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This month’s to-do list may include submitting a student loan application for a child starting college next year, shopping for a used car now that the old one is making that sputtering sound again, paying a mortgage bill, and paying a credit card statement balance. (Plus a little extra because there weren’t enough funds last month to pay off the statement balance.)

These are fairly run-of-the-mill chores for any adult’s to-do list. But there’s something out there that affects each of those four tasks. It’s called the LIBOR.

Every item on that list—a student loan, car loan, mortgage payment, and credit card bill—comes with an interest rate. The London Interbank Offered Rate, or LIBOR, affects interest rates across the globe.

Chances are, the LIBOR rate has affected almost every American today, either directly or indirectly. So, what is this LIBOR rate that is affecting everyone’s finances?

LIBOR is the interest rate that serves as a reference point for major international banks. Just as average joes might take out loans that carry interest rates, banks loan each other money at an interest rate. This rate is the LIBOR.

The LIBOR rate is recalculated every day and published by the Intercontinental Exchange, aka ICE, an American financial market company.

The LIBOR rate should not be confused with the US prime rate. The LIBOR rate is floating, meaning it changes every day. The US prime rate is another benchmark interest rate, but it stays fixed for an extended period of time.

The LIBOR is an international rate, so it’s based on five currencies: the American dollar, British pound, European Union euro, Swiss franc, and Japanese yen.

It also serves seven maturities, or lengths of time: overnight (also referred to as “spot next”), one week, one month, two months, three months, six months, and one year.

The combination of five currencies and seven maturities results in 35 separate LIBOR rates each day. Borrowers might hear about the one-week Japanese yen rate or six-month British pound rate, for example.

The most common LIBOR rate is the three-month U.S. dollar rate. When people talk about the current LIBOR rate, they’re most likely referring to the three-month U.S. dollar LIBOR.

Every day, ICE polls a group of prominent international banks. The banks tell ICE the rate at which they would charge fellow banks for short-term loans, which are loans that will be paid back within one year.

ICE takes the banks’ highest and lowest interest rates out of the equation then finds the mean of the numbers that are left. This method is known as the “trimmed mean approach,” or “trimmed average approach,” because ICE trims off the highest and lowest rates.

The resulting trimmed mean is the LIBOR rate. After calculating the LIBOR, ICE publishes the rate every London business day at 11:55 a.m. London time, or 6:55 a.m. in New York.

How LIBOR Is Calculated

So far, we know that a group of international banks submits interest rates to ICE, and ICE calculates the trimmed mean to find the LIBOR rate. But there’s more to it than that. Which banks are involved, and how do the banks decide what rates to submit?

ICE selects a panel of 11 to 16 banks from the countries of each of its five currencies: The United Kingdom, United States, European Union, Switzerland, and Japan. This group of banks is redetermined every year, so banks may come and go from the panel.

The chosen banks must have a significant impact on the London market to be selected. (The L in LIBOR does stand for London, after all.) Some of the current US banks are HSBC, Bank of America, and UBS, just to name a few.

The banks have a pretty complex way of determining their rates called the “Waterfall Methodology.” There are three levels to the waterfall. In a perfect world, every bank from the panel would be able to provide sufficient information in Level 1, and that would be that. But if a bank can’t provide adequate rates for Level 1, it moves on to Level 2; if it doesn’t have submissions for Level 2, it moves on to Level 3.

•   Level 1: Transaction-based. A bank determines rates by looking at eligible transactions that have taken place close to 11 a.m. London time.

•   Level 2: Transaction-derived. If a bank doesn’t have rates based on actual transactions, they provide information that’s been derived from reliable data, such as previous eligible transactions.

•   Level 3: Expert judgment. A bank only gets to Level 3 if it can’t come up with transaction-based or transaction-derived rates. In this case, its bankers submit the rates they believe the bank could afford to charge other banks by 11 a.m. London time.

Seems complicated, doesn’t it? And bankers from every bank on the panel go through the Waterfall Methodology every business day.

After the ICE Benchmark Administration (IBA) receives all the banks’ rates, they cut the lowest and highest numbers and use the remaining data to find the “trimmed mean,” and—tada!—that’s the LIBOR for the day.

Why LIBOR Matters

Wondering why people should care about LIBOR? If they don’t work at a bank, who cares? Well, LIBOR actually affects almost every person who borrows money. Many lines of credit, including credit cards, mortgages, auto loans, student loans, and more, are tied to LIBOR.

All federal student loans come with fixed interest rates. Once the government sets interest rates, that rate remains fixed regardless of what happens with LIBOR because it’s based on the 10-year Treasury note instead.

When it comes to things like private student loans and mortgages, however, Americans can choose between fixed-rate loans and variable-rate loans. With variable-rate loans, the borrower’s rate may increase or decrease along with the LIBOR rate.

That may seem like a scary way to determine rates. What if the LIBOR rate increases to, say, 10%? Many lenders place a rate cap on loans so variable-rate loans can’t become expensive to the point that many borrowers may feel they have no choice but to default on their loans.

So while the LIBOR does affect many variable-rate loans, borrowers shouldn’t worry about rates spiraling out of control.

When the LIBOR rate is low, it could be a good time for consumers to take some steps toward achieving financial goals.

They might consider consolidating or refinancing their loans, or even taking out a personal loan. If their income is steady and credit score is good, a low LIBOR rate could help them land a competitive interest rate.

Someone with no debt or a fixed-rate loan might think, “Phew! It looks like the LIBOR doesn’t affect me.” Actually, LIBOR affects everyone. When the LIBOR rate continues to increase, borrowing can become so expensive that many Americans can’t afford to borrow money anymore.

When people stop taking out loans or using their credit cards, the economy slows down and the unemployment rate could rise as a result. After a while, this could lead to a recession.

Remember the financial crisis of 2008? LIBOR played a big part in that tumultuous time for America.

Subprime mortgages started defaulting, and the Federal Reserve had to bail out insurance companies and banks that didn’t have enough cash. Banks were afraid to lend to each other, so the LIBOR rate surged and investors panicked, leading the Dow to drop by 14%.

And think about what is currently going on in the economy right now. Because of the coronavirus pandemic unemployment rates have skyrocketed and interest rates have dropped dramatically.

But, interest rates will no longer be tied to LIBOR in the near future. 2021 has been set as a deadline for financial firms to move away from using LIBOR. Financial firms are looking to tie to other rates, such as the Secured Overnight Financing Rate (SOFR), instead.

The History of LIBOR

How LIBOR Began

Why does LIBOR exist in the first place? Well, in the 1960s and 1970s, demand for interest rate-based goods such as derivatives started to increase.

The British Bankers’ Association (BBA) represented London’s financial services industry at the time, and the association decided there should be a consistent way to determine rates as demand grew. This led to the creation of the BBA LIBOR in 1986.

The BBA doesn’t control LIBOR anymore. In fact, the BBA doesn’t even exist. The association merged with UK Finance a few years ago. After some struggles and scandals took place on the BBA’s watch, ICE took over LIBOR in 2014. The BBA LIBOR is now the ICE LIBOR.

LIBOR Scandals

Bankers in ICE’s group of banks have been found guilty of reporting falsely low LIBOR rates. In some cases, these lies benefited traders who held securities tied to the LIBOR rate.

In other instances, the banks raked in the dough by keeping LIBOR rates low. People tend to borrow more money from banks when rates are low, so by deceiving the public, banks conducted more business.

In 2012, a judge found Barclays Bank to be guilty of reporting false LIBOR rates from 2005 to 2009, and the CEO, Bob Diamond, stepped down. Diamond claimed other bankers did the exact same thing, and a London court found three more bankers guilty of reporting false LIBOR rates.

After the 2008 financial crisis and 2012 scandal, it became clear that there were some flaws in how LIBOR was determined.

The Financial Conduct Authority of the United Kingdom started overseeing LIBOR, and in 2014, the ICE Benchmark Administration (IBA) took over LIBOR and started changing how things were done.

How LIBOR Is Changing

LIBOR has gone through a lot of changes since 1986. In 1998, the bankers were told to change the question they asked themselves each morning before reporting their rates. Bankers used to base rates on the question, “At what rate do you think interbank term deposits will be offered by one prime bank to another prime bank for a reasonable market size today at 11 a.m.?”

Now they should ask themselves, “At what rate could you borrow funds, were you to do so by asking for and then accepting interbank offers in a reasonable market size just prior to 11 a.m.?” The questions may seem similar, but the change in wording showed that the BBA was trying to keep them honest.

In 2017, the IBA held a three-month test period of LIBOR standards in an attempt to limit further scandal.

LIBOR has changed currencies over the years. There used to be more than the remaining five currencies and more than the seven maturities, but some were added and removed after the financial crisis of 2008.

But despite all the attempts at improvements over the years, CEO of the FCA Andrew Bailey has announced that he hopes to stop using LIBOR by the end of 2021.

Some say LIBOR is becoming less reliable as banks make fewer transactions that depend on its rate. The Federal Reserve is proposing American banks use alternative benchmark rates, one option being an index called the Secured Overnight Financing Rate (SOFR) .

Competitive Interest Rates With SoFi

It’s difficult to know what will happen with the LIBOR rate next week, next month, or even at the end of 2021. But one thing’s for sure: benchmark rates continue to affect the US economy and consumers’ loan interest rates.

When members apply for a loan through SoFi, borrowers can choose between variable rates (which would be more directly affected by fluctuations in benchmark rates) or fixed rates on a variety of loan products.

SoFi offers variable-rate or fixed-rate mortgage, variable rate or fixed rate private student loans, or fixed rate personal loans. They may also be able to refinance their student loans or mortgages for more competitive rates if they qualify.

SoFi members can receive other discounts when they borrow through SoFi. For example, when student loan borrowers set up automatic payments, they are eligible to receive a reduction on their interest rate.

Whatever happens with LIBOR, SoFi members can benefit from perks like unemployment protection, exclusive member events, and member discounts.

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SoFi Student Loans are originated by SoFi Bank, N.A. Member FDIC. NMLS #696891. (www.nmlsconsumeraccess.org). SoFi Student Loan Refinance Loans are private loans and do not have the same repayment options that the federal loan program offers, or may become available, such as Public Service Loan Forgiveness, Income-Based Repayment, Income-Contingent Repayment, PAYE or SAVE. Additional terms and conditions apply. Lowest rates reserved for the most creditworthy borrowers. For additional product-specific legal and licensing information, see SoFi.com/legal.

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Financial markets are notoriously fickle. Trying to time the market is a difficult task that few non-professional investors do with repeatable success. Still, there are some ways to make more educated investment picks based on publicly available data.

Once an investor selects which securities to buy, how do they decide a good price to enter into a trade at? One of the simpler ways to make a more informed decision regarding when to buy or sell a stock involves using trend indicators.

Trend indicators give investors a sense about which direction the market has moved and for how long it has been heading that way. Trend analyses aim to anticipate futures based on previous patterns in buying, selling, and pricing over time.

Understanding Trend Indicators

Trend indicators are an aspect of technical analysis. Technical analysis uses either computer-generated mathematical information (indicators) or looking for visible patterns in the charts of stock prices.

This investment approach isn’t guaranteed and doesn’t always boost investors’ returns. But, trend analysis can provide investors with one way to try to appraise the market’s next move.

Although technical analysis involves the use of objective data rooted in mathematics and historical price movements, this kind of analysis also relies on human interpretation of that data.

So, it can be said that using indicators and patterns involves aspects of both art (aka interpretation and intuition) and science (aka data and math).

Commonly Used Trend Indicators

Here’s an overview of five commonly used trend indicators that investors may want to look into:

1. Moving Averages

A “moving average” (aka MA) is defined as the mean of time series data. In finance, this technical trading term means the average price of a security (aka a monetary instrument, like stocks, with monetary value)—as calculated over a certain timeframe.

When prices begin trading above a moving average, this can sometimes be seen as a bullish signal, but doesn’t always produce reliable returns over time. A much stronger signal comes when two moving averages of different time lengths cross paths.

When a shorter-time-frame moving average crosses above a longer-time-frame moving average, the move is referred to as a “golden cross.” The general consensus among traders is that the most significant golden cross involves the 50-day MA moving above the 200-day MA. Put another way, it’s when a security’s short-term average is heading above it’s long-term valuation average.

While a single moving average can convey some important information, MAs can be much more useful when used in conjunction with additional MAs of different lengths or with other trend-following indicators.

2. Relative Strength Index (RSI)

The Relative Strength Index (aka RSI) provides insight into whether a security might be overvalued or undervalued. This indicator oscillates between extremes, which is a fancy way of saying that it moves up and down.

The RSI is as straightforward as they come. It’s represented by a single line plotted on a graph with values that range from 0 to 100.

The higher the Relative Strength Index value, the more overbought a security is thought to be. In contrast, lower values are generally thought to indicate oversold conditions. So, for some investors, a low reading on the RSI could signal a potential buying opportunity.

Just how low should this indicator drop before it can be considered a buy signal? The answer to this question might depend on who you ask.

Fortunately, there is an easy way to estimate when the RSI becomes overextended in either direction. Between 30 and 70 is a shaded area sometimes called “the paint.” When the line breaches this zone, it’s thought that trading momentum in a given security has begun to reach its limits, and a trend reversal could be in the cards soon.

In other words:

•  an RSI reading of below 30 is generally thought to indicate oversold conditions, meaning prices could be getting ready to move higher sometime soon.
•  An RSI above 70 is generally thought to indicate overbought conditions, meaning a move downward could be coming soon.

As with most other trend following indicators, the RSI works best when used in conjunction with other metrics of a stock’s overall trading sentiment.

3. Moving Average Convergence Divergence (MACD)

The Moving Average Convergence Divergence (aka MACD) illustrates the relationship between two moving averages. While the Relative Strength Index (aka RSI) noted above tracks changes in pricing in a single stock or asset (typically represented as a fluctuating line graph), the MACD shows two lines in addition to a histogram that indicates trend strength.

This indicator is used in a similar way as the RSI, although there is a little more information contained in the MACD. Both indicators are known as momentum indicators because they try to gauge the strength of a trend.

Whereas the RSI oscillates between 0 and 100 based on average price gains and losses over a set period, the MACD measures the relationship between two exponential moving averages.

Subtracting the 26-period Exponential Moving Average (EMA) from the 12-period EMA is how the MACD is calculated. This calculation results in the MACD line. A nine-day EMA of the MACD, which is often referred to as the “signal line,” is shown on top of the MACD line. The lines are plotted atop a histogram meant to give traders an idea of momentum strength.

As with most trend indicators, there are multiple ways to interpret the MACD. One of the most common interpretations involves the MACD crossing its signal line.

A cross above the signal line is considered to be a potential buy signal, while a cross below the signal line is considered to be a potential sell signal.

4. On Balance Volume (OBV)

On balance volume (OBV) is a measurement of the selling and buying pressure on a given security. Volume gets added on up days and subtracted on down days.

On a day when the security closes at a higher price than its previous closing price, all of that day’s volume is considered upward volume. When the security closes lower than its previous closing price, that day’s volume is considered downward volume.

The numerical value of the OBV isn’t really important – it’s the direction that counts. Declining volume tends to indicate declining momentum and price weakness, while increasing volume tends to indicate rising momentum and price strength.

While the RSI is an indicator that signals bullishness when weak, OBV works in the opposite way. One of the most striking signs of a potential pullback in price can be seen using OBV. This can happen when the price of a security continues making higher highs even as OBV stalls or begins declining.

When this happens, it’s referred to as a negative divergence, and may mean that fewer traders are pouring money into a trade—potentially indicating that prices could start falling.

Here are a few other quick notes about OBV:

•  When both OBV and price make higher highs and higher lows, there’s a higher likelihood that the upward trend may continue.
•  When both OBV and price make lower highs and lower lows, it’s likely the trend could continue.
•  When prices are confined to a tight range, and OBV is rising, this may signal a period of accumulation. An upward breakout could be on the horizon.
•  When prices are confined to a tight range, and OBV is falling, this may signal a period of distribution. A downward breakout could be on the horizon.

5. Average Directional Movement Index (ADX)

The ADX is another trend indicator that aims to measure trend strength. It works by averaging the differences in price range over time. So, if an asset’s price barely move from day-to-day, the ADX will show a lower reading—while a big change in price will show a higher reading.

The Average Directional Movement Index is represented by a simple line graph beneath a stock chart. This trend line is even easier to use than most. It’s thought that an ADX above 25 indicates a strong trend and an ADX below 20 indicates little to no trend.

Here are some notes about potential ways to interpret the ADX:

•  When the ADX nosedives from a high point, it could signal a coming trend reversal.
•  A downward trend in the ADX could suggest that trends are dissipating overall. And, so, using any trend-following indicators could prove less reliable.
•  If the ADX rises by 5 points or more after a long period of staying low, this could be interpreted as a trade signal (a time to potentially buy or sell, depending on the direction of price movement).
•  A rising ADK generally means the market is entering into a stronger trend. The slope of the ADX line will be steeper when prices change faster. Steady, gradual trends tend to lead to a flattening of the ADX.

Keeping Tabs on Market Trends

There’s an old saying among traders—“the trend is your friend.”

Simply put, trends tend to keep moving in a certain direction when they have enough momentum. That’s why traders try to take note of them by studying trend-following indicators.

Trend indicators are a key way that many traders try to discern things like:

•  Which way a trend is moving
•  How strong that momentum is
•  How long the trend is likely to continue.

Some traders even go as far as trying to pick the exact time when a trend will change, using advanced strategies like options and futures contracts to try and profit from market volatility.

For most novice investors, adopting this kind of exact-timed technical strategy could prove highly risky, and might not always be necessary to earn returns over time. Individual investors might find it easier to use trend indicators to try determine when to buy and sell orders.

Whether an investor is brand new to the markets or has been building a portfolio for years, SoFi Invest® lets users take care of their investment needs in one secure app – including, trading stocks, buying crypto, and automated investing.

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