Unlocking the Mysteries of Modern Finance – Part 2: Indicators, Terminology, and Sifting Through the Noise

The Hoax of Modern Finance: Part 2 – Indicators, Terminology, & Noise Many investors and analysts are leaving money on the table in their investments due to the overwhelming nature of the current market. The market is constantly changing, and many indicators and terms are being thrown around which can be daunting for even experienced traders. This article will attempt to debunk the hoax of modern finance by discussing the importance of indicators, familiarizing readers with relevant terminology, and ensuring any “noise” doesn’t cloud an investor’s judgement. Indicators are mathematical equations or statistics that are used to assess a security or to assess the health of the market. For example, the most commonly used technical indicator is the Relative Strength Index (RSI), which is used to assess whether a security is overbought or oversold. The RSI is calculated by taking a stock or index’s average sell price and subtracting its average buy price. The result is then divided by the difference between the stock’s high and low prices. When the RSI is near or above the 70 threshold, it is commonly considered to be overbought; and when it is near or below the 30 threshold, it is commonly considered to be oversold. Other indicators include the Moving Average Convergence/Divergence (MACD), which is primarily used to identify potential momentum, and the Moving Average (MA), which helps measure the trend of a security. Knowing these indicators and understanding their role in market analysis can help investors make informed and daring decisions in the market. Familiarizing oneself with the terminology in the market is essential to becoming a confident investor. Such terms include: leverage, which is a way to increase potential profits or losses by investing more money than one has; margin, which is the amount of money that a trader uses to purchase a security; shorting, which is the selling of a borrowed stock in anticipation of a price drop or sell-off; and algorithmic trading, which is an automated trading system that relies on computer algorithms to make trades. Knowing and understanding these terms will not only provide investors with the relevant knowledge to make informed decisions, but also make them sound smarter around their peers. Noise, is the idea that investors should expect to face a barrage of unimportant information and should recognize it as noise. Keeping a focused mind on the task at hand is critical for investor success. Listening to the news and obtaining information from credible sources is integral to success, yet it is not always easy to distinguish between important news and noise. Doing research on the security in question, focusing on the fundamentals of the security, and spotting trends that may be relevant to the security is paramount in order to make good decisions. By understanding indicators, familiarizing oneself with the proper terminology, and ensuring any noise does not cloud an investor’s judgement, the hoax of modern finance can be debunked. Following this advice appropriately will result in successful investments in the market and healthy returns.