How to calculate EBITDA is one of the topics of interest to traders. Besides helping to value a business, does EBITDA have a role in a trading strategy? If not using EBITDA, what tools will support technical analysis? find out the answer to Forex Trading in the article below.
What is EBITDA? How to calculate EBITDA
EBITDA has the ability to value and evaluate business performance. This tool will help traders in the process of making investment decisions.
EBITDA Overview
EBITDA is the abbreviation for Earnings Before Interest, Tax, Depreciation, and Amortization. This index reflects a business’s profitability before taxes, interest, and investment in fixed assets.
Not only businesses or traders are interested, but EBITDA is also noticed by hedge funds. what’s a hedge fund? The hedge fund is translated as a hedge fund. It is also known as a mutual fund or risk insurance fund. Hedge funds are designed to protect investment portfolios from market fluctuations and increase proactive profits for investors.
These funds will combine EBITDA with other financial metrics to evaluate the companies they want to invest in. Through how to calculate EBITDA, they will understand the financial health of that company. From there, investment decisions will be made appropriately.
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Instructions on how to calculate EBITDA
There are 3 how to calculate EBITDA:
- Method 1: EBITDA is the Sum of Profit After Tax, Taxes, Interest, and Depreciation.
- Method 2: EBITDA is the Sum of Profit Before Tax, Interest, and Depreciation.
- Method 3: EBITDA is the Sum of EBIT and Depreciation.
Example of how to calculate EBITDA:
The business results report of ABC Company Limited is as follows:
- Revenue: 200 million USD
- Profit before tax: 60 million USD
- Loan interest: 35 million USD
- Corporate income tax: 29 million USD
- Depreciation expense: 25 million USD
- Profit after tax: 31 million USD
So how to calculate EBITDA and what is ABC company’s EBITDA?
- Method 1: EBITDA = Profit after tax (31) + Tax (29) + Loan interest (35) + Depreciation (25) = 120 million USD.
- Method 2: EBITDA = Profit before tax (60) + Interest (35) + Depreciation (25) =. 120 million USD.
- Method 3: EBITDA = EBIT (Profit after tax (31) + Tax (29) + Interest (35)) + Depreciation (25) = 100 million USD
Is EBITDA calculation important in technical analysis?
After understanding how to calculate EBITDA, let’s find out if this indicator is necessary for a forex strategy.
Meaning of EBITDA calculation in investment
The EBITDA index brings many benefits to investors when implementing any trading strategy:
- Thanks to EBITDA analysis, traders can accurately assess the level of profitability and growth potential of the business. From there, they will make wise investment decisions.
- By eliminating taxes, interest expenses, and depreciation, traders can accurately calculate the business results of the business. From there they get a comprehensive view of the company’s financial situation.
- EBITDA also helps evaluate the growth rate and predict the growth potential of a business. Traders thus make wise investment choices.
- Through EBITDA, traders can also easily compare the profits of businesses. Thanks to that, they determine which business they want to invest in.
Originally Answered: Is EBITDA calculation important in technical analysis?
EBITDA shows the financial health of a company. Financial health is a factor that can affect a company’s stock price. In some cases, traders can apply how to calculate EBITDA with other financial indicators to evaluate the potential of a stock or market.
However, in technical analysis and forex trading, EBITDA does not directly affect investment decisions. Instead, traders will use technical indicators or price chart analysis. The most common technical indicators include MA lines, MACD indicators or RSI. In the next section, let’s learn more about these indicators.
The 4 best technical indicators for simple trading strategies
Technical indicators will be very useful for your trading strategy. You should equip yourself with knowledge of at least 4 simple indicators and learn how to combine them. This way, you will increase your chances of accurately determining entry and exit points in the market.
Trading strategy based on MA Line
Moving averages are one of the easiest tools to use. MA is suitable for all investors, regardless of experience level. This tool helps traders easily detect potential trading opportunities according to market trends. When the market is trending up, traders can take advantage of MA lines or multiple MA lines to identify trends and make effective buying and selling decisions.
This indicator is also used to calculate the average price of a currency pair over a specific period of time. From there, traders will recognize the general trend of the market.
Trading strategy based on RSI Indicator
What is MFI? What is RSI? You need to understand clearly so as not to confuse these two indicators. The money Flow Index is used only in stocks. MFI shows the strength or weakness of a stock’s cash flow over a certain period.
RSI is used both in the stock and forex markets. RSI helps investors determine the overbought or oversold level of a currency. The possibility of a trend reversal will be within the prediction. Traders who follow the “buy low, sell high” school of thought will be well suited to using RSI.
RSI is effective in both trending markets and range trading markets. It helps investors identify potential buying and selling points. When the market has no clear trend, you can execute buy/sell orders like the image below. With a clear market trend, traders can enter orders following the trend when the indicator signals from the overbought/oversold zone.
Due to its nature as a momentum indicator, RSI has a value ranging from 0 to 100. An RSI level of 100 indicates that the market is in an overbought state, with the potential for a downward correction. Meanwhile, RSI 0 shows that the market is in the oversold area, which could lead to a recovery trend. When the market is trending up, investors need to pay attention to the RSI reversal from the oversold area (below 30) to enter orders following the trend.
Trading strategy based on the Stochastic Indicator
Stochastic is a momentum indicator that helps traders identify overbought or oversold conditions. The Stochastic indicator is also capable of predicting trend reversals. This indicator uses two lines %K and %D to provide trading signals. Since momentum indicators share the same overbought/oversold scale, identifying potential buy signals is simple. You just need to watch the %K line cross the %D line and cross the 20 threshold.
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Trading strategy based on the MACD Indicator
MACD has the ability to visually display changes in momentum through moving averages. This indicator provides high performance in all market contexts. Determining the market context (trading within a range or following a trend) is a prerequisite for effectively using the MACD indicator.
To determine the upward or downward trend of currency pairs, you need to observe the position of the lines relative to the zero line. Then you will base it on the crossover point of the MACD line (red) and the signal line (green). This will help identify market trends and assist you in deciding on appropriate buy/sell orders.
The MACD indicator will be most effective when the market is trending or trading within a range. After determining the trend, the next step is to identify trend intersections. Traders can place a stop-loss order at a level higher than the peak before the crossover signal appears and set a profit take-off point to ensure a profit double the risk level.
summary
The article shows how to calculate EBITDA and explains the importance of EBITDA in trading strategies. Although not used for technical analysis, EBITDA is the best tool to evaluate the financial health of a company. Instead of using EBITDA, you can use MA, RSI, Stochastic or MACD in forex investing. Don’t forget to follow Forex Trading to update the best knowledge about investing in foreign exchange.
FAQs
When should EBITDA be used?
EBITDA is used to compare financial performance between companies in the same industry. EBITDA can also evaluate a business’s profitability. It also assists traders in business valuation.
Why should technical indicators not be used independently?
Technical indicators are not perfect. This means you cannot accurately assess the situation if you rely on just one tool. Each tool has both advantages and disadvantages. The main advice is to learn about each type and combine them to increase investment efficiency.
Which technical indicator is best in forex trading?
Depending on your trading style and strategy, market reaction to choose the appropriate indicator. Each indicator has its own use. Please learn carefully how to use it to choose the appropriate tool.
