Lothien User Guide

VaR (Value at Risk) is a risk metric that measures the maximum potential loss an investment may face at a given confidence level and time horizon.

How It Works?

For example, '1-day VaR at 95% confidence level = 2.5%' means that in 95 out of 100 trading days, your daily portfolio loss will not exceed 2.5%.

Here μ is average return, z is the z-score for the confidence level, and σ is the standard deviation.

Calculation Methods

• Parametric VaR: Calculated assuming a normal distribution. Broadly used and fastest method but may underestimate tail risks.
• Historical VaR: Calculated by taking the percentile directly from the historical return distribution. Does not require normality assumption.
• Cornish-Fisher VaR: An advanced method that adjusts the normal distribution for skewness and kurtosis. Captures tail risks better.

CVaR (Conditional VaR or Expected Shortfall) is the average of the losses extending beyond the VaR threshold. CVaR steps in where VaR fails to answer 'How bad gets worst?'.

VaR is just a threshold value and does not provide information about what happens beyond that threshold. CVaR calculates the average loss magnitude once that threshold is breached.

Volatility measures the amount of fluctuation in an asset's price. High volatility means the price can change rapidly and extensively.

Types

• Daily Volatility: The standard deviation of daily returns.
• Annual Volatility: Calculated by Daily Volatility × √252 (number of trading days in a year).

Risk Levels

• Low: < %20
• Medium: %20 – %35
• High: %35 – %55
• Very High: > %55

Correlation measures the relationship between the price movements of two assets on a scale from -1 to +1. It forms the basis of portfolio diversification.

• +1.0: Perfectly positive — two relative assets always move in the same direction.
• 0.0: No correlation — movements are largely independent.
• -1.0: Perfectly negative — two relative assets always move in the opposite direction.

The P/E ratio is calculated by dividing the current stock price by earnings per share. It shows how expensive or cheap a company is relative to its earnings.

• Low P/E (5-10): The stock may be undervalued or the company's growth expectations might be low.
• Mid P/E (10-20): Fair valuation — properly compare it with the sector average.
• High P/E (20+): The stock might be overvalued or the market expects high growth.
• Negative P/E: The company is currently operating at a loss.

The P/B ratio is a company's market capitalization divided by its equity (book value). Relates to how a company is priced in the market compared directly to its assets.

• P/B < 1: The stock could be trading cheaper than the company's net assets — a potential opportunity.
• P/B 1-3: Normal range — inherently fair for most stable sectors.
• P/B > 3: Market values the company far above what it strictly owns — strong brand/growth expectation typically.

TRAMA is an advanced moving average technique that autonomously adjusts to varying market conditions. It is a vital technical indicator of the Lothien platform.

Unlike traditional moving averages, it responds slower and smoother to high volatility, but faster and sharper during low volatility periods. Shows supreme performance in trend tracking.

Signals

• BUY: When price breaks directly above TRAMA — signals the beginning of an uptrend.
• SELL: When price breaks steadily below TRAMA — signals the beginning of a downtrend.

RSI is a crucial momentum indicator oscillating between 0 and 100. Relates to evaluating strictly overbought or oversold conditions.

• RSI > 70: Overbought area — price could drastically retreat.
• RSI 30-70: Neutral area.
• RSI < 30: Oversold area — price likely to recover.

Bollinger Bands exist essentially as standard deviation bands systematically plotted away from a central moving average. Maps out the normal boundaries.

Signals

• A squeeze: Low volatility — a major price movement is incoming soon.
• Price touches the upper band: Indicates a likely overbought signal.
• Price touches the lower band: Indicates a likely oversold signal.

MACD detects trend direction changes and momentum strength generally by subtracting two exponential moving averages (EMA).

• BUY: When the central MACD line crosses the signal line decisively upwards.
• SELL: When the major MACD line crosses the signal line conclusively downwards.

Monte Carlo simulation is a statistically fundamental technique that explicitly creates varying random scenarios projecting future asset price paths.

Primarily utilizing the Geometric Brownian Motion model, it produces probable future price paths based on historical returns and volatility data.

Maximum Drawdown points essentially to the highest drop percentage a specific asset encounters stretching from its highest peak continuously to its lowest trough.

Diversification actively acts as a fundamental risk-reduction strategy actively placing direct capital spanning diverse differing asset classes. Strictly built on 'Not putting all your eggs securely into one single basket'.

How It Works?

• Select stocks exclusively from substantially different broader sections: Banking, precise energy, heavy industrials.
• Fundamentally prefer essentially lower correlated investments — when one plunges sharply, ideally the other rises.
• Actively broadly mix exact asset sub-classes: Stocks, stable bonds, strict gold, reliable foreign currency.

The definitive Lothien Score explicitly operates exclusively as a unified composite 0-100 rating dynamically grading fundamental analysis combined tightly and comprehensively with active broader technical markers.

Components

• Valuation: Core P/E ratio, P/B ratio aligned broadly directly analyzing respective sector positioning.
• Growth: Explicit revenue expansion reliably joined actively with exact fundamental net profit pacing.
• Technical: The explicit TRAMA relative stance combined heavily with standard central broader momentum positioning.
• Risk: Pure exact volatility and maximum relative precise drawdown metrics combined directly.

• 70+: Strong — solidly favorable positive broad major markers.
• 40-70: Neutral — actively broadly mixed active conditions requiring deeper review.
• <40: Weak — purely major substantially negative broad metrics heavily dominating.

Skewness: Evaluates the symmetry of the return distribution. In financial markets, returns are often not perfectly symmetric.

• Negative Skewness: Indicates that large negative returns happen more frequently than large positive ones.
• Zero Skewness: A symmetrical, perfectly balanced tail of returns.
• Positive Skewness: Indicates that large positive returns are more frequent than large negative ones.

Excess Kurtosis: Evaluates fat tails in a distribution, meaning extreme price shocks are far more likely to occur than a normal distribution predicts.