Two Important Tools Investors and Analysts Depend On
Stock traders and investors depend on charts and analysis tools to get an idea of what to expect, and make decisions accordingly.
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In conventional or online trading, stock traders and investors depend on analysis to help make what they’d consider to be the right trading decisions. There are also charts that provide a picture of how things could be. Let’s look at two of these tools. The Dot Plot Dot plot refers to a statistical chart where data points are plotted in the form of dots on a graph having x- and y-axes. The purpose of the chart is depicting data groupings or trends. You find this talked about a lot in Fed meetings. The US Federal Reserve uses dot plots for conveying its outlook for benchmark interest rates at the meetings of the FOMC (Federal Open Market Committee). Dots are placed on the dot plot, and they denote the interest rates they project for the future. It could be projections for the immediate years as well as the long run. Investopedia provides this example of a dot plot that was released by the FOMC in December, 2018 in its article.
The present year and the future years are labeled on the x-axis along with the longer run. The y-axis shows the expected interest rates of the Federal Funds, with the dots representing the view of each of the members regarding the interest rates by the end of each of the years. www.tradezero.co
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Importance of the Dot Plot On the dot plot, you have the median of dots which usually depicts the overall interest rate outlook of the FOMC. As you can see from the chart above, the 2019 median is somewhere in the region of 2.9%. The 2020 median stands somewhere around 3.1%. These projections are something watched closely by economists and investors to identify the future interest rate trajectory. Interest rates are so critical to the way markets go. That’s why the dot plot is so important. Sensitivity Analysis Sensitivity analysis is another aspect of analysis that investors rely on. What the sensitivity analysis does is determine how an independent variable and its different values affect a dependent variable. This impact is determined under certain variables. Sensitivity analysis is used within certain boundaries on the basis of certain input variables. Sensitivity analysis is also called simulation analysis or “what-if” analysis and helps predict a decision’s outcome under certain variables. The analyst assigns certain variables, such as certain economic conditions, and then applies sensitivity analysis to figure out how any changes made in those variables affect the overall outcome of the market. The sensitivity analysis is different to the scenario analysis. While sensitivity analysis depends on some particular assumptions or variables, scenario analysis depends on an actual scenario, such as a market crash, and the analyst then alters the variable in the model for aligning with the situation. Both are used by analysts, traders and investors for arriving at some conclusions and figuring out the possible outcomes. It gives some more data for the investor to mould his/her trading strategy.
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