Fuad Akhundov
© Fuad Akhundov, 2018
ISBN 978-5-4493-9708-9
Created with Ridero smart publishing system
Author’s note:
The Reductive-Investment Analysis is the latest method of calculation of the investments’ effectiveness. It is a unique decision for the investment analysis of the exchange market. It guarantees a simplified understanding of the market prospects, gaining of profit and the continued success of the investor. It gives you opportunity to make a management decision on the feasibility of investment or the timely withdrawal from the market. It has an exceptional mechanism to model the dynamics of future prices. The present publication is recommended for trade floor analysts and financial experts.
INTRODUCTION
A significant part of investments in financial tools of the stock market does not provide the expected and planned result for reasons beyond the control of investor. An absurd or poor-quality investment analysis causes most of the cases resulting in losses. Against the backdrop of globalization and a certain “mutation” of the financial market, the need for new and advanced methods for the theoretical description of the mass expectations of financial market participants has grown, with possible further modelling of quotes on this basis. This paper, titled “A Reductive-Investment Analysis”, describes the results of long-term, empirical studies of the financial and stock market. It represents a new, alternative approach to assessing, analyzing and modelling in financial markets using logical techniques and such statistical software tools as a regression channel, calculated based on the least squares method.
A Reductive-Investment Analysis is a system of logical and practical approaches, methods of analyzing financial tools of the stock market (securities, currencies, derivative contracts, etc.), for the investor, substantiating and evaluating the feasibility of making investments, and optimizing investment trading operations, to make an effective decision. It is a dynamic process occurring in two planes – time and price. In the time plane, the work is carried out to monitor market expectations. They provide a steady understanding of the process of developing investment objectives. In the price plane, analysis and development of descriptive solutions in different substantive aspects are mainly carried out. These aspects include the econometric component, correctly stated objectives and tasks of investment, analysis of investment risk, and the general sensitivity to changes in certain significant factors.
The principle of the Reductive-Investment Analysis as a whole is a method to narrow the complexity one down to the simplicity, by means of logical-methodological procedures of presenting a complex process as a sequence of simple techniques. This method makes it available for analysis.
The process of Reductive-Investment Analysis comes laden with descriptive methods of converting data associated with a particular stock exchange tool in order to simplify it and present it by means of some more accurate language, as well as to model the investment objectives.
The subject matter of this analysis as a practical method is that for the solution of a complex task, the researcher narrows its structure down to a simpler version available for analysis or solution. For example, the solution of a matter in mathematics can be narrowed down to another matter, if the solution of the first one can be the solution of the second one. In logic and in the methodology of science, the reduction is usually refers to the explanation of the theory or a variety of experimental laws established in one research area, using the theory formulated for another one.
Methods and techniques of Reductive-Investment Analysis are the means for an objective research of the processes in the investment area, as well as the formulation of conclusions and recommendations based on them. The procedure and the applied methods of this analysis are aimed to propose alternative options for modelling possible processes, identifying the scale of proposed events and their actual comparison according to various efficiency criteria.
The objects of the Reductive-Investment Analysis are financial and stock tools, which are traded within online international stock exchanges.
The subjects of this analysis are users of analytical information directly or indirectly interested in the results and achievements of investment activities, owners, management, personnel of financial organizations, suppliers, buyers, creditors, the state represented by statistical and other bodies analysing information in terms of their interests to make investment decisions.
Section 1. The main characteristics, typology and principles of the Reductive-Investment Analysis
The Reductive-Investment Analysis, as a descriptive method, combines a set of theoretical techniques and models based on econometric theory, using mathematical and statistical tools (linear regression channel), providing quantitative expressions with visual perception with the further possibility of visual modelling of goals and prospects for further development of the ongoing process.
In economic researches the problems of identifying the factors that determine the dynamics of the economic process are often solved. Also, in order to reliably reflect the processes existing in the economy objectively, it is necessary to identify significant relationships and give them a quantitative assessment. This approach requires the disclosure of causal dependencies. The causal dependence means such a relationship between processes, when a change in one of them is a consequence of a change in another. The solutions of such matters most often use methods of correlation and regression analysis.
Economic data is usually presented in tabular form. The numerical data contained in the tables usually have explicit (known) or implicit (hidden) connections between them. The indicators that are obtained by direct counting methods, i.e., are calculated according to previously known formulas, are clearly connected. For example, percentages of plan fulfilment, levels, specific gravity, deviations in the sum, deviations in percentages, growth rates, accession rates, indices, etc. Connections of the second type (implicit) are not known in advance. However, it is necessary to be able to explain and predict complex phenomena to control them. For this reason, with the help of observations, specialists seek to reveal hidden dependencies and express them in the form of formulas, mathematically simulate phenomena or processes. One of such opportunities is provided by the correlation and regression analysis. Mathematical models are built and used for three generalized purposes: explanation, prediction and control. The presentation of economic and other data in spreadsheets or through the tools of trading platforms has become ordinary and widespread these days. Equipping electronic trading platforms with the means of correlation and regression analysis gives specialists in the financial field opportunity to transform well-founded probability-theoretic methods into everyday effective analytical tools. Using the tools of correlation and regression analysis, analysts measure the linear statistical dependence of the indicators by means of the correlation coefficient. This reveals the connection, different in strength and direction. Regression analysis is one of the main methods to identify implicit and covert connections between observational data in modern mathematical statistics.
Mastering the technique of using tools based on regression analysis, you can apply it as needed, gaining knowledge about hidden connections, improving analytical decision-making support and increasing their validity. Thus, the methodology of the Reductive-Investment Analysis is a research method closely related to the tools of correlation and regression analysis, which is based on the use of the Linear Regression Channel tool (Fig. 1) available in modern electronic trading platforms. The Linear Regression Channel is built based on the Linear Regression Trendline, an ordinary trend line built between two points on the price chart using the least squares method. This method calculates the Y=a+b*X trend line, minimizing the sum of squares of vertical deviations between the closing price value and the trend line value during a given time interval. The trading platform software calculates the values (a, b) and builds a Linear Regression line for any time interval. As a result, this line turns out to be the exact median line of the changing price.
The Linear Regression Channel, developed by Gilbert Raff in 1991, consists of two parallel lines equidistant up and