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Trading Theory

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Category – Trading Theory

Trading theory encompasses the conceptual frameworks and models used to understand market behavior and guide trading decisions. In trading, theories such as the Efficient Market Hypothesis (EMH), Dow Theory, and Behavioral Finance influence how traders approach market movements. Trading theory helps traders interpret patterns, anticipate price movements, and manage risk. While some traders focus on technical analysis and price action, others rely on fundamental factors or economic theories to inform their trading strategies.

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CALMAR RATIO

Calmar Ratio measures risk-adjusted return by comparing the annualized return to the maximum drawdown, providing insights into performance relative to worst-case losses. A higher Calmar Ratio indicates better performance relative to risk.

CURRENT RATIO

Current Ratio measures a company’s ability to cover liabilities with assets, indicating liquidity and financial stability.

INTEREST COVERAGE RATIO

Interest Coverage Ratio measures a company’s ability to cover interest expenses using EBIT, highlighting financial resilience.

PRICE-TO-BOOK RATIO (P/B RATIO)

Price-to-Book Ratio compares a company's market value to its book value, assessing whether a stock is over- or undervalued.

PRICE-TO-SALES RATIO (P/S RATIO)

Price-to-Sales Ratio compares a company's market value to its revenue, assessing its valuation relative to sales performance.

STOP-OUT RATIO

Stop-Out Ratio indicates the percentage of trades where stop-loss levels were triggered.

CASH RETENTION RATIO

Cash Retention Ratio measures the percentage of the account's initial balance still available as total cash. It reflects the trader's ability to preserve liquidity relative to their starting capital, aiding in financial performance analysis.

MAX RISK PERCENTAGE

Max Risk Percentage is the maximum percentage of the account balance that a trader sets at the account level to define their risk tolerance for transactions, trades, and the portfolio. It ensures disciplined and consistent risk management.

MAX RISK TOLERANCE

Max Risk Tolerance defines the maximum acceptable risk level for an account, reflecting the investor's capacity and willingness to withstand losses. This is determined by the trader's Max Risk Percentage.

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