR2.
Historical volatility vs implied volatility: Historical volatility based on past price standard deviation, implied volatility reverse-engineered from option prices (VIX index). IV/HV ratio >1.2 indicates expensive options, suitable for selling volatility strategies.
On-Balance Volume (OBV): Pioneered by Joseph Granville, cumulative volume direction. OBV new high confirms sustainable price rise. OBV diverging from price is leading warning: price new high OBV not new high → capital outflow.
Chaikin Money Flow (CMF): Improved by Marc Chaikin from OBV, considering price position in daily range. CMF = Σ[(C-L)-(H-C)]/(H-L)*V / ΣV. CMF>0.25 indicates capital inflow, < -0.25 outflow.
Volume Weighted Average Price (VWAP): Institutional execution benchmark. Intraday VWAP resets daily. Price consistently above VWAP indicates institutional net buying, suitable for following strategies.
Alligator system: Designed by Bill Williams, three shifted SMAs (lips 5-period shifted 3, teeth 8-period shifted 5, jaw 13-period shifted 8). Three lines opening = trend start, crossing tangling = consolidation.
Ichimoku Cloud: Five-line system, conversion line = (9-period high+low)/2, base line = (26-period high+low)/2, leading A/B lines advanced 26 periods, cloud thickness indicates support strength. Price above cloud + green cloud = strong bullish.
Parameter sensitivity testing: RSI period from 14 to 10, short-term signals increase but false signal rate rises 20%. Use Walk-Forward Testing to avoid overfitting: 70% historical data for optimization, 30% out-of-sample validation.
Monte Carlo simulation: Randomly shuffle historical sequences 10000 times, test strategy robustness. Max drawdown exceeding expected 30% requires position adjustment.
Apple 2023 bull market: MACD golden cross (March) + price breaking Bollinger upper band + OBV new high, triple confirmation buy. RSI hovering at 75 without exceeding 80, avoiding premature sell. Final profit 45%.
Bitcoin 2024 adjustment: RSI from 85 to 65 forming failure swing, CCI breaking -100, early warning top. Combined with VIX rise, timely reduction avoided 30% drawdown.
Risk warnings: Indicators fail in extreme markets (such as flash crashes), must combine fundamentals and stop-loss. Over-optimization of parameters leads to curve fitting, poor live performance.
Market breadth indicators measure the number of stocks participating in rises/falls to judge if the rally is healthy.
Advance-Decline Line (ADL): Daily cumulative (advancing issues - declining issues). Divergence from index is leading signal: S&P new high but ADL not new high indicates only a few heavyweights lifting, broad market weak, signaling adjustment. NYSE ADL historical data shows 68% probability of market decline within 3 months after divergence.
High-Low Index: (new highs - new lows)/(total issues)*100. >70 indicates strong breadth, <30 weak. Extreme reversal: March 2020 new lows 98% followed by rapid rebound.
McClellan Oscillator: 19-day EMA net advances - 39-day EMA net advances. >100 extreme optimism, <-100 extreme pessimism. Zero line cross is short-term buy/sell signal.
VIX fear index: Calculated by CBOE from S&P 500 option implied volatility. VIX>30 indicates high volatility, >50 extreme panic (such as 80+ in 2008). VIX futures curve inversion signals short-term volatility surge. VIX and S&P correlation coefficient -0.7, usable as hedging tool.
Put/Call Ratio: Put option/call option volume ratio. >1.2 indicates thick bearish sentiment, often at market bottoms; <0.7 excessive bullishness, often at tops. Equity PCR better reflects retail sentiment, total PCR includes index options more institutional.
AAII Investor Intelligence Survey: Weekly survey of retail bull/bear ratios. Bull >60% or bear >55% extreme, contrarian operation success rate 70%.
Institutional capital flow: Track hedge fund position changes quarterly via 13F reports. ETF capital flow (SPY inflow >$50 billion) confirms bull market.
Smart Money Flow Index: First 30 minutes + last 30 minutes volume proportion, filtering retail noise. SMFI leads S&P by 30 minutes, often used for intraday strategies.
CFTC Commitment of Traders Report: Released every Friday, large speculators net long/short positions. Net long >80% historical extreme, often signals reversal.
Yield curve: 10-year - 2-year Treasury spread inversion lasting >6 months predicts recession with 85% accuracy (8 inversions since 1960, 7 recessions).
Copper/Gold Ratio: Copper represents industrial demand, gold safe-haven. Ratio >5 indicates risk appetite, <3 safe-haven sentiment.
Credit spread: High-yield bonds (JNK) vs Treasury spread widening >600 basis points signals credit crisis.
Arms Index (TRIN): (advancing/declining)/(advancing volume/declining volume). <0.8 bullish strength, >1.2 bearish strength. Extreme >3 or <0.3 often reverses same day.
Bullish Percent Index (BPI): Percentage of stocks in market with buy signals. >70% overbought, <30% oversold.
VIX + ADL combination: VIX>40 and ADL new low → extreme panic bottom signal (successful March 2020).
Put/Call + VIX: Both high → market bottom probability 80%.
Data delay: CFTC report lags 3 days, need real-time ETF flow combination.
Extreme market failure: 2008 VIX calculation model distorted due to option liquidity drought.
Improvement methods: Use VIX9D (9-day options) to capture short-term panic, combine with social media sentiment index.
2008 financial crisis: VIX from 20 to 80, ADL 3 consecutive months divergence, early warning systemic risk 2 months in advance.
2022 inflation bear market: Put/Call sustained >1.3, copper/gold ratio to 2.8, yield curve inversion 12 months, accurately predicted S&P decline 24%.
Market analysis is a systematic method to evaluate security value and price trends, combining fundamentals, technicals, quantitative, and behavioral aspects. The core goal is to identify pricing deviations (buy undervalued, sell overvalued) and manage risk. Analysis frameworks are divided into top-down and bottom-up.
Top-down analysis process:
Bottom-up analysis: Starts from company fundamentals, ignoring macro cycles. Core indicators: ROE>15%, free cash flow yield>8%, debt ratio<50%.
Three financial statement linkage:
DuPont analysis decomposes ROE: ROE = profit margin × asset turnover × equity multiplier. Identifies whether driven by profit, turnover efficiency, or leverage.
Free cash flow discount model (DCF): Enterprise value = Σ(FCF_t / (1+WACC)^t) + terminal value. WACC = E/V * Re + D/V * Rd * (1-Tc). Sensitivity analysis: Revenue ±5%, perpetual growth rate 2-4%.
Relative valuation:
Absolute valuation:
Economic cycle sector rotation:
Porter's Five Forces model: Supplier bargaining power, buyer bargaining power, new entrant threat, substitute threat, industry competition intensity.
Correlation matrix: Stock-bond correlation coefficient -0.4 (negative correlation hedge), emerging markets and dollar index -0.6.
Currency risk: Strong dollar suppresses commodities, gold under pressure when DXY>100.
Fama-French three-factor: Market risk, size factor (small-cap outperformance), value factor (low P/B outperformance).
Behavioral bias correction: Set investment memorandum, regular review to avoid confirmation bias.
Scenario analysis: Stress test -20% market decline.
Monte Carlo: Simulate 10000 paths.
Netflix 2020 pandemic outbreak: Macro (stay-at-home orders) + industry (streaming demand surge) + fundamentals (subscriber exceed expectations) + technicals (break descending channel), March position to year-end 180% gain.
Enron 2001 bankruptcy: Fundamental fraud (off-balance sheet debt), technical head and shoulders top, volume-price divergence, multi-dimensional early warning systemic risk.
Trading strategies are preset entry, exit, position management rule systems. Core philosophy: Probability edge + risk control > single trade profit. Strategies divided into trend following, mean reversion, event-driven, arbitrage four categories.
Trend following philosophy: Let profits run, cut losses short. Core assumption: Strong assets will continue strong.
Donchian Channel breakout system:
Turtle trading rules:
Pairs trading:
Bollinger Band reversion:
Earnings arbitrage:
Merger arbitrage:
Statistical arbitrage: Cointegration test confirms long-term equilibrium relationship. OU process models spread reversion speed.
High-frequency market making:
Kelly formula: f = (bp - q)/b. b: Odds, p: Win rate, q=1-p. Example: 60% win rate, average reward:risk 2:1, f=0.2 (20% position).
Risk parity: Each asset contributes equal risk, weight inverse to volatility.
Backtest framework:
Common pitfalls:
Soros 1992 pound short: Fundamentals (interest rate inversion) + technicals (support break) + leverage amplification, single trade profit $1 billion.
LTCM 1998 collapse: High leverage (250:1) + Russian debt default, proves correlations approach 1 in crisis.
S&P 500 Index: Covers 500 large US companies, market-cap weighted, represents US economic barometer. Component adjustments by committee, tech weight 32% in 2024. Historical annualized return 10.5% (1957-2024), including dividend reinvestment.
Nasdaq Composite Index: 3000+ tech and growth companies, market-cap weighted. Apple, Microsoft, Amazon combined weight 25%. Higher volatility than S&P, suitable for growth investors.
Dow Jones Industrial Average: 30 blue-chip stocks, price-weighted (high-price stocks greater influence). Oldest index, industrial representativeness declined.
Bloomberg US Aggregate Bond Index: Tracks investment-grade bonds, duration approximately 6 years, yield curve benchmark.
JPMorgan Emerging Market Bond Index (EMBI): USD-denominated emerging sovereign debt, Brazil, Mexico high weights.
CRB Commodity Index: 19 commodities equally weighted, energy 33%. Inflation hedge tool.
Baltic Dry Index (BDI): Shipping rates, leads global trade 6-9 months.
US Dollar Index (DXY): Against 6-currency basket, euro weight 57.6%. DXY>100 suppresses commodity prices.
Shiller CAPE: S&P 10-year average inflation-adjusted earnings P/E, >30 indicates overvaluation (1929, 2000).
Market-cap weighted: Large companies greater influence, suitable for passive investing.
Equal weighted: Each stock equal, RSP ETF annualized outperformance 1.2%.
S&P 500 bear markets: Average decline 37%, duration 14 months.
VIX extreme values: 80+ in 2008, 85 in 2020.
Core-satellite strategy: 80% track S&P, 20% satellite growth stocks.
Factor tilt: Low-volatility index (SPLV) Sharpe ratio 0.9.
2000 tech bubble: Nasdaq P/E>100, CAPE>40, collapsed to zero in 5 years.
2022 inflation cycle: CRB index up 40%, BDI early warning supply chain crisis.
Principal: The total amount of money initially invested by the investor, serving as the basis for calculating returns. Does not include subsequent additional investments. Example: In a dollar-cost averaging plan, each periodic investment is an additional principal, and the total principal is the cumulative investment.
Return: The percentage of investment gain relative to the principal. Total return = (ending value - principal + dividends)/principal. Annualized return uses CAGR formula: (ending value/principal)^(1/n) - 1.
Systematic Risk: Risk that affects the entire market and cannot be eliminated through diversification. For example, rising interest rates causing all stocks to fall. Beta measures systematic risk exposure.
Credit Risk: The risk that the issuer defaults and cannot pay principal and interest. Widening credit spreads in high-yield bonds indicate rising risk.
Discounted Cash Flow (DCF): Discounts future free cash flows to present value using weighted average cost of capital. Terminal value commonly uses perpetual growth model.
Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA): Proxy for operating cash flow, excluding financing and accounting policy effects. EV/EBITDA used for cross-industry comparison.
Market Order: Executes immediately at the current best price, suitable for highly liquid assets.
Limit Order: Executes at specified price or better, unfilled portion remains pending.
Relative Strength Index (RSI): 14-period momentum oscillator, above 70 overbought, below 30 oversold. Divergence signals lead price reversals.
Moving Average Convergence Divergence (MACD): Difference between 12 and 26-day EMA, signal line is 9-day EMA. Golden cross above zero line bullish.
Arbitrage: Simultaneously buying and selling related assets to capture price differences, risk-free profit.
Hedging: Establishing opposite positions to reduce risk, such as buying put options to hedge stock downside.
Bull Market: Rise of 20% or more from lows, sustained optimistic sentiment.
Bear Market: Fall of 20% or more from highs, dominated by panic.
Leveraged ETF: Tracks index with daily 3x leverage, suitable for short-term but decays long-term.
Greeks: Delta (direction), Gamma (Delta rate of change), Vega (volatility sensitivity), Theta (time decay).
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